Enphase Energy Inc (ENPH) — Q1 2024 Earnings Call Transcript

Good afternoon, and thank you for joining us today to discuss our first quarter 2024 financial results. We reported quarterly revenue of $263.3 million, shipped approximately 1.4 million microinverters and 75.5 megawatt hours of batteries, and generated free cash flow of $41.8 million. We reduced our channel inventory by approximately $113 million in Q1, slightly less than anticipated because of softer demand. For the first quarter, we delivered 46% gross margin, 31% operating expenses, and 15% operating income, all as a percentage of revenue on a non-GAAP basis, including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 78% in Q1 compared to 77% in Q4. Our average call wait time was 1.9 minutes in Q1 compared to 1 minute in Q4. We are adding data scientists, enhancing our analytics to identify problems proactively, and fixing them automatically through software. Our field engineers and technicians are assisting installers on complex installations, while bringing back learning to our development teams, enabling continuous improvement. Let's cover operations. We shipped approximately 506,000 microinverters in Q1 from our US contract manufacturing facilities that qualified for 45X production tax credits. Once fully ramped, we expect to have a global capacity of approximately 7.25 million microinverters per quarter, of which 5 million capacity will be in the US. We expect to ship approximately 0.5 million microinverters to customers from our US manufacturing facilities in Q2. The number is a little less than what we would like, but our top priority is to reduce our factory inventory. We anticipate resuming a higher level of shipments in the second half of the year. For IQ Batteries, we have two cell pack suppliers, both in China, which have sufficient manufacturing capacity to support our ramp in 2024. As previously discussed, we expect to add battery manufacturing capability in the US during the third quarter of 2024. Let's now cover the regions. Our US and international revenue mix for Q1 was 57% and 43%, respectively. For more visibility into our business, we are providing regional breakdowns and sell-through dollar metrics by region. In the US, our revenue decreased 34% sequentially as we under-shipped to end customer demand. The overall sell-through of our microinverters and batteries in the US was down 23% in Q1 compared to Q4. Let's discuss the market trends we are seeing in the US, split by non-California states and California. For non-California states, our overall sell-through was 21% down in Q1 compared to Q4. The sell-through was similarly down for both microinverters and batteries due to seasonality. In California, our overall sell-through was down 30% in Q1 compared to Q4. Sell-through of our microinverters was down 37% and sell-through of our batteries was down 18% in Q1 due to seasonality and the NEM 3 transition. I'll provide more statistics and color on NEM 3 later in the call. In Europe, our revenue increased 70% sequentially as channel inventory improved and we introduced new products. The overall sell-through of our microinverters and batteries was up 7% in Q1 compared to Q4. The sell-through of our microinverters was up 3%, while the sell-through of our batteries was up 28% in Q1. I'll provide some color on key markets in Europe, particularly Netherlands, France, and Germany. In the Netherlands, our overall sell-through in Q1 was down 4% compared to Q4. The market stabilized during Q1 and we are encouraged by the demand signals we see after the government's decision to support NEM for the foreseeable future. We expect to see the sell-through of microinverters pick up in Q2 as a result of this decision. We continue to believe solar plus batteries are going to become the norm as dynamic tariffs and grid services become more prevalent. In France, our overall sell-through in Q1 was up 13% compared to Q4. We have been encouraged by the continued strength in this market, supported by higher utility rates. Solar penetration in France is still small, and we see potential for the country to grow and evolve into a significant solar plus battery market for Enphase. In Germany, our overall sell-through in Q1 was up 28% compared to Q4. We are going from strength to strength in this market. We plan to launch our three-phase battery solution in the country later this year, along with additional software. We are leveraging AI and ML to enhance our home energy management software and expand grid services participation. We are continuing to launch our IQ8 Microinverters and IQ Batteries into many new countries across Europe. Notably, we started shipping IQ Batteries into Italy in the first quarter. Our sell-through in the new countries is beginning to ramp, and we anticipate steady growth throughout 2024. In Australia, our Enphase Energy systems are powered by IQ8 Microinverters and IQ Battery 5P, our third-generation battery, which we introduced in June last year. We expect higher battery attachment rates in Australia during the second half of this year. In Brazil, we are making good progress in building our installer base. In Mexico and India, we are shipping our highest-powered microinverters, IQ8P, to support high-power panels. We just started shipping the same microinverters into Thailand and the Philippines in Q1. As a reminder, IQ8P is the high-powered microinverter at 480 watts AC for both residential and commercial applications. Let me say a few words about our market share. In the US, we see stable share for our microinverters and batteries based on both internal and third-party data. There have been several changes in the market over the last year, including a shift away from loans and towards leases and PPAs. Our continued strong market share is a testament to our installer relationships and the differentiated value proposition we provide them with our products. We are fully focused on enhancing our product portfolio, solving installer pain points, and deepening our relationships. In Europe, we are using the same strategy to grow market share. Let me provide some color on NEM 3.0. In the last three to four weeks, I've been on the road. We have visited over 25 installers in California to really understand how their businesses are doing. Many reported that their businesses are down by 50% or more from last year's high, and they have all adjusted by becoming much leaner. They are getting better at selling NEM 3.0. They can clearly articulate what works and what doesn't. They are hungry for high-quality leads. They are also becoming adept at selling batteries, either a grid-tied battery or a backup battery with every install. They are becoming flexible in the financing options they offer to the homeowners. If the loans don't work, they aren't afraid to switch over to leases or PPAs, which are becoming increasingly available to the market. Most of them reported stronger sales in March of this year compared to January and February. I came away feeling that we are beginning to climb out of the bottom, and we should get back to growth shortly. Let's cover some NEM 3.0 statistics, which haven't changed that much from our last call. In Q1, 50% of our California installs were NEM 3.0 systems. These systems have a very high battery attach rate, over 90%, compared to NEM 2 systems which have an attach rate of 15%. Our data also shows that half of our NEM 3 systems are using Enphase batteries. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times our average NEM 2.0 system. We believe this will contribute to stabilizing and increasing our California revenue in the second half. Let's come to our Q2 guidance. We are guiding revenue in the range of $290 million to $330 million. We expect to ship 100 megawatt hours to 120 megawatt hours of IQ Batteries. We expect sell-through demand for our products to be approximately $400 million in Q2, up from $376 million in Q1, due to seasonal strength in Europe and non-California states, offset by some decline in California. We plan to under-ship to the end market demand for our products by approximately $90 million in Q2. We expect the channel to normalize by the end of Q2 on microinverters as we previously forecasted. Our channel is almost normal on batteries already. Let's talk about products, starting with IQ Battery. Our third-generation battery called IQ Battery 5P has been very well received. It delivers the best power specifications and commissioning times of any Enphase battery to date at an industry-leading 15-year warranty. Battery adoption rates are on the rise globally, and we are well-positioned to grow our sales in 2024. As we discussed last quarter, we expect our gross margins on batteries to continuously improve throughout the year. There are three factors: cell pack costs, which are coming down rapidly; battery microinverter costs, which are coming down due to the IRA benefit from manufacturing in the US; and costs coming down due to improved architecture on our fourth-generation battery. We are already seeing the benefits of the first two factors, and we will benefit from the third factor early next year. We are working on entering more countries in Europe and Asia with our third-generation battery. We expect to also introduce our new three-phase battery with backup for Germany during this year. We expect to launch several balance-of-system improvement initiatives for the US that will improve the cost of installing batteries for backup. We plan to pilot our fourth-generation battery later in the year. This battery will have a great cost structure and an elegant form factor due to the integrated battery management and power conversion architecture. As previously discussed, we have entered many new markets with the IQ8 family of microinverters, and we are now in 24 countries. We plan to enter more new countries in Europe and Asia throughout 2024 with our microinverters. We plan to increase our served available market further by introducing social housing and balcony solar solutions to European countries during the year. We recently launched the IQ Combiner Lite in the Netherlands to simplify the installation of small solar systems on social housing units. The other variant of the IQ8P microinverter with the new three-phase cabling system is well-suited for small commercial solar installs ranging from 20 kilowatts to 200 kilowatts. We launched this product in North America in December, and we are seeing good early adoption. We are excited about the product and look forward to manufacturing IQ8P microinverters at our US facilities starting this quarter, further reducing costs. Let's cover EV charging. We launched our IQ Smart EV chargers in the US and Canada in Q4. We are developing smart EV chargers for European countries and we expect to introduce them this year. The team is also working on bidirectional EV chargers, which will unlock use cases like V2G and V2H as part of the Enphase system. This charger will have a GaN-based bidirectional inverter. We expect to release the product in 2025. Let's cover the latest upgrades to our energy management software. We recently did a press release where we launched Enphase Power Control or PCS software that can integrate with our systems in North America. PCS dynamically controls the power produced by the Enphase system, giving installers a lot of flexibility in system design to build larger systems and avoid costly main panel upgrades while meeting utility and national electric code requirements. Our software is evolving to manage the increased complexity in energy markets by leveraging AI and ML for forecasting and optimization. Our next software offering will manage dynamic tariffs in countries like the Netherlands and Germany. This new software is intended to help maximize ROI and reduce the payback period for solar homeowners throughout Europe, where electricity prices can change by the hour. Let me provide you with an update on IQ9 Microinverters with gallium nitride, also called GaN. We expect IQ9 Microinverters to deliver higher power at lower costs. Multiple vendors have been providing us with GaN parts, and we are increasingly confident in the reliability of our design. We expect to launch the product in the first half of 2025 to address the two markets; one is residential and the other is three-phase small commercial markets, both the 208 volts as well as the 480 volts. Let's now discuss our Installer Platform. We announced some key features and improvements to Solargraf in Q1, including advanced 3D design with smart design capability, California NEM 3.0 support and enhancements, NREL and NYSERDA verification of shading, and support for small commercial projects. Solargraf is currently available to installers in the US, Canada, Brazil, Germany, and Austria, and we expect to release it to more countries in the coming quarters. Let me conclude. We have been managing through a period of slowdown in demand. We believe Q1 was the bottom quarter. Europe has already begun to recover, and we expect the non-California states to bounce back in Q2. California is becoming less of a wild card, and we expect demand to stabilize and increase in the back half of 2024. We are bullish about NEM 3 in the long term. The payback is attractive for solar plus batteries. The utility rates are going up steeply, and the sales teams are learning rapidly. I am pleased that we have executed well through the market downturn over the last year. We have maintained profitability and free cash flow throughout this period while correcting the channel. We have not sacrificed any new product development or geographic expansion plans and are now entering a growth cycle with a good product portfolio and a growing TAM, and there is still a lot more to come. We expect to begin field testing our microinverters, IQ9 microinverters, and fourth-generation batteries later in the year. We are making balance-of-system improvements to enable faster and easier battery installation. We plan to roll out significant software upgrades like PCS and dynamic tariffs in both the US and Europe. We remain laser-focused on operational excellence, concentrating on sell-through and installer count, reducing operating expenses and product costs, and maintaining a healthy gross margin as our company returns to strong growth. With that, I will turn the call over to Mandy for a review of our financial results. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2024 financial results, as well as our business outlook for the second quarter of 2024. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $263.3 million. We shipped approximately 603.6 megawatts DC of microinverters and 75.5 megawatt hours of IQ Batteries in the quarter. Non-GAAP gross margin for Q1 was 46.2% compared to 50.3% in Q4. The decrease was primarily driven by lower net IRA benefit. GAAP gross margin was 43.9% for Q1. Non-GAAP gross margin without net IRA benefit for Q1 was 41% compared to 41.8% in Q4, mainly driven by lower volume. GAAP and non-GAAP gross margin for Q1 included $13.7 million of net IRA benefit. Non-GAAP operating expenses were $82.6 million for Q1 compared to $86.6 million for Q4. The decrease was the result of the restructuring plan we implemented in December 2023. GAAP operating expenses were $144.6 million for Q1 compared to $156.9 million for Q4. GAAP operating expenses for Q1 included $56.7 million of stock-based compensation expenses, $3.5 million of amortization for acquired intangible assets, and $1.9 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $39 million compared to $65.6 million for Q4. On a GAAP basis, loss from operations was $29.1 million for Q1 compared to a loss of $10.2 million for Q4. On a non-GAAP basis, net income for Q1 was $48 million compared to $73.5 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.35 for Q1 compared to $0.54 for Q4. GAAP net loss for Q1 was $16.1 million compared to GAAP net income of $20.9 million for Q4. This resulted in GAAP diluted loss per share of $0.12 for Q1 compared to GAAP diluted earnings per share of $0.15 for Q4. We exited Q1 with a total cash, cash equivalents, and marketable securities balance of $1.63 billion compared to $1.7 billion at the end of Q4. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 332,735 shares of our common stock at an average price of $126.21 per share for a total of approximately $42 million in Q1. In addition, we spent approximately $60 million by withholding shares to cover taxes for employee stock vesting and options in Q1 that resulted in a dilution reduced by 480,735 shares. We expect to continue this anti-dilution plan. In Q1, we generated $49.2 million in cash flow from operations and $41.8 million in free cash flow. Despite the macroeconomic challenges, we continued to generate free cash flow. Capital expenditure was $7.4 million for Q1 compared to $20.1 million for Q4. Capital expenditure requirements decreased due to a reduction in our US manufacturing spending. Now let's discuss our outlook for the second quarter of 2024. We expect our revenue for Q2 to be within a range of $290 million to $330 million, which includes shipments of 100 megawatt hours to 120 megawatt hours of IQ Batteries. We expect GAAP gross margin to be within a range of 42% to 45%. We expect non-GAAP gross margin to be within a range of 44% to 47% with net IRA benefit and 39% to 42% before net IRA benefit. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect the net IRA benefit to be between $14 million and $17 million on estimated shipments of 500,000 units of US-made microinverters in Q2. We expect to increase the US-made microinverter shipments to two-thirds of our overall microinverter shipments in the second half of this year. We expect our GAAP operating expenses to be within the range of $134 million to $138 million, including approximately $56 million estimated for stock-based compensation expense, acquisition-related amortization, and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $78 million to $82 million. We expect our GAAP and non-GAAP annualized effective tax rate, excluding discrete items, for 2024 to be at 18%, plus or minus 1%. With that, I will open the line for questions.

Thanks so much, guys. As you start entering some of these newer markets with energy storage, can you talk about how much of the volume you're guiding to in Q2 could be considered sell-in to build a little bit of inventory to support those customers?

Yeah. Could you please repeat that question, Colin? I didn't follow that properly.

Sure. So, as you start selling energy storage into new markets, and looking at the Q2 guide, how much of that energy storage sales dynamic is actually selling into the channel and channel fill, just to get prepared in this one?

Not much, because the new markets are just starting for us. For instance, we launched storage in Italy in the first quarter, which is our only new market introduction at this time. Before that, we entered a few European countries and the UK. Our storage channel is performing very well, and we are currently stable with our storage offerings. I want to share a piece of information that I didn't mention during the call. In the fourth quarter, our global sell-through of batteries was 140 megawatt hours, while in the first quarter, it was 128 megawatt hours, which is only an 8% decrease. This is much better than the 20% seasonal decline we are seeing with other products. Overall, batteries are performing well, and even though we achieved 128 megawatt hours in sell-through, we were disciplined enough to ship only 75.5 megawatt hours. This means we reduced our inventory by 43 megawatt hours, leaving the storage channel quite lean, which is why we are increasing our guidance. For the first quarter, I initially guided 70 to 90 megawatt hours, but now I'm guiding for the second quarter for 100 to 120 megawatt hours in storage. Storage is a strong point for us, and we expect this trend to continue long-term, with every market moving towards solar plus storage. We discussed our performance in various markets like the Netherlands and France, and Germany is already there. California will follow soon. Overall, storage is a positive development for us.

Thanks so much. And then, on the pricing dynamic, it looks like microinverter pricing was down maybe 4%-ish, 5% quarter-over-quarter on average. Can you talk a little bit about the dynamic around pricing and discounts as you get through the inventory flush? And what we can expect as you get into the mid of the year here?

We track ASP variance and customer variance. Customer variance reflects how much pricing has changed for a specific customer from one quarter to the next. ASP variance indicates how product mix affects pricing. For instance, if a customer's pricing decreases but their volume increases, it appears as an overall reduction in ASP. The effectiveness of our pricing strategy is assessed through customer ASP variance. We're very disciplined in our pricing strategy, and what you're observing is attributed to product mix rather than any pricing games to move inventory. We prioritize selling based on value and remain disciplined in our approach.

Excellent. Super helpful. Thanks, guys.

Hey, guys, good afternoon. Thanks for taking the questions. Hey, Badri, can you talk a little bit about, you said at the onset of the call that you under-shipped demand in Q1 a little bit less than or destocked a little bit less than you would have expected just because demand was softer. So, the $90 million of destock, that should kind of clear the inventory for micros in Q2. In your guide, you're saying normalized, you're seeing $400 million. So, are you inferring that normalized demand when you strip out the $90 million of destock is running at like $490 million? Because I know last call you were talking about $450 million to $500 million. So, maybe just high-level kind of walk us through your thought process of what demand you're seeing out there? What the normalized level looks like once you get through all this inventory reset? And then maybe what timeframe do you think you kind of get back to those normalized run rates as well?

Got it. In the first quarter, our sell-through demand, which reflects end customer demand, was $376 million, and we reported revenue of $263.3 million. This results in a $113 million shortfall in shipments. For the second quarter, I guided revenue between $290 million and $330 million, with a midpoint of $310 million. My estimated sell-through for Q2 is $400 million, leading to a $90 million shortfall. Regarding expectations for the second half of the year, we anticipate improvements in various markets. For instance, in Europe, particularly the Netherlands, where the government has approved net metering for the foreseeable future, we're seeing a significant increase in lead generation, which should translate to higher sell-through and activations. In France, utility rates are favorable, and we expect strong performance there as well. Germany has shown a 28% increase in sell-through from Q4 to Q1, with high electricity costs driving growth in solar and storage products. Additionally, we've had successful product launches, expanding our offerings in 24 countries. In the US, both California and non-California states are showing signs of improvement. In the past few weeks, we've noticed better sell-through trends, supported by our Solargraf software usage among over 1,000 installers, which indicates rising sales and contracts. Anecdotal feedback from customers suggests that March was a significantly better sales month than February. Third-party reports confirm an increase in permits for both California and non-California markets. Overall, we feel cautiously optimistic about the upward trends which is why we've raised our Q2 guidance and expect sell-through to increase from $376 million to $400 million. Lastly, the prospect of upcoming interest rate cuts could further enhance demand in non-California states. All of these factors will contribute to our growth outlook.

Understood. That's really helpful. If we look at the normalized demand outlook, considering the channel is clear at the end of Q2 and assuming no significant changes in mix or pricing, and demand remains around $400 million, is there any reason you wouldn't ship at that level in Q3? Are there any structural changes in what the channel is prepared to accept, such as lead times? I'm trying to grasp what factors could keep that $400 million steady versus what might raise it, given that there was initially an expectation for it to exceed $400 million this year, but now it's at that figure. What could cause it to increase, and what might drive it lower?

I believe you're correct. Once the channel stabilizes, sell-in and sell-out should align. For instance, we anticipate higher sell-through in Q3, but if it stays around the $400 million mark, our sell-in will remain consistent since we've cleared out all the inventory. There will be no need for under-shipment anymore, so sell-in and sell-out will be balanced at that point. However, as I mentioned, there are several factors that could enhance sell-through in Q3, including developments in Europe, new product launches, improvements in non-California states, California installers adapting to NEM 3.0, increased financing options for installers across the US, and our efforts to expand small commercial products. All of these elements make me optimistic that sell-through will increase in Q3 and beyond.

Hi, thank you for taking my question. Just one on, how much NEM 2.0 backlog is remaining with the installers? I think you talked about 50% being NEM 3.0. So, going into Q2, how can we expect the backlog cadence to dwindle down for NEM 2.0?

That's an interesting question. All our discussions with installers indicate varying backlogs, with one having a nine-month backlog and others around three months. We can't be certain about the exact figures. Like you, we were surprised that 50% remains in NEM 2. However, installers are quickly adapting to NEM 3 and are working through their NEM 2 backlog. I can't predict the exact number, but I believe it will significantly decrease within six months.

I wanted to check if there are any updates on the exclusivity arrangement with SunPower. I remember it was supposed to conclude around March, so I'm interested to know if there's anything to discuss regarding that.

The question is, is there any update on SunPower? SunPower has new management, as everybody knows, and we know Tom Werner well. I've been talking to Tom. Right now, it's a business as usual for us. We have a very strong relationship. We are supporting SunPower well and vice versa. And when we sign such a contract, we will let you know.

Hi, thank you for taking my question. Just one on, how much NEM 2.0 backlog is remaining with the installers? I think you talked about 50% being NEM 3.0. So, going into Q2, how can we expect the backlog cadence to dwindle down for NEM 2.0?

That's an interesting question. In our discussions with installers, one mentioned having a backlog of nine months, while others have three months. We don't have a definitive answer on this. Like you, we were surprised that 50% of the backlog remains NEM 2. However, installers are quickly adapting to NEM 3 and are working through their NEM 2 backlog. I can't predict the exact numbers, but I believe that within six months, it should significantly reduce. No. So we think that Q1, we lowered our guidance, so we think that Q1 is the bottom quarter. And therefore, we expect Q2 to be reflecting slightly better growth. As we go through the next quarters, we expect the news to be quite good.

Awesome. Thank you for all the detail.

Yeah. Thanks so much for taking the question. Most of my questions at this point have been answered. It's been a very comprehensive call. But if I can just maybe zoom out for a second, I'm just curious, how are you guys improving your visibility into the channel so this inventory issue doesn't happen again. I'm assuming this isn't going to be the last cycle that we all see. So, I guess, how are you investing in the platform, whether that be software or otherwise, to make sure you have more visibility the next go around, the next time there's demand side shock and to avoid these channel inventory issues next time? Thank you.

The answer is relatively straightforward. It involves gaining better control over the metrics at the front end, which includes tracking how leads convert into proposals, then into contracts, permits, and finally installations, leading to activations. We need to delve into the front end, which we are doing with Solargraf. This platform is essential for us as it provides design and proposal software, giving us visibility into the overall trends, including what occurs in specific regions each month and the statistics comparing leads to signed contracts. We also utilize third-party reports for permit tracking and our own Enlighten software for monitoring activations. Additionally, we focus on sell-through, which is when distributors sell our products to installers. Our goal is to tighten this entire process by implementing metrics at each stage, ensuring more revenue coverage for Solargraf's design and proposal tools to maximize the number of installers using them. This will generate more statistics. We will continue to compile aggregate reports from third parties as they become available and combine all these data points to develop a regression model, potentially aided by advanced machine learning techniques. The critical aspect for us is to make informed decisions regarding how much product to sell into the channel, ensuring we do not engage in excessive optimism which could lead to overstocking. We adhere to a principle my former boss referred to as mass balance, which means that all shipments into the channel should align with the actual sales. We are implementing statistical process controls and are already seeing improvements. Each week during our shipping review, we closely monitor sell-through and sell-in statistics to assess whether we should adjust our selling strategies. We maintain our operations within established guidelines, questioning any metrics that exceed 10 weeks. This approach is proving beneficial as it allows us to concentrate on genuine growth by training installers to boost sell-through and identifying those who are underperforming. Our sales team is now prioritizing the right efforts instead of just pushing inventory into the channel. Overall, I believe our company has significantly improved in this area over the past year.

Hi, this is David Benjamin from Maheep. I've got a question and then a follow-up. Can you please give us some insights on your thoughts on the Solargraf market share or penetration with installers within the US? Just trying to get some visibility with sales leads in the market.

Yeah. We have over a thousand installers on Solargraf using our design and proposal tool. And we have over a few hundred using our permitting tool.

Thank you. I have a follow-up question regarding gallium nitride. Can you share where you plan to source the materials? Will it primarily come from China or other markets? Additionally, do you have any thoughts on how the AD/CVD might affect solar demand in the US, or on the NEM 3 challenge currently in the California courts?

Gallium nitride, we do have a lot of sources for gallium nitride transistors. Some of the sources are people we already do business with for the silicon FETs. So, we aren't worried. We have lots of opportunities. There are many people with good quality gallium nitride FETs. Raghu will take the question on NEM 3.

Yes, we are aware of the challenges regarding NEM 3. It has gone to appeals court after losing in the lower court. It’s uncertain whether it will be overturned, but if it is, the market will certainly react. For now, we continue our operations as usual. We believe that the long-term solution lies in solar combined with batteries, and we are committed to ensuring our solar plus battery offerings are top-notch. While the court proceedings will take time, it's not our primary focus at the moment.

Hi, good afternoon. Just my first question here, what does the market or growth opportunity look like for home battery sales on new installations versus upgrades of existing solar arrays that are already installed on homes?

Both opportunities are equally valuable, depending on the geography. For instance, in California, all new homes are required to have solar systems, and if you're involved in NEM 3 installations, you definitely need batteries. With a solar-only installation under NEM 3, your bill offset would be around 55%. However, by adding a 10-kilowatt-hour NEM 3 grid-tied battery, you could increase your bill offset to as high as 80% to 85%. Therefore, it makes complete sense to add a battery in that scenario. Conversely, in California's NEM 2 environment, there’s not much incentive to add a battery for bill offset since you already benefit from NEM 2, where the grid essentially serves as your battery. The only other reason to add a battery in that situation would be for resiliency or backup. In regions outside of California, the case for batteries is also growing, particularly with the rise of VPP programs or grid services. People may retrofit batteries onto their systems to take advantage of incentives provided by utilities, which could be an upfront dollar per kilowatt-hour for adding a battery or ongoing benefits for participating in VPP programs. A similar situation exists in Europe, such as in the Netherlands, where retrofitting batteries is gaining traction due to a high solar penetration level of about 28%. Uncontrolled solar export incurs penalties, making self-consumption more appealing, which can be achieved by adding a battery and managing the solar and battery system through software, particularly in dynamic tariff programs. The same applies to countries like Germany and others in Europe.

Yeah, hi. Thanks for running a little long to fit me in here. Just a quick one from me on buyback. So, it looks like share repurchases in the quarter more or less matched up with your free cash flow generation, whereas in Q4 I think you bought back a little more than you actually generated. So, just curious, how are you thinking about the attractiveness of repurchases at these levels? And how should we think about your cash allocation as demand hopefully ramps back up from here?

Sure, I’ll provide some additional details, and then Mandy can elaborate further. We spent roughly the same amount in both quarters, but let me clarify the differences. In the fourth quarter, we repurchased $100 million worth of shares. In the first quarter, we combined our efforts by repurchasing around $40 million in shares and spent about $60 million to mitigate the dilution from stock options that were vesting, which Mandy prevented from affecting the market. Essentially, we allocated a total of $100 million, with $40 million going towards share buybacks and $60 million to stop additional shares from entering the market. We expect to maintain a similar spending level as long as the stock remains attractive, which it currently is.

Yeah. Thanks so much for taking the question. Most of my questions at this point have been answered. It's been a very comprehensive call. But if I can just maybe zoom out for a second, I'm just curious, how are you guys improving your visibility into the channel so this inventory issue doesn't happen again. I'm assuming this isn't going to be the last cycle that we all see. So, I guess, how are you investing in the platform, whether that be software or otherwise, to make sure you have more visibility the next go around, the next time there's demand side shock and to avoid these channel inventory issues next time? Thank you.

The answer is straightforward. We need to focus on the metrics at the front end, which involves tracking how leads are converted into proposals, contracts, permits, and then installs followed by activations. Our approach involves using Solargraf, our design and proposal software, to gain visibility into overall trends rather than individual customer activities. We're interested in understanding region-specific performance metrics, such as the ratio of leads to contracts signed, and we also rely on third-party reports for permits, along with our own Enlighten software for activations. Additionally, we monitor sell-through, which refers to the distribution of our products to installers. Our goal is to strengthen this entire process by implementing metrics at each stage and expanding Solargraf's revenue coverage to include as many installers as possible. This will help us gather more statistics, along with aggregate reports from external sources. We aim to develop a regression model, potentially utilizing advanced machine learning techniques, to inform our decisions on how much product to sell into the channel. We need to avoid the pitfalls of overestimating demand; instead, we should adhere to a mass balance approach, ensuring that what we ship into the channel corresponds with what we ship out. We've implemented statistical process controls to help us with this, and it's already yielding better results. During our weekly reviews, we track our sell-through versus sell-in and evaluate whether we are adhering to our target inventory levels. When inventory exceeds ten weeks, we analyze the reasons behind it. This process has been beneficial as it allows us to concentrate on real growth by training installers to boost sell-through and identifying those who are underperforming. Our sales team is now focused on the right objectives rather than just pushing products into the channel. Overall, we've seen significant improvements in this area over the past year.

Hi, this is David Benjamin from Maheep. I've got a question and then a follow-up. Can you please give us some insights on your thoughts on the Solargraf market share or penetration with installers within the US? Just trying to get some visibility with sales leads in the market.

Yeah. We have over a thousand installers on Solargraf using our design and proposal tool. And we have over a few hundred using our permitting tool.

Thanks very much. I have a follow-up regarding gallium nitride. Can you share your plans for sourcing the materials? Will it primarily come from China or other markets? Additionally, do you have any insights on how the AD/CVD situation might affect solar demand in the US or thoughts on the NEM 3 challenges currently facing the California courts?

Gallium nitride, we do have a lot of sources for gallium nitride transistors. Some of the sources are people we already do business with for the silicon FETs. So, we aren't worried. We have lots of opportunities. There are many people with good quality gallium nitride FETs. Raghu will take the question on NEM 3.

We are aware of the challenge with NEM 3, as it has gone to appeals court after losing in the lower court. It is uncertain whether the decision will be overturned, and if it is, the market will respond accordingly. For now, we are continuing with our operations as usual. We acknowledge that, in the long term, solar combined with batteries is the optimal path forward, and we are focused on ensuring that our solar plus battery solution is top-notch. While the courts will take their time with this matter, it is not something we are concentrating on at the moment.

Hi, good afternoon. Just my first question here, what does the market or growth opportunity look like for home battery sales on new installations versus upgrades of existing solar arrays that are already installed on homes?

Both opportunities hold significant value, depending on location. For instance, in California, all new homes are required to have solar, and if you are involved in NEM 3 installations, incorporating batteries is essential. A solar-only installation in that scenario would lead to a bill offset of around 55%. However, using a 10-kilowatt-hour grid-tied battery with NEM 3 could increase the bill offset to approximately 80%-85%. Therefore, it makes sense to include a battery in that situation. In a retrofit scenario within California, particularly under NEM 2, there are not many incentives for adding a battery aimed at bill offset since the grid essentially serves as your battery. The primary reason to consider a battery in this case would be for backup or resiliency. In other regions outside California, the need for batteries is growing, particularly with the emergence of VPP or grid services programs. Homeowners might choose to retrofit their systems with batteries to take advantage of incentives provided by utilities, such as one-time payments per kilowatt-hour for battery installation or ongoing benefits for VPP participation. This trend is similarly observed in Europe. For example, in the Netherlands, where net metering is in practice, there is a movement towards retrofitting batteries due to the high penetration of solar, around 28%. Users face penalties for uncontrolled solar exports, making self-consumption a goal, which can be achieved by adding a battery and managing the solar plus battery system through software, especially by engaging in dynamic tariff programs. The same principle applies to Germany and other European countries.

Yeah, hi. Thanks for running a little long to fit me in here. Just a quick one from me on buyback. So, it looks like share repurchases in the quarter more or less matched up with your free cash flow generation, whereas in Q4 I think you bought back a little more than you actually generated. So, just curious, how are you thinking about the attractiveness of repurchases at these levels? And how should we think about your cash allocation as demand hopefully ramps back up from here?

I will provide some additional details, and then Mandy can elaborate further. We had a comparable buyback amount in both quarters, but there are some differences worth noting. In Q4, we repurchased shares totaling $100 million. In Q1, we took a different approach, buying back around $40 million in shares while also addressing some stock options that were vesting. To prevent dilution, we allocated about $60 million for that purpose. Essentially, we spent the same total of $100 million: $40 million to repurchase shares and $60 million to avoid dilution in the market. We plan to maintain a similar buyback strategy as long as our stock remains appealing, which it currently does.

Hi, thank you for taking my question. Just one on, how much NEM 2.0 backlog is remaining with the installers? I think you talked about 50% being NEM 3.0. So, going into Q2, how can we expect the backlog cadence to dwindle down for NEM 2.0?

That's an intriguing question. In our discussions with installers, we've noted some with a backlog of nine months and others with a backlog of three months. Therefore, we don't have a clear answer. Like you, we were surprised to see that 50% is still NEM 2. However, installers are quickly adapting to NEM 3 and are working through their NEM 2 backlog. I can’t predict the exact figures, but I believe that in about six months, it will reduce significantly.

Yeah. Thanks so much for taking the question. Most of my questions at this point have been answered. It's been a very comprehensive call. But if I can just maybe zoom out for a second, I'm just curious, how are you guys improving your visibility into the channel so this inventory issue doesn't happen again. I'm assuming this isn't going to be the last cycle that we all see. So, I guess, how are you investing in the platform, whether that be software or otherwise, to make sure you have more visibility the next go around, the next time there's demand side shock and to avoid these channel inventory issues next time? Thank you.

The answer is relatively straightforward. We need to gain a better understanding of the metrics at the front end, such as how leads transform into proposals, which then become contracts, followed by permits and installations leading to activations. Our focus is on the front end, where Solargraf plays a crucial role. This platform provides us with design and proposal software, offering us visibility into trends and activities within specific regions, including metrics like leads versus contracts signed. We also utilize third-party reports for permits and our own Enlighten software for activations. Additionally, we monitor sell-through, which occurs when distributors sell our products to installers. Our goal is to tighten this entire process by implementing metrics at every stage. We aim to increase revenue coverage for Solargraf so that a greater number of installers are using the platform, giving us access to more statistics. We'll continue gathering aggregate reports from third parties whenever possible and combine this data to develop a regression model potentially supported by machine learning. The key for us is to make informed decisions about how much product to sell into the channel, avoiding overselling based on over-optimism. We adhere to a principle where the amount we ship out matches what we ship into the channel. We are implementing statistical process control and have already seen improvements. In our weekly ship review, we analyze our sell-through and sell-in numbers, questioning any situations where sell-in exceeds a certain threshold. This approach allows us to concentrate on genuine growth, such as training installers to boost sell-through and identifying those who are underperforming. Our sales team can then focus on the right priorities instead of just pushing products into the channel. Companies have improved significantly in this area over the past year.

Hi, this is David Benjamin from Maheep. I've got a question and then a follow-up. Can you please give us some insights on your thoughts on the Solargraf market share or penetration with installers within the US? Just trying to get some visibility with sales leads in the market.

Yeah. We have over a thousand installers on Solargraf using our design and proposal tool. And we have over a few hundred using our permitting tool.

Thank you very much. I have a follow-up question regarding gallium nitride. Can you share your plans for sourcing the materials? Will most of it come from China or from other markets? Additionally, do you have any thoughts on how the AD/CVD might affect solar demand in the US or on the NEM 3 challenge in the California courts?

Gallium nitride, we do have a lot of sources for gallium nitride transistors. Some of the sources are people we already do business with for the silicon FETs. So, we aren't worried. We have lots of opportunities. There are many people with good quality gallium nitride FETs. Raghu will take the question on NEM 3.

Yes, regarding NEM 3, we are aware of the challenges as the case was taken to appeals court after a loss in the lower court. It remains uncertain how it will unfold. It seems likely to be tough to overturn, but should they succeed, the market will respond accordingly. For now, we continue our operations as usual. We are focused on the long-term vision of solar combined with batteries. We are actively working to ensure that our solar plus battery solution is top-notch. While the court process may take time, it is not our primary concern at this moment.

Hi, good afternoon. Just my first question here, what does the market or growth opportunity look like for home battery sales on new installations versus upgrades of existing solar arrays that are already installed on homes?

Both opportunities are valuable, but their significance varies by location. For instance, in California, all new homes are required to include solar installations. If you're part of the NEM 3 program, having batteries is essential because a solar-only installation would only offset about 55% of your bill. However, if you add a 10-kilowatt-hour NEM 3 grid-tied battery, your bill offset could increase to 80-85%. It makes sense to incorporate a battery in this scenario. In the case of retrofitting in California under NEM 2, there aren't many incentives for adding a battery primarily for bill offset since NEM 2 already provides that benefit, with the grid essentially functioning as your battery. The only potential reason to add a battery in this situation would be for resilience or backup power. In other regions outside of California, the case for batteries is also evolving, with more VPP or grid services programs emerging. People might retrofit a battery to capitalize on utility incentives, whether through upfront payments per kilowatt-hour or ongoing benefits for joining the VPP program. A similar situation exists in Europe, such as in the Netherlands, which has a net metering system. There is a growing interest in retrofitting batteries there due to the high solar penetration rate, around 28%, where uncontrolled export of solar can lead to penalties. Therefore, it makes sense to focus on self-consumption, achieved by adding a battery and managing the solar-plus-battery system through software, particularly when participating in dynamic tariff programs. The same applies to Germany and other European countries.