Enphase Energy Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2022

There are 16 speakers on the call.

Operator

Thank you for standing by, and welcome to the Enphase Energy's First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Karen Tiggett, please go ahead.

Speaker 1

Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's Q1 2022 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer Mandy Yang, Chief Financial Officer and Raghubalur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q1 ended March 31, 2022. 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 current and future technology and products and the benefits to homeowners and installers our operations, including manufacturing, customer service and supply and demand and the anticipated growth in the market and in our sales and regulatory 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 annual report on Form 10 ks for the year ended December 31, 2021, on file with the SEC and our quarterly report form on 10 Q for for the quarter ended March 31, 2022, which will be filed with the SEC in the Q2 of 2022. We caution you not to place any undue reliance on forward and undertake no duty or obligation to update any forward looking statements as a result of new information, future events or changes in expectations. Also please note that financial measures used on this call are expressed on a non GAAP basis unless otherwise noted and has 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 posted today, which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Pathandaraman, President and Chief Executive Officer of Enphase Energy.

Speaker 1

Audrey?

Speaker 2

Good afternoon and thank you for joining us today to discuss our Q1 2022 financial results. We had a good quarter. We reported record quarterly revenue of $41,300,000 achieved non GAAP gross margin of 41% and generated free cash flow of $90,100,000 We ramped IQ8 microinverters in the Q1 and started piloting IQ8 D microinverters to small commercial customers. We exited The Q1 at approximately 41.15.26. This means 41% gross margin, 15% operating expenses and 26% operating income, all as a percentage of revenue on a non GAAP basis.

Speaker 2

As a reminder, Our baseline financial model is 35, 15, 20. We will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Q1 Net Promoter Score worldwide was 68% compared to 69% in Q4 and our North American Net Promoter Score was 74% compared to 73% in Q4. Our average call wait time decreased to 3.2 minutes in Q1 compared to 8.9 minutes in Q4.

Speaker 2

We reduced call wait times through staffing and training. During Q1, we added field service technicians in the U. S. And Europe to provide on-site help to our installers, particularly for batteries. Let's talk about microinverter manufacturing.

Speaker 2

As we have discussed in the past calls, the global supply chain situation is still under stress, but our situation is stable due to supplier management and qualification of alternate suppliers. With The growing demand for our microinverters, we remain vigilant regarding the global supply chain and logistics challenges due to COVID disruption. I'm very proud of our teams who have worked hard to manage this difficult situation. Currently, our quarterly capacity across all contract manufacturing facilities is a little more than 5,000,000 microinverters. Mexico has a quarterly capacity of 2,250,000 microinverters, India with Cell Comp has 1,500,000 and the rest is in China.

Speaker 2

To support the increased demand and to improve delivery times to customers in Europe, we are adding an automated line at Flex's factory in Romania. This line will have quarterly capacity of approximately 750,000 microinverters starting in Q1 of 2023 and will enable a global capacity of nearly 6,000,000 microinverters per quarter. Let's now talk about batteries. Our two sources for battery cell packs currently have a total capacity of 180 megawatt hours per quarter. Our existing Cellpack suppliers can add more capacity if needed.

Speaker 2

We are also on track to add a third Cellpack supplier in the second half of this year. Our lead times for batteries are still long at about 14 to 16 weeks, primarily due to and global logistics challenges. The lead time should come down once shipping and port congestion conditions improve. Let's move on to the regions. U.

Speaker 2

S. And international revenue mix for Q1 was 84% 16%, respectively. In the U. S, Revenue increased 9% sequentially and 49% year on year. We are pleased to report record sell through for microinverters and record revenue for batteries in Q1.

Speaker 2

The channel inventory for both microinverters and batteries call. These were at a healthy level at the end of Q1. In Europe, revenue decreased 6% sequentially, while increasing 39% year on year. The sequential decrease was due to unforeseen shipment delays towards the end of Q1. Homeowners in Europe have a strong desire for energy independence.

Speaker 2

We recently teamed up with 1,5, with a German installer group to deliver microinverters and batteries to customers in Europe. We are currently shipping IQ batteries to Germany and Belgium and plan to introduce them in other European countries throughout 2022. Our batteries are now compatible with most call. We continue to see strong growth in our existing markets in Europe, including Netherlands, in France and Belgium and are also pleased with our growth in newer markets, including Italy, Spain and Portugal. We expect our momentum in Europe to continue with more than 40% sequential revenue growth expected in Q2 versus Q1.

Speaker 2

We are continuing to expand the team and are very excited about our growth in the region. In Latin America, revenue increased 13% sequentially and more than doubled year on year. We had steady growth in our solar plus storage business in Puerto Rico during the Q1. Now I'll provide some color on Australia, Brazil and India. In Australia, we expect to introduce IQ Batteries in the second half of twenty twenty two.

Speaker 2

We think regulatory changes designed to improve solar installation practices will favor our safe AC approach as grids and utilities require more intelligent and safer solutions. As for Brazil, we have started shipping IQ7 plus microinverters call for installers in Q1 and expect to ramp continuously. We also expect to introduce an IQ8D version into Brazil to optimize cost. In India, we are making steady progress in adding more installers into our network, ramping digital sales and planning to introduce IQ batteries in early 2023. Let's now discuss the overall bookings for Q2.

Speaker 2

Our overall customer demand for Q2 is quite robust for both microinverters and batteries and exceeds the higher end of our guidance range. The component availability is better than what we have experienced in the last 18 months, but there are still global challenges which are not specific to Enphase. We remain optimistic that the lead times will come down by the end of this year. Let's talk about batteries. We shipped 120.4 Megawatt Hours of IQ Batteries in the Q1, a 20% increase from Q4 of 2021.

Speaker 2

We are working diligently on improving commissioning and we are now seeing some significant

Speaker 3

changes in our inventory.

Speaker 2

While we have done various fixes to improve quality and homeowner experience of the battery, We are still not where we would like to be on commissioning and installation experience. We are doubling down on this in this quarter and expect to make good progress. Our goal remains to get the commissioning time down to an hour and ensure installers have a seamless experience. We expect to ship between 130 and 140 megawatt hours of batteries in Q2. Due to the increase in logistics and component costs Driven by inflation, we implemented a modest price increase on our batteries in March of 2022.

Speaker 2

Let's now discuss the installer training and certification on batteries. By the end of the Q1, we have certified will be more than 1300 installers in the U. S. On a cumulative basis. Our hands on storage training in the U.

Speaker 2

S. Uses mobile vans located in the East and West Coast along with regional training centers. We started with an Enphase YouTube channel in Q1 for training where installers can access videos to learn installation tips and tricks. Let's talk about new products. In Q1, we ramped shipments on IQ8 microinverters in North America and are receiving positive feedback about the product in general.

Speaker 2

As a reminder, IQ8's solar microinverters can form a microgrid during a power outage using only sunlight, providing backup power even without a battery. IQ8's grid forming technology eliminates traditional ratio requirements between solar system call. And with our sunlight jump start feature, IQ8 microinverters can start a home energy system call using sunlight only after prolonged grid outages that may result in a fully depleted battery. We also expect to introduce IQ8 microinverters internationally into Europe and Australia during the second half of this year. Let's talk about IQ8D microinverters for small commercial applications.

Speaker 2

We started piloting IQ8D 6 40 watt AC microinverters to select installers in North America during the Q1 and we expect production shipments in late Q2. The value proposition of IQAD is the ease of installation, high quality and rapid shutdown capability. On batteries, we plan to introduce our next new product IQ Battery 5P later this year. This battery will deliver twice the power of our current battery at lower manufacturing cost, enabling homeowners to start heavier loads. Also going forward, we will enhance our communication using control area network, which is a robust wired protocol for connectivity between the battery, the gateway and the system controller.

Speaker 2

We expect this to further streamline installations and simplify commissioning. Let's now discuss Clipper Creek, an acquisition which we completed in Q4 of 2021. The acquisition is performing in line with our expectations with reasonable gross margins and profitability in Q1. We're doing a few things to ramp the business. We are introducing EV chargers to our Solar distributors and installers this quarter.

Speaker 2

We are also on track to begin manufacturing AV chargers at our Flex facility in Mexico in the Q4 of this year. We believe this will help us scale better and drive down costs. As for new products, We expect to introduce a smart EV charger to customers in the U. S. And Europe in early 2023.

Speaker 2

This will provide connectivity to the cloud through Wi Fi as well as local connectivity into the Enphase Home Energy system. The increasing penetration of electric vehicles has significant implications for home energy management. The energy consumed by the home will significantly increase with an EV. This increase will drive adoption of more solar and storage, which will enable homeowners to save money and charge their vehicle in a green manner. The large EV battery could also be used for home backup call vehicle to home as well as helping the grid in the future call vehicle to grid.

Speaker 2

This acquisition plays extremely well to our strength in energy management, ultimately helping the homeowner manage solar, storage, EV and other home loads. We We are in discussions with a few EV makers to enable proof of concept for V2H and V2G features. Let me cover Grid Services. During the Q1, we announced that Vermont based utility, Green Mountain Power will offer Enphase Energy Systems to its customers in a cutting edge battery lease grid services pilot program. We have previously announced our participation in Connected Solutions covering 3 utilities in the Northeast U.

Speaker 2

S, Hawaiian Electric's Battery Bonus Grid Services Program and Arizona Public Services Residential Battery Grid Services Program. We also recently announced a partnership with Svel Energy to participate in VPP programs in California, New York and Hawaii. We also have many new grid services engagements in the pipeline and look forward to working with utilities and aggregators. Let's discuss the installer platform. We are working on SolarCraft Pro, a design and proposal tool with shading analysis, ability to detect obstructions on the roof and 3 d modeling of homes.

Speaker 2

Approximately 900 installers use with the Solar Graph tool today. We expect to launch the Solar Graph Pro, a higher advanced version of the product in Q2 and already have a few installers piloting the software. In addition, we plan to expand the availability of SolarGraf Pro internationally starting with Germany. In March of 2022, we acquired Solar Lead Factory, which provides high quality leads to solar installers in the U. S.

Speaker 2

Our objective is to substantially increase lead volumes and conversion rates to help drive down customer acquisition cost for installers. We plan to expand the team, optimize lead management

Speaker 4

and

Speaker 2

offer this service broadly to our installer network. We have made 4 acquisitions in the last 15 months to strengthen our installer platform in the areas of lead generation, on Solar Design Software, Permitting Services and O and M Software. In addition, we have robust and homegrown mobile apps for commissioning and monitoring of Solar and Storage Systems. We plan to integrate all of these seamlessly onto one platform and offer them to our installation network, simplifying their lives and reducing soft costs. Let me now give you a quick update on our Enphase installer network or EIN.

Speaker 2

We have now on boarded approximately 1200 installers to our EIN worldwide through highly selective process focused on installation quality and an exceptional experience to homeowners across the globe. Next, I'd like to comment on some recent policy issues that are impacting the U. S. Solar industry. As you're aware, the U.

Speaker 2

S. Department of Commerce is investigating the circumvention of antidumping and countervailing duties on some PV modules. This is a time of great change in the energy market. Utility costs are rising, climate change is happening, Geopolitical issues are driving energy security and EVs are taking off. At a time like this when there needs to be full The prices for homeowners and increased import from China, all of which are counter to the goals of the current administration.

Speaker 2

We are hoping that the current administration takes this problem seriously and resolves it rapidly well before the proposed August timeframe. As it relates to Enphase, our products aren't directly impacted by ADCVD as we don't make modules. But based on conversations with some of our partners, it is our opinion that the module supply for the residential segment will be less impacted than other segments. Many of our partners are currently working on securing module supply for the latter part of this year. Module pricing is expected to be higher in the interim and we think the residential segment may be able to absorb higher prices.

Speaker 2

All of this further underscores the importance of supporting domestic manufacturing through a production based The support of domestic manufacturing is well aligned with the administration's goals to promote renewables, increase U. S. Jobs, Reduce electricity pricing for homeowners and lessen the dependency on imports from China. We would like to see rapid resolution of both ADCVD as well as implementation of PTC as soon as possible. I would also now like to comment on the California NEM 3.0 proposed decision, RPD, which was announced in the December of 2021.

Speaker 2

We expect a modification to the current PD and an opportunity for stakeholders to participate and provide their feedback to the California PUC. We've been actively participating in the process and will continue to work diligently with various stakeholders to try and influence the best outcome. Let me wrap up. Full home electrification is slowly but surely coming. EVs are ramping up considerably for obvious reasons.

Speaker 2

So are heat pumps. Climate change coupled with situations like the Ukraine is forcing European countries and others to think hard about their reliance on oil, call and natural gas. Countries like Germany are leading the way in adopting renewable technologies such as and consumers want energy independence. There is no doubt that other countries will follow suit. It is just a matter of time.

Speaker 2

Our strategy is pretty simple. We create best in class solar plus storage home energy systems. We sell them to homeowners through our installation and distribution partners enabled by our installer platform. Our topmost core value is customer first and we are focused on providing a great experience to installers and homeowners. We are well placed to capitalize on the trend towards full home electrification and look forward to ramping our presence in Europe in a significant manner over the coming months years.

Speaker 2

With that, I will hand the call over to Mandy for her review of our financial results. Mandy?

Speaker 5

Thanks, Baji, and good afternoon, everyone. I will provide more details related to our Q1 of 2022 financial results as well as our business outlook for the Q2 of 2022. We have provided reconciliations of these non GAAP to GAAP financial results in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $441,300,000 representing an increase of 7% sequentially and a quarterly record. We shipped approximately 10 29 Megawatts DC of microinverters and 120.4 Megawatt hours of IQ Batteries in the quarter.

Speaker 5

Non GAAP gross margin for Q1 was 41.0 percent compared to 40.2% in Q4. The increase was driven by

Speaker 2

conference call.

Speaker 5

GAAP gross margin was 40.1% for Q1. Non GAAP operating expenses were $66,300,000 for Q1 compared to $68,200,000 for Q4. The decrease was driven by lower marketing expenses, offset by continued investment in R and D and customer service. Ship operating expenses were $115,100,000 for Q1 compared to $105,600,000 for Q4. GAAP operating expenses for Q1 included $45,300,000 of stock based compensation expenses and $3,600,000 of acquisition related expenses and amortization for acquired intangible assets.

Speaker 5

On a non GAAP basis, income from operations for Q1 was $114,500,000 compared to $97,700,000 for Q4. On a GAAP basis, income from operations was $61,800,000 for Q1 compared to $57,700,000 for Q4. On a non GAAP basis, Net income for Q1 was $109,700,000 compared to $102,800,000 for Q4. This resulted in non GAAP diluted earnings per share of $0.79 for Q1 compared to $0.73 for Q4. GAAP net income for Q1 was $51,800,000 compared to GAAP net income of $52,600,000 for Q4.

Speaker 5

This resulted in GAAP diluted earnings per share of $0.37 for both Q1 and Q4. We exited Q1 with a total cash, and marketable securities balance of approximately $1,100,000,000 compared to approximately $1,000,000,000 at the end of Q4. In Q1, we generated $102,400,000 in cash flow from operations and $90,100,000 in free cash flow. Capital expenditure was $12,400,000 for Q1 call increased manufacturing capacity as well as costs related to IT infrastructure, R and D equipment and international facilities. Now let's discuss our outlook for the Q2 of 2022.

Speaker 5

We expect our revenue for the Q2 of 2020 call to be within a range of $490,000,000 to $520,000,000 which includes shipments of 130 to 140 Megawatt Hours of IQ Batteries. We expect GAAP gross margin to be within a range of 37% to 40% and non GAAP gross margin to be within the range of 38% to 41%, which excludes stock based compensation expenses and acquisition related amortization. We expect our GAAP operating expenses to be within a range of of $127,500,000 to $130,500,000 including a total of approximately $57,000,000 estimated for stock based compensation expenses and acquisition related expenses and amortization. The estimated stock based compensation expenses include approximately $4,800,000 accrual for the earn out that are tied to certain performance targets to be paid in company stock for the acquisition. We expect our non GAAP operating expenses to be within a range of $70,500,000 to $73,500,000 With that, I will now open the line for questions.

Operator

Our first question comes from the line of Julien Dumoulin Smith from Bank of America. Your question please.

Speaker 3

Hi, good afternoon. Thank you so much team for the time. Congratulations on the continued results and performance here. If I can, just kicking it off here, can you talk a little bit more about the European expansion that you guys emphasized here a moment ago in the prepared remarks. Can you talk about what exactly you're doing to infiltrate those markets, if you will?

Speaker 3

You obviously talked a lot about training. How should we expect that to filter through in terms of operating expenses and especially against your model on OpEx? And then related to that, how should we expect that to filter through on top line as you think about your revenue mix here in Europe as well as gross margin impact.

Speaker 2

Right. So just quick on the background for Europe. In general, we are quite strong in Netherlands, France, Belgium And those businesses or those regions continue to grow pretty well on the solar side. The new regions, if we talk about actually are Germany, Italy, Spain and Portugal. So let me talk about Germany.

Speaker 2

Germany, extremely interesting market. The residential solar is well north of a gigawatt a year, maybe even up to 2 gigawatts a year right now on residential. Battery attach 80%. Most of our installers say For a given home, when they mean solar, they mean solar, battery, EV charger and the heat pump. So they are much more advanced, probably the most advanced, I would say, in terms of full home electrification.

Speaker 2

So there's an incredible opportunity there for us. And the companies that will do that will be successful are companies that can manage all of these resources, solar, storage, EVs and heat pumps. That's what we do. We make best in class home energy systems. Now with Clipper Creek, we have an EV charger.

Speaker 2

We are quite strong in solar and storage. And so we are working on expanding our sales force in Germany. We are working on Business Development, we are working with a lot of installers. We are ramping things there at a pretty nice clip. And our natural advantages are we do things with very high quality that Germans care about.

Speaker 2

We care a lot about customer experience, customer service. So that's on our side. So we are very optimistic about Germany. I was there. I was there late February to early March with our team and is really, really clear that the opportunity is big And now, when you compare to that, the next biggest is Netherlands.

Speaker 2

Netherlands It's primarily a solar market today, but storage is coming according to all of the installers and installers are all They like and face a lot, primarily due to the attributes I told you, quality, customer experience. If you go to Italy, Italy has been promoting the heck out of batteries. The eco bonus and the super bonus program, The super bonus almost says that the batteries are virtually free. And there we are going to participate with some of our partners. And these programs are will extend multiple years, may not be the super bonus, but at least the eco bonus will be there.

Speaker 2

So Spain, for example, we have a natural advantage because of small systems in Spain. Each country is a diverse each country needs to be understood well because you go from Germany, you have a 12 kilowatt, 13 kilowatts of PV, you go to campaign, which is probably 4 kilowatt 3 or 4 kilowatts of PV. So Each market is different, requires in-depth understanding. We are going to be there. We are going to have sales force in each region.

Speaker 2

We are tripling down on Europe in terms of spending. So there is No barriers there, and we are doing well. In fact, this quarter, the second quarter, We expect our revenue to be 40% higher than the Q1. And with regarding our OpEx, you should Continue to think of our OpEx as right at the baseline. We are very disciplined as a company.

Speaker 2

Our OpEx is Our baseline numbers, financial numbers are OpEx equals 15% of sales. That's the number that you need to be thinking about.

Speaker 3

Excellent. Thank you. Just super quick, if I can ask you to elaborate here as well. Just the 15 megawatt hour increase quarter over quarter on the battery side, Just what are you seeing on margins today? Do you feel comfortable, just given the macro that you elaborated on in the prepared remarks, especially relative to raw material inflation?

Speaker 3

I. E, do you think about price inflation again just to pass that along or how you think about the battery part of the mix both in terms of the trajectory and acceleration as well as the price points that you're entering at?

Speaker 2

We don't break out the individual products. We don't break out What is the gross margin on microinverters and what's the gross margin on batteries? But what we do is Our baseline gross margin is 35%. We never launch a product that does not have the capability to hit 35% And we are maniacal about costs. You see last quarter we guided 38% to 41%.

Speaker 2

We landed at 41%. So Regarding your specific question on raw materials, yes, sell pack Costs have been a little bit up because our suppliers are facing issues in their supply chain too. And we already said we are doing a modest Price increase effective March on batteries. So that will keep the gross margins in check. So, yes, we We are quite healthy in overall gross margin as of the company.

Speaker 3

Excellent. I'll leave it there. Thank you, guys. Best of luck. Congrats again.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from the line of Mark Strouse from JPMorgan. Your question please.

Speaker 7

Yes, good afternoon. Thank you very much for taking our questions. In the past, you have talked about how your order visibility into the coming quarter has either been in line or even I understand what you're saying about your supply chain being stable at the moment, but just given AD CBD lockdowns in China that are happening maybe in other areas of the value chain. Can you just talk about where your visibility into your 2Q guidance stands as of today?

Speaker 2

Yes. We got a lot of visibility into the Q2 and we got visibility into the Q3 in terms of backlog too. So, we only guide this quarter, meaning the Q2 and we are very comfortable with these numbers. Like what I said in the prepared remarks, our demand is quite not off the higher end of the guidance range. Regarding COVID shutdowns in general, we are also seeing some shutdowns in China, but our factories remain open.

Speaker 2

The shipping lines remain open. There are hiccups in raw materials getting into manufacturing in China from time to time, but we are managing it. The situation with regarding component availability is obviously much better than what it was Last year for us, we have made all of the necessary adjustments there. We have a number of suppliers for Each part, so we have learned how to mitigate our risks a lot. So I cannot predict what's going to happen tomorrow, but And I can say right now our situation is quite stable.

Speaker 7

Okay. Thank you. And then just a quick follow-up to Julian's question on Europe. So you mentioned the new markets you're entering into, you're obviously signing up new dealer partners. I mean, the 40% growth that you're talking about in 2Q, how should we think about that as far as Kind of market share gains versus just market expansion?

Speaker 2

I think it's both. I mean in places Like Netherlands, in Germany, I would say the market is growing so much. It's as part of market expansion. And of course, we do take market share because of our quality and customer experience. I can't quantify how much is each, but yes, I would say that It will be a healthy mix of both.

Speaker 2

Regarding new regions like Spain, etcetera, they come to us because of our quality. Even in Netherlands, we continue to gain market share because of our service and quality. In Germany, we do gain market share from some string inverters because of One is we do supply all the components. We can do both solar plus storage and we can manage the complete home energy system in the future. We can add an EV chargers.

Speaker 2

In the future, we are able to work with heat pumps as well. So they like our capability as energy management, home energy management And sometimes we get the nod because of that. So it's a multitude of both.

Speaker 7

Got it. Okay. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from on the line of Philip Shen from ROTH Capital Partners. Your question please.

Speaker 6

Hi, everyone. Thanks for taking my questions. Congrats on the strong quarter. As it relates to the lockdown in Shanghai, I was wondering if you could drill in a little bit deeper on the potential impact, if any, on the cell supply. And then as another follow-up on batteries, with rising battery chemistry costs, Can you talk through how much you can reduce your battery COGS ahead as you reduce the board count from 7 to 1 with the new chip.

Speaker 6

Can you keep margins flat, for example, without raising prices? Thanks.

Speaker 2

Yes. So as far as the cell supply is concerned, right now we have 2 sources of cell packs. Both of them are situated in China and we are adding a third CellPack supplier in the second half of the year. You talked about the lockdowns, I explained it. In terms of the lockdowns, our factories are still operating in China.

Speaker 2

Our shipping is still active. The batteries are generally on the board with a lot of weeks in advance. Now we are planning for a long cycle time 14 to 16 weeks. We We are able to absorb any minor disruptions. We don't see a big deal on the battery side.

Speaker 2

On the microinverter side, I was mentioning about Some of the connectors, some raw materials, we see some hiccups from time to time due to COVID disruption, But so far so good. Like I said, I cannot predict tomorrow, but so far it seems to be okay. On the battery costs, there are a couple of ways that we are working on battery costs. First is obviously call. The sell pack costs and for that we have multiple sources of sell pack and therefore we do All the standard price negotiation, but we are also sensitive to their increasing costs.

Speaker 2

And so there is limited things we D. Moriarty:] We can do in the timeframe, but there's a lot of things we can do partnering with them over the long term in terms of optimizing the battery pack. In terms of what we can do, is what I call as overhead, meaning you have the cell pack and then you want to convert that cell pack from DC to AC. This involves battery management, Our conversion and associated electronics. And that's where I think we can add a lot of value, which we are.

Speaker 2

So, first thing we are doing is the battery that's coming out in the second half goes to a slightly higher modularity, meaning instead of 3.3 kilowatt hours, we are going to 5 kilowatt hours, so we can amortize the overhead over the 5 kilowatt hours making the overhead less. And so, in addition, that battery has got double the continuous and peak power. So that's got the natural cost advantage due to the amortization, the higher modularity. In addition, it provides customers with and superior customer experience compared to our current generation battery. Then on top of that, we are going next year into our next What I call it the next generation battery where we are taking individual microinverters, the same microinverters that we use on the rooftop plus extra battery management circuitry plus a bunch of connector boards.

Speaker 2

We are taking overall 7 boards and collapse P. Vijay Kumar:] Bring them into 1, which is integrating the battery management plus power conversion into a big microinverter as well as Utilizing some advanced technologies and a unique architecture, which we call as a full bridge architecture. So That one will help us do a very high power microinverter and we basically will be able to cut the volume of the battery Almost by 40%, because everything is consolidated into a single board versus 7 boards. So the energy density of the batteries is going to be up almost by 50%. The volume is going to be cut by 40%, It's going to be much easier to install.

Speaker 2

And along with this deep integration comes cost reduction. So quite significant, we're not ready to quantify yet, but definite reduction in manufacturing cost for us. So, all of these initiatives basically blocking and tackling for the present going to the next generation battery for the second half sorry, going to the high power battery for the second half And the next generation battery for 2023 will continuously improve our gross margins and also enable us to Do the appropriate thing for customers in terms of price.

Speaker 6

Great. Thanks, Bajri. Next question here is on IQ8 versus from IQ7 starting this quarter in Q2, due in part I believe to some chip issues for the IQ7. Can you talk through that a bit and Also the mix of IQ8 and 7 by quarter this year? And then what exactly caused the IQ7 shortage?

Speaker 6

When do you expect it to get resolved, if at all? And does this possibly mean that there could be pent up demand later? Thanks.

Speaker 2

Yes. Just for the record, we never force customers. Customers have their own choices. They can make all these decisions. We are incredibly respectful of them.

Speaker 2

Sometimes If the problem is entirely ours, we will be able to give them the appropriate adjustments for the given timeframe. For some customers, the movement to IQ8, they wanted to be on the latest and greatest product and They negotiated for a good deal to transition faster and each customer there is a story, Each customer we is unique and we don't force anything wholesale on customers. That's 1. And then number 2, what caused the issue? IQ7 uses an ASIC And that ASIC is made in a foundry in Taiwan, Basically, in general, the foundries are on allocation.

Speaker 2

And so we basically were short of that ASIC. But the beautiful thing is IQ8 uses another foundry from another manufacturer and there is plenty of supply there. So basically, we were able to mix and match IQ7s and IQ8s and we're able to support customers and we were happy that we supported customers for some customers. We gave them some concessions for that quarter where it in your language it seems like we forced them, but in reality we didn't. Dan, in terms of the customer conversion, I've always said, It takes us 4 to 6 quarters to convert from 7s to 8s.

Speaker 2

In the Q1, Our total shipment of overall microinverters, 20% of them was IQ8. Call. This quote meaning Q1 I'm talking about. So and it's just math as I said. When you take 100% divided by 5, That's 20% a quarter.

Speaker 2

And so next quarter, we roughly expect that. Sometimes it may take 5, sometimes it may take 6, sometimes it may take 4, It depends. So North America, we expect that transition. For Europe, we are going to introduce IQ8 in the second half of twenty twenty two. And so that will come with its own transition there.

Speaker 2

So bottom line, IQV is going quite healthy.

Speaker 6

Great. Thanks. One very quick follow-up on EU. You already talked a lot about it, but wanted to see if there's potential for a new line beyond the one you've already talked about, which is 700 1,000 units per quarter by year end, when do you think you might make a decision on yet another line in Europe?

Speaker 2

I mean it's easy for us. Now we once we have Flextronics, great partner by the way, we have a great relationship. We started we are starting with an auto line that 750,000 units. And if we think we need more, it only takes us 3 months. We are now very experienced.

Speaker 2

We know all the puts and takes it takes to order an extra auto line. So if we need it, we'll pull the plug on ordering it. So we are not worried about that. What's interesting is and what's exciting is our demand in Europe. I mean, This quarter like what I said, I think we'll shift more than 40% compared to last quarter.

Speaker 2

And we are very excited about Germany, Netherlands like what I talked about.

Speaker 6

Great. Thank you so much.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Brian Lee from Goldman Sachs. We'd also like to remind our audience to please limit yourself to one question and one follow-up.

Speaker 8

Hey, guys. Thanks for taking the questions. And Balaji, just on the new battery, I was Curious, it sounds like it's going to be higher gross margin than the current battery product you're shipping into the market, But it also sounds like lower cost. So are you going to be in a position in 2023 when you're shipping the new battery to be more aggressive on price? So you're driving both volume upside as well as margins on the new battery?

Speaker 8

And then also similar to how you You give us the progression of new generations like IQ8 versus IQ7, any sense of how much of your mix you would target for the New battery in 'twenty three versus the current generation?

Speaker 2

Yes. The Good question on the next gen battery. That's a little bit out. So, it's probably too early to give some numbers out. But the idea is generally that meaning today we have extraordinarily Meaning the situation is extraordinary in terms of inflation, supply chain, etcetera.

Speaker 2

It's not going to last forever. Eventually batteries need to come down the cost reduction curve and this provides us we are healthily placed there because we are reducing the fundamental cost structure of our product. And whenever you reduce cost structure, you basically integrate You instead of 7 boards, you have 1 board, that's all goodness. So it depends upon the situation at that time, but You're right. We may use it for market share gains, while still retaining a healthy gross margin.

Speaker 2

And it'll once we come to that, we'll make a decision. [SPEAKER DANIEL MARTINEZ VALLE:] And with regarding the next gen battery, I mean, there is no reason why that cannot follow [SPEAKER SRINIVASAN VENKATAKRISHNAN:] A similar process like the microinverters, in fact it can be accelerated. If it provides a lot of benefits for customers like form factor is quite less and other things, We may be able to do the transition in 2 to 3 quarters instead of 4 to 5. So, We got to get there first. We got to make sure our product is new product is released.

Speaker 2

And then I think our plans will get more firm.

Speaker 8

Okay. That's super helpful. And then just my follow-up on Europe. I know there's a lot of questions on Europe, but the 40% growth sequential here for 2Q call. Quite robust.

Speaker 8

Is some of that a function of I know that's a VAR reseller market. Are you kind of filling in the channels since you're newer to some of these markets and that's the big growth? And so how does that translate to kind of What you think sequentially is sustainable through the back half? Like can you keep growing in Europe at those rates? Or is this kind of a big 1st quarter fill in and then things start to moderate?

Speaker 8

Thank you.

Speaker 2

Yes. I mean, that's a good question as well. Is it you're filling the channel for The first time is your question. That's relevant for new markets. Usually, we are very disciplined in filling The channel are not and we always look at point of sales.

Speaker 2

Point of sales means, regardless of what we ship From Enphase to a distributor are the installers purchasing from the distributors. We have a very meticulous meeting, meaning review every week where we look at point of sales in Europe by country, by distributor. We look at that. So, there may be a little bit of Creating a channel in some really regions where we have never shipped before, but That's not the primary reason. The primary reason is, especially for countries like Netherlands, in general, Booming solar for countries like Germany is especially considering the Ukraine situation, everybody wants S.

Speaker 2

Whang:] To go towards self consumption and so basically solar plus storage there. So these 2 are the biggest markets by large and And of course, closely followed by Italy where the government is making it very easy. All of these Three regions, yes, actually, Italy, you can argue that some of the channel thing is there, but at least in Netherlands and Germany, we are We've been present for some time. So I would say more robust growth. Of course, we cannot say whether we are going to grow every quarter like that, but we'll give you we'll do the same thing next quarter.

Speaker 2

We'll talk about the Q3. We'll take it 1 quarter at a

Speaker 8

All right. Thanks a lot. I'll pass it on.

Speaker 4

Thank you.

Operator

Thank you. Our next Question comes from the line of Colin Rusch from Oppenheimer. Your question please.

Speaker 9

Thanks so much. And guys, can you just give us a sense of where channel inventories are right now? I'm curious to understand a little bit about both in the U. S. And Europe, how much of the guidance is really channeled to at this point?

Speaker 2

Historically, I've always said that Reasonable channel inventory is 8 to 10 weeks and we don't usually quantify it every quarter, but that's a Healthy inventory. U. S, I would say is quite healthy. Europe, I would say is a little bit less in terms of channel inventory and they need product and that should be obvious because of the demand increase.

Speaker 9

Great. And then the change in the battery volume, I guess I'm curious what's driving that change? Is there some cost reduction driving that? Is there an issue at the installer level in terms of placement of that, but just the logic and kind of the purpose of that change and how quickly we can see that shifting to all the product that's out in the field?

Speaker 2

I mean, the logic is we release new products and new products get better and better over time. So As simple as that, we today our battery basically does 3.84 kilowatts of continues power for 10 kilowatt hour battery and 5.76 kilowatts of peak power for a 10 kilowatt hour battery. And very often when you have air conditioners and when you have pool pumps etcetera, What you do, the tendency is to buy a lot more kilowatt hours to solve the kilowatt problem. Now, with this, we don't need homeowners to buy kilowatt hours just for the heck of It was for solving a power problem. Of course, if they need it for energy, they need it for energy.

Speaker 2

But at least what we take is, Right now with the high power battery which is going to be released in the second half of this year, We will be able to support 7.68 kilowatts

Speaker 6

for a

Speaker 2

10 kilowatt hour battery continuous and something like 11. Something kilowatts peak power. So we'll be able to start some really nice loads with a 10 kilowatt hour battery for example. And so that's a customer experience thing. And of course, when we did that design, what we said is, Okay.

Speaker 2

Our previous modularity are batteries that we are shipping today have a modularity of 3.3 kilowatt hour. These new batteries, if we have a modularity of 5 kilowatt hour, then you can amortize our overhead, what I call is anything other than the cell pack over a higher kilowatt hour. So that gets better. The cost gets a little better, Manufacturing cost. And then you go to the next generation, which is in next year, 2023, is We talk about transforming the overhead to something that is was a lot to something that's very less.

Speaker 2

It's 7 boards is going to one goal, which is integrate power conversion, integrate battery management all into One goal and mimicking our microinverters a high power microinverter. And that microinverter will be like approximately a 2,000 watt microinverter, a single board. And that single board can be on the side of the cell pack. So you can see a drastic volume reduction of 40%. So that's incredibly helpful.

Speaker 9

I'm sorry to cut you off there, but yes, I appreciate it.

Speaker 2

Yes.

Operator

Thank you. Our next question comes from the line of Kashy Harrison from Piper Sandler. Your question please.

Speaker 10

Good afternoon. Thank you for taking the questions. So first one for me, there's been just broader concern in the market about a economic deceleration So, I think, we're going to be seeing a lot of 40% sequential revenue growth in Europe. So we know demand is rocking and rolling over there. However, I was wondering if you could just give us a sense of what you're hearing from customers in the U.

Speaker 10

S, specifically in April. I'm trying to get a sense if you're seeing any signs of deceleration in U. S. Resi demand in April or it seems like demand is still strong within the U. S.

Speaker 10

Based on your most recent discussions.

Speaker 2

Okay. Yes, demand is very strong in the U. S, as simple as that. And we that's why we told you that our demand is well north of our higher end of guidance and it is broad based. We work with a number of installers of all shapes and sizes.

Speaker 2

We work with long tail installers, we work with big installers and everywhere the demand is up. And we are continuing to take market share in the list. So that's good. And then we talked about Europe. So those 2 Yes, the biggest for us.

Speaker 10

That's good to hear. And then maybe just switching gears to the battery side. You said you're adding a 3rd battery supplier in the second half of the year. Can you talk about how much capacity you are adding? And then are you adding the 3rd supplier because you anticipate demand up and beyond what your suppliers are capable currently call of delivering or is this more so an attempt to get down to that 8 to 10 week target of lead times as opposed to where you are right now at 14 to 16 weeks?

Speaker 10

And that's it. Thank you.

Speaker 2

[SPEAKER MIHAEL POLYMEROPOULOS:] Yes. I mean we are adding a 3rd supplier And when we actually added, I'll provide more details on the capacity. But I have no doubt it will be comparable to the others. Then in terms of the motivation to add, it's all of the above. We have noticed, I mean, we have realized it Based upon the last couple of years on supply chain for the microinverters, there are some products that we need 5 suppliers And they are critical components.

Speaker 2

So like that the batteries are very the cell pack, if we don't get cell packs, we are dead, Right. So, more number of suppliers, it helps us in terms of yes, it helps us on everything, price negotiation, it helps us on supply, it helps us on delivery, It helps us on volume. So, it helps us on upside. So this is a long term strategy. It's got nothing to do with the short term.

Speaker 2

And we'll continue to add, this supplier is also based in China and we will continue to look for diversification opportunities elsewhere outside China. That's a top priority for me. But right now, all of our presale pack suppliers are in China.

Operator

Thank you. Our next question comes from the line of James West from Evercore ISI. Your question please.

Speaker 11

Hey, good afternoon, Badri. Hi. So you've made several acquisitions that are going to strengthen your installer platform, including the installer lead factory, I guess, was the most recent one. Are the is the acquisition phase here done? And then could you talk about the integration of these businesses and how quickly you can get integrated product after the installer base?

Speaker 2

Yes. The installer platform got a few elements to it. Lead Generation and Management, number 1. Design and proposal, number 2. With the connectivity to the FinTech partners, that's number 2.

Speaker 2

Number 3 is permitting. Number 4 is installation and commissioning.

Speaker 11

Right.

Speaker 2

Number 5 is monitoring. And number 6 is operations and maintenance. So, we have made acquisitions on lead management through Solar Elite Factory. They very healthy business, profitable business. They work with about 10 installers mostly.

Speaker 2

90% of the revenue comes from 10 installers. They are very competed in lead management. Those installers love them. The name of the game for us is to take that business, generate A lot more leads, increase the quality of leads, make sure those leads Have a very high conversion rate into actual installs and kind of make sure We proliferate the long tail. So that's the name of the game on the first one, lead generation and management.

Speaker 2

Number 2, design and proposal. We bought a company called Solar Graph in January of 2021. Business is doing quite healthy. I would say this quarter that business will do 50% higher than 1 year ago. And essentially, the business services 900 plus installers right now.

Speaker 2

But that design tool lacks shading capability,

Speaker 5

lacks 3d,

Speaker 2

lacks storage modeling, which we are all fixing. We are fixing right now. We are piloting that. We are going to introduce it to many more of Our installers and all of them are waiting for it and it's an opportunity for them to utilize that platform there. Also, another important thing is Solar Graph or Softdesk.

Speaker 2

That software has got connectivity to various FinTech partners.

Speaker 12

Okay.

Speaker 2

So that's important. Ease of access of FinTech partners is very important for our installers. That's true. So that business Doing well. We have lots of plans for it.

Speaker 2

We are going to introduce these new features. We are going to become the best in class there And we are patient. We don't expect miracles. It's steady, steady progress. Now number 3, Permitting services, we have a team in Noida, approximately 80 installers, 80 installers.

Speaker 2

The volume that we do is a lot there. We almost do Proposal and permitting services, meaning an installer says just generate this proposal for me. I don't want to use the software, Jeff generated this proposal for me or here is the details of the proposal I want to permit plan set from you in 24 hours. We have a large team there, 80 installers doing very well. Again, that Revenue is ramping quite nicely, very profitable.

Speaker 2

There the name of the game for us is automate The permit plan set so that we can reduce the cycle time from hours to minutes And we can service the long tail well with highest quality. That's permitting service. Now, installation and commissioning is what we do for a living. Monitoring is What we do for a living, we have over 100 of Maniars invested into the installer app and the monitoring app for homeowners. So we are continuing to make that better and better and better.

Speaker 2

We're still not happy with our commissioning on batteries like what I indicated. And that's the major goal for me. It's got a lot of points for me and we are going to make that better. So but we don't need to buy a company for that. We already have homegrown efforts for the last several years.

Speaker 2

The last one is a new one that we bought end of December and that one is probably the most nascent of them is the concept being it's like an Uber for an installer or Uber for an asset manager. Basically, if I have a problem with the particular asset, I've already charged The customer for an O and M contract and I'm short of labor which happens all the time, We can the platform can basically find The platform is a labor marketplace for you. There are about 300 installation companies Which are logged into the platform and when you as an asset owner or You are a service provider, want to service a particular asset, but you don't have the manpower to do so Because your crew is busy on new installs, you then log into the platform, submit a work order, it automatically gets routed to the next labor service provider who is free and that is a match that happens and Enphase gets paid for at both ends of the platform as a software fee. And that's the newest of them all, which we need to basically We need to introduce that company to our installers, But we will not do that unless they have a the software It's high quality.

Speaker 2

We have enough number of service providers on the platform. So those are the aspects we are working on in terms of O and M. So I gave you a very long answer, but the way we think about it is, all of these are coming together. We are switching them all into a seamless flow. Some are basically less mature than the other, But all of them are geared to only one thing, making installers' life simple.

Speaker 11

Right. Thanks, Bhadir. That's great. I appreciate it, Bhadir. Thanks for the answer.

Speaker 11

I'll turn it back.

Operator

Thank you. Our next question comes from the line of Maheep Mandloani from Credit Suisse. Your question please.

Speaker 13

Hey, good evening and thanks for taking the questions. Whether you have a very large installer network, right, in the U. S. And have Systems developers and installers, right? So is that something you could do to help installers with Procuring these solar modules in the short term to ease some of these issues in the supply chain we're seeing in the short term?

Speaker 2

No, we are not in that business. No.

Speaker 13

Got you. And Just two other questions from me. Outside of Europe, how fast is the international business growing in Q2? And how should we think about the $1,100,000,000 of cash used this year in terms of M and A or buybacks? Thanks.

Speaker 2

Yes. I mean, we made 5 acquisitions in the last 15 months, all of them are small ones, but they add up. The next so what are our priorities for cash? We have $1,100,000,000 as you noted. Our first priority is to obviously take care of the needs of the business, make sure we have plenty of cash For working capital, make sure that we make the necessary capital investments on the software side, Make sure we invest in anything on batteries that we need, so take care of the current needs of the business.

Speaker 2

That's number 1. Number 2, we do have a lot of interesting ideas, interesting pipeline in terms of mergers and acquisitions. And obviously, we are rounding out the digital platform. We are looking at energy management like what I talked about in Germany is leading the way in every home having solar, storage, EV, heat pump and other home loads and Effectively managing that requires a lot of software talent, a lot of Software including volume companies and because the market in Germany is reasonably mature like for example And not all systems may use Enphase. Enphase, Actually solar, some may only use Enphase storage, might have third party solar, might have some of someone else's EV charger and somebody else's heat pump.

Speaker 2

But Enphase has come to the part call. And it needs to come to the party by having a comprehensive energy management software that aggregates all of these together and presents a single interface to the home loan. That's extremely important. That's what I call interoperability. So we are going to do that.

Speaker 2

So that requires heavy investments in home energy management, which we are prepared to do. So including considering acquisitions. Of course, we got into EV charging. We think most of Charging is going to be done at home. 80% of charging is going to be done at home.

Speaker 2

So we are always looking for Networking opportunities on EV chargers that enable that basically enable dynamic So, it's both inside and outside the home. So, we're looking we're always interested in software companies there. And new technologies, where are we interested batteries are something that we are always and also looking for how can we reduce How can we reduce costs, increase performance? Those are the areas where we will double down. So once we look at that, Make sure we have enough cash for the M and A pipeline and then we look at, okay, if we still have cash left over, How is our what's the current share price?

Speaker 2

How is the current share price? And is the share price below a conservatively calculated intrinsic value. And it's nothing more than Yes, taking a page from Warren Buffett's book. We do exactly what he recommends and it just makes sense for us. So we did for example, last year, we bought back Mandy, we bought back 3,200,000 shares.

Speaker 2

We bought back 3,200,000 shares last year, bought back at $1.55 a share. And if the share price goes down, we will Consider opportunistic scenarios like that to do more buyback provided number 1 and number 2 are taken care of. Thanks for the question

Speaker 13

and answer. And just Swicky, on the other part on international business growth in Q2?

Speaker 2

You know internationally, the biggest is Europe. The other areas that we are working on as I said, Brazil is something that we are very excited about. I haven't talked about it too much, But we have an outstanding guy running Brazil. We have a very strong team and I think it's a matter of time before which We start seeing meaningful revenues from Brazil and they are going to get The IQV variant of the product which will help them on the cost structure that's pretty soon. Other than that We are ramping up on Australia.

Speaker 2

We have not introduced our storage yet in Australia which we are working on and they should have their storage in the second half of this year. So that will provide them some growth. And in addition, we are focusing on other Southeast Asian countries as well. All of them are small efforts and when they become meaningful, I'll talk more.

Speaker 13

Awesome. Thanks for the answers.

Operator

Thank you. Our next question comes from the line of Joseph Asha from Guggenheim Partners. Your question please.

Speaker 12

Hello and good afternoon. Two questions for you. First, just looking at your installer network and hearing from Different sources that just simple labor availability for the install process has been a bit of a challenge. So I'm just wondering if you Can you comment on feedback that you're getting from your network?

Speaker 2

D. Moriarty:] Yes, you're right. I mean, the demand is quite high. Demand is very robust like what I pointed out. So installers are always looking for skilled labor.

Speaker 2

And when I say skilled, Accretions are very hot demand. Then there is a technician, which is slightly below electrician. Labor is in hot demand. Are

Speaker 12

you is that gating the ability of your dealers to get stuff done at this point, do you think?

Speaker 2

I mean, from our case, you saw our guidance, you saw our demand. Yes, I'm sure they can do even more. But yes, right now they are limited by their lead. That's right.

Speaker 12

Okay, fair enough. And then the other question, we've talked a lot about M and A, but in particular as regards grid services, right, aggregating and bidding assets into Yes, frequency regulation markets or what have you, that's pretty challenging. I'm just wondering if you feel like the Current skill set you have inside Enphase is sufficient or if that is perhaps one area that you're inclined to do additional shopping? And that's it for me. Thank you.

Speaker 4

Yes. Grid services really is focused on providing capacity, Not necessarily frequency regulation at this time, that really is for front of the meter type application. So we are focused on the residential market. And if you look at all of the grid services programs that we participate in are really focused around that, which means that During periods of stress typically around where the greatest stress between 4 pm and 9 pm, the batteries get a signal to discharge The batteries for the duration of that period. So, we really are focused on that market.

Speaker 4

We have a very strong team. They are doing some Very interesting work and how to enable utilities to provide this service very easily. We also have a very easy way for the homeowner to sign up for these programs through the app. So we have a very strong team both On the battery side to enable the battery to discharge, the homeowner side for the homeowner to sign up simply as well as a platform or grid services manager as we call it, where the utilities are very clean, a very simple access, one view access into all of the assets that are available to them. We of course work in some cases with utilities, but we also work with aggregators.

Speaker 4

And in that case, we provide them with API and API access for the entire fleet to allow them to Discharge the battery. So, yes, very strong team. As you can see, we have made significant amount of progress with this team and they're developing Very strong tools and products to meet the requirements.

Speaker 12

Okay. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Eric Stine from Craig Hallum. Your question please.

Speaker 7

Hi, everyone. Maybe just on the IQAD, you talked about it a

Speaker 3

little bit, but maybe if

Speaker 7

you could expand on expectations for the ramp here throughout 2022. And then just curious, I mean, what percentage do you think C and I can be of your business if you look out 3 to 5 years?

Speaker 2

Yes. I mean, so remember this IQ8D only addresses the small commercial market. The small commercial market in the U. S. Is we are talking about, a TAM maybe a little more than a gigawatt.

Speaker 2

And we are talking about small schools, churches, hospitals, small hospitals, gas stations. And when I say small commercial, it means 20 kilowatts to 200 kilowatts. So, we think our microinverters can be extended there with the use of IQAT. Having said that, we just are getting started. We are piloting with about, I would say, 10 plus installers.

Speaker 2

And if the pilots go well, which we will find out in the next few weeks, We always make some changes. We always find issues invariably. We basically We'll do some tweaks, modifications and then we will release the product to production. We expect that to happen in this quarter. And then onwards, it is a business that will take some time to develop.

Speaker 2

But We are confident that with our principles quality, customer service, a rapid shutdown capability Our easy to use product that this will get good adoption. And first, we'll start off with North America. The market size I mentioned was primarily North America and then we will extend it to other regions as well. And if we are successful and success means that We are like residential where we can capture significant share and then we will look at The next follow on, which is the real commercial market for that we need a 4 80 product Basically.

Speaker 3

Okay. Thank you for that.

Operator

Thank you. Our next question comes from the line of Sophie Karp from KeyBanc. Your question please.

Speaker 14

Hi, good afternoon. Thank you for the time.

Speaker 2

Hi. A

Speaker 14

couple of questions I have. So you mentioned the whole home electrification and obviously you've been making Acquisitions along the lines of you have an inverter product and storage and now with a clip or click you have EV charges as well. And you mentioned heat pumps a bunch of times. So I was kind of wondering if that is something that could make sense for you to add as the time progresses to your technology package. How should we think about that?

Speaker 4

Yes. Hi, this is Raghu. So the way we think about it is we have this technology Energy Management Technology Platform and its role is to manage a whole family or disparate set of We distributed energy resources. So, we obviously do solar today, storage. We manage the grid.

Speaker 4

We integrate generators. And now we are integrating EV chargers as well, by making the EV charger very smart, so we can do green charging. But there are other elements also that we need to integrate and that's those are heat pumps. Obviously, we will not be selling heat pumps, but our goal is to develop either develop or buy companies that can that through software Integrate all of these other and other heat pumps, etcetera, and other loads as well and effectively bring them on to the platform. And when we bring them on to our energy management platform, we can then manage how the loads get services, what's the most Economical, what's the most reliable and what's the most green way of servicing the load.

Speaker 4

In the case of EV, for example, if the So homeowner may choose, I only want to charge my car from charge my car through green electrons, which is, obviously the first choice would be your own solar system Or if you get a signal from the grid that says the grid is green at this time, then you can charge from the grid as well. In general, it's about managing all of these different type of And we'll do that with software primarily. And you're seeing is a lot of standardization that's starting to Take place where all of these different kinds of loads, different types of heat pumps and different types of EV charges, etcetera, are starting to adopt Certain standards and those standards will make it easier for us to integrate them onto our platform.

Speaker 14

Great. Thank you so much. This is very helpful. And my other question was maybe taking another stab at the supply chain Right. And you have managed the supply chain much better than your peers and competitors, right, not just your competitors, but other companies in other sectors, right, the large ones at that.

Speaker 14

What sets you Mark, Mike, what makes you more or less immune to these trends at this point? I guess, is that the fact that most of the components you use are more specialized And there's less competition for them from maybe bigger industries? Is that just the relocation of where the manufacturing facilities are? Like what should we think about here?

Speaker 2

I mean to tell you, you're giving us a lot of credit. Last year, we didn't And we had a supply problem last year in 2021. And what we learned from that, the learning is what can we do. For critical components, we need to have multiple sources. How can we plan better?

Speaker 2

For critical components, how can we make sure that Short term disruptions. We know there are always going to be short term disruptions. How can we smoothen all of those into What's right for the customer? So we've just learned to plan better. And I think planning better and executing on multiple factories, Multiple sources and it also helps that we don't have a lot of SKUs.

Speaker 2

We The way we design it is one single piece of hardware with we try all our microinverters to have one single piece of call. And then so that every region we can load the appropriate grid profile in software So that can get functioning. In that way, we don't need to make one SKU for 1 country. We try. It's hard to do.

Speaker 2

It's hard to reduce the number of part count. Many companies bloat up on part counts. But again, I think With the software defined architecture that we have, it helps us a lot. So to answer your I think it is upfront product architecture, diligent supplier management, qualification of multiple sources, Planning better and some luck too. So, yes, hopefully, we have had our Hopefully luck is on our side.

Speaker 2

We don't know what's going to come tomorrow in terms of COVID disruptions, but I think it's safe to say that we anticipate and we are prepared for it.

Speaker 14

Thank you so much. It's all coming.

Operator

Thank you. Our next question comes from the line of Cameron Loughridge from Stephens. Your question please.

Speaker 12

Hey, thanks for squeezing me in here guys. Good afternoon.

Speaker 2

Hi. Well, I was hoping we

Speaker 12

could start just very quickly on this Department of Commerce investigation, I understand this is on modules and this is not where you guys play, but you mentioned Residential was like a little bit more insulated from any effects of this. It sounds like your customers are working on module procurement for the second call. If you could just offer just any kind of framework for how you're thinking about the potential impact, if any, to your business In the second half and or even if you want to take stab at it this way, if you think about your outlook for 2022, how has it changed now versus what it may have been 3 months ago?

Speaker 4

Really, we are not As we sit here today, based on all of the discussions that we have had with our customers, based on what we see out in the marketplace. We don't see any impact on our business. Obviously, we are And we have heard that module prices are going up. So in our opinion, can those module prices increase in module prices be absorbed by the residential customer and we believe that 90 giga module price increase that we are seeing can easily be absorbed by the customers. So our opinion is that we won't see any impact on our business.

Speaker 4

And also bear in mind that Most residential systems are financed systems. So what the homeowner actually sees is a small increase in their monthly payment. And we believe that those monthly payments are not going to be larger than what the utility rate increases that They're experiencing. So all of those things point to residential segment that is probably going to be much more resilient segment and any other segment.

Speaker 12

That's great. That's very helpful. Thank you, Badri. And then just switching gears to your European strategy. I was hoping you could talk a little bit about your installer strategy there.

Speaker 12

I mean, you've had tremendous success in the U. S. Obviously with the long tail installers. Maybe just talk about does the same dynamic exist in Europe? Is it different?

Speaker 12

And basically, just do you think you can replicate your installer strategy that you've had success within the U. S? Can you replicate that in Europe?

Speaker 2

Yes, the same principles hold. If you say U. S. Has got a lot of long tail installers, Europe is even more long tail. So, Germany, for example, has got 5,000 installers.

Speaker 2

And I think, Yes, I'm not sure about it, but I was told that the top installer is an installer who does approximately 10 megawatts to 20 megawatts for the year. So basically, it's the same definition holds, the same principles hold for us We think those installers will obviously care about quality, care about customer experience. So as long as we do a good job there, Good things will happen for us.

Speaker 12

Great. Thanks very much. I'll turn it back. Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Pavel Molchanov from Raymond James. Your question please.

Speaker 15

Thanks for taking the question. Two quick ones also call. So about Europe, obviously in the current geopolitical situation, all of the frontline states in the Eastern portion of Europe are in the headlines. Do you see signs that rooftop solar in places like Poland, Czech Republic, Hungary is starting to develop and if so will you be playing in that geography?

Speaker 4

Yes, obviously, we do pay attention to the regions and pay attention to opportunities that lie, and we'll continue to do that. At this time, we are very focused On the countries that we talked about, the market is really expanding very strongly in The countries that we are already in, which is Netherlands, France, Belgium, Germany and the new markets, which include Spain, Italy and Portugal. And we need to bring all our products, we need to bring IQH there, we need to make sure we have batteries in all of those countries as well. And so right now we are focused on these, but we keep an eye out, Craig, we pay attention to what's happening in the countries that you referred to.

Speaker 5

Okay.

Speaker 15

Last year, EV market share in Europe was 4 times Higher than the United States, 19%. Is there room for Clipper Creek To get a slice of that infrastructure build out?

Speaker 2

There is always room Brook Lippert Creek and the angle is what I said, which is when an installer basically It goes to a homeowner and who is even thinking about an EV. There are so many incentives that an installer actually told us saying even if the homeowner doesn't have an EV, I still install an EV charger. So, what that means is this, when an installer is there selling the homeowner solar storage, EV charger and heat pump. In that sale, Enphase can make Life better by having a comprehensive home energy management system. Clipper Creek definitely has its place.

Speaker 2

And so we are planning to introduce an EV charger basically into Europe in Q1 of 2023, but in the interim, we are working hard to make our system interoperable with other EV chargers, so that the homeowner still gets the right experience.

Speaker 15

Got it. Thank you very much.

Speaker 2

Thank you.

Operator

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Badri Katandaraman for any further remarks. Yes.

Speaker 2

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

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Earnings Conference Call
Enphase Energy Q1 2022
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