Enphase Energy Inc (ENPH) — Q2 2019 Earnings Call Transcript

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Second Quarter 2019 Results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer; Eric Branderiz, Chief Financial Officer; and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its second quarter ended June 30, 2019. During this conference call, Enphase management will make forward-looking statements including, but not limited to, statements related to Enphase Energy's financial performance, and the capabilities and performance of its technology and products, operations including service capacity and supply and current and future market and customer demands and trends for its services and products. 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, 2018, which is on file with the SEC and the quarterly report on Form 10-Q for the quarter ended June 30, 2019, which will be filed with the SEC in the third quarter of 2019. 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 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 a reconciliation 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. Now I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Good afternoon, and thank you for joining us today to discuss our Second Quarter 2019 Financial Results. We had a strong quarter, reporting revenue of $134.1 million, driven by robust customer demand. While demand continued to exceed supply in Q2, we increased our capacity to better support our customers. I'll provide a supply update later in the call. Our non-GAAP gross margin for the second quarter was 34.1%, with a non-GAAP operating income of $23.2 million. Our gross margin was negatively affected by 330 basis points due to expedite fees related to component shortages, specifically from air shipments made to serve our customers. We have made significant progress in strengthening our balance sheet, exiting Q2 with a cash balance of $206 million, which included net proceeds of about $115.5 million from the issuance of convertible senior notes due 2024 and the repurchase and exchange of certain convertible notes due 2023. We exited Q2 with an approximate 34-17-17 ratio, indicating 34% gross margin, 17% operating expense, and 17% operating income, all approximate non-GAAP figures. A common question is whether we will reset our target financial base model, given our performance exceeding 30-20-10; it's certainly a possibility we will consider in the future, but we prefer to see a few more quarters of solid execution first. Eric will provide more details on our financial results later in the call. Now, let's turn to the customer experience. Our Net Promoter Score in Q2 was 53% in North America, although our call wait times were longer than desired. We are working to bring wait times down to two minutes or less by adding staff and enhancing self-service options. We are happy to report that over 5,000 homeowners have joined our Enphase Upgrade Program, aimed at early adopters of our legacy microinverters, which reflects our commitment to quality and customer service. Homeowners gave an NPS of 65% for this program in Q2. We're also focusing on our mobile apps to improve customer experience. For instance, homeowners can use the Enlighten mobile app for detailed energy generation visibility, energy consumption tracking, and battery system operation if applicable. In January, we launched a new version of this app, initially receiving poor iOS ratings, but we've formed a task force to address these issues, and we're now pleased that our rating has improved to about 4.4 out of 5. Now, regarding tariffs, we've shared the cost increases due to tariffs with our customers. We are working on mitigating the Section 301 tariffs by expanding manufacturing with Flex in Mexico, alongside increasing global capacity and improving delivery. We began shipping our IQ 7 microinverters from the Flex Mexico factory in late Q2, although shipments were delayed a couple of months primarily due to qualification issues. The most efficient way to ramp up production was by replicating the successful processes from Flex China, which we executed well except for two of the 230 process steps. We quickly identified this through our monitoring and audits and have swiftly addressed these issues. We are progressing well, as stated in our July 1 press release about shipments from Flextronics Mexico. We anticipate this production ramp may take another two to three quarters as we streamline operations in terms of headcount and factory processes. Moving on to our regional performance, our U.S. and international revenue mix for Q2 was 74% and 26%, respectively, compared to 78% and 22% in Q1. Revenue in the U.S. increased by 29% sequentially and 107% year-on-year due to strong demand, which included volume shipments of our IQ 7XS and IQ 7AS microinverters as planned. In Europe, revenues rose by 71% sequentially and 46% year-on-year, supported by our supply increases meeting growing customer demand and normalizing channel inventory. The IQ 7 microinverters have unique advantages in the European market, particularly for new builds and small residential systems. The Netherlands and France continue to be strong markets for us. In the APAC region, revenue grew by 29% sequentially but declined by 23% year-on-year as we rebuild our solar and storage teams under our new sales leader for Australia. Latin America saw a 7% sequential decline in revenue but a 27% increase year-on-year. We're optimistic about growth opportunities in Latin America, particularly with Ensemble, and collaborating with customers in North America regarding ITC safe harbor demand. We have a clear perspective on Q3 demand and are analyzing expectations for Q4 2019 and Q1 2020. We anticipate Q4 will be significant, with some safe harbor demand spilling into Q1. Our strategy is to first address the intrinsic demand from our customers followed by safe harbor demand; Eric will later provide our safe harbor revenue outlook for Q3. Now, let’s discuss supply. Component shortages, notably of high-voltage FETs, have limited our supply in previous quarters. We have qualified multiple suppliers and secured key contracts while increasing our microinverter output each quarter. We are focused on ensuring we have adequate manufacturing capacity to meet demand, aiming to ramp to around 2 million microinverters and beyond in Q4 2019. I’d like to share a few words about our long-term strategy. We are transforming Enphase from a solar microinverter system company to a home energy management systems company, conceptualizing this transformation through four components: energy generation, energy storage, energy consumption, and services. Our current focus is on energy generation, which remains the core of our business. The latest addition to our product lineup, the IQ 7 family of microinverters, constitutes about 98% of our shipments in Q2, up from 94% in Q1. We are on track for the general availability of the IQ 7A microinverters for 72-cell modules in North America later this year. We continue to provide value with AC modules that lower logistics costs and reduce installation time, with the ramp up for SunPower now largely completed. We are also progressing with Panasonic, Solaria, and other partners in Europe. Enphase Energized ACMs have now been embraced by over 500 U.S. installers. With regards to our Off-grid product, we're nearing completion of the final requirements for our pure off-grid IQ 8 microinverter solution, expecting to increase shipments in Q3. We shipped about 1,000 microinverters to our partner in Q2 and have a few remaining requirements under our development agreement to fulfill before receiving the final $675,000 milestone payment. Next, energy storage is anticipated to be a major contributor to our near-term revenue growth. We plan to roll out the Ensemble 1.0 solution in Q4 2019, mainly focused on residential storage in North America. Storage capabilities will be supported by the Encharge battery, a modular 3.3-kilowatt hour solution that offers installation flexibility and scalability while streamlining our supply chain. The Encharge battery will be available in capacities of 3.3 and 10 kilowatt hours. Our third focus area is energy consumption, enabling customers to measure and manage their energy use. We currently offer products for measurement and reporting through our Combiner Box and Enlighten products at an aggregate level and expect to introduce new products with advanced capabilities for finer energy management at the breaker and appliance levels over time. Finally, services represent the last area of focus. With over 940,000 systems installed worldwide, there are numerous opportunities for product upgrades related to solar and storage, as well as software services. We have learned valuable lessons from our legacy product upgrade initiatives and will leverage that knowledge to introduce Ensemble 1.0 storage upgrades through our installer network. Several services, including APIs, warranty extensions, and system monitoring, hold the potential to generate new revenue streams, and we plan to discuss more of these in the upcoming quarters. In summary, we are satisfied with our progress in the second quarter. In the short term, our priorities are to ramp our supply chain to meet growing customer demand, enhance customer experience through quality and ease of business, and deliver Ensemble 1.0 later this year. With that, I will turn the call over to Eric for his review of our financial results.

Thanks, Badri. I will provide more details related to our second quarter of 2019 financial results as well as our business outlook for the third quarter. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis unless otherwise noted. We have provided reconciliation of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the Investor Relations section of our website. Total revenue for the second quarter of 2019 was $134.1 million, an increase of 34% sequentially and an increase of 77% year-over-year. We shipped approximately 416 megawatts DC in the second quarter of 2019, an increase in megawatts of 36% sequentially and an increase of 105% from the year-ago quarter. The megawatts shipped represent 1.283 million microinverters, approximately 98% of which were IQ 7. Both IQ 6 and IQ 7 represented almost 100% of the Q2 microinverter shipments. Non-GAAP gross margin for the second quarter of 2019 was 34.1% compared to 33.5% for the first quarter. Component shortages continue to negatively impact our Q2 non-GAAP gross margin by approximately 330 basis points. Non-GAAP operating expenses were $22.5 million for the second quarter of 2019, compared to $22.3 million in Q1 and $19 million in the second quarter of 2018. GAAP operating expenses were $27.9 million for the second quarter of 2019, compared to $26.2 million in Q1 and $23.3 million in the second quarter of 2018. GAAP operating expenses for the second quarter included $4.2 million of stock-based compensation expenses, $546,000 of amortization expenses for acquired intangible assets, and $631,000 of restructuring expense. On a non-GAAP basis, income from operation was $23.2 million in the second quarter of 2019, compared to $11.3 million in Q1 and $4.1 million in the year-ago quarter. This increasing operating income is reflective of our continued improvement in operational excellence and product leadership. On a GAAP basis, income from operations was $17.4 million in the second quarter of 2019. On a non-GAAP basis, net income for the second quarter of 2019 was $23.2 million, compared to $9.5 million in Q1 and $1.6 million in the year-ago quarter. This resulted in basic earnings per share of $0.20 and diluted earnings per share of $0.18 in the second quarter of 2019, compared to basic earnings per share of $0.09 and diluted earnings per share of $0.08 in the first quarter of 2019. GAAP net income for the second quarter of 2019 was $10.6 million, compared to $2.8 million in Q1 and a loss of $3.7 million in the second quarter of 2018. This resulted in basic earnings per share of $0.09 and diluted earnings per share of $0.08 in the second quarter of 2019, compared to basic earnings per share of $0.03 and diluted earnings per share of $0.02 in the first quarter of 2019. We are happy to report that this was the third quarter in the company's history that we achieved GAAP net profitability. Now turning to the balance sheet. Inventory was $20.1 million in the second quarter of 2019 compared to $13 million in Q1 and $17.5 million in the year-ago quarter. We ended at 21 days of inventory on hand as of June 30, 2019, significantly below our internal target of 30 days, up from 18 days in the first quarter and down from 30 days in the year-ago quarter. The increase in days of inventory on hand as of June 30, 2019, was intended to improve shipment linearity to our customers and better serve increasing global demand. Inventory management continues to remain one of our key cash management initiatives. We exited the second quarter of 2019 with a total cash balance of $206 million, compared to $78.1 million in Q1. As Badri mentioned, the second quarter cash balance included net proceeds of approximately $115.5 million on June 5, 2019, associated with the issuance of $132 million aggregate principal amount of convertible senior notes due 2024 and the repurchase of $60 million aggregate principal amount of convertible notes due 2023 in exchange for shares of Enphase common stock and separate cash payments. This convertible note transaction enhanced our balance sheet and will help enable our growth. We generated $14.8 million in cash flow from operations and $12.3 million in adjusted free cash flow in the second quarter of 2019. Now let's discuss our outlook for the third quarter of 2019. We expect our revenue for the third quarter of 2019 to be within a range of $170 million to $180 million, including a range of $6 million to $10 million for ITC safe harbor. Turning to margins, we expect GAAP and non-GAAP gross margins to be within a range of 33% to 36%. Note that our Q3 gross margin guidance includes a negative impact of approximately 200 to 300 basis points due to expedite fees to meet customer demand. We expect our GAAP operating expenses to be within a range of $28.5 million to $30.5 million, including a total of approximately $5 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. We expect non-GAAP operating expenses to be within a range of $23.5 million to $25.5 million. You should note that the midpoint of this guidance represents 34.5-14-20.5, which is 34.5% gross margin, 14% operating expense, and 20.5% operating income, all non-GAAP numbers. With that, I will now open the line for questions.

Can you talk a little bit about the preparedness of the supply chain to support the elevated levels of revenue that you're seeing? Certainly, I think a lot of us are trying to figure out what the real ceiling is here.

Yes, we have discussed component shortages over the past few quarters. We have qualified multiple suppliers, particularly for the high-voltage FETs, and have signed several contracts. Additionally, we have been increasing our microinverter output each quarter. In Q1, we produced about 980,000 microinverters, while in Q2, we reached around 1.28 million. We expect to produce approximately 1.7 to 1.8 million microinverters in Q3, and we are confident in this projection. We also anticipate being prepared to supply a couple of million microinverters in Q4. Overall, in terms of high-voltage transistors, we expect to be in a good position as we approach the end of the year.

Okay. And then just in terms of pricing power with your customers. How much do you have right now? Is it a situation where you guys could actually raise prices here or in the last couple of quarters and sustain that into 2020? Or are you just trying to move as much volume as you can right now?

Well, I mean, we have already increased pricing on customers because of the tariffs. The customers are actually absorbing the pricing today. And in general, other than that, the pricing environment is largely stable.

I would like to discuss SunPower for a moment. Can you share your expectations for its contribution in Q3? Your Q2 results appear to be performing better than your initial projections, so please explain how this influences your guidance and its significance to your overall business.

We did the SunPower transaction last year. We announced the transaction in June, we closed the acquisition in August of 2018. We said we would, by and large, be done by the second quarter of 2019, and that is the case. We are done with the SunPower acquisition, meaning we are done with the ramp. Basically, we also said we will do roughly about $60 million to $70 million of annualized run rate when the business ramps. So everything revenue we did in Q2 is completely consistent with that. So SunPower was largely on track, things are going well. If SunPower does well, we do well and that's all we can say right now.

Yes, no, I got it. Okay, maybe I don't know if this is a number you've ever disclosed, but I'm just curious what percentage of your mix would be AC modules. And just obviously, that's a big component of the traction that you're getting. And wondering if that is something that's attracting other people, other potential partners for that in the market.

The growth in AC modules is consistent, characterized by slow and steady progress. Our primary customers include SunPower, along with Panasonic, which began increasing its output a few quarters back, and Solaria, which is also ramping up production. Additionally, we're collaborating with several module customers in Europe to offer differentiated AC module solutions. The uptake has been gradual, with approximately 400 to 500 installers having experimented with AC modules. While not all of them will completely transition to AC modules, those who have tried them tend to continue using them. Currently, the growth remains slow and steady.

Okay, but it's fair to say we could see more partners for you in that area.

Yes. I mean we are always in the process of adding partners if and when it makes sense. And that will be the case going forward.

Okay. Last one for me. Just on the component shortages you mentioned that you expect that to be pretty much taken care of by the end of the year, but I also know expedited shipping can be just a part of the business. What would you expect a more normal number to be rather than the 300 basis points it was this quarter?

Yes, normal expedite fees should be between 1% and 2%, or essentially between 100 and 200 basis points. Regarding component shortages, we are mostly past the challenges with high-voltage FETs, but keep in mind that the microinverter consists of 300 components. Therefore, we continuously monitor the supply chain, looking a few quarters ahead to ensure we are fully in the clear overall.

Congratulations on the results, it was a solid quarter. I would like to inquire about your unit expectations, as you mentioned 1.7 to 1.8 million in Q3 and $2 million in Q4 units. Could Mexico potentially exceed expectations as we move into 2020? Is there a chance that this facility could ship closer to 2.5 million or even 3 million units?

Yes, we're currently focusing on our Q4 '19 numbers, but as a management team, we’re planning for the next six quarters and reviewing it monthly. Our capacity planning has shifted to a monthly process, not just a one-time assessment. While we've provided specific figures for Q4 '19, that doesn't limit our ability to increase those numbers as demand grows. We're in a strong position to increase production because of our factory in Mexico, where Flextronics has performed exceptionally well. Additionally, we follow a capital light approach, which means we only need to add the necessary textures for production. The capital investment required is minimal, though we do have a lead time of about a quarter. With our six-quarter forecasting system allowing for reasonable notice, there's no reason we can't ramp up production.

Great. And then to what degree are you considering alternative geographies for capacity as well? So beyond China and Mexico. Is there anything there that you guys might be able to share?

Yes. We are not going to share in detail, but I'll tell you one thing that we have always talked about multi-sourcing in all aspects of our business. And that is truly everywhere. So you can count on us to deploy the strategy wherever it makes sense.

Fantastic. As it relates to safe harbor, Eric, I know you guys talked about $6 million to $10 million in Q3. We've heard in our checks that there are some meaningful safe harbor deals brewing. So $6 million to $10 million seems a little modest, but it is earlier in the year. As you ramp up to Q4, what percentage of your shipments in Q4 could actually be safe harbor?

We are not going to be talking about Q4 at this point right now; we have great visibility, but good visibility of Q3. We don't yet know about Q4; we'll talk about it when we're ready in the next earnings call.

Great, Badri. And this is a very quick set of housekeeping questions. Can you share what the impact of the tariff was on the margin in terms of basis points or maybe even dollars? And then, in terms of megawatts, any chance you guys could share how many megawatts was actually shipped in the U.S. or delivered in the U.S. in Q2? And if you think you guys are actually taking share from your peer at this point?

Well, I'll have Eric comment on the basis points if he's ready, but in terms of the megawatts, we said the rough split up in geographies we said 74% in the U.S. and 26% outside the U.S. So you should think about the overall megawatts from that ratio.

Well, Phil, we will not break it out, but you know the tariff percentage, as you know, we actually increased prices to cover 100% or a portion of it, I guess, of the cost, right? So we are providing that cost with our customers. With that being said, we shouldn't be concerned about the breakout. It's all covered through the price increase.

Wow, great revenue growth...

Brad?

You are growing a lot faster than the market. And then also, last call, you said you were sold out in Q2 at the time of the call. Are you sold out in Q3?

Yes, we are fully booked for Q3. Yes, at this point in time.

How do you interpret the amount of market share you are currently capturing, considering there was a reduction in the business due to bankability issues and the need to catch up?

Yes, it really comes down to four key areas that we consistently discuss. First is our bankability and our strong balance sheet, which you are all aware of. Our current cash balance stands at $206 million. The second area is product quality, where we aim for an annual DPPM of 500. While we're not quite there yet, we are making significant progress. The third area is customer experience. Even though we've seen an increase in rate times, our management team is dedicated to this aspect. In fact, during our executive staff meetings every Tuesday, I start by reviewing customer service calls to identify the issues our customers are facing. Our management team is highly focused on improving customer service. Lastly, we have innovation. I believe customers are inclined to stay with us because of products like Ensemble. Although we haven't executed as well as we hoped on Ensemble due to some delays, our priority is to launch Ensemble 1.0, aimed at residential storage, in the fourth quarter of 2019. We are fully committed to this goal. These four areas are crucial, and I believe they contribute to customer loyalty, particularly among long-tail customers. This group aligns with our focus on quality and customer experience, as they typically lack the time to address quality concerns or to reach out to us frequently. Therefore, this is where we excel in service. So Brad, those are the key factors, and I hope I’ve addressed your question adequately.

Just one other question would be, can you talk about the Mexico ramp? I think on July 1, you have a press release saying that the volumes were finally ramping out of Mexico. And you said in the past that Q1 of next year would be 100% Mexico. So should we just assume it's a linear ramp to that January level?

Yes, I would like to share some updates regarding the ramp in Mexico. We are currently a few months behind our initial expectations due to challenges in transferring the process steps using the copy exact methodology. Specifically, two out of the 230 process steps encountered issues. We addressed these promptly, and we have successfully aligned all signals in terms of reliability and monitoring, along with completing audits. Consequently, our overall progress is slightly delayed, which is why we only began shipping on July 1. Looking ahead, we anticipate that in this quarter, we will likely produce around a couple of hundred thousand units in Q3 of 2019. In two or three quarters, we expect operations to stabilize with sufficient manpower to manage all shipments. Our primary focus is on maintaining high quality, ensuring a controlled ramp-up. Over the next 90 days, we are aiming to achieve those 200,000 units in Q3, which is my objective.

And just last small one was, can you tell us the total megawatts shipped in the U.S. in Q2?

Well, we already disclosed the megawatts for the quarter being 416 megawatts DC, so we talked about 74% being domestic. So you can probably do the math.

Yes, 74% of 416; that is roughly 312, around that.

Congratulations from me on the strong results. A couple of questions of mine. I was wondering if you could just flesh out the share gains. Are you seeing any noticeable trends, Badri, on sort of the larger Top 5 installers in North America? Or is it more the longer tail of folks buying through distribution? Any noticeable commentary you have there would be helpful.

Yes. We are not going to give out any market share numbers because we don't look at the business like that. Basically, we are laser-focused on customer experience; we are laser-focused on our quality. And at the end of the day, profitable top line growth is what we are looking at. Having said that, we have 100% of the SunPower business. The North American demand is ramping quite nicely across the board and our long tail of customers is probably the place where we basically are gaining some share. And Europe is also, if you see the Europe numbers are also not too shabby either. The places that we are doing well are actually Netherlands and France. And I was just in Europe to do a bunch of review meetings there and it does turn out that Netherlands is the fastest growing country in Europe. So I think we are in the right places there. And these basically contribute to overall share.

That's helpful and while you're meandering around the world, any commentary you have on the new leadership in Australia or Asia-Pacific more broadly?

We put the new leadership in place a couple of quarters ago. I'm going to be in Australia pretty soon. We are going to do a similar kind of exercise that we did in Europe, but I think Australia, we need to rebuild our organization first. I think the Australian market is a very interesting market, both in terms of solar plus storage, and it is not a small market. And so we are going to work on it.

Can you provide any insight into the fully booked status for Q3? For Q2, you mentioned a supply constraint. What was the excess demand in Q2 that you were unable to fulfill, or did it just carry over into Q3? I'm trying to understand if customers are turning away due to long lead times.

We are not going to break out the specific numbers, but we have had this situation over the last three quarters. People have not walked away, and as I mentioned, we are fully booked for Q3. And we still have a lot more days left in Q3.

Makes sense. And then just the last one I had is just around the fourth pillar of your strategy around services and I'm an Enphase customer myself. I just received an email today asking me to enroll in your program, but can you just talk about your attempt at services in getting the consumer engaged? And how do you bridge the border of stepping on the toes of the installer versus going straight to the customer in bringing them awareness of Ensemble and getting them on the 5,000 person waiting list to upgrade? If I click on that link in my own email that I received today, does my installer receive an indication that I'm interested in doing that? Or can you just walk us through how that works? How you monetize that?

First of all, I want to emphasize that this is still in the early stages, and we are just beginning to explore our potential. If you're considering that we might bypass the installers, I want to clarify that we can never do that. The installers are essential to our operations. Our focus is on finding ways to better serve the customers. We are discussing the legacy product upgrade program for customers who have purchased the first two generations of Enphase products. It’s been some time since their purchase, and we want to offer them the option to buy an IQ 7 system and potentially an Encharge system when it's available. In this way, we create demand and pass it on to our network of installers who handle the work for us. This creates a beneficial situation for all parties involved, including the installers. We're just beginning to tap into this aspect. There is much more we can do, such as understanding consumption patterns and providing homeowners with various tools to support them, and we will discuss these developments further in the future.

Congratulations on the quarter. Just trying to dig more on the market share and thanks for the comments earlier, but can you just talk about how much of the growth in Q2 or even Q3 is driven by gaining market share versus overall growth? Just trying to understand your thoughts on the North American market business?

It's the same answer that I gave Jeff. We are not going to give out any numbers in market share, but the reasons why we are gaining market share I believe is basically along the lines of our core competence, which is essentially the focus on providing the highest quality, the highest customer experience, and basically, products like Ensemble show innovation in our product innovation capability. We think customers would like to stick to somebody who has an innovation roadmap like Ensemble. So those are the broad strokes, and of course, the healthy balance sheet always helps.

Got it. Second, you said you're fully booked in Q3, but how does the bookings look beyond Q3 or how should we think about that? And as part of that question, how do you think of the international mix in 2020 or kind of like a long-term target? Can you give an update on that?

Yes, we're not going to be breaking out numbers on Q4 bookings; it's just too early right now; we are not going to give guidance. In terms of international mix, obviously with the SunPower acquisition, international mix is skewed a little bit towards North America. Right now we are approximately 75-25, and in the past, given numbers, if possible, 50-50 would be nice. 50 North America and 50 rest of the world would be nice in a couple of years. And ultimately, something that is balanced between APAC, Europe, and North America would be actually perfect, but that's a little bit beyond doubt.

And just last question on Ensemble, could you just talk about the delay we now expect in Q4? And would we see some initial presentations to dealers? So could you just talk about their initial feedback from dealers and U.S. rather markets?

Yes, Ensemble 1.0 is expected to be released in Q4 of '19 and particularly we are targeting residential storage. And we haven't started any alpha or beta demonstration yet. In the next three months, we expect to obviously start doing those two with a few installers. But right now, we are laser-focused on the development; we are heads down. It's all about execution.

Most of my questions have been asked. Just looking at IQ 8, is this more of a 2020 driver now largely?

No, it's not. If you see our Ensemble 1.0, we are talking about high-capacity residential storage for North America. If you see the Encharge, the Encharge battery system, it has got battery cells; it has got battery management systems, software, the controller, and battery controllers. Every 3.3 kilowatt hour system has got four IQ 8s. That IQ 8 is nothing but our grid-forming microinverter. That's how we put together a battery system. So IQ 8 will be inside our battery. And that will be the first product that we will be releasing, that's what we call Ensemble 1.0. That will work with IQ 6 and IQ 7 installed base on the PV side. That's what we're going to release in the fourth quarter of 2019. Of course, Ensemble 2.0 is what we are talking about IQ 8 PV, which is IQ 8 on the roof, the IQ 8 solar system that could be available in 2020.

Okay, understood. As we transition into a company focused more on home energy management solutions, how should we consider the longer-term shift in margins? How much of these services might be offered as SaaS-type solutions? Or will they continue to be one-time sales? Can you provide any insights on this?

Good question. We will have a detailed discussion on this during Analyst Day. Our perspective is that storage alone has significant revenue potential, transitioning from $2,000 per home, which is based solely on microinverters, to over $10,000 per home. Additionally, consumption and services will contribute even more. Overall, this will positively impact our revenue and gross margins. We have already set a standard, ensuring we will not engage in any business with a gross margin below 30%. For this quarter, we expect our gross margin guidance, particularly the midpoint, to be 34.5%.

Understood. And on the OpEx site, from just your ramping on the revenues on the OpEx, are we at a stable level of these current levels? Or do we expect some ramp obviously from a marketing point of view, it may be some increases, but generally should we expect leverage to now really start kicking in?

Yes. So you remember that we had the big realignment of resources around the world, where we did double structure activity moving a functional model, we created a new headquarter in Fremont establishing a center of excellence in India, plus additional R&D resources in New Zealand, right? Four of those are part of the bigger strategy on how we are going to be able to scale and we are going to have operating leverage, right? So from an expand point of view, operating leverage at the corporate level on G&A is probably already somewhat reflective of the guidance, right? So if you look at the guidance, we are at 14% OpEx as a revenue, right? Now in terms of sales and marketing and R&D, remember we are an innovation company, right? So our focus on investing in new products and product development and digital platform work and all that kind of stuff that Badri mentioned as part of our strategy and we'll have that probably in the R&D part of that kind of OpEx as well, the same results of marketing growing regionally. Yes, we developed Europe; I think Badri mentioned Asia-Pacific, we may need boots on the ground, a sales force there. We are going to roll out formation as well, right, in those depreciation associated with those technologies or licenses will also hit OpEx, right, in many cases. So I think that we have a healthy operating leverage, already will trigger on the guidance. You should also think about how those R&D investments will materialize over time.

On power storage. So it sounds like Q4 is when you expect that to become kind of financially needle moving in the sales mix for the first time. Is that fair to say?

No, Q4 '19 will not be needle moving. Q4 '19 will be the introduction and then obviously, there will be a ramp. And I would say needle moving will be in 2020.

Okay. And when you talk about margin structure, 30% your long-term target, you're obviously a little above that now. Before the introduction of the storage product, is storage, all else being equal, likely to move that up or down, given the different competitive dynamics in the battery market as compared to microinverters?

Storage will always contribute to our corporate gross margin. This is not a commodity product; it’s how we will set Ensemble apart from others with unique features such as flexibility, scalability, and modularity. Eventually, Ensemble will integrate with our IQ 8 in the future. Additionally, we will introduce various software to enhance the customer experience. Therefore, you should not view it solely in terms of the battery cell side. It will align with our corporate gross margin.

I have a quick follow-up. How much do you think the market share gains is driven by the lower failure rates in our surveys of installers, we increasingly been hearing of high 5%, 10% failure rates at SolarEdge. And I'm not sure what yours are exactly, but I think they are probably 90% less than that. How much do you think that's a driver of the unit growth?

That we are not going to comment on that.

Okay. Well, in Storage, just to get a sense for how quickly it could grow. I know you're in touch with a lot of your existing installed base. Have you asked that installed base what their interest is in storage or do you know what percentage roughly might have said that they would be interested?

Yes, of course, these are surveys that are not comprehensive, but usually, people get excited when you ask them such questions and then they change their mind when it comes time to cut the check. So we'll see; we are very close to launching this product. So we are heads down launching this product right now. We will look at both new installers as well as our existing installed base, but we are obviously excited.

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