Enphase Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 18 speakers on the call.

Operator

Good afternoon, and welcome to Enphase Energy's Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. If you have additional questions, you may rejoin the queue. Please also note that this event is being recorded today.

Operator

I would now like to turn the conference over to Zach Friedman. Please go ahead, sir.

Speaker 1

Good afternoon, and thank you for joining us on today's conference Call to discuss Enphase Energy's Q3 2023 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer Mandy Yang, our Chief Financial Officer and Raghu Balor, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results For its Q3 ended September 30, 2023. During this conference call, Enphase Management will make forward looking statements, And the benefits to homeowners and installers our operations, including manufacturing, customer service and supply and demand Anticipated growth in existing and new markets, the timing of new product introductions and regulatory and tax matters. These forward looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations.

Speaker 1

For a more complete discussion of the risks and uncertainties, please see our most recent Form 10 ks 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 ks, which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kothandaraman,

Speaker 2

Our President and Chief Executive Officer. Audrey? Good afternoon and thanks for joining us today to discuss our Q3 2023 financial results. We reported quarterly revenue of $551,100,000 shipped approximately 3,900,000 microinverters And 86 Megawatt hours of batteries and generated free cash flow of $122,000,000 Approximately 86% of our Q3 microinverter shipments were IQ8. We exited the 3rd quarter At 48% gross margin, 18% operating expense and 30% operating income, all as a percentage of revenue On a non GAAP basis and including the IRA benefit, Mandy will go into our financials later in the call.

Speaker 2

Let's now discuss how we are servicing customers. Our worldwide NPS was 77% in Q3 Compared to 74% in Q2, our NPS in North America was 78% compared to 77% in Q2. Our average call wait time was 1.3 minutes compared to 1.1 minutes in Q2. We made significant progress on root cause fix Operations. In general, the overall supply environment for microinverters and batteries is quite stable right now.

Speaker 2

Let's cover microinverters specifically U. S. Manufacturing. We began manufacturing at Cellcom's facility in Arlington, Texas during Q3. We shipped approximately 531,000 microinverters to customers in Q3 From our 3 contract manufacturers in the U.

Speaker 2

S, Flex in South Carolina, Foxconn in Wisconsin And sell comp in Texas. We expect to ship approximately 1,000,000 microinverters to customers from our U. S. Manufacturing facilities in Q4. Let's talk about batteries.

Speaker 2

For IQ Batteries, we have 2 Cellpack suppliers, both of which are in China. We have a manufacturing capacity of 300 Megawatt hours 3rd quarter positioning us well to ramp up in 20 24. We are looking at bringing Our U. S. And international revenue mix for Q3 was 64% and 36% respectively.

Speaker 2

In the U. S, our revenue decreased 16% sequentially and 22% year on year. The overall sell through of our microinverters was down 12% in Q3 compared to Q2. On the other hand, the sell through of our IQ batteries in the U. S.

Speaker 2

Was up by 34% in Q3 compared to Q2. In Europe, our revenue decreased 34% sequentially and increased 26% year on year At healthy gross margin, the sell through of our microinverters in Europe was also down 35% in Q3 compared to Q2. The sell through of our IQ batteries in Europe was down by 14% in Q3 compared to Q2. We are now shipping IQ microinverters and batteries into many countries in Europe. We recently entered UK, Sweden, Denmark and Greece markets with both IQ8 microinverters and IQ batteries.

Speaker 2

Combined, these new markets represent more than 1.5 gigawatts of residential solar opportunity with countries like the UK having a healthy Battery attach rate of 30%. I'll provide some brief commentary on Australia. Our revenue in Australia more than doubled year on year. We are quite pleased with the launch of our Enphase Energy system. It is state of the art, powered by IQ8 microinverters plus 3rd generation battery.

Speaker 2

Let me comment on rest of the world. In Brazil, we launched our IQ8 P microinverters 480 watts AC, the highest power microinverters that we have. We also launched the Solar Graph And the 480 watts IQ8P microinverters into India to support high powered solar panels. Let's now talk about Q4 guidance. We are guiding revenue for Q4 in the range of $300,000,000 to $350,000,000 This reflects approximately $150,000,000 of to the end market demand for our products by approximately $150,000,000 We anticipate under shipment will continue in Q1 And expect our channel inventory to normalize in Q2.

Speaker 2

Of course, we are conservative and are assuming the demand picture is Unchanged from the current level. So what has changed since 90 days ago when we told you that the inventory levels would normalize by the end of Q3. We have seen a substantial demand reduction in Europe. We've also seen the U. S.

Speaker 2

Market continue to fall driven by California. When the demand falls, we think more decisive inventory correction becomes necessary. We are being conservative in our assumptions of no For guidance, we are maintaining our non GAAP gross margin above 40% in our guidance without the IRA benefit. We aren't making any broad based pricing changes at this time on microinverters and we have already made the necessary changes on batteries before. Our pricing and operations team are doing an excellent job of managing pricing and reducing costs.

Speaker 2

Let's discuss some market trends. I'll give you a little more than usual color on markets. Let's split the U. S. Market by non California states and California.

Speaker 2

For non California states, the sell through of our microinverters was 4% lesser in Q3 compared to Q2. We see this business starting to stabilize given the weekly sell through trends. In California, The sell through of our microinverters was 25% less in Q3 compared to Q2 due to the NEM 3.0 transition. It will take a few more quarters for our installers to fully transition to NEM 3.0 and normalize sales to NEM 2.0 levels. Utility rates are continuing to move higher in California with 1 California utility The payback period for an M3 solar plus a battery system will become close to an M2.0 solar only system.

Speaker 2

So that's good. Let me say a few words about U. S. Market share before I give more color on Europe. We see stable share today for our microinverters based on both internal as well as third party data.

Speaker 2

Competition is not new for us. We have always relied on our differentiated technology with our distributed AC architecture, Product quality and customer service to win share and we expect this to continue. We have many tools at our disposal such as the installer services That we have bought we made several acquisitions over time in the last couple of years such as The software tool for design and proposal, the permitting tools, lead management, etcetera, we have a lot of tools at our disposal to help our installers And our partnerships go a lot deeper in the downturn. Let's talk about Europe demand a little bit. We are facing 2 challenges in Europe and the situation has dramatically changed from the last quarter from 90 days ago.

Speaker 2

We saw a much weaker demand recovery from summer. We also see a lot of distributors facing oversupply of solar Equipment, particularly panels leading to much more aggressive destocking. Despite this temporary weakness, We think that the pullback in Europe will be temporary as the fundamentals remain strong and We are relatively under penetrated in the U. S. We are entering a lot lots of new geographies with our IQ8 microintroters and batteries.

Speaker 2

So we remain very bullish about Europe. Let me spend a few minutes discussing our 3 largest markets in Europe, the Netherlands, France and Germany in detail. In Netherlands, our largest European market, our Q3 sell through was down 40% compared to Q2. This was our And confusion around ending of the net metering has caused the market pullback. I was in Netherlands 2 weeks ago.

Speaker 2

I visited with our leading installers. I came away confident that this pullback will be short lived. We think that the plans for net metering will be clarified after the country's elections in November. The payback period are continuing to be attractive in Netherlands. In addition, total system solutions, which includes batteries, Solar and EV chargers are going to become the norm as dynamic tariffs Become more prevalent in Netherlands.

Speaker 2

We are well positioned to take advantage of these changes. In France, our Q3 sell through was down 34% compared to Q2, driven by seasonality. We see potential for this market to rebound very quickly. We are already seeing that as utility rates recently moved higher and are expected to increase even more in early 2024. In Germany, our Q3 sell through was down 32% Compared to Q2, we saw strong sequential growth in installer count and activations and we are continuing to gain traction there.

Speaker 2

Let's talk about our new products, IQ batteries. Our sell through for batteries has been steadily increasing over the last couple of quarters. We are at an inflection point for our battery business. With our iQ battery 5P, we can deliver the best power specs and the best commissioning times of any Enphase battery till date has an industry leading 15 year warranty and at the right price point. The battery adoption rates are on the rise globally.

Speaker 2

We are well positioned to grow battery sales throughout 2024. And we are working on entering even more countries in Europe and Asia in the next few months with our IQ Battery 5G. In addition, we expect to introduce our 4th generation battery in the middle of 2024 that will have a much reduced form factor and the reduced cost structure. As previously discussed, we have entered many new markets With the IQ8 family of microinverters, we plan to enter many more new markets in Europe and Asia in the next several months. Let's talk about our latest microinverter for the residential segment in emerging markets.

Speaker 2

I did mention this before. This is the IQ8P microinverter, our highest power microinverter till date, 480 watts of AC power That can support solar panels up to 6.50 watts DC for Brazil, India, South Africa, Mexico, Spain and other emerging markets. We have started shipping the product into Brazil, South Africa and India in Q3 and are on track It to start shipping in Mexico and Spain in Q4. The other variant of the IQ8 microinverter, IQ8T microinverter With a new 3 phase cabling system is well suited for small commercial solar installations ranging from 20 to 200 kilowatts. We are doing beta installations as we speak there and we expect to release the product this quarter into the U.

Speaker 2

S. Market. We are very bullish about the small commercial solar business where we believe we can add value to our business owners and installers with our quality and good customer experience. Let's cover EV charging. We shipped over 3,500 chargers in Q3 Compared to over 6,600 chargers in Q2, we launched our IQ Smart EV chargers in the U.

Speaker 2

S. Just a few days ago, both U. S. And Canada actually, the IQ EV charger is Wi Fi enabled. It includes smart control and smart monitoring capabilities.

Speaker 2

It seamlessly integrates into our solar and battery systems To help homeowners maximize savings, for example, by directly charging from solar energy only, that's called green charging. We are also working on developing IQ EV chargers for many countries in Europe and we expect to introduce them in the middle of 2024. Let's now discuss our installer platform briefly. Solar Graph, our cloud based design proposal software platform NEM provides NEM three point zero functionality for solar and battery systems in California. We are now offering 3 d and shading features and continue to make progress on our new features and functions.

Speaker 2

The software platform is now available to installers in U. S, Germany, Austria and Brazil. We expect to make this software release as part of our standard offering to any country that we enter. Let me conclude. We are managing through a slowdown in our overall demand.

Speaker 2

In the U. S, it is due to high interest rates and N3.0. In Europe, it is due to broad macroeconomic conditions. Despite this, we are very bullish about our business long term. We see several positive drivers that will accelerate adoption such as the 30 percent ITC tax credit in the U.

Speaker 2

S, Rising utility rates globally, increased grid instability also globally, climate change and of course increasing EV adoption worldwide. We have no doubt that these will drive meaningful solar plus battery growth. Our strategy is very clear. We manage for the long term. We are doubling down on our relationships with our customers during these times.

Speaker 2

We are driving down installation times and investing in our customer service teams. We are also strongly investing in innovation. We are working on IQ 9 and IQ 10, Our next 2 generations of microinverters as well as the next 2 generations of batteries. We are also rapidly expanding Worldwide with systems comprising of IQ8 microinverters, IQ batteries, IQEV chargers and home energy management software. We are introducing products for the small commercial and emerging residential solar markets and we are making continuous Enhancements to our installer platform in addition to driving towards world class costs on our products.

Speaker 2

We remain very positive about our future growth and profitability and will continue to make best in class home energy systems with the laser focus on innovation, Quality and customer experience. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Speaker 3

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our Q3 of 2023 financial results As well as our business outlook for the Q4 of 2023, 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 Q3 was 551,100,000 We shipped approximately 1585.6 Megawatts DC of microinverters and 86.2 Megawatt hours of IQ Batteries in the quarter. Non GAAP gross margin for Q3 was 48.4% Compared to 46.2 percent in Q2, the increase was driven by increased net IRA benefit. GAAP gross margin was 47.5 percent for Q3.

Speaker 3

GAAP and non GAAP gross margin for Q3 included $14,500,000 net IRAs benefit for our microinverters made in the U. S. And shipped to customers in the quarter. Non GAAP operating expenses were $99,000,000 for Q3 compared to $98,200,000 for Q2. Operating expenses were $144,000,000 for Q3 compared to $153,000,000 for Q2.

Speaker 3

GAAP operating expenses for Q3 included $41,100,000 of stock based compensation expenses and $3,900,000 of Amortization for acquired intangible assets. On a non GAAP basis, income from operations for Q3 was $167,600,000 compared to $230,500,000 for Q2. On a GAAP basis, Income from operations was $118,000,000 for Q3 compared to $170,300,000 for Q2. On a non GAAP basis, net income for Q3 was $141,800,000 Compared to $205,600,000 for Q2, this resulted in non GAAP diluted earnings per share of $1.02 for Q3, compared to $1.47 for Q2. GAAP net income for Q3 was $114,000,000 Compared to GAAP net income of $157,200,000 for Q2, this resulted in GAAP diluted earnings per share of $0.80 for Q3 compared to $1.09 for Q2.

Speaker 3

We exited Q3 with a total cash, Cash equivalents and marketable securities balance was $1,780,000,000 compared to $1,800,000,000 at the end of Q2. As part of our $1,000,000,000 share repurchase program authorized by our Board of Directors in July 2023, we repurchased Approximately 847,000 shares of Enphase common stock in Q3 at an average share price of $129.92 for $110,000,000 In addition, we spent Approximately $8,500,000 of withholding shares to cover withholding taxes for employees divesting in Q3 I reduced the diluted shares by approximately 59,800 shares. We expect to continue this anti dilution plan. In Q3, we generated $145,900,000 in cash flow from operations and $122,000,000 Capital expenditure was $23,800,000 for Q3 compared to $44,000,000 for Q2. Capital expenditure requirements decreased as we largely completed building out our U.

Speaker 3

S. Manufacturing lines. Now let's discuss our outlook for the Q4 of 2023. We expected our revenue for Q4 to be within a range of $300,000,000 to 3 $1,000,000 which includes shipments of 80 to 100 megawatt hours of active batteries. We expect GAAP gross margin to be within the range of 46% to 49% with net IRA benefit and 38% to We expect non GAAP gross margin to be within a range of 48% to 41% with net IRAs benefit and 40% to 43% before net IRAs benefit.

Speaker 3

Non GAAP gross margin excludes stock based compensation expenses and acquisition related amortization. We expect the net IRA benefit to be Between $26,000,000 $28,000,000 an estimated shipment of 1,000,000 units of U. S. Manufactured microinverters. We expect our GAAP operating expenses to be within the range of $142,000,000 to $146,000,000 Including approximately $57,000,000 estimated for stock based compensation expenses and acquisition related expenses and amortization, We expect our non GAAP operating expenses to be within the range of $85,000,000 to $89,000,000 We are reducing our non GAAP operating expenses by 12% in Q4 as compared to Q3, but we will now compromise on investing in customer service, innovation and sales.

Speaker 3

Moving to tax, since we have utilized most of our net operating loss and research tax credit carry forward, We are now a significant U. S. Cash taxpayer. We expect GAAP and non GAAP annualized effective tax rate for 2023 to be at 22% Plus or minus 1% was IRI benefit. We expect the production credit, net of any incremental cost for domestic manufacturing to be in the range of $26 to $28 per microinverters sold to customers in Q4.

Speaker 3

We expect to shipped 1,000,000 microinverters to customers this quarter. We now have all 3 of our U. S. Manufacturing facilities operational. With that, I will open the line for questions.

Operator

We will now begin the question and answer If you have additional questions, you may rejoin the queue. At this time, we will take our first question, which will come from Brian Lee with Goldman Sachs. Please go ahead.

Speaker 4

Hey, guys. Good afternoon. Thanks for taking the questions. I know the environment is pretty Certain. So appreciate the additional sort of out quarter visibility and some of the market by market color, Badri.

Speaker 4

So Can I just ask, as you think about the framework, you said you'd undership in Q1 the way that you're undershipping in Q3 and Q4? Can you give us one, a sense of how much you expect to undership in Q1? And then you may need to comment that this is all contingent upon sort of Demand trends staying about where they're at. Can you give us a sense of what your internal expectations for demand Trends are it sounds like you don't expect them to get worse, but sort of can you quantify that a bit? And then I have a follow-up.

Speaker 2

Yes. I think there are a few puts and takes. First to answer your question is, Is the under shipment going to be close to $150,000,000 in Q1? We expect it to be a little bit less Then $150,000,000 but not too much less. That's our expectation.

Speaker 2

And second is I will talk about markets and then It will become clear to you. First of all, we see the non California state stabilizing. We see that. So therefore, we aren't that much worried there. Of course, things could go a lot south during the winter, but We are already at pretty low levels, so we don't think so.

Speaker 2

California is definitely a wildcard, but Even if that goes down 10% more, I think we'll be fine because We expect Europe to recover a little more. Europe right now, For all the reasons I said, we basically are under shipping quite a bit In order to normalize inventory and that will be the fastest to normalize. So we expect Europe revenue to come back A little bit up in Q1. Therefore, what we expect at least what we expect internally is that Our revenues, sell in revenues, we think will be close to what We are looking at in Q4. Of course, I don't have a crystal ball.

Speaker 2

I'm not giving you Q1 guidance, but this is our expectation right now. And Q2 onwards, we think the channel inventory is going to approach Normalized level. And therefore, that normalized level assuming the demand picture is unchanged, That normal level is what we said, roughly around $450,000,000 to $500,000,000 is the Normal level. That assumes no change in demand from the current situation. So We expect our revenue to approach that number in the Q2, but of course that doesn't tell you Too much because I'm assuming that the demand is the same at the current depressed level.

Speaker 2

One thing which I forgot to say is In France, which is another very big market for us, we already see the sell through rates, for example, in the 1st 3 weeks of this Quarter are already back up high, which is good. Basically, the utility there was a utility rate hike in August. There is one more expected in February. So we think France will recover fast. Netherlands, we have some education to do.

Speaker 2

Like what I told you, there is some political uncertainty there. We think that will get cleared After Q4, so I think Q1 will be definitely better. And that's a great market where that market is now In addition to solar, I think with the dynamic tariff starting to become prevalent in Netherlands, there is opportunity for battery storage in 7,000,000 homes. Today, just so that everybody understands Netherlands, there is 7,000,000 to 8,000,000 homes. Solar is there in 2,200,000 homes today.

Speaker 2

And now with this opportunity where Net metering is going to evolve into something similar to California, not exactly the same, but very similar. What's going to happen is it opens up opportunity for solar plus storage in all 7,000,000 homes. So I think long term is going to be great for us, but I told you what's going to happen in the short term.

Speaker 4

Yes, that's great context. Appreciate it. Just the second one here and I'll pass it on. On the margins, gross margins non GAAP, it Seems like you're guiding to low 40s ex IRA benefit. How much of that it's down a couple of 100 bps from what you've been tracking at recently, how much of that is due to pricing?

Speaker 4

How much due to mix? Maybe can you give us a sense of the margin Puts and takes into year end and then do you see anything that would put incremental pressure on the margins into next year? Thank you.

Speaker 2

Yes. It's pretty simple. And Brian, you will understand it quickly. The You can see our storage business is actually going a little bit up. Our microinverter business is the one that is going A lot down now because of our under shipment.

Speaker 2

And therefore, if you see it's a product mix issue and microinverters Have a little bit more gross margin than storage and therefore with this product mix that's Why we have the guidance of non GAAP gross margin 40% to 43% for the company Without Ira, non GAAP gross margin of 48% to 51%. So, In terms of pricing, I mean, we are not planning to make any broad based pricing changes. Of course, the pricing, There is a lot of competition, but we have seen competition for the last few years since I've been here. We have a very disciplined Business process, it's a pricing business process. It's called SPA.

Speaker 2

Phil Shen likes to talk about it. It's a special pricing adjustment. We have been Doing that forever and this is not new. That's one. And also in these times, Of course, under loading, we have to work with our contract manufacturers to take care of under loading.

Speaker 2

But in these times, Especially when you have multiple suppliers for a particular component, multi sourcing for a component, This is the opportunity where we can drop costs a lot. So Our target, I mean, any good company in these times, we should be able to drop our cost by 10% for the year. We'll be targeting that. And so we have to talk both the equations, pricing and cost. And so we are quite confident in our gross margins.

Speaker 2

This is what we do. It is not new. This is what we established When I joined the company, we have a pricing team that price is based on value. We have a world class cost team that works on costs And it's business as usual for us in these environments.

Speaker 4

All right. Thank you. I'll pass it on.

Operator

Our next question will come from James West with Evercore ISI.

Speaker 5

Hey, good afternoon, Badri.

Speaker 6

Hi.

Speaker 5

Badri, as we're going through And you have a very value based pricing strategy. Are you seeing any behavior that's By your competitors that is somewhat irrational or is the market overall behaving rationally understanding that this will get out of this in a few

Speaker 2

Well, I'll be lying if I tell you I'm not seeing something irrational. Of course, installers I'm very stressed, right? They do want to take advantage of the lowest cost available at a given point in time. So therefore, Sometimes without understanding, they may want to switch to somebody who is offering low cost, but We usually most of our installers are they have a lot of experience. They are very well trained now And they understand the importance of distributed architecture.

Speaker 2

They understand the importance of single point no single point of failure. They understand quality. They understand customer service. And therefore, you might save a Few dollars upfront, but if you have a quality problem, a service call By the installer is a truck roll. You spend a lot of money in 1 truck roll.

Speaker 2

And if you just do One more, I mean, that's it. You have no more room there despite the low cost. So It's a penny wise pound foolish strategy to do that and they've all realized it. And If you actually put things in context, let us say the pricing is $3 or $3.50 for what You look at the inverter bill of materials, probably of the order of 10%. Should you play around there?

Speaker 2

Should you take a lot of risks there? And it's their call at the end of the day and many of them are wise to say we are not going to make that call. So, I mean, we have a lot of robust discussions. This is the time where we are Talking to customers more than ever, we have a lot of other tools at our disposal, for example, Solar Graph. We do design and proposal.

Speaker 2

We can generate leads for installers at very economical rates. We can help them on permitting services for example, sometimes even free of charge. Have a lot of tools at our disposal to reduce their soft costs. And that's critical because we have to look at everything. We cannot look at component level.

Speaker 2

We have to look at the full system level in these times. Once you start looking at that and have these discussions, usually it comes back to we get more market shares, not less. And more installers want to move to us, not less. And you can see some evidence of that in the 3rd party reports.

Speaker 5

Okay, got it. That's very helpful, Badu. Thank you. And just one quick follow-up for me. You mentioned producing IQ Batteries in the U.

Speaker 5

S. By middle of 2024, did you give a capacity number along with that?

Speaker 2

No, we have not given. We will provide more details as we come close to that date.

Speaker 5

Okay, got it. Thanks.

Speaker 2

Yes. Thank you.

Operator

Our next question will come from Eric Stine with Craig Hallum. Please go ahead.

Speaker 7

Hi, everyone. So just talking about California, I can appreciate talking or thinking about that as a wildcard, Given what's going on in the market, but if I think about the expectation that that market stays flat, but then the hangover from NIM, Which you said has a few quarters here left to work out. I don't want to put words in your mouth, but I mean, is it fair to say that there is some cautious optimism about California As we get into the back half of next year?

Speaker 2

Absolutely, yes. As we get into the back half, Absolutely. Meaning, one is the utility rates are continuing to go up. The second is, let us assume the utility rates Go up even by half the amount they are advertised, the payback like what I said is going to become I mean, for a solar plus storage system is going to become the same as almost the same as the solar only NAND2 system. And the economics are there actually today.

Speaker 2

The battery can not only provide resilience, it can help the grid during times of stress In August September when the grid needs it the most. So it's a combination of And we are well positioned to doing that. Why? Because we got great microinverters, number 1. We got batteries now that can discharge at very high power, double the power of our earlier batteries.

Speaker 2

Why is that important? Because during certain hours, you have the utility paying you a lot for exporting power to the grid And what we can do because of a high discharge rate, during those times, we can maximize the power. So We can do that. So we have solar plus storage and of course we have complete energy management software And we couple that with our solar graph design and proposal tool, we have everything, all the optimization at The fingertips of the homeowner and many times he needs to do nothing. He just needs to turn on our optimization engine.

Speaker 2

It will do the right thing for him. So we're absolutely very bullish about California towards the second half of twenty twenty four.

Speaker 7

Got it. And maybe just sticking with California for my follow-up. With NEM, is that That transition takes place being the biggest factor. I mean, what are some of the other factors that could that cause California to be a wildcard. What are the things, that are maybe top of mind for you that could cause that market to take another leg down?

Speaker 2

Yes. This is Raghu.

Speaker 8

And as Pradeep mentioned, all of the potential tailwinds that are there, remember in an environment where the demand Per home is continuing to go up. People are continuing to electrify. People are buying more

Speaker 2

and more EVs, heat pumps, etcetera.

Speaker 8

And couple that with utility rates where they are and going further up, this is the right solution. Solar plus battery is the right solution. The energy management software is absolutely the right solution in order to drive Your ROI and as well as reduce your payback. And to that end, what we have done as well is a lot of education into the market In terms of explaining to people what the benefits of solar plus battery system with energy management and etcetera and going out there and educating the market as well as providing them with a lot of tools. So in this environment where demand You have the education, you have the tools, financials are there, the payback is very good.

Speaker 8

That's the reason why we are extremely bullish About California coming back strongly.

Speaker 2

So to answer the question in another way, the headwinds are headwinds that we see are if installers You know, aren't educated by us properly. If we don't do a good job of educating the installers, things can stall out a little bit. So it is important for us and other companies too in this space To make sure the installers whatever we provide installers, the tools are very easy to use So that they can sit at the kitchen table and look at the homeowner and the IE and say, your payback is 6 years And here is why your payback is 6 years and explain to them very confidently. And it's not just Enphase, it is Enphase plus Our competition plus all of the energy companies, all of us have to do our job in training the installers. And I think that is of course that's a piece that is not very easy to do and You cannot have enough of it.

Speaker 2

So, that's the biggest headwind that I see.

Speaker 7

Okay. Thank you.

Operator

Our next question will come from Carlin Rush with Oppenheimer. Please go ahead.

Speaker 9

Thanks so much guys. Can you talk a little bit about how much modulation you can do with the OpEx as you look at investing in these Incremental programs and bringing these products to market, is there some incremental cutting that you can do or is there or there's going to be a regular spend increase on R and D side?

Speaker 2

No, I mean we are cutting OpEx by 12% from Q3 to Q4. How are we doing that? We are on a hiring freeze except for critical positions, for example, in sales and customer service and to a little bit on the innovation side there. So basically that It's got a big effect on bringing down costs. The other ones are there are A few professional expenses like for example, this is the time where we look at a lot of fat, Cutting out a lot of fat in the company.

Speaker 2

For example, when the companies are doing well, we do Hired a lot of contractors and we are looking at all of those and we have taken all the necessary actions To cut that level as well. And of course, as we continue to grow, I cannot deny that That is some fact that we found we can easily cut in other areas. We were able to cut about 12%. We are always looking for Further room to cut because we'd like to get back to our baseline of OpEx pretty quickly, which is 15% of sales. So, we'll give the guidance accordingly.

Speaker 2

And of course, this is a dislocation in revenue and that is temporary, But we are very cognizant of that and we are always going to be trying to operate close to our model 15% of sales.

Speaker 9

Excellent. And then on the component side, given the change in volumes that you guys are working through on the microinverter side, Obviously, you're guiding to reasonably stable gross margins here, but I'm assuming that there's going to be some break Points on the components that you may run into with the negative impact. Can you just talk a little bit about how your suppliers are scaling down with you here over the next quarter or 2 3, and what that might do to your COGS line?

Speaker 2

Yes. I mean, it is a tough situation for our contract manufacturers, no question. And but we have great partners here. We have Flex, amazing partner who helped us when We were especially 2017, 2018, when we had some tough times, they were there right with us. SALCOM also a great partner.

Speaker 2

So we work well together. We do have this is the time where both of us can recognize saying, okay, is this a Is this a long term problem? Can we do things structurally? We recognize that both of us need to be profitable, not just one versus the other. And we do take some necessary actions and all of those are confidential in terms of our relationships.

Speaker 2

I mean, We cannot disclose the actions we are taking, but our P and L always incorporates all of these. And so, the message is over the next few quarters, we will continue to work with them. We will give you the P and L transparently The guidance for gross margin, but we are very confident that we are finding the right solutions working together.

Speaker 9

Okay. Thanks so much guys.

Speaker 2

Thank you.

Operator

And our next question will come from Philip Shen with Roth Capital. Please go ahead.

Speaker 10

Hey guys, thanks for taking my questions. Badger, you brought up Spas, so I figured I'd jump in with On that, as you know, our checks have come up with lower micro pricing under a bunch of SPA agreements on the order of 10%. Does that resonate with you at all or is that off base? I know you often will get something in return for some kind of price When you negotiate the spas, maybe exclusivity or higher volume, can you just talk through that a little bit? And then Mandy, Can you talk through how SPA accounting might work on your financial statements?

Speaker 10

For example, do you Net the SPA like the refunds against your sales, you have net sales or do you accrue a liability on your balance sheet? Thanks.

Speaker 2

So, SPA, first of all, for the others in the call, SPA stands for special pricing adjustment. It is a business process that has been forever at Enphase and it is always happening. It's business as usual. A large fraction of our business usually happens at what we call as ADLP, which is the distributor list price. And if business happens at ADLP, there is no spot.

Speaker 2

But for a small fraction of our customers depending upon how their volumes may go up within the quarter, next quarter, Depending on their forecast, we do spas. Spas are you have a volume price curve And when the volume goes up, the price comes down. And that's how it is. And that process is very active. It's always been active.

Speaker 2

It's the one I instituted 6 years ago when I came and the accounting for that is unchanged. Whatever is exactly what we have done in the last 6 years. So, you talk about a $10 reduction, all of those are anecdotal, they don't matter. 1 customer doesn't matter. It's not a trend.

Speaker 2

It is a large Fraction of our customers buy at the list price. So, I'd like you to If there is a broad based pricing adjustment, we will tell you. And we are telling you right now that there is no broad based pricing adjustment from Yes, we'll continue to do both. That's the way of life for us. And sometimes it is the way for us to Lot market share for the mix, X amount of quarters and we'll do that.

Speaker 2

It's business as usual, nothing new.

Speaker 3

So, Phil, to answer your accounting question, yes, we accrue for SPA rebates as our liability, When we recognize revenue, the associated future potential rebates For the current quarter shipping, we accrue a reduction in revenue and is a liability on our balance sheet. Same accounting process, no change.

Speaker 10

Great. Thanks, guys. Okay. And then shifting gears, appreciate the Thank you. I know you don't have any official guidance for 2024, but I was wondering if you could talk through how you expect margin to trend By quarter in 2024.

Speaker 10

So you gave some perspective on Q1. There's under shipment there, close to Q4. So due to product mix, so should we expect Q1 margin to be similar to Q4 because that product mix is maybe more heavily skewed to Batteries again. And then due to product mix returning back in this base case to micros, more micros Potentially in Q2, after the under shipment in Q4 and Q1, would you expect margins to return back To the pre undershipping levels in Q2 of 2024 and back half next year? Thanks.

Speaker 2

Yes. I mean that's logical. It is logical. If at Q1 what you said is right, we expect similar levels. Of course, I'm not giving guidance, but I'm just giving trends.

Speaker 2

And then Q2, we expected to because the mix is going to change. The microinverter mix is going to be a little bit higher than the prior quarter. So We expect that logical. That's correct.

Speaker 10

Great. Okay. Thanks guys. I'll pass it on.

Operator

Our next question will come from Mark Strouse with JPMorgan. Please go ahead.

Speaker 11

Yes. Thanks for taking our questions. I believe I asked this on the 2Q call as well, but just kind of given the Precipitous decline in valuations across the space, I thought it's worth revisiting. So you're obviously sitting on a pile of cash. You continue to generate cash.

Speaker 11

Just curious your latest thoughts on M and A, if that's something that you're planning on leaning into Until the macro improves here?

Speaker 2

Yes.

Speaker 8

We do take a look at

Speaker 2

a number of companies All the time, every week, I have an M and A meeting. There are a lot of companies that come. We are very careful, Especially in these times to not buy something in a hurry. We're also careful of Making sure that that company is aligned of course in terms of strategic fit and cultural fit. The former is extremely important.

Speaker 2

The latter is practically even more important. So The areas that we usually look for are more in the energy management software. Sometimes in home automation for example, small commercial solar, Any innovation in batteries, we look for these usually we like smaller companies bolt on acquisitions. That's What we have done till now, but I mean we are looking at all kinds of companies. Please stay tuned if we are going to move on something, It won't be without you knowing.

Speaker 11

Okay. Thanks, Badri. And then just a real quick follow-up. I apologize if I missed this, but was there an update on the small commercial product, the timing or any color there?

Speaker 2

Yes, yes, there was. We are right now doing beta installations as we speak. The product is working great. We expect to introduce this product in this quarter current quarter and we expect to make some reasonable revenue Out of this product in Q4.

Speaker 9

Okay. Thanks, Bhagavath.

Speaker 10

Yes.

Operator

Our next question will come from Steve Fleishman with Wolfe Research. Please go ahead.

Speaker 12

Yes. Hi. Thank you. The $150,000,000 of undership that you're talking about, could you break that out between the U. S.

Speaker 12

And Europe?

Speaker 2

I would say approximately equal between the 2.

Speaker 12

Okay. Thank you. And then In Europe, the impact of you mentioned 2 things, the weaker demand and then also the issues with the distributors Could you just give some flavor of what when you look at the weakness, you started to see what's Are they about equal drivers? Is one kind of dominating the other?

Speaker 2

[SPEAKER DANIEL MARTINEZ VALLE:] Yes. Actually to tell you the truth, every country is a little bit different. Clubbing them together Under macroeconomics, we'll not do justice, but there are some a few factors. Let me tell you, Overall thing that can be generalized is basically if you rewind to last year, All distributors, installers, consumers were a little were a lot more aggressive due to the Ukraine crisis. The Ukraine crisis, the shortage of natural gas caused many countries to be very aggressive Pulling their plans for renewables and we saw a huge spike in virtually every country in Europe.

Speaker 2

Solar plus storage, everybody started talking up a lot and we also profited from that. Our revenue also peaked. But then that enthusiasm is a little bit tempered right now. And because of that, what's happening is the distributor suddenly realizing that They got more on their hands. And also earlier, maybe a year and a half back, the product availability wasn't that high because of that increase in demand, but now all of these suppliers have geared up, especially panels.

Speaker 2

Product availability of panels is very high. So a lot of over inventory, particularly on the panels has happened. That is putting a pressure on the distributors because they have purchased inventory at high prices before and now the prices have collapsed On panels, so there is some financial weakness there. But again, they are Therefore, they are conservative now and they want to hold as less inventory as possible. So that's a Kind of a macroeconomic.

Speaker 2

Now let's come to Netherlands, our biggest market. Netherlands has got very interesting dynamic that when I went there 2 weeks ago, because I went there when I heard that our demand was dropping, I got concerned, I went there. And when I looked at it, Netherlands situation is actually not so bad. If you see, Their payback is about 6 years, but they had a Care recently a couple of maybe 2 or 3 months ago where an energy company called Van de Braun Basically said that to the consumer saying we are going to charge you a penalty to export solar back Into the grid. And you know, Van de Graan is a very small fraction.

Speaker 2

There are about 35 energy companies, I think in Netherlands, it's a deregulated market. Vanderpraan is one of them. They serve about 3% of customers. They basically said that, oh, we are going to charge you an export penalty. All they were trying to do is to put some pressure on the government saying, you need to Help us with net metering because the simple fact of the matter is Netherlands has got wind, it's got solar, There's 2,200,000 homes with solar out of 7,000,000 homes.

Speaker 2

These if they start to Export solar energy in a random manner, the energy companies are finding they cannot handle that easily. So They are putting pressure on the government to say, okay, net metering needs to evolve into something where The customers have self consumption, which is solar plus storage. And so it's actually extremely good for us There, but the way they are doing it is of course a little bit disruptive. So there is The government is going to respond once it is in place. Now there is an election happening, Net metering clarity is going to come probably after that.

Speaker 2

And But the way it's going to evolve is this market, net metering will still last until 2025. So we are covered for the next 2 years with good payback and then the payback We'll be maintained after that with the combination of solar plus storage Plus dynamic tariffs, which is getting popular there. So that's the big picture in Netherlands. Many of the European countries are evolving in a similar way. Many of them have gotten dynamic tariffs.

Speaker 2

Germany is a little bit ahead. They don't have dynamic tariffs, but they introduced feed in tariffs early, which Very similar to net metering, export is not paid as much as important. In fact, it's only a fraction. That is why Germany, you find 80% attach rate on batteries. So, long answer to your question, but that's the color on Europe.

Speaker 12

I guess just to wrap the topic up overall, just let's say we continue to move away from the kind of Ukraine energy crisis conditions, But we do have these markets each put in these changes. Just does your kind of expectation of Europe kind of improving, Can it be driven just by these market by market changes or do you need to see some kind of move up in energy prices again?

Speaker 2

Well, I didn't talk about energy prices. Energy prices are also increasing. In places like France, the energy prices are also going up. So, I mean, energy prices are going to help us. The utility rates are increasing.

Speaker 2

And so that is definitely going to be a tailwind. But make no mistake, Despite all of this, in a place like Netherlands, 2 gigawatts of solar in a place like France, the payback is extremely good still. 5 to 6 years, where can you get that? Even just for solar, it's going to evolve into solar plus storage with the payback of Maybe 7 to 8 years, but still very good for a 25 year product. So There is a small dislocation right now due to inventory issues due to these, but that's why we expect The ramp up normalized I won't say normalization, revenue recovery, a quick revenue recovery at least to some level

Operator

Our next question will come from Jeff Osborne with Cowen. Please go ahead.

Speaker 13

Thank you. Badri, I was just curious on your What is your working assumption on normalized inventory in the channel? I think in the past you had talked about 8 to 10 weeks and assuming that is still the case, I guess, is there an argument that now that manufacturing is localized in Continent by both yourself as well as competitors that why wouldn't that number be 5 or 6 weeks and maybe pressure would continue into Q2?

Speaker 2

Yes. I mean, what you're saying is possible, but we don't think so. So I'll give you a quick primer on the weeks on hand, so You follow it. And I think generally, I'd like to say that so that everybody follows it. For example, if you have Let's say you start off with 100 units at the beginning of a quarter in the channel And let us say you drain inventory at 10 weeks, I mean, 10 units a week.

Speaker 2

And you also ship into the channel at 10 units a week, okay. So you ship into the channel at 10 units a week, you drain from the channel at 10 units a week. Therefore, at the end of the quarter, you find yourself at the same 100 because 100 plus 130, which is 13 weeks, Minus 130, you have 100 units at the end of the quarter. You ask yourself what is the weeks on hand. You say that is 100 divided by 10, that's 10 weeks.

Speaker 2

So remember that number, 10 weeks. Now, I'd say, oh, my demand suddenly dropped by, let us say, 40%. That means I have 4 units a week That is accumulating. So that means and assume I shift the same number of units into the channel, Because I'm slow in recognizing that the situation has changed. So let us say, I still ship The same 130 as before, but now my drink is only 78 instead of 130.

Speaker 2

So I therefore end up with 4 units excess per week, which is 52 units more than the last case. So now I have at the end of the quarter 152. 152, but my end customer demand is only 6 units a week. So I tell you that my weeks on hand now is 152 over 6, which is 25 weeks. So I suddenly go my weeks on hand increases by 150% due to a 40% drop in demand.

Speaker 2

Yes, I am I continue to be oblivious of continue to be oblivious and ship the material into the channel. So it can blow up disproportionately, Right. And of course, the further the demand drops, the further your weeks on hand will go up and the converse is true. So, if the demand improves a little bit, the weak finance is going to come down fast. So, We think that the distributors, I mean, we'll look at logical things here because even a 10 to 12 week inventory Will be the similar dollar number that they have held in the past.

Speaker 2

Yes, in fact, a lesser dollar number that they have held in the past. So, We think logic will prevail and of course end market demand could change all of that pretty quickly. So Wix on hand is not something that you that is obvious. It can really change drastically By small changes in demand, I gave you the example there.

Speaker 13

I appreciate that. My follow-up is and correct me if I'm wrong, but I think you're allowed to under the IRA Export U. S. Manufactured goods to international jurisdictions. Is that something A, you're already doing or B, you intend to do in 2024?

Speaker 2

Not doing today, but of course we'll consider.

Speaker 13

Got it. Thank you.

Operator

And our next question will come from Julien Dumoulin Smith with Bank of America. Please go ahead.

Speaker 14

Hey, good afternoon, team. Thank you guys very much for the time. Appreciate it. Hey, I just wanted to pivot to a slightly different direction here, right? So you have a few of these Exclusive deals across a number of different customers, but some larger ones, if you will.

Speaker 14

I'm curious, how do you think about How locked in those are going into the next year? And how you think about working together realistically as partners and Optimizing your value proposition while dealing and addressing with their respective needs, which are clearly and likely dynamic, especially given the backdrop in California. If you can Speak to that, those dynamics.

Speaker 10

I know I'm not trying

Speaker 14

to get into the contract specifics here, but really working with them, if you will, and how you think about how locked in that portion of volumes are?

Speaker 2

Yes. I mean, I presume you're talking about 1 large customer here. That's the only one we have, which is official. We love our partners, right. We work very closely with them.

Speaker 2

We Value their relationship a lot and we are there. I mean, we are at their service all the time, Whether it's quality, whether it's customer experience, we value their relationship a lot. So, yes, of course, we will be looking to renew all of those.

Speaker 9

Right. Yes, fair

Speaker 14

enough. It's difficult to be opine too much. And then just coming back to all these different contract manufacturing relationships, I know they may not might not be identical here, but do you think about underutilization costs here? I mean, what are the commitments like? How flexible are the terms as you look at Both flexing down and up the volumes through the course of the year here under these new arrangements.

Speaker 2

Right. I did talk about it Answering a prior question and I will say the same thing here. We have great contract manufacturing partners. Flex has been great for us. They particularly helped us when we were in trouble in 2017.

Speaker 2

We are grateful there. Our relationship has been very healthy even during these times. And We are working together. Sometimes we look at a problem and say, is this a short term problem or a long term problem? If it is Going to cause them pain, we are willing to restructure.

Speaker 2

And All of those accounting are in our P and L. We reported as part of our non GAAP And GAAP gross margin. So you should read the P and L and know that everything is there. And We view this particular situation is temporary, but we are very cognizant of the fact that Under loading is a pain for our contract manufacturer. So and we think the right approach is to make sure both of us are profitable and Share the pin and we will be doing that.

Speaker 10

Got it.

Speaker 14

All right. Well, best of luck guys. We'll speak to you soon.

Speaker 2

Thank

Speaker 14

you.

Operator

And our next question will come from Andrew Percoco with Morgan Stanley. Please go ahead.

Speaker 9

Great. Thanks so much for squeezing me in. So I just wanted to come back to a prior question. So It's clear that the demand backdrop is going to be a tough demand backdrop potentially for the next few quarters. Can you maybe just discuss the Health of the average installer that is a recurring user of your equipment and their ability to manage through this period and transition to the TPO model, I think there's been some challenges around working capital and tax equity.

Speaker 9

So just curious what you're seeing and what you're hearing from some of those maybe repeat buyers on the smaller scale The idea of the installer community. Thank you.

Speaker 2

Yes. I mean, we only hear Color from other industry news, but We do see some transition to the leasing model. We do see that clearly. For us, how does it affect us is we have some great partners. We have Sunnova, great partners.

Speaker 2

John Berger is a close friend of mine. SunPower, Sunrun And other leasing partners, we do business with all of them. They're all great partners. So for us, it is if loan moves to lease, Our business, I would say, there could be some product mix issues, but business is nominally not affected. We have heard anecdotes from a few industry sources that installers in California, there There are many long tail installers who are who aren't in business any longer, but we don't have any direct data There.

Speaker 2

So I can only tell you what I know. The of course, I mean, it is a stressful Time for them and we are trying to help them with whatever we can whether it leads or whether We can provide them some other services like our solar graph, etcetera, whether we can help them with NIM-three, their business. We are doing that. And that's the color that we have. In In general, we do business through distribution.

Speaker 2

We do business majority of the business we do is through distribution. And the distribution, one of the ways we would see it is in our payment, right, if we were to do direct business with all the installers, which we don't. We do business with distribution partners. So therefore, we are one level a little bit away from Direct relationship with the long tail installs.

Speaker 9

Yes, that makes sense. Thank you. And the other questions my other questions have been answered, so I'll just leave it there.

Speaker 2

Yes. Could you repeat the question? Okay.

Operator

Our next question will come from Tristan Richardson with Scotiabank. Please go ahead.

Speaker 6

Hey, good evening, guys. Thank you so much, Ash and the answer. Appreciate all the commentary on 2024. And really just thinking about the commentary you made around stabilization Next year, should we think that could there be a swing factor with some of the new markets you've entered, whether that's UK, Greece, Denmark, even India, could that be a meaningful factor that could affect sort of the timing of that stabilization or present A growth wedge above kind of that 2Q timeframe you're talking about?

Speaker 2

Absolutely. We have a lot of vectors of growth And that's a great place for us to start, but we are in the color I gave you, we didn't assume all of that, but we have absolutely so many countries We are not we were not present even a couple of quarters ago, like we have introduced in batteries and microinverters, Actually batteries, for example, in Austria, in Spain, UK, as you correctly pointed out, Sweden, Denmark, Greece, we have plans to introduce to about 15 countries In the Q4, microinverters alone, they're all new countries. So That's one vector. New geography is very important for us. But on the flip side, There, it does take some time to establish infrastructure there.

Speaker 2

You do need to build up your installer base. You don't need to Training them very well because our bread and butter is our installers. Therefore, we need to train them excellently And we need to win them 1 by 1 and that is a process in itself. It can be as early as 3 to 6 months, but it can be over a longer time frame as well. We got several New markets in Asia that are also interesting for us like for example Taiwan, Korea, Indonesia we are there today, but we are rapidly moving Into IQ8, there are a few other smaller countries in Eastern Europe that we are going after.

Speaker 2

Small commercial, That's a very big one. The small commercial in the U. S. Is about a gigawatt. We are going to add that product this quarter.

Speaker 2

The small commercial opportunity in Europe is much bigger. It's about 10 plus gigawatts. And We are figuring out that one systematically because we can service that market less than 100 kilowatts with the products we have. So there, of course, pricing is something that we're looking there on how to be competitive in that segment. But we do have a lot of levers there on small commercial.

Speaker 2

So that is one more. The other one is EV charging. EV charger, we just introduced our connected EV charger. That is a big deal. Now with everybody wanting to electrify, Meaning their home, which is buying electric vehicles, electrified their vehicles, for example.

Speaker 2

Our product will work with solar Plus batteries and it will help the homeowner optimize his bill. He can do green charging now. He doesn't need to spend money charging the vehicle From the grid, all he needs to do is to add about one time investment. Of course, he's got to do that, 6 to 8 panels or 6 to 10 panels. He needs to add it if he buys an EV and that is a huge opportunity.

Speaker 2

We are now following up and introducing these EV In Europe, then the other one is Home Energy Management software, right, we're now Beginning with Germany, we now have the ability to also connect to 3rd party EV chargers and heat pumps. So now we can optimize the entire system, our solar, our storage, hopefully our EV charger soon, but in the meantime 3rd party EV chargers, 3rd party EV, I mean 3rd party heat pumps and giving the homeowner one app, all in one app, Optimizing his energy from his fingertips, so that's energy management software. Plus, we have some hardware there, which we will eventually integrate into our gateway. So We'll roll that out to all the countries including the U. S.

Speaker 2

So we got a lot of vectors there which is introduce solar plus batteries into many, many new countries worldwide. We are introduced products for the small commercial markets worldwide, Introduce IQ's smart TV chargers both in the U. S. Which we have done and worldwide, Energy Management software plus whatever hardware is required to manage heat pumps in 3rd party EVs worldwide. So we have a lot of vectors.

Speaker 2

Of course, I did not include that in the color, which I gave, which is conservative from our perspective.

Speaker 6

That's great, Badri. Appreciate all the extra comments tonight.

Speaker 15

Thank you.

Operator

Our next question will come from Moses Sutton with BNP Paribas. Please go ahead.

Speaker 14

Hi, Bob. Thank you for squeezing me in. I just wanted to Tag on to Andrew's comment about the Fat Cow installer. Are you seeing stress outside of the California market? Are you seeing any So I was talking to distributors asking for price concessions, maybe distributors asking for concessions on terms and receivables.

Speaker 14

Just curious if you could give a

Speaker 2

I'm just clarifying the question. You want to know the health of the business outside California, is that correct?

Speaker 14

Specifically for the fat tail, for the really small stores.

Speaker 2

Specifically for the long tail. I mean, Yes. The color that I can give you is the non California business as a whole is Stabilizing right now. That's what we see. We see Q3 was 4% down From Q2 and the 1st 3 weeks of Q4, which is the last 3 weeks of this quarter.

Speaker 2

Also not too bad. In fact, it's a little bit up. So We think the non California business is pretty decent, but of course it is Fell down from the high levels that we had by nearly 35%, meaning from Q4 Of last year, Q4 2022, it is still down by nearly 30% to 35%. And your question is, how is the health of the long tail? It's a similar answer for us.

Speaker 2

We work with Our business, if you see 80 plus percent probably, maybe 75% is the long tail there. So We see all of them down whether there are installers going out of business. We don't get that information, but I think we don't have the data. We do see the same trend, which is Loans moving to leases and all our partners are pretty Great. Yes, Sunnova, SunPower, Sunrun.

Speaker 2

So for us it is moving from one hand to another hand like what I said. That's the color I can give you.

Speaker 14

That's very helpful. And then just any sense on Texas and Florida in particular. I know outside California is Averaging a little better, but maybe specifically those markets?

Speaker 2

Yes. I mean, they were disproportionately down because of Because the utility rates aren't as high compared to the increase in the interest rates. So they were worst affected, but we see many of them in Texas and California, I mean, Texas Florida particularly moving to the lease model. We do see that like what you said and we do see that business starting to recover.

Speaker 8

Thank you.

Operator

And our next question will come from Joseph Osha with Guggenheim Partners. Please go ahead.

Speaker 16

Hey, thanks for fitting me in, Badri. I appreciate it. Two questions. First, following on from the previous one. Look, we all see Sunrun, Sunnova, SunPower accessing, ABS or whatever markets For 3rd party ownership, I'm curious, do you know if your long tail has found any other Solutions for 3rd party ownership or when you talk about that avenue, is it basically those 3 companies that you're seeing?

Speaker 16

And I do have one other question.

Speaker 2

Majority is those companies and there are a few smaller leasing companies that are coming up 2, but 90% is those 3 companies.

Speaker 16

Okay, great. And then this is really more of a philosophical question. I know all of this on Wall Street, just love to hear you talk about defending your gross margin. But Given how the market is evolving, have you done some analysis? And are you sure that your business couldn't Curious as to your philosophy as to why the gross margin has to stay where it is?

Speaker 2

It is the eternal question. Can I grow faster if I drop prices, right? I mean for us it is pricing It's based on value. The moment we stop generating value, it is over. So That's why I never look at those in conjunction pricing.

Speaker 2

I don't base it on cost. The moment you base it on cost, it's a problem. Then you forget about the value drivers. And therefore, What that means is, if we need to add values value in both microinverters and batteries And software. And that's hard to do, but that's what we do for a living.

Speaker 2

Innovation is someone said it right in Silicon Valley, innovate or die. We have that company. That's our philosophy. So We believe high quality is high volume and high price or the right price

Operator

And our next question will come from Vikram Bakri with Citigroup. Please go ahead.

Speaker 15

Good evening, everyone. Very helpful color on demand and supply dynamics in countries in Europe. So you mentioned you expect EU to recover a bit in your calculation of $300,000,000 of inventory reductions over the next two quarters. Is that rebound, is that a function of Enphase entering a number of new countries in EU this year as you mentioned and gaining market share in existing markets just Germany, the outlook for inventory reductions assumes that the base demand rebounds in Q1 and on top of that you gain market Share in new as well as sort of like existing markets. And then if you can talk about U.

Speaker 15

S. Market also, it seems like you are Looking to defend market share, you haven't seen any declines in market share so far, but if there were some, you will look to defend that.

Speaker 2

Yes, I mean we already told you that we aren't assuming the demand picture changing from the current levels in our assumptions. And basically, I'm not here to give guidance for Q1, but I'm just giving you a general color for Q1. So all our assumptions are based on demand picture not changing in the next Demand picture is not changing from what it is today. So that's what we said In our assumptions. Then your question is on U.

Speaker 2

S. U. S. For us We work with a lot of customers. This is the time where our partnerships like what I said are a lot deeper.

Speaker 2

Every one of our executives is always on the road visiting customers. Every opportunity to gain market share, we are all over it. And Like what I said, we have a number of tools. Yes, of course, it's defending against competition. All competition is very important for us.

Speaker 2

We take everybody seriously. We work on our problems. We fix our problems. Our customer service UC, many people simply stick to us for our quality and customer experience. Our Net Promoter Score is 78 in the U.

Speaker 2

S. We are open 24x7, our call center. We have field service technicians who will show up In your home tomorrow if you have a problem today, right? So we have a If you put the total picture together, it's innovation, quality And customer experience, now we have one more factor. We have we can give people the Made in America product.

Speaker 2

No. We do have that and many of our installers love it because they for example, we just had In Flex, we in South Carolina, we have President Biden in Cayman, Cayman inaugurated That client and we have a lot of installers there, including not just installer partners, distribution partners. So It's very important for them. Made in America product right there in South Carolina, right there in Arlington, right there in Wisconsin. It is there.

Speaker 2

So we think that will help too. And We are going to in a similar vein, we are going to bring in our batteries as well in the U. S. And we will take advantage of the domestic content there. And so that will provide Extra help to some of our leasing partners.

Speaker 2

So Yes, we are always working on market share. We always take competition seriously, not just right now. This is all we do business.

Speaker 15

Thanks, Badri. And as a follow-up, I wanted to quickly follow-up on the GAAP alliteration question earlier in the call. I was wondering if your priorities have Changed given where the stock price is today, I see you've repurchased about $110,000,000 in shares versus $122,000,000 of free cash flow this quarter. Should we expect similar trend going forward, share buybacks closely following free cash flow generation In quarters?

Speaker 2

Yes. Well, I mean, we have a lot of cash like what you pointed out, dollars 1,800,000,000 We have shown that we are willing to buy back stock in a disciplined fashion. We have bought back stock in the last couple of quarters. I think we've bought back $310,000,000 in total, $110,000,000 in Q3 $200,000,000 in the prior quarter. I think this is an opportunistic time for us where we can take advantage of the stock price.

Speaker 2

So We will be opportunistic about it.

Speaker 15

Thank you very much.

Speaker 2

Thank you.

Operator

And our next question will come from Praneeth Satish with Wells Fargo. Please go ahead.

Speaker 17

Thanks for squeezing me in here, long call. I guess I wanted to ask about Tesla's new Powerwall 3 offering and maybe what are The puts and takes there comparing that against your IQ8 and 5P battery. And I guess do you anticipate any market share changes when this The product is launched next year.

Speaker 8

Yes. Hi, this is Raghu. And as Badri mentioned earlier on, our competition is not new to us. And any company out there that's doing string and butters, we've been competing against those since the inception of And we have a very, very strong value proposition against our technology, technology that we've been fighting against Since 2008. So if you think about it, if you break it down, we just produce more energy.

Speaker 8

We do maximum PowerPoint tracking on a per module basis, Because we have an we do power conversion right at the module itself. We are much more reliable. We don't have a single point of failure. That's True value of the distributed architecture, so even if 1 of our micros or the module were For the fail or get impinged on energy, the rest of the system continues to operate. String inverters on the other hand are a very Significant single point of failure, if that swing in order were to fail, your entire system is dead.

Speaker 8

Again, if you look at also design, installation and maintenance, we don't have String designs anymore like those string designs are a thing of the past, those things went away in 2012. And with us, And maintenance, we provide you with per module information, right? And with traditional string inverters, you're completely blind to how your modules are So I think that's going backwards. And finally and arguably one of the most important elements of it is safety, Right. You want to do you don't want any high voltage DC anywhere in the system.

Speaker 8

And so with Enphase, we are All low voltage DC, we are traditional AC. And the combination of high voltage DC and high energy chemistry is probably not very optimal. And on the reliability front, We mentioned one is system level reliability, which is not having a single point of failure. But look, our unit itself is extremely reliable. We offer 25 year warranty compared to other types of technologies that offer 10, 12 year warranties.

Operator

And on the battery, if

Speaker 8

you break the battery down as well, modularity is extremely important. You don't need to have very large batteries and you have the Bharat, our building block is fast kilowatt hours. You can right size the system to exactly what the homeowner needs. We mentioned the higher power of our 3rd generation battery, our IQ battery 5P. The high C rate of the battery is Really, it's an economic benefit to the homeowner because it can you can export significant amounts of power During those times of the day or those times of the hour where you get compensated by the utility For exporting energy.

Speaker 8

And finally, on safety, we use lithium iron phosphate, LFP chemistry, right? LFP chemistry Arguably, much safer than any other chemistry that's out there. Put all that together, look at it in the totality of the system, Right. All the software that we provide, the design tools that we provide, those are the competitive modes against any other technology That is out there. Now couple that with our customer service, right?

Speaker 8

We are open 20 fourseven. Our customer service The installer can call us at any time. The homeowner can call us. They have a beautiful app where they see Their solar, their batteries, now even though with the connected EV charger, they're seeing how their EV is doing. If you have a VPP program right from the app You can sign up for the VPP program.

Speaker 8

We really bring a comprehensive solution that is completely differentiated Complete system solution for the homeowner and of course great customer experience. So, yes, take any so we have a very competitive

Speaker 14

solution and like I said competition is not new for

Speaker 8

us at all. Is not new for us at all.

Speaker 17

That's very helpful. I guess just quickly switching gears to California. I just wanted to you mentioned that you're educating installers about NEM 3.0. The payback is 6 years, maybe down to 5 years with some of these rate increases. You've got the StolarGraft software where you're kind of Automating a lot of the calculations for installers.

Speaker 17

But despite all this and it all sounds good on paper, but despite all this that the permits are just They're moving down week on week, right, in the wrong direction. So I'm just trying to understand if there's anything else you can do to simplify the process And help convert some of the leads to sign contracts? Or is it just is it rates? Or is it just waiting for time waiting for just macro to improve a bit?

Speaker 8

It's not waiting, right. It's our we have to go out there and we and the rest of our industry needs to get out there and Continue educating our installer partners, helping our install partners educate the homeowner. That's what it's going to take. And I think all the tools are there, Everything is ready. But most importantly, the economics are there, right?

Speaker 8

It's simply getting in front of the homeowner, Getting and convincing them that showing them the numbers, showing them using a tool like Solar Graph and showing them what a solar install of their house would look like, The size of the battery that they would require, and then showing them the payback period that it's anywhere from 5 7 years and getting better as utility rate continues to improve. So I think we are all doing the right things. We are getting out there and least Enphase, we are getting out there and I'm sure our competition is also getting out there and educating both installers and customers. And so we expect yes, we expect it's simply a matter of time. I think you'll see the California market turnaround as well.

Speaker 13

Thank you.

Operator

This concludes our question and answer session. Would now like to turn the conference back over to Badri Kothamdaraman for any closing remarks.

Speaker 2

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

Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.

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Key Takeaways

  • Enphase reported Q3 revenue of $551.1 million, shipped ~3.9 million microinverters (86% IQ8), achieved a 48% non-GAAP gross margin and generated $122 million in free cash flow.
  • U.S. manufacturing kicked off in Arlington, Texas, with ~531 000 microinverters shipped in Q3 and expectations to deliver ~1 million U.S.-made units in Q4 to secure the IRA production credit.
  • Market sell-through softened: U.S. shipments were down 12% sequentially (25% slump in California under NEM 3.0), Europe fell 35% amid macro headwinds and panel destocking, while Australia more than doubled year-over-year.
  • Q4 guidance calls for $300 million–$350 million in revenue with a 40%–43% non-GAAP gross margin ex-IRA benefit, reflecting ~$150 million of under-shipments in Q4 and Q1 and normalization of channel inventory by Q2.
  • Expansion efforts include the 480 W IQ 8P inverter for emerging markets, the IQ 8T small-commercial inverter, Wi-Fi-enabled IQ Smart EV chargers, enhancements to the Solar Graph installer platform and entry into new European, Indian and Latin American markets.
A.I. generated. May contain errors.
Earnings Conference Call
Enphase Energy Q3 2023
00:00 / 00:00