Enphase Energy Inc (ENPH) — Q3 2024 Earnings Call Transcript

Good afternoon and thanks for joining us today to discuss our third quarter 2024 financial results. We reported a quarterly revenue of $380.9 million, shipped approximately 1.7 million microinverters and 172.9 megawatt hours of batteries. We generated free cash flow of $161.6 million. Our overall channel inventory remained normal as we exited Q3. For the third quarter, we delivered a 48% gross margin, 21% operating expense, and 27% operating income, all as a percentage of revenue on a non-GAAP basis, including net IRA benefits. Mandy will go into our financials later in the call. Let's discuss customer service. Our worldwide Net Promoter Score was 78% in Q3, slightly down from 79% in Q2. Our average call wait times increased to 4.4 minutes from 2.5 minutes, partially due to higher call volumes from disruptions in the installer landscape. We are actively managing this while rolling out software fixes and automation to reduce wait times. Let's talk about operations. Our global capacity is around 7.25 million microinverters per quarter, with 5 million in the US. In Q3, we shipped approximately 1.2 million microinverters from our US contract manufacturing facilities, booking 45X production tax credits. We anticipate shipping 1.3 million units from our US facilities in Q4. We also introduced a higher domestic content SKU for IQ8HC microinverters to help lease/PPA and commercial asset owners qualify for a 10% domestic content ITC adder. This translates to about $0.40 per watt in savings for them. We are seeing strong traction in the lease and PPA markets for this product. We expect to begin shipping our commercial IQ8P-3P microinverters, as well as our residential IQ8X microinverters, also from our US contract manufacturing facilities, featuring higher domestic content, starting this quarter. Our cell pack suppliers in China have enough capacity to support our plans for batteries in 2024 and 2025. We are on track to produce the battery at our US contract manufacturing facility in this quarter using domestically manufactured inverters, battery management systems, and packaging while continuing to source cell packs from China. Let's now cover the region. Our US and international revenue mix for Q3 was 75% and 25% respectively. For more visibility into our business, we will be providing regional breakdowns for Q3. In the US, our revenue increased 43% compared to Q2. The overall sell-through of our products in the US was up 6% across all channels in Q3 compared to Q2. This increase was despite a large US customer declaring bankruptcy in Q3. Our distributor sell-through in the US was up 13% compared to Q2, which reflects improving market fundamentals in the US. In California, our distributor sell-through was also up 13% in Q3 compared to Q2. In Q3, we saw healthy growth for both microinverters and batteries in California. NEM 3.0 now represents approximately 65% of California installs, and the attach rate of our own batteries continues to be close to 50%. In non-California states, our distributor sell-through was up 14% in Q3 compared to Q2. Looking ahead, we see lower interest rates, ITC adders, and higher power prices as the key drivers for 2025 growth. In Europe, our revenue was down 15% compared to Q2. The overall sell-through of our products in Europe was down 34% in Q3 compared to Q2. While every country in Europe has its nuances, the overall business environment in the region is challenging. Power prices have declined from the early 2023 highs. The economic growth is slow and consumer confidence is limited. We are focused on what we can control: building and strengthening relationships with installers, launching many new products, and expanding into new markets as we believe we are under-penetrated, as well as collaborating closely with our distribution partners. We believe this will position us well for significant growth when the cycle rebounds. I'll provide some additional color on our key markets in Europe: the Netherlands, France, and Germany. In the Netherlands, the solar market is transitioning away from solar-only systems due to regulatory uncertainty around NEM, which is about to expire in early 2027, and export penalties imposed by the energy providers. These issues have increased the adoption of batteries, which avoids export penalties and allows participation of residential solar plus battery systems in energy markets. While this transition is still in its early stages, we are encouraged by strong engagement with the country's energy providers. We are well-positioned to lead the market recovery in the Netherlands with our microinverters, along with batteries, our upcoming new EV chargers, and AI-powered IQ energy management software, which is crucial to maximize savings and improve homeowner ROI. In France, our Q3 was impacted by summer seasonality. We expect a cooling-off period for solar demand in the country, driven by expected utility rate cuts in early 2025. Overall, France remains a key growth market for us given our market leadership there, as well as the country's low solar penetration. We plan to introduce many new products for France, mainly the new EV charger, batteries with backup, and energy management for hot water heaters. In Germany, we are excited about a few upcoming product launches that are imminent. These will expand our reach in Europe's largest solar market. Our three-phase battery backup solution for Germany, Austria, and Switzerland, which was unveiled at Intersolar Munich in June, has received highly positive feedback. Our IQ Balcony Solar is nearing launch. We are targeting a 400-megawatt market with this product and believe that Enphase microinverters are ideally suited for these very small systems. Additionally, we plan to launch the new IQ EV charger into Germany in Q4. A bright spot in Europe has been the UK, where the sell-through was up approximately 80% compared to Q2. However, we are still under-penetrated in this market and have a lot more room to grow. There are similar countries in Europe, including Italy, Spain, Belgium, Luxembourg, Austria, Switzerland, Sweden, Denmark, and more. While each country faces its own unique challenges and opportunities, homeowners are increasingly prioritizing safety, reliability, quality, savings, and a seamless all-in-one app experience for their home energy systems which perfectly aligns with our core strength. We plan to introduce our entire product portfolio: the IQ8 series of microinverters, both single and three-phase batteries with backup, the new IQ EV chargers, AI-powered IQ energy management software, and the Solargraf installer platform across many more European countries. We continue to make incremental progress in other regions in the world. Our IQ8P and IQ8HC microinverters are ramping well in India. We are now taking pre-orders for the battery in India, with shipments to installers to begin in December. In Brazil, we are ramping on the 480 watts IQ8P microinverters into this emerging residential market in order to support newer, higher power panels. In Australia, we recently started shipping IQ8X microinverters for higher DC input voltage panels and now offer a 25-year limited warranty as default for all IQ8 microinverters, which is currently the longest standard residential warranty in the Australian market. Let's come to our Q4 guidance. We are guiding revenue in the range of $360 million to $400 million. We anticipate incremental improvement in our US business and a continued slowdown in Europe in Q4. We are approximately 85% booked to the midpoint of our overall revenue guidance, which is very similar to last quarter. We expect to ship between 140 to 160 megawatt hours of IQ batteries in Q4. Our battery sell-through is doing well; it continues to increase, and we expect Q4 to reflect a slight uptick in demand. The reduced battery shipments in Q4 compared to Q3 is primarily due to channel restocking in Q3 that will not repeat in Q4. Before we talk about new products, let's discuss the evolution in our industry away from single hardware components and towards total energy systems. In many countries around the world, solar-only is no longer enough. Our Enphase systems are now composed of IQ microinverters, IQ batteries, EV chargers, and increasingly sophisticated IQ energy management software to manage multiple use cases including rate arbitrage, grid resilience, VPP participation, wholesale market participation, and more. All parts of the system must be best-in-class with software that ties it all seamlessly together in order to win. We believe our current and future products uniquely position us to win in these total system solution-focused markets. Let's talk about IQ Batteries. Our third generation IQ Battery 5Ps continue to be very well received by the market. It offers an industry-leading 15-year warranty, with differentiated quality, serviceability, modularity, and power capability. We are on track to pilot our fourth-generation battery in the US in the fourth quarter and begin production in early 2025. We believe this new battery will be a game changer for us. The battery takes up 60% less wall space, due to its integrated battery management and power conversion architecture. In addition, the fourth generation IQ Battery will be paired with our new IQ meter collar and enhanced IQ combiner. The battery system will reduce installed costs by approximately $300 per kilowatt hour for a typical system with backup, making us highly competitive for all use cases. We have expanded the IQ microinverter family into 51 countries and plan for more by the end of the year. We are particularly excited about Japan where we expect to launch our IQ8HC microinverters in early 2025, targeting a 1.3-gigawatt market. The Tokyo Metropolitan Government has offered subsidies for MLPE products, making it very attractive for consumers. Japan's solar market, especially Tokyo, with its small system sizes of 2 kilowatts to 3 kilowatts, complex roofs, and demand for quality, aligns well with our strengths. Let's talk about our commercial microinverter, IQ8P. The IQ8P with its new three-phase cabling system is perfect for small commercial solar installations between 20 kilowatts and 200 kilowatts. We have over 380 sites in the US, with an average size of 50 kilowatts, and the feedback so far has been quite positive. These three-phase microinverters will soon ship from US factories with increased domestic content offering a 10% ITC adder for commercial asset owners, which should drive demand up even further. Let me provide an update on our IQ9 microinverters powered by Gallium Nitride Technology. The IQ9 family is designed to handle higher DC input currents up to 18 amperes and supports elevated AC grid voltages, including 480 volts for the small commercial market. IQ9 is expected to come in two power variants, 427 watts and 548 watts, offering flexibility and performance. We are on track for a launch in the second half of 2025, positioning us to meet growing market demands. Let's dive into EV charging. We are gearing up to launch our second-generation IQ EV charger across several European countries in Q4, tapping into a $1.4 billion annual market. With up to 22 kilowatts, three-phase charging, the charger integrates well with Enphase solar and battery systems, enabling homeowners to minimize electricity costs by using excess solar energy. Key features of this new IQ EV charger include dynamic phase switching and 1 ampere current control, which result in much more efficient green charging, ISO 15118 support for AC bidirectional charging in the future, and compatibility with MID meters in Germany, as well as compatibility with OCPP 2.0.1 software for third-party control, making it a very comprehensive and future-ready solution. Let's cover software. Our IQ Energy Management Software supports grid services programs, VPPs, in regulated markets like the US, and energy market participation in deregulated markets like Europe and Australia. In the US, we are active in around 25 programs across key states in California, Massachusetts, Texas, and North Carolina, with more than 10,000 customers and 120 megawatt hours of battery capacity enrolled. These programs enable homeowners to discharge batteries during peak demand, supporting the utilities in times of need. In deregulated markets, our software enables homeowners to earn up to $1,500 annually through energy providers. As electricity rates become more complex, our AI-powered software differentiates us, maximizing ROI and reducing payback period. Let's discuss Solargraf, our installer platform. We've added new features to Solargraf in Q3, including an updated battery design tool, as well as a do-it-yourself permit plan set for US customers. Solargraf is now available to both residential and commercial installers in the US, Canada, Brazil, Germany, Austria, and the Netherlands with plans to expand to more countries in the coming quarters. Let me conclude. We have worked diligently to manage and navigate through an industry slowdown. The midpoint of our revenue guidance for Q4 is flat with respect to Q3, and is a 44% increase from our revenue bottom of $263 million earlier in Q1 2024. We expect Q4 to also be impacted by the same large US customer due to its bankruptcy, but we believe a substantial portion of this revenue will return through our distribution channels in future periods. We generated approximately $321 million in free cash flow for the first nine months of 2024, and have maintained strong gross margins throughout the downturn. Over the last year, we have expanded our global footprint in microinverters and batteries, and are developing a strong pipeline of innovative products that are nearing launch. Our three-phase battery, IQ Balcony Solar, and the new IQ EV charger for Europe are set to expand our served available market by $4 billion. Our upcoming fourth-generation battery system featuring the IQ meter collar and enhanced combiner is expected to significantly reduce installation costs for backup. Our GaN-powered IQ9 microinverters will enable us to enter new three-phase commercial markets which are incremental for us while boosting power and lowering costs in the residential markets. We are also excited to advance our AI-powered energy management software in collaboration with retail energy providers in the Netherlands and cater to complex energy markets around the world. Looking ahead to 2025, we see improving US market fundamentals driven by lower interest rates, ITC adders, and higher power prices in key markets that are expected to drive nice growth. Our best-in-class microinverters coupled with our next-generation battery system should allow us to defend and grow our market share in the US. Internationally we believe we are well-positioned for growth when the solar market stabilizes due to our broadened geographic reach and product portfolio. We remain committed to delivering best-in-class solutions and are energized by the road ahead. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our third quarter of 2024 financial results, as well as our business outlook for the fourth quarter of 2024. We have provided reconciliations of this 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 Q3 was $380.9 million. We shipped approximately 730 megawatts DC of microinverters and 172.9 megawatt hours of IQ Batteries in the quarter. Non-GAAP gross margin for Q3 was 48.1% compared to 47.1% in Q2. GAAP gross margin was 46.8% for Q3. Non-GAAP gross margin without net IRA benefit for Q3 was 38.9% compared to 41% in Q2. Our GAAP and non-GAAP gross margin was negatively impacted by a one-time 3.3 percentage point charge related to cost of goods sold on batteries. Non-GAAP gross margin for Q3 included $35.2 million of net IRA benefits. Non-GAAP operating expenses were $81.6 million for Q3, compared to $81.7 million for Q2. We continue to invest in new products, customer service, and geographic expansion. GAAP operating expenses were $128.4 million for Q3, compared to $135.4 million for Q2. GAAP operating expenses for Q3 included $43 million of stock-based compensation expenses, $3.1 million of amortization for acquired intangible assets, and $677,000 of restructuring-related expenses. On a non-GAAP basis, income from operations for Q3 was $101.4 million, compared to $61.1 million for Q2. On a GAAP basis, income from operations was $49.8 million for Q3 compared to $1.8 million for Q2. On a non-GAAP basis, net income for Q3 was $88.4 million compared to $58.8 million for Q2. This resulted in non-GAAP diluted earnings per share of $0.65 for Q3 compared to $0.43 for Q2. GAAP net income for Q3 was $45.8 million compared to $10.8 million for Q2. This resulted in GAAP diluted earnings per share of $0.33 for Q3 compared to $0.08 for Q2. Both our non-GAAP and GAAP diluted earnings per share for Q3 were negatively impacted by $0.09 per share net of tax, related to impairment of an investment in a private company. We exited Q3 with a total cash, cash equivalents, and marketable securities balance of $1.77 billion compared to $1.65 billion at the end of Q2. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 434,947 shares of our common stock in Q3 at an average price of $114.48 a share for a total of approximately $49.8 million. We had approximately $598.3 million remaining for further share repurchases. In addition, we spent approximately $6.3 million by withholding shares to cover taxes for employee stock vesting and options in Q3, that reduced the diluted shares by 59,607 shares. We expect to continue this anti-dilution plan. In Q3, we generated $170.1 million in cash flow from operations and $161.6 million in free cash flow, due to our strong working capital management. Capital expenditure was $8.5 million for Q3 compared to $9.6 million for Q2. Now let's discuss our outlook for the fourth quarter of 2024. We expect our revenue for Q4 to be within a range of $360 million to $400 million, which includes shipments of 140 to 160 megawatt hours of IQ Batteries. We expect GAAP gross margin to be within the range of 47% to 50%. We expect non-GAAP gross margin to be within a range of 49% to 52% with net IRA benefit, and 39% to 42% before the 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 $38 million and $41 million of estimated shipments of 1.3 million units of our US microinverters in Q4. We expect our GAAP operating expenses to be within the range of $135 million to $139 million, including approximately $54 million estimated for stock-based compensation expense, acquisition-related expenses, and amortization. We expect our non-GAAP operating expenses to be within a range of $81 million to $85 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.

Thank you. Good evening. I guess I just wanted to start on the batteries. You mentioned that you expect sell-through to be up slightly for batteries in the US quarter-over-quarter. But shipments are down because you restock during the quarter. Can you give us a sense of what sell-through was in 3Q? Is the 4Q guide more in-line with what sell-through levels actually are? And if we could get a rough split of the shipments, going to the US versus everywhere else?

Yes. Essentially, we informed you 90 days ago that the battery channel was understocked, and we have addressed that issue. Our shipments into the channel and the shipments out are now balanced, which is why we are expecting 140 to 160 megawatt hours. Additionally, our US revenue split of approximately 75% to 25% should reflect a similar distribution for batteries.

Okay. And just as a follow-up to that, revenue was up 43% quarter-over-quarter in the US, I think you said, and sell-through is something in the single digits across all channels. So was the disconnect here all the batteries as we just kind of mentioned? Or is there any restocking here on the MI side? And then just as we think about Europe as well, it sounds like your sell-through was worse than what your sell-in was there. So maybe weeks of inventory went up there? And I guess, how should we assume what you are assuming for 4Q?

The increase in our revenue by 43% can be attributed to a simple reason: we stopped under shipping in Q3, bringing our revenue back to normal levels. Currently, in the US, we are in a good place where sell-in and sell-through are aligned, allowing us to maintain healthy weeks of inventory. For us, healthy weeks of inventory means maintaining between 8 to 10 weeks, adhering to the discipline of not exceeding 10 weeks. This is behind the observed revenue increase of 43% in sell-in. In the US, overall sell-through across all distribution and direct channels rose by 6% in Q3 compared to Q2, despite a significant US customer declaring bankruptcy that quarter. Within our distribution channels, sell-through in the US increased by 13%, and sell-through in California and outside California saw similar boosts at 13% and 14%, respectively. Overall, sell-through remains strong for both microinverters and batteries. In Europe, however, the situation is different. Our revenue fell due to a 34% decline in overall sell-through of products, prompting us to take action. We have significantly shortened our response time compared to last year. As a result, we continued to under ship in Europe despite the decreased sell-through rates, leading to slightly higher weeks of inventory. Nonetheless, we are very disciplined, and as soon as conditions improve, our weeks on hand will decrease rapidly. We are cautious for Q4, which is why our guidance reflects a slowdown in Europe, and we are not pushing additional inventory into the channel.

Thanks so much guys. It sounds like you're getting a little bit of traction with these EV chargers. Can you talk a little bit about your strategy around evolving the sales of those? And how we should think about the trajectory on attach rates as we get into 2025?

Right. On the EV chargers, basically, there are two interesting markets. One of course, is the US market and the other is the Europe market. We bought a company called ClipperCreek towards the end of 2021. They made high-quality chargers and also provided excellent service. They had a reasonable market share in the US. What we did was we took that and essentially moved manufacturing to our contract manufacturing facilities in Guad. We then did some surgery on the product. Those chargers were what you call unconnected chargers. They did not have Wi-Fi in them. So we took our time to make that product. Last year, we introduced IQ Smart EV chargers in the US. In the meantime, we've been working furiously in Europe, where the adoption is also quite nice and high. The European market is a very interesting place. There are about 14 countries that we will introduce our IQ EV chargers to. Our Served Available Market (SAM) is about $1.4 billion. And these chargers are a little bit different from the US; they are all smart chargers. And as I mentioned, there are several features in the EV chargers for Europe. For example, most of these EV chargers are three-phase. And when you do, for example, green charging with the EV chargers, many of the competitive products require a particular minimum power to charge from solar. Our product has got a unique feature where it can start with single-phase, enabling green charging from solar at a lower power and then switch to three-phase when solar energy ramps up. That's a significant benefit. It integrates well with the Enphase solar and battery systems, enabling homeowners to view everything from the app. The other big thing we are interested in is bidirectional EV charging. That is AC bidirectional charging and DC bidirectional charging. AC bidirectional charging means there is no external inverter outside; DC bidirectional charging means you take care of the inversion outside. So our product, the latest IQ EV chargers, is compatible with a standard called ISO 15118. That ISO 15118 is a standard where the EV charger can communicate with the car, and it can get things like the state of charge of the car, which is not possible today. So we are planning to embark on an AC bidirectional charger as well for the US and for Europe as needed. That AC bidirectional charger, as I said before, takes the DC input from the car, and it has inverters outside to connect to the grid. So that's the design we are building; each inverter is about 3.8 kilowatts. It interfaces with 1000 volts DC on one side, which is interfacing with the car, and AC on the other side. So for example, to have an 11-kilowatt bidirectional charger, you will have three of those 3.8-kilowatt inverters. These inverters are designed according to the same microinverter architecture. So zooming back down, right now the most important thing for us is to introduce the IQ EV charger second generation into 14 countries in Europe, take advantage of the big Served Available Market of $1.4 billion, and then work on both AC bidirectional charging in Europe and DC bidirectional charging in the US.

Okay. Thanks. And then just very quickly, please. Can you give us an update on the initial traction in the commercial market and the size of systems that you're able to address as you get into 2025? Are you able to get into the 100 to 200 kW systems? Or are you still generally on the smaller side on the commercial systems at this point?

Yes. Our IQ8P is a commercial-specific microinverter. We benefit from the three-phase cabling system. It's perfect for small commercial solar installations between 20 kilowatts and 200 kilowatts. As you know, commercial projects have a slightly longer cycle time. So we started shipping this product about nine months ago, and the traction has been quite good. We reported a couple of hundred sites 90 days ago; now things are starting to ramp. We are over 380 sites. In fact, in the Fremont building that I'm sitting right now, I have 396 panels on the roof. I can monitor it nicely. I can immediately find out if an inverter is not working. That's what the installers value. The higher power production, the per-panel monitoring, and the immediate focus on quality. It's a 214-kilowatt system using 550-watt panels. So this microinverter is perfect at 480 watts. So we're very excited about this. We are doing a couple of things. One is we aren't yet addressing the 480-volt market, which we are going to address with IQ9. That product is coming out in the second half of 2025. That's going to be a gallium nitride design, suitable for high power with ultra-low cost. And the second important thing you should note is that our IQ8P three-phase microinverters are going to be shipping from the US, where they have increased domestic content that enables commercial asset owners to get the benefit of an additional 10% ITC. So we think that will also propel demand. So we are quite excited about that.

Yes. Good afternoon. Thanks for taking our questions. Going back to RE+, we heard quite a bit of optimism looking into 2025, just kind of based on a view that interest rates would be lower. Since then, there's been a pretty big spike in rates in the wrong direction. Just kind of curious, to the extent that you've had very recent conversations with some of your customers, if that's creating any pause in the industry?

Our sell-through data for Q3 shows positive signs in the US. For instance, in California, NEM 3.0, which was previously a concern, is no longer an issue. Some installers have adapted to NEM 3.0 and are finding that solar plus storage is economically viable. Beyond California, our sell-through data indicates a 14% increase. I have been tracking this since RE+, and our data is improving weekly. We expect incremental improvements in the US market in 2025, driven by further rate cuts and the 10% domestic ITC adders, which can save TPO providers and help them reinvest approximately $0.40 per watt back into installing or boosting consumer demand. Utility prices are also rising. While I acknowledge your concerns, the data suggests a positive outlook for growth in the overall US market in 2025.

Okay. That's great to hear. Thanks, Badri. And then real quick on Europe. You mentioned some of the cross currents with some of the industry headwinds, but maybe offset by new products and market expansion, that kind of thing. Adding all of that up, do you care to comment about what 2025 might look like in Europe for Enphase? Fully appreciating that you do not guide a year out. But just generally speaking, any color would be great. Thank you.

Yes, we believe that Q4 may be somewhat challenging in Europe, but we think we are at a turning point. There are some promising markets, particularly the Netherlands, which has been significantly impacted by NEM uncertainty, an issue that is gradually being resolved. We are optimistic that moving into 2025, the Netherlands will transition from focusing solely on solar to incorporating storage and software solutions as well. We are currently collaborating with almost 10 energy providers in the Netherlands. For instance, some of them require solar curtailment for brief periods throughout the year to avoid hefty penalties. Although that market needs some transformation, we see it as an opportunity to reshape it. France has historically been a strong market for us, holding over a 50% share. We are hearing that utility rates may present some challenges early next year, but the underlying fundamentals are robust, and we anticipate a strong recovery as we near the end of 2025. Germany is facing general weaknesses, as some installers have gone bankrupt, similar to trends observed in the US. In response, we are focusing on the fundamentals by introducing new products and expanding our market reach by $4 billion. These new products include three-phase battery backup, which is particularly relevant for Germany, Austria, and Switzerland, as well as our newly introduced IQ Balcony Solar, which fits into smaller systems. It's worth noting that Balcony Solar isn't limited to Germany, as countries like Austria, Belgium, and France have their own variants, and we plan to introduce these products as well. In Germany specifically, we are targeting 400 megawatts with Balcony Solar. We are also working on our IQ EV charger. We are aware that our presence in Europe is still developing and there's more ground to cover. We are concentrating on areas we can influence, such as launching new products, managing our distribution channels, entering new markets, and collaborating with both small and top-tier installers. We believe we are making the right moves, and we expect the market to eventually recover.

Hi, everyone. Thank you for the questions. I have two, both concerning guidance. Firstly, at the midpoint of the revenue guidance, you're flat for the fourth quarter. I see three main factors: Battery Storage, Europe, and SunPower. You've indicated a $15 million headwind for battery storage. In Q3, Europe had a drag of $5 to $10 million. Will it be similar in Q4, since you're expecting it to decrease? Additionally, while SunPower may have been producing less than 50 megawatts a quarter towards the end, that still translates to $10 to $15 million in revenue for you. So my question is, can you help quantify what seem to be three significant headwinds affecting sequential growth into Q4? I also have a follow-up.

In Q4, our overall sell-through of microinverters is showing improvement compared to Q3, and we are guiding towards that. On the battery side, we are targeting 140 to 160 megawatt hours, down from 170 megawatt hours. You are correct that SunPower represents a headwind of $10 to $15 million, and while we do not expect that to impact Q4 immediately, we are collaborating with installers and anticipate recovering most of that in the upcoming quarters. To answer your question, we expect an increase in microinverter sell-through. The battery sell-through is also performing well, aside from a one-time channel destocking. Europe continues to exhibit slight weakness compared to Q3.

Yes, that's super helpful, Badri. Second question on that same line of thought, you strip up the battery storage, microinverter sales, you're saying are going to be up about 5% or so in the 4Q guide at the midpoint. But I would have thought stripping out all these other factors like SunPower, Europe, etc., you have US seasonality, US domestic content. And also, it sounds like you had some price increases in the US. So can you talk us through some of the tailwinds that, I don't know, if they're actually showing up in 4Q or if they are going to show up later. But I would have expected those to maybe help you a bit more into 4Q outside of all these other headwinds we just talked about. So domestic content, US price increases. Just any general thoughts around that? Thank you, guys.

Yes, we are not increasing any prices in the US. The domestic content product is new, and there is an additional cost associated with increased domestic content. We expect these factors to drive performance: the increased domestic content, the sell-through on microinverters, and strong battery sales. We anticipate even stronger performance starting in Q1 '25 with our fourth-generation system. Overall, if microinverters perform well, they can offset weaker areas.

Thank you for taking my questions. My first one is about your previous comments on reaching a sell-through demand run rate of $450 million to $500 million. Back in May, you mentioned that this might occur in Q4. What are your current thoughts on when this could happen on a quarterly basis? Is it possible in '25, perhaps Q2, or could it be later in the year?

Yes, we've addressed that before, and there have been a few challenges. We've seen some installer bankruptcies, including a significant one. Although the US market is moving in a positive direction, Europe presents a different challenge. A few months ago, we did not expect the installer bankruptcies or the continued decline in our European business. That is the current reality. However, the US distribution market is showing promising signs, both in overall and California-specific sell-through numbers. Non-California markets in the US are also looking positive. We did lose some revenue due to a major customer's bankruptcy, but we anticipate recovering that revenue. While we don’t provide guidance for 2025, those are the areas we see for growth. We plan to launch our fourth-generation system in Q1, which we expect will reduce installed costs by $300 per kilowatt hour, enabling us to be competitive not just in grid applications but also for backup solutions.

Thank you for the detailed information, Badri. Regarding Powerwall 3 and Tesla, our analysis indicates strong and widespread demand for Powerwall 3. I understand it's a string inverter, and as you've outlined, your technology is significantly superior and more advanced. However, many of your customers are increasing their Powerwall 3 orders. When you discuss this with your customers, what insights are they sharing? Are you surprised by the volume of business transitioning to Powerwall 3? Some of your larger customers have mentioned that you might be anticipating a loss of market share to Powerwall 3, particularly until your new battery, meter collar, and combiner box are released. How much do you expect to lose in this transition? I realize this is a challenging question, but I think it's a crucial one. Thank you for addressing it.

Thank you for your question. I can provide insights based on the data available to us. Our third-party reports indicate that we are maintaining our market share. Specifically, our sales in California have increased by 13% quarter-over-quarter. This growth includes both batteries and microinverters, which are closely linked. As I mentioned earlier, 70% of our installations in California are grid-tied. The costs associated with our Enphase batteries are not higher; in fact, they are lower. We are utilizing two 5P batteries that are connected to the AC bus, using the same combiner box without the need for additional equipment. We are addressing existing issues and plan to launch our latest battery in the first quarter, featuring a 10-kilowatt hour capacity and requiring 60% less wall space compared to our current model. This new design eliminates the previous system controller in favor of a collar, which we anticipate will pass compliance and gain utility approval by Q1 2025. Our new battery includes neutral grounding and an enhanced combiner, offering several features that installers appreciate. The installation cost will decrease substantially, saving about $300 per kilowatt hour for typical storage systems with backup. We aim to introduce this solution to the market in Q1 2025, focusing on growth in both grid-tied markets and backup markets, which will be critical for our expansion in 2025. Additionally, Enphase offers numerous advantages, such as improved power production compared to string inverters, particularly in shaded areas. We also prioritize reliability, as there are no single points of failure. If a microinverter on the roof fails, the majority of the system remains operational. Each IQ battery contains six microinverters, ensuring continued functionality even if one fails. Our warranty terms are favorable too, with batteries covered for 15 years and microinverters for 25 years, compared to a standard 10-year warranty for string inverters. Our systems are designed for simplicity and ease of installation on rooftops. The low-voltage DC for batteries is advantageous, and firefighters appreciate the AC architecture. Serviceability is a key concern, especially with battery fleets where servicing can be time-intensive. Our distributed architecture approach eliminates single points of failure, with all components AC coupled. Homeowners benefit from a combined solar and storage system. Overall, our fourth-generation system will enhance our competitiveness in the backup market and is expected to grow our battery market share moving forward.

Thank you for the color, Badri. I will pass it on.

Good afternoon. Thank you for accommodating me today. I’ll keep it to one question. Regarding pricing, you've provided a lot of insights, but I believe you mentioned some pricing concessions in Europe due to the current weakness. You've maintained a consistent approach to pricing based on value. I’m curious about your perspective on this as we move into the fourth quarter in Europe. Additionally, are there any changes to your overall pricing strategy, particularly concerning micros?

Pricing, I did not mention we did anything for Europe. So I think you must have misunderstood it. We are not dropping pricing anywhere. Pricing is something that we manage on a daily basis. We instituted a pricing team in 2017, and there is a team of about six people. Their job is to ensure we always price on value. We spend a significant amount of time understanding the full system, the bill of materials to make sure that we clearly understand the areas where we can save money for the consumer in terms of the overall system. We do this very diligently. I'm not saying that we never drop prices, but it is a non-event for us because sometimes if there is a loyal customer who needs a little bit of help, we will assist them. But that's not an event; it is a business process. We expect that business process to continue.

Thanks for taking the question. Can I ask kind of high level about Europe? Yes, power prices are down; module pricing is down 30% versus a year ago, as well as lithium-ion batteries. Why is that not acting as a counterbalance against cheaper electricity?

Hi, this is Raghu. We think that part of the reason, if you again look at it country by country. In the case of the Netherlands, which was a solar-only market before, it was very clear that the NEM uncertainty, as well as homeowners being penalized for exporting solar into the grid, was a big headwind. Obviously, in the Netherlands, we believe we are doing all the right things there for that market to completely turn around by adding batteries. Solar plus batteries in a dynamic electricity market where energy can be traded into the market is a very good way for homeowners to improve their ROI. In general, the urgency that was there before, during the crisis, during the Ukraine crisis and the steep increase in power, that urgency is gone. The economy is also not doing that well. We believe that the combination of those factors is why Europe seems to be slow. But as Badri mentioned, it is possible that Q3 could be the bottom there. Specifically for Enphase, with the introduction of all the new products and the expansion of our SAM by $4 billion can act as a catalyst for us to get Europe back where it needs to be.

I'll follow up with a quick question about India, which no one has asked about yet. You recently announced a new product launch in the Indian market, which I typically think of as a very price-sensitive market. Are you going to be cost-competitive there?

Yes. Let me tell you about India; this battery will cater to the premium segment. There are many single-family homes, apartments, and villas where, if you didn't know, you lose power five times a day. The system today is a backup UPS with lead acid batteries. And you all know how lead-acid batteries are. That's why we shifted to lithium-ion. We introduced this battery in India; it's a 5-kilowatt hour battery. It is perfect for India because Indian families, even high-end, may not use more than 10-kilowatt hours a day. So this battery comes with a backup switch. That backup switch means you won't even know you're running on backup. It is a beautiful solution for many of the luxury builders who can build it into homes that can cost anywhere from $200,000 to a couple of million dollars. They can install it into the home and raise the value of the home while providing complete energy independence. We are working with these builders. Of course, granted the volumes, we'll have to see it ramp up. India is a beautiful market because there is a big problem with power shutdowns, and we have a solution for the high-end markets.

India also has a lot of solar potential; it's a very good solar market. There’s a new program for small systems with very significant incentive programs for small systems, including 2, 3, and 4 kilowatts. Those present a perfect market for India. We are very bullish about that market.

Hi, good afternoon. I just wanted to comment on the market share question from a slightly different angle and ask just specifically on the TPO market. I think you had kind of identified that as an opportunity to take incremental share specifically in Q4. I just want to check in on how that's kind of playing out. Thank you.

Yes. We work with all of the TPO providers. We have a great relationship with everybody. Our market share, the way we have built market share to be even more than 50% in the US is by working with everybody. We work with Tier 1 installers, Tier 2 installers, and long-tail installers. These installers are being served by a handful of TPOs. All of them are working with us on domestic content. It's currently unclear if we will gain more share now, but we are already shipping domestic content microinverters with increased domestic content right now. That is on our mainstream product called IQ8HC. Soon, we will start shipping batteries with domestic content in November. So basically, if they have a reliable supply of domestic content, they will seek that out; right now very few suppliers have clear plans for domestic content, and we are working with each one of those TPOs.

Thank you. If I can squeeze in just one more. You covered kind of managing the battery channel earlier in the call. But just looking past Q4, as you prepare to start shipping the fourth-gen battery, how should we think about your strategy to prep the channel ahead of that? Thanks.

Yes. There are a couple of things you need to note. One is as we introduce batteries into a lot more regions. For example, as I told you, we are under-penetrated in a few regions in Europe, including Germany. The three-phase battery is going to come into Germany; that's going to increase our battery volumes. It's going to introduce batteries into many more countries in Europe, that's going to increase the volumes. And that, we are still talking about the third-generation battery. In the US, we are going to switch to the fourth-generation battery. That is going to result in a drastic reduction in bill of materials and installation costs. So the inventory transition is much easier for us because we have the third generation still shipping for the rest of the world, and we will ramp on to the fourth generation. We expect that transition to be well managed and not leave any problems in the channel.

Thank you for the question, Badri. My understanding is that the increase in ASPs and IRA benefits helped to counter the domestic manufacturing costs and product mix impacts on gross margins. Was this a lever you pulled? Or how do you think about the sustainability of these higher ASPs going forward?

Yes. It's quite simple; the cost of manufacturing in the US means our cost increases many times by 10% to 15%. So therefore, all we are doing is to ensure that we take care of that in terms of pricing. However, if you look at the big picture, the few cents that we might be adding is creating value of $0.40 to $0.50 a watt for somebody. That $0.40 to $0.50 of a watt can be reinvested back, or provided to the installers. There are various ways that each TPO will choose to cut it. But that's the math. We are generating that value. We are generating the domestic content. We are taking a few dollars to do that because in US manufacturing, it is a little more expensive. We are covering those costs. There is still a lot of value being generated.

Good afternoon and thank you for taking my questions. So my first one, and hopefully, this isn't a dumb one, but you highlighted that distribution growth in Q3 was much higher than sales from more channels because of the SunPower bankruptcy. How do you know that the growth you're seeing in distribution isn't because the bankruptcy occurred, and your distribution customers aren't actually just gaining share from SunPower?

We don't. But what we know is this; the time period is too short for installers to adjust their plans, and it typically takes some time for installers to bleed off their current inventory. So our projection is there will be some installers who will come through in Q4. The majority will come through from Q1 onwards through the channel. The good news is that we are working with almost all of them. They understand us very well. We are meeting with them, and they are making plans for ramping with us.

Thank you. I have a follow-up question. A key aspect of Enphase's strategy, since your initial tenure, has been to continuously reduce costs and pass some of those savings on to customers. Recently, considering factors like the duopoly, inflation, and domestic content, it appears that there haven't been significant cost reductions in the inverter segment. With the IQ9 set to launch later this year and potentially lowering your costs significantly, how are you planning to return to the previous practice of cutting costs and sharing those benefits with your customers? Thank you.

Yes. If you look at IQ9, our aim, desire is to deliver increased watts at the same cost to installers. The way we would price that product is appropriate like that, which utilizes advanced technology like GaN, Gallium Nitride. We are able to achieve high power with improved form factor and cost. How is that possible? Let me describe a simple change in the microinverter today, our bread-and-butter microinverter called IQ8HC. We have four silicon AC FETs, which are 600-volt transistors. We also have a big transformer that you've seen in our microinverters. Now going to GaN, four FETs will be replaced by two bidirectional FETs. If we run the GaN transistors at an increased frequency, we can get ready to run them at a megahertz in IQ10. If we run them at a high frequency, the transformer cost and form factor can come down drastically, along with many passive components. That's how we are thinking. We want to offer installers 10% higher value; for example, IQ8HC got a power of 384 watts. The IQ9 product, which we will release in the second half of next year, will be around 427 watts and will offer 10% to 12% higher power. We'd like to make sure that is given to installers for a similar price they buy today, thereby improving their cost per watt. That's our plan for microinverters. I already told you about our plans for batteries. Battery costs are continuously going down. Cell pack costs are continuously going down. According to a market study, cell pack costs will soon be well below $100 per kilowatt hour. By designing the system properly, with neutral farming embedded in the batteries, we can drastically reduce installation costs, meaning no longer needing a complicated backup box. We only need the collar. The collar is not a new concept; it's been around for some time. So in almost all of these cases, technology is the end, and that's what we're focused on: GaN technology, breaker technology, battery technology, it's all driving down costs.

Also software, right? The quality of the software, AI-powered software can really also improve the homeowner's ROI just by being very intelligent about when to charge the battery, when to discharge the battery, when to buy from the grid, and when to sell to the grid. You're making real-time decisions in software that can also improve the homeowners' ROI. That's what we care about at the end. We also have power control system software built into our combiner boxes that can avoid main panel upgrades, again applying technology, hardware, and software technology to improve the homeowners' ROI. We have to look at all elements of the system and how to keep driving costs down. We started with solar only, but now we have moved to comprehensive energy systems now.

Hi, Mandloi. Thanks for taking the questions. Maybe just one quick one on the IQ9 timing. I think you said second half of next year. Is that for the commercial or the residential? If just the commercial, then when do you expect the residential launch?

We'll start with the commercial microinverters. Commercial microinverters will address 427 watts and 548 watts of AC power. They will take care of three-phase 208 volts and 480 volts. Note that 480 volts is a brand-new market for us. What we have heard in the small commercial market, which we talk about, which consists of schools, small businesses like restaurants, churches, and any small-scale building you can think of, we've heard that 75% of them are 480 volts; 25% are 208. Today, we are only addressing the 208. We're going to expand that in the second half of '25. Following that, we will introduce our residential microinverter. There are two flavors there: 427-watt residential microinverter and 548 watts for emerging markets, very high-power panels, for example, in India, where panels are 650 to 700 watts. Similar in Brazil, in many emerging residential markets, we need a high-power solution, while in the US and Europe, we need a 427-watt solution, and that will immediately follow. We expect to introduce all of it in the second half of 2025.

Got it. And just on the cash, you have almost $1.8 billion now. Any thoughts on how to deploy that or buybacks or any other use in the future?

Yes. As I said before, we look at three things. One is making sure we have enough capital for expansion, whether it's a factory, whether it's a contract manufacturing line, whether it's some of the new line of business, that is our first priority. The second priority is looking at M&A. For example, we are quite interested in energy management software. We are looking at interesting things on EV chargers as they become mainstream, which is bidirectional charging and making them integral parts of solar and batteries. We are looking at commercial batteries; there is scope and opportunities for us. We are casting a wide net, but our standards are very high. We will not buy companies that we think are not a good fit for us. So we are very selective but are looking at many of them. The third option, if there is enough cash left over, is to engage in systematic buyback. We've been doing buybacks over the last few quarters and expect to do so in consultation with the Board, especially whenever we can be opportunistic and do so when there is some pressure on the stock.

Hi everyone. I'll keep this brief. Can you share the percentage of domestic content SKU for the third and fourth quarters, and what do you anticipate for the first quarter regarding US products?

Q3 has not ramped. I should say close to 0%. For Q4, our estimate is going to be around 10%, 10% to 15%, with a steady ramp from there on.

Hi, good evening. Thanks for taking my questions. Do you have any concerns about the 30% residential tax credit in the IRA being changed by a new Congress or a new Presidency next year? And how would that affect your expectations for US growth in the out years?

The ITC is very important for the US market. If that gets disrupted at this stage, it would not be good for the overall market. It would also be bad for the general economy. We believe demand is going up substantially; electrification is taking place in the homes. People are buying EVs, heat pumps. That demand must be met. A majority of that demand is being met immediately by renewables. Any hit to a 30% ITC would be detrimental for everyone, and that the IRA has created numerous jobs here. The manufacturing has come back here. We expect the probability of ITC going away to be very, very low, maybe zero.

Great. Thank you for the time.

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