Enphase Energy Inc (ENPH) — Q3 2017 Earnings Call Transcript

Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's third quarter of 2017 results. On today's call are Badri Kothandaraman, Enphase President and Chief Executive Officer; Bert Garcia, Chief Financial Officer; and Raghu Belur, Co-Founder and Chief Product Officer. After the market closed today, Enphase issued a press release announcing the results for its third quarter ended September 30, 2017. During the course of this conference call, Enphase management will make forward looking statements including but not limited to statements related to Enphase Energy's financial performance, market demand for its current and future products, advantages of its technology and market trends. These forward-looking statements involve significant risks and uncertainties, and Enphase Energy's actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see the Company's annual report on Form 10-K for the year ended December 31, 2016, which is on file with the SEC, and the quarterly report on Form 10-Q for the quarter ended September 30, 2017 which will be filed with the SEC in the fourth quarter of 2017. Enphase Energy cautions you not to place any undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in its expectations. Also, please note that certain financial measures used on this call are expressed on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. The Company has provided reconciliations of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the Investor Relations section of its website.

Good afternoon and thank you for joining us today to discuss our third quarter 2017 financial results. We had a good quarter. Our 30, 20, 10 transformation is going very well. We were almost breakeven in non-GAAP operating income during the third quarter, and we have stabilized our cash position. We reported revenue of $77 million for the third quarter of 2017, an increase of 3% compared to the second quarter of 2017. We shipped approximately 231 megawatts or 790,000 microinverters. Our GAAP gross margin was 21.4% and non-GAAP gross margin was 21.8%. Our focus on operational excellence resulted in gross margin expansion, lower OpEx and overall improvement to our financial position in the third quarter. We're laser focused on further gross margin improvement through supply chain optimization, new product introduction and pricing management, and we are on track to reach our 30, 20, 10 target operating model by the fourth quarter of 2018. Bert will go into greater detail about our financial results later in the call. So, turning to our market. The third quarter revenue in the U.S. was up 2% sequentially. We completed the transition to the IQ 6 product for our U.S. and Latin American customers during the quarter, and nearly all fourth quarter inverter shipments to these regions will be the IQ 6 products. Shipments for the AC module product also increased sequentially. In the Latin American market, the third quarter revenue was down 9% sequentially due to the devastating hurricane in Puerto Rico at the end of the quarter, which impacted overall shipments to the region. We look forward to playing a key role in the future as the island rebuilds and diversifies its electrical infrastructure. Raghu, our Chief Product Officer, will provide details later in the call on a key technology that will be central to this effort. In the APAC region, revenue increased 35% sequentially as demand for our products continued to grow. We established new partnerships with distributors, installers, and module manufacturers in India during the quarter resulting in our first shipments to the region. In Europe, revenue was up 3% sequentially and 114% year-over-year. The third quarter was a record quarter for unit shipments and revenue in the region as we continue to grow our customer base. Moving on to products, we believe the IQ 6 microinverter system and our AC modules will help drive profitable growth with new and existing partners, thus increasing our market share. We remain focused on operational improvements to achieve this goal. With the introduction of the IQ 7 product in the first quarter of 2018, we expect to grow revenue by expanding our served available market. IQ 7 will be a single worldwide product SKU that allows us to penetrate new markets in Europe, Asia Pacific, and Latin America while also helping to drive gross margin expansion. In summary, we are pleased with our overall progress during the past three months. My top priorities over the next six months are to improve cash flow, further expand gross margin with the introduction of IQ 7 worldwide, and achieve sustained profitability, creating a solid financial foundation. We will also continue to provide customers with the value, quality, and customer service they’ve come to expect from Enphase. With that, I would like to turn the call over to Raghu, our Chief Product Officer, to provide an expanded update on our products.

Thanks, Badri. As part of our commitment to deliver increased value to our customers, we transitioned over the past few quarters from our M-series to our IQ series product. IQ is an integrated solar, storage and energy management platform that enables self-consumption and delivers our core value proposition of yielding more energy, simplifying design and installation, and improving system availability, uptime and reliability. In addition, IQ provides advanced grid functions that are capable of meeting worldwide regulatory requirements. IQ also enables our AC module product, further simplifying the installation process, reducing installation time and streamlining logistics. IQ 6 delivers more power and higher efficiency while further reducing the balance of system cost due to its simplified wiring, reduced size, and weight. Much of IQ 6 performance was achieved by silicon integration with our new ASIC. With IQ 7, we will yet again offer greater power and a smaller, lighter and easier to install product. What is unique about our IQ 7 is that it's a single worldwide SKU, achieved as a result of our software-defined architecture. Similar to IQ 6, we have developed a new ASIC for IQ 7 that enables greater semiconductor integration. Solar plus storage, which includes our AC battery product, is central to our product strategy. Our storage business continues to expand worldwide because of the unique features of our AC battery solution. We believe the storage market will continue to improve over the next 12 months as costs come down and as utilities better understand how to incorporate distributed storage onto the grid. Now let me talk about our next generation IQ 8 product expected to be introduced in 2019 based on our always-on technology called Ensemble. One of solar's biggest challenges is that it is grid-tied. This means that if the grid fails and the sun is still shining, there will be no production from your solar system. Most customers are unaware of this limitation with today's solar technology. To address this limitation, we have invented a microinverter technology that is completely grid agnostic. This means that even if the grid fails and there is sufficient sunlight, the Enphase system will continue to produce energy and meet the demands of the home or business. The Enphase microinverter system's capabilities are further enhanced when the Ensemble technology is incorporated into our AC battery storage solution. With IQ 8, you can have a system that will continuously produce energy, regardless of the presence or absence of the grid—solar during the day and storage at night. That is what we mean by always-on, and it can address challenges like those experienced in Puerto Rico, other island nations, and countries with weak grids. We also believe IQ 8 will grow our total addressable market worldwide. For example, there are over 1.2 billion people with limited or no access to energy in regions such as India and Africa. IQ 8 is uniquely positioned to address the energy challenges inherent in these and other regions of the world. We'll continue to update you on IQ 8's progress over the coming quarters. Now I'll turn the call over to Bert for his review of our financial results.

Thanks Raghu. I'll provide more details related to our third quarter 2017 financial results as well as our business outlook for the fourth quarter. As a reminder, the financial measures that I am going to provide are on a non-GAAP basis unless otherwise noted. Total revenue for the third quarter of 2017 was $77 million, an increase of 3% sequentially. Total net revenue per DC watt was unchanged from the prior quarter, reflecting relatively stable ASPs. On a year-over-year basis, total net revenue per DC watt decreased by 11%, directionally consistent with the broad reduction in ASPs. We shipped approximately 231 megawatts DC in the third quarter of 2017, an increase in megawatts of 3% sequentially and a decrease in megawatts of 3% on a year-over-year basis. The megawatts shipped represented 790,000 microinverters, approximately 6% of which were our new IQ microinverter system. As Badri mentioned, we completed the transition to the IQ 6 product for our U.S. and Latin American customers during the third quarter, and as a result nearly all fourth quarter shipments to these regions will be our IQ 6 product. Non-inverter revenue, which includes our AC battery storage solution, Envoy Communications Gateway, and all accessories, was consistent as a percent of revenue with our prior quarter results. Non-GAAP gross margin for the third quarter of 2017 was 21.8% compared to 18.4% in the second quarter. Non-GAAP gross margin excludes approximately $347,000 of stock-based compensation. The improved gross margin reflects the transition to our IQ microinverter system in North America as well as the improvements to date that we have implemented on our supply chain optimization initiatives. The improvement to our gross margin was slightly offset by approximately negative 1.8% related to expedited fees that we incurred as a result of industry-wide component shortages mentioned on our Q2 call. Non-GAAP operating expense decreased by $865,000 sequentially from $17.8 million in Q2 to $16.9 million in Q3. Compared to the year ago quarter, we reduced non-GAAP operating expense by 41% or $11.7 million, reflecting the cumulative impact of restructuring actions and operational efficiencies we've implemented. Non-GAAP operating expense in the third quarter of 2017 excludes $4.1 million of restructuring charges and $1.4 million of stock-based compensation expense. On a non-GAAP basis, income from operations was essentially breakeven with a loss of $102,000 compared to an operating loss of $4 million in Q2. We are extremely pleased with the progress we've made on operating income and have increased confidence in our ability to achieve non-GAAP operating profitability in the fourth quarter. Our non-GAAP net loss was $964,000, resulting in a loss of $0.01 per share compared to a net loss of $6.6 million in Q2 or a loss of $0.08 per share. Now turning to the balance sheet, inventory levels were $25.3 million for the third quarter compared to $20.8 million in the second quarter and $39.1 million in the year ago quarter. Inventory levels increased from the second quarter, primarily as a result of the timing of shipments. We exited the quarter with a total cash balance of $28.9 million, a slight decrease from the Q2 balance. We expect to be cash flow positive in the fourth quarter. Now let's look at our outlook for the fourth quarter of 2017. We expect our revenue for the fourth quarter of 2017 to be in a range of $72 million to $80 million. Turning to margins, we expect GAAP and non-GAAP gross margin to be within a range of 21.5% to 24.5%. Note that our Q4 gross margin guidance includes the negative impact of higher expedited fees resulting from industry-wide component shortages. Non-GAAP gross margin excludes approximately $300,000 of stock-based compensation expense. We expect our GAAP operating expense for the fourth quarter to be within a range of $19.5 million to $21.5 million, and non-GAAP operating expense to be within a range of $16 million to $18 million, excluding an estimated $1.4 million of stock-based compensation expense and approximately $2.1 million of additional restructuring expense. I'll note that we do not expect to incur significant restructuring expenses beyond the fourth quarter. At the midpoint of our guidance range, we expect to be profitable on a non-GAAP operating income basis in Q4. With that, I'll open up the line for questions.

Hi everyone. Thanks for taking my questions. Maybe just starting with the AC modules, could you provide some commentary on early returns and are you still targeting an additional module partner by the end of the year?

Let me give you some color on AC module. We started shipping AC modules to LG in the second quarter of 2017. We mentioned in the June Analyst Day Presentation that we shipped about 18,000 units to LG. Our shipments increased sequentially in Q3 of '17. LG, if you know, introduced the IQ 6+ neon AC module in July. That product is making its way through the channels now. It's too early to say, but we've conducted a lot of interviews with the installers and those interviews have been very encouraging. There are clear savings on installation time as well as streamlined logistics on the AC modules. We announced the Jinko Eagle and IQ 6 AC module at SBI, and we expect to start shipping that shortly. We also announced Waaree, a module partner in India. We are working with a few other partners as well and will announce when we're ready.

Okay. Sticking with India and Waaree, is that a little bit different version of what you're able to talk about? Is that a little different version or scaled-down version versus LG or Jinko, and if so, is that something that you're working to replicate with other partners in different markets?

No, it's not a scaled-down or a different version. We have an AC module product strategy that is in line with all the other partners as well, the only difference being LG is a 60-cell module and Waaree will be a 72-cell module because in India the primary market segment is 72. What's really good is that the IQ 6 Plus and the IQ 7 Plus products work on both 60-cell and 72-cell modules.

Got it. Okay. Thanks for that color. Maybe last question for me. Just an update on installer trends. You mentioned the good feedback you're getting early with LG, but clearly things moving to Tier 2 and Tier 3 installers. So just any thoughts or color there would be helpful. Thanks a lot.

Yeah, we're continuing to reach out to all the installers who have either done installs, and we are currently on roadshows collecting data and the feedback has been pretty consistent. The value is there; the installed time value, logistics value, the good matching between the power production because of the inverter and the module being closely matched. And then, quantitatively speaking, good quality installed as well because it's a very fast and clean install. So, a lot of outreach is going on, we're on the road right now showing it to a number of the longtail installers as well. So, the feedback has been good.

And just market share there, just overall share with Tier 2 and Tier 3. Any thoughts on how that's trended? I know you gave an update at the Analyst Day, but maybe anything that might be refreshing over the last couple months?

No, it's too early to tell at this time.

Hey guys. Good afternoon. First question is do you think that the revenues you were able to achieve this quarter were limited by the 201-case impact, which has increased module prices and made them more scarce in some cases, and also due to the component shortages that you have?

So, hey Brad. No, I think there's been a lot of concern around the 201 case, and as everyone saw, the preliminary recommendations that were made were certainly looking more punitive than everybody was expecting, but that's good news. That said, looking at the third quarter, we really didn't see any impact related to 201 in terms of revenue shipments.

If revenue is limited, were there limitations by component availability?

So, Brad, the revenue was not limited by component shortages, but what we noted is that the gross margin was impacted. As we noted, the Q3 gross margin was negatively impacted by about 1.8%, resulting from expedite fees, and those expedite fees were a result of having to use air shipments compared to ocean shipments. In Q4 '17 we still see continued pressure on memory and high-voltage feeds, and that's why we said we expect to incur expedite fees in Q4 '17 as well. We are putting in some business processes in place like qualifying multiple sources as mitigation actions, but we really need the supply situation to improve, and at this point, we see the situation persisting into the first half of 2018.

Yeah, it sounds like lead times have come down already for the feeds, but on IQ 7, is there a—what portion of the market would you say is a high-voltage modules that had not really been duly served by your power rating on the M280 or the IQ 6, like how much more market does it open up for you?

Sure, hey, thanks Brad, this is Raghu. One of the nice things about the IQ 7 being a universal black farmhouse, like a worldwide SKU, is that it does open up the market for the 96-cell module as well. So, there are a couple of players who are doing 96-cell modules as well. Panasonic has now entered the market with a 96-cell product. We already know there's another player here lately who is also a 96-cell product, but the IQ 7 does open up those markets for us as well from a technology point of view.

Yeah, yeah, I think it's about a quarter or a third of the U.S. residential market probably, is that right?

Yeah, probably around that order, or maybe a little bit less actually.

Okay, and this is last question, thanks for the time, on the IQ 8, could you talk a little bit more about the types of companies that are currently serving this market? I've read about half a dozen that are well-capitalized in Africa doing small 1-10 installations that enable light, and some articles have talked about the AC output enabling air-conditioning and refrigeration, which is limited by the current DC output. So, I would love to hear any more about the dynamics of what you see out there in that market?

I think it's Africa, and there is also India as well. There are a number of players. Go to market is the problem that needs to be solved there. I think we have solved the technology problem. We are seeing that both in India and Africa, and in India there are a number of companies that are working on the go-to-market problem and have had varying degrees of success there. So yes, there are a number of companies that are out there; they're not making any announcements at this time.

Hey guys. Thanks for the questions. First one here is on the IQ 7. I think in your release, you talked about getting that out there in Q1 '18, so what do you expect the mix of IQ 6 and IQ 7 to be starting Q1 '18, and how do you expect that mix to trend as we go through 2018?

To give you some color on IQ 6, the IQ 6 transition took us three quarters to complete. We expect the IQ 7 transition to take a similar time, maybe a little bit less. A new product transition is always tough to predict, but we're doing a lot of detailed planning to counter surprises. Having said that, the IQ 6 and the IQ 7 use the same balanced system as IQ 6, so that will make it a little bit easier. And also, one more thing is the transitioning for example IQ 7 to North American customers is going to be easier than transitioning worldwide. I expect that to be done faster, maybe in a couple of quarters compared to worldwide, which might take the full three-quarter timeframe. More to come there, but we are doing a lot of detailed planning.

Good. Thanks, Badri, and if you can remind us or update us on what kind of margin benefits we should see as you fully transition from IQ 6 to IQ 7?

As I told you, we are focused on building a healthy financial foundation, and we are laser-focused on gross margin and operational excellence leading to profitability. We told you that we will reach the 30, 20, 10 target operating margin by Q4 of '18 and we are on track to do so. The 30, 20, 10 stands for 30% gross margin, 20% OpEx, and 10% operating income. The IQ 7 transition will not only help in improving gross margin but will also help to expand the served available market into more regions in Europe and Asia Pacific to increase the top line. We also see the AC modules as an important driver for the IQ 7 platform. With all the supply chain optimizations that we are doing, we expect to reach our target operating model by the timeframe that we stated, which is Q4 of '18.

Okay. Great. So, moving the question to the top line that I think you blended ASP decline in the quarter was roughly 12% year-on-year. Do you continue to expect that rate of decline? I think that was for Q3. So, do you continue to expect that for Q4 and what are you seeing now for Q1 and what do you expect for 2018?

Well for 2018, we have a number of factors I'll come to that later. But for Q4, I see the pricing pretty stable at about 2% erosion a quarter. So, in 2018 I have a couple of factors that could contribute to the pricing environment. One is the trade case, and we don't know what the final outcome is going to be in January. So that could influence that. The second one is a potential Huawei entry in the middle of 2018. If I pretend that those two weren't there, I expect a pretty stable pricing environment, similar to 2017.

Okay. Good. And finally, as it relates to your non-GAAP profitability, it sounds like you are in check for Q4. I know you haven’t provided guidance for '18, but do all signs give you a sense that you can maintain that for '18 and what are the puts and takes maybe just mentioned a couple with the trade case and Huawei, but how are you thinking about profitability as we go through '18?

Hey Phil, it's Bert. You’re right that we did signal non-GAAP profitability to the midpoint of the range for the fourth quarter. If we transition out into 2018, you're right; we don't provide guidance out that far, but clearly the work we've done to date to restructure is beginning to yield significant benefits for us. If we think about the transition to IQ 7, that's certainly going to continue to help, not only margin expansion but also help grow the top line. As Badri mentioned, the IQ 7 does open up a couple of new markets that are certainly helpful, but bear in mind, a lot of the work we've done around restructuring even here in the tail end of 2017 will continue to bear fruit in 2018. It's more of a process than an event, so we do expect to continue to see benefits from our broad supply chain optimization and our focus on operational excellence also continue to help move margins and profitability along in 2018.

Great. Thanks for taking my question. First just in terms of 4Q guidance, can you talk a little about your puts and takes on that? It seems like your guidance is flattish right and mostly just seasonality in the fourth quarter or do you see the margin recovering after this trade case is settled; do you have any color on that?

What you're seeing in our guidance is really us holding share. We're being very disciplined on pricing, optimizing for profitability, and that is reflected in our topline guidance. In terms of puts and takes, as I mentioned to Brad, I am not seeing any impact from the trade case factored into our guidance. So it really is a matter of us holding share and being disciplined on pricing.

Okay. That's helpful. And then maybe talk a little about gross margin, given that you have this excess that could happen because of shortages, right? How much impact have you factored out into your gross margin guidance, and do you have any kind of view when we should start to have this stabilize and you can stop being risky?

Just to level set, Q3 had about a 1.8% negative impact, and we're expecting somewhere between 1% and 2% in Q4. After that, we expect to start seeing it tail off into 2018. It's a little early; it's not entirely within our control, but our guess right now is that we'll start to see a tailing off of that impact in Q1.

Okay. That's helpful. I guess I'll stick with you, Badri. I saw on the balance sheet inventories actually going up, and I think costs have also gone up a lot this quarter. Do you expect those to normalize as you enter the fourth quarter or would that take some time?

Yes, we do expect to normalize, and they are somewhat related. So, on the receivables line, it was really impacted by the linearity of sales in Q3 relative to Q2, which drove the increase. On the AP side, it was related to inventory; we had some late receipts of inventory in September reflected in the increase sequentially. Also, in our AP line, that's beyond the inventory, it’s part of the work that we've been doing on supply chain optimization and working capital management, particularly inventory management, working with our vendors to get returns so you see some of that in our AP in Q3, with a slight improvement in AP terms.

Okay. Great. One last question I had on IQ 7; I think you mentioned 1Q is not launched out, and you mentioned it will penetrate some new markets. Is it just the software feature that allows you to configure for different regions of the world or what allows you to penetrate these new markets? I notice that Japan was mentioned there; where do we stand on Japan?

Yes, this is Raghu. The architecture is such that it's a digital architecture; it's a piece of power electronics, not a big box power. Both are on our ASICs. So, it is a completely software-defined device that allows us to configure based on the geography that you're in, meeting the connection requirements. We are focusing on the IQ 7 as our expansion plan, and Japan is on the roadmap. We're not exactly discussing timing on that, but it does open up; as I said, it’s a worldwide skew that can be configured for virtually all geographies. So, we'll be attacking more geographies over time.

Do you see IQ 7 accelerate ACM adoption, or are those mutually exclusive?

No, absolutely, IQ 7 is again much smaller, much lower profile. It's actually been designed and architected with the ACM in mind because ACM is absolutely a very key strategy for us. So yes, it does in fact accelerate ACM and accelerate new partners as well.

Great. That's all I have. Thank you. Appreciate it.

Bert, can you talk a little bit about the pricing dynamics on a regional basis? It looks like you're flat quarter-over-quarter, but with the growth in Asia, is that offsetting some price pressure in other geographies?

Regarding the pricing environment, we see pricing pretty stable at about 2% erosion quarter-on-quarter. If you ask me what it was for 2017, it was about 7% to 10%.

Okay. So, you're seeing a 2% across the board regardless of regions. Okay. And then with the working capital dynamics, as you guys get into a more robust transposition and operational cash flow, are you seeing opportunities to go back to your suppliers and get better terms and support some of the balance sheet with longer payment terms on the payables line?

Yeah, I just mentioned with the last caller that one of the driving factors behind AP going up a little bit sequentially is the better terms. You’re hitting something that's really important, Colin, which is as our financial performance improves, naturally my cost of capital comes down. I expect to see that reflected in terms only with my vendors but also with our lender. We're excited about the opportunity to go back and recast some of those relationships in a more positive way.

Okay. And then the last question for me is really about the warranty obligations— they haven’t really moved much here for a little while, and obviously you are growing sales. So, can you talk a little bit about some of the reliability data that you're seeing and how those things are rolling off for you guys in terms of the forward risk?

Sure, I can handle both of those areas. I may ask Raghu to weigh in a little bit on the reliability piece. So, I would like to take them in reverse order. On the reliability piece, we're seeing tremendous reliability returns from our current product; it is really performing very, very well. The reliability is very high, and as a result, the returns are understandably low. From a warranty perspective, bear in mind, you're right, our install base is growing, but we are relieving the warranty liability as we build it. So, what you're seeing is really the netting of those two things over time. As we ship more units into the installed base, the warranty liability will go up as we settle the warranty obligations for a large and growing install base; you will see that liability come down.

And Colin, from a product point of view, what's core to our product strategy is semiconductor integration. Every generation of product from the M-series to IQ 6 to IQ 7 has a new ASIC, a new chip. This chip offers more and more integration. We’re increasing from 1.8 million gauges to 2.8 to 3.8 million gauges now with the IQ 7. More integration means better reliability because you have fewer components. Our testing gets more sophisticated over time, and the data that comes back from the field is high-quality because our systems are connecting. All of that informs the quality and reliability of our product. The combination of a semiconductor strategy, which is core to Enphase, coupled with all the feedback that we get from the field creates a nice virtuous cycle that enhances our digital architecture and power electronics.

Thanks for taking the question, guys. Given that Jinko and a few other Chinese companies as your partners do not currently have manufacturing assets in the U.S., would anything change in a relationship depending on how the tariff decision ends up coming out?

No. We don't expect any significant change there. Again, with the tariffs concerned, it's on the module. We don't know all the details as yet, but our expectation is that it won't change. Second, we also think about the AC module as a worldwide SKU. It's not simply a North American SKU alone; and coupled with the fact that IQ 7 is a worldwide product, we think that the risk is lower and manageable.

Okay. And there was a comment you guys made earlier about the percentage of non-inverter revenue remaining stable quarter-over-quarter if I heard that correctly. Will that percentage in theory increase over time, particularly as battery sales become more meaningful, and should it be increasing?

It's very intuitive; it should. You're right: as ACVs become a larger portion of our mix, it would be an increasing portion of that non-inverter revenue mix.

Yeah, hi. Thanks for taking my question. Just a couple of questions on the pricing environment and the competitive environment. You mentioned stable pricing in the near-term; what are your conversations with the customers suggesting pricing is going to be in the next quarter? Also, when considering seasonality, what are you seeing in the business? Lastly, you mentioned Huawei is rolling out products in the second half of '18. What’s the initial feedback you're hearing from the field on that product from your customers?

Regarding the pricing environment, it has been pretty stable; we're currently seeing about a 2% erosion per quarter. For the entire year, it has been about 7% to 10%. Regarding the trade case, as I mentioned earlier, the final outcome is still unknown. In regards to Huawei, we don't even know what their product is yet. Once that is announced, we can react better. But let me give you some color on our pricing management; we do this through value-based pricing. We take the next best alternative offered by our competition and think about the value we bring compared to the next best alternative. This means we have a transactional discussion with every one of our customers. This transactional pricing results in hundreds of line items every quarter, and we are constantly working to optimize gross margin and reach our 30, 20, 10 operating model by Q4 of '18.

As you know, Vishal, we don't guide beyond the current quarter. But there is no reason to believe that normal seasonality patterns are not going to hold, and there is likely to not be a significant impact.

Thank you for joining us today. We're extremely pleased with our progress in the third quarter towards our 30, 20, 10 target operating model. We look forward to speaking with you again on our call next quarter.