Enphase Energy Inc (ENPH) — Q3 2021 Earnings Call Transcript

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Third Quarter 2021 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer, and Eric Branderiz, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for the third quarter ended September 30th, 2021. 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, including availability and features, our operations, including manufacturing and customer service, the anticipated growth in our sales and in the markets in which we operate and target, and the potential benefits to homeowners and installer partners. 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, 2020, which is on file with the SEC and quarterly report on Form 10-Q for the quarter ended September 30, 2021, which will be filed during the fourth 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 press 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 third quarter 2021 financial results. We had a good quarter. We reported record revenue of $351.5 million, shipped approximately 2.6 million microinverters, and 65 megawatt hours of Enphase Storage systems. We achieved a non-GAAP gross margin of 40.8% and generated strong free cash flow of $100.7 million. We exited the third quarter at approximately 41%, 16%, and 24%. This means 41% gross margin, 16% operating expenses, and 24% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35%, 15%, 20%. CFO Eric will go into detail about our financials later in the call. Let's now discuss how we are servicing customers. Our Q3 Net Promoter Score worldwide was 67% and our North American Net Promoter Score was 71%, both unchanged from Q2. Our average call wait time went up a little bit, and was at 5.5 minutes in Q3, compared to 3 minutes in Q2, primarily related to the growth in our business. We're working on reducing call wait times to under a minute through additional staffing and training. We have increased the number of field service teams in the U.S. and Europe to provide on-site help to our installers, particularly for storage. We remain laser-focused on customer experience. Let's talk about manufacturing. As we have discussed in the past earnings call, the global supply chain is under stress. Our situation is primarily improving due to our efforts in qualifying alternate suppliers. For the AC FET drivers, we now have 5 suppliers qualified. Our supply of AC FET drivers is much better in Q4 than in prior quarters. For the A6 yields in our microinverters, we are a little bit tight on supply, but we expect to manage the situation. While we are happy with the overall supply for Q4, the situation is quite dynamic worldwide for both supply chain and logistics. We remain vigilant considering the growing demand. Given our strong demand, we are adding a fully automated line in Mexico in Q4, bringing our quarterly capacity in Mexico to approximately 2.2 million microinverters. We have already added a second fully automated line in Q2 at our contract manufacturing partner in India, bringing that quarterly capacity to over 1.5 million microinverters in India. Along with our existing capacity in China, we expect to easily achieve our target global capacity of 5 million microinverters per quarter by the end of the year. We have now geographically diversified two-thirds of our contract manufacturing capacity outside of China. Let's now discuss batteries. Our two sources for battery cell packs have increased their capacity to a total of approximately 180 megawatt hours per quarter from 120. Our existing suppliers are capable of adding more capacity as required. In the meantime, we are working on adding additional suppliers in 2022 to achieve global diversification. Our lead times for storage systems are currently long at approximately 14 weeks due to global logistic challenges. These lead times will come down once the shipping constraints and port conditions improve. Despite these headwinds, we expect to increase shipments of our entry storage systems by approximately 45% sequentially in Q4. Let's move on to the regions. Our U.S. and International revenue mix for Q3 was 76% and 24%, respectively. The U.S. market demand was quite strong in Q3 and we reported record revenue. We had record sell-through from our distribution partners to installers for both microinverters and storage. While our microinverter channels' inventory was at a healthy level at the end of Q3, our storage channel inventory remained tight due to strong demand and logistics issues. We expect microinverter channel inventory to remain manageable in Q4, and expect storage channel inventory to improve. In Europe, we reported record revenue in Q3. We continue to see solid growth in the Netherlands, France, Germany, and Spain. Our storage business in Germany is just getting started, and we are continuing to train a lot of installers. In September, we announced our entry into Italy, where we are providing IQ7 family microinverters to residential installers. Earlier this month in October, we began selling Enphase Storage systems to customers in Belgium, further expanding product availability in Europe. Overall, I am very pleased with our growth in Europe. In the Asia-Pacific region, revenue declined a little bit in Q3, primarily due to ongoing COVID lockdowns in Australia. Despite the disruptions, we are pleased with the growth of the Enphase Installer Network, the continued adoption of our high-power IQ7A product, and the growing strength of our AC model chips. In Latin America, we reported record revenue in Q3, largely due to increased sales of solar and storage systems in Puerto Rico. We are quite optimistic about our business in Puerto Rico and expect steady growth in the next few quarters, especially in storage. We also announced our entry into Brazil in September and started shipping IQ7+ microinverters to installers in early October. Now that we have covered the regions, let's discuss the overall bookings for Q4. Our overall customer demand for Q4 once again exceeded the high end of our guidance. The component availability is currently much better in Q4 compared to Q3, but not fully there yet. We are optimistic that our supply will catch up to demand by early next year. Let's now move to an update on our storage systems. We shipped 65 megawatt hours of Enphase storage systems in Q3, which was a 51% increase from Q2. Let's discuss the training for Enphase storage systems. By the end of Q3, we had trained 3,771 installer personnel, representing approximately 1,700 unique installation companies. Our hands-on training during installations through our mobile vans and training centers also started ramping in Q3 with electricians and lead installers attending training sessions and experiencing valuable hands-on time with real systems, which will allow an installer to visit the site, install, and commission an Enphase storage system in a matter of hours. We recently introduced two new features for our Enphase storage system. In late May, we introduced Load Control, which provides homeowners the ability to conserve their energy consumption by shedding non-essential loads during an outage, thereby extending backup duration. We have full circuits for Load Control designed into our Smart Switch. These loads will be active when the grid is present, and will be automatically shed in the event of a grid failure. This feature is configurable and controllable by the homeowner via our Enphase app. Last week, we announced that our home energy systems will soon integrate with most leading models of home standby AC generators, providing enhanced performance and a glitch-free transition for homeowners during power outages. Homeowners can monitor the real-time power flow, start and stop their generator remotely, set quiet hours to prevent their generator from operating until their batteries fall below a certain state of charge, and control everything with the Enphase app. This new feature will be available to installers in the U.S. in November. With the addition of these new features, plus our laser focus on customer experience, we continue to see an acceleration in demand for our Enphase storage systems. As a result, we expect to ship between 90 and 100 megawatt hours of Enphase storage systems in Q4. Let's discuss new products. Yesterday, we announced the all-new all-in-one Enphase Energy system with IQ8 Solar microinverters for customers in North America. IQ8 is Enphase's smartest microinverter yet. Unlike competing devices, IQ8 can form a microgrid during a power outage using sunlight, providing backup power even without a battery. Since the Company's inception, we have invested in custom applications and specific integrated chips for our microinverters, and today we see a significant payoff with a software-defined microinverter smart enough to form a microgrid. Many homeowners often assume that their solar systems will function if the sun is shining, even during a power outage. Unfortunately, this is not true until today. Now with IQ8, homeowners can realize the true promise of solar: to generate and use their own power. IQ8 solar microinverters can provide sunlight backup during an outage, even without a battery. The Enphase Energy system with IQ8 comes in four different configurations. The first is solar only, which is a standard grid-tied system that everybody is used to today. The second is sunlight backup, which I've just discussed, without a battery. The third is a very interesting configuration: Home Essentials backup with a small battery for low power and nighttime backup. The fourth configuration is the full energy independent system: a solar system with IQ8 and a large battery. While the first configuration, as I mentioned, is a standard grid-tied system, the remaining three configurations are grid-agnostic systems that need an Enphase system controller or a Smart Switch, which isolates the home during an outage. For homeowners who want a battery, there are no sizing restrictions in pairing an Enphase battery with an IQ8 solar system. All configurations can be customized for homeowners with the help of our valued Enphase installer partners. We started piloting IQ8 with select installers in Q3 and will ramp shipments in Q4 starting in December. We expect the IQ8 ramp to take four to six quarters, similar to the IQ7 ramp. Let me also say a few words about IQ8D. IQ8D is the high-power 640-watt AC microinverter capable of supporting two DC panels, primarily for the small commercial solar business. We expect to start piloting IQ8D with select installers in Q4, and begin production shipments in Q1. This product is very important to us, not only for the small commercial solar business but also for our next-generation batteries as we increase discharge power and improve our cost structure. Let's turn to digital transformation. Both of our recent acquisitions achieved record revenue in Q3. Enphase Montreal, which provides design and proposal software, added a significant number of new installers. We plan to release several new software features early next year to improve the installer experience. Enphase Noida, which provides proposal and permitting services for installers, also experienced a significant increase in customer demand, and is focused on automating the creation of permit plan sets to further expand the installer base. Both teams will significantly leverage the Enphase Installer Network to grow and expand their business. Let me now give you an update on our Enphase Installer Network or EIN. We have now onboarded approximately a thousand installers to our Enphase Installer Network worldwide through our highly selective process focused on quality and homeowner experience. Our EIN in the U.S. has grown 57% since its introduction last year. We're very pleased with this initiative's progress and are thankful to our installers who act as our product demand, providing exceptional experience to homeowners. Let's talk about grid services. Last quarter, we discussed our participation in the Connected Solutions program, which is an incentive program implemented by three utilities in the Northeast U.S. to reduce electrical demand during high consumption periods. Our storage customers in Connecticut, Massachusetts, and Rhode Island can sign up, monitor, track money earned, and control participation in the program using the Enphase app. We are pleased to announce in Q3 our participation in Hawaiian Electric's battery bonus services program. This program offers a new incentive for homeowners on the Island of Oahu who install a new home battery. The first customers accepted by Hawaiian Electric into the program will be eligible to receive $850 per kilowatt that they commit to make available during a fixed two-hour period each day. The program helps Hawaiian Electric realize the goal of 100% renewable power by 2045, and enables more homeowners than ever before to install storage systems. We expect to engage with more aggregators in our grid services program during the months ahead. In summary, we are pleased with the overall progress we have made this year. We now have solar storage, load control, grid services, and generator compatibility as part of our Home Energy Management System. We're making significant progress on the digital platform for installers in order to reduce soft costs. We will remain laser-focused on both products and the digital platform to deliver a superior customer experience for both our installers and homeowners. I would like to make one more important announcement. We will be hosting an Investor Day on November 16th to provide a deeper update on our business. More details will follow over the next few weeks. With that, I will hand the call over to Eric for the review of our finances. Eric.

Thanks, Badri, and good afternoon everyone. I will provide more details related to our third quarter of 2021 financial results, as well as our business outlook for the fourth quarter of 2021. We have provided a 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 Q3 was $351.5 million, representing an increase of 11% sequentially and a quarterly record. We shipped approximately 913 megawatts DC of microinverters and 65 megawatt hours of Enphase storage systems in the quarter. Non-GAAP gross margin for Q3 was 40.8%, the same as compared to Q2. Non-GAAP gross margin was impacted by higher logistics and expedited costs, partially offset by a price increase on microinverters and continued cost management. GAAP gross margin was 39.9% for Q3. Non-GAAP operating expenses were $57.3 million for Q3 compared to $51.7 million for Q2. The sequential increase was primarily due to increased investments in R&D, IT infrastructure, and brand awareness marketing programs. GAAP operating expenses were $103 million for Q3, compared to $68.4 million for Q2. GAAP operating expenses for Q3 included $44 million of stock-based compensation expenses and $1.6 million of acquisition-related expenses and amortization for acquiring intangible assets. On a non-GAAP basis, income from operations for Q3 was $85.9 million compared to $77.2 million for Q2. On a GAAP basis, income from operations was $37.4 million for Q3 compared to $59.4 million for Q2. On a non-GAAP basis, net income for Q3 was $84.2 million compared to $74.7 million for Q2. This resulted in diluted earnings-per-share of $0.60 for Q3, compared to $0.53 per share for Q2. GAAP net income for Q3 was $21.8 million compared to GAAP net income of $39.4 million for Q2. GAAP diluted earnings per share was $0.15 for Q3, compared to diluted earnings per share of $0.28 for Q2. Now turning to the balance sheet and the working capital front. Inventory was $65.4 million at the end of Q3 compared to $37.8 million at the end of Q2. The sequential increase was due to the expected higher demand for our Enphase solar and storage systems in Q4, as well as longer lead times due to growing logistics and supply chain challenges. Days of inventory outstanding were 28 days at the end of Q3 compared to 18 days at the end of Q2 to support the growth in demand. Our target is 30 days. Accounts receivable were $273 million at the end of Q3 compared to $281.2 million at the end of Q2. DSO was 54 days in Q3, down from 65 days in the prior quarter. We exited Q3 with a total cash and cash equivalent and marketable securities balance of approximately $1.4 billion compared to approximately $1.3 billion at the end of Q2. We did not make any share repurchases against our recently approved $500 million share repurchase authorization. In Q3, we generated $113.4 million in cash flow from operations and $100.7 million in free cash flow. Capital expenditures were $12.7 million for Q3 to expand both microinverters and historic manufacturing capacity as well as costs related to development for website and IT. Now let's discuss our outlook for the fourth quarter of 2021. We are projecting our revenue for the quarter to be within a range of $390 million to $410 million, which includes shipments of 90 to 100 megawatt hours of Enphase storage systems. We expect GAAP gross margin to be within our range of 37% to 40% and non-GAAP gross margin to be within a range of 38% to 41%, which excludes stock-based compensation expense. We expect our GAAP operating expenses to be within a range of $119 million to $122 million, including approximately $52 million estimated for stock-based compensation expenses, acquisition-related expenses, and amortization. We expect our non-GAAP operating expenses to be within a range of $67 million to $70 million. Let me provide some additional color on a few topics. The revenue guidance assumes increasing microinverter shipments including IQ8, as well as storage systems shipments. We expect to ship 90 to 100 megawatt hours of Enphase storage systems in Q4, representing approximately 45% sequential growth at the midpoint of the guidance. We expect improved component availability for microinverter production in Q4 and continued momentum for the Enphase storage systems. On the cost side, we are continuing to expedite components and finished goods in Q4 to ensure customers have an adequate supply of our products. We expect quarterly expedited expenses to remain at similar levels as Q3. Due to the steep increase in logistic costs and rising component costs driven by inflation, we are implementing a modest price increase on all products starting in the second half of Q4. It is also prudent for us to maintain our baseline financial model as we continue to navigate global component supply constraints and logistics challenges. Finally, I would like to touch upon our OpEx guidance. Our guidance for non-GAAP operating expenses as a percentage of revenue is expected to increase in Q4. As we mentioned on the last earnings call, our OpEx may be slightly above our 15% targets at times, but we still expect to be comfortably above our baseline target of 20% operating income. We continue to invest significantly in R&D to further our competitive advantage. Significantly, we are more focused on semiconductor integration in our ASIC and software advancements, including cloud software to increase our system performance, reduce costs, and increase reliability. We also ramp up our marketing expenses in the back-half of the year with new product launches and brand awareness. For Q4, accruals for post-combination expenses from prior acquisitions are expected to be approximately $3.6 million. With that, I will now open the line for questions.

Hey guys. Good afternoon, thanks for taking the questions. Kudos on the strong results here. First one I had was just around the storage business. Eric, Badri, you guys talked about 50% growth or close to 50% growth sequentially here again into 4Q based on the guidance. I'm just wondering, with all the supply chain headwinds and concerns that are out there, I know you talked a little bit about the expediting, but is this product that's already in the channel or can you talk about visibility into shipments? And if there are any supply chain or logistical constraints that you're embedding in that number or kind of how de-risked it is?

Yeah. So, to just give a general color on the storage business so that you understand why our demand is picking up. We introduced the storage system in July of 2020. It's a beautiful product, distributed architecture, modular AC coupled, lithium-ion phosphate safe chemistry, air cooled. We have interesting features like Power Start, which helps optimize starting an air conditioner. Of course, Enphase customer service has improved, and my expectations are that we will continue to improve our NPS beyond 71 in the future. We've learned a lot in the last year, especially regarding homeowner experience and the notifications they need to receive. For installers, we are focusing on ease of use and commissioning. So, a lot of learning has gone into it. We have made continuous hardware and software updates over the last year. Additionally, we introduced Load Control in May 2021. Load Control has helped significantly in terms of customer experience, and we're finding that usage is quite successful. Along with the introduction of Load Control, we also optimized our pricing. Initially, we had a higher starting point, but we thought it was the right time to adjust pricing. Therefore, we started to see a strong demand in Q3. This is reflected in the 50% growth from Q2, and that demand remains healthy as we continue to improve our product. For Q4, we stated we would manage shipments of 90 to 100 megawatt hours. Primarily, that's constrained by logistics. As you know, the global situation is quite dynamic. Containers have become scarce; container costs have increased 8X. Ocean freight has also risen significantly. A typical container, which used to cost a couple of thousand dollars, is now costing around $16,000. So, logistics and supply chain challenges are prevalent across the industry. However, we are pleased with our long tail of installer adoption. We have trained 1,700 installation companies through our Enphase University, and over 1,000 of them are certified. We expect that number to continuously increase, resulting in broad-based demand. While we have logistics issues, we believe we have secured our contract manufacturers and cell pack capacity. Ultimately, it's a logistics issue we expect to navigate successfully; thus, we foresee shipping between 90 to 100 megawatt hours. Regarding Q1, I cannot provide specifics right now because the situation remains dynamic.

Yep, fair enough. Absolutely, it makes a ton of sense. Maybe just as a bit of a segue, I'd zoom out to the question around margins as well. I mean, you guys have been navigating this environment as well as anyone out there. You've been tracking at this sort of 40% to 41% non-GAAP gross margin level despite all these elevated costs and supply chain issues. And this year you have the two price increases. You've got the IQ8 coming in. And then presumably lessening supply chain and logistics costs as you head into 2022; I know you can't crystal ball that, but if you consider all that, it seems like there's a setup here where you should be earning significantly higher gross margins at some point next year, assuming some of these things normalize. So, can you speak to that a bit? Where you're at today and why you wouldn't be at a significantly higher gross margin at some point as you move through next year? Thanks, guys.

Right. There are several factors to consider. If you look at our component suppliers, the people who supply components to the microinverters and batteries, they are in the same situation as us. They are significantly increasing costs on us, with some component costs going up by over 100%. Due to the tight supply chain, I have to use air freight many times, which incurs considerable costs. Additionally, ocean freight has drastically increased as I mentioned earlier. Unfortunately, we cannot hide from these cost increases. However, we have made a lot of cost reductions over the last year which enables us to absorb some of the increases. Despite this, we have found it necessary to implement modest price increases for our customers, which we already did. That said, I cannot predict the situation for Q1 based on dynamic developments, but we uphold our guidance for Q4.

All right. Fair enough. I will take the rest offline. Thanks, guys.

Hey, good afternoon. Thanks for the questions and congrats on the quarter. First, I wanted to touch on factors impacting the storage lead times. I know you talked about an 8 to 10-week target before, relative to 12 to 14 weeks in Q2, and you mentioned 14 weeks just now. How much of that is driven by the worsened freight and logistics constraints? And how much of that have you been able to offset by your directly controllable efforts if you can speak to progress on the latter as well?

The situation is quite different in Q4. We have no problems with our manufacturing. The constraints are all coming from the global logistics sector. Transportation of dangerous goods is now under even greater scrutiny, which increase costs. Therefore, we face this challenge in moving these batteries through ocean freight, as we cannot air freight them like we do with microinverters. When the global shipping conditions improve, we will see lead times drop to the normal level of around eight weeks, but for now, it is over 14 weeks.

Got it. So over 14 weeks is embedding, you already accomplished your direct control on manufacturing. Appreciate the clarification there. And on the 2Q update, you also talked about getting towards 120 megawatt hours. And 1Q, the lead times were to drop towards 8 to 10 weeks. Given the higher timeline outlook of over 14 weeks, can you just give us an update on how you think about that volumetric ramp against the upside of the higher quarterly cell capacity at 180 megawatt hours? Appreciate it.

As I mentioned, our two cell pack suppliers are capable of delivering 180 megawatt hours per quarter. Currently, it is purely a logistics constraint. There is no limitation in demand. So, it’s too early for me to comment on Q1. However, if you look at our past history, especially in 2021, we have had healthy and reasonable growth every quarter and we expect to continue that into 2022. However, we will have to provide precise guidance for Q1 when that quarter arrives.

Thank you. I will take the rest offline.

Hi, thanks for taking my question. Congrats on the quarter. To confirm the modest inverter price increase that starts in Q4, was this mid-Q4, or was it already in Q3, or was this another increase?

This is another increase. It starts in mid-Q4.

Great, great. And then how much of the two recent acquisitions, Softest and DIN, are contributing, maybe on a percentage of run-rate revenue today, if we were to annualize it?

We're not going to break out that much. Let me give you some color. There are two companies that we acquired earlier this year. The first one was called Softest, which provides design and proposals tool for installers. Their tool is called Solargraf. Solargraf allows installers to drop solar panels on the roof and get proposal calculations to discuss with homeowners. The team is quite skilled; they were affected somewhat by COVID, with some hiring limitations. However, they are now operational again and driving improvements. We expect to release several new software features early next year to enhance the installer experience. The second acquisition, DIN, offers proposal and permitting services. This service allows installers to create proposals and permit sets within a short turnaround. This team is growing rapidly and is focused on automating permit generation. Both teams will leverage the Enphase Installer Network to expand further.

Great. That's very exciting.

To summarize, those two acquisitions are performing exceptionally well. They hit records in Q2, and new records in Q3, and I expect them to continue performing well in the future.

Very great. Thank you. Just to squeeze one last one. By Q4, how much of your storage as a percentage of shipments are outside the U.S.?

We just started shipping into Germany, so it's really not material at this point. As you know, when entering a new country, we need to train installers. The good thing about Europe is that most of the demand comes from long-tail installers. We know how to approach this segment. It requires hard work and a steady approach. I would say that the international business is not yet material, yet our U.S. market remains extraordinarily strong in storage.

Great. Thank you. I'll take the rest offline.

Thank you for taking our questions. Considering the improvements in supply chains, I understand that the situation is very fluid. However, if some of these improvements are sustained, how do you view the possibility of accelerating the rollout of products like IQ8 and the storage product on a global scale? Will this affect your plans in any way if it continues?

There are some factors we can control and others we cannot. I already spoke about the logistics situation, which is largely outside our control. What we could control was the AC FET driver supply. Through hard work, we were able to pivot from having 2 or 3 suppliers to now five. We believe IQ8 offers many interesting possibilities. Homeowners have been under the false assumption that their solar systems will produce power during a grid outage as long as the sun is shining. However, a standard solar system requires grid voltage and frequency as a reference, so without that, it cannot produce power. We are changing that paradigm with IQ8. It can form microgrids, and we believe this innovation will significantly expand our business moving forward.

Okay. I'll take the rest offline. Thank you very much, Badri.

Thank you.

Thanks so much, guys. Can you speak to the potential of IQ8 enabling you to enter the commercial rooftop market in a more aggressive way, even before you introduce the IQ8D?

We are poised to introduce IQ8D imminently. While we acknowledge this delay, beta installations are happening this quarter. The IQ8D offers an excellent cost structure with 640 watts of AC packed in a form factor slightly larger than IQ8. It is perfect for the small commercial sector. We're considering IQ8 not just as a microinverter, but as an entire system. An installer can visit our website, design a product for various structures, and get a quick proposal while having access to permitting services. Alongside that, they will be able to manage their fleet and monitor performance for profitability. Our goal is to provide an end-to-end solution and embodiment of this for asset managers and installers. We'll pilot this in Q4 and expect to ramp in Q1.

That's helpful. And it's a nice segue into my second question. So, with additional functionality and all the data that you collect on these systems, can you talk about your strategy for monetizing that data? It’s been something that's lingered around the Company for a number of years. I’m curious how you all are approaching the potential to monetize a lot of that data. And also, the performance of these systems on a granular level.

To be candid, we haven’t monetized enough to date. The data we collect is invaluable for servicing improvements. We're able to predict problems proactively, improving customer service significantly. However, we have not yet fully tapped into monetizing this information.

To add to that, we find extreme value in understanding consumption and production patterns to support algorithm developments using AI. This adds significant significance within our home energy management system, enhancing service elements such as maintenance and resolving issues. Furthermore, we see potential for integrating this information into a trading platform, allowing for microgrid trading. There are multiple facets of data use, but selling to a third-party isn't currently in our plans.

We'll dive deeper into these topics during the Analyst Day.

Hi, everyone. Thanks for taking my questions. Congrats on the quarter. Wanted to dig into the chip supply situation a bit more. I know you gave a bunch of color already. In terms of availability catching up to demand, it seems like we might see improvement in Q1. Is it fair to say that the bottleneck from chips might be limited by Q1, or is it maybe Q2, or perhaps the back-half of '22? Thanks.

Q4 is already a significant improvement from Q3. We effectively mitigated the AC FET driver shortage by qualifying five suppliers. However, I cannot predict compoent dynamics. In Q1, the supply should improve from Q4. Still, it’s challenging to deliver futures because the situation remains fluid.

Great. Thanks for that color.

Remember also, Q1 typically is a seasonally weaker quarter, so those are considerations as you model and think through this.

Great. Thank you both. As for next-gen products, you guys are launching IQ8, congratulations on that. You mentioned a four to six quarter ramp. If you can give us color on next-gen products, perhaps IQ9, its feature set and timing.

We will cover IQ9 at the Investor Day. IQ9 will feature advancements that cater to power upgrades, requiring innovations in transistors and transformers to handle higher frequencies efficiently. This innovation isn't an easy task, but we aim to achieve higher power with a smaller form factor. At the same time, IQ8 is already positioned well and we’re excited about its capabilities. The new ASIC will enable a more rapid response to grid events.

Just a quick clarification. Is IQ9 estimated to be two years away or further?

We will share more details at the Analyst Day. We are focused on a particular cadence for our microinverters going forward.

Great. Thank you.

Hey guys, good afternoon. On competition, I have two questions here. So first, one of your peers showcased their new micro solution at their Investor Day recently. Any thoughts on how the Enphase offering compares here, or more broadly, how you expect the competitive environment to evolve over the next couple of years? Second, do you see risks of losing market share due to the price increases you've implemented throughout this year?

We have observed competition in microinverters over the years, and we take all competitors seriously. Our focus remains on what we can control. We have made eight generations of microinverters and possess strong intellectual property, along with 300 plus patents. All of our microinverters are built on ASIC chips specifically designed for us, which allows for a single-stage architecture. In turn, this minimizes the components used, reduces heat dissipation, and ultimately, elevates quality. As for IQ8, this technology allows for sunlight backup in the event of an outage, which represents a new direction in our offerings. Regarding price increases, we don’t anticipate losing market share because our customers understand the pressures we face in pricing—such as the sharp rise from $2,000 to $16,000 for container costs and comparable increases in component costs. When we introduced modest price increases, we did so considerately, ensuring our partners understand the challenges. No one enjoys price jumps, but we expect our customers will appreciate our transparency.

Great. If I could just ask the second...

No worries; go ahead.

Thanks, I appreciate that.

Good afternoon, Badri. Quick question on the margin guidance here. I know you're using your typical baseline guidance, but given you've brought up freight, I wonder if weshould be concerned that as this continues as logistics problems persist, we will be closer to the lower end of your guidance. Or do you feel that was already baked into your Q3 results, meaning we're comfortable.

Thank you for the question. James, Badri and I are cautious about ensuring that we provide guidance numbers we stand behind based on our understanding as we speak with you. The guidance range remains flexible. In prior quarters, our delivery has consistently stayed within that range.

Right.

We have past-track records to demonstrate our delivery within that guidance. For the way we are currently managing costs and opportunities related to our technology, we have unique visibility several quarters ahead. Currently, in terms of logistics, market conditions may require short-term adjustments but no long-term impacts. Therefore, we believe our guidance is consistent with how we’ve been managing our operations, even during the most significant supply challenges.

Right. Right. Eric, that was very helpful. Thank you. And then maybe Badri on IQ8. We're excited about it; the technology is indeed promising, and I look forward to seeing it in action at the Analyst Day. I wonder if you could roll it out faster than that four to six quarters, potentially ramp it up sooner.

We’ve experienced complexities in rollouts in the past. We think this transition could be successful. But I would stress that each transition brings its challenges. It's crucial to properly educate installers, distributors, and customers. Thus, we set a projected timeline of four to six quarters, though I'm personally hopeful we could trim that timeframe.

Okay. Got it. Thanks, guys.

Thank you.

Hi. Thanks for squeezing me in, guys. Congratulations on the quarter. It looked like your international revenues were up about 5% sequentially. I'd be interested in some color on which regions or specific countries are driving that growth.

Yes, the growth primarily stems from Europe. The countries where we have performed well are the Netherlands, France, Belgium, and Spain. We're beginning to ramp up operations in Germany with our latest IQ7 offerings, and we'll soon experience growth from our Enphase storage systems introduced in both Germany and Belgium. Overall, Europe is where we are observing stronger growth. Latin America is showing excitement, particularly in Puerto Rico where storage is seeing significant uptake. Growth expectations continue to build in Puerto Rico and Brazil as well, albeit those numbers are ramping up slowly as the market develops.

Great. Thank you, guys.

Thank you.

All right. Hey, Badri, Aric, Karen. How is everybody doing? My question pertains to pricing and margins on the storage products in your Q4 guidance.

We haven't broken out the margins for individual product lines. To clarify, we are still in the early ramp stages of our storage offerings, which typically results in higher costs. However, we are working continuously to streamline our supply chains, manufacturing processes, and overall cost structure. We are also working on new products and features to realize more efficiency, which I will share during the Analyst Day. In storage, two critical metrics to monitor are kilowatt-hours per liter and watt-hours per liter, as well as watt-hours per kilogram. We will focus on maximizing our system performance to achieve our target margin. We will not enter any business unless we are confident of hitting our targets.

Yes, at a minimum. Okay. That's helpful. Another question I had was just on the rollout of IQ8D—while you're talking about potentially a new set of customers, how are partnerships coming along, and are there many new partnerships that you would need to forge to expand into that business?

To give you more context, we believe there is insufficient support for the long-tail installers, who are critical in this market, especially within the small commercial segment. This segment captures installations from 20 to 200 kilowatts. Instantly, many of these installs are managed by the same installers who work with residential clients. The key for us is to deliver an unparalleled customer experience and top-quality installations to address the installers' pain points within this segment.

We're also focused on offering complete solutions, beyond microinverters; this includes software for design and proposals, permits, fleet management, and O&M services. The expectation is that the combination of high-quality microinverters alongside these services sets us up well for success with IQ8D. We'll share more of our strategic plans and roadmap at the Analyst Day.

Okay, great. Thanks.

Thanks for taking my questions and congrats on the quarter. Badri, you've been discussing strong demand, yet there are numerous supply chain challenges. I wanted to ascertain whether these challenges span the entire supply chain from sourcing and manufacturing to shipping, or whether any specific constraints persist across your value chain right now. I have a follow-up on this.

To put it simply, if we split the business into microinverters and batteries, we have largely resolved the supply constraints on the microinverters. However, we continue to face logistics challenges for the batteries, which we cannot air-freight like we do microinverters. Our main issue on logistics continues to be substantial.

Got it. Thanks for the clarifications. So, you mentioned getting a third battery supplier. I recall you were discussing signing someone outside Asia to mitigate these challenges on battery supply chains. When might we hear more about that?

At present, we have two battery cell pack suppliers, both located in China. Initially, they were expected to provide around 120 megawatt hours; this capacity has grown to 180 megawatt hours. While we might increase capacity further with them, I'm interested in achieving global diversification to minimize risks associated with disruptions in supply chains within China. We're exploring many interesting opportunities, but I'm not ready to share specifics at this moment. I'll announce when we have something concrete.

All right. Thanks, answering my questions.

Hey. Good evening, guys. I appreciate all the commentary on IQ8. Very helpful. Just returning to that four to six quarter ramp, you noted success could be measured by IQ8 becoming prevalent among the EIN or reaching critical mass. Can you define what success would look like at the end of this ramp phase?

Success for us entails educating homeowners about the innovations we offer while enabling flexible and cost-effective system sizes. A homeowner, for instance, with a six-kilowatt solar system shouldn't need a 16-kilowatt storage solution – they should be able to acquire a storage system that matches their unique needs seamlessly. Ideally, we will see battery solutions sprouting in homes at an accelerated pace. However, the homeowner's preferences play a significant role, and it's up to our installers to guide them on suitable choices.

That's helpful. Also regarding the pricing dynamic with IQ8; is that drive a product-specific increase reflecting its differentiation from the rest of the product lineup?

Yes. We are not breaking out specific pricing for IQ8 in this call, but its distinct value proposition has led to a higher price structure compared to IQ7. As mentioned previously, we plan to start shipments of IQ8 in Q4, specifically in December.

Appreciate it. Thanks, Badri.

Thank you.

Wow, I made it. Hello everybody. Two questions for you, one financial, one technological. It sounds to me like you're saying that IQ9 is probably going to be the first product that steps away from IGBT's and uses some kind of wide band. Is that an accurate assessment?

Yes, we're acknowledging that IQ9 will likely use GAN devices.

Okay. All right. You have said that, fair enough. And then the second question just to turn Brian's question on its head earlier. You've done a great job of protecting margins, even in this kind of input cost environment. Going forward, given what you've said about long-term margin targets, will your strategy lean toward recouping that margin or perhaps taking lower input sectors as they arise, with a view toward lowering prices and gaining more market share?

We aim to focus on innovation and differentiation. The margins we present in our guidance are built towards not compromising growth at the same time. Our innovation approach allows us to deliver effectively. As we introduce new products and transform, this company is evolving significantly from what it was when I joined nearly four years ago. We remain committed to serving customers and managing pricing strategies with effective cost reductions. We'll also focus on negotiating with suppliers and emphasizing transparency to customers.

Okay. Thank you.

Hi everyone, just wanted to quickly touch on the capacity. I know that you're on track to reach 5 million microinverters per quarter by the end of the year. As we think about longer-term, beyond some of the supply chain issues, I'm curious if you are willing to discuss when you think you might need to increase that number again?

In Q3, we shipped 2.6 million microinverters. We are working towards achieving 5 million microinverters capacity based on our contract manufacturers' supply. However, the components needed for this manufacturing are contingent on the supply chain. We cannot predict when these constraints will lift, but once they do, we do not anticipate issues with our future capacity. The planning to add more automated lines will depend on demand, but we are prepared to scale as needed.

Okay. Thanks.

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again during our Investor Day on November 16th. Thank you.