Enphase Energy Inc (ENPH) — Q4 2020 Earnings Call Transcript

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter 2020 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 fourth quarter ended December 31, 2020. During this conference call, Enphase management will make forward-looking statements, including but not limited to, statements related to Enphase Energy's expected future financial performance, the capability of our technology and products, our operations, including in the manufacturing and customer service, the anticipated growth in our sales and in the markets in which we operate and target, the performance of the tools we make available to and the capabilities of our installation partners, and expected regulatory changes. These forward-looking statements involve significant risks and uncertainties and the 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, 2019, which is on file with the SEC and the annual report on Form 10-K for the year ended December 31, 2020 which will be filed with the SEC in the first quarter of 2021. 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 thanks for joining us today to discuss our fourth quarter 2020 financial results. We had a good quarter. We reported revenue of $264.8 million, shipped approximately 2.3 million microinverters, achieved a non-GAAP gross margin of 40.2% and generated strong free cash flow of $78.5 million. We exited the fourth quarter at approximately 40%, 13%, 27%. This means, 40% gross margin, 13% operating expense and 27% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35%, 15%, 20%. Eric will go into greater detail about our finances later in the call.

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2020 financial results as well as our business outlook for the first quarter of 2021. 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 IR section of our website. We are very pleased with the significant increase in demand for our microinverter systems in Q4 2020 despite the pandemic. Total revenue for Q4 2020 was $264.8 million which did not include any revenue from safe harbor shipments during the quarter. Total revenue increased 48% sequentially and we shipped approximately 762 megawatts DC of microinverters and 32 megawatt-hours of the storage systems in Q4 2020. The 32 megawatt-hours is equivalent to 12.2 megawatt-hours of power. As we previously discussed, some of our microinverter units met certain size and weight criteria, qualifying them for an exclusion to the Section 301 tariffs on prior shipments. We requested refunds totaling approximately $39 million plus accrued interest, of which $23 million were approved in Q3 2020 and $16 million were approved in Q4 2020. This refunds have been accounted for as a reduction of cost of goods sold in the respective quarters where they were approved and the associated accrued interest was recorded in other expenses. We have excluded trust tariff refunds from non-GAAP financial results to present a more accurate picture of ongoing business performance. We don't expect any further refunds in 2021. Non-GAAP gross margin for Q4 2020, which excluded the $16 million tariff approved refunds, was 40.2% compared to 41% for Q3 2020. The sequential decline was due to higher shipping and logistics costs related to component supply constraints. GAAP gross margin was 46% for Q4 2020. Non-GAAP operating expenses were $34.2 million for Q4 2020 compared to $29.6 million for Q3 2020. The sequential increase was primarily due to the hiring of 85 employees during the quarter, mainly focused on engineering, cost of experience, and innovation. GAAP operating expenses were $42.8 million for Q4 2020 compared to $43.2 million for Q3 2020. GAAP operating expenses for Q4 2020 included $7.8 million of stock-based compensation expenses and $684,000 of acquisition-related expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations was $72.4 million for Q4 2020 compared to $43.7 million for Q3 2020. On a GAAP basis, income from operations was $79.1 million for Q4 2020 compared to $51.8 million for Q3 2020. On a non-GAAP basis, net income for Q4 2020 was $71.3 million compared to $41.8 million for Q3 2020. This resulted in diluted earnings per share of $0.51 for Q4 2020 compared to $0.30 per share for Q3 2020. On an annual basis, we are pleased to report our record non-GAAP net income of $188.5 million. GAAP net income for Q4 2020 was $73 million compared to GAAP net income of $39.4 million for Q3 2020. GAAP diluted earnings per share was $0.50 for Q4 2020 compared to diluted earnings per share of $0.28 in Q3 2020. Now turning to the balance sheet and the working capital front. Inventory was $41.8 million at the end of Q4 2020 compared to $37.5 million at the end of Q3 2020. The sequential increase in inventory was driven by the planned increase of raw materials for our Enphase Storage systems in anticipation of the production ramp in 2021. Although the dollar value of inventory increased sequentially, days of inventory outstanding decreased to 27 days, compared to 41 days in Q3. This sequential decrease in days of inventory was driven by the higher shipment volumes in Q4. Our target is 30 days nominally and we will always do what is right for customers. Accounts receivables were $182.2 million at the end of Q4 2020 compared to $122.4 million at the end of Q3 2020. The sequential increase was due to the higher revenue in Q4. DSO of 50 days decreased slightly from 52 days in the prior quarter due to our collection management. We remain committed to efficient working capital management and driving down our cash conversion cycle. We exited Q4 2020 with a full cash balance of $679.4 million, compared to $661.8 million for Q3 2020. We did not make any share repurchases against our $200 million share repurchase authorization. However, we spent $16.3 million to withhold to cover tax transactions on employee stock vesting that prevented the issuance of approximately 132,000 shares in Q4. For the calendar year 2020, we spent $68.3 million at an average price of $50 per share on withhold to cover transactions and prevented the issuance of approximately 1.4 million shares. In Q4, we also spent $43.9 million on the partial repurchase of convertible notes due 2024. Since the end of Q4, we have received additional conversion requests of $61.5 million as the notes are deep in the money compared to the commercial price. We expect to repay the principal amount of this conversion requesting cash and in the money amount in shares. Settlement will occur in Q1 2021. In Q4 2020, we generated $84.2 million in cash flow from operations and $78.5 million in free cash flow. For calendar year 2020, we generated a record $198.9 million of free cash flow. Capital expenditure was $8.9 million for Q4, mainly for the Enphase Storage manufacturing capacity increase, IT enhancements, Enlighten software app development costs, and the production ramp with our second contract manufacturing partner. Capital expenditure for 2020 was $20.6 million. Now let's discuss our outlook for the first quarter of 2021. We expect our revenue for the quarter to be within a range of $280 million to $300 million. We expect GAAP gross margin to be within a range of 37% to 40% and non-GAAP gross margin to be within a range of 38% to 41%, which excludes stock-based compensation expenses. The gross margin guidance includes a further increase in shipping and logistics costs to ensure we are best serving our customers and getting them as many units as possible. We expect our GAAP operating expenses to be within a range of $64 million to $67 million, including a total of approximately $22 million estimated for stock-based compensation expenses, acquisition-related expenses, and amortization. We expect non-GAAP operating expenses to be within a range of $42 million to $45 million. All guidance estimates include the Sofdesk acquisition but do not include the DIN's Solar Design Services business. I would like to touch upon our OpEx guidance. Our non-GAAP operating expenses are increasing quite a bit from Q4 to Q1. The increase is due to two reasons: hiring to support our growth plans and consolidation of acquisition, plus we lead in incentive accruals. The hiring is related to the new product development and investment in innovation to create the best-in-class home energy management system. The Sofdesk and DIN Solar Design Services Business acquisition are building blocks that enable us to build a world-class digital platform for homeowners and installers. At the same time, we are not taking our eyes off the baseline financial model and plan to maintain operating expenses at 15% of revenue. Before turning the call back to the operator for questions, I would like to mention a couple of things. First, we published our inaugural ESG report a few weeks ago. Sustainability is at the core of what we do at Enphase, and we are proud of our team as we continue to enable clean energy and energy independence through innovation. Second, Enphase has recently been added to the S&P 500 Index and we are very proud of this accomplishment. I want to acknowledge the hard work and dedication of the entire Enphase team. With that, I will now open the line for questions.

Hey, guys. Thanks for taking the questions and congrats on a great quarter. Maybe first if we could sort of dig into the guidance a little bit. I know there are some shortages here on the micro side, I'm assuming there's some on the battery side as well. But can you give us a sense of sort of supply demand for both the micro side as well as the Encharge system? It sounds like you're leaving some business on the table here. Can you kind of quantify what impact that's having on Q1 and is that expected to also persist into Q2? And then related to that, I guess on gross margins, what percent hit did you see? Is it a 100 bps, is it more than that on Q4, given the additional freight and logistics costs you had to incur?

Let me start with the microinverters. There is significant demand from customers, which I attribute to our high quality and excellent customer experience. Although I won’t specify the exact increase in demand compared to our previous guidance, it is markedly higher. Our main challenge lies in semiconductor components, which is a widespread issue in the industry. We are specifically facing constraints with two components: the ASIC for the microinverters and the AC FET drivers for the high-voltage FETs. We are working to qualify additional sources to increase our supply and expedite production, and I am in touch with the CEOs of those companies who are assisting as much as possible. We anticipate resolving these issues by early April. Our top priority is ensuring we meet our customers' needs and keeping their operations running smoothly. On the storage side, we have ample capacity. As of last quarter, we had about 50 megawatt-hours of capacity, and by Q3 of 2021, that will increase to 120 megawatt-hours. Our storage shipping ramp has been promising, with a 35% increase in megawatt-hours shipped in Q4 compared to Q3, and we expect a similar growth for Q1. Regarding storage statistics, over 360 unique installation companies have installed at least one Enphase Storage system, and we have trained more than 650 unique installation companies along with over 1,200 installation personnel. We are learning from both installers and homeowners and continuously improving our processes. Although I wish we had achieved more, we are addressing our challenges, such as reducing our commissioning time to under 24 hours to enhance the installer experience, which is crucial for us. Installers often face difficulties with main panel rewiring and replacement, which we are actively addressing. Homeowners are also just beginning to understand how to utilize storage systems effectively. Even though the transition from on-grid to off-grid is seamless, it doesn’t change homeowners’ behaviors. We need to educate them better through intelligent notifications and load control systems. It’s essential to ensure our initial storage designs account for power capacity, as many overlook this. Enphase is committed to simplifying the installation process for our installers. Additionally, we need industry-wide reforms such as faster permitting processes for storage and innovative financing solutions to boost overall adoption. To summarize, we are experiencing substantial growth, with a 35% increase from Q3 to Q4, and we expect a similar growth rate for Q1. Our focus remains on the long-term with a commitment to training installers and streamlining our storage systems for easier installation.

Thank you, Badri, that's very helpful. I have a second question regarding batteries, which you have addressed to some extent. It appears that Encharge revenue was around $25 million to $30 million in Q4, and it seems the guidance indicates it will be over $30 million in Q1. So my first question about batteries is whether it's correct to assume those revenue figures are accurate and that there won't be any price changes in the near future. My second question relates to your new product; the installation rates aren't as quick as you've experienced in solar, and your shipments aren't matching your capacity. You've mentioned planning for 120 megawatt hours by Q2, with a desired 35% surge capacity, meaning you're aiming for around 85 to 90 megawatt hours as your target for shippable capacity. When do you expect shipments to align better with your available capacity? Thank you.

Your ballpark for the revenue is right. The second one is, like what I said, I mean, it's a long-term gain. So once we fix the ease of doing business for the installers, we expect to ramp. As you see, we are making significant progress with both the long tail installers as well as the Tier 1 and 2 installers. You saw all of the press releases, you will see a lot more going forward. So we continue to grow at a nice clip. You can do the math. If we continue to grow at this 30%, soon we will need a third supplier; that might happen in 2022, and we are already talking to those people.

Hi, thank you for taking our questions and congratulations on the quarter. You mentioned that you'll begin shipping IQ 8 in the second quarter. How should we consider the standalone pricing of IQ 8 compared to IQ 7? What could the potential premium range be? Additionally, do you anticipate that over time, a majority of installers will prefer IQ 8 over IQ 7, or is that still uncertain?

We won't discuss the exact pricing right now, but we are just a few months away from going to market, so that will happen soon. As for whether customers will prefer IQ 8 over IQ 7, we believe the answer is obvious—it will be a yes. IQ 8 is a grid independent microinverter system, and we expect high adoption rates when it launches. There are many options with IQ 8; some customers might choose to purchase it with a smaller storage system, and we will actively promote it.

Great. Looking forward. What percent of U.S. installers using your products now still need to be trained on Encharge? I know you gave the number of installers trained already for the system. How much is left in the U.S. training process?

Look, I mean, we work with a couple of thousand installers in the U.S. usually, and we reported numbers of 650 unique installation companies. That number we are catching up on those numbers very fast. So we expect within a couple of quarters to basically train everyone that matters.

Can you provide the annualized contribution from the two recent bolt-on M&As in terms of revenue and possibly gross profit?

We're not going to break out those numbers right now.

Good evening. Thank you for taking our questions. A lot has changed in the macro environment since your third quarter call. Can you discuss how your customer conversations may have shifted since the ITC was extended? Additionally, while it's uncertain what the future holds, if stand-alone energy storage is included in a future ITC revision, what impact do you anticipate this would have on Enphase, particularly regarding retrofit activity? Thank you.

Yeah, hi, this is Raghu. Clearly, change in administration is something that's very positive for us. Obviously, the first thing that happened was the ITC extension. As a result, you see all our numbers have no safe harbor in them. So that was probably a very significant change that took place. With regards to some bills that are in Congress that are being worked on right now, the one that is really interesting is the one around standalone storage. And the nice thing about our architecture is the fact that we are AC coupled, which means that it lends itself very well to a standalone system. So the combination of a standalone storage device plus a safety device, the microgrid interconnect can now add substantial value to the homeowner both in terms of providing resiliency in the event of an outage plus participating in value-added services such as grid services, for example. One could even extend your thinking into our portable power station, but also someday we participate in that as well in terms of providing both resiliency as well as participating in value-added services. So we really are excited about the storage standalone discussions that are going on right now.

Okay.

In terms of the ITC, the possibility of it being extended to storage, and potentially even offering a cash refund, is quite appealing. Homeowners consider payments, and financing plays a role in encouraging adoption. As the costs continue to decrease, both per kilowatt hour and per watt, the adoption rate can be accelerated. We are supportive of these developments.

Thank you. I would like to follow up on Moses's question about Sofdesk specifically. Is the purpose of the acquisition to build stronger relationships with your customers, or is there also a financial reason for these acquisitions in that they would independently meet your corporate target margin profile?

We appreciate our long tail installers and want to simplify doing business with them. Our goal is for them to continue using our platform, purchasing our products, software, permitting services, and more exciting offerings that are coming soon.

Okay, thank you very much.

In terms of financially, we look at those transactions and they stand on their own feet. So rest assured that that is there.

Got it, thank you.

Hey, guys. Congrats on the quarter. Just a quick question on storage trend for revenue storage across the industry...

Aric, you've got a really bad connection there.

Can you hear me better now?

We cannot hear you well.

Can you hear me better now?

Yeah, just keep it up top.

Slightly better.

Okay. First on storage. With the supply constraints across the industry right now, can you talk about your ongoing supplier discussions there? And is there any color you can provide around the amount of storage capacity you would expect to expand to near-term with your third supplier beyond the two existing suppliers? And a follow-up question after that.

Okay. Yeah, so right now we have two qualified suppliers. The first one we have already ramped well with. The second one is in the process of ramping; they started shipping to us in the fourth quarter. And we said that basically in Q4, meaning the quarter that just passed, we had a supply of 50 megawatt-hours. In Q3 of '21, we expect that supply between these two suppliers to go up to 120 megawatt-hours. And if we find that we are short maybe by the time we get into 2022, we are already talking to a third supplier, or rather multiple suppliers. And then it takes us usually anywhere from 6 to 12 months to qualify the product. We are starting those discussions right now.

Got it. And just to clarify, would you still expect to bring on a third supplier this year or are you saying that that's more going to contribute into 2022?

We will have a third supplier ready if we need it. So yes, we are starting those activities, that's correct.

Okay, thank you. And then just on the R&D cycle, are there any updates you can provide on the development of IQ 9, where that currently stands at this time? Is it still being developed or is it in testing phase? If you can provide any color there? Thank you.

We are currently working on IQ 9. Our vision for IQ 9 is to make it smaller, cheaper, faster, and more powerful than IQ 8. Right now, we are focused on a few key areas. One is figuring out how to reduce the size of the transformers, the ECAPS, and the 600-volt AC FET devices through some semiconductor process innovation. GaN transistors are becoming increasingly common, including GaN on GaN and GaN on silicon. The benefit of GaN is that it allows us to operate our AC FETs at a higher frequency, which enables us to decrease the size of the transformers, ultimately making the overall footprint much smaller. This is a theoretical concept, and we need to validate it through prototype vehicles and reliability testing. I expect this to take about 12 to 18 months. We will also focus on next-generation developments, including advanced cooling options and alternatives to current components. Currently, we have numerous components between our gate drivers, AC FETs, and DC FETs. By leveraging semiconductor packaging and GaN technology, we may be able to significantly reduce the number of components needed. A lot of R&D is taking place, and we hired our CTO, Hans, a year ago, who is excellent. Discussions have begun and there is a team actively working on this. Whenever our CFO, Eric Branderiz, mentions innovation, he refers to the investment in the CTO team. We are investing more heavily than before.

Got it. And one last question and I'll pass it on here. Could you just talk about any data points you can give us on traction or progress with the long tail installers in Europe? How is that training process going?

Europe is a great story for long tail installers. At our 2019 Analyst Day, I mentioned we had only five salespeople in Europe, but we've since increased that number significantly, maybe quadrupled or more. Our team is expanding in the Netherlands, Belgium, and France, and we’ve opened offices in Poland and Spain with sales and SAE teams there. We’ve also launched a major initiative in Germany, where we're training many installers and bringing more on board. We plan to introduce our storage solution in Europe in the third quarter. Germany is a vital market with 1 gigawatt of PV and an 80% attach rate due to low feed-in tariffs. While it's a mature market with many suppliers, we have clear differentiation. It may take some time, but with our strong focus on quality and customer experience supporting the long tail of installers, I’m confident we’ll make significant progress in that region.

Thank you.

Thanks so much, guys. Can you give us a sense of the progress that you're making in pre-selling the IQ 8D? And the activity you've got going in the commercial market right now?

Clearly, the IQ 8D adds significant value to the commercial segment. Just to remind everyone, the IQ 8D has 50% higher power density and can connect two panels to one device. Additionally, we see it not just as a standalone device but as part of a comprehensive end-to-end solution. We aim to utilize our digital platform, which includes design and proposal services, permitting packages, and an advanced operations and maintenance system for fleet management and performance tracking. We're committed to delivering a complete solution set to the market. Currently, we are in the alpha stage, with installations underway. The installation process has become much simpler. We have been working on small commercial projects with IQ 7, but the transition to IQ 8D represents a significant improvement. We're making considerable progress, and we'll provide more updates as we advance.

Great. And then just in terms of thinking about the integration of generators with the storage and solar. As you guys look at the competitive landscape, can you speak to the differentiation for the grid formation functionality that you have and how long you think it will take before anyone else has a similar sort of capability out in the marketplace?

The generator integration is something we consider unique to our offerings. For example, we have the microgrid interconnect device or smart switch, which eliminates the need for an automatic transfer switch that is typically required with generator integration. This function is handled through software on our end. By connecting the generator to the device, the entire system is managed by that device and the energy management system. There are additional advantages to our approach. Because of how we integrate everything within the AC domain, the generator can operate in parallel with the storage system. This allows homeowners to set up their systems to automatically make decisions, such as turning on the generator instantly when the grid fails. Alternatively, if the grid fails, the generator can be programmed to activate only when the battery's state of charge reaches a certain level and to shut off once it indicates another charge level. Additionally, there is a quiet period feature that can be configured via software, allowing users to set times when the generator won’t start, helping to minimize noise pollution. Overall, it provides a comprehensive experience where users can monitor real-time power flow through their app, creating a seamlessly integrated one-stop solution by incorporating the generator into a unified platform.

All right. Thanks so much, guys.

Thank you.

Hi, everyone, congrats on the strong results. My first question is on when you think you might add the second line in India. So given how low channel inventory is in the overwhelming demand, have you already made the decision to ramp up the second line? And if not, why not, and what else do you need to see?

No, we have already decided to add a second line. To remind everyone, we currently have half a million microinverter capacity. We plan to invest in adding another line that will provide an additional half a million microinverters. This will take about six months to be operational. In the meantime, we have alternative sources. In China, our Fuyong plant has a lot of capacity. Additionally, Guard has just reached a million microinverters, and we will also invest in Guard to significantly increase our capacity. With IQ 8 expected to arrive in one to two quarters, we recognize the need to expand our capacity and we will be focusing on this.

Okay. Thanks, Badri. So when do you expect the second line in India to come online, maybe fully, and by the end of the year, if you add up all the capacity, China, Mexico, India, what is the quarterly run rate you think we're at, maybe in Q4?

For the specific question about India, I would estimate around six months. Regarding our overall capacity by the end of the year, this is not about demand but rather purely about capacity, so I would anticipate being prepared for between 4 million and 5 million units per quarter.

Okay, great. And then as relates to international, I think on the last quarter you talked about, and by the end of this year, getting to a 70%-30% U.S. international mix would be reasonable and you'd be perhaps even disappointed if you weren't there. What's your latest view on that mix, and what do you think it ends up being by the end of the year?

We introduced a challenge by shipping the storage systems, which are completely based in the U.S. Now we need to ship the international storage systems. Alongside increasing our solar systems, we will be focusing on that as well. Achieving a 70%-30% split by the end of this year might be difficult. However, I believe it could be feasible by the middle of next year.

Hi, everyone. Given the strong free cash flow, your cash balance will soon approach $1 billion. Regarding capital allocation, are there any potential acquisitions? I know you've made a few smaller, strategic ones. Are there any acquisitions or business areas that could be beneficial from that standpoint, or is your focus more on product development and organic growth?

Both organic growth and acquisition will be essential for us. The challenge with organic growth is that our framework allows us to generate cash more effectively. Therefore, we plan to be very active in pursuing acquisitions. We have several initiatives we need to enhance our digital platform. Raghu and Adam are diligently working with a strong pipeline of M&A opportunities. Badri has established criteria for identifying suitable candidates or targets. This area will be very dynamic, and you can expect to see more developments throughout the year.

Yeah, Eric, do you have any other insights on areas of potential growth? You mentioned the digital platform, but are there any new regions or different strategies you’re considering?

We have a clear understanding of our long-term strategy for business growth. We envision every home as a micro-grid that connects with others, creating networks where energy can be shared. The upcoming electrification of homes and appliances, including electric vehicles, will increase demand for this transformation. Although we can't share specific details, we have a strong pipeline of opportunities we are exploring, as Eric pointed out, which informs our M&A plans. This includes both digital transformation and product development to align with our strategic vision.

And there are no confines on companies within the space, right. So we are thinking now is expanding that into other sectors, software and other areas. So it's a very, very diversified pipeline from multiple sources, right.

And it's international as well. So just as he's saying, the two acquisitions we have done, neither of those are actually in the U.S., but we are looking across the world, yeah.

And the other one is the ability of the company to absorb and integrate those acquisitions is going to be very important. So I feel very confident on Jeff McNeil's organization, in the finance organization; we are used to deal with acquisitions integration so it will be a very active place in 2021.

Yeah, no, that's very helpful. Maybe just last one from me. Just thoughts on updating the target operating model. I'm trying to think how many quarters it took for you to go from 30%, 20%, 10% to the new 35%, 15%, 20%, I mean you're now at the 40%, 15%, 25%, I mean, any thoughts on how long you'd like to see that sustained before you officially update that?

We want to ensure that we provide a cautious baseline, which is what we've done with our current framework. When launching new products and entering new markets, many factors come into play. For long-term planning, this is the appropriate framework. In the short term, the midpoint of our guidance for the current quarter is a responsible approach. For the long term, I believe this framework will generate cash. We have a specific business model regarding our operating expenses and capital expenditures. We do not have manufacturing plans, and while our capital expenditures will increase this year, we can continue to operate with our controlled manufacturing strategy. This framework should remain stable until we can provide an update, potentially during our Analyst Day if there are any changes.

Okay, thank you.

Hi, thank you. Good afternoon. I understand it’s still early in the storage sector, but I’m curious about your perspective on demand trends within the competitive landscape and any potentially favorable government policies. How is this influencing your outlook on market pricing for the upcoming year?

Our perspective is that when it comes to pricing and market trends, we need to continually add value. This means we should not view storage merely as a product or component; instead, it must be seen as an essential element of a comprehensive solution that includes energy management features like solar energy, storage integration, load management, and generator integration. Recently, we announced a partnership with a fuel cell company, illustrating that our focus is not on individual products and their pricing. Rather, we concentrate on delivering a complete solution that adds value for our installer partners and homeowners.

Okay. Fair enough. Should we anticipate any changes in the mix regarding storage long tail installers and your Tier 1 and Tier 2 installers over the next year or so?

No.

I think what we have today is right.

Okay. Thanks very much.

Thank you.

Hi, thanks for taking the questions. Badri, maybe this question is for you. Regarding the storage product, you mentioned that there are delays in installation due to the time needed to train the installers. This seems to also apply to your competitors, so I would like to know if you are experiencing similar issues with other products launched by your competitors in the market, or if there is something specific to the Encharge solution that is causing these delays?

I'm not going to comment on other competitors, but we take pride in supporting our long tail installers. Many of them may not have experience with storage installations, but there is significant demand. Our role is to train them to make storage installs seamless. We launched this product in July, and by the end of December, over 360 long tail installers, representing unique installation companies, have installed one Enphase Storage system, which is a significant achievement for us. We're adding 10 to 15 installers weekly. We have trained over 650 unique installation companies, which is also a success, but we believe we can improve further since there are thousands of installers available. We will focus on enhancing this aspect. If we assume each installer has at least two trainees, we have trained around 1,200 individuals. Our unique business model concentrates on the long tail, and our task is to ensure smooth and seamless installations. This is a long-term commitment, and we will remain dedicated to this process.

Got you. Thanks for the explanation. And just on the new acquisitions and the digital strategy. Could you maybe talk about, like what's the goal here in terms of reducing that soft cost? I think a couple of the solar developers have talked about $7,000, $8,000 per customer of soft costs. So is the idea here to kind of like bring it down similar to probably what the soft cost is in Europe and Australia, or what's your thinking process here? And have just a quick follow-up after that as well. Thanks.

Yeah. So, soft cost is an outcome of what our goal is; our goal is to provide our installers partners with the best service possible. And so it's our partners actually, as well as the homeowner. So we have mapped out a very detailed journey of both how the entire installation process as well for both the installers as well as our homeowners, starting with leads all the way through design proposal, permitting, procurement, commissioning, installation commissioning, permission to operate O&M, etc. And so if we do an amazing job on that, where we create a very powerful platform and these acquisitions that we're talking about are important elements of that journey, then I think the natural outcome of that is going to be a reduction in the soft cost. But we are starting with a very clear focus that this is about bringing great value for our long-tail installer partners.

So Maheep, this has been a focus of the industry for quite a long time. And everybody here it takes back into the easiest part of the value chain, which is reduce the cost of the panel, reduce the cost of the hardware, things that there are easy or tangible. When you're thinking about, for example, simplifying and streamlining permitting, you are talking about multiple counties, multiple different approaches, different timing, different locations. So is a much more complex problem to tackle and that's the problem that we are tackling. And as Raghu said it, we are tackling by understanding the problem from the standard point of view and solving that individual problem. And that incorporates pretty much every aspect of lead-gen, all the way through commission and post that, the O&M process, right, which we are digitizing in many fronts, right. And these acquisitions basically fill those gaps.

Got it. No, that's helpful. And then just last one, just housekeeping. So the megawatts shipped in the quarter, does that include microinverters shipped to the storage product as well, or that's just for the solar shipments?

We will have to get back to you on that. I think right now, my off-the-cuff answer is, it basically only includes the microinverters that are pure solar and it does not include the microinverters inside the batteries. But we will have to get back to you on that.

All right. Thanks for taking questions.

Hi there. Thanks for taking my question. I've got two completely unrelated questions. The first relates to demand management as regards your storage business; you've kind of alluded to this a little bit Badri. We've seen Enbala get sold, AMS get sold, then go out. Might we see you make an investment in sort of the software infrastructure to really offer a fully integrated demand management capability to your customers with the utilities?

We won't go into specifics, but generally speaking, we believe there's a significant opportunity to provide value-added services with every storage system we sell. With our strong existing platform, our first focus is to establish partnerships that will integrate well with the platforms currently available. There are multiple potential partners across various programs, both on the East Coast and in California, that we can engage with as we expand our storage offerings. Additionally, incorporating the coordination and management of these distributed energy resources onto our platform is a logical next step for us.

Okay. And so that's interesting. You would not have a problem say, making sure that you operate well with AutoGrid or somebody like that?

Absolutely, if there are existing programs we would do it. Yes.

Okay.

There are, in fact, cases that are getting standardized anyway.

It's interesting to hear you discuss wide bandgap FETs. Can we envision a future where all the high energy MOSFETs in your device are GaN, or is silicon carbide also part of this vision?

No, I did not mention silicon carbide. We believe GaN is the way to go, but we are only beginning to explore its potential. We are collaborating with a few companies. GaN on GaN and GaN on silicon are two promising technologies. They will help us reduce our footprint and support high power, which is everything we desire.

So I guess over time we can reasonably expect to see those individual high-power sockets probably transition to wide bandgap technology over the next couple of years. Is that the idea?

Yeah.

Yeah.

All right, thank you so much.

Thanks for taking my questions. I have a couple regarding storage. In terms of bottlenecks or challenges, do you think they stem more from slow training of installers, a lack of customer education, or potentially pricing issues? Additionally, do you notice different demand trends between the Encharge 3 and Encharge 10, and do you anticipate any changes in product sizing moving forward?

No, as I mentioned earlier, I might have addressed Brian Lee's question, but let me go over the details again. There are several issues that can arise for installers when it comes to storage. Some of these issues fall directly under Enphase's responsibility. Installers prefer to complete their jobs within 12 hours, and if our commissioning time is too long, it creates challenges for them, which we recognize. We are actively working to reduce that commissioning time. Additionally, installers often need to rewire the main panel, which can be a costly endeavor. If we can provide solutions that eliminate this need, it simplifies their work. Moreover, when homeowners first start using these storage systems, they might need assistance frequently. For instance, if they switch from on-grid to off-grid without adjusting their energy consumption during a grid outage, they could quickly deplete their storage, particularly if they have air conditioning running. This can lead to confusion and calls for help from installers, resulting in lost profits for them. Enphase can address these issues by ensuring our systems provide clear notifications to homeowners and enabling load control features through an app, allowing them to set preferences like avoiding air conditioning during off-grid times to extend storage life. Furthermore, during the initial design phase of the storage system, we need to ensure a transparent and simple consultation process between homeowners and installers. These aspects are fully within Enphase's control, and we must take responsibility for them. On a broader scale, the industry faces challenges, such as lengthy permitting times that need to be addressed collectively. Additionally, as financing options for solar improve, financing for storage must also evolve. Customers are becoming more comfortable with monthly payments rather than making large upfront cash payments. These two industry-wide issues are areas we will work on. Therefore, we will focus on improving Enphase-specific processes while also advocating for necessary changes in the industry. These efforts are crucial for us to significantly scale up beyond our current growth levels.

So Sameer. Many of the comments made by Badri are not unique to Enphase. We are approaching this as if we are training installers who have never conducted an installation before, particularly with storage, and they are performing well with microinverters. For them to initially use our components or perhaps salvage a new product to convince homeowners that this is a great option is crucial. Once they successfully do that, we align everything with the crews, handle the commissioning, complete the training, and complete the installation. This process takes time. Currently, they are managing closely with the microinverter systems. Therefore, we decided to launch with a longer time frame; this is an investment we are making. Once they invest in our system, we believe they will find it challenging to switch to another alternative because they will be trained, familiar with our technologies, and understand our approach. Concurrently, we have interest from Tier 2 and Tier 1 companies which are more sophisticated and have experience with installations using competitive products. They feel that our product will be an easy choice to adopt. All of these factors are occurring simultaneously.

It's impressive that you have pinpointed the specific challenges you are encountering and are taking steps to address them. That’s a positive sign. Shifting topics, you noted that DNI revenues are not included in your Q1 outlook. I initially thought that DNI served primarily as back-office support to enhance operational performance rather than being a revenue-generating entity. Am I misunderstanding something?

Yes, you are mistaken. DIN primarily offers permitting services to installers for revenue. Alongside permitting services, they also deliver design and proposal services. The main goal is to enable installers to obtain the necessary paperwork and permit plan sets within 24 hours. Once again, the alignment is clear for us because we prioritize what matters to our long tail installers, even more than they do.

Right, right. And then last one, over the last several years you have had several instances of these supply constraints. And now that you are sitting on approximately $700 million, is there any effort towards going upstream?

No, I mean, we're very clear. We're going to keep our capital expenditures and operational expenditures low. This situation arose because we did not anticipate such a significant surge in demand following the pandemic. Perhaps we should have seen it coming, but we didn’t, and it's clearly because our product is well received. The high quality I’ve always mentioned, targeting 500 DPPM, along with providing a great customer experience, are our guiding principles. We did not foresee such a substantial increase, and as a result, we are somewhat limited. However, this constraint is not as severe as what we have experienced in the past, and I believe we will be making adjustments in how we operate the company moving forward to prevent similar situations from occurring. We learn from our mistakes, and we will implement the appropriate business processes. Nonetheless, there is no need to alter our strategy; it remains one focused on capital efficiency.

Thanks for taking the question.

Thank you for taking my question. It's still very early in the rollout of the storage product, but given the initial demand trends you are observing, what are your thoughts on the potential attachment rates we might see in the next three to five years?

When we chose not to discuss attach rate, we provided megawatt-hours instead, which offers a clearer picture for calculating the attach rate. This is because the storage's popularity varies by state; for instance, it may be more widely adopted in California compared to other states. Therefore, the metrics differ, and we cannot simply discuss attach rate in isolation. That's why we provided megawatt-hours. I prefer to focus on megawatt-hours rather than attach rates. As mentioned, we are experiencing steady growth from Q3 to Q4 at 35%, and we anticipate a similar growth rate from Q4 to Q1. This underscores the progress we're making in terms of megawatt-hours.

Is there a specific number we can aim for regarding megawatt-hours over the next few years, or do you have that information available with the current low mid-term guidance?

It's hard for us. Right now this product is in the early stages of its brand. It's hard for us to give a number right now. It'll take us a few more quarters.

That's fair. Thanks.

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