Enphase Energy Inc (ENPH) — Q1 2022 Earnings Call Transcript

Good afternoon. Thank you for joining us on today’s conference call to discuss Enphase Energy’s first quarter 2022 results. On today’s call are Badri Kothandaraman, Enphase’s President and Chief Executive Officer; Mandy Yang, Chief Financial Officer; and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2022. During this conference call, Enphase management will make forward-looking statements, including, but not limited to statements related to our expected future financial performance, the capabilities of our current and future technology and products, and the benefits to homeowners and installers, our operations, including manufacturing and customer service and supply and demand, the anticipated growth in the market and in ourselves and regulatory matters. These forward-looking statements involve significant risks and uncertainties and our 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 our Annual Report on Form 10-K for the year ended December 31, 2021 on file with the SEC and our quarterly report Form on 10-Q for the quarter ended March 31, 2022, which will be filed with the SEC in the second quarter of 2022. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in 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. We’ve provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release posted today, which can also be found in the Investor Relations section of our website. Now, I would like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Good afternoon and thank you for joining us today to discuss our first quarter 2022 financial results. We had a good quarter, reporting record quarterly revenue of $441.3 million, achieving a non-GAAP gross margin of 41%, and generating free cash flow of $90.1 million. We ramped up IQ8 Microinverters in the first quarter and started piloting IQ8D Microinverters to small commercial customers. At the end of the first quarter, we had approximately 41% gross margin, 15% operating expenses, and 26% operating income, all based on revenue on a non-GAAP basis. Our baseline financial model is 35%, 15%, 20%. We will review our financials later in the call. Now, let’s discuss customer service. Our Q1 Net Promoter Score worldwide was 68%, down from 69% in Q4, while our North American Net Promoter Score increased to 74% from 73% in Q4. Our average call wait time improved to 3.2 minutes in Q1, down from 8.9 minutes in Q4, achieved through staffing and training. We added field service technicians in the U.S. and Europe during Q1 to assist our installers, especially with batteries. Regarding microinverter manufacturing, the global supply chain is still under stress, but we have maintained stability due to effective supplier management and the qualification of alternative suppliers. With increasing demand for our microinverters, we remain alert about the global supply chain and logistics challenges stemming from COVID disruptions. I’m proud of our teams for their hard work in managing this challenging situation. Our total quarterly capacity across all contract manufacturing facilities is just over 5 million microinverters, with Mexico having a capacity of 2.25 million, India with Salcomp at 1.5 million, and the remainder in China. To meet rising demand and improve delivery times to customers in Europe, we are adding an automated line at FLEX’s factory in Romania, which will have a quarterly capacity of about 750,000 microinverters starting in Q1 of 2023, allowing us to achieve nearly 6 million microinverters per quarter globally. Now, about batteries. Our two suppliers for battery cell packs currently have a total capacity of 180-megawatt hours per quarter, and they can increase capacity as needed. We are also on track to add a third cell pack supplier in the latter half of the year. Lead times for batteries are currently long, at around 14 to 16 weeks, primarily due to global logistics challenges, but we anticipate this will decrease as shipping and port congestion improve. Moving to regional performance, our revenue mix for Q1 was 84% from the U.S. and 16% international. In the U.S., revenue grew 9% sequentially and 49% year-on-year. We are pleased to announce record sell-through for both microinverters and batteries in Q1, with channel inventory remaining healthy at the quarter's end. In Europe, revenue dipped 6% sequentially but increased 39% year-on-year, primarily due to unexpected shipment delays towards the end of Q1. European homeowners are increasingly interested in energy independence, and we’ve partnered with a German installer group to deliver microinverters and batteries. We are currently shipping IQ batteries to Germany and Belgium and plan to expand to more European countries throughout 2022. Our batteries are now compatible with most brands of third-party PV inverters. We continue to experience strong growth in existing markets in Europe, including the Netherlands, France, and Belgium, while also seeing positive momentum in newer markets like Italy, Spain, and Portugal. We anticipate continued growth in Europe, forecasting over 40% sequential revenue growth in Q2 compared to Q1. Our team is expanding, and we are excited about our growth in this region. In Latin America, revenue increased 13% sequentially and more than doubled year-on-year, with steady growth in our solar plus storage business in Puerto Rico. Now, I’ll provide updates on Australia, Brazil, and India. In Australia, we expect to introduce IQ batteries in the second half of 2022, as regulatory changes are likely to favor our safe AC approach. In Brazil, we’ve started shipping IQ7+ Microinverters and plan to ramp up continuously, with the IQ8D version optimizing costs. In India, we are steadily adding more installers to our network, enhancing digital sales, and planning to launch IQ batteries in early 2023. Now, regarding overall bookings for Q2, we see robust customer demand for both microinverters and batteries, exceeding the higher end of our guidance range. Component availability has improved compared to the last 18 months, though global challenges remain. We are optimistic that lead times will decrease by year-end. Turning to battery shipments, we shipped 120.4 megawatt hours of IQ batteries in Q1, marking a 20% increase from Q4 2021. We are focused on improving commissioning times for installers and while we've made various fixes to enhance quality and homeowner experience with the batteries, we still aim to improve commissioning and installation experiences. Our goal is to reduce commissioning time to one hour and ensure a seamless experience for installers. We expect to ship between 130 and 140 megawatt hours of batteries in Q2. Due to rising logistics and component costs driven by inflation, we implemented a modest price increase on batteries in March 2022. Now, regarding installer training and certification on batteries, we've certified over 1,300 installers in the U.S. by the end of Q1. Our hands-on training utilizes mobile vans across the East and West Coast and regional training centers. We launched an Enphase YouTube channel for training, giving installers access to installation tips and tricks via video. In Q1, we ramped shipments of IQ8 Microinverters in North America and are receiving positive feedback on their performance. IQ8 solar microinverters can create a microgrid during power outages using only sunlight, guaranteeing backup power even without a battery. IQ8’s grid-forming technology removes the traditional size ratio requirements for solar systems and batteries. The Sunlight Jump Start feature allows IQ8 Microinverters to initiate a home energy system using sunlight alone after extended grid outages that may fully deplete a battery. We also plan to roll out IQ8 Microinverters in Europe and Australia in the second half of this year. We have begun piloting IQ8D 640-watt microinverters for small commercial applications to select installers in North America during Q1, with production shipments expected by late Q2. IQ8D is designed for ease of installation, high quality, and rapid shutdown capability. Additionally, we plan to introduce IQ Battery 5P later in the year. This new battery will provide twice the power of our current model at a lower manufacturing cost, allowing homeowners to power heavier loads. We will also enhance communication using a control area network, which will streamline installations and simplify commissioning. Moving on to ClipperCreek, our acquisition completed in Q4 of 2021, it is meeting our expectations in terms of gross margins and profitability. We are taking steps to grow the business by introducing EV chargers to our solar distributors and installers this quarter. Production of EV chargers at our Flex facility in Mexico is set to begin in Q4 of this year, which we believe will help us scale and lower costs. We expect to launch a smart EV charger in the U.S. and Europe by early 2023, connecting to the cloud via Wi-Fi and integrating into the Enphase home energy system. The rise of electric vehicles will significantly increase energy consumption in homes, driving demand for more solar and storage solutions, enabling homeowners to save money and charge their vehicles sustainably. The larger EV batteries can also function as backup power for homes, termed vehicle-to-home, and provide services to the grid, known as vehicle-to-grid. This acquisition enhances our capabilities in energy management, facilitating homeowners in balancing solar, storage, EVs, and other energy needs. We are in discussions with several EV manufacturers to explore proof-of-concept for V2H and V2G features. Let’s move to grid services. In Q1, we announced that Green Mountain Power in Vermont will offer Enphase Energy systems to customers as part of a battery lease grid services pilot program. We have also announced our involvement in connected solutions with three utilities in the Northeast U.S., as well as programs in Hawaii and Arizona. Additionally, we've established a partnership with Swell Energy to engage in VPP programs in California, New York, and Hawaii, and we have many new grid services opportunities in progress. Now concerning the installer platform, we are developing Solargraf Pro, an advanced design and proposal tool with shading analysis, roof obstruction detection, and 3D modeling capabilities. Currently, around 900 installers are using the Solargraf tool, and we plan to launch Solargraf Pro in Q2, with some installers already piloting the software. We also intend to expand Solargraf Pro's availability internationally, starting with Germany. In March 2022, we acquired SolarLeadFactory, which generates high-quality leads for solar installers in the U.S. Our goal is to significantly boost lead volumes and conversion rates, thereby reducing customer acquisition costs for installers. We have made four acquisitions in the past 15 months to strengthen our installer platform in lead generation, solar design software, permitting services, and O&M software. Alongside this, we have developed robust mobile apps for commissioning and monitoring solar and storage systems. We plan to integrate all these tools into one platform for our installation network, simplifying their operations and minimizing costs. Now, regarding our Enphase Installer Network, we have onboarded about 1,200 installers worldwide through a selective process focused on installation quality and customer experience. Next, I want to address recent policy developments affecting the U.S. solar industry. The U.S. Department of Commerce is investigating potential circumvention of antidumping and countervailing duties on some PV modules. This is a transformative time in the energy sector with rising utility costs, climate change, geopolitical factors affecting energy security, and the growth of electric vehicles. An AD/CVD investigation introduces uncertainty in the market that we believe could impact U.S. jobs, increase electricity prices for homeowners, and lead to higher imports from China, contradicting the current administration's objectives. We hope the administration addresses this issue seriously and resolves it swiftly, well before the proposed August deadline. Regarding Enphase, our products aren't directly affected by AD/CVD since we do not manufacture modules. However, we think the module supply for residential applications will be less affected than for others, as many partners are working on securing module supplies for the latter part of this year. Module prices are expected to rise temporarily, yet we believe the residential sector can manage these higher costs. This situation highlights the need for supporting domestic manufacturing through a production-based tax credit to proactively increase local production rather than reacting to market disruptions. Supporting domestic manufacturing aligns with the administration’s aims to promote renewables, create U.S. jobs, lower electricity prices, and reduce dependency on imports from China. We hope for a rapid resolution of the AD/CVD situation and the timely implementation of the PTC. Additionally, I'd like to discuss the California NEM 3.0 proposed decision announced in December 2021. We anticipate modifications to the current proposal and an opportunity for stakeholders to give feedback to the California PUC, in which we've been actively involved and will continue to engage with various stakeholders for the best outcome. In conclusion, full home electrification is gradually advancing. The rise of electric vehicles is clear, as are the increasing adoption of heat pumps. Climate change, along with situations like the Ukraine conflict, compels countries to reconsider their reliance on fossil fuels. Nations such as Germany are leading in adopting renewable technologies to support heat pumps, EVs, and other home energy needs. Self-consumption is becoming standard, and consumers are seeking energy independence. It is only a matter of time before other countries follow suit. Our strategy is straightforward: we create best-in-class solar and storage home energy systems, selling them to homeowners through our installer and distribution partners, supported by our installer platform. Our core value is putting customers first, and we strive to ensure a great experience for both installers and homeowners. We are well-positioned to take advantage of the trend toward full home electrification and look forward to significantly increasing our presence in Europe in the coming months and years. I will now hand the call over to Mandy for her review of our financial results.

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2022 financial results, as well as our business outlook for the second quarter of 2022. We have provided a reconciliation of these non-GAAP to GAAP financial results in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $441.3 million, representing an increase of 7% sequentially and a quarterly record. We shipped approximately 1,029 megawatts DC of microinverters and 120.4 megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q1 was 41.0% compared to 40.2% in Q4. The increase was driven by favorable product mix and lower expedite costs. GAAP gross margin was 40.1% for Q1. Non-GAAP operating expenses were $66.3 million for Q1 compared to $68.2 million for Q4. The decrease was driven by lower marketing expenses, offset by continuous investment in R&D and customer service. GAAP operating expenses were $115.1 million for Q1 compared to $105.6 million for Q4. GAAP operating expenses for Q1 included $45.3 million of stock-based compensation expenses and $3.6 million of acquisition-related expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations for Q1 was $114.5 million compared to $97.7 million for Q4. On a GAAP basis, income from operations was $61.8 million for Q1 compared to $57.7 million for Q4. On a non-GAAP basis, net income for Q1 was $109.7 million compared to $102.8 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.79 for Q1 compared to $0.73 for Q4. GAAP net income for Q1 was $51.8 million compared to GAAP net income of $52.6 million for Q4. This resulted in GAAP diluted earnings per share of $0.37 for both Q1 and Q4. We exited Q1 with a total cash, cash equivalents, and marketable securities balance of approximately $1.1 billion compared to approximately $1.0 billion at the end of Q4. In Q1, we generated $102.4 million in cash flow from operations and $90.1 million in free cash flow. Capital expenditure was $12.4 million for Q1 to increase manufacturing capacity as well as costs related to IT infrastructure, R&D equipment and international facilities. Now, let’s discuss our outlook for the second quarter of 2022. We expect our revenue for the second quarter of 2022 to be within a range of $490 million to $520 million, which includes shipments of 130 to 140 megawatt hours of IQ batteries. 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 and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $127.5 million to $130.5 million, including a total of approximately $57 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. The estimated stock-based compensation expenses include approximately $4.8 million accrual for the earnouts and are tied to certain performance targets to be paid in company stock for the acquisition. We expect our non-GAAP operating expenses to be within a range of $70.5 million to $73.5 million. With that, I will now open the line for questions.

Congratulations on the continued results and performance here. If I can, just kicking it off here, can you talk a little bit more about the European expansion that you guys just emphasized here a moment ago in the prepared remarks? Can you talk about what exactly you’re doing to infiltrate those markets, if you will? You obviously talked a lot about training. How should we expect that to filter through in terms of operating expenses and especially against your model on OpEx? And then, related to that, how should we expect that to filter through on top line as you think about your revenue mix here in Europe as well as gross margin impact?

Sure. Here's a brief overview of our situation in Europe. We're performing quite well in the Netherlands, France, and Belgium, and those markets are continuing to grow strongly in solar energy. As for new markets, we’re focusing on Germany, Italy, Spain, and Portugal. Germany is particularly noteworthy, with residential solar installations exceeding 1 gigawatt annually, possibly reaching up to 2 gigawatts. The attachment rate for batteries is about 80%, and most installers are integrating solar with batteries, EV chargers, and heat pumps for residential homes, making them leaders in home electrification. This creates a significant opportunity for us as successful companies will be those who can manage all these resources together. We excel in producing top-quality home energy systems and, with our ClipperCreek acquisition, we now offer EV chargers alongside our strong solar and storage offerings. We're expanding our sales team in Germany and engaging with numerous installers, and we're seeing good progress. Our focus on high-quality service aligns well with German preferences, which gives us an edge. I visited Germany recently, and the potential there is substantial and immediate. In the Netherlands, there's a strong solar market, with storage solutions on the rise, and installers favor our brand because of our quality and customer experience. Italy has been heavily promoting battery solutions through initiatives like the Ecobonus and the Super Bonus program, which makes batteries nearly free for consumers. We plan to collaborate with our partners to leverage these programs, which will last for several years. In Spain, we have an advantage with smaller systems, but each country has unique needs that require a deep understanding. We are committed to establishing a sales force in every region and are significantly increasing our investments in Europe. There are no obstacles to our growth, and we expect our revenue in the second quarter to be 40% higher than in the first quarter. Additionally, our operating expenses remain steady at 15% of sales, as we maintain our disciplined financial management.

Just super quick, if I can ask you to elaborate here as well. Just the 15-megawatt hour increase quarter-over-quarter on the battery side. Just what are you seeing on margins today? Do you feel comfortable, just given the macro that you elaborated on in the prepared remarks, especially relative to raw material inflation? I.e., do you think about price inflation again just to pass it along, or how are you thinking about the battery part of the mix, both in terms of the trajectory and acceleration as well as the price points that you’re entering at?

We don’t break out the individual products. We don’t break out what is the gross margin on microinverters and what the gross margin on batteries. But what we do is our baseline gross margin is 35%. We never launch a product that does not have the capability to hit 35%. And we are maniacal about costs. You see last quarter we guided 38% to 41%. We landed at 41%. So, with regard to your specific question on raw materials, yes, cell pack costs have been a little bit up because our suppliers are facing issues in their supply chain too. And we already said we are doing a modest price increase effective March on batteries. So that will keep the gross margins in check. So, yes, we are quite healthy in overall gross margin as the company.

In the past, you have talked about how your order visibility into the coming quarter has either been in line or even exceeded at times what your guidance has been. I understand what you’re saying about your supply chain being stable at the moment. But just given AD/CVD, lockdowns in China that are happening, maybe in other areas of the value chain. Can you just talk about where your visibility into your 2Q guidance stands as of today?

Yes. We got a lot of visibility into the second quarter, and we got visibility into the third quarter in terms of backlog, too. So, we only guide this quarter, meaning the second quarter, and we are very comfortable with these numbers. Like what I said in the prepared remarks, our demand is quite north of the higher end of the guidance range. Regarding COVID shutdowns in general, we are also seeing some shutdowns in China, but our factories remain open. The shipping lines remain open. There are hiccups in raw materials getting into manufacturing in China from time to time, but we are managing it. The situation regarding component availability is obviously much better than what it was last year for us. We have made all of the necessary adjustments there. We have a number of suppliers for each part. So, we have learned how to mitigate our risks a lot. So, I cannot predict what’s going to happen tomorrow. But I can say right now, our situation is quite stable.

And then just a quick follow-up to Julien’s question on Europe. So, you mentioned the new markets you’re entering into, you’re obviously signing up new dealer partners. I mean, the 40% growth that you’re talking about in 2Q, how should we think about that as far as kind of market share gains versus just market expansion?

I believe it’s both aspects. In countries like the Netherlands and Germany, the market is experiencing significant growth, contributing to market expansion. Additionally, we are gaining market share thanks to our quality and customer experience. While I can't provide exact figures on each factor, I can confidently say it will be a healthy blend of both. As for new markets like Spain, they are attracted to us because of the quality we offer. Even in the Netherlands, we continue to increase our market share through our service and quality. In Germany, we are also increasing market share from some string inverters because we supply all the necessary components. We can provide solar and storage solutions, manage entire home energy systems, and integrate future features like EV chargers and heat pumps. Our capability as a home energy management supplier often gives us an advantage. Therefore, it is a combination of both factors.

Congrats on the strong quarter. As it relates to the lockdown in Shanghai, I was wondering if you could drill in a little bit deeper on the potential impact, if any, on the cell supply. And then, as another follow-up on batteries, with rising battery chemistry costs, can you talk through how much you can reduce your battery COGS ahead as you reduce the board count from 7 to 1 with the new chip? Can you keep margins flat, for example, without raising prices? Thanks.

Currently, we have two sources for cell packs, both located in China, and we will be adding a third supplier in the latter half of the year. Despite lockdowns, our factories in China are operational, and our shipping processes remain active. We are prepared for longer cycle times, estimating between 14 to 16 weeks, and can handle minor disruptions without any major concerns on the battery front. Some disruptions in microinverter production due to COVID have affected connectors and raw materials, but overall, things are progressing well. Regarding battery costs, we are addressing them through various strategies. We have multiple sources for cell packs, allowing us to negotiate prices while being mindful of rising costs. While immediate adjustments are limited, we aim for long-term optimizations. One area we are focused on is reducing overhead by increasing battery modularity from 3.3 kilowatt hours to 5 kilowatt hours, which will decrease overhead per unit. This new battery also boasts double the continuous and peak power, offering natural cost advantages. Next year, we will introduce our next-generation battery, which integrates multiple components into a single microinverter board. This consolidation reduces the total number of boards from seven to one, thereby improving energy density by nearly 50% and reducing the battery's volume by 40%, making installation significantly easier. This integration will lead to considerable cost reductions, although we are not yet ready to specify the exact savings. Collectively, these initiatives will enhance our gross margins and help us manage pricing effectively for customers.

Next question here is on IQ8 versus IQ7, our work a couple months ago suggests that you were and are forcing top customers to IQ8 from IQ7 starting this quarter in Q2, due in part, I believe, to some chip issues for the IQ7. Can you talk through that a bit and also the mix of IQ8 and 7 by quarter this year? And then, what exactly caused the IQ7 shortage? When do you expect it to get resolved, if at all? And does this possibly mean that there could be pent-up demand later? Thanks.

Yes. For the record, we do not force our customers. They have their own choices and decisions to make, and we respect them. If the issue is completely our fault, we can provide appropriate adjustments. Some customers prefer to move to IQ8 to access the latest product and negotiate favorable terms for a quicker transition. Each customer's situation is unique, and we do not impose changes on them. Regarding the issue, IQ7 relies on an ASIC from a foundry in Taiwan, TSMC, which has limited availability. However, IQ8 uses components from a different supplier that has sufficient supply, allowing us to support our customers effectively. While we did provide some concessions to certain customers during this quarter, we do not force these changes. Converting customers from IQ7 to IQ8 typically takes us four to six quarters. In the first quarter, 20% of our total microinverter shipments were IQ8. Given that, we expect a similar trend in the next quarter, though the timeline may vary slightly. In North America, we anticipate this transition, and we plan to introduce IQ8 to Europe in the latter half of 2022, which will have its own transition period. Overall, IQ8 is performing well.

One very quick follow-up on EU. You already talked a lot about it. But I want to see if there is potential for a new line beyond the one you’ve already talked about, which is 750,000 units per quarter by year-end. When do you think you might make a decision on yet another line in Europe?

It's straightforward for us. With Flextronics as a strong partner, we have developed a solid relationship. We are initiating an auto line with a capacity of 750,000 units, and if we find the need for more, it will only take us three months to implement. We have gained substantial experience and understand the requirements involved in placing an order for an additional auto line. Therefore, if necessary, we will proceed with that order. We're not concerned about it. What is particularly interesting and exciting is our demand in Europe. This quarter, I believe we will ship over 40% more compared to last quarter. We are very enthusiastic about developments in Germany and the Netherlands, as I previously mentioned.

Badri, just on the new battery, I was curious. It sounds like it’s going to be higher gross margin in the current battery product you’re shipping into the market. But, it also sounds like lower cost. So, are you going to be in a position in 2023 when you’re shipping the new battery to be more aggressive on price? So, you’re driving both volume upside as well as margins on the new battery? And then, also similar to how you give us the progression of new generations, like IQ8 versus IQ7, any sense of how much of your mix you would target for the new battery in ‘23 versus the current generation?

Yes, that's a good question about the next-generation battery, but it's still a bit early to provide specific numbers. Currently, we are in an extraordinary situation regarding inflation and supply chain issues, which won't last indefinitely. Eventually, battery costs will need to decline, and we are well-positioned to benefit from this trend by lowering our product's fundamental cost structure. For example, we are moving from using seven boards to just one, which is a positive change. The strategy will depend on market conditions at the time. You're correct that we might leverage this for market share growth while maintaining a healthy gross margin. Once we reach that point, we will make our decision. Regarding the next-generation battery, there's no reason it can't follow a process similar to that of microinverters, and it may accelerate if it delivers significant benefits to customers, such as a more compact form factor. In that case, we could achieve the transition in 2 to 3 quarters instead of 4 to 5. However, we need to ensure that our new product is ready before we can solidify our plans.

Yes, that's a good question. Are you asking if we are entering the channel for the first time? That's relevant for new markets. We are usually very disciplined about filling the channel and always monitor point of sales. By point of sales, I mean checking whether installers are purchasing from distributors, regardless of what we ship from Enphase to them. We have a detailed weekly meeting where we review point of sales in Europe by country and by distributor. While there may be some channel creation in regions where we haven't shipped before, it's not the main reason for growth. For countries like the Netherlands, the solar market is booming, and in Germany, due to the situation in Ukraine, there's a strong move towards self-consumption, particularly with solar plus storage. These two countries are the largest markets, followed closely by utility sectors where the government is facilitating growth. Italy also has some channel activity, but we've been established in the Netherlands and Germany for some time, leading to more robust growth. While we cannot guarantee growth every quarter at this rate, we will provide updates next quarter and take it one quarter at a time.

Can you just give us a sense of where channel inventories are right now? I’m curious to understand a little bit better growth in the U.S. and Europe, how much of the guidance is really channel until at this point?

Historically, I’ve always said that a reasonable channel inventory is 8 to 10 weeks, and we don’t usually quantify it every quarter, but that’s a healthy inventory. U.S., I would say, is quite healthy. Europe, I would say, is a little bit less in terms of channel inventory, and they need product, and that should be obvious because of the demand increase.

Great. And then the change in the battery volume. I guess I’m curious what’s driving that change. Is there some cost reduction driving that? Is there an issue at the installer level in terms of placement event? But just the logic and kind of the purpose of that change and how quickly we can see that shifting to all the product that’s out in the field.

The idea is straightforward: we continuously release new products that improve in quality over time. Currently, our battery provides 3.84 kilowatts of continuous power and 5.76 kilowatts of peak power for a 10-kilowatt hour battery. Typically, for appliances like air conditioners and pool pumps, customers tend to purchase more kilowatt hours to address power issues. However, with our new high-power battery set to launch in the second half of this year, we will offer 7.68 kilowatts of continuous power and over 11 kilowatts of peak power for a 10-kilowatt hour battery. This enables us to manage substantial power loads effectively. In designing this battery, we improved modularity from 3.3 kilowatt hours to 5 kilowatt hours, allowing us to reduce overhead costs per kilowatt hour. Furthermore, in 2023, we plan to streamline our technology significantly by reducing components from seven boards to one, integrating power conversion and battery management into a single board to create a high-power microinverter with approximately 2,000 watts. This change alone could reduce volume by 40%.

That’s incredibly helpful. I’m sorry to cut you off there. But yes, I appreciate it.

So, first one for me. There’s been broader concern in the market about an economic deceleration entering Q2 and beyond just globally. You’ve already highlighted a meaningful 40% sequential revenue growth in Europe. So, we know demand is rocking and rolling over there. However, I was wondering if you could just give us a sense of what you’re hearing from your customers in the U.S., specifically in April? I’m trying to get a sense if you’re seeing any signs of deceleration in U.S. resi demand in April, or it seems like demand is still strong within the U.S., based on your most recent discussions?

Demand is very strong in the U.S. That’s why we mentioned that our demand exceeds the higher end of our guidance. It is widespread, as we collaborate with installers of various sizes, from small to large. Across the board, demand is increasing, and we are gaining market share in the U.S. This is a positive development. Additionally, we discussed Europe, which is our other major market.

That's great to hear. Shifting to the battery side, you mentioned that you will be adding a battery supplier in the second half of the year. Could you elaborate on how much additional capacity you are bringing on board? Also, is the decision to introduce a third supplier based on expected demand exceeding what your current suppliers can provide, or is it primarily aimed at achieving your target lead time of 8 to 10 weeks instead of the current 14 to 16 weeks? Thank you.

Yes, we are bringing on a third supplier, and I will provide more details on the capacity once it is added. I have no doubt that it will be similar to the others. The motivation for this addition is multifaceted. Over the past couple of years, we’ve realized that we need five suppliers for some critical components, like the cell pack. If we don’t have the cell pack, we cannot operate. Having more suppliers benefits us in several ways, including price negotiation, supply, delivery, and volume, which contributes to our long-term strategy. This focus on supplier diversification is important, and while all three of our cell pack suppliers are currently based in China, we are actively looking for opportunities outside of China as a priority.

So, you’ve made several acquisitions that are going to strengthen your installer platform, including the SolarLeadFactory, I guess, was the most recent one. Is the acquisition phase here done? And then, could you talk about the integration of these businesses and how quickly you can get an integrated product after the installer base?

The installer platform has several components: lead generation and management, design and proposal with fintech partner connectivity, permitting, installation and commissioning, monitoring, and operations and maintenance. We have acquired SolarLeadFactory for lead management, which operates profitably with around ten installers, generating 90% of its revenue from them. Our goal is to enhance lead generation by increasing the quantity and quality of leads and improving conversion rates into installations. In January 2021, we acquired Solargraf for design and proposal services, which is performing well and is expected to deliver 50% higher revenue this quarter compared to last year. Currently, it serves over 900 installers, but it lacks features like shading capability, 3D modeling, and storage modeling, which we are actively working to improve and pilot to our installers. This software also connects to various fintech partners, which is crucial for our installers. For permitting services, our team in Noida, consisting of around 80 installers, is managing a substantial volume. We offer services where installers can request proposals and permit plans rapidly. Our strategy here is to automate the permit process to decrease cycle times from hours to minutes. In terms of installation and commissioning, we have invested significant resources into our installer app and homeowner monitoring app, continuously making enhancements. We're working to improve our battery commissioning processes without the need for acquisitions, utilizing our existing resources. Additionally, we recently acquired a new platform that acts like an on-demand labor marketplace for installers and asset managers, helping to connect service providers with labor needs. This platform currently includes about 300 installation companies. Service providers can submit work orders, which will be matched with available labor, enabling efficient project completion. We plan to introduce this platform to our installers once we ensure its quality and provider numbers are sufficient. All these components are being integrated into a cohesive system, aiming to simplify challenges for installers, even though some parts are more developed than others.

Badri, you have a very large installer network, right, in the U.S. and have access to most developers and installers, right? So, is that something you could do to help installers with procuring these solar modules in the short term to ease some of these issues in the supply chain we’re seeing in the short term?

No, we are not in that business. No.

Got you. And just two other questions from me. Outside of Europe, how fast is the international business growing in Q2? And how should we think about the $1.1 billion of cash used this year in terms of M&A or buybacks? Thanks.

We made five acquisitions in the last 15 months, all small but significant in total. Our first priority for our $1.1 billion cash is to meet the business's needs, ensuring we have sufficient working capital and making necessary investments in software and battery technologies. We also have various promising ideas in the pipeline for mergers and acquisitions and are enhancing our digital platform. In Germany, we are focusing on energy management as homes increasingly adopt solar, storage, EVs, heat pumps, and other energy loads. Effectively managing this integration calls for advanced software capabilities, including potentially acquiring companies. The German market is quite mature, and not all systems utilize Enphase products, meaning some may use third-party solutions. To address this, we aim to provide comprehensive energy management software that unifies these systems through a single interface for homeowners, which is vital for interoperability. Therefore, we're committed to investing heavily in home energy management and considering acquisitions. We're also looking into EV charging, as we believe that most charging will occur at home, with 80% of it happening there. We're interested in networking opportunities for EV chargers that promote dynamic access both inside and outside homes, and we're always on the lookout for software companies in that space as well as new battery technologies aimed at reducing costs and enhancing performance. After ensuring we have enough cash for our M&A opportunities, we will evaluate our remaining cash based on the current share price and its relation to a conservatively calculated intrinsic value, which aligns with principles advocated by Warren Buffett. For instance, last year we repurchased 3.2 million shares.

Right.

We bought back 3.2 million shares last year, bought back at $1.55 a share. And if the share price goes down, we will consider opportunistic scenarios like that to do more buyback, provided number 1 and number 2 are taken care of.

Just quickly on the other part on international business growth in Q2?

International, the biggest is Europe. The other areas that we are working on, as I said, Brazil is something that we are very excited about. I haven’t talked about it too much, but we have an outstanding guy running Brazil. We have a very strong team. And I think it’s a matter of time before which we start seeing meaningful revenues from Brazil. And they are going to get the IQ8D variant of the product, which will help them on the cost structure, that’s pretty soon. Other than that, we are ramping up on Australia. We have not introduced our storage yet in Australia, which we are working on and they should have their storage in the second half of this year. So, that will provide them some growth. And in addition, we are focusing on other Southeast Asian countries as well. All of them are small efforts, and when they become meaningful, I will talk more.

Two questions for you. First, just looking at your installer network, I’ve been hearing from different sources that just simple labor availability for the install process has been a bit of a challenge. So, I’m just wondering if you can comment on feedback that you’re getting from your network.

Yes, you’re right. I mean, the demand is quite high. Demand is very robust, like what I pointed out. So, installers are always looking for skilled labor. And when I say skilled, these electricians are very hot demand. Then there is a technician, which is slightly below electrician. So, labor is in hot demand.

Do you think this is hindering your dealers' ability to get things done at this point?

I mean, from our case, you saw our guidance, you saw our demand. I’m sure they can do even more. But right now, they are limited by their labor. That’s right.

I was hoping we could briefly discuss the Department of Commerce investigation. I understand this pertains to modules, which is not your area. However, you mentioned that the residential segment might be somewhat shielded from potential impacts. It seems your customers are preparing for module procurement in the latter half of the year. Can you provide any insights on how you view the possible effects, if any, on your business during that period? Additionally, regarding your outlook for 2022, how has it evolved compared to three months ago?

We do not see any impact on our business based on our discussions with customers and the current market conditions. While we expect module prices to increase, we believe that the magnitude of this increase can be absorbed by residential customers. Additionally, most residential systems are financed, meaning homeowners will only notice a minor increase in their monthly payments, which we don't think will exceed the utility rate hikes they face. These factors suggest that the residential segment should remain relatively resilient compared to other segments.

And then just switching gears to your European strategy, I was hoping you could talk a little bit about your installer strategy there. I mean, you’ve had tremendous success in the U.S., obviously, with the long tail installers. Maybe just talk about does the same dynamic exist in Europe? Is it different? And basically, just do you think you can replicate your installer strategy that you’ve had success with in the U.S., can you replicate that in Europe?

Yes, the same principles apply. While the U.S. has many long tail installers, Europe has even more. For instance, Germany has around 5,000 installers. I believe a top installer typically manages about 10 to 20 megawatts annually. Essentially, the definition and principles remain the same for us. We believe these installers will prioritize quality and customer experience. As long as we perform well in these areas, positive outcomes will follow for us.

Two quick ones also about Europe. Obviously, in the current geopolitical situation, all of the frontline states in the eastern portion of Europe are in the headlines. Do you see signs that rooftop solar in places like Poland, Czech Republic, Hungary is starting to develop? And if so, will you be playing in that geography?

Yes. Obviously, we do pay attention to the regions and pay attention to opportunities that lie, and we’ll continue to do that. At this time, we are very focused on the countries that we talked about. The market is really expanding very strongly in countries that we are already in, which is Netherlands, France, Belgium, Germany and the new markets, which include Spain, Italy and Portugal, and we need to bring all our products. We need to bring IQ8s there. We need to make sure we have batteries in all of those countries as well. And so, right now, we are focused on these, but we keep an eye out, right? We pay attention to what’s happening in the countries that you referred to.

Okay. Last year, EV market share in Europe was 4 times higher than the United States, 19%. Is there room for ClipperCreek to get a slice of that infrastructure build-out?

There is always room for ClipperCreek. When an installer approaches a homeowner considering an EV, there are numerous incentives available. One installer mentioned that even if the homeowner does not yet own an EV, they still install an EV charger. This indicates that when an installer is selling solar, storage, EV chargers, and heat pumps to the homeowner, if Enphase can enhance the experience with a comprehensive home energy management system, ClipperCreek certainly has a role to play. We plan to launch an EV charger in Europe in the first quarter of 2023, and in the meantime, we are working diligently to ensure our system can work seamlessly with other EV chargers to provide the best experience for homeowners.

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