Enphase Energy Inc (ENPH) — Q2 2024 Earnings Call Transcript

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's second quarter 2024 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its second quarter ended June 3, 2024. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions, and regulatory and tax 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 most recent Form 10-K and 10-Qs filed with the SEC. 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 have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K, which can also be found in the Investor Relations section of our website. Now I would like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri?

Good afternoon, and thanks for joining us today to discuss our second quarter 2024 results. We reported quarterly revenue of $303.5 million, shipped approximately 1.4 million microinverters and 120 megawatt hours of batteries, and generated free cash flow of $117.4 million. The end market demand for our products was approximately $396 million in Q2, and we reduced our channel inventory by approximately $92 million. Our overall channel inventory returned to normal levels as we exited Q2. For the second quarter, we delivered 47% gross margin, 27% operating expenses, and 20% operating income, all as a percentage of revenue on a non-GAAP basis including the net IRA benefit. Mandy will go into our financials later in the call. Let's discuss how we are servicing customers. Our worldwide NPS was 79% in Q2, up from 78% in Q1. Our average call wait time was 2.5 minutes in Q2, compared to 1.9 minutes in Q1. We have several AI and machine learning initiatives to drive automation and further reduce wait times. Let's talk about operations. Our global capacity is around 7.25 million microinverters per quarter. 5 million units of those are in the US. In Q2, we shipped approximately 574,000 microinverters from our US contract manufacturing facilities that we booked for 45X production tax credits. We expect to ship approximately 1.1 million microinverters from our US facilities in Q3. Our US-made IQ8 Microinverters can help lease PPA and commercial asset owners qualify for the 10% domestic content ITC credit. I'll discuss more on this later in the call. For batteries, our cell pack suppliers in China have sufficient capacity to support our ramp-up in 2024. We also plan to manufacture batteries in the US starting in Q4 with power conversion, battery management, and enclosures made domestically while using cell packs from China. Let's cover the regions. Our US and international revenue mix for Q2 was 65% and 35% respectively. For more visibility into our business, we are providing regional breakdown and sell-through dollar metrics for Q2. With our channel normalized, we will not be providing detailed sell-through statistics going forward. In the US, our revenue increased 32% compared to Q1. The overall sell-through of our products in the US was up 8% in Q2 compared to Q1. Let's discuss the market trends in the US split by non-California states and California. For non-California states, our overall sell-through was up 7% in Q2 compared to Q1. The sell-through for microinverters was up 6% and the sell-through for batteries was up 10%. In California, our overall sell-through was up 7% in Q2 compared to Q1, indicating that our California business has stabilized. The sell-through of our microinverters was flat and the sell-through of our batteries was up 14% in Q2 due to the high NEM 3.0 battery attach rates. I'll provide more statistics on NEM 3.0 later in the call. In Europe, our revenue was flat in Q2 compared to Q1. The overall sell-through of our products in Europe was up 3% in Q2 compared to Q1. The sell-through of our microinverters was flat and the sell-through of our batteries was up 18% in Q2. I'll provide color on some key markets in Europe, the Netherlands, France, and Germany. In the Netherlands, our overall sell-through was down 15% in Q2 compared to Q1. The country's solar demand continues to be challenged by regulatory uncertainty. However, we are beginning to see battery demand pick up. This is a trend we expect to continue, especially as dynamic electricity rates become more prevalent in the Netherlands. We launched our IQ energy management software in the Netherlands during Q2 that will allow our installers to offer an Enphase system that can deliver healthy payback even without NEM. The modularity of our batteries allows homeowners to start either with a 3.5 or a 5 kilowatt hour battery along with their solar systems, making the economics work well. In France, the overall sell-through in Q2 was flat compared to Q1. We recently launched our third generation battery in France and expect that solar plus storage system will become increasingly important for this market as the spread between retail electricity rates and feed-in tariffs rise. We expect to introduce IQ EV chargers and IQ energy management software in France later in the year. In Germany, our overall sell-through in Q2 was up 7% compared to Q1, building on the growth we reported in the previous earnings call. In June at Intersolar Munich, we unveiled some exciting products, our three-phase battery backup solution for Germany, Austria and Switzerland that will increase our served available market. In addition, we showcased our IQ balcony solar kit, which will also increase our served available market in Germany by approximately 400 megawatts a year. We believe Enphase microinverters are ideal for these small systems and we plan to roll out the balcony solutions throughout Europe in the coming quarters. A general comment about Europe. We are still underpenetrated in markets like the UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden and more. Each country has its own challenges and opportunities. But homeowners increasingly seek safety, high-quality savings, and an all-in-one app experience from their home energy system, which aligns well with our strengths. We plan to introduce our entire product portfolio, IQ Microinverters, Batteries, IQ EV chargers, IQ energy management software, and the Solargraf installer platform across more European countries and scale our sales and support accordingly. Let's come to Asia. We are making incremental progress in Asia. Our revenue in India, although small, has doubled from a year ago with the introduction of the IQ8 family of microinverters. We are gaining solid traction in Thailand and the Philippines, where quality and safety are highly valued. In Brazil, we have a good team in place. We work with approximately 600 long-tail installers through the help of some good distribution partners. We are currently shipping our 480 watt IQ8P microinverters into these emerging residential markets to support newer high power panels. In Australia, there is interest in our Enphase Energy System powered by IQ microinverters and the third generation battery. We introduced this product approximately a year ago. Later this year, we will be introducing more products into Australia, including the IQ8X microinverters for higher DC input voltage panels and grid-tied batteries. Let me come to NEM 3 and provide some statistics there. As I said before, the end customer demand in California for us has stabilized in the second quarter. As of last week, 60% of our California installations were NEM 3.0. These systems have a high battery attach rate of over 90% compared to NEM 2.0 systems, which have an attach rate of 15%. Our data also shows that half of our NEM 3 systems are using Enphase batteries, consistent with what I have reported in the last few earnings calls. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times the average NEM 2.0 system. We believe this will contribute to stabilizing our California revenue in the back half of the year. Let me say a few words about market share. In the US, our microinverters and batteries have stable market share, according to both internal and third-party data. As batteries become more common in California, there is some interest in centralized inverter solutions. Our success continues to be driven by our unique AC coupled architecture, which offers significant advantages over legacy string inverter systems in terms of performance, reliability, and safety. We strongly believe in this value proposition. Our system will become even easier and faster to install for backup applications with further improvements we are making to our balancer system. They include our IQ meter collar, our fourth generation 10 kilowatt hour battery, and the enhanced IQ combiner, which are all expected to be available in early 2025. Additionally, we believe our AI-based software is essential for helping homeowners maximize savings with a complex tariff structure like NEM 3. Let's come to our Q3 guidance. We are guiding revenue in the range of $370 million to $410 million. We expect to ship between 160 and 180 megawatt hours of IQ batteries. We anticipate incremental improvement in our US business and a seasonal slowdown in Europe. We are over 85% booked to the midpoint of our overall revenue guidance. This is the healthiest backlog position we have had in the last year. Let's talk about new products, starting with IQ batteries. Our third generation IQ batteries have been well received, and we have almost converted to the third generation battery right now. It offers an industry-leading 15 year warranty with differentiated quality, serviceability, modularity, and power capability. We have expanded the IQ Battery 5P, our third generation battery, into more countries in North America and Europe. We recently started shipping to customers in Canada, Mexico, France, Netherlands, and Luxembourg. We plan to pilot our fourth generation battery in the US later in the year and begin production in early 2025. This new battery will feature a better cost structure and a smaller form factor thanks to its integrated battery management and power conversion architecture. Additionally, the meter collar and the enhanced IQ combiner will be introduced along with the fourth generation battery to reduce our balance of system cost. As previously mentioned, we have expanded into many new markets with the IQ8 family of microinverters and are now present in 43 countries. We plan to enter many more new countries by the end of the year. We aim to further increase our served available market by simplifying installations of small solar systems and social housing and rolling out balcony solar solutions to more European countries, starting with Germany. The other variant of the IQ8P microinverter with the new three-phase cabling system is well-suited for small commercial solar installations ranging from 20 to 200 kilowatts. We launched this product in North America in December last year and have installed over 200 sites with an average of 45 kilowatts of solar per site. The feedback of this product has been quite positive, and we expect the growth to accelerate in the coming quarters. We recently began shipping IQ8P commercial microinverters from our contract manufacturing facility in Texas. We are now producing both residential and commercial microinverters from our US manufacturing facility. Some of our US-made microinverter SKUs, which, when paired with select US-made solar racking equipment, can allow lease PPA and commercial asset owners to qualify for the domestic content bonus credit. This credit is valuable for customers at 10% of the overall project cost. We think this will be a good opportunity for us on both microinverters and batteries. Let me provide an update on IQ9 microinverters with gallium nitride. The IQ9 family will support higher DC input currents up to 18 amperes and higher AC grid voltages, including 480 volts for the small commercial market, which is a brand new market for us. Using gallium nitride high-voltage transistors, these microinverters will deliver higher output power at lower cost. We are on track to launch this product in 2025. Let's discuss EV charging. We showcased our upcoming EV charger for Europe at Intersolar, Munich in June. The charger offers a 22-kilowatt three-phase option and an 11-kilowatt single-phase option. It integrates seamlessly with Enphase solar and batteries, allowing homeowners to optimize cost by using excess solar energy. Green charging, or charging from solar, is what it's called. Other key features include dynamic phase switching from single-phase to three-phase and vice versa, a MID meter for a few countries, ISO 15118 support to communicate with the car, OCPP cloud software support, and 1-ampere fine-grained current control to maximize green charging. We plan to introduce this charger in many European countries later in the year. Additionally, we recently launched our most powerful CS-100 EV charger for commercial fleet electric vehicles in the US. Our team is developing a bi-directional EV charger that will enable V2H and V2G capabilities as part of the Enphase system. The charger will feature modular GaN-based bi-directional inverters, providing up to 11 kilowatts for single-phase applications and 22 kilowatts for three-phase applications. We are targeting to release this product in late 2025. Let's now cover our IQ Energy Management software. Our software is rapidly evolving to handle the growing complexity of energy markets by using AI and ML for forecasting and optimization. We train our AI models with data from over 4 million systems. In Q2, we launched our latest software in the Netherlands and Belgium to manage dynamic electricity rates, helping homeowners maximize ROI and reduce payback periods as electricity prices fluctuate hourly. We see AI as a crucial technology to scale and enhance our products and services. Let's discuss our installer platform. We recently introduced Solargraf, our design, proposal, and permitting software platform to the Netherlands. With built-in support for dynamic electricity rates, Solargraf software delivers the financial calculations that address the complexities of energy markets in the Netherlands. Solargraf is also available to residential and commercial installers in the US, Canada, Brazil, Germany, and Austria, and we expect to release it to many countries in the coming quarters. Let me conclude. We remain dedicated to delivering best-in-class home energy systems with a strong focus on innovation, quality, and customer experience. Over the last year, we have significantly expanded our global reach and have an exciting pipeline of new products set to launch worldwide in the coming year. We have successfully normalized our channel inventory by the end of Q2. Our customer demand has increased by 5% in Q2 as compared to Q1. Our battery business is also doing very well with growth from quarter to quarter. Our bookings in Q3 are the healthiest that they have been in a year. Our early commitment to US manufacturing is positioning us well with leased PPA and commercial asset owners. We also expect the Fed to lower interest rates later in the year, improving solar economics for the US consumers. Our efforts to capture market share in Europe and other international regions are also promising. Despite continued macroeconomic challenges, we are confident in our revenue recovery and remain bullish about our long-term growth prospects. With that, I will turn the call over to Mandy for her review of our finance. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our second quarter of 2024 financial results, as well as our business outlook for the third 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 Q2 was $303.5 million. We shipped approximately 608.3 megawatts DC microinverters and 120.2 megawatt hours of IQ batteries in the quarter. Non-GAAP growth margin for Q2 was 47.1%, compared to 46.2% in Q1. GAAP gross margin was 45.2% for Q2. Non-GAAP gross margin without net IRA benefit for Q2 was 41%, flat from Q1. We had a non-GAAP gross margin for Q2 included $18.4 million of net IRA benefits. Non-GAAP operating expenses were $81.7 million for Q2, compared to $82.6 million for Q1. We continue to invest in new products, customer service, and sales. GAAP operating expenses were $135.4 million for Q2, compared to $144.6 million for Q1. GAAP operating expenses for Q2 included $49 million of stock-based compensation expenses, $3.5 million of amortization for acquiring intangible assets, and $1.2 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q2 was $61.1 million compared to $39 million for Q1. On a GAAP basis, income from operations was $1.8 million for Q2, compared to a loss of $29.1 million for Q1. On a non-GAAP basis, net income for Q2 was $58.8 million compared to $48 million for Q1. This resulted in non-GAAP diluted earnings per share of $0.43 for Q2 compared to $0.35 for Q1. GAAP net income for Q2 was $10.8 million compared to GAAP net loss of $16.1 million for Q1. This resulted in GAAP diluted earnings per share of $0.08 for Q2, compared to GAAP diluted loss per share of $0.12 for Q1. We exited Q2 with a total cash, cash equivalents and marketable securities balance of $1.65 billion compared to $1.63 billion at the end of Q1. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 891,896 shares of our common stock in Q2, at an average price of $112.02 per share for a total of approximately $100 million. We have $648.1 million remaining for further share repurchases. In addition, we spent approximately $7.5 million by withholding shares to cover taxes for employee stock vesting and options in Q2, which reduced the diluted shares by 66,126 shares. We expect to continue this anti-dilution plan. In Q2, we generated $127 million in cash flow from operations and $117.4 million in free cash flow due to our strong working capital management. Capital expenditures were $9.6 million for Q2, compared to $7.4 million for Q1. Capital expenditures increased due to an increase in our US manufacturing spending. Now let's discuss our outlook for the third quarter of 2024. We expect our revenue for Q3 to be within a range of $370 million to $410 million, which includes shipments of 160 to 180 megawatt hours of active battery. We expect GAAP gross margin to be within a range of 45% to 48%. We expect non-GAAP gross margin to be within a range of 47% to 50% with net IRA benefit and 39% to 42% before net IRA benefit. Non-GAAP gross margin improved stock-based compensation expense and acquisition-related amortization. We expect the net IRA benefit to be between $30 million and $33 million, an estimated shipment of 1.1 million units of US microinverters in Q3. We expect our GAAP operating expenses to be within a range of $138 million to $142 million, including approximately $59 million estimated for stock compensation expense, acquisition-related amortization, and restructuring. We expect our non-GAAP operating expenses to be within the range of $79 million to $83 million. We expect our GAAP and non-GAAP annualized effective tax rate, excluding discrete item for 2024, to be at 18% plus or minus 1% with net IRA benefits. With that, I'll open the line for questions.

Hi, everyone. Thanks for taking my questions. First one here on sell-through. Q2 was $396 million, the midpoint of your Q3 guide is $390 million. But batteries are up meaningfully. So I was wondering if you could share what you expect the sell-through to be in Q3. Can you confirm there's no destocking in Q3? And then when do you expect to return to the $450 million to $500 million of normalized revenue? Is it still on the table for the back half, or is it potentially more in '25? Thanks.

There is no destocking for Q3. Going forward, we aim to achieve a balance between sell-in and sell-through. We will only report under-shipment or over-shipment if there is an imbalance. Currently, the channel is balanced, and we are in a good position. Regarding the $450 million, we are very optimistic. In Q2, our sell-in revenue was $303.5 million, and the midpoint of our Q3 guidance is $390 million, indicating good growth. We have successfully normalized our channel inventory, and our battery business is strong, increasing from 75.5 megawatt hours in Q1 to 120 megawatt hours in Q2. We are now guiding for 160 to 180 megawatt hours in Q3, with contributions from California and other regions. Our customer demand in Q2 rose by 5% compared to Q1, and we have built some conservatism and potential risks into our guidance, which is why we set a range of $370 million to $410 million. Our Q3 bookings are the strongest they've been in a year, with over 85% bookings after assessing various worldwide risks. Our commitment to US manufacturing is benefiting us with lease, PPA, and commercial asset owners. We expect the Fed to lower interest rates later this year, which will help improve solar economics for US consumers. Our efforts to gain market share in Europe are also encouraging. Although Europe Q3 will experience seasonality, we are still underpenetrated there and making good progress in several countries. We feel very optimistic about growth in Europe.

Good afternoon. Thank you for taking our questions. Your gross margins have remained strong. Leading up to the micro-manufacturing scale, you provided guidance on the allocation of the 45X tax credit that you expected to retain. I have two inquiries: First, regarding the battery side as it prepares to ramp up in the US, could you share your expectations on how that credit might be allocated? Second, with the domestic content ITC adder language available, if a customer could receive an additional $0.30 to $0.40 per watt, how much of that do you believe Enphase could retain, and how much might be passed on to customers to encourage demand? Any insights on pricing strategy would be appreciated. Thank you.

We are continuously working on improving our gross margins through a cost reduction program for microinverters and batteries. Progress is being made, and I anticipate our non-GAAP gross margins, excluding the IRA, will keep improving. In the battery sector, the prices of cell packs are decreasing, and we are starting to manufacture our microinverters for batteries in the US while implementing significant architectural changes as we transition from the third to the fourth generation. Even with the third generation, the serviceability rate for the batteries and backup system controllers is about 90%. This means that servicing often involves simply replacing a $50 board rather than removing a $5,000 battery, which highlights the advantage of our easily serviceable and modular architecture. We are optimistic about our gross margins, both with and without the IRA. Regarding the IRA, most benefits will come from microinverters, and we are just beginning to scale our battery production. More of the microinverters used in batteries are now domestically produced. It's a bit early to discuss the specific benefits, but we are focused on domestic content and engaging with all key stakeholders to work out the details. Our goal is to ensure that these incentives ultimately benefit the end consumer, though it remains unclear how lease and PPA providers will manage their share of the incentives. For us, this could mean establishing more factories, as we begin domestic production of the microinverter enclosures. We are setting up factories and plan to charge for the value we provide. This is beneficial for consumers, especially with incentives that could reach around $0.40 per watt, representing 10% of project costs.

Hey, guys, good afternoon. Thanks for taking the questions. Maybe this is for either Badri or Raghu. Can you talk about the competitive landscape at all? Just thoughts around some reports of Tesla Powerwall 3 gaining traction and then maybe on the flip side, your most direct MLPE peer having some struggles. Just kind of what's the market share landscape looking like for you? Are you gaining some traction? And then secondarily, as we think about Q4, just some of the moving pieces, is it fair to assume battery shipments continue to grow sequentially into Q4? Badri, you mentioned Europe is seasonal in Q3, but do we take that to mean that it bounces back in Q4? And then can you talk at all about the kind of the domestic content demand you are seeing if you can quantify at all what uplift you might see in Q4? Thanks guys.

Got it. I'm going to give some detailed color on the competitive situation and then Raghu will add more. For the people who did not listen to my prepared remarks, our installers are steadily ramping on NEM 3, and we are talking primarily about California here. The battery attached in California is increasing. Our numbers, like what I said, overall worldwide shipments were 75.5 megawatt hours in Q1, growing to 120 megawatt hours in Q2 and guiding 160 megawatt hours to 180 megawatt hours in Q3. So battery attach, and a lot of it is coming from California indeed. California as of last week, 60% of our installations are happening on NEM 3. This is brand new data, fresh data, and we do a lot of installations per week. So this is important. 60% is NEM 3, 40% is NEM 2. Battery attach we are noticing is obviously very high for NEM 3, greater than 90% compared to NEM 2. Good news is half of our NEM 3 solar is still attached to Enphase batteries. This data has been consistent for the last two or three quarters. One more point for you to note is we provide a strong value proposition for grid-tied batteries and this data I did not say in the prepared remarks, but our NEM 3 batteries, over 70% are grid-tied, and our grid-tied batteries are very easy to install. Many customers just prefer two 5 kilowatt hour batteries. No extra balance of system, no complexity. The existing combiner box can be used. We have something called Enphase power control software that will make sure that we can do a lot of things in software and do not need to add any more hardware than what is necessary. And no main panel upgrades are required because of Enphase power control software. And I talked to you about 24/7 support, easy serviceability, highest warranty in the industry, 15-year warranty. We are able to do that because of our architecture. We don't use fans; we have air cooling. No single point of failure. For backup, backup is a little more complex. There is going to be more dollars the user has to shell out because the useful backup probably is about 20 kilowatt hours of battery and for backup we are streamlining our balance of systems. We are going to have a new 10 kilowatt hour battery and we are basically embedding the neutral. So we are eliminating the system controller and we are enhancing our combiner there. We are reducing the number of things they have to buy and basically we'll have a best in class solution there. On the PV side, I didn't explicitly say the advantages over a string inverter are numerous. First of all, obviously, high power production, enhanced power production could range anywhere from a couple of percent to 15% more. Safe AC architecture. No high voltage DC on your roof. That's the single most important factor, for example, that some people in Europe select our product. It's simply because no high voltage DC on the roof. Per panel monitoring. I was in Austria and Switzerland recently, per panel monitoring was they say, we want to see everything that is happening. For panel monitoring is very important for them. 25-year warranty versus inverters; we may be talking about our ten-year warranty. I mean, 25-year warranty matters, and obviously the domestic content readiness. So domestic content readiness, of course, our competition will also be ready, and we believe that we have a good solution there, and we are going to make it even better for both microinverters and batteries. So we will be able to capture some value there. Those are all of the puts and takes on the competitive situation. I'll have Raghu qualify the competitive situation more, but I'll answer the other question. Battery, do we expect Q4 growth? At this point, it's early for me to guide anything, but we do expect Q4 growth and domestic content. How much of the Q3 number includes domestic content? Little to zero. Domestic content is a conversation that we are having and we expect it to pan out in the fourth quarter. Raghu, talk about anything more?

Yeah, I think as Badri mentioned, we have a very strong value proposition, and really this has been the value proposition from the very onset of the company, is that compared to centralized big box solutions, we just have much better performance, better reliability, as reflected in the 25-year warranty, and no high voltage DC anywhere. So much greater safety. The value proposition becomes even more important when you think about the new tariff structures like NEM 3, which is all about arbitrage and required batteries. And this is where, as we said, for a homeowner, if they can get just a 10-kilowatt hour battery, grid-tied, which means you connected into the existing combiner box, your value proposition for NEM 3 significantly improves. So our battery, the modularity of a battery, the high power, and the fact that it can be done in 10 kilowatt hours with two of the IQ Battery 5P makes it a very, very good fit. But we also mentioned that for backup, there's a lot of work that we're doing to make it as easy to install as the grid-tied solution as well. So we've always said decentralization is the key. Distributed architecture is just always win in the long run for cost, performance, and reliability.

Great, thanks so much for taking the question. I did just want to come back to the $450 million to $500 million run rate that you guys were talking about earlier this year. You guys have obviously done a good job at clearing out the channel inventory, but it just feels like over that time period demand has stayed relatively stable at about $400 million or so on a per-quarter basis. So I’m just curious where you think the growth is going to come from, from here if you look at the 4Q and then into 2025? I know you guys don't officially guide that far out, but what markets are you expecting the growth to come from in Europe or in the US? And I guess how much of that will be battery driven versus micro-driven? Thank you.

I believe you might have missed some of my earlier comments, so let me clarify a few points. While we haven’t provided guidance for Q4, we’re optimistic based on current trends. We successfully normalized our channel inventory by the end of Q2, and our customer demand grew by 5% from Q1 to Q2. Our battery business is performing exceptionally well, with 75.5 megawatt hours in Q1, 120 megawatt hours in Q2, and we anticipate a midpoint of 170 megawatt hours in Q3, expecting continued success. Our Q3 bookings are at their strongest in a year, which are good indicators for our performance. Our commitment to US manufacturing is giving us a competitive edge with commercial asset owners, presenting significant opportunities to provide valuable solutions that should stimulate demand. Additionally, there are indications that the Federal Reserve may lower interest rates this year, which could enhance solar economics for US consumers. On the international front, I’ve discussed our activities in the Netherlands, France, and Germany. In the Netherlands, we recently launched our Solargraf software platform to help installers effectively sell, and we introduced a new 5-kilowatt hour battery. We plan to roll out our EV chargers in that market toward the end of Q3 and early Q4. In France, our business remains robust, and we’ve launched our third-generation battery along with plans for IQ energy management solutions. We will also introduce the same IQ EV chargers in the French market. In Germany, we showed positive growth in sell-through for Q2 compared to Q1 and introduced a highly differentiated three-phase battery backup solution at the June Intersolar event in Munich. This solution boasts excellent round-trip efficiency due to innovations in managing unused microinverters, ensuring less waste. We expect this battery to do well in Germany, Austria, and Switzerland. Additionally, we will launch balcony solar in Germany in Q3, a product that was a standout at Intersolar, with the ability to connect up to two panels and export power through a special gateway device. This solution is expected to create significant opportunities in Germany. We see a total addressable market of 400 megawatts just for balcony solar in Germany alone and plan to replicate this success throughout Europe. Our EV chargers will also be introduced across all these markets. Although we’re strong in France, the Netherlands, and Germany, we still have growth potential in the UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, and Sweden. We aim to launch our full product line, including microinverters, batteries, EV chargers, energy management software, balcony solar, and Solargraf. Homeowners are looking for safety, high-quality systems, savings from dynamic pricing, and a seamless all-in-one experience without the complexity of juggling multiple apps. We have many new products coming, some available in Q3 and others in Q4, all of which will contribute to our growth trajectory.

Thanks so much. Guys, can you talk about the guidance for the batteries? How much of that is for the growth from new geographies and channel fill and how much is coming from existing markets? And then, as you think about introducing the IQ9 and the evolution of module sizes and efficiency, can you speak to the product market fit and any potential headwinds you have for bringing that product to market?

Yeah. I mean, we usually don't break out the regions, but I will tell you, we expect Europe is a little bit seasonal, so I think maybe a little down to flat in Europe. But a lot of the growth is coming from the US and a lot of growth in California on batteries.

The product market fit, given the evolution of module efficiency, form factor, etc, any headwinds you're expecting as you bring that to market?

We are actively working on IQ9, which will be based on GaN technology. This technology is significant because it enables us to provide higher power while maintaining the same cost. Our first product will target the small commercial market, specifically the 480 volt segment, which we currently do not serve. We plan to introduce a 427 watt product for this three-phase market, which will feature a competitive cost structure. The innovation with GaN involves using two bi-directional GaN switches instead of four silicon FETs, which contributes to cost savings. Additionally, by operating these switches at higher frequencies—potentially doubling from 100 kHz to 200 kHz or 300 kHz—we can significantly reduce the size and cost of the main transformer. Our aim is to achieve a cost level for this product that is similar to IQ8, resulting in a lower cost per watt. Following the 427 watt model, we also plan to launch a 548 watt version for emerging markets and specific areas in Europe, suitable for both residential and commercial customers. We anticipate introducing the first IQ9 model to the market in 2025.

Great product market fit, right? I mean, you asked that question. You're seeing that the module power is continuing to go up and so our plans in fact, we have the platform already developed that can address for the foreseeable future any increase in power and uniquely benefits Enphase, because as the power continues to go up, you can build that same system with fewer number of modules you don't need. If you were doing it with 20 modules before, now you can do it with 18 modules as opposed to a big box inverter. It doesn't matter, a seven-kilowatt inverter is a seven-kilowatt inverter. So we have some unique benefits when it comes to the direction in which the modules are going and we have the platform now, both in fact, with IQ8 and getting better with IQ9 to address any increase in module power.

Hey, good afternoon, Badri. A quick question about the countries that you've highlighted where you're under-penetrating in Europe. What is the strategy to increase penetration? Is that the new products? Is it adding more sales and dollars? That's the first question. The second question is around the commercial products business and kind of what you see is the outlook there?

It's quite straightforward. Our strategy is to systematically introduce new products into all the regions, which we are currently doing. For instance, almost every region now has IQ8 microinverters. Some areas will require three-phase batteries and single-phase batteries with backup, which we expect to offer by the year's end. Similarly, IQ EV chargers will be available again in the fourth quarter. We are consistently rolling out the Solargraf platform in all regions to ensure significant revenue coverage in those countries. The Solargraf platform enhances the value proposition that installers can offer homeowners. Additionally, there’s the IQ energy management software. Currently, there aren't many places with dynamic electricity rates—Germany, Sweden, Norway, and the Netherlands are the main ones—but we anticipate this trend will expand. Each region will have specific needs, such as time-of-use rates or dynamic tariffs, and we are preparing for variations in rate structures. Overall, we're focused on increasing sales, expanding field application engineering coverage, providing excellent 24/7 customer service, ensuring our products are readily available, and offering thorough training for installers. While I don't foresee an abrupt increase, I do expect to see steady growth as we continue to introduce products over the coming years.

Hey, guys. Thank you very much. Appreciate the time. Yeah, can you guys hear me? Hopefully. Thank you very much. Just wanted to kick off your first, just expectations on SunPower in third quarter here. Just wanted to make sure and confirm that it's been adjusted for kind of expectations on whatever happens there. And then maybe just more holistically as you think about that fourth quarter. I know you're providing third quarter guide here, but how do you think about the domestic contents? You talk about the value proposition being flipped. How do you think about that impacting sort of more of a step function recovery in the residential market here? I mean, clearly, we've seen a little bit of a drag out in backlog ads in California, for instance. How do you think about that adding to overall volumetric health as we close out the year with that additional 10%?

Yeah, thank you. So first one, with respect to SunPower, we're not going to comment on customer specifics here, but as usual, what we do is when we give you guidance, we always take risks everywhere in the world, globally. And we have done exactly that in the guidance that we gave you. That's one. On the domestic content again, it is early to tell, but we like what we are seeing. We believe we'll start to see some output of the domestic content in Q4 that will be positive, hopefully for the industry because it is a large incentive, and that incentive can be used to propel demand to improve economics for the PPA providers and improve economics for the industry, making sure installers also, their situation gets robust. So I think it will benefit everybody in some way or another. And we are happy to provide those solutions and we are, our product right now, we basically said certain select products that we have today, combined with racking, qualify even today for domestic content. We are making that better by increasing our domestic content, which is manufacturing enclosures for microinverters and getting that ready in the fourth quarter. So once that is in play, then we will be able to increase the percentage of domestic content available there and we will be able to service customers better. But I'm very excited by it. I think this, along with potentially the Fed rates, has the potential to propel the market significantly in Q4.

Thank you for letting me ask a question at the end. I noticed that 60% of your installs were on NEM 3, and I’m curious about how long you think it will take to transition from NEM 2. Also, regarding your high attach rates, can you provide a rough estimate of what your energy storage volumes might look like when that transition occurs?

Yes, if history is any indication, about three months ago I mentioned that approximately 50% of our installs were on NEM 2, and now that figure is at 60%. I can’t predict the timeline precisely, but I estimate it may take another two or three quarters to fully transition from NEM 2. Raghu mentioned grid-type batteries, which offer improved economics; for a single 5 kilowatt hour battery, the bill offset improves from around 55% to 70%. With two 5 kilowatt hour batteries, it can increase to 85% to 90%. Therefore, the ideal configuration is two 5 kilowatt hour batteries for those opting for grid-type solutions. However, there are customers who prefer backup systems as well. We anticipate that a complete shift to NEM 3 will significantly drive battery attachment rates. Currently, only 60% of the installations have transitioned, and several factors, including the health of the installers, impact this. While I cannot provide a precise figure, we are optimistic as our revenue from sales in California has stabilized since Q1 and even increased by 7% from Q1 to Q2. I noted that while microinverters were flat, battery sales rose by around 14%. This is encouraging news, but it is just one quarter, so we need to remain cautious. Overall, we believe this will significantly boost our battery business growth.

Good afternoon. Appreciate you all squeezing me in here. Maybe just a quick one for me. I appreciate all the details you all have continued to provide on US manufacturing and your outlook there. Just wanted to get your thoughts. Obviously a lot going on the geopolitical front, upcoming election both here in the US and in Europe. I just wanted to see how you're thinking about the risks there from maybe an IRA perspective and then over in Europe.

We recognize that we can't control external factors. However, we believe we have a robust business with an excellent value proposition for our product. Our business operates independently of these incentives. Specifically regarding the IRA, we have successfully brought advanced manufacturing back to the US, and we are ramping up these efforts. We are creating jobs and making investments, which we anticipate will be supported regardless of the political landscape. We are confident that we are making the right decisions. We are transparent with details like our gross margin, both including and excluding the IRA, which reflects the strength of our business independent of any incentives. The outcomes remain uncertain and beyond our control, but we believe we are on the right path.

Yeah, absolutely. And then just a quick follow-up. I noticed you get the number of certified battery installers and saw some really nice growth there this quarter. I'm just wondering what initiatives are kind of driving those installer certification. Where would you expect that number to kind of trend?

Yeah, I mean, those are reflective of the number of countries we are entering and the training that we are providing. We have a very active training department in worldwide, and we have an Enphase University. Of course, battery installations aren't simple, although the grid-tied installations are getting there. So it does need some training, and we have a lot of installers getting trained both in the US and Europe. The IQ Battery 5P is a good product. It solved some of the earlier deficiencies that we had in terms of low power and wireless connectivity, etc. All of those are fixed. So it's being well received globally, not just the US. And now we are following it up with a three-phase battery to address the market. So that's what you're seeing: you're seeing that sort of strength training, not just big installers, focusing on all the installers. Like for example, when I was in Austria and Switzerland about a month ago, in Switzerland, I met about seven installers in a couple of days. And these are anywhere from 1 megawatt to 5 megawatts. Those are our installers. We celebrate them. We make sure that we provide them the correct guidance. We're not perfect many times; there are problems, but once we know, we solve the problems quickly. I think what you're seeing is this transformation from solar to energy, and I think you should expect this trend to continue. We have talked about it, but now it's really turning into a reality, where if you look at, the number of markets have made this transition from solar to solar, plus battery, plus EV charger, plus heat pump. And so you can see how our products are aligning with that transformation. We are doing everything from continuing on an inverter side, going IQ8 to IQ9 to match module power increases. You're looking at what we are doing on our battery with 5T battery and then the next generation 10 kilowatt hour battery, introducing the three-phase battery for backup, introducing EV chargers, introducing all of the software. So you're seeing that the training that we now need to do to get people more comfortable with selling systems is also on the increase. And all of this is good for us because this is what our DNA is: building hardware and software systems, building software systems that are software-defined. And this is a unique advantage for us.

Thank you for accommodating me. In California, I think you mentioned that your customers are pairing your inverters with your batteries 50% of the time. Is this significantly different in California compared to the rest of the US? You mentioned that 70% of your batteries are grid-tied, which is beneficial for NEM 3.0 and the rate arbitrage. However, outside of California, I would assume that batteries are mainly used for backup rather than for rate arbitrage. I’m interested to know if your market share for batteries is greater in California than in the rest of the US.

You're right that outside the US, batteries are mainly used for backup. However, there are certain areas in the US with many grid services that offer incentives for using batteries to support the grid, particularly during the summer. An example of this is Massachusetts and the Duke PowerPair program. Generally speaking, in the NEM world, the grid itself acts as the battery. When people install batteries, it's often for some form of security, particularly emotional security, which is why backup use is common in many regions of the US. In California, battery use is driven by rates; it has evolved from NEM to NEM 3, making it primarily an economic decision. Therefore, grid-tied batteries are very beneficial there. Regarding market share, I don't have specific numbers, but I believe the market share outside California is likely comparable to that in California.

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