Enphase Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 17 speakers on the call.

Operator

Good day, and welcome to the Enphase Energy Second Quarter 2024 Financial Results Conference Call. All participants will be in a listen only mode. Please note that this event is being recorded. I would now like to turn the conference over to Zach 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 2024 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer Mandy Yang, our Chief Financial Officer and Raju Gullore, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q2 ended June 3, 2024. During this conference call, Enphase Management will make forward looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, capabilities of our technology and products and the benefits to homeowners and installers, our operations including manufacturing, customer service and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions and regulatory and tax matters. These forward looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations.

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 expectation. 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, our President and Chief Executive Officer.

Speaker 1

Badri?

Speaker 2

Good afternoon and thanks for joining us today to discuss our Q2 2024 results. We reported quarterly revenue of $303,500,000 shipped approximately 1,400,000 microinverters and 120 Megawatt hours of batteries and generated free cash flow of $117,400,000 The end market demand for our products was approximately $396,000,000 in Q2 and we reduced our channel inventory by approximately $92,000,000 Our overall channel inventory returned to normal levels as we exited Q2. For the Q2, we delivered 47% gross margin, 27% operating expenses and 20% operating income, all as a percentage of revenue on a non GAAP basis and including the net IRA benefit. Mandy will go into our financials later in the call. Let's discuss how we are servicing customers.

Speaker 2

Our worldwide NPS was 79% in Q2, up from 78% in Q1. Our average call wait time was 2.5 minutes in Q2 compared to 1.9 minutes in Q1. We have several AI and machine learning initiatives to drive automation and further reduce wait times. Let's talk about operations. Our global capacity is around 7,250,000 microinverters per quarter, 5,000,000 units of those are in the U.

Speaker 2

S. In Q2, we shipped approximately 574,000 microinverters from our U. S. Contract manufacturing facilities that we booked for 45x production tax credits. We expect to ship approximately 1,100,000 microinverters from our U.

Speaker 2

S. Facilities in Q3. Our U. S. Made IQ8 microinverters can help lease PPA and commercial asset owners qualified for the 10% domestic content ITC error.

Speaker 2

I'll discuss more on this later in the call. For batteries, our cell pack suppliers in China have sufficient capacity to support our ramp up in 2024. We also plan to manufacture batteries in the U. S. Starting in Q4 with power conversion, battery management and enclosures made domestically while using cell packs from China.

Speaker 2

Let's cover the regions. Our U. S. And international revenue mix for Q2 was 65% 35% respectively. For more visibility into our business, we are providing regional breakdown and sell through dollar metrics for Q2.

Speaker 2

With our channel normalized, we will not be providing detailed sell through statistics going forward. In the U. S, our revenue increased 32% compared to Q1. The overall sell through of our products in the U. S.

Speaker 2

Was up 8% in Q2 compared to Q1. Let's discuss the market trends in the U. S. Split by non California states and California. For non California states, our overall sell through was up 7% in Q2 compared to Q1.

Speaker 2

The sell through for microinverters was up 6% and the sell through for batteries was up 10%. In California, our overall sell through was up 7% in Q2 compared to Q1 indicating that our California business has stabilized. The sell through of our microinverters was flat and the sell through of our batteries was up 14% in Q2 due to the high NEM3.0 battery attach rates. I'll provide more statistics on NEM3 later in the call. In Europe, our revenue was flat in Q2 compared to Q1.

Speaker 2

The overall sell through of our products in Europe was up 3% in Q2 compared to Q1. The sell through of our microinverters was flat and the sell through of our batteries was up 18 percent in Q2. I'll provide color on some key markets in Europe, the Netherlands, France and Germany. In the Netherlands, our overall sell through was down 15% in Q2 compared to Q1. The country's solar demand continues to be challenged by regulatory uncertainty.

Speaker 2

However, we are beginning to see battery demand pick up. This is a trend we expect to continue, especially as dynamic electricity rates become more prevalent in Netherlands. We launched our IQ Energy Management software in Netherlands during Q2 that will allow our installer to offer an Enphase system that can deliver healthy payback even without NEM. The modularity of our batteries allows homeowners to start either with a 3.5 or a 5 kilowatt hour battery along with their solar systems making the economics work well. In France, the overall sell through in Q2 was flat compared to Q1.

Speaker 2

We recently launched a 3rd generation battery in France and expect that solar plus storage system will become increasingly important for this market as the spread between retail electricity rates and feed in tariff widen. We expect to introduce IQ EV chargers and IQ Energy Management Software in France later in the year. In Germany, our overall sell through in Q2 was up 7% compared to Q1, building on the growth we reported in the previous earnings call. In June, at InterSolar Munich, we unveiled some exciting products, our 3 phase battery backup solution for Germany, Austria and Switzerland that will increase our served available market. In addition, we showcased our iQ balcony solar kit, which will also increase our served available market in Germany by approximately 400 megawatts a year.

Speaker 2

We believe Enphase microinverters are ideal for these small systems and we plan to roll out the balcony solutions throughout Europe in the coming quarters. A general comment about Europe. We are still under penetrated in markets like the UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden and more. Each country has its own challenges and opportunities, but homeowners increasingly seek safety, high quality, savings and an all in one app experience from their home energy system which aligns well with our strengths. We plan to introduce our entire product portfolio, IQ Microinverters, batteries, IQ EV chargers, IQ Energy Management Software and the Solar Graph Installer platform across more European countries and scale our sales and support accordingly.

Speaker 2

Let's come to Asia. We are making incremental progress in Asia. Our revenue in India, although small, has doubled from a year ago with introduction of IQ8 family of microinverters. We are gaining solid traction in Thailand and Philippines where quality and safety are highly valued. In Brazil, we have a good team in place.

Speaker 2

We work with approximately 600 long tail installers through the help of some good distribution partners. We are currently shipping our 480 watt IQ8P microinverters into these emerging residential markets to support newer high power panels. In Australia, there is interest in our Enphase Energy System powered by IQ Microinverters and the 3rd generation battery. We introduced this product approximately a year ago. Later this year, we will be introducing more products into Australia, including the IQ8X microinverters for higher DC input voltage panels and grid tied battery.

Speaker 2

Let me come to NAM3 and provide some statistics there. As I said before, the end customer demand in California for us has stabilized in the Q2. As of last week, 60% of our California installations were MEM 3.0. These systems have a high battery attach rate over 90% compared to NEM2.0 systems which have an attach rate of 15%. Our data also shows that half of our MEM-three systems are using Enphase batteries consistent with what I have reported in the last few earnings calls.

Speaker 2

Taking the data into account, our average revenue per NEM three point system is approximately 1.5 times the average NIM2.0 system. We believe this will contribute to stabilizing our California revenue in the back half of the year. Let me say a few words about market share. In the U. S, our microinverters and batteries have stable market share according to both internal and third party data.

Speaker 2

As batteries become more common in California, there is some interest in centralized inverter solution. Our success continues to be driven by our unique KC coupled architecture, which offers significant advantages over legacy string inverter systems in terms of performance, reliability and safety. We strongly believe in this value proposition. Our system will become even easier and faster to install for backup applications with further improvements we are making to our balancer system. They include our IQ meter collar, our 4th generation 10 kilowatt hour battery and the enhanced IQ combiner, which are all expected to be available in early 2025.

Speaker 2

Additionally, we believe our AI based software is essential for helping homeowners maximize savings with a complex tariff structure like NEM3. Let's come to our Q3 guidance. We are guiding revenue in the range of $370,000,000 to $410,000,000 We expect to ship between 160,180 megawatt hours of IQ batteries. We anticipate incremental improvement in our U. S.

Speaker 2

Business and a seasonal slowdown in Europe. We are over 85% booked to our to the midpoint of our overall revenue guidance. This is the LPS backlog position we have had in the last year. Let's talk about new products, starting with IQ batteries. Our 3rd generation IQ batteries has been well received and we have almost converted to the 3rd generation battery right now.

Speaker 2

It offers an industrial industry leading 15 year warranty, differentiated quality, serviceability, modularity and power capability. We have expanded the IQ Battery 5P, our 3rd generation battery into more countries in North America and Europe. We recently started shipping to customers in Canada, Mexico, France, Netherlands and Luxembourg. We plan to pilot our 4th generation battery in the U. S.

Speaker 2

Later in the year and begin production in early 2025. This new battery will feature a better cost structure and a smaller form factor, thanks to its integrated battery management and power conversion architecture. Additionally, the metered collar and the enhanced IQ combiner will be introduced along with the 4th generation battery to reduce our balance of system cost. As previously mentioned, we have expanded into many new markets with the IQ8 family of microinverters and are now present in 43 countries. We plan to enter many more new countries by the end of the year.

Speaker 2

We aim to further increase our served available market by simplifying installations of small solar systems and social housing and rolling out balcony solar solutions to more European countries starting with Germany. The other variant of IQ83 microinverter with a new 3 phase cabling system is well suited for small commercial solar installation ranging from 20 to 200 kilowatts. We launched this product in North America in December last year and have installed over 200 sites with an average of 45 kilowatts of solar per site. The feedback of this product has been quite positive and we expect the growth to accelerate in the coming quarters. We recently began shipping IQ8P commercial microinverters from our contract manufacturing facility in Texas.

Speaker 2

We are now producing both residential and commercial microinverters from our U. S. Manufacturing facility. Some of our U. S.

Speaker 2

Made microinverters SKUs, which when paired with select U. S.-made solar racking equipment can allow lease PPA and commercial asset owners to qualify for the domestic content bonus credit. This credit is valuable for customers at 10% of the overall project cost. We think this will be a good opportunity for us on both microinverters and batteries. Let me provide an update on IQ9 microinverters with Gallium Nitride.

Speaker 2

The IQ9 family will support higher DC input currents up to 18 amperes and higher AC grid voltages including 480 volts for the small commercial market, which is a brand new market for us. Using Gallium Nitride high voltage transistors, these microinverters will deliver higher output power at lower cost. We are on track to launch this product in 2025. Let's discuss EV charging. We showcased our upcoming EV charger for Europe at inter solar Munich in June.

Speaker 2

The charger offers a 22 kilowatt 3 phase option and 11 kilowatt single phase option. It integrates seamlessly with Enphase Solar and Batteries allowing homeowners to optimize cost by using excess solar energy. Green charging or charging from solar is what it's called. Other key features include dynamic phase switching that from single phase to 3 phase and vice versa and a MID meter for a few countries, ISO 15,118 support to Talk to the Car, OCPP cloud software support and 1 ampere fine grain current control to maximize green charge. We plan to introduce this charger in many European countries later in the year.

Speaker 2

Additionally, we recently launched our most powerful CS100 EV charger for commercial fleet electric vehicles in the U. S. Our team is developing

Speaker 3

a bidirectional EV charger that

Speaker 2

will enable V2H and V2G capabilities as part of the Enphase system. The charger will feature modular GaN based bidirectional inverters providing up to 11 kilowatts per single phase applications and 22 kilowatts for 3 phase applications. The charger will be compatible with both 400 volts and 800 volt electric vehicles. We are targeting to release this product in late 2025. Let's now cover our IQ Energy Management Software.

Speaker 2

Our software is rapidly evolving to handle the growing complexity of energy markets by using AI and ML for forecasting and optimization. We train our AI models with data from over 4,000,000 systems. In Q2, we launched our latest software in Netherlands and Belgium to manage dynamic electricity rates helping homeowners maximize ROI and reduce payback periods as electricity prices fluctuate hourly. We see AI as a crucial technology to scale and enhance our products and services. Let's discuss our installer platform.

Speaker 2

We recently introduced Solar Graph, our design proposal and permitting software platform to the Netherlands. With built in support for dynamic electricity rates, Solar Graph software delivers the financial calculations that address the complexities of energy markets in the Netherlands. SolarCraft is also available to residential and commercial installers in the U. S, Canada, Brazil, Germany and Austria and we expect to release it to many countries in the coming quarters. Let me conclude.

Speaker 2

We remain dedicated to delivering best in class home energy systems with a strong focus on innovation, quality and customer experience. Over the last year, we have significantly expanded our global reach and have an exciting pipeline of new products set to launch worldwide in the coming year. We have successfully normalized our channel inventory by the end of Q2. Our customer demand has increased by 5% in Q2 as compared to Q1. Our battery business is also doing very well with growth from quarter to quarter.

Speaker 2

Our bookings in Q3 are the healthiest that they have been in a year. Our early commitment to U. S. Manufacturing is positioning us well with lease BPA and commercial asset owners. We also expect the Fed to lower interest rates later in the year, improving solar economics for the U.

Speaker 2

S. Consumers. Our efforts to capture market share in Europe and other international regions are also promising. Despite continued macroeconomic challenges, we are confident in our revenue recovery and remain bullish about our long term growth prospects. With that, I will turn the call over to Mandy for her review of our finance.

Speaker 2

Mandy?

Speaker 4

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our Q2 of 2024 financial results as well as our business outlook for the Q3 of 2024. We have provided reconciliations of these non GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q2 was $303,500,000 We shipped approximately 608.3 Megawatt DCO microinverters and 120.2 Megawatt hours of iQ batteries in the quarter. Non GAAP gross margin for Q2 was 47.1% compared to 46.2% in Q1.

Speaker 4

GAAP gross margin was 45.2% for Q2. Non GAAP gross margin without net IIA benefit for Q2 was 41%, flat from Q1. GAAP and non GAAP gross margin for Q2 included $18,400,000 of net RIA benefits. Non GAAP operating expenses were $81,700,000 for Q2, compared to $82,600,000 for Q1. We continue to invest in new products, customer service and sales.

Speaker 4

GAAP operating expenses were $135,400,000 for Q2 compared to $144,600,000 for Q1. GAAP operating expenses for Q2 included $49,000,000 of stock based compensation expenses, dollars 3,500,000 of amortization for acquired intangible assets and $1,200,000 of restructuring and asset impairment charges. On a non GAAP basis, income from operations for Q2 was $61,100,000 compared to $39,000,000 for Q1. On a GAAP basis, income from operations was $1,800,000 for Q2 compared to a loss of $29,100,000 for Q1. On a non GAAP basis, net income for Q2 was $58,800,000 compared to $48,000,000 for Q1.

Speaker 4

This resulted in non GAAP diluted earnings per share of $0.43 for Q2 compared to $0.35 for Q1. Net net income for Q2 was $10,800,000 compared to GAAP net loss of $16,100,000 for Q1. This resulted in GAAP diluted earnings per share of $0.08 for Q2 compared to GAAP diluted loss per share of $0.12 for Q1. We exited Q2 with a total cash, cash equivalents and marketable securities balance of $1,650,000,000 compared to $1,630,000,000 at the end of Q1. As part of our $1,000,000,000 share repurchase program authorized by our Board of Directors in July 2023, We repurchased 891,896 shares of our common stock in Q2 at an average price of $112.02 per share or a total of approximately $100,000,000 We have $648,100,000 remaining for further share repurchases.

Speaker 4

In addition, we spent approximately $7,500,000 by withholding shares to cover taxes for employees divesting

Speaker 3

We expect to continue

Speaker 4

this anti dilution plan. We expect to continue this anti dilution plan. In Q2, we generated $127,000,000 in cash flow from operations and $117,400,000 in free cash flow due to our strong working capital management. Capital expenditure was $9,600,000 for Q2 compared to $7,400,000 for Q1. Capital expenditure increased due to an increase in our U.

Speaker 4

S. Manufacturing spending. Now let's discuss our outlook for the Q3 of 2024. We expect our revenue for Q3 to be within the range of $370,000,000 to $410,000,000 which includes shipments of 160 to 180 megawatt hours of IQ batteries. We expect GAAP gross margin to be within a range of 45% to 48%.

Speaker 4

We expect non GAAP gross margin to be within a range of 47% to 50% with net RIA benefits and 39% to 42% before net RIA benefits. Non GAAP gross margin excludes stock based compensation expense and acquisition related amortization. We expect the net IRAs benefit to be between $30,000,000 $33,000,000 on estimated shipments of 1,100,000 units of U. S. Main microinverters in Q3.

Speaker 4

We expect our GAAP operating expenses to be within the range of $138,000,000 to $142,000,000 including approximately $59,000,000 estimated for stock based compensation expense, acquisition related amortization and restructuring. We expect our non GAAP operating expenses to be within the range of $79,000,000 to 80 $3,000,000 We expect our GAAP and non GAAP annualized effective tax rate, excluding discrete items for 2024 to be at 18%, plus or minus 1% with non IRA benefits. With that, I'll open the line for questions.

Operator

Thank And our first question today will come from Philip Shen with ROTH Capital Partners. Please go ahead.

Speaker 5

Hi, everyone. Thanks for taking my questions. First one here on sell through. Q2 was 396,000,000 dollars The midpoint of your Q3 guide is €390,000,000 but batteries are up meaningfully. So I was wondering if you could share what you expect the sell through to be in Q3.

Speaker 5

Can you confirm there's no destocking in Q3? And then when do you expect to return to the $450,000,000 to $500,000,000 of normalized revenue? Is it still on the table for back half? Or is it potentially more in 20 25? Thanks.

Speaker 2

Yes. There is no destocking for Q3. And then on the you should always now think about us as achieving balance between sell in and sell through. In other words, we only need to report under shipment or over shipment if we do not have a balance. So now going forward, the channel is balanced and we are in good shape.

Speaker 2

So answering your question on the $450,000,000 we are very optimistic. As you can see, our sell in revenue in Q2 was 303.5. Our sell in revenue at the midpoint of guidance for Q3 is $390,000,000 That's a good growth rate and we are extremely optimistic. So like what I talked about, we have successfully normalized our channel inventory. Our battery business is very healthy.

Speaker 2

We went from 75,500,000 or 75.5 megawatt hours in Q1 to 120 in Q2. Now we are guiding 160 to 180 in Q3 and California is contributing to it in addition to the other regions. Like what I said, our customer demand in Q2 increased by 5% as compared to Q1. So we are building in a little bit of conservatism there and building in some potential risks into our guidance. That's why we gave you $370,000,000 to $410,000,000 Our Q3 bookings are the healthiest they have been in a year.

Speaker 2

I told you about over 85% bookings and that too after removing a bunch of risks that we evaluate continuously on a worldwide We expect the Fed to lower interest rates later in the year. So that will also be a tailwind improving solar economics for U. S. Consumers. Our efforts to capture market share in Europe like what I said.

Speaker 2

Europe, Q3, there is seasonality, but what I said, we are under penetrated in Europe. There are so many countries where we are making good progress. So, we feel very optimistic about growth in Q1.

Operator

And our next question will come from Mark Schall with JPMorgan. Please go ahead.

Speaker 6

Yes, good afternoon. Thank you very much for taking our questions. So your gross margins continue to be very resilient. I remember leading up to the micro manufacturing, getting ready to scale, you gave guidance as far as kind of the split of the 45x tax credit that you thought you could keep. I'm curious on 2 things.

Speaker 6

On the battery side, as that gets ready to ramp in the U. S, if you can give us a split of what that credit might look like for you. And then also, with the domestic content, ITC adder language being out there, if a customer is going to get an incremental $0.30 to $0.40 per watt, how much of that do you think that Enphase could potentially keep versus passing on to the customer to stimulate demand? Just any pricing strategy comments would be helpful. Thank you.

Speaker 2

Right. So, basically the first question, we work on gross margins a lot. We have a cost reduction program that is going on continuously for microinverters and battery. We are making a lot of progress in it. I expect our non GAAP gross margins without IRA to continuously improve.

Speaker 2

I'll tell you the dynamics in the battery business are the cell pack prices are going down. We are making our microinverters starting to make our microinverters for batteries in the U. S. And we are also making some fundamental changes in the architecture and going from the 3rd generation to the 4th generation. Additionally, even in the 3rd generation, the serviceability of the batteries and the system controllers for backup is approximately 90%.

Speaker 2

90% serviceability means that you do not need to take batteries off the wall. You basically service them in situ, which means very often problem becomes simply replacing a board that maybe worth only $50 and not taking out a $5,000 battery. That's the advantage of our architecture. It is easily serviceable and we have made it modular. So gross margins actually we are very bullish on gross margin both with and without IRA.

Speaker 2

As far as your question on IRA, most of the IRA benefit for us comes from microinverters. We are only now starting to ramp on our batteries. The microinverters inside the batteries are increasingly made in the U. S. Last question is the benefits.

Speaker 2

It is too early to talk about it. The good news is we have our act together on the domestic content. We are talking to everybody that matter and we are working out the details with them. Our intention is that this entire incentive maybe a good thing ultimately for the end consumer. And I'm not sure what the plans of several lease and PPA providers are, whether are they going to keep it for themselves or are they going to pass it down, I'm sure it is a mix.

Speaker 2

As far as we are concerned, I mean we will be for us it involves setting up even more factories. For example, previously, we weren't manufacturing the enclosure for the microinverters in the U. S. Now we are going to be manufacturing that enclosure in the U. S.

Speaker 2

We are setting up factories and we basically will be looking to charge for value. But is a good thing for the end consumer, especially with incentives we are talking about in the range of $0.40 a watt, which is 10% of project cost.

Speaker 7

The next question will come from Brian Lee with Goldman Sachs. Please go ahead.

Speaker 8

Hey guys, good afternoon. Thanks for taking the questions. Maybe this is for either Badri or Raghu. Can you talk about the competitive landscape at all? Just thoughts around some reports Tesla Powerwall 3 gaining traction.

Speaker 8

And then maybe on the flip side, your most direct MLPE peer having some struggles, just kind of what's the market share landscape looking like for you? Are you gaining some traction? And then secondarily, as we think about 4Q, just some of the moving pieces, is it fair to assume battery shipments continue to grow sequentially into 4Q? Badri, you mentioned Europe is seasonal in 3Q, but do we take that to mean that it bounces back in 4Q? And then can you talk at all about kind of the domestic content demand you are seeing, if you could quantify at all what uplift you might see in 4Q?

Speaker 8

Thanks guys.

Speaker 2

Got it. I'm going to give some detailed color on competitive situation and then Raghu will add more. For the people who did not listen to my prepared remarks, our installers are steadily ramping on NEM-three and we're talking primarily about California here. The battery attach in California is increasing. Our numbers like what I said overall worldwide shipments was 75.5 Megawatt hours in Q1 growing to 120 in Q2 and guiding 160 to 180 in Q3.

Speaker 2

So battery attach and a lot of it is coming from California indeed. California as of last week, 60% of our installations happening. So this is brand new data, fresh data and we do a lot of installations per week. So this is important. 60% is NIM-three, 40% is NIM-two.

Speaker 2

Battery attach we are noticing is obviously very high for NIM-three, greater than 90% compared to NEM2. Good news is half of our NEM3 solar is still attached to Enphase batteries. This data has been consistent for the last 2 or 3 quarters. One more point for you to note is we provide a strong value proposition for grid type batteries. And this data I did not say in the prepared remarks, but our NIM-three batteries over 70% are grid type.

Speaker 2

And our grid type batteries are very easy to install. Many customers just prefer 2 5 kilowatt hour battery. No extra balance of system. No complexity. The existing combiner box can be used.

Speaker 2

We have something called Enphase Power Control Software that will make sure that we can do a lot of things in software and do not need to add any more hardware than what is necessary. And no main panel upgrades are required because of Enphase power control software. And I talked to you about 20 fourseven for easy serviceability, highest warranty in the industry, 15 year warranty. We are able to do that because of our architecture. We don't use fan.

Speaker 2

We have air cooling, no single point of failure. For backup, backup is a little more complex. That is going to be more dollars the user has to shell out because the useful backup probably is about 20 kilowatt hours battery. And for backup, we are streamlining our balance of systems. We are going to have a new 10 kilowatt hour battery and we are basically embedding the neutral.

Speaker 2

So we are eliminating the system controller and we are enhancing our combiner there. We are reducing the number of things they have to buy. And basically, we'll have a best in class solution there. On the PV side, I didn't explicitly say the advantages over a string inverter are numerous. 1st of all, obviously high power production, enhanced power production could range anywhere from a couple of percent to 15% more.

Speaker 2

Safe AC architecture, no high voltage DC on your roof. That's the single most important factor for example that some people in Europe select our product simply because no high voltage DC on there. Per panel monitoring, I was in Austria and Switzerland recently. Per panel monitoring was they say, we want to see everything that is happening. But panel monitoring is very important for them.

Speaker 2

25 year warranty versus inverters we may be talking about our 10 year warranty. I mean 25 year warranty matters. And obviously, the domestic content readiness. So domestic content readiness, of course, our competition will also be ready. And we believe that we have a good solution there and we are going to make it even better for both microinverters and battery.

Speaker 2

So we will be able to capture some value there. And so those are all of the puts and takes on the competitive situation. I'll have Raghu qualify the competitive situation more, but I'll answer the other question. Battery, do we expect Q4 growth? At this point, it's early for me to guide anything, but we do expect Q4 growth.

Speaker 2

And domestic content, how much of the Q3 number includes domestic content? Little to 0. Domestic content is a conversation that we are having and we expect it to pan out in the Q4. So, Raghu, talk about anything more.

Speaker 9

Yes. I think as Paze mentioned, we have a very strong value proposition. And really this has been the value proposition from the very onset of the company is that compared to centralized big box solutions, just have much better performance, better reliability as reflected in the 25 year warranty and no hypo phase DC anywhere, so much greater safety. The value proposition becomes even more important when you think about the new tariff structures like NEM 3, which is all about arbitrage and require batteries. And this is where, as we said, for a homeowner, if they can get just a 10 kilowatt hour battery, right, grid tied, which means you connect it into the existing combiner box, your value proposition for NEM 3 significantly improves.

Speaker 9

So our battery, the modularity of our battery, the high power and the fact that it can be done in 10 kilowatt hours with 2 of the IQVARITY 5P makes it a very, very good fit. But he also mentioned that for backup, yes, there's a lot of work that we're doing to make it as easy to install as the grid tied solution as well. So we have always said decentralization is the key. Distributed architecture is just always win in the long run for cost, performance and reliability reliability

Speaker 7

reasons. Our next question will come from Andrew Percoco of Morgan Stanley. Please go ahead.

Speaker 10

Great. Thanks so much for taking the question. I did just want to come back to the $450,000,000 to $500,000,000 run rate that you guys were talking about earlier this year. You guys have obviously done a good job at clearing out the channel inventory. But it just feels like over that time period, demand has stayed relatively stable at about $400,000,000 or so on a per quarter basis.

Speaker 10

So I'm just kind of curious where you think the growth is going to come from, from here if we look out to 4Q and then into 2025. I don't I know you guys don't officially guide that far out, but what markets are you expecting the growth to come from in Europe or in the U. S? And I guess how much of that will be battery driven versus micro driven? Thank you.

Speaker 2

Right. So I I think maybe you were not there in the prior when I answered a question a couple of questions ago. So, let me go through those points. As you rightly said, we did not guide Q4, but we are very optimistic based upon what we have seen. We have successfully normalized our channel inventory by the end of Q2.

Speaker 2

Our customer demand increased by 5% in Q2 as compared to Q1. Our battery business is doing phenomenally well, 75.5% in Q1, $120,000,000 in Q2, midpoint of guidance $170,000,000 in Q3 and we naturally expect it to do well. Our Q3 bookings are the LDS that they have been in a year. These are the leading indicators for you. Our early commitment to U.

Speaker 2

S. Manufacturing is positioning us well with respect to the commercial asset owner, at least PPA and commercial owners. So that one is a huge opportunity for the commercial asset owners and we expect to offer solutions to them there and we expect them to be highly value added solutions which can drive demand. Additionally, we are hearing that the Fed will lower interest rates this year at least once, improving solar economics for U. S.

Speaker 2

Consumers. On the international side, I talked at length about Netherlands. I talked at length about France. I talked about Germany. And there, I think in Netherlands, we are going to we just introduced Solar Graph software platform that enables the installers to sell effectively at the kitchen table incorporating things like the dynamic tariffs and absence of NIM 3, I mean absence of NIM.

Speaker 2

So we just introduced our 5 kilowatt hour battery, the latest and greatest battery into Netherlands. We plan to introduce our EV chargers there towards the end of Q3 and early Q4. Coming to France, I mean France is doing phenomenally well for us. Despite all of this, France has stayed very, very healthy. We just introduced our 3rd generation battery in France.

Speaker 2

We are going to introduce solutions for IQ, energy management, meaning software is what we said for effectively managing, steering a hot water heater in France. We also expect to introduce the same IQEV chargers there as well. In Germany, we're doing well. Our overall sell through in Q2 was up compared to Q1. At the June Intra Solar Munich, we unveiled our 3 phase battery backup.

Speaker 2

This is a 3 phase solution with backup and it's a highly differentiated solution. It's the smallest size battery with 3 phase capability. In addition, that battery is going to have phenomenal round trip efficiency because we are innovating on turning off the unused microinverters when the consumption of the user is pretty low. That enhances the efficiency and avoids waste. So round trip efficiency is going to be better than competition.

Speaker 2

So that battery is going to open up a nice stamp in Germany, Austria and Switzerland, where there are large homes and 3 phase backup. Backup by the way is simply an emotional requirement. They really do not have outages, but it is a requirement because people are worried because of incidents like Ukraine. So additionally, we are launching Balcony Solar into Germany in Q3 and the IQ Balcony Solar product that we introduced at inter solar in June, that was the hit of our show. That's what we consider the hit of our show because that one is a beautiful product.

Speaker 2

It produces there are 2 panels and this balcony gateway basically connects to those 2 panels and then you're allowed to export up to 800 watts into the wall socket in Germany. And people can even add they can go from 2 to 4 panels till only exporting 800 watts, but there is an auxiliary socket on the balcony gateway where you can plug in additional loads and make use of the extra solar. Furthermore, if there is a backup, meaning if there is a power outage, there is a relay in the gateway that will automatically open and disconnect the connection to the wall socket, but still maintains powering the appliance connected into the auxiliary socket. So sunlight backup is available for ultra low cost there. So we expect Balkyali Solar that's a TAM of 400 megawatts.

Speaker 2

We expecting 400 Megawatts just in Germany. We expect to replicate that solution everywhere into Europe. So that's what we introduced at Intrado Solar. Of course, our EV charger, I talked about We are going to introduce our EV charger in all the countries there. And then I made a statement in my prepared remarks that we are strong in France, we are strong in Netherlands, we are strong in Germany, we are still underpenetrated in UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden and more.

Speaker 2

And we plan to introduce our entire product portfolio, same things I talked about, microinverters, batteries, EV chargers, energy management software, balcony solar and solar graph. And what do homeowners want? They want the same thing. They want safety, no high voltage DC. They want high quality system to work.

Speaker 2

They want savings because they have these dynamic rates and they want an all in one experience, all in one app. They don't want one thing from one supplier, one thing from another supplier and it doesn't work for them. They don't want to go to 2 apps, 3 apps. No, They want to do an all in one app. So, a lot of new products are coming.

Speaker 2

Many of them are some of them will be available in Q3, some of them will be available in Q4. But like what I said, they are all going to propel us in the right direction.

Operator

And our next question will come from Colin Rusch with Oppenheimer. Please go ahead.

Speaker 10

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

Speaker 2

Yes. I mean, we usually don't break out the regions, but I will tell you, we expect Europe is a little bit seasonal. So I think maybe a little down to flat in Europe, but the growth a lot of the growth is coming from U. S. And a lot of growth in California on batteries.

Speaker 2

And Colin, your second question?

Speaker 10

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

Speaker 2

Right. In Q9, actually I can talk about IQ9. Yes, IQ9, we are working very hard on IQ9. IQ9 is going to be GaN based. And GaN is a very interesting technology.

Speaker 2

It allows us to offer higher power for the same cost structure. So what will we offer? What will Enphase offer for IQ 9? We are going to our first product will be focused on the commercial market where today we do not play which is the 480 volt small commercial market. So we will introduce a 4 27 watt product for the small commercial market 3 phase.

Speaker 2

It will have an outstanding cost structure. We are the key innovation in GaN is instead of 4 silicon FETs that we have, we will have 2 bidirectional GaN switches. So that is how you save cost. Another way you save cost is if you run those switches at high frequency even double the frequency, 100 kilohertz becomes 200 kilohertz or 300 kilohertz, there is opportunity to drop the main transformer size big and therefore the cost structure big. So our internal goals are to make the cost on an absolute basis for this product the same as IQ8, which means cost per watt will be automatically much lower.

Speaker 2

And on the heels of the 4 27 watts, we will also offer a 548 watts that will be for emerging markets as well as for some places in Europe and that will be available for both the residential as well as commercial customers. So a lot of plans, we expect to have the 1st IQ9 into market in 2025.

Speaker 9

Great product market fit, right? I mean, you asked that question. We are seeing that the module power is continuing to go up. And so our plans, in fact, we have the platform already developed that can address for the foreseeable future any increase in power and uniquely benefits Enphase. Because as the power continues to go up, you can build that same system with fewer number of modules.

Speaker 9

You don't need if you are doing it with 20 modules before, now you can do it with 18 modules, right? As opposed to a big box inverter, doesn't matter. 7 kilowatt inverter is a 7 kilowatt inverter. So we have some unique benefits when it comes to the direction in which the modules are going. And we have the platform now both with in fact with IQ8 and getting better with IQ9 to address any increase in module power.

Operator

And our next question will come from James West with Evercore ISI. Please go ahead.

Speaker 11

Good afternoon, Badri. A quick question about the countries that you've highlighted where you're underpenetrating in Europe. What is the strategy to increase penetration? Is that the new products? Is it adding more sales, installers?

Speaker 11

That's the first question. The second question is around the commercial products business and kind of what you see as the output there?

Speaker 2

Yes. It's quite simple. It is to introduce new products systematically into all of those regions which we are. We are following it up like for example every region almost every region has IQ8 microinverters today. Some of the regions will need 3 phase batteries and even single phase batteries with backup that will be available by the end of the year.

Speaker 2

And then IQEV chargers, what I told you similarly will be available again in Q4. We are steadily releasing the Solar Graph platform in all of the to make sure we have a lot of revenue coverage there in those countries. And SolarCraft platform helps us to enhance the value proposition that the installer can provide the homeowner at the kitchen table. Last bit is the IQ Energy Management Software. So places where there are dynamic electricity rates, there are that many now, Germany, Sweden, Norway, Netherlands, those are the 4, but I'm sure that that's a phenomenon that will come and every region will have its own thing there, time of use or an M3 type tariff or a dynamic tariff and even imbalance in some countries and how we can help in imbalance which are much more instead of a day instead of us getting day ahead tariff, we may be getting information a few minutes ahead.

Speaker 2

So we are getting ready for all of that, but the short answer is more sales, more FAE coverage, great customer service 20 fourseven and making sure all our products are available there and handholding the installers, training them well is something that we do. And we need to continue to do that for all of these regions. So I don't expect a step function, but I expect steady growth as we introduce products over the years.

Operator

And our next question will come from Julien Dumoulin Smith with Jefferies. Please go ahead.

Speaker 3

Good morning, guys. Thank you very much. Appreciate the time. Yes, could you guys hear me hopefully? Thank you very much.

Speaker 3

Just wanted to kick off here. First, just expectations on SunPower in Q3 here. Just wanted to make sure and confirm that it's been adjusted for kind of expectations on whatever happens there. And then maybe just more holistically, as you think about that Q4, I know you're providing Q3 guide here, but how do you think about the domestic contents? You talked about the value proposition being split, but how do you think about that impacting sort of more of a step function recovery in the resi market here?

Speaker 3

I mean, clearly we've seen a little bit of a drag out in backlog adds in California for instance. I mean, how do you think about that adding to overall volumetric health as we close out the year with that additional

Speaker 2

10%? Yes, thank you. So first one with respect to SunPower, we would not going to comment on customer specifics here. But as usual, what we do is when we give you guidance, we always take risks everywhere in the world globally and we have exactly done that in the guidance that we gave you. That's one.

Speaker 2

On the domestic content, again, it is early to tell, but we like what we are seeing. We believe we'll start to see some output of the domestic content in Q4 that will be positive hopefully for the industry because it is a large incentive and that incentive can be used to propel demand to improve economics for the PPA providers, improve economics for the industry, making sure installers also their situation get robust. So I think it will benefit everybody in some way or the other. We are happy to provide those solutions. And we are our products right now, we basically said certain select products that we have today combined with racking qualify even today for domestic content.

Speaker 2

We are making that better by increasing our content, which is manufacturing enclosures for microinverters and getting that ready in the Q4. So once that is in play, then we will be able to increase the percentage of domestic content available there And we'll be able to service customers better. But I'm very excited by it. I think this along with potentially the Fed rates has got the potential to propel the market significantly in Q4.

Operator

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

Speaker 12

Hey, thanks for sneaking me in here at the end. Just curious, you mentioned that 60% of your installs were NEM III. I mean, just curious how long you think it takes? I know it's dragged on for some time. How long until you think you're through NEM II?

Speaker 12

And then just thinking about the high attach rates, what do you think any way to ballpark where your energy storage volumes may be when that time comes?

Speaker 2

Yes. I mean just if history were to tell you something, I think last time I told you approximately 50% 3 months ago. So right now it is 60%, six-zero. So I don't know the answer. Maybe another 2, 3 quarters is when NEM2 will eventually go.

Speaker 2

And yes, I mean, I think the Raghu talked about grid tied batteries. They provide the right economics. The bill offset if you have 15 kilowatt hour battery improves from something like 55 to 70. If you have 2 5 kilowatt hour batteries, it can go from it can go to 85% to 90%. So the sweet spot is 2, 5 kilowatt hour batteries.

Speaker 2

And that's for people who choose grid type. Now there are people who choose backup too. So what we talked about earlier. So we do expect full conversion to NEM III to drive the battery attach. There is still mathematically if you see only 60% is converted.

Speaker 2

Now, of course, many things plays into this like the health of the installers, etcetera. So I cannot guide a number, but I think we are quite positive because first of all, our revenue, through revenue in California has stabilized compared to 21. In fact, it was up, I said, by 7% from Q1 to Q2. And I gave you the split up, which means microinverters were flat and battery was up by, I think I said, 14%. So it is generally good news, but it is 1 quarter.

Speaker 2

We have to be cautious. We remain optimistic that this is going to drive our battery growth, battery business significantly.

Operator

And our next question will come from Jordan Levy with Truist Securities. Please go ahead.

Speaker 11

Good afternoon. I appreciate you all squeezing me in here. Maybe just a quick one for me. I appreciate all the details you all have continued to provide on U. S.

Speaker 11

Manufacturing and your outlook there. Just wanted to get your thoughts. Obviously, a lot going on, on the geopolitical front, the upcoming election, both here in the U. S. And in Europe.

Speaker 11

I just wanted to see how you're thinking about the risks there from maybe an IRA perspective and then over in Europe?

Speaker 9

We think that of course we don't control what happens there, right. So but we feel like we have a very sound business. Our value proposition of a product is very electionant and the business stands alone independent of these incentives. So what now specifically talking about the IRA, obviously we have brought high technology manufacturing back to the U. S.

Speaker 9

And we are doing more of that now. We are creating jobs, we are making investments. And this we believe is something that is expected to be supported regardless of who is in the government. So we think we are doing all the right things. We share with you things like gross margin with and without the IRA.

Speaker 9

So we're giving you a lot of details about our business regardless of incentives. So I think what happens, the outcome remains to be seen. It's not in our control, but we are I think we have done all the right things.

Speaker 11

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

Speaker 2

Yes. I mean those are reflective of the number of countries we are entering and the training that we are providing, we have a very active training department worldwide and we have an Enphase University. Of course, we battery installations aren't simple, although the grid tied installations are getting there. So it does need some training and we have a lot of installers getting trained both in the Europe and in the U. S.

Speaker 2

The IQ Battery 5B is a good product. It solved some of the earlier deficiencies that we had in terms of low power and wireless connectivity, etcetera, all of those are fixed. So it's being well received globally, not just the U. S. And now we are following it up with the 3 phase battery to address the market.

Speaker 2

So that's what you're seeing. You're seeing that's our strength in our training, not just big installers, focusing on all the installers. Like for example, when I was in Austria and Switzerland about a month ago, in Switzerland, I met about 7 installers in a couple of days. And these are anywhere from 1 to 5 megawatts. Those are our installers.

Speaker 2

We celebrate them. We make sure that we provide them with the correct guidance. We're not perfect many times. There are problems, but once we know we solve the problems quickly. I think what you're

Speaker 9

seeing is this transformation from solar to energy. And I think you should expect this trend to continue. We have talked about it, but now it's really turning into a reality where if you look at number of markets have made this transition from solar to solar plus battery plus EV charger plus heat pump. And so you can see how our products are aligning with that transformation. We are doing everything from continuing on our inverter side going IQ8 to IQ9 to match module power increases.

Speaker 9

You're looking what we are doing on our battery with 5P battery and then the next generation 10 kilowatt hour battery, introducing the 3 phase battery for backup, introducing EV chargers, introducing all of the software. So you're seeing that the trainings that we now need to do to get people more comfortable with selling systems is also on the increase. And all of this is good for us because this is what our DNA is, building hardware software systems, building software systems that are software defined. And this is a unique advantage for us.

Operator

And our next question will come from Christine Cho with Barclays. Please go ahead.

Speaker 7

Thank you for taking firstly squeezing me in. In California, I think you said your customers who are getting your inverters are attaching your battery 50% of the time. Is this that different in California versus the rest of the U. S? I think you said 70% of your batteries are grid tied and is great for NEM 3.0, the rate arbitrage.

Speaker 7

But outside California, I would think batteries are primarily used for backup and not for rate arbitrage. So curious if you find that your market share for batteries is higher in California versus rest of U. S?

Speaker 2

You're correct that outside the U. S. Batteries are used for backup. But there are some places in the U. S.

Speaker 2

Where there are a lot of grid services, where you do have a lot of incentives simply for using the battery and helping the grid out, especially during summer. And Massachusetts is an example, the Duke Power Repair program is an example. So you're generally right though. In the NEM world, a battery the grid is the battery. Therefore, when people add a battery, they really need it for some kind of security, emotional security.

Speaker 2

That's why it is with backup for most places in the U. S. In California, it is a function of rates. It's not NEM any longer, it's NEM3. And therefore, there it makes sense.

Speaker 2

It's a pure economics game there in California. And so grid tied batteries make a lot of sense there. Market share, coming to the market share, I don't know the answer to that, but I would say the market share between outside California as well as in California, probably equivalent.

Speaker 7

Okay. And then I know you gave your sell through numbers quarter over quarter, but would we be able to get your sell through for storage in megawatt hours for 2Q? And I know that you said the channel is clear in general, but would you say that the weeks of inventory for batteries is also currently your standard 8 to 10 weeks?

Speaker 2

Well, the batteries have an opposite problem. I'm very tight on batteries. And I can tell you that the weeks on hand in the U. S. Is less than 8 weeks.

Speaker 2

And that's a good problem for us to have. We do need to make sure the installers have enough inventory. We're always going to stay in the guardrail of 8 to 10 weeks in general. That's where we'd like to get to, but the batteries are very tight right now in the channel, meaning the channel is, I would say, short of batteries.

Operator

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

Speaker 13

Thanks. Just, two quick questions on domestic content here. First, you mentioned that the domestic content uplift with lease PPA providers will mostly come in Q4. There's no benefit included in the Q3 guidance. But your inverters qualify today, assuming you use domestic racking.

Speaker 13

So I guess the first question is, could we see any benefit in Q3 or maybe the tail end of Q3? And then secondly, SolarEdge's inverter is also on track to be qualifying in Q4. So to the extent you do pick up any market share gains in Q3 or Q4 tied to domestic content with some of the larger lease PPA providers. Do you think those gains will sustain into 2025?

Speaker 2

Yes. Number one question first question is right now our guidance doesn't comprehend any domestic content for Q3. But you're right, it could be that some of them may use what is already available. I don't know. But our guidance doesn't comprehend that yet.

Speaker 2

For Q4, yes, all of our competitors will probably come with their own domestic content. So we need to continue to offer right value to our customers. And for us, the way we see it is MLPE, we have the opportunity to climb up in domestic content quite a bit by making sure our enclosures are also made in the U. S. And so that can take us to a good number where you only need less percentage from racking or elsewhere.

Speaker 2

So we're focused on getting that out by the end of Q3 and early Q4. And then we expect the demand to go up there.

Operator

And our next question will come from Kashy Harrison with Piper Sandler. Please go ahead. Good evening, everybody,

Speaker 3

and thanks for taking the questions. Badri, just maybe following up on your commentary that the global channel is normal in 2Q. You flagged at a prior question that batteries are less than 8 weeks. And so I was just wondering if you could help us think through, are there any other notable geographic differences between U. S.

Speaker 3

And micros for sorry, U. S. And Europe for micros and storage that we should be thinking through, just trying to understand the health of the

Speaker 11

channel by product, by geography?

Speaker 2

Yes, I mean, look, I gave you a global number. Our global number is healthy. That's what I gave you. Of course, there is if I start giving you country by country, there will be some variability. I also mentioned that the batteries is a good problem that we are trying to fix, which means I mean, it's not a good problem for customers.

Speaker 2

It is we got to fix it to make sure that the channel has enough inventory. But we are focused on that 8 to 10 weeks. Some regions might have close to 8 weeks, some regions might have close to 10 weeks and we are focused on that range. We will never allow that to exceed that range. We We have statistical process controls in place where we talk about it and we actually will not support the channel.

Speaker 2

So like what I said, we've normalized the channel on a global basis and we plan to keep it that way. That's why we going forward, we will not be talking about self.

Operator

And our next question will come from Dylan Asano with Wolfe Research. Please go ahead.

Speaker 10

Hey, good afternoon. Just on the Q2 bookings being the healthiest they've been in over a year, can you say how much higher that 85% is compared to last quarter or last year? And do you feel like your visibility into forward demand has improved at all as channels cleared?

Speaker 2

We don't really give numbers there, but we are talking about Q3 bookings, not Q2. Q3 bookings are over 85% and that's a healthy number and that too after considering some puts and takes and considering the risks, number is a good number. We do not have the visibility for Q4 right now because our lead time is of the order of 8 weeks. So by definition distributors will only book within that lead time.

Operator

And our next question will come from Amit Thakkar with BMO Capital Markets. Go ahead.

Speaker 1

Hi, good afternoon. I just had one quick question on kind of just thinking about the balance sheet longer term. You guys have like I think $730,000,000 of convertible debt that will come to you kind of call it over the next 20 months. You obviously have a very advantageous liquidity position.

Speaker 2

Can you just talk to

Speaker 1

us a little bit about how you think about the balance sheet longer term? You're buying back shares now. I mean, in terms of kind of would you just plan on kind of delevering the business or are you thinking about maybe accessing the traditional corporate bond market or

Speaker 2

some bank debt? Thanks. Yes. I mean, look, obviously, our first priority is to take into account the needs of the business, invest in the right things. If we need anything like the domestic content factory investment, we will do that.

Speaker 2

And second one, which we are actively looking is, are there any new verticals and M and A areas that we can get inorganically in software, in power conversion, even in battery. We're always looking at that. So and the third is if we find 12 are static meaning we don't have many opportunities or we have done what we can and then we repurchase shares as long as the share price is below a conservatively estimated income. And we have done that exactly. In the last few quarters, we have done systematically, we've taken out we have bought back our shares $100,000,000 per quarter.

Speaker 2

And like what Mandy said, she her team is excellent at free cash flow even in a tight macroeconomic situation. Our free cash flow is $117,000,000 and we manage cash well. It's important for us. We'll continue to look at these three things I said and we'll make decisions along with our Board on a quarterly basis. Samantha, do you want to add something?

Speaker 4

Yes. In terms of debt maturities, right, we only have about $102,000,000 of principal amount due March next year and that we could easily pay off out of our own cash, right. The 2026 convert that is $632,000,000 still 20 months away. So we have a lot of optionality there a year from now, right, whether we pay off or partially refinance, right, the current rate environment, we are not going to do anything earlier than that.

Operator

And our next question will come from Jonathan Kees with Daiwa Capital Markets. Please go ahead.

Speaker 14

Great. Thanks for working me in. Great to meet you at our Smart Saves. I wanted to ask two things, 1 is a hard number and second is more housekeeping. Arvind, if you can help me understand,

Speaker 1

you're bullish in terms of

Speaker 14

your prospects. You're quite encouraged in terms of your markets where you talk about fairs, ceremonies, Netherlands and then the other countries that are very public. I guess I'm kind of tie my thing with you have a peer in Europe who brought down the numbers for the year and started a reduction in demand, specifically for residential and for commercial and industrial utilities was fine. And this is back in June. And then your MLPE peer

Speaker 3

a couple

Speaker 14

of months back had said things are still looking kind of gloomy in Europe. And yes, they just announced another force reduction that's unfortunate for their staff or employees there. So if you can I know these are peers, but I guess I'm trying to tie in your outlook there, your bullish outlook with what's happening with these data points? Does the market just take off? And in terms of the last couple of months, did it really improve?

Speaker 14

Was this like a hockey stick? It it just took off there or are you just doing something different from everybody else?

Speaker 2

No, I think the key is you need to understand in Europe every country, the dynamic. And for us like what I said, I probably said it 5 times already in the call. We are under penetrated in Europe. We are very strong in Netherlands, strong in France, strong in Germany. I gave detailed color on those markets.

Speaker 2

We're managing inventory well with our distributors and installers. We have a lot of opportunities in other countries where we are not where we are under penetrated and we are introducing new products there. So for us, it's we are still into learning about Europe and penetrating into Europe. So we have a lot more market left like for example, we just introduced our balcony solar for Germany and installers love that because they didn't have access to a high quality solution like that. Now they have access and we can take that to the country.

Speaker 2

The 3 phase battery, for example, same deal. The IQ EV charger, if you see, I was like what I said, when I went to Switzerland and Austria, actually Switzerland, very interesting. They are willing to pay a very high price for their EV charger. And they just want deep integration smart EV charger, integrate that with solar plus storage, plus EV charger with software and managed heat pumps. We need to get better at all of that, but that's the opportunity for us and every market is unique.

Speaker 2

We have to be our strength is to work with long tail installer. We are not in the utility scale. Unlike some of the news that you heard, we are not yet in large scale commercial. We are scratching the surface on small commercial, but we are firmly implanted on the residential side. On the residential side, our strengths are supporting all of the installers managing inventory tightly, helping our distribution partners and growing cities.

Speaker 2

That's why our sell through in Europe, we talked about sell through was up 3% from Q1 to Q2. Netherlands was down 15%, but France was flat, Germany was up 7% and you had a bunch of growing countries, which weren't present before. So long answer, but we are very optimistic there about all of these countries and our plans to introduce robust solutions to each other.

Operator

And our next question will come from Maheep Mandeboye with Mizuho. Please go ahead.

Speaker 15

Hi, this is David Benjamin in for Maheep. I've got a quick question. Thanks for squeezing me in. I was wondering if you could clarify the timing on IQ9. Is that a first half or second half launch?

Speaker 15

And then on Europe, we were hearing about 5% to 10% decline in pricing in Europe. I was wondering if you had any comments on the pricing competition there in Europe.

Speaker 2

Yes. I mean, on IQ9, we think it will be in the second half of the year and not too much beyond Q2 though. That's what we think. And then on the other one pricing comment, no, we are not planning to do. We don't have any plans today to change our pricing.

Operator

And our next question will come from Dimple Gossai with Bank of America. Please go ahead.

Speaker 16

Thank you. Appreciate you taking the time. Can we just elaborate on that, please? I think on the last call, Badri, I think you guys spoke about being open to price concessions if needed. And I think the market from what we're hearing from our peers is becoming increasingly promotional.

Speaker 16

So just how your strategy might differ between the 2 markets, U. S. And Europe on ASP strategy? Yes.

Speaker 2

I mean, look, we have done the same thing for 6 years or 7 years. Our strategy is no different. We have something called we do have special pricing adjustments based upon installers, their volume, value that we provide. So there isn't anything extraordinary we are planning to do. At the end of the day, Enphase products need to add value compared to the next best alternate.

Speaker 2

And we are focused on that. The moment we feel we don't add value, we will take the appropriate action. But at this point in time, there is nothing very different going on between the U. S. And Europe.

Speaker 2

The pricing situation is relatively stable in my opinion.

Operator

And our next question will come from Austin Mueller with Canaccord Genuity. Go ahead.

Speaker 10

Hi, it's Andrew Steinhardt on for Austin. Thanks for squeezing me in. Two part question. I'm sorry if I missed this on the first part. Is the U.

Speaker 10

S. Battery facility on target to be up and running in Q3 in line with previous guidance? And then second, the Q3 net IRA benefit guide of $30,000,000 to $33,000,000 include the forecasted sales for the IQ8P commercial inverters in the U. S. And the new U.

Speaker 10

S. Battery manufacturing facilities operation? Thank you.

Speaker 2

Yes. To answer, we are a little late on the battery manufacturing. We only expect it to begin in Q4 and that is because we are doing we are changing our approach on due to the domestic content guidance from the treasury, there are a few more things we have to manufacture in the U. S. We're already going to do power conversion, battery management in the U.

Speaker 2

S. We need to pull in the enclosure in the chassis also, which we are working on. So that's going to take us to the Q4. And with regarding your question on the $30,000,000 to $33,000,000 yes, it includes IQV-eight fee, true. And it does not include I mean, it does include the microinverters for the batteries as well.

Operator

And our next question will come from Graham Price with Raymond James. Please go ahead. Hi, good afternoon. Just one quick one for me on the Netherlands. Sell through was down 15% quarter over quarter.

Operator

You mentioned Europe overall was up 3%. So just wondering what impact does the slowdown in the Netherlands have on your normalized overall EU revenue?

Speaker 2

You're seeing it already. This is the impact it is having. Our Europe numbers were flat from Q1 to Q2 and sell through was only up by 3%, but there is an opportunity here. While Q3 will still be seasonally weak, there is an opportunity to turn Netherlands into having a very high battery attach. That is what we are working on.

Speaker 2

We do have several 100,000 homes in Netherlands as an installed base and we just introduced Solar Graph software platform. We're going to be working with installers to help them sell this to consumers better at the kitchen table, because right now consumers are little spooked on the exact regulatory uncertainty. They don't know when NIM is going to go. They're worried about penalties from the energy providers. We can take care of penalties by doing intelligent things like with the IQ Software, IQ Energy Management.

Speaker 2

For example, you'll find this in our investor deck now, but when you let's say, for example, when there is excess energy that the grid has and it doesn't need any more solar. It can provide an intelligent signal or a day ahead tariff that's called as negative tariff. Negative tariff means that you don't produce PV. You actually are paid to consume and charge your battery. You're paid to consume power.

Speaker 2

You don't export PV, you cut tail PV. And business models like that are going to come. Many of the utilities would want some of that capability because many times they are losing several 1,000,000 of dollars dealing with this imbalance. And we do have a unique opportunity to assist there because we have a nice installed base. We can add a 5 kilowatt hour battery and we can assist there.

Speaker 2

So I think Netherlands will it might remain weak for some time, but I clearly see good potential, actually enormous potential for batteries in that market. And I talked about other regions as well. And we have several new products for the region, the IQ EV charger, balcony solar, 3 phase battery, solar graph everywhere. So we're going to be introducing a lot of products into Europe.

Operator

And our next question will come from Tom Curran with Seaport Partners. Please go ahead.

Speaker 6

Thank you. Bajir or Raghu, are

Speaker 1

you still expecting to hit the battery gross margin target of 35% at some point in the second half here, so let's say before calendar 2024 end? And then my second question, sticking with batteries California under NEM III, when it comes to the 50% of your NEM III systems that are attaching a rivals battery, I think we've been assuming that's mainly been Tesla, Powerwall 3, with maybe a smattering of SolarEdge's home battery and then Franklin's Franklin Home Power Systems in there. But has there been any interesting changes in that 50%? And how is your strategy evolving for trying to capture a higher portion of that?

Speaker 2

Yes. I think we talked about it, but let me clarify. Gross margin on batteries is we don't really break gross margin between batteries and inverters. But our battery margins are doing healthy. Cell pack pricing is coming down rapidly.

Speaker 2

Our serviceability is increasing. That means service costs, warranty costs are going down. Then we will we have some benefit from the IRA that we make microinverters for the batteries in the U. S. So those 3 contribute to a very good GM, improving GM on the battery sequentially quarter over quarter.

Speaker 2

And then we do have architecturally 4th generation battery where we are cutting down the form factor by doing some deep integration of battery management and power conversion. And we are cutting the number of boards on that from the 3rd generation to the 4th generation significantly. And so that one also helps us architecturally. So that will continuously improve our gross margin. And then to answer the other question on we cannot name who is the other 50%, but that 50 percent attached for Enphase to NEM-three Solar Systems has remained steady, like what I report in the last 2 or 3 quarters.

Speaker 2

It's been steady and I cannot confirm the rival names. I can say one thing, our plan is to we talked about our plans today. We are 70% over 70% of those installations are grid type. And we are going to be introducing brand new battery, meter collar and an enhanced system controller. The battery will be 10 kilowatt hours.

Speaker 2

So that means the modularity will be 10 kilowatt hours and not 5. Also the battery will have a neutral in it, which means that we are eliminating the system controller in fewer boxes and we are enhancing the combiner to have a lot of bells and whistles. So the installer feedback is taken and they can connect even EV chargers. It's just enhanced functionality there. So I think we are well on our way there.

Speaker 2

We expect to introduce our 4th generation system, which is the battery, the collar, enhanced combiner in the Q1 of 2025 and we expect that to do well.

Operator

And this will conclude our question and answer session. I'd like to turn the conference back over to Badri Kusandaraman for any closing remarks.

Speaker 2

Yes. 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 for attending today's presentation. You may now disconnect your lines at this time.

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Key Takeaways

  • Enphase reported Q2 revenue of $303.5 M with a 47% non-GAAP gross margin, shipping ~1.4 M microinverters and 120 MWh of batteries, and generated $117.4 M in free cash flow.
  • Channel inventories normalised by quarter-end, global end-market demand rose 5% in Q2, and Q3 bookings are over 85% of guidance underpinning revenue guidance of $370 M–$410 M.
  • U.S. microinverter production is ramping to maximise IRA tax credits, and U.S. battery manufacturing will begin in Q4 to qualify for the 10% domestic content ITC bonus.
  • In California, 60% of installations are on NEM 3 with >90% battery attach rates and ~1.5× higher revenue per system, while Europe saw flat-to-modest growth with targeted expansion in the Netherlands, France and Germany.
  • Ahead of 2025, Enphase plans to launch 4th-gen IQ Batteries, IQ 9 GaN microinverters, new EV chargers and enhanced AI-driven software (Solar Graph and Energy Management) to capture emerging residential and small-commercial markets.
A.I. generated. May contain errors.
Earnings Conference Call
Enphase Energy Q2 2024
00:00 / 00:00