Enphase Energy Inc (ENPH) — Q2 2025 Earnings Call Transcript

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Second Quarter 2025 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 30, 2025. 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 tax, tariff and supply chain 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'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri?

Good afternoon, and thank you for being with us to discuss our financial results for the second quarter of 2025. We reported quarterly revenue of $363.2 million, shipped 1.53 million microinverters and 190.9 megawatt hours of batteries, and generated free cash flow of $18.4 million. Our Q2 revenue included $40.4 million of safe harbor revenue. As we concluded Q2, our battery channel inventory was normal, while our microinverter channel inventory was slightly elevated. We achieved a gross margin of 49%, operating expenses of 21%, and operating income of 27% for Q2, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefit. Mandy will elaborate on our financials later in the call. Our global customer service NPS was 79% in Q2, up from 77% in Q1. The average call wait time decreased to 1.8 minutes, mainly due to our staffing improvements and investments in automation. On operations, our global capacity is approximately 7 million microinverters per quarter, with 5 million coming from the U.S. In Q2, we shipped around 1.41 million microinverters from our U.S. contract manufacturers, booking 45 times production tax credits. Our domestically produced microinverters assist residential lease PPA providers and commercial asset owners in qualifying for the 10% domestic content ITC adder. We project that we will ship about 1.2 million microinverters from the U.S. in Q3. Our domestic battery production grew in Q2, with shipments of 46.9 megawatt hours compared to 44.1 megawatt hours in Q1. We are manufacturing the IQ Battery 5P in the U.S. using domestically made microinverters, thermal and battery management systems, and packaging while sourcing cell packs from China. These batteries, which have over 45% domestic content, can again help our lease and PPA customers earn ITC bonuses. We are on track to have non-China cells available by the year's end, starting battery builds in the first half of 2026. Our U.S.-made batteries with non-China cells can aid customers in qualifying for domestic content ITC bonuses and complying with foreign entity of concern criteria, which are becoming stricter each year. Regarding tariffs, in Q2, we experienced a 2% gross margin impact due to tariffs. The initially proposed 145% tariff on Chinese products was lowered to 30% in May. Consequently, our anticipated margin headwind of 6% to 8% in Q3 has improved to an estimated 3% to 5%, even considering new tariff increases on several non-China countries effective August 1. This improvement is a direct result of our team's execution in diversifying our supply chain. We are not only reducing tariff risk but also preparing our operations for the future, positioning Enphase to lead amid tightening FEOC compliance rules. For our revenue by region, our U.S. and international revenue mix for Q2 was 75% and 25%, respectively. In the U.S., our revenue rose 3% in Q2 compared to Q1, primarily driven by seasonal demand, albeit partially offset by lower safe harbor revenue of $40.4 million versus $54 million in Q1. The overall sell-through of our products increased by 17% in Q2 compared to Q1. In the U.S. solar market, we are noticing improvement with increased battery attach rates and seasonal demand contributing to rising momentum. Although we haven't witnessed a significant surge related to the expiring 25D homeowner tax credit, we anticipate urgency will build later in the year as more consumers aim to secure the credit. As we approach 2026, the U.S. solar industry must swiftly adapt following the recent tax reconciliation bill. We foresee an accelerated transition towards leases and PPAs, supported by the 48E tax credit through 2027. Batteries will play a key role in every solar sale, buoyed by decreasing installation costs, long-term tax credit aid through 2033, and growing homeowner interest in energy resilience and participation in VPPs. Additionally, the industry needs to reduce customer acquisition and selling costs to maintain competitiveness in a mature market. We believe these structural shifts, along with rising utility rates and increasing grid instability, create a favorable environment for continued demand in residential solar plus storage. Enphase is implementing a multifaceted strategy to lead the industry through these transformations. We are collaborating with third-party owners to create innovative financing structures that maximize tax credit capture under the new regulations. Our aim is to broaden lease financing access across a larger installer base, including smaller and midsized companies. By minimizing friction in financing and expanding access, we intend to accelerate residential solar adoption and allow more homeowners to engage in the clean energy transition. Our battery technology roadmap is advancing with a strong emphasis on reducing installation costs and achieving economies of scale. In June, we started shipping our fourth-generation battery systems in the U.S., significantly lowering backup costs. Our fifth-generation battery is in development and expected to offer a 50% improvement in energy density along with a substantial cost reduction, enhancing performance and affordability. When combined with our next-generation IQ 9 microinverters launching later this year, we anticipate delivering one of the industry's most compelling and integrated solar plus battery solutions designed for both homeowners and installers at scale. We are also intensifying our installer services platform to aggressively lower soft costs industry-wide. With Solargraf, our comprehensive design and proposal platform, SolarLeadFactory, our performance-driven lead generation tool, and Enphase Care, our around-the-clock expert support for homeowners, we provide a unique toolkit to streamline operations, reduce acquisition costs, and enhance installer productivity. We see these resources positioning Enphase not just as a technology provider but as a full-fledged partner aiding the industry’s efficient scaling. In Europe, our revenue rose 11% in Q2 compared to Q1, and overall sell-through grew by 5%. The business climate across the region remains difficult, but we are focused on controlling the channel and expanding our available market by launching new products. Specifically looking at key European markets: In the Netherlands, demand was soft in Q2 as the market moves from solar-only systems to integrated solar plus battery solutions. This change is accelerating, driven by rising export penalties and the planned end of net metering by late 2026. We are in a strong position to lead in this evolving market thanks to an installed base of around 500,000 residential solar systems. As net metering phases out, we believe homeowners will increasingly look to batteries for maximizing self-consumption, backup power, and participation in VPPs for new retail energy market opportunities. This shift could unlock a significant $2 billion market, providing us with a strategic chance to strengthen our utility partnerships, scale battery deployments, and drive regional growth. In France, the market remained subdued as anticipated in Q2, with expectations of a major VAT reduction on solar systems taking effect in October, which should reignite demand. Despite the current slowdown, France is crucial for us, supported by our strong brand and technology leadership amid the country's relatively low solar penetration. We are observing a significant uptick in battery demand due to low feed-in tariffs, enhancing the value of self-consumption. Our IQ Battery 5P with full backup capability has received positive feedback from homeowners and installers. In May, we introduced intelligent hot water heater steering to further improve self-consumption and savings; this feature is expected to be a key driver in the French market where water heating is a significant part of household energy use. With those elements in place, we believe we are well-positioned for the next wave of growth in solar plus battery adoption in France. In Germany, we are increasing our sales of the IQ Battery 5P with FlexPhase and the IQ EV charger 2, both gaining momentum as homeowners seek all-in-one solutions. We also introduced our IQ Balcony solar systems in Q2, tapping into a fast-growing market segment for renters and apartment dwellers. These innovations alongside our partnerships with leading installers are helping us return to growth and broaden our footprint in this important market. The U.K. market continues to thrive for us as we enhance partnerships with retail energy providers, and our robust API platform is proving instrumental in supporting them. We are launching our IQ EV charger 2 in the market, with plans to offer backup capabilities for our batteries in Q3, expanding our energy resilience offerings in the region. In Australia, we are seeing increased interest in batteries spurred by a government rebate effective July 1. We are poised to launch our IQ Battery 5P with FlexPhase in the country soon, delivering strong 3-phase backup and flexible power to meet dynamic DSO requirements. Our IQ8P microinverters will also be available shortly, supporting the latest high-power solar modules for both residential and commercial applications. We have also rolled out next-generation IQ EV chargers and improved compatibility between IQ 7 and IQ 8 microinverters on the same branch circuit, facilitating easier retrofits and enhancing installer productivity. For Q3, we anticipate revenue to fall between $330 million and $370 million. We expect growth in the U.S. and seasonal softness in Europe, with approximately 75% of our bookings aligned with the midpoint of our revenue guidance. In terms of IQ batteries, we expect to ship between 190 and 210 megawatt hours this quarter. We are actively collaborating with various TPO partners awaiting clearer guidance on safe harbor rules following the recent executive order, and we remain ready to assist them as they finalize their plans. Regarding new products, in June, we began shipping our fourth-generation battery systems to the U.S., which provide 30% more energy density, occupy 62% less wall space, and reduce installation costs. Our IQ Meter Collar simplifies whole home backup by incorporating MID functionality, while the new combiner integrates solar, batteries, EV charging, and load control connections into a single unit. Together, these innovations ease backup installation, enhance reliability, and deliver significant value to homeowners. The meter collar has gained approval from 29 U.S. utilities, with more to come. We are confident our aggressive battery development beyond the fourth generation will continue to push performance, integration, and cost boundaries. Our IQ Batteries are designed not just for backup but to enable earnings. With advanced APIs, they can easily integrate into VPPs in regulated markets like the U.S. and participate in wholesale energy markets in deregulated regions such as Europe and Australia. We are currently involved in over 50 VPP programs globally, with 210 megawatt hours of Enphase batteries enrolled, unlocking new revenue opportunities for homeowners and accelerating the transition to a more flexible, resilient grid. Turning to microinverters, our IQ8 microinverter family is now available in 58 countries, and we are preparing to launch IQ9, our most advanced microinverter thus far. Utilizing cutting-edge gallium nitride technology, IQ9 is designed for the future, accommodating higher DC input currents, higher AC voltages, and 3-phase compatibility. With a peak output of 427 watts, IQ9 is optimized for pairing with the most powerful residential and commercial panels available. Internal testing is already underway at Enphase facilities, and we remain on course for full-scale production in Q4. We believe IQ9 represents a significant advancement in performance and platform flexibility, unlocking a 2-gigawatt market opportunity by allowing us to serve 480-volt 3-phase commercial systems in the U.S. for the first time. Our commercial IQ8P-3P microinverters are gaining traction, with over 850 commercial sites deployed across the U.S., averaging 35 kilowatts per system and receiving consistent positive field feedback. Both IQ8P 3P and IQ9 microinverters are expected to comply with FEOC regulations, offering a strong alternative in a market still largely dominated by Chinese products. The timing for IQ9's launch is strategic, providing a high-quality, reliable, and compliant solution as the industry shifts towards a domestically compliant framework. Regarding Balcony Solar, our IQ Balcony Solar product is now shipping to Germany and Belgium, with additional rollouts planned across Europe, Japan, India, and Utah in the coming quarters. Built on Enphase's AC framework, it allows homeowners to plug in between 1 and 4 panels directly into a standard wall outlet, eliminating the need for permits or rewiring. A standout feature is sunlight backup, which keeps crucial appliances powered during daytime outages without a battery, setting us apart in the industry. On the portable power front, the IQ PowerPack 1500 represents our entry into the direct-to-consumer energy market. We plan to significantly grow our e-commerce sales as this category opens a novel channel for customer engagement and brand development. Simultaneously, we aim to expand the IQ PowerPack family into new markets like Europe, India, and Japan, while diversifying use cases to cater to a wide range of mobile energy needs. In EV charging, we are now distributing our next-generation IQ EV charger 2 in 18 countries across Europe, Australia, and New Zealand. Designed for seamless integration with Enphase solar and battery systems, it also serves as a high-quality standalone solution. Recently, we received EV Ready certification in France, a rigorous safety and performance standard, showcasing our commitment to quality. Over the coming months, we plan to broaden availability to more European countries, as well as Brazil and India, while reintroducing it in the U.S. to support the global shift toward electrification with a trusted solution. Lastly, I want to update you on our IQ bidirectional EV charger, expected to launch mid-2026. This 11-kilowatt solution utilizes three high-performance microinverters built on a full GaN architecture, ensuring exceptional efficiency and a compact design. When paired with the IQ Meter Collar in the U.S., it enables seamless vehicle-to-home and vehicle-to-grid functionality with automatic black start. This combination offers a cost-effective and easy way to provide whole home backup without requiring solar or stationary batteries. Homeowners can start with just an EV, our bidirectional charger, and the meter collar, then add solar or Enphase batteries based on their preferences and energy objectives. Now, let’s talk about Solargraf, our all-in-one installer platform. We are implementing significant enhancements, including seamless integration with our top TPO partners, a powerful custom tariff builder, advanced dealer management tools, and a vastly simplified AI-driven design process. Each upgrade is aimed at making Solargraf more intuitive, intelligent, and essential. As it evolves, Solargraf is becoming a strategic growth engine, empowering installers to sell faster, design more efficiently, and scale confidently. The signing of the tax reconciliation bill marks a pivotal moment for the U.S. solar industry, but adapting to changes is fundamental to Enphase's identity. Over the years, we have transitioned from a single microinverter product company to a global energy technology leader. Today, we provide a comprehensive range of microinverters, batteries, EV chargers, and smart home energy management software. Our systems are operating in over 160 countries, with more than 4.9 million Enphase-powered homes worldwide. We are making strides into new consumer markets with products like Balcony Solar and portable energy systems. With the upcoming launch of IQ9 microinverters, we expect to access the 480-volt commercial solar market in the U.S., broaden our addressable market, and take significant steps into larger-scale energy applications. We feel we are well-equipped to lead in the next stage of industry transformation. Our product strategy is accelerating with next-generation microinverters and batteries that emphasize reducing installation costs and simplifying processes. We are committed to enhancing our installer services platform to help drive down soft costs and improve access to lease financing throughout the industry. The long-term fundamentals for distributed energy are robust, with rising demand, soaring utility rates, and increasing homeowner interest in resilience and energy independence. As the market shifts, we will continue to focus on what we do best: purposeful innovation, swift action, and an unwavering focus on our customers. Now, I will pass the call to Mandy for a review of our financial results. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our second quarter of 2025 financial results as well as our business outlook for the third quarter of 2025. 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 $363.2 million. We shipped approximately 675.4 megawatt DC microinverters and 190.9 megawatt hours of IQ Batteries in the quarter. Q2 revenue included $40.4 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who claim to install the inventory over more than a year. Non-GAAP gross margin for Q2 was 48.6% compared to 48.9% in Q1. GAAP gross margin was 46.9% for Q2 compared to 47.2% in Q1. Non-GAAP gross margin without net IRA benefit for Q2 was 37.2% compared to 38.3% in Q1. Reciprocal tariffs impacted our gross margins by approximately 2% in Q2. GAAP and non-GAAP gross margin for Q2 also included $41.5 million of net IRA benefit. Non-GAAP operating expenses were $77.8 million for Q2 compared to $79.4 million for Q1. GAAP operating expenses were $133.5 million for Q2 compared to $136.3 million for Q1. GAAP operating expenses for Q2 included $49.5 million of stock-based compensation expenses, $2.9 million of amortization for acquired intangible assets and $3.3 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q2 was $98.6 million compared to $94.6 million for Q1. On a GAAP basis, income from operations was $37 million for Q2 compared to $31.9 million for Q1. On a non-GAAP basis, net income for Q2 was $89.9 million compared to $89.2 million for Q1. This resulted in non-GAAP diluted earnings per share of $0.69 for Q2 compared to $0.68 for Q1. GAAP net income for Q2 was $37.1 million compared to $29.7 million for Q1. This resulted in GAAP diluted earnings per share of $0.28 for Q2 compared to $0.22 for Q1. We exited Q2 with a total cash, cash equivalents and marketable securities balance of $1.53 billion, flat when compared to Q1. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 702,948 shares of our common stock in Q2 at an average price of $42.67 per share for a total of approximately $30 million. We have a remaining $268.7 million authorized for further share repurchases. In addition, we spent approximately $3 million by withholding shares to cover taxes for employees divesting in Q2 that reduced the diluted shares by 58,332 shares. We expect to continue this anti-dilution plan. In Q2, we generated $26.6 million in cash flow from operations and $18.4 million in free cash flow. Capital expenditure was $8.2 million for Q2 compared to $14.6 million for Q1. Now let's discuss our outlook for the third quarter of 2025. We expect our revenue for Q3 to be within a range of $330 million to $370 million, which includes shipments of 190 to 210 megawatt hours of IQ Batteries. We expect GAAP gross margin to be within a range of 41% to 44%, including approximately 3 to 5 percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within a range of 43% to 46% with net IRA benefit, and 33% to 36% before net IRA benefit, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect the net IRA benefit to be between $34 million and $38 million on estimated shipments of 1.2 million units of U.S. microinverters in Q3. We expect our GAAP operating expenses to be within a range of $130 million to $134 million, including approximately $52 million estimated for stock-based compensation expenses, acquisition-related amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $78 million to $82 million. For the year 2025, we expect our GAAP tax rate of 19% to 21% and a non-GAAP tax rate of 15% to 17%, including IRA benefits. With that, I will open the line for questions.

Badri, you mentioned partnering with TPO providers and introducing creative financing structures to help maximize tax credit capture. Can you elaborate on what those structures could look like and when you plan to launch them? Is the goal to strengthen your relationships with long-tail installers and onboard them onto a TPO platform? Additionally, what is your current market share with TPO providers after the recent bankruptcies in this space, and how do you expect that to change by 2026?

I'll begin by addressing the second question first. Our overall market share in the U.S. remains strong, as indicated in public analytic reports. We hold a healthy share among both cash and loan customers, as well as with TPO customers. While we haven't provided a detailed breakdown, we actively engage with all our TPO partners and are currently in extensive discussions with them. We are focused on servicing long-tail installers through our established relationships, and by providing lease financing options, we aim to prevent overall market erosion. We are actively collaborating with numerous TPOs and will share further details soon, likely in the next earnings call. We are committed to advancing this initiative aggressively. I've examined several analyst reports, which suggest that the U.S. total addressable market (TAM) will reach around 4.5 gigawatts for solar and approximately a couple of gigawatt hours for batteries in 2025. Looking ahead to 2026, my estimate is a potential 20% decline in TAM due to regulatory changes. To address this anticipated market reduction, we believe there are three key areas to focus on. First, we plan to provide lease financing to the long tail effectively through our strong TPO partnerships. Second, we aim to reduce installation costs; we recently launched our fourth-generation batteries, which are becoming more cost-effective in the U.S. Additionally, we're working on a fifth-generation battery scheduled for release in a year that will enhance energy density by over 50%, significantly lowering costs and installation expenses. Our IQ9 product incorporates innovations like GaN designed to further reduce costs, and we are looking forward to introducing world-class products that enhance efficiency and decrease installation costs. Lastly, lead generation constitutes an important challenge. The customer acquisition cost in the solar industry ranges from $0.70 to $1 per watt, and we recognize the need for Enphase to make significant improvements in this area. We are launching aggressive initiatives to generate leads that can be shared with our installers. We currently have a customer base of 5 million homes, and while installers previously might not have focused on the upgrade market, it is becoming increasingly viable for them. Therefore, we are concentrating on three main strategies: providing lease financing to the long tail, creating world-class products to lower installation costs, and helping to reduce lead generation costs across the industry.

Got it. That's very helpful. Maybe kind of switching gears, you mentioned that the micro channel is slightly elevated. We know demand is going to decline in 2026 once the 25D credit expires. I guess how do you intend on managing field inventories with distributors for the balance of the year? Do you plan to undership micros in either Q3 or Q4 to help reduce inventories? Or do you think inventories could just get rightsized more organically if we see maybe a pull forward of demand or some safe harbors in the second half?

I think you answered the question yourself. Basically, that's exactly what we expect. We expect 25D increase in demand, which will come from the channel and make the channel at reasonable levels by the end of the year.

In terms of the Q3 guidance, did you mention how much safe harbor you anticipate in the Q3 revenue? You also mentioned not having seen the pull forward of demand yet. How do you expect that to materialize? Will it be more of a Q4 factor, or could there be an upside surprise for Q3? Additionally, regarding the elevated channel, how did we reach those levels? Was there a pause earlier this year, or did we overship into the channel? What are the current levels? Historically, when you recently rightsized, you were at 8 to 10 weeks. Are we now talking about 12 weeks or higher?

The Q3 revenue guidance does not include any safe harbor. We are collaborating with several TPO partners who are assessing the recent Executive Order and are awaiting further clarity. Once they have that information, they will take the necessary actions. From our end, we are ensuring that we are prepared in terms of capacity to meet their needs whenever they require the product. Regarding your question on 25D demand, we anticipate seeing that possibly emerge in early Q4. Currently, we are not witnessing it, but we still have August and September to go, so I expect it will come soon. Some installers may have to adjust their workforce, possibly by adding temporary teams to handle the increased demand, which will take some time. I believe this demand will arise in Q4. As for channel management, we are transparent with you. We are in a strong position. Our experience over the past two years regarding undershipment has taught us that it was an anomaly, and we are committed to avoiding that situation in the future. When I refer to slightly above, I mean slightly above 8% to 10%.

Thank you, Badri. I have a follow-up question regarding your earlier statement about your assumption for '26 being a TAM that is 20% lower. Could you explain how you arrived at that 20% figure, including the baseline for loan versus TPO versus cash? Additionally, while I understand you won't provide guidance for Q4 and Q1, could you share your thoughts on the cadence for those quarters if possible?

Yes. We expect about a 20% reduction in the total addressable market. To put it simply, for the 4.5 gigawatts, we have 2 gigawatts from leasing and 2.5 gigawatts from cash and loans. I anticipate that the leasing market will see a slight increase, while the cash and loan market will decrease significantly. Therefore, by 2026, we believe the market will shift to approximately 2.5 gigawatts in leasing and 1 gigawatt in cash and loans. Naturally, estimates vary. Our reasoning is based on key U.S. markets, particularly California, where utility prices are high. Currently, the payback period is six to eight years, which could extend to eight to ten years by 2025 due to the absence of the investment tax credit for cash purchases. Despite this extension, the economics remain attractive, particularly with a 25-year product. We observe similar trends in the East Coast, where high utility rates and virtual power plants are prevalent. In Puerto Rico, the majority of transactions are lease-based, indicating that market will likely stay stable. However, we anticipate harder hits in the Midwest, Central, and Southeast regions, where utility rates are generally lower. Overall, we predict a decline from 4.5 gigawatts in 2025 to 3.5 gigawatts in 2026, with leasing growing from 2 to 2.5 gigawatts and cash and loans dropping from 2.5 to 1. This is our assessment, and it’s subject to interpretation.

I guess, Badri, just following up on your strategic initiatives in a declining TAM environment. I appreciate you guys have an action plan already sort of in place. I mean when you talk about working with the long tail on TPO and financing and then the lead gen, can you maybe give us a sense how quickly you can implement those strategies? And then how much incremental cost you would have to incur? I would imagine maybe the OpEx has some incremental cost or some investment required to be able to start driving those two initiatives. And then I guess my follow-up would just be in this environment where you just outlined a potential 20% reduction in volume, you're looking at ways to maintain as much of that volume as possible. Would pricing actions to mitigate some of that TAM loss and capture more volume be part of the strategy? Maybe walk us through what you're thinking around pricing in that type of environment as well.

Yes. We do not expect any significant changes in operating expenses because our primary focus is on ensuring that demand remains intact. The long tail now has access, which should provide more business for the TPOs. Consequently, our operational costs to enable this will not increase significantly. Regarding pricing actions, I've mentioned how we are progressing with batteries. For instance, we have already lowered installation costs with our fourth-generation products and plan to reduce them further by enhancing energy density and moving to prismatic cells, which will significantly improve our margins. Similarly, with the IQ9, transitioning to the bidirectional GaN switch will enable us to run at higher frequencies and optimize our bill of materials, allowing us to generate potentially 10% to 20% more power at a comparable cost structure. Innovation is key here. We are advancing with both batteries and the IQ9, and we will also introduce a new 3-phase 480-volt product. So, with these fundamental cost structure changes, adjusting pricing will be straightforward, allowing us to set appropriate prices for consumers based on the value we provide.

This is Dishant here for Julien. Could you discuss how the dynamics will work for the fourth quarter safe harboring? As we understand it, the system needs to be installed by year-end to receive the credit, correct? Will we see loan originations in the fourth quarter given the uncertainty about the timing of the installation?

No. I think safe harbor, basically, the rules are that the TPO partners, and I'm speaking for them, the TPO partners have approximately a year until June 30th in order to finalize their safe harbor inventory and strategy. So what I guess you're talking about is the 25B.

25B, yes. Correct.

You're referring to the 25 billion, which indicates that the customer is required to pay and the system must be installed by the end of the year.

Yes. So in that instance, do you think we will see -- because I know that you haven't seen installed yet in -- or you haven't seen that demand pull in yet in 3Q. So unless you expect to see that in 4Q, do you think that will actually happen because there might be some uncertainty on loan originations, right?

Well, our opinion is it will happen. Our installers are experts. They know what to do. And I think right now, they need to make sure they expand their crews so that they start to cater to the demand rush. But they have a lot of experience. They can get solar installations done quickly. So I do expect it to happen.

Can you talk about your ability to upsell existing homeowners on either chargers or batteries and kind of what those unit economics look like as a combined sale and your access to those customers through your partners? Or can you go direct to those folks?

Yes, as Badri mentioned, this is a crucial segment of the market that we are focusing on. The customer acquisition cost is considerably lower since we are dealing with existing customers. From a product perspective, we have a significant advantage due to our AC-coupled approach. This means we don't have to alter the existing solar system; instead, we can simply add a battery or an EV charger. If necessary, expanding the solar system is also straightforward with an AC-coupled solution. Therefore, we see substantial benefits in terms of customer acquisition and product offerings. There is no need for extensive changes, such as removing inverters; existing systems can remain intact while we implement our solutions. Furthermore, by adding a battery, customers can participate in a VPP program if available. This market presents many advantages for us and is quite large, with an installed base of about 4.9 million homes globally, primarily in the U.S. This makes it a vital market segment for our efforts.

And then my follow-up is on the non-EU, non-U.S. markets. Obviously, you've had some success in Latin America, Australia and other places. Can you talk a little bit about what growth looks like outside of those two main markets and how we should think about that as a contributor to the balance of this year and into next year?

In Australia, growth has been flat to declining over the past year and in the first half of this year. However, the new government has introduced a lucrative battery rebate, leading to expectations that the battery attach rate will increase significantly from around 30% to 80% or 90%. This presents a substantial opportunity for us, and we are already observing an increase in installations. We are launching several products tailored for Australia, including a 3-phase backup system that we will introduce shortly. Additionally, our high-powered microinverters will be aimed at the commercial market, resulting in a comprehensive update of our product offerings in Australia over the coming months. We anticipate that Australia will begin to grow again starting in Q3. In India, we have introduced the cost-effective full IQ8 P system designed for high panel voltages, along with our battery solution. Given the frequent power outages—up to five times a day—resilience is crucial. Our offering is focused on premium clients, such as luxury villas, which will utilize both IQ microinverters and IQ batteries to provide complete energy independence. We are experiencing steady growth in India, with each quarter outperforming the last, even if not exponentially. In Japan, we recently launched a new product in mid-Q2. Just last week, I met with local installers to discuss ramping up operations, as this process typically takes time in Japan. Nevertheless, we see significant potential there and are excited about our plans. We will soon introduce the Balcony Solar product with a small systems gateway, which is well-suited for the Japanese market. Next year, we also plan to launch our battery systems in Japan. Currently, we are working on scaling our microinverters with our installers in the region.

First one, just on the tariff impact. Could you quantify the tariff impact on the Q3 earnings guidance? And kind of follow-up on that on the Section 232 polysilicon investigation, it looks like there could be tariffs on silicon carbide, which I think is like 5% of the cost. Any thoughts on what tariffs could be expected on silicon carbide? And is IQ9 the way to kind of offset that or something else you have on that as well?

To address your first question, we do not utilize silicon carbide, so it does not impact us. Regarding the tariffs, previously we had faced a 145% tariff from China, which we anticipated would affect our gross margin by 6% to 8%. In May, this tariff was reduced to 30%. However, starting August 1, many countries implemented reciprocal tariffs. For instance, Malaysia's tariff is currently at 25% and Vietnam's at 20%, meaning there’s no escape from tariffs. Our estimate is that tariffs will have a 4% impact on our gross margin, broken down to 1% from microinverters and 3% from batteries. The small impact from microinverters indicates that we have been addressing this issue for some time, but there will still be a tariff effect. On the battery side, we face impacts from cell costs, and manufacturing cells in the U.S. does not provide a substantial cost advantage due to high labor costs. To mitigate the 4% impact, we are focusing on our fifth-generation battery, which will significantly improve our gross margin compared to the previous generations. Currently, we're estimating the tariff impact at 4%, which may decrease to around 3% in the upcoming quarters and could be eliminated with the launch of our fifth-generation battery.

Just curious, you mentioned that some of the TPOs are waiting on guidance and set to figure out their safe harbor plans. I mean any thoughts on when the treasury might issue that guidance? I mean I've seen a number of potential dates, and it seems that no one really knows, but I would love your opinion of when that might be.

We are in the same situation as you. We do not have insight into when the treasury will provide their guidance. Our TPO partners are much more knowledgeable about this and are monitoring the situation daily. Sadly, their plans are also changing. Therefore, we are currently in a wait-and-see mode to identify the details of the treasury's guidance and then implement the safe harbor plan.

I just wanted to follow up and see if there's any additional kind of demographic information you could share about the TPO players that you're currently in discussions with. Are these like large existing players? Where do they sit kind of geographically? And then as a follow-up, have you identified any potential obstacles when it comes to helping the long tail shift to the leases? So just thinking about are there any customers saying they'd rather try to sell cash-only systems without the credits rather than maybe add the complexity of offering leases?

Yes. We work with every TPO, and we are having conversations with almost 80% of them right now on safe harbor. Your second question? Can you repeat your second question?

Yes. Sorry, yes. Just in terms of what your customers are saying, are there any that are kind of indicating they'd rather just try to sell cash systems without credits...

There are many who believe that, for instance, in California, especially in San Diego, the payback period for solar plus batteries is currently six years but may extend to eight years. We are conducting installer roundtables every week with different regions to ask how they are handling this transition. Some installers remain confident in selling cash and loans, while others are shifting towards leases and power purchase agreements. The responses are varied.

At this point, I'll just stick with one. I have a clarifying question regarding an earlier topic about assisting your tail customers with financing. I understand you'll provide more details soon, but is using your own balance sheet part of the scenarios you're considering? Or is it primarily focused on data and partnerships? I'm just curious if you're planning to leverage your balance sheet at all.

We are not planning to make any changes to the balance sheet at this time, but we will inform you if that changes. What’s crucial is our extensive knowledge of all our installers. We have detailed insights into their volume and customer service metrics, including their Net Promoter Score. We understand their motivations and work closely with them, putting us in a strong position for vetting processes. Additionally, since we design the products, we can easily handle the service and maintenance, as most issues, about 90%, can be resolved remotely. Our data analytics team is equipped to address these challenges.

I was just wondering if you might be able to elaborate as you look into 2026, you talked about a bunch of product innovation efforts to lower cost. I was wondering if there are any other kind of internal cost reduction efforts, potentially efforts to lower overhead, OpEx, for example, anything you're exploring there?

Absolutely. The market has faced a demand issue over the past couple of years. During this time when our demand has decreased, we have consistently adjusted our expenses while still prioritizing R&D and customer service, and we will continue to do so. For us, managing expenses is an ongoing process rather than a one-time event. We view expenses not just in terms of labor but also include non-labor costs. We regularly ask whether we need certain software tools or if we can replace them with more efficient alternatives. As we navigate any decline in demand, which we are working to mitigate, we will keep adjusting our expenses as needed.

I wanted to go back to some of the comments on the strategy, and there's been a big focus here on marketing to the long tail and you've mentioned getting lease financing to them, improving lead generation. But I guess there's an argument that with the adoption of TPO, maybe there is additional consolidation in the industry. So maybe focusing on the other end, the maybe the fat part of the tail here. Is there any changes or anything you're doing in strategy to maybe expand your share with some of the bigger TPO providers? And how are you, I guess, maybe looking at those relationships? And is there anything you can do to improve those relationships?

Absolutely. There is a misconception that we don't collaborate with third-party operators. That's completely inaccurate. We engage with all third-party operators and seek opportunities to support their success. This involves total installation cost and time, as well as operations and maintenance. We work with each of these third-party operators on these aspects. For instance, regarding the fourth-generation battery and the meter collar, our backup costs are only slightly higher than those for grid-tied options. What I'm trying to convey is that we closely partner with the third-party operators on our products and service opportunities. Since we work with all of them, we have strong partnerships and intend to focus even more on this to capture additional market share.

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