Enphase Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 14 speakers on the call.

Operator

Day, and welcome to Enphase Energy's Second Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Zack Friedman. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q2 2023 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer Mandy Yang, our Chief Financial Officer Raghu Baloor, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q2 ended June 3, 2023. During this conference call, Enphase Management will make forward looking statements, including, but not limited to, Statements related to our expected future financial performance, the capabilities of our technology and products and the benefits to homeowners and installers, Our operations, including manufacturing, customer service and supply and demand anticipated growth in existing and new markets The timing of new product introductions and regulatory and tax matters. These forward looking statements involve significant risks and uncertainties and our actual results and the timing of events For a more complete discussion of the risks and uncertainties, please see our most recent Form 10 ks and 10 Qs 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.

Speaker 1

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 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 Kosandaraman, our President and Chief Executive Officer. Badri?

Speaker 2

Good afternoon and thank you for joining us today to Our Q2 2023 financial results. We reported quarterly revenue of $711,100,000 Shipped approximately 5,200,000 microinverters and 82.3 Megawatt Hours of Battery And generated free cash flow of $225,200,000 Approximately 78% of our Q2 microinverter We exited the 2nd quarter at 46% gross margin, 14% operating expense And 32% operating income, all as a percentage of revenue on a non GAAP basis. Mande will go into the financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 74% in Q2 compared to 75% in Q1.

Speaker 2

Our North American NPS was 77%, the same as Q1. Our average call wait time was 1.1 minutes Compared to 1.2 minutes in Q1, we continued to focus on root cause fixes of customer issues and expanded our customer service and field service teams global. Let's talk about microinverter manufacturing. Our overall supply environment remains quite stable and there are no major shortages right now. Let's come to IRA.

Speaker 2

We expect the IRA to increase the overall solar demand in the U. S. And accelerate domestic production. We are pleased to be part of creating new jobs in the U. S.

Speaker 2

And advancing the country's clean energy economy. We shipped 50,000 microinverters to customers in Q2 from 2 of our contract manufacturers, Flex In South Carolina and Foxconn in Wisconsin, we are on track to begin with the 3rd contract manufacturer in Q3. We expect to ship approximately 600,000 microinverters to customers in Q3 from our U. S. Manufacturing facilities.

Speaker 2

Let's now cover the regions. Our U. S. And international revenue mix for Q2 was 59% And 41%, respectively. Q2 was a record quarter for our international revenue, primarily due to the growth in Europe and Australia.

Speaker 2

In the U. S, our revenue decreased 12% sequentially and decreased 1% year on year. The overall sell through of our microinverters in the U. S. Was up 2% in Q2 compared to Q1.

Speaker 2

In Europe, our revenue increased 25% sequentially and more than tripled year on year at healthy gross margin. Our sell through of microinverters in Europe was 13% higher in Q2 compared to Q1. We are now shipping IQ 8 microinverters into Germany, France, Netherlands, Spain, Portugal and Poland. In addition, we are shipping IQ batteries into Germany, Belgium, France, Netherlands, Spain, Portugal, Austria and Switzerland. I'll now provide some brief commentary on Australia, Latin America and Brazil.

Speaker 2

Our revenue in Australia more than doubled year on year. We started shipping our new IQ Battery 5P Australia during the Q2. In Latin America, we introduced the new battery in Q2, while in Brazil, we introduced Our Solar Graph software platform, which will help installers with design and proposal for their residential customers. Let me provide some additional color on the U. S.

Speaker 2

Followed by Europe. We recognize revenue when we ship Product to distributors and large installers. It is therefore relevant to talk about the sell through trends of our products From our distributors to installers, since we have a healthy share in the U. S, our statistics are As I said earlier, our Q2 sell through of microinverters in the U. S.

Speaker 2

Was only up 2% Compared to Q1 and only up 2% year on year, the second quarter is typically stronger than the first quarter, But that did not happen this year due to the market environment. Let's now discuss the market trends we are seeing in the U. S. Split by California and rest of the U. S, for non California states, the Q2 sell through of microinverters Was 6% lesser as compared to Q1 and 11% lesser year on year.

Speaker 2

The sell through was disproportionately worse in Texas, Florida and Arizona. In these states, The economics of loan financing has worsened due to the combination of rising interest rates and lower utility rates. In California, the Q2 sell through of microinverters was 20% higher compared to Q1 and 34% higher year on year. The higher sell through was driven by high backlog of NEM2 installation, Which is expected to last through this summer. We expect NIM 3.0 will have a greater impact on results Beyond Q3 and I will speak more on what we are seeing there later.

Speaker 2

I'd like to provide some more context About our revenue guidance for Q3, our microinverter sell through in the U. S. Peaked in the Q4 of 2022. The sell through in the first half of twenty twenty three in both Q1 and Q2 Approximately 20% below the 4th quarter due to the high interest rate environment in the U. S.

Speaker 2

Our sell in to the channel was only 10% down in the first half of twenty twenty three Relative to the Q4, we were expecting a seasonally up Q2 2023, But that didn't materialize. This has increased the inventory in the channel. Plus, we are assuming the same level of uncertainty continues going forward. Therefore, we are taking aggressive and prudent actions in the U. S.

Speaker 2

To manage down the channel inventory and this is reflected in our light third quarter guidance. Let me say a few words about market share. We see stable high market share today for microinverters Based on both internal and third party data, competition is not new for us And we have always relied on our differentiated technology with distributed architecture, product quality and customer service to win share And we expect to continue doing so. We have many tools at our disposal for installers And our partnerships go even deeper during the downturn. For storage, We have shipped approximately 1 gigawatt hour of battery systems cumulatively By the end of the second quarter, we continue to manage our storage channel inventory in Q2 And expect further improvement in Q3.

Speaker 2

As we introduced our 3rd generation IQ Battery 5P To the U. S. Market in Q2, we reduced pricing for our 2nd generation battery. We also expanded the warranty for both batteries to 15 years. We see the new price point and warranty for both batteries as well as strong early customer adoption of the new battery Driving increased sell in and sell through during Q3, we believe there will be a bigger inflection For Q4 and beyond, as California battery attach rates increase with NEM 3.0.

Speaker 2

Before moving to Europe, I'd like to speak a little bit about NEM 3.0. Early anecdotes on NEM 3.0 activity from our Dollars are encouraging. Since the crossover date in April, we have seen an increasing rate of mem3.0 California proposal activity with healthy storage attach rates. We offer a comprehensive mem3 solution, which includes a smart battery, power control system to avoid main panel upgrades and energy management system That maximizes ROI for homeowners. The smart battery can do both backup as well as utility rate arbitrage.

Speaker 2

Grid tied batteries require less labor and fewer balance of system components, making them significantly easier and faster to install. Our solar graph design and proposal tool can model the complex interactions between solar, batteries, Consumption and tariff and provide a simple proposal. Our financial analysis show that for a cash system, Homeowners can expect a bill offset between 70% 90% and payback between 5 7 years. We think installers can effectively sell these economics to consumers. Let's now cover Europe.

Speaker 2

Our European business remains strong. Q3 is typically down due to summer vacation, but our year on year Growth trend is very robust. We plan to introduce IQ8 microinverters and batteries into more countries in Europe, Such as Sweden, Denmark, Greece, UK and Italy later this year. We saw strong broad based growth across Europe in Q2. Netherlands and France continue to be very strong for us.

Speaker 2

We are starting to gain real attraction in Germany in both residential solar and batteries. The residential solar market in Germany, the biggest in Europe, is roughly 3 gigawatts and the attach Rates for batteries is approximately 80%. We saw strong quarterly sequential growth in installer count, Sell through and activations of both solar and batteries in Germany during Q2. During Q2, we also launched our IQ Router family of devices, which is part of our home energy management system In Germany and Austria, to enable the integration of select third party EV chargers and heat pumps Into Enphase Solar and Battery Systems, there is a great push towards whole home electrification in Europe And countries like Germany are leading the way in adopting renewable technologies to support heat pumps, EVs and other home loads. Self consumption is the norm as consumers want energy independence.

Speaker 2

As we think about our competitive positioning in Europe, We see increasingly complex power markets and home energy management needs playing right into our strengths. Our complete home energy management system solution delivers use cases like self consumption and green charging Along with newer software features, which we plan to release this year, our key differentiators in addition to our quality and service That will help strengthen our market position. Let's cover more new products. We launched our 3rd generation IQ Battery 5P In Australia, U. S.

Speaker 2

And Puerto Rico in Q2 with plans to launch in Europe by the end of the year. As I've previously discussed, the battery has a modularity of 5 kilowatt hour and delivers double the continuous power And triple the peak power for the same kilowatt hour compared to our prior generation of batteries. The higher Charging and discharging rate of our 3rd generation battery will be uniquely beneficial for NEM 3.0 systems in California Through its ability to generate revenue by exporting into the grid at appropriate time. In addition, Our 3rd generation battery is easy to install and commission with the targeted sub-thirty minutes commissioning times. We are excited about the positive feedback we have received from our Australian and U.

Speaker 2

S. Customers. We have now certified over 3,500 installers worldwide to install our IQ batteries. Let's now talk about our latest new product for the residential segment in emerging markets. This product, the IQ8P microinverter We'll deliver 480 watts of AC power, supporting panels up to 650 watt DC For Brazil, Mexico, India, Spain and other emerging markets, we are on track to release This IQ8P microinverter variant into production later this year.

Speaker 2

The other variant of the IQ8P microinverter With the new 3 phase cabling system is well suited for small commercial solar installation ranging from 20 to 200 kilowatts. These microinverter systems offer the same grid compatibility, high quality, rapid capability as a standard residential products. We expect to release this product into the U. S. Small commercial solar market later this year.

Speaker 2

In general, we see the global commercial opportunity As greater than 11 gigawatts, we are extremely bullish about this small commercial solar Market where we believe we can add tremendous value to business owners and installers in Europe and U. S. With our high quality rapid shutdown capability and micro grid forming capability of our microinverter systems. Let's discuss our U. S.

Speaker 2

EV chargers. We shipped over 6,600 EV chargers in Q2 compared to 8,600 in Q1. We expect to introduce IQ Smart EV chargers in Q3. These smart chargers will have Wi Fi connectivity, Enabling use cases like green charging and allowing homeowners full visibility into operation of their Enphase solar Plus battery, plus EV charger system through the app. Let's now discuss the installer platform.

Speaker 2

We released updates to our Solar Graph design and proposal software platform in Q2, including NEM3.0 functionality. The updated SolarCraft platform offers a simplified experience for designing an N3.0 systems by optimizing panel placements For both grid tied as well as grid agnostic systems, configuring battery sizing by leveraging modularity And enhancing system operations for time of use management and energy export to deliver the best Possible electricity bill offset and payback. Let me conclude, we are managing through in the U. S. Solar market after 3 years of phenomenal growth, a period in which the residential solar market doubled and Enphase sales tripled.

Speaker 2

Even so, residential solar has only achieved 4% to 5% penetration in the U. S. We believe there are several positive long term drivers, Which will accelerate adoption such as the 30 percent IDC tax credit, the rising utility rates, Increased grid instability, climate change and increasing EV adoption, there is no doubt That these will drive meaningful solar plus battery growth over the long term. Our strategy is clear and unchanged. We manage for the long term.

Speaker 2

We will make best in class home energy systems with a laser focus on innovation, quality and customer experience. We are doubling down on our relationships with customers. We are driving down installation times and investing in our service teams. We are investing even more on new product innovation. We are expanding our IQ8 microinverters and battery reach globally, Accelerating our business in Europe, introducing IQ8P microinverters for the small commercial solar Emerging residential markets worldwide and making continuous enhancements to our installer platform.

Speaker 2

Before I turn the call over to Mandy, I'm happy to announce that our Board of Directors has authorized a new share repurchase program. Given our confidence in Enphase's future growth, free cash flow generation and the value we see in our stock, our Board has authorized an additional $1,000,000,000 for share repurchases. With that, I will turn the call over to Mandy for her review of our finances. Mandy?

Speaker 3

Thanks, Audrey, and good afternoon, everyone. I will provide more details related to our Q2 of 2023 financial results as well as our business outlook for the Q3 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 Q2 was $711,100,000 We shipped approximately 2,121.3 Megawatts DC of microinverters and 82.3 Megawatt hours of active battery In the quarter, non GAAP gross margin for Q2 was 46.2% compared to 45.7% in Q1. The increase was driven by increased IQ8 product mix and improved logistics.

Speaker 3

GAAP gross margin was 45.5% for Q2. GAAP and non GAAP gross margin for Q2 included $1,600,000 of a net IRA benefit for Our microinverters made in the U. S. And shipped to customers in the quarter. Non GAAP operating expenses were $98,200,000 for Q2 compared to $98,400,000 for Q1.

Speaker 3

GAAP operating expenses were $153,000,000 for Q2 compared to $158,700,000 for Q1. GAAP operating expenses for Q2 included $51,000,000 of stock based compensation expenses and $3,900,000 of acquisition related expenses And amortization for acquiring tangible assets and $208,000 of restructuring and asset impairment charges. On a non GAAP basis, income from operations for Q2 was $230,500,000 compared to 233 point $6,000,000 for Q1. On a GAAP basis, income from operations was $170,300,000 for Q2, compared to $167,700,000 for Q1. On a non GAAP basis, income for Q2 was $205,600,000 compared to $192,300,000 for Q1.

Speaker 3

This resulted in non GAAP diluted earnings per share of $1.47 for Q2 compared to $1.37 for Q1. GAAP net income for Q2 was $157,200,000 compared to GAAP net income of 146 $900,000 for Q1. This resulted in GAAP diluted earnings per share of $1.09 for Q2, Compared to $1.02 for Q1, we exited Q2 with a total cash, cash equivalents and marketable securities balance of $1,800,000,000 compared to $1,780,000,000 at the end of Q1. We repurchased Approximately 1,250,000 shares of Enphase common stock in Q2 at an average price of $159.43 for a total of approximately $200,000,000 This completed our $500,000,000 share repurchase authorization from our Board of Directors. As Badri mentioned, our Board of Directors has authorized a new $1,000,000,000 share repurchase program.

Speaker 3

In addition, we spent approximately $12,700,000 by withholding shares to cover withholding taxes for employees divesting in Q2 Now, reduced the diluted shares by approximately 72,000 shares. We expect to continue this anti dilution plan throughout the year. In Q2, we generated $269,200,000 in cash flow from operations $225,200,000 in free cash flow. Capital expenditure was $44,000,000 for Q2 compared to $22,500,000 for Q1. The increase was primarily due to investment in U.

Speaker 3

S. Manufacturing and R and D equipment. Now let's discuss our outlook for the Q3 of 2023. We expect our revenue for the Q3 of 2023 Within a range of $550,000,000 to $600,000,000 which includes shipment of 80 to 100 megawatt hours of IQ batteries. We expect GAAP gross margin to be within a range of 41% to 44% and non GAAP gross margin to be within a range of 42% to 45%, which excludes stock based compensation expenses and acquisition related amortization.

Speaker 3

Our gross margin guidance numbers Do not include any IRA benefit. We expect net IRA benefit to be between $14,500,000 $16,500,000 on Estimated shipments of 600,000 units of U. S. Manufactured microinverters. We expect our GAAP Operating expenses to be within the range of $159,000,000 to $163,000,000 including approximately $58,000,000 And may I ask for stock based compensation expenses and acquisition related expenses and amortization.

Speaker 3

We expect our non GAAP operating expenses We will continue to invest in product innovation, Customer service and international growth. 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.

Speaker 3

We expect GAAP and non GAAP annualized effective Now I'd like to discuss how the advanced manufacturing production credit from the IRA is reported in our earnings. We had originally thought that the production And credit will be reflected in income tax expenses. But based on the latest guidelines from the U. S. Treasury, We expect to claim the production credit by direct pay and therefore account for the production credit as a reduction in cost of goods sold.

Speaker 3

We expect the production credit net of any incremental cost for domestic manufacturing

Speaker 4

to be

Speaker 3

in the range of $24 to $28 per microinverters sold to customers in Q3. We expect to ship 600,000 microinverters to customers this quarter. We plan to have our U. S. Contract manufacturing facilities fully operational by the end of 2023.

Speaker 3

We estimate shipments to reach our U. S. Capacity of 4,500,000 microinverters per quarter by the end of 2024, assuming robust demand. With that, I will open the line for questions.

Operator

We will now begin the question and answer session. Brian Lee, your line is open. You may ask your question. The next question comes from Phil Shen with Roth So perhaps your line is muted.

Speaker 5

Hi, everyone. Thanks for taking my questions. Hi, everyone. Hey, sorry, I'm bouncing between calls. So Wanted to check-in on what you're doing with pricing on micros in the U.

Speaker 5

S. Our checks this week suggest Your recent spot discounts may be aggressive with big customers in exchange for Semi exclusivity, our contacts suggest it may be in response to some of the volume that may be going to Tesla. Can you quantify what the magnitude of the discounts might be, if anything or what it might mean, if anything, On a blended ASP basis ahead, I know historically you always have some kind of spot discount, but incrementally is it greater now to try to Maintain that business. Thanks.

Speaker 2

Right. We are not planning any microinverter pricing reductions In general, overall, as regarding pricing pressure, it is normal for us. Since inception, we are always used to pricing pressure. We are always used to competing With string inverters from day 1. This company was founded based on distributed architecture wins.

Speaker 2

Distributed architecture basically means no single point of failure. So distributed architecture means that it's a semiconductor based architecture, which Basically, it's got less number of components and very high quality, which means 0.05% failure rates. It also means 25 years of warranty versus other string inverters that may be half That many number of years. In addition, we service customers very well, 24x7 customer service, 74% NPS. Also, we strongly believe in AC coupled architecture, which means that The combination of it's an Enphase system for solar, it's an Enphase system for storage, it is a full home energy management With an Enphase EV charger as well and that is starting to become more and more important as NEM3 Type tariffs come and those tariffs are already there in Europe, for example.

Speaker 2

So, spas Standing for special pricing adjustments are a fact of life. We do that always. We are very disciplined. We have a pricing team And it always depends upon the volumes. And of course, we do we form deeper partnership with customers In times like this and we have a lot of tools at our disposal.

Speaker 2

We have done Our recent M and As on digital transformation that we did, Solar Graph software platform is invaluable for us at this time Because we are able to give customers the option of designing, for example, showing an N3 design And making sure they can sell that effectively to homeowners. So SolarCraft, even leads Lead generation company we got that is coming of use in times like this. So Basically to answer your question, pricing is normal. We aren't planning on any pricing reduction on microinverters. On batteries, it's a different story.

Speaker 2

On batteries, I was very clear a month back in the public call Saying that, yes, we introduced our 3rd generation battery and we cut the price of our 2nd generation battery And both of them coexist. We believe that the 2nd generation battery will be very good for grid tied NEM 3.0 as well as Grid type batteries in Europe, the 3rd generation battery that comes with a 30 minute commissioning time, which we are very happy about, That is priced appropriately for backup. So, and these pricing decisions aren't done on the fly. They are done with extensive planning and we do have offer pricing protection to our channel partners And so we believe in doing things in a structured way. This is no exception.

Speaker 5

Great. Thanks, Badri. You just talked about price protection and that was for storage and we had written about that as well for The channel inventory, from an accounting standpoint, which quarter does that price protection hit? Did We already see it in Q2 results or should we expect in Q3, what was the magnitude? And then hypothetically, if you pursue a price cut For micros, would you provide price protection for the existing micro channel inventory as well since the channel It's a little bit full.

Speaker 5

Thanks.

Speaker 3

Yes. Phil, so the price protection for storage has been accounted for in our earnings, there will be no other impact in Q3 or going forward. And price protection we offer to distributors as a policy. So in the case, if we lower our ADOP For Micros, we will provide price protection by this point. We are not planning to do things like that.

Speaker 5

Great. Thanks, Mandy. Okay, I'll pass it on.

Speaker 6

Thank you.

Operator

The next question comes from Colin Rusch with Oppenheimer. Please go ahead.

Speaker 6

Thanks so much guys. Can you talk a little bit about your opportunities for driving cost out of the supply chain? It sounds like there's plenty of supply available And your ability to continue to walk that cadence down here over the next several quarters?

Speaker 2

Yes. I mean, we work on World class cost initiatives for microinverters and batteries. So On microinverters, there is a lot of tactical negotiations that we do. Let me put that On the site, that's but that's not insignificant. That's a nice number, especially in times like this.

Speaker 2

Our procurement organization He's extremely active. The other one, which is will take over 3 to 6 months is Opportunities where we design in multi source. For example, when we have 3 sources of transformers Having a 4th and 5th source, especially in times like this, and when you have, for example, 3 Versions of integrated circuits for our AC gate drivers having a 4th one. Those are also extremely active With our microinverter group running extensive qualification because we are very careful on that 500 dPPM quality, The last thing we need is a quality excursion. So that's the first and foremost priority for us, Making sure that quality is preserved through all of that.

Speaker 2

Then the third one is a little bit more long term, which is over 9 to 12 months. We look at parting material. We look at ASIC. Is there an opportunity for us to redesign the ASIC in another platform to save cost. Is there an opportunity for us to integrate an op amp or a comparator into The ASIC so that we can save $0.20 So for example, a $1 savings In our microinverter, assuming we ship 20,000,000 units worldwide a year, that's $20,000,000 So you're looking at $0.01 is $200,000 It's a big amount.

Speaker 2

And so we have a massive program called world class cost. That's why you see even in Q2, our gross margin Continues to increase. On batteries, it is like many people keep asking the same question, Can you make money on batteries? And my answer is always the same. We never enter a business until unless we are convinced that The business will make at least my baseline gross margin.

Speaker 2

And so on batteries, we are getting better. Generation 1 was higher cost, generation 2 is a little bit lower. Now we are in generation 3, where we have figured out a lot of ways to take Cost out. And then on top of it, in terms of warranty, we are getting a lot better on batteries. We are introducing serviceability on batteries where instead of you having to replace the entire battery, which is so cumbersome for the Caller and homeowner, you replaced a board insight, because we have figured out that the cell pack, the battery pack never fails.

Speaker 2

It is the power electronics, which consists of power conversion, battery management and even mechanical components. Those are the ones that And we are making them bulletproof. But coming back to that, we don't need to replace a $3,000 battery. We can replace a $40 board. We don't need to take the battery off the wall.

Speaker 2

We can replace it in situ. Therefore, the customer downtime is very large handed as we want the customer downtime to be no more than 24 hours and we are driving our teams achieve that and when we achieve that, you'll find your warranty and your replacement costs are minimized a lot. So that's on the 3rd generation. Now what's happening on the 4th generation? 4th generation of batteries It's scheduled to come approximately within a year, maybe within 9 months, if I'm a little bit more aggressive.

Speaker 2

And that has got a fundamentally Transformative cost structure, what we are doing there is we are combining power conversion And battery management into 1 board. So, 7 boards in the 3rd generation will now become 2 boards In the 4th generation, this is accompanied by significant component count reduction, significant cost reduction, And that will get us even better on the gross margin curve. So I gave you a bunch of puts and takes on Microinverters, batteries, and then we are also serious on our accessories. We ship combiner boxes. We have cellular modems.

Speaker 2

We have the gateways. For example, in Europe, in Q3, we are going to be introducing A combiner box, that is going to be very cost effective for installers and it is going to help them both On dollars as well as time savings. So a lot of actions in the company and we started this 6 years ago. We have not stopped since then.

Speaker 6

Excellent. Thanks so much guys. Just a simple follow-up here. You've historically talked about wanting to have 8 to 10 weeks of channel inventory. Will The guidance that you're indicating here for 3Q gets you to those levels in the U.

Speaker 6

S. From what you're seeing at this point?

Speaker 2

Right. So Let me provide some more context in general because it may not have been clear to everybody and they may not have been present to. So Our sell through of microinverters in the U. S. Peaked in the Q4 of 2022.

Speaker 2

The sell through in Q1 2023 was about 20% below that and the sell through in Q2 2023 Was at the same level, which is 20% below Q4. Now what we did was our sell in, We only reduced 10% in Q1 thinking that Q2 will be a seasonally good quarter. That's what we thought, But that was not the case. Q2 sell through was same as Q1 with respect to Q4. So we find ourselves with excess inventory in the channel and the responsible thing to do from My point is to take is to correct that, to do a one time correction Of that to reduce inventory in the channel, the only way we reduce inventory in the channel is by not shipping as much And taking a correction there.

Speaker 2

So we are doing that. We are aggressively reducing the inventory in the channel and we expect the channel inventory, the weeks on hand

Speaker 6

Okay. Thanks so much, guys.

Operator

The next question comes from Mark Strouse with JPMorgan. Please go ahead.

Speaker 6

Great. Thank you very much for taking our questions. Just thinking about with valuations coming down across Space, how you're weighing potential M and A versus prioritizing this new $1,000,000,000 buyback?

Speaker 2

Right. I mean, first of all, the way we think about capital allocation is first, do we have enough Capital to work on the things we need to internally. How about domestic manufacturing? How about building a new R and D lab? How about investing in domestic Battery supply chain, we take care of the needs of the business first.

Speaker 2

That's number 1. Number 2, we look at opportunities in M and A. We look at to see whether we can increase the value of the company significantly, maybe in the small commercial space, Maybe in the software space, in the home energy management space, those are the areas we Normally look for as well as in the battery space, which is always exciting. So but we are not going to be making hasty decisions. We usually like bolt on acquisitions, which are easy to integrate because we are aware that integration most integrations fail Big companies.

Speaker 2

So we are always very cautious and we have a clarity. For example, we will not By a company to do anything specifically on inverters, because we think we have enough homegrown Talent that we can organically grow. So that's the second piece. We look for Active M and A opportunities and we have cash and we've looked for those. The third one is After we have taken care of the needs of the business, after we have looked at M and A is, can we buy back stock at a Conservatively estimated at a value below the intrinsic value of the stock, Which is conservatively estimated.

Speaker 2

So we look at that and Mandy talked about some of the actions we did. We bought 200

Speaker 6

$1,000,000

Speaker 2

of stock last quarter, 1,250,000 shares at approximately $159 And, but we are disciplined about the Board has authorized another $1,000,000,000 For share buyback, considering we generate close to $200,000,000 of free cash flow every quarter, But you can expect us to be disciplined, do things when it makes sense and not be overly aggressive.

Speaker 6

Okay. All right. Thanks, Badri. And then just a follow-up. I think you touched on this a bit on California, but maybe just repeat what you said about What 3Q guidance assumes as far as NIM 2.0 systems and when you expect that backlog To be removed and start selling 3.0?

Speaker 2

We think NEM 2.0 will continue Through Q3, that's what we are hearing from our installers. It will continue through the summer till September. We believe Q4 NEM 3.0 will start. And The anecdotes we are hearing from some of our installers, some of our big installers who say that Their battery attach rates are pretty nice, higher than 50%. The I mean most installers, they need to get educated on NEM 3.0.

Speaker 2

But the fact of the matter is even for Pure Solar, NEM 3.2 payback is between 7 8 years, Even for pure solar, when you add a battery and let us say when you add a 10 kilowatt hour battery, which seems to be kind of standardizing in that direction, you then achieve even better payback. So payback comes down from the 7 to 8 years to 5 to 6 years with High enough battery system. So once the installers realize that economics, then they are a lot more confident Off selling NEM 3.0, our Solar Graph tool tells them these things exactly. Also another phenomenon is California is my view on it is California is going to move to a majority of grid tied systems. That's how Germany evolved.

Speaker 2

And in Germany right now, it is very, very similar. It is Most of the solar plus storage are grid tied today. And California may evolve in that direction. That's my view. An Agrita system suddenly is easier to install.

Speaker 2

You don't need to worry about main panel upgrades. You don't need to worry about partial home backup and full home backup and all of that. And yet the battery provides a lot of savings. And in fact, the battery is a moneymaker for a couple of months in summer, where the grid needs help and the battery can export energy Back to the grid. So, but having said that, MEM3.0 is new.

Speaker 2

Therefore, installers We'll take we'll have their ramp, but I think eventually it will be very easy to sell. And I think we will start seeing Solar and storage normalize in 2024.

Speaker 6

Okay. Thank you very much.

Operator

The next question comes from Andrew Percoco with Morgan Stanley. Please go ahead.

Speaker 7

Great. Thanks so much for

Speaker 6

the question. I just had a follow-up question to Phil's question earlier on, so pricing appears to be Relatively stable. So in that context, it appears like the 3Q guide is really volume driven. So can you maybe Just discuss between regions what your expectation is on volume in the Q3 specifically? And if you could just start to provide more context around how you expect that to rebound or change in the 4th That would also be helpful.

Speaker 6

Thank you.

Speaker 2

Yes. I mean, the just for context, in Q2, we grew about 25% In Europe compared to Q1 and in Q3, we expect Europe to be Slightly down compared to Q2 due to summer typical summer seasonality. And Europe for us is under penetrated. In general, we are very strong in Netherlands and France. We are upcoming in Germany.

Speaker 2

But for us, the other countries are almost a blue ocean like Italy, U. K, Sweden, Denmark, Greece, Austria, Switzerland, Poland, We are entering all of those regions. And so we are extremely bullish on Europe. In the U. S, as I said, we said that the revenue decreased 12% sequentially In Q2 compared to Q1, but we are taking a heavier hit because of In Q3, because of the following phenomenon, which I elaborated just now, it is our sell throughs, Compared to Q4, which was our peak and the 20% down is for both Q1 as well as Q2.

Speaker 2

We sold into the channel. We only dropped the shipments into the channel by 10%. And the rationale of dropping 10% only was we expected Q2 to be a strong seasonal recovery Quarter, that didn't happen. And so now we have to correct for these two quarters. And On top of it, we are assuming the depressed sell through going forward.

Speaker 2

So that's why we are taking a one time correction in the U. S. But I think in general, the revenue for us will exactly mimic the percentage demand drop On a quarterly basis.

Speaker 6

Got it. That's super helpful. And can I just ask one more on what you're seeing on Europe Channel inventory levels, I understand that 3Q is maybe historically and seasonally a light quarter, but can you just maybe elaborate on We're seeing across Europe on inventory levels?

Speaker 2

Right. Channel inventory is a little bit high on the 10 week side in Europe. It is. And that's why we are cautious now. But for us, I mean, we are really not worried about it because we are introducing products In newer countries, so we think we can maintain it in the 8 to 10 week range.

Speaker 6

Got it. Thanks so much.

Operator

The next question comes from Julien Dumoulin Smith with Bank of America. Please go ahead.

Speaker 8

Excellent. Thank you. Good afternoon, team. Appreciate it. Hey, can you talk a little bit more about the inventory levels and any write down risk here?

Speaker 8

Can you talk a little bit about just the backdrop on that front? And then more importantly, just the normalizing functions as think about these different inventory levels across geographies, especially thinking to continued European growth, What might be implied by inventory levels, etcetera?

Speaker 2

Yes. I just now answered the question for Europe. Inventory level in Europe is a little bit normal, although it's on the higher side at about approximately 10 weeks. And that is why we said, Q3 is a seasonally down quarter in Europe and we expect to be slightly down in revenue as compared To Q2, but then I talked about we are introducing several new products. All our growth in Europe is coming from new products And we are going to be introducing several new products, for example, in Italy, in UK, In Sweden, in Denmark, in Greece, in Poland where we are non existent today.

Speaker 2

So all of those are going to be incremental And not worried about revenue I mean not worried about inventory there. U. S, On the other hand, U. S. Is we were in great shape in at the end of Q4 22, which was our highest sell through quarter.

Speaker 2

Sell through means we are selling meaning the installer, Buying from the distributor is called sell through. Our sell through rate was the highest and our channel inventory was very healthy At the end of Q4, what happened is the sell through rates declined overall in the U. S. 20% with respect to Q4 for Q1 and for Q2. And therefore And in response to that, we did throttle our shipments into the channel, but we didn't throttle it enough because we assume Q2 will be a seasonally good quarter, which turned out to not be the case.

Speaker 2

So therefore, we are now left with 2 quarters of inventory that is added on And meaning 2 quarters of extra inventory and we are also assuming going forward we are not making any aggressive assumptions. We are saying The demand will be at the same level as it is today and therefore we are taking a one time correction For shipments into the channel and that is why our guide is light for Q3.

Speaker 8

Right. Effectively equal to that excess inventory here. Great. And then just related here, if you can comment on gross margins, obviously, you guys provide I've been providing consistently improving gross margin guidance over time and implicit within that is the confidence to sustain that for At least sometimes several quarters as far as I read it. You still feel confident in supporting these higher gross margin levels here Despite this backdrop through this period of time, for several quarters?

Speaker 2

Yes. I mean, look, we are careful on the gross margin guidance. We have non GAAP guidance that we gave is 42 to 45. And like what I said, we Like for example, I didn't even say this to the gentleman who asked me the question before. For example, in logistics, Last quarter, we saved $8,000,000 last quarter.

Speaker 2

Like we have a lot of Initiatives from our world class costs on saving The cost of a capacitor, a resistor, porting, semiconductors, ASICs, Not only by 2nd source qualification or multi source qualification, but simply purely by negotiation. So we do that and we do that on Microinverters, we do that on batteries, we do that on combiner boxes and accessories. So our world class cost Effort is invaluable and has saved us a lot of dollars. And we are now moving to a higher and higher mix of IQ8, which has Got a little bit more gross margin than IQ7. Now, on the batteries, we are also getting better In terms of gross margin, I gave a big commentary on batteries on how we have improved the learning from one generation to the other In terms of warranty, for example, instead of taking a $3,000 hit on return, We don't do that.

Speaker 2

We basically service boards within that product and The Board replacements, which are $40 are done much faster than full unit replacements. So Innovative ways in order to reduce our overhead costs on batteries are also helping. And like what I said, Our 4th generation batteries are coming. The 4th generation batteries provide a huge Reduction in terms of power electronics, which is the battery management is now integrated into power conversion. And so 7 boats in a Gen 3 system will now be 2 boats.

Speaker 2

And in that process, we take significant cost out. So, in general, we are quite confident of our trajectories on gross margin On both microinverters and batteries.

Speaker 8

All right. Sounds it for several quarters to come. Thank you very much.

Speaker 2

Thank you.

Operator

The next question comes from Kashy Harrison with Piper Sandler. Please go ahead.

Speaker 9

Good afternoon. Thanks for taking the questions. So based on the feedback that you're receiving from your distribution network, are you getting the impression That sell through in non California will have bottomed by 3Q or do you still believe non California is in the process Of recalibrating. And then, you said that the early M3 data is encouraging from your larger Can you maybe just speak to with attachment is down to 50%, can you just maybe speak to where we are on year over year trends just based on the leading edge data?

Speaker 2

Yes. I think to answer your question on sell through for non California, I mean, it has not changed much In Q1 and Q2, in fact, I said Q2 was a little bit worse compared to Q1, about 6% worse. I think it is expected to probably be at this level until the interest rates take a meaningful turn for the better, That in non California. On NEM-three, I mean, we only have anecdotal evidence right now. The channel is still NEM2 and NEM2 installations are happening.

Speaker 2

Many some of our distribution partners Said that a few installers may even do NEM2 till October or November. We are hearing that for most of Q3 It will be NEM-two and we will start getting data on NEM-three, sell through data only in Q4. But we see a lot of design and proposal activity from one of the benefits of us buying the Solar Graph software platform Yes, we are able to see the early signs of NEM3. And there are a lot of designs on NEM3. I can't quantify it yet because We don't have a meaningful market share in the Solar Graph software space, but I like the trends I see.

Speaker 2

I like the battery attach rate very nice. I see it over 70% in most cases. And like what I said, we have clear facts that the payback is awesome for Grid type batteries and solar, the payback is fine even for pure solar. So we think it is a matter of training A lot of installers and actually Raghu who is sitting with me, he has visited himself 1,000 installers came to his sessions throughout Last quarter and our only job there was to evangelize NEM 3.0. We showed them with Solar Graph software platform on how to design for NEM three point zero, what is the payback, how to sell To the homeowners and so that installers have very high confidence to sell to the end consumer.

Speaker 2

But still, having said that, we don't have statistics yet. We will start getting statistics in the 4th quarter.

Speaker 9

Thank you for that color. And then maybe just for my follow-up question. So clearly demand is Tracking beneath expectations as you're adding a significant amount of capacity to the U. S, do you have the ability to ramp U. S.

Speaker 9

To peak capacity by throttling back in Mexico, India and Romania, Or are there minimum activity levels that you would need to maintain per your agreements with your contract manufacturers? Thank you.

Speaker 2

Good question. We have a total of 3 contract manufacturers right now. 2 of them have been with us forever And that is one of the reasons we even chose those 2 because we have deep relationships with them. And we want to be highly sensitive on how we load their factories outside the U. S.

Speaker 2

Versus Factories inside the U. S. There is one new partner Foxconn That is manufacturing our microinverters in Wisconsin. Now our assumption is We are going to be ramping steadily from Q2 of 50,000 units to a Q4 number of 4.5 Q4 'twenty four number, a 4,500,000 units pending robust demand. And of course, I mean, this is a long term decision That we take and we do expect us to have Come with healthy demand by then.

Speaker 2

If not, we will work with our contract manufacturing partners and we will make the right decision on how to appropriately load the factories. And we will provide that guidance to you on a quarterly basis.

Operator

The next question comes from Jordan Levy with Truist. Please go ahead.

Speaker 10

Afternoon, all, and thanks for taking my questions. Just a quick one for me. Just curious if you could give us A little more detail on the EV charging side of things, what it takes to break into and grow that business to a bigger segment and then the eventual Progression toward bidirectional charging and how you're viewing that?

Speaker 2

Right. So EV chargers, we bought A company called Clipper Creek and that was towards the end of 2021. And basically now what we have done is we have basically moved The manufacturing of those EV chargers so that we can start to scale a lot to Flextronics in Mexico. We have done that. That's Phase 1.

Speaker 2

Now what we are doing and we will release in Q3 is an IQ smart TV chargers. The original Clipper Creek chargers, which are very popular by the way simply because of their very high quality, very high durability and great service. So we are taking that architecture and we are adding connectivity to The Clipper Creek EV Charger and we are rebranding it as an IQ Smart EV Charger. And once you have the connectivity and then the integration into Enphase Solar Plus Storage, You can do a lot of interesting things like for example, you can configure in your app saying never charge my EV from the grid, Only charge EV from solar, green charging only. We can do interesting things like that.

Speaker 2

So that's what I call Phase 2. That will happen in Q3 in the current quarter we are in. Now The next phase will be to introduce these EV chargers into all countries in Europe And that will happen in Q1 and Q2 of 2024. We are already working on that. And the same thing there, our existing partner channel partners are all selling Enphase Solar Plus Storage.

Speaker 2

It would be a natural extension For them to be selling Enphase solar plus storage plus EV chargers with a full home energy management system capable of managing heat pumps as So that's Phase 3. We have already demonstrated bidirectional EV charge. It is on our website And it is very closely aligned with our Ensemble architecture. So essentially, We tap into the DC port of the car and that interface there is called digital interface. There is a digital interface.

Speaker 2

There is Our interface, the digital interface is 15,118 that basically you can exchange things like the SoC of the car, the state of charge of the car and other control signals. And then we will have power conversion, which is our inverters, The same inverters that we use, the higher wattage inverters basically will take that DC and plug it into our Home Energy Management System, which is an AC Couper system. So once we do that, we can easily do V2H as well as V2, V2X, which is V2H and V2G. So we expect that product to come into the market By Q4 of next year, that is we are still in early days there and we are working on our Bi directional inverter right now. So, that's those are the 4 phases and then Raghu can add.

Speaker 2

Yes. So in

Speaker 7

terms of the importance of the connected e charger that we are going to release in this quarter, again an important role as Bhagir mentioned in your home energy management system. Specifically, when you think about it in the context of NEM 3 as well, Right. You want to avoid charging your car at certain times of the day, which is part of the time of use construct, As well as allow your battery or preserve your battery to discharge power into the grid at certain times of the day, particularly in the summer. So getting a significant load like an EV under control of your home energy management system It becomes extremely vital, so you can deliver great savings for the homeowner both in terms of bill offset as well as payback period. As you think about NEM3 here in the U.

Speaker 7

S. As well as you think about Home Energy Management broadly in Europe as well.

Speaker 6

Thanks so

Speaker 10

much for that.

Speaker 6

Thank you.

Operator

The next Question comes from Brian Lee with Goldman Sachs. Please go ahead.

Speaker 11

Hey guys, thanks for taking the questions. Apologies about earlier. I had a question about the, I guess, the destock and how you're reading the channel. I appreciate, Audrey, all the Kind of detailed disclosure about the quarterly cadences you've experienced. So if I do the math, you kind of shift 10% more than sell through 2 quarters in a row based on your commentary in the U.

Speaker 11

S. So roughly, let's call it $100,000,000 if my math is correct. And your guidance is effectively down that much sequentially, if not a little bit more. So does this imply you're entirely resetting Kind of the channel all in once in 3Q and then as you get into 4Q, we're going to start to Be looking at a normalized environment, you're starting to fill the channel again, like what's sort of the implication here, if that math is correct to begin with?

Speaker 2

Right. So in addition to that math, Brian, the other way, one more way to look at it is the you always look at your Ending on hand inventory, assuming a projected demand going forward. So we are not assuming any Optimistic demand for Q3, we assume the same level of uncertainty continues for Q3. And so that's another portion of the math that needs to be done to calculate how much we should really ship Into the channel in Q3 and we took that into account. As I also said in Europe, We expect to be slightly down as compared to last quarter due to typical seasonality.

Speaker 2

So that and to answer your question, that's the idea. We'd like to bring the channel back to a healthy place at the end of Q3.

Speaker 11

Okay, fair enough. But embedded in your guide for 3Q, the sell through sounds like you're Assuming continued weakness, do you anticipate that to just kind of be a flat line assumption All the way through the rest of this year, end of the year, and that's how you're approaching the channel reset Even beyond 3QI days?

Speaker 2

That's right. We are assuming also a little bit on the NEM-three. But I mean, look, we are confident that this is a one time correction. The reason is we have a lot more new products And so we all feel good that this one time correction will Clearly normalized the channel and on top of it, we have so many initiatives to diversify our revenue, Including the new countries in Europe and the small commercial in the U. S.

Speaker 2

That we talked about. So we are cautiously optimistic we are correct.

Speaker 11

Okay, great. And then I guess, that's a good segue into my second question and then I'll pass it on. You're sort of the newer player in Europe. You're coming out with new product, new markets. And obviously, you have the highest margins out there in the industry and I know you want to protect those, but as you enter new markets in this environment, is there a Kind of different mindset around pricing strategy.

Speaker 11

Can you maybe speak at a high level about kind of what you're thinking in regards to pricing You're out in Europe and you're trying to gain share there and maybe you have some margin wherewithal to work with? Thanks guys.

Speaker 2

Yes, I think that's also a good question. In Europe on microinverters, I mean, The folks in Netherlands and France understand us perfectly. For small systems Like in Netherlands and France, they love our quality, they love our service And we are extremely close to these partners. We provide them In outstanding service, the your question on new areas, I mean that's something we are always thinking as we enter the emerging markets, For example, like Brazil, for example, like even the small commercial market, We are able to manufacture those microinverters, which are high power microinverters, 480 watt AC. Those we are able to manufacture in the U.

Speaker 2

S. And we get incentives, production tax credit to the tune of $0.11 a watt For those inverters, so I think there is some opportunity there for us to become a little more aggressive in terms of market share And we'll be pursuing those.

Speaker 11

Okay. Appreciate that. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Eric Stine with Craig Hallum. Please go ahead.

Speaker 5

Hi, everyone. Thanks for sneaking me

Speaker 12

in here at the end. So if I understand correctly, it sounds like you feel pretty good about battery inventory in the channel. And again, I do appreciate everything you gave on the microinverter side. But just curious, with that in mind, with Gen 3, the launch getting into the market. And then NIM-three expected to start in 4Q.

Speaker 12

I mean, are you willing to call a bottom? I think last quarter you said that you thought Q2 might be the bottom for battery volumes. Is that, I mean, is that still a fair expectation?

Speaker 2

Yes, I mean, that's right. That is still a fair expectation. We are exactly on track for that. We feel really good on batteries. We have started shipping Our 3rd generation battery, the 3rd generation batteries solve some unique problems with The 2nd generation, although on the 2nd generation, we have kind of cleaned it up.

Speaker 2

The 3rd generation has got outstanding commissioning tanks. The beautiful thing in Australia is that we have the One product that combines the gateway plus the isolator and so it is nice and compact And it's very easy to install the entire commissioning time. And I was told yesterday somebody did it in under 10 minutes. So We feel really good there. In terms of power, I mean this battery 5 kilowatt hour battery It's got 3.84 kilowatts of continuous power and 7.68 kilowatts of peak power, just a 5 kilowatt hour battery, Which is double compared to our prior generation.

Speaker 2

In fact, it is double on continuous and triple on peak power. And that peak power is very critical because that is what helps you start air conditioners. So and We can do a lot of great things in software. If somebody thinks it is too much power, we have the ability to throttle continuous power, but still maintain peak power. So, I mean, we are very happy with our 3rd generation.

Speaker 2

Of course, we can No product is perfect at the time of introduction, but this is a step function compared to Gentoo In terms of power, we think our battery business, I mean, we call Q2 as the bottom. I believe it is the bottom. We are guiding Q3 to be the same range, 80 to 100. And we think with the NEM three point zero starting to come up in Q4, you should start seeing a lot more activity there, Along with our introduction into UK, Italy, Poland, Greece, all of those should Start to account for more megawatt hours as well.

Speaker 7

And also in Europe, Germany as Badri mentioned earlier on, It's an 80% battery attach and our business in Germany is definitely starting to pick up. It gives me a lot of confidence as well. Germany is one of the More mature and a tough market to go as a new entrant to

Speaker 2

go in and win. And we

Speaker 7

are definitely Doing well in Germany as well both not just for solar, but solar and our battery. So definitely feel Optimistic, bullish on the battery.

Speaker 12

Okay. Thanks for the color.

Operator

The next question comes from Jeff Osborne with Cowen. Please go ahead.

Speaker 6

Hey, Badri and Raghu. Two quick ones. I was wondering if you could provide us The walk of guidance, you're down about $135,000,000 sequentially at the midpoint. Is it safe to say that sort of 2 thirds of that might be from the U. S, just due to the channel inventory and a third seasonality in Europe?

Speaker 6

Is there a way Yes, fungitizing?

Speaker 2

I would say more like 8515.

Speaker 6

Got it. That's helpful. And then It seems the strategy is to expand into as many geographies as humanly possible quickly. In your experience with past geography And how quickly does it take the country to be productive in terms of training, working with the distributor, marketing? Is that a 6 month lag or you're talking about Greece, U.

Speaker 6

Like what's your expectation internally? Is that more mid next year when those would start kicking in or spring? Any thoughts would be helpful.

Speaker 2

Yes, that's a good question. I'll just answer it because This is what I tell my sales guys. It is to say, we need a complete cross Functional team when we enter the new geography. What does a cross functional team mean? You need a sales leader In the country, you need a couple of account managers in that country, assuming the Sales is meaningful in terms of the total available market.

Speaker 2

Then you need field application engineers because the moment you have sales, The first thing they are going to be asking is help on how do you design in the product. So field application engineers Need to be hired at the same time. Then you need training. We need to conduct we have beautiful courses. We need to conduct training workshops every day of the week in every city.

Speaker 2

So, training folks are required and then customer service is vital. We will never enter a region without customer service staffed in the local language. Then for batteries, field service technicians All critical, where because these field service technicians are the ones who will take any battery issue off the installers' plate, they are experts, 1 or 2 per region. So a good cross functional team for entering a region is about 5 to 6 Folks, the people that I mentioned, and we are in the process of staffing that up. I've got Dave Ranhofer back, my Chief Commercial Officer.

Speaker 2

He thought he retired 3 months ago, but I've gotten him back. He's going to be with us for a couple of more years. And so He basically is championing all of our go to market activity in Europe As well as new segments in the U. S.

Speaker 5

Appreciate it. Thank you.

Operator

The next question comes from Steve Lieschman with Wolfe Research. Please go ahead.

Speaker 13

Yes, thanks. Just wanted to clarify, sorry to ask a similar question to some others, but The impact of the inventory reset from the first half of the year that you're going to do in Q3, can you just Identify what that catch up is as opposed to kind of ongoing inventory changes?

Speaker 2

Maybe you missed my detailed answers on this. Let me try to say once again. Basically,

Speaker 13

I guess I heard actually just like in 100 of 1,000,000 like on that on revenue, do you have a number for that Tens of millions?

Speaker 2

Yes. I mean, what we said is we are taking our guidance From or we are taking our revenue numbers from an actual Q2 actual of 711 2, guidance for Q3, $550,000,000 to $600,000,000 midpoint is $575,000,000 and A portion of it, most of it, 85% is what I said, is because we are doing a one time correction. And the rest of it is Europe is seasonally down in Q3.

Speaker 13

Okay. Great. And then on the Europe aspect, Could you just clarify how you know it's this seasonal issue as opposed to The beginning of some of the same issues we've seen in the U. S. In terms of gas prices down, higher rates, How do you know what's the seasonality?

Speaker 2

Well, that's what we are hearing. We are very close to our customers. This is what We are hearing from all of them. The fundamental drivers aren't changing. And for us, really, Like what I said, we aren't that much worried about talks of inventory because we are under penetrated in Europe.

Speaker 2

We are strong in France and Netherlands, but every other region in Europe is a blue ocean for us. Like for example, in Italy, solar plus storage in U. K, the same thing. In Poland, similar in Sweden and Denmark, similar in Greece, similar. So we are under penetrated in most of the regions except France and Netherlands, which have been fantastic for us.

Speaker 2

And so I think we are extremely bullish about Europe. Our growth rate like what we said is More than tripled growth in Q2, more than tripled year on year. We are very bullish there.

Speaker 13

Understood. Thank you very much.

Operator

The next question comes from Corrine Blanchard with Deutsche Bank, please go ahead.

Speaker 4

Hey, good evening, team. Look, most of my questions have been answered at this time, but Maybe if you can help me or help us understand the impact of the IRA benefit into next year. I believe you now And you get like a tax credit. So does that fully erase what you will be paying or just if you can give some color here?

Speaker 2

Yes. So the net benefit from IRA, we are breaking it out, so you can see it properly. So in the Q2 that ended just now, the net benefit was $1,600,000 And that came because of 50,000 units shipped at you can do the math roughly $30 odd. So that's about 1 point 600,000 units and an estimated IRA benefit of 14.5 To $16,500,000 so you can calculate how much is on a per unit basis. In the past, I have told you that the net benefit is between $20 $30 per unit and we will continue to give That number every quarter because the mix is changing every quarter.

Speaker 2

Sometimes we make high power products depending on customer demand And sometimes it is slightly lower power product, so the mix changes. We also gave you a number, which is Pending robust demand, we will do 4,500,000 units per quarter. We will reach up to that number in Q4 of 2024. So that number, if you do the math, it is 4,500,000 units Times, let us say, an average benefit of $25 that's like a $112,500,000 of net benefit in Q4, twenty twenty four. So that's the math and that is that will be accounted in the cost of goods sold.

Speaker 2

And so we will break out the gross margin with IRA and without IRA. So you can see this and it will be very clear.

Speaker 4

Great. Thank you. And Just one quick follow-up. But previously, you had mentioned you expected to reach that 4 point I'm maybe on quarterly capacity by the end of 2024. As of today, look, I understand Visibility can change and demand can change, but as of today, that's still something that you anticipate by next year to reach?

Speaker 2

It all depends. That is why we qualified it with saying pending robust demand. And if that demand is, for example, let us say we go through another session next year. Then I mentioned earlier that we would look at how to balance this out Between U. S.

Speaker 2

And international and we will give you the appropriate guidance at that time.

Speaker 4

Okay. Thank you.

Operator

The next question comes from Sophie Karp with KeyBanc. Please go ahead.

Speaker 4

Hi, good afternoon. Thank you for squeezing me in. I wanted to ask you a question on kind of go to market strategy, particularly as you expand to Europe where competition is higher across different product lines. Does it make sense for you to, I guess, Launched some kind of brand awareness campaign aimed at the end consumer, so that people could maybe Learn and say the brand by name or do you think that you should continue just reaching customers by primarily targeting dealers and

Speaker 7

If you take a

Speaker 2

book out of what we have done here

Speaker 7

in the U. S, we really have focused Not installers, right. Our installers are really the front for the homeowner and obviously that has Been very effective. Having said that, we do use all of the social media that we have at our disposal to reach end consumers. So we do provide cover to our installer partners.

Speaker 7

But really our focus remains Letting our installers be the ones that are actually selling the product to the end consumer. Now the end consumer does see the Enphase product very clearly because they have that all in one app that they see and they see the Enphase brand. So they do get to see it. But in general, we let our installer partners be the front For company and products.

Speaker 4

Got it. Thank you. And then maybe a quick one on TPO versus, I guess, cash sales and loans. Do you have any visibility with your stores or any commentary you can share How they navigate in the environment where TPOs are maybe taking the market share becoming more price competitive, given the interest rates and the What does that mean for the volume of business that they can be doing going forward?

Speaker 2

We do see a number of installers trying to shift their business from cash I mean from loans to PPAs, usually these are slightly bigger installers, less on the long tail. And we work with them. We work with many of the leasing partners. They buy our microinverters. So for us, so far it hasn't nominally changed anything for us, But we do see some shift happening.

Speaker 2

That is correct.

Speaker 4

All right. This is all for me. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

Speaker 2

Thank you for joining us today and for your continued

Operator

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

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Earnings Conference Call
Enphase Energy Q2 2023
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