Enphase Energy Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

There are 18 speakers on the call.

Operator

Day, and welcome to the Enphase Energy's Second Quarter 2022 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note that this event is being recorded. I would now like to turn the conference over to Karen Zagat. Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q2 2022 results. On today's call are Badri Kassandraaman, our President and Chief Executive Officer Mandy Yang, our Chief Financial Officer and Raghu Balor, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q2 ended June 30, 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 technology and products and the benefits to homeowners and installers our operations, including manufacturing, customer service and supply and demand The anticipated growth in sales and the market, new product introductions 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 most recent Form 10 ks and 10 Qs filed with the SEC. We caution you not to play any undue reliance on forward looking statements and undertake no duty or obligation to update any forward looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non GAAP financial measures to GAAP financial measures in our earnings release posted today furnished with the SEC and which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kazandaraman, President and Chief Executive Officer of Enphase Energy.

Speaker 1

Badri?

Speaker 2

Good afternoon and thank you for joining us today to discuss our Q2 2022 financial results. We had a good quarter. We reported record revenue of $530,200,000 Achieved non GAAP gross margin of 42.2 percent and generated free cash flow of $192,000,000 And 37% of our Q2 microinverter shipments were IQ8. We exited Q2 at approximately $42,000,000 $13,000,000 This means 42% gross margin, 13% operating expenses and 29% operating income, all as a percentage of revenue on a non GAAP basis. As a reminder, our baseline financial model is 30five-fifteen-twenty.

Speaker 2

Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Q2 Net Promoter Score or NPS worldwide was 68%, The same as in Q1 and our North American NPS was 71% compared to 74% in Q1. Our average call wait time increased to 4.7 minutes in Q2 compared to 3.2 minutes in Q1, Primarily due to an increase in call volume related to the growth in the business. During Q2, we added customer service agents and field service Technicians in U.

Speaker 2

S, Europe and Australia. We remain focused on customer service and ensuring that we are easy to do business with. Let's talk about our microinverter manufacturing. Our supply chain situation is quite stable Due to diligent supplier management as well as qualification of alternate suppliers, with the growing demand for our products, We remain vigilant regarding the global supply chain and logistics challenges. Our quarterly capacity across all contract manufacturing facilities is around 5,000,000 microinverters today.

Speaker 2

We are on track to begin manufacturing at Flex's factory in Romania starting in Q1, 2023. This will enable a capacity of 6,000,000 microinverters per quarter for us globally. We are also working on reducing manufacturing costs by adding More fully automated lines instead of semi automated lines. Let's talk about IQ Batteries. We are on track to add an additional Cellpack supplier early next year for our 3rd generation battery.

Speaker 2

Our lead times for batteries are still around 14 to 16 weeks due to global logistics challenges. Let's move on to the regions. Our U. S. And international revenue mix for Q2 was 80% 20% respectively.

Speaker 2

We experienced strong growth in the U. S. And even stronger growth in Europe. In the U. S, revenue increased 15% sequentially And 66% year on year.

Speaker 2

We are pleased to report record quarterly revenue in the U. S. And record sell through for our microinverters in Q2. We continued to win both large and small solar and storage installers. Our microinverter channel inventory was at a healthy level at the end of Q2, while our storage channel inventory was a little elevated Due to longer installed times.

Speaker 2

In Europe, the revenue increased 69% sequentially And 89% year on year led by strong demand for our microinverters in Netherlands, France, Germany, Belgium, Spain and Portugal. We are starting to see good demand for our IQ batteries in Germany. Homeowners want self consumption as the region not only faces energy prices that are rising, But also a growing demand for home electrification driven both by electric vehicles proliferation as well as natural gas shortages. We plan to introduce IQ batteries into a few more European countries later in the year. We also expect to ship our IQ8 family of microinverters into Netherlands and France later this year.

Speaker 2

Sector coupling is the latest buzzword in Germany and it denotes the integration of 3 sectors, the heating and cooling sector, The transport and mobility sector along with the power producing renewable sector, all three of them are required to achieve full home We are working towards sector coupling by making our solar plus battery systems seamlessly work With 3rd party EV chargers and heat pumps and providing a single interface for homeowners to monitor and control Their energy through the Enphase app. Bottom line, we are quite happy with our progress in Europe. We are aggressively expanding the team. We expect this momentum to continue. Supply is tight.

Speaker 2

The channel inventory continues to be below normal levels. We are working hard to get supply into the region. In Q3, we expect to grow revenue more than 40% compared to Q2. In Latin America, revenue increased 22% sequentially And 61% year on year. We had steady growth in our solar plus storage business in Puerto Rico during Q2.

Speaker 2

Now I'll provide some color on Australia, Brazil and India. In Australia, we are starting to see the market Beginning to recover from COVID interruptions as well as federal election. We remain optimistic about our growth in the country and expect to introduce IQ Batteries in early 2023. As for Brazil and India, we continue to ramp IQ7A microinverters In Q2 and are starting to see a steady increase in demand quarter on quarter. Let's discuss the overall bookings for Q3.

Speaker 2

Our customer demand for Q3 is very robust and exceeds the higher end of our guidance range. The component availability is certainly better than what we have experienced in the last 18 months. This has enabled us To meet the growing demand, but there are still global logistics challenges that are not unique to Enphase. Let's discuss batteries. We introduced IQ Batteries into North America 2 years ago in the Q3 of 2020.

Speaker 2

Since their introduction, we have grown battery shipments by an average of 28% per quarter Over the last 2 years, we have certified more than 1600 installers worldwide till date and we are continuing to win around 15 new installers a week in the U. S. In the Q2 of 2022, we shipped 132.4 Megawatt Hours of IQ Batteries, a 10% increase From the Q1 of 2022. In addition to North America, we are also ramping up batteries in Germany and Belgium. We have learned a lot in the last 2 years.

Speaker 2

We have made several improvements to both in the installer and the homeowner experience. Currently, our installers in North America are experiencing 2 plus hours of commissioning time, which we would like to cut down by half. We are also updating the device firmware at both our distribution centers as well as in the channel Avoid updates by installers on-site. We expect the commissioning time of 90 minutes as we exit Q3 And 60 minutes as we exit Q4. We also plan to release several software improvements for homeowners during Q3 For enhanced outage performance, for Q3, we expect to ship between 130 and 145 Megawatt Hours of IQ batteries.

Speaker 2

I recently visited The top installers in Puerto Rico in May. And in Puerto Rico, the storage attached is 100%. I came away extremely excited about how our IQ batteries as well as IQ8 microinverters Ken provide a very highly differentiated solution compared to the competition. Both The Sunlight Jumpstart feature and the unlimited solar to battery ratio are really valuable to our installers, particularly in Puerto Rico where outages are quite frequent. Our focus is to make the installer and homeowner experience seamless throughout these outages.

Speaker 2

While we are focused on providing a great experience with our current IQ batteries, We expect to introduce our 3rd generation IQ battery starting in North America in early 2023. We expect this battery to deliver double the power, enabling homeowners to start heavy loads. The product will also use The robust wired can protocol for seamless connectivity. We expect This 3rd generation battery to have simple installation leading to an improved customer experience. Let's now talk about our small commercial product.

Speaker 2

As previously discussed, we piloted IQ8D With a few installers in the Q2 in order to receive feedback. The product has been working well and the feedback That we got was quite useful. The installers have told us that the module power for the small commercial business Significantly higher as manufacturers are moving rapidly to the larger format cell. Given this, We are going to increase the AC power of the microinverter in order to avoid potential clipping. We think it is prudent to do this now and introduce the product in early 2023.

Speaker 2

We understand this is a few more months of delay, But we are confident it's the right long term decision. We are extremely bullish about the small commercial market Where we can add tremendous value to business owners and installers with our high quality, rapid shutdown capable And micro grid forming capability of our microinverter systems. Let's discuss EV chargers. We acquired Clipper Creek in December of 2021 and the team is now fully integrated. We shipped more than 8,200 and chargers in Q2 at a healthy gross margin and the business is quite profitable as well.

Speaker 2

We introduced EV chargers to our solar distributors and installers in Q2 and we also strengthened our digital marketing efforts to consumers. We are on track to manufacture Enphase branded EV chargers at our contract manufacturing facility in Mexico this quarter. This will help us scale capacity and drop costs. As for new products, we expect to introduce smart TV chargers to Customers in U. S.

Speaker 2

And Europe in the first half of twenty twenty three. This will provide connectivity to the cloud through Wi as well as local connectivity to the home energy management system, allowing homeowners full visibility into Monitoring and control of their Enphase solar plus storage plus EV system. As I've stated before, our strategy is to build the best in class home energy systems and deliver them to homeowners Through our network of distributors and installers enabled by our installer platform. So far, we talked about the key products on this call, microinverters, IQ batteries, EV chargers. Let's now talk about the installer platform.

Speaker 2

Before that some background, we acquired a total of Five companies in the last six quarters. 4 of those companies are geared to help installers become efficient. The companies we acquired provide lead generation services, solar design software, Proposal and permitting services and an O and M software platform for our installers. Our latest acquisition we did in March is Solar Lead Factory, which provides lead generation services for installers. We want to provide high quality leads to our network of installers in a cost effective manner.

Speaker 2

Currently, the quality of the leads In general, in the solar industry is not very good. We therefore think we have a tremendous opportunity to improve the situation As it is a big pain point for the U. S. Installers. We acquired A company called Softdesk in January of 2021, 18 months ago, which provided us with Solar design software capability.

Speaker 2

Our software business now has a record customer count in Q2 With approximately 950 installers using the Solar Graph software, we We are making improvements to the software based on installer feedback and are implementing new features including shading and 3 d, Modeling for better accuracy, adding batteries and EV chargers into proposals and integrating electronic signature capabilities for contracts. We acquired a business in Noida in April of last year. This gave us the capability to provide proposal and permitting services to installers. Today, we service large installers And most of the work here is highly manual. We'd like to change that and are working on automation to scale the business And provide these services to our entire network of installers.

Speaker 2

The next one, The company's software platform enables a 2 sided marketplace. The buyers are customers consisting of installers, Asset owners are original equipment manufacturers. The sellers are service providers consisting of Technicians and third party installers providing services for residential and commercial solar, storage and EVs. Our vision is to simplify maintenance for our installer network by using the software platform and getting them access to a labor market With these acquisitions now in house, we have the right tools that we are combining Into one platform to offer our installer network. We recognize the problems that the installers face such as soft costs, Disparate tools and manual processes and are committed to building the platform to help minimize those.

Speaker 2

Let me now give you a quick update on our Enphase installer network or EIN. We have onboarded approximately 1200 installers to For EIN Worldwide through a highly selective process focused on install quality and an exceptional experience to homeowners across the globe. Next, let's talk about policy. I'd like to comment on a recent policy issue that is impacting the solar industry. As it pertains to NEM 3.2 in California, we submitted our comments to the proceeding in late June.

Speaker 2

We hope the CPUC will review the feedback from all stakeholders and eliminate the grid participation charge While providing a glide path for the solar only market and incentivizing the solar plus storage market. With regarding the federal reconciliation package, despite the recent setback, we will be actively engaged over the next couple of months Continue pushing for a climate deal that includes a solar ITC extension and a new storage ITC. In summary, we are happy with our performance for the first half of twenty twenty two and the strong demand for our microinverters and batteries. Our markets in North America and Europe are growing at a tremendous rate as reflected in our numbers. We remain focused on our products and platform to deliver a superior customer experience for our installers, distributors and homeowners.

Speaker 2

With that, I will turn the call over to Mandy for her review of our finances. Mandy?

Speaker 3

Thanks, Audrey, and excellent, everyone. I will provide more details related to our Q2 of 2022 financial results As well as our business outlook for the Q3 of 2022, we have provided reconciliations of This 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 $530,200,000 representing an increase of 20% sequentially and a quarterly record. We shipped approximately 12 13 Megawatts DC of microinverters and 132,400,000 Megawatt hours of active weathers in the quarter. Non GAAP gross margin for Q2 was 42.2% Compared to 41% in Q1, the increase was driven by favorable product mix.

Speaker 3

GAAP gross margin was 41.3 percent for Q2. Non GAAP operating expenses were $71,200,000 for Q2 Compared to $66,300,000 for Q1, the increase was driven by increased investment in R and D, customer service, sales And IT Infrastructure. GAAP operating expenses were $125,000,000 for Q2, Compared to $115,100,000 for Q1, GAAP operating expenses for Q2 included $49,900,000 of GAAP based compensation expenses and $3,900,000 of acquisition related expenses and amortization for acquired intangible assets. On a non GAAP basis, income from operations for Q2 was $152,400,000 Compared to $114,500,000 for Q1, on a GAAP basis, income from operations was $94,000,000 for Q2 compared to $61,800,000 for Q1. On a non GAAP basis, Net income for Q2 was $149,900,000 compared to $109,700,000 for Q1.

Speaker 3

This resulted in non GAAP diluted earnings per share of $1.07 for Q2 compared to $0.79 for Q1. GAAP net income for Q2 was $77,000,000 compared to GAAP net income of $51,800,000 for Q1. This resulted in GAAP diluted earnings per share of $0.54 for Q2 compared to $0.37 for Q1. We exited Q2 with a total cash, cash equivalents and marketable securities balance of approximately $1,250,000,000 Compared to approximately $1,060,000,000 at the end of Q1. In Q2, we generated 200 $700,000 in cash flow from operations and $192,000,000 in free cash flow, which is more than double from Q1 as a result of our record revenue and improved cash conversion cycle in Q2.

Speaker 3

Capital expenditure was $8,700,000 for Q2 compared to $12,400,000 for Q1. Now let's discuss our outlook for the Q3 of 2022. We expect our revenue for the Q3 of 2022 to be within the range of 5 $190,000,000 to $630,000,000 which includes shipments of 130 to 145 Megawatt hours of IQ Batteries, we expect GAAP gross margin to be within a range of 38% to 41% and non GAAP gross margin to be within a range of 39% to 42%, which excludes stock based compensation expense and acquisition related amortization. We expect our GAAP operating expenses to be within the range of $137,000,000 to $141,000,000 including a total of approximately $60,000,000 estimated for stock based compensation expenses and acquisition related expenses and amortization. The estimated stock based compensation expenses include approximately $4,900,000 For the earn outs that are tied to certain performance targets to be paid in the company's stock for the acquisition.

Speaker 3

We expect our non GAAP operating expenses to be within the range of $77,000,000 to $81,000,000 With the year to date process reported, we expect to utilize all of our net operating loss and research tax credit carry forwards in 2022 and become a U. S. Cash taxpayer. As our non GAAP tax expense reflects cash tax expense and reserves, We expect our non GAAP tax expense for the Q3 of 2022 to be approximately 10% of our non GAAP Profit before tax and approximately 15% for Q4 2022. We expect GAAP tax expense With that, I will now open the line for questions.

Operator

Thank you. And we will now begin the question and answer session. And our first question today will come from Brian Lee with Goldman Sachs.

Speaker 4

Kudos on the great execution here. First question I had was just on the gross margin guidance. It's the first time since 2020 That you've raised the non GAAP gross margin range upwards to now 39% to 42%. So just wondering, Yes. How much of that is simply IQ8 mix and better margins on that product?

Speaker 4

Or are you also Seeing better, I guess, battery storage margins versus expectations. And then maybe finally, is Europe also helping on the margins in terms of expansion? Just Maybe some of the puts and takes there on the gross margin guide and what's driving it? And then I had a follow-up.

Speaker 2

Yes, I mean, mainly it is IQ8. Yes, it's as simple as that. And Europe margins and U. S. Margins are

Speaker 4

Okay, fair enough. And then, you're clearly doing well in Europe. It seems like you're gaining share. Can you speak a little bit, Badri, as To kind of where you're seeing the share gains, who you're gaining share from? And then can you kind of talk about It sounds like the 69% sequential growth was microinverters as opposed to battery.

Speaker 4

And so Is this a number where as batteries start to become a bigger part of the mix and given the higher ASPs, you could actually see Another kind of tailwind in the region. I know you're talking about 40% sequential here into 3Q, but as we look beyond, I guess the next couple of quarters, could you even see an acceleration once batteries become a bigger part of the mix in that region? Thanks.

Speaker 2

Yes. A few answers here. The growth mainly came comes from Netherlands And Germany. And basically, you're right that Q2 growth is more growth comes from solar, But storage also grew quite well. For Q3, it's actually Quite balanced.

Speaker 2

We expect growth to be equally good on solar and storage. And what's happening in Netherlands, right? So Netherlands, We are quite strong there. We service the long tail of installers. They like us because And many of the other suppliers have been unable to ship Product in these times.

Speaker 2

And in addition, the utility rates are also rising, so there is a natural momentum In Netherlands and considering the geopolitical situation, it's even more accelerated. So We're extremely happy about Netherlands and the name of the game for us is to get a lot more supply into the region. That's why we embarked on building the Flex plant in Romania where we can Have the microinverters coming out in Europe versus getting shipped from elsewhere. On Germany, It's fascinating. We are quite small in Germany, let me say that first, but the German market is a big market.

Speaker 2

The last I heard is, it's roughly 2 gigawatts residential TAM. I'm talking solar. And I'm hearing 80% attached. So 2 gigawatts times 80% is 1.6 gigawatt hours Of batteries, that's the market. So very, very healthy market in there.

Speaker 2

It's There are about 5,000 long tail installers in Germany. And what they need is they need high quality, They need reduced installation time because they always have labor issues. And every installation is accompanied every solar installation is accompanied by a battery, by EV charger, which is virtually free due to the rebates and then normally heat pumps as well. So they require us to basically work with 3rd party EV chargers, 3rd The heat pumps, which we are working very hard to have that capability and we expect to have that shortly. So it's very similar to what we have told you for the U.

Speaker 2

S. We'd like to provide that single interface For the homeowner, where everything shows up in his app, solar, Storage, home loads, EV, heat pumps, he has the capability to monitor and control the things he wants. And with the utility rates being so high and the feed in tariff in Germany, The only option is self consumption. Self consumption means you utilize all solar, Figure out ways to utilize also, which is store it in a battery, use it later, right, do green charging for electric vehicle, So, lots of interesting opportunities, Lots of work for us to do on home energy management, but I think this is our strength. And so this is where we have tremendous opportunity.

Speaker 2

And that's why We expect to grow disproportionately in that region. And in fact, Germany is going to grow, although the numbers are small, Germany, The numbers are quite big in terms of growth from Q2 to Q3. Percentage growth is quite big. That's the story. Right.

Speaker 4

I appreciate it. Netherlands,

Speaker 2

Germany. Yes.

Speaker 4

That's All the color. I'll pass it on here.

Speaker 2

Thank you.

Operator

And our next question will come from Phil Shen with ROTH Capital Partners. Please go ahead.

Speaker 5

Hey, everyone. Congrats on the strong results. Wanted to dig in deeper into Europe. Specifically, if you could talk through the FX headwind there. In spite of that, you guys delivered an amazing guide.

Speaker 5

Just wanted to understand to what degree FX impacted Q2 and even the Q3 guide. Can you quantify That at all and then can you talk through how you expect to manage that going forward as Europe grows over time? Thanks.

Speaker 3

Sure. So our FX exposure currently is very limited, given we generate 80% of our revenue in the U. S. And 20% from international. And also if you look at our expenses, right, certain international expenses actually Are in foreign currencies.

Speaker 3

So we have a little bit natural hedge there for our revenue. With that said, we are actually Evaluating FX hedging programs for our European revenue, given we are growing very fast there. In terms of our Q3 guidance, we have factored in our Q3 revenue and gross margin And guidance using very conservative euro FX rates. So we are good there. So

Operator

And our next question comes from Julien Dumoulin Smith. Please go ahead.

Speaker 6

Congratulations team, very nicely done again. If I

Operator

can, just following up on some of

Speaker 6

the Q3 commentary here. Just looking at the storage numbers, 130 to 145, how

Speaker 7

are you thinking about

Speaker 6

the exit run rate? I had marked down earlier 180 was The earlier contemplated rate, how do you think about that ramp here? Can you talk about some of the nuances that you alluded to in the script here earlier?

Speaker 2

Yes, I mean, we are incredibly excited about battery. Let me say that we have grown at an Average rate of 28% per quarter over the last 2 years. And we are proud of certifying more than 100 installers worldwide. Long tail installers are our focus and we continue to win 15 installers a week In the U. S.

Speaker 2

In the second quarter, we were 10% higher than the Q1. We did about 132 megawatt hours. And we are shipping into 3 countries, North America, Germany, as well as Belgium. We've learned a lot. We have made a lot of improvements.

Speaker 2

I would say still our commissioning times need to improve. We still have 2 plus hours commissioning time and because of that what happens is we do have a little bit more inventory in the channel than what I'd like. So we are going to get to the bottom of it. We are confident of getting that under control and we are going to unleash The demand backup again. And so we are extremely confident.

Speaker 2

I talked about Our trip to Puerto Rico and there is huge opportunities for us and we expect to get our fair share of that. So bottom line is we expect to grow in batteries. We expect to get the commissioning times fully under control in Q3. And Although we don't guide to the 180 number that you talked about, we expect to continuously grow.

Speaker 6

Got it. At the similar trajectory of that 28%.

Speaker 2

Yes. We're not going to guide when

Speaker 6

you Okay. Right.

Speaker 2

When you are moving from let's say, for example, when you go from 10 megawatt hours to 20 megawatt hours, That's the 50% increase. But then the next quarter you go from 20% to 30%, that's only that's a lesser increase basically, right? So You need to understand that even a 10% growth quarter on quarter is very healthy, that's 40% for the year. And I'm not saying we'll grow at 10% every quarter, maybe more, maybe less. But we love the business.

Speaker 2

We think we are well positioned. We our market is the long tail of installers. The moment we make it a lot easier for them in terms of commissioning time, The floodgates will open and we expect to continuously grow.

Speaker 6

Hey, and just a quick clarification to the earlier question here, Related to the gross margin, I mean, obviously, just very impressive here. But as it pertains to IQ8 and where you are, I mean, I think you're not even at 40% On IQ8 deployment and you're already hitting this increasing gross margin trajectory. In the art of the possible, where can we go in gross margins here also considering obviously you ramp Geographies that could weigh here, etcetera, but can you elaborate a little bit?

Speaker 2

Yes. I mean, the IQV provides A lot of value. Three things is sunlight backup. Basically, when the grid is out, IQ8 continues to work and provides power, 1. Number 2, it removes any limit on solar to storage ratio, which In other words, you can have a lot of solar with very tiny storage and the extreme end being 0 storage.

Speaker 2

That's number 2. Number 3 is sunlight jump start, which means that in other batteries when you completely drain the battery Because you use it overnight and you accidentally drained it, in the morning, IQ8 can come and independently jump start the batteries, because It can generate its own micro grid and kick start the battery. So there is 3 big differentiators And we do value based pricing, which is, since we are different, since we add value, We expect to get the right price for it. Now so at the IQ8 Percentage increases in North America, we expect the margins to kind of track that, which is going up. The second thing is in Europe, for example, in Europe, the grids are quite stable.

Speaker 2

Like for example, in Germany, The installers aren't even interested in backup. They only wanted self consumption. So the value that they associate with Sunlight backup is a little bit less compared to the U. S. So there we may not get as much value, but we'll get a little bit.

Speaker 2

So to answer your question, As the percentage of IQAs become more and more, our gross margins will go up and we will Guide them appropriately. That's why we increased up the gross margin by a point right now.

Speaker 6

Okay. We shall see. Thank you, guys.

Operator

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

Speaker 8

Thanks so much guys. Could you talk a little bit about the competitive landscape from a technology perspective around grid formation and the batteries. Obviously, that's been a point where you guys have led the market, but are you seeing folks start to catch up with you or find workarounds for some of

Speaker 7

So, hi, this is Raghu. The way again, what we provide It's important, right? We are trying we have the home energy management solution that we have, we are providing a very comprehensive solution. This is not just about the solar part, not just about the battery part or just about the EV part or managing the heat pump, etcetera. Our goal is to provide a one stop shop, a completely comprehensive solution and everything is managed from software with a home energy management system.

Speaker 7

This is Drew in Europe and actually and it's Drew here as well. So for us our value add when we think about relative to competition is Not look at any one single piece, although we have to be better than them in every individual component that we are building, But it is about looking at the overall solution. So the homeowner has a great experience where they have one app And they see they get unprecedented visibility into the performance of their entire system. Same thing true for an installer partners as well. They get Trained by one company to deliver all of the different components on how to install them, how to commission them, Etcetera.

Speaker 7

And if there is any problem, there is one phone call to make. If there are any warranty issues, it go to 1 company. So it's that entire end to end solution It's where how we differentiate ourselves from everybody else and we feel like we have done a good job with visavis the competition.

Speaker 8

I'll take it offline. I wanted to just get in a little bit more specific on that. So my follow-up is really about new geographies in the U. S. Can Can you talk about the number of installers that are you're training in new geographies and how some of those Emerging markets within the U.

Speaker 8

S. Are developing and potentially driving growth on your core business here.

Speaker 2

Yes. I mean, like what I said, we certify a lot of installers. I think the last earnings call I said 1300. I don't remember and now it is 1600. So we certify a few 100 of installers a quarter.

Speaker 2

We work with the long tail of installers in all geos, All regions in the U. S. Like what I said, Puerto Rico, great market, Very interesting market. Only when I went and saw there, it was quite eye opening for me on the number of times They had a power shutdown every day. And there the requirements for example are A little bit different from California where the grid is by and large table, right.

Speaker 2

So this basically Gave us a completely new perspective on, hey, We need to make sure the homeowner experience through outages. The outage performance of our app Needs to be flawless and the installer experience and the homeowner experience has to be good. Those are the kinds of things we learn and we do it across all the states. We have sales people, we have FAEs, we have field sales technicians. They are the ones who will help these 300 installers that we certify, by certification we mean they have to do the training course plus they have to complete the 1st install.

Speaker 2

And we do have some challenges on the commissioning. So, we do initial handholding With the help of our field service technicians and then we unleash the installers. And we got to get better like what I said. I would call Nirvana when I do a half an hour commissioning and I don't even need to train the installers. That's where we are trying to get to because we recognize that All of the installers will install batteries if they make money on batteries.

Speaker 2

And in order for them to make money, We, Enphase, needs to take the lead and help them with standardizing the workflow With streamlining the way the product works and take care of any problems They have immediately. So we are Doing all of them with upfront training and roundtables and field service technicians and FAEs And our sales people.

Speaker 8

Okay. Thanks so much, Badri. I appreciate it.

Operator

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

Speaker 9

Hi, good afternoon. Thanks for taking the questions and congrats Another strong update. Badri, you mentioned in Germany that sector coupling across heating, cooling, transport, power has become So topic du jour, obviously core business is power and you're now participating and expanding into the transport mobility side via EV charging. But I was wondering if you could share any commentary on the heating and cooling space. Do you see any opportunities for Enphase to add value Within that sector or is that somewhere where it may not be as enticing to you at this point?

Speaker 2

No. At this point, sector coupling is quite complex. We are scratching the surface here By basically providing the capability for the solar plus storage system to connect To heat pumps and electric vehicles and For electric vehicles, there is a fairly reasonable standard called as OCPP, Which we need to be compliant with and then we can connect to all third party electric vehicles. On heat pumps, it is still a rudimentary standard called as SG Ready standard. There are 4 modes of operation, which are relatively trivial To implement, all of them, the EVs, the heat pump, solar storage home loads when you Integrate all of them, then you provide complete control to the homeowner at their fingertips.

Speaker 2

And we At least for now, we don't plan to go and do anything as far as the heating and cooling We just want to make sure that we enable the sector coupling By achieving interoperability with EV chargers and heat pumps. That's what we are looking at now.

Speaker 9

Got it. That makes perfect sense. And then as my follow-up, it's quite evident that you're showing excellent operating leverage in both 2Q results and 3Q guidance based on non GAAP OpEx as a percentage of sales. I was just wondering if your views on the appropriate levels of non GAAP OpEx investments are evolving as the company gains increasing scale. And then maybe part and parcel with that, we've obviously it sounds like the labor market in Silicon Valley is cooling.

Speaker 9

Just wondering if

Speaker 2

Our baseline 35, 15, 20, that 15 stands for operating expenses as a function of revenue, non GAAP. We don't plan to deviate from that. We are well under that. One of the advantages that we have is We are able to get talent at we are able to have the right people at the right places, which means we are able to get a lot of good talent In places like India, in places like New Zealand, in Austin, in China, we are able to get The talent that we need and because we are growing fast, we are able to keep our operating expenses under control. So we don't plan to deviate from 15%.

Speaker 2

We don't plan to compromise on any new products. We will get everything that is necessary. Regarding what you said on interesting opportunities created by Recent layoffs in Silicon Valley and other places, I mean, we are always looking for talent. At the same time, We are always cautious. We don't like to go overboard.

Speaker 2

If we see people who are outstanding, we won't hesitate to pick it up. But it's easy to get fat here. And we are very disciplined. You can expect us to always meet the 15% with margins And still not compromise in R and D because we are growing so fast.

Operator

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

Speaker 8

Yeah, Good afternoon. Thank you very much for taking our questions. Most of them have been asked. First one though, just given Europe is Celebrating beyond what you were calling for just even a few months ago. Just curious if you can go back to kind of the manufacturing Expansion there.

Speaker 8

So Romania is still on track for 1Q 'twenty three. I believe you've said that's about 750,000 micros.

Speaker 2

When do

Speaker 8

you think you need to make a decision to potentially increase that or move elsewhere in Europe? And can you talk about the opportunities To expand your manufacturing in Europe, but do it profitably perhaps outside of Romania or Eastern Europe?

Speaker 2

Yes, I think the decision is staring at our face. I mean, it's kind of obvious we should get a lot more than 7 50,000 microinverters, we are going to make that happen. But first, let's get Our manufacturing and production done by Q1 'twenty three and I think we can immediately add Another full auto line and we can take it up to a couple of 1,000,000 units very quickly

Speaker 8

From Romania. From Romania. Okay. And then just a quick follow-up, Audrey. I'm sorry if I missed this, but Previously, you've been talking about adding a 3rd battery supplier in the second half of this year, just Time is

Speaker 2

muted. Yes. Today, we have 2 suppliers, A1, A2, A3 and A2L and we are on track to add a 3rd supplier And for our 3rd generation battery and that will start to ship hopefully In the Q1 of 2023 and that time we will have a 3rd supplier qualified.

Speaker 8

Okay, fair enough. Thank you.

Operator

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

Speaker 10

Hi, everyone. Thanks for taking the questions.

Speaker 11

So you mentioned Supply chain is starting to show some improvement, but I know that as has been the case in past quarters and 3Q guide is still well below demand. Just wondering If you're able to quantify that how much below the demand level or at least how that's trending quarter over quarter?

Speaker 2

Yes. We usually don't quantify that. It's a matter of lead times. Basically, Our battery lead times are 14 to 16 weeks. That means if an order comes today, It's going to take us 16 weeks to service it.

Speaker 2

Our microinverter lead times are almost, I would say, 8 to 10 weeks. So that's a little bit better. Yes, I mean the balance for us is to make sure That we always look at channel inventory all the time for microinverters and storage and Do not get ahead of ourselves. The one place where I wish I could ship more is Europe Because the channel inventory there is quite dry and but It takes cycle time for us to do that. We have to get product there without compromising our schedules To other customers, that's always a challenge and we are very determined to not upset Other customers who have already placed orders.

Speaker 2

So we are very strict in all of that. Yes, That's how we

Speaker 11

work. Okay, that's helpful. And then maybe just on the manufacturing footprint, I know that when Romania comes on, you'll have the ability or targeting 6,000,000 microinverters a quarter. I think you did, what, 3 point 4 in this quarter, I mean, I know it's dependent on geography, but I mean, do you have kind of a timeframe or maybe big picture When you think you'll be pushing up against that $6,000,000 and then potentially obviously need to add more?

Speaker 2

I mean, if you look at it if you look at our guidance, midpoint of guidance for Q3, that's 610. And if you look at what is the percentage growth from Q2, 530 To 610, that's basically roughly around 15%. So you see, you can that's a proxy for microinverter growth from Q2 to Q3. So you correctly pointed out 3,300,000 micros in Q2. So you apply 15% that becomes something like 3 point 8,000,000 maybe 3,900,000 micros in Q3.

Speaker 2

And of course, I mean, I'm not going to break out future quarters growth rate, but you can do the math. Yes, within a few quarters, we will run up against the 6. Like what I said, it's a no brainer for us to Basically make the decision on the Flex Romania plan to add one more line. Of course, we are going to do that. We'd like to get some data from the plant on the current Microinverters first and then we'll make those decisions.

Speaker 2

But I mean it's easy for us to We have sufficient time to make these decisions because we evaluate these every quarter and we have options to add. We can add in Chennai Cell Comp, We can add in GUARD, Mexico for servicing U. S. Customers. We can add in Flex Romania for servicing Europe customers And we can also add in Fuyang, China for servicing Australia customers if we need.

Speaker 2

So Everything is flexible. Everything can be expandable. And all we need to do is to make The decision at the right times.

Speaker 11

Okay, thanks.

Speaker 2

Thank you.

Operator

And our next question will come from James West with Evercore ISI. Please go ahead. Hey, good afternoon, Badri.

Speaker 12

Hi. A question on your EV charging business, the Clipper Creek EVs. You Talked about 2 things. 1 is moving to the contract manufacturer in Mexico. And I'm curious how much scale you might be able to add to the production by doing that?

Speaker 12

And And secondarily, you're making chargers smarter, integrating them into your home energy management system, curious on the timeline to achieve that?

Speaker 2

Yes. Basically, we should be able to do several multiples of the number I gave you.

Speaker 12

Okay.

Speaker 2

So that's why we are doing it to achieve a lot of scale. Then with regarding the making the charger smart, we expect that to be done by the first half of twenty twenty three for both Charges shipping into the U. S. And Europe.

Speaker 12

Okay, that's helpful. And then a follow-up for me On the cash balances here, I mean, great free cash flow during the quarter. You've got $1,200,000,000 or so. What do you to do with that capital going forward? Is there more M and A on the horizon?

Speaker 12

Is there other return of capital to shareholders, things like that you're contemplating?

Speaker 2

Yes. I mean, again, the answers are very similar to what I've given in the past. The first thing for us is Take care of the needs of the business. If we need a different if we need an auto line, if we need something special on the batteries, if we need Buy software, take care of the needs of the business. That comes first.

Speaker 2

Have plenty of cash to do that. If we need to expand the facility, for In the U. S, we need to build a new reliability lab, so I can go on and on. So that's number one priority. Number 2 priority is evaluate continuous pipeline of acquisition.

Speaker 2

The areas that we are interested are, for example, EV charging It's a potential area we are interested mainly on the software side to get more software capability. Number 2, the second thing we are interested in as potential acquisition targets are Anything interesting in batteries, right? Anything Not manufacturing of batteries, but battery systems innovation there, we are interested there. That's 2. And then 3rd is home energy management systems.

Speaker 2

The ability to not only network To things outside the home such as EV chargers or heat pumps, the ability to network things inside the home To provide that comprehensive experience to the homeowner. So these three are the things we will be continuously looking at. We might Still do some more acquisitions on the platform side of things in order to round it up. Okay. That's my next priority to basically look at the acquisitions in those areas.

Speaker 2

And then the last one is, If we take care of number 1 and number 2, which is have plenty of cash required for the business, have plenty of cash For M and A in certain key specific areas, if those 2 are taken care of, then we look at Buying back shares, there we look at is our share price. We believe our share price is below a conservatively estimated intrinsic value. And it's not my idea. This is Warren Buffett as taught everybody. Right.

Speaker 2

And then so it's quite logical There, and the key question is always how do you estimate your intrinsic value? How do you be conservative? So we have our own formulas for that. And then if we feel that's the right time, we'll buy shares. If not, no.

Speaker 12

Okay. Very helpful. Thanks, Badri.

Operator

Yes. And our next question will come from Amit Thakkar with BMO Capital Markets. Please go ahead.

Speaker 4

Hi, good afternoon. Thanks for squeezing me in and congratulations on the quarter. Just one quick one for me. I think On the Q3 earnings call last year, you guys talked a little bit about ocean freight being I think 8 times more. It looks like Some of the data suggests that ocean freight rates have actually come in a little bit.

Speaker 4

I was just wondering, have you guys seen any benefit in that and was any of that reflected in the quarter? Certainly, your lead times haven't really shrunk yet, but just on the ocean freight rates.

Speaker 2

Yes, the lead times have been shrunk, but you're correct. The ocean Rate rates have gotten a little better, not a lot better. We are expecting them to continuously come down.

Speaker 4

All right. Thanks, guys.

Operator

And our next question will come from Maheep Mandloi with Credit Suisse. Please go ahead.

Speaker 13

Hey, good evening and thanks for taking the questions. I think most of the questions have been asked. Maybe one on Policy side on the Section 301, are you hearing anything around that as we come to potential hearings against That later this year, any expectations on what could happen on that end? Thanks.

Speaker 9

No, there was no, we

Speaker 7

are not hearing anything Specific, there's just some general news that we are hearing about, will there be some relief from tariff given the situation, Given the economic situation right now, but there is no specific action that we have come across that says that there will be any

Speaker 13

Thanks. And just a last question from me on The revenue growth here, could you talk about how much we're seeing from Europe, Latin and other regions versus U. S. In Q3? Like anything to help us Understand the top line BTM.

Speaker 13

Thanks.

Speaker 2

So, Manif, are you asking about Q3 or are you asking about Q2?

Speaker 13

Q3.

Speaker 2

In Q3, we already said, we already gave you specifically on Europe that we do expect to Grow revenue in Europe by 40% compared to Q2. So basically, in the U. S, we will grow at very healthy levels. Our U. S.

Speaker 2

Contribution obviously is very high proportion of revenue. We will grow at very healthy levels in the U. S. In Europe, due to the geopolitical issues, Utility prices that are rising and many of our competitors unable to supply, We have an incredible opportunity in Europe and we grew 59% from Q1 to Q2 in Europe and we are forecasting to grow by at least another 40% From Q2 to Q3.

Speaker 13

Got you. I appreciate the clarification. Thanks a lot.

Speaker 2

Thank you.

Operator

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

Speaker 14

Hi, everybody. Coming back to the storage business, I know this might be a hard question To answer, if you weren't supply constrained, looking at the remainder of this year, just maybe the current quarter, how much do you think you could ship? I'm just trying to understand what you think underlying demand here is? And then I have a follow-up.

Speaker 2

Well, I mean, like what I said, We are incredibly bullish about the demand and our installers are incredibly bullish about using Enphase. What we need to get under control is what I talked about. Our channel inventory is a little bit high. Our commissioning times are a little bit high. We are going to work on them and this will unleash the demand.

Speaker 2

So We're not worried about demand. We are growing quarter on quarter. We expect to grow. We continue to expect That the growth will be healthy in the coming quarters.

Speaker 14

So to be clear, it's really more about Commissioning time and channel inventories than necessarily sell constraints per se, is that a correct way of putting it?

Speaker 2

Yes, I mean we do have longer lead times, 14 to 16 weeks, but we have made No, we don't think cell will be a constraint and we have lined up the right capacity that we need For the future once we solve these issues.

Speaker 14

Okay. Thank you. And then unrelated question, Kashy, I I was kind of touching on this a little earlier. To what extent do you think B2H or Maybe even further down the road, B2G functionality might could become a part of your EV charging And that's it for me. Thank you.

Speaker 7

Absolutely. It has to be a core part of our offering, because we see that it brings significant amount of value to the homeowner by doing that. So for example, in the case Of V2H where you're in a situation where you may have a grid outage, not only will you have Say 10 or 20 kilowatt hours of stationary storage to help you through that outage. You may have IQ8 on the roof that will also support you through that outage. You have an additional 80 to 100 kilowatt hours of storage available to significantly expand out The outage period that can be supported.

Speaker 7

So absolutely, B2H is going to be is a key part of our strategy. We want We want to bring that vehicle on to our Ensemble platform so that we can effectively manage it. With regards to vehicle to grid, We are the guys who really understand very well how to connect power systems to grids, things such as Grid profiles, things such as dynamic requirements around how grid profiles are going to change, all of those things we are extremely good at. And so with vehicle to grid, if we can again, if the right Sure, business model and business structure is available where the homeowner can be compensated for allowing the Hard to be discharged onto the grid in order to provide things like grid services and grid support. Absolutely, that's a good business model and we will support it with All the technology and like I said, we are absolutely the right guys to do it.

Speaker 7

Now in order to get there eventually to make that car completely bidirectional, There has to be some standards development work, not necessarily technology development. We feel like the technology is available whether that is done through a DC to AC conversion that occurs externally or onboard By making the bidirectional charge by making the charger, the level 2 charger that's within the car We feel like we are very well positioned to do all of those. And with regards to standards, we are actually actively participating in the standards body to drive Dry standards to allow for bidirectionality. I think it's going to take some time, but we are actively We are also engaging very closely with a number of EV manufacturers. We are working on some developing some highlights With them, so we are very actively involved.

Speaker 7

That's part of our EV roadmap. What Badri mentioned, the connectivity part and the control Art is just that smart EV charger. That's the only the very first step on a much broader roadmap that we have for

Speaker 8

Okay. Thank you very much.

Operator

Thank you.

Speaker 4

And our

Operator

next question will come from Gus Richard with Northland. Please go ahead.

Speaker 9

Yes. Thanks for taking the question. I think the guide for battery this quarter was 130 Megawatt Hours to 145. And was just wondering if you could talk a little bit about what would cause you to fall on the low end of that range and or the high end of that range? And that's it for me.

Speaker 2

Yes, I mean, we are typically conservative in our guidance. We'd like to make sure that One of the things we look at is we look at channel, we look at inventory, we are hawks at monitoring that We're extremely disciplined. So we gave ourselves slightly wider range at this time. But like what I said, we're incredibly bullish about our business. We The installers love using our product.

Speaker 2

We meet with 10 to 15 installers every week. We take down all of the issues that they have And all of the things that Enphase needs to do in order to make sure their life becomes easier, we take those actions, we go execute them. So

Speaker 4

Yes. I

Speaker 2

mean, we are quite happy with where we are. We have grown at a 28% rate And I have rate in the last 2 years that's not too shabby and we are forecasting continuous increase. Got it. Thanks so much.

Speaker 15

Thank you.

Operator

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

Speaker 16

Thanks. Obviously, very strong growth in Europe. I want to touch briefly on the Netherlands. I think Some new net metering rules that are going to go into place there next year. Can you talk about how that will impact end phase, is that good or bad?

Speaker 16

And Will you see an acceleration due to more battery deployment? Where could attach rates go? Just curious for your thoughts on that.

Speaker 7

Yes. So this is Raghu. As a means of clarification, it was net metering was supposed to there was a glide path Out of net metering starting at the end of next year, but right now there are discussions that net metering could be pushed out by an additional Couple of years. So the good and the bad there is, of course, we would of course, Solar continues to expand and net metering is a Fantastic incentive program and Solar is going to continue to expand at the rate that's happening as we speak and for the reasons that Badri alluded Which is a whole home electrification and the need for self consumption. So the flip side to that of course is that we were expecting battery deployment in Netherlands to increase Starting in 2023 in preparation for the sunsetting of net metering and I think that's going to get pushed out probably by another 12 to 24 months.

Speaker 7

But all in all, Netherlands is growing at a and we are very strong in Netherlands Netherlands is growing at a very, very good rate for us. It's solar centered around solar. And Netherlands, if you look at it, It's one subset of sector coupling and that it's the EV adoption is extremely high in Netherlands. And so it's a combination of solar and EV and now there is heat pump adoption also increasing there as the government is pushing to sunset The use of natural gas and of course natural gas is obviously in shortage as well. So, all in all Netherlands is an excellent market for us With solar and then eventually EV and storage as well.

Speaker 16

Got it. And then just staying on Europe, I mean, it sounds like you're gaining share partly because So I guess what happens when competitors there rebuild supply? Do you think that will impact your growth? Or do you think once an installer As an Enphase product, they don't go back to competitors. I guess just how durable is the growth?

Speaker 16

Thanks.

Speaker 2

We cannot be arrogant. We need to create meaning we need to provide value to the installers, which is high quality, which we think We are quite good there when compared to competition. So we are good there in terms of Customer experience, we pride ourselves on Net Promoter Score and answering the calls. We need to continue to do that. That's a big differentiator for Enphase.

Speaker 2

The last one Yes, it's what I said, the sector company, making sure that we take care of the homeowner to not have disparate Things in this home which are unconnected, it is one experience, manage your energy, Ensure that things like EV chargers and heat pumps are connected seamlessly to the home energy management system. Do that flawlessly, Take care of customers. We need to earn that business. So I have no qualms that this business is here to stay. But We will focus on quality and customer experience and usually if we get that right, the customers will stick.

Speaker 8

Thank you.

Operator

And our next question will come from Jeff Osborne with Cowen and Please go ahead. Hello, Jeff, your line is open.

Speaker 10

Sorry about that. Thanks for squeezing me in. I appreciate the commentary so far, I was wondering if you can comment on the IQ8 mix over time, where you think that can go? I know there's some customers like SunPower that are still using IQ7. Is there That can go to 80% or 100% over time or what's the ultimate destination in terms of mix?

Speaker 2

Yes. I mean, We're not going to comment on specific customers, but our target is to get to 90% by the Q2 of 2023.

Speaker 10

Got it. And then quick one for Raghu, is there any progress that you can share on the gallium nitride development for IQ9?

Speaker 7

Yes. I don't have Any specific details to share, but in terms of technology, absolutely, we are continuing to Developed the Gallium Nitride based microinverter. So, yes, Probably at the next Analyst Day, we may have more things to share, but right now,

Speaker 2

I'll give you some color. We understand whom to work with. The devices come in a similar Form factor that we are used to for the high voltage FETs today, silicon FETs, which is great. We need to do work on the transformers, which we understand, and it's well underway. We need to work on the gate drivers, which we understand that's Well underway.

Speaker 2

So, I think it is a matter of 12 to 18 months and I think We are going to have the 1st Gallium Nitride product.

Operator

And our next question will come from Biju Perinchel with Susquehanna. Please go ahead.

Speaker 5

Hi. Thanks for taking my question. I had a question on the U. S. Micros.

Speaker 5

And So based on some of the checks that we've done, looks like the long tail installers are maybe able to control their costs A little better than some of the larger installers. So, are you seeing any indications that the installers on EIN, are they gaining Market share when you look at them as collectively just wondering if that's a tailwind for the domestic business?

Speaker 4

We

Speaker 2

don't see exactly what you said. We do see that the demand is very strong. We do see both installers doing well, the big installers as well as the small installers. Small installers usually they understand they are local, they understand what the homeowners Understand about the area. They can give more personalized service and That kind of business, the long tail of installers is where we add the most value because They don't want to be on calls with reference to quality issues or service issues.

Speaker 2

So we add the most value there. But we aren't seeing one category versus the other category Changing much right now.

Speaker 5

Okay, got it. And I had a A follow-up on battery shipments. I think in the past, you had some installers maybe waiting on features like Load control and things like that. So is there sort of a similar dynamic now with It is it's in the 5P product, I think, is still coming out second half of the year. And Then you mentioned the next generation battery coming out in next year?

Speaker 2

Yes. Just to say that we already have load controllers that are available to our installers, 1st generation load controller. We have generated compatibility available to our installers. So all of those are fully available today. The IQ Battery 5P is our 3rd generation battery.

Speaker 2

That's going to be available in the early 2023 is what I said. And that's the Q1 of 2023 is what I said. And that the focus for that battery is high power, Double the power, both continuous and peak power. And it's to basically Do some more improvements in overall commissioning and go to a wired form of connectivity versus wireless. Just focus on removing any pain points for the installer and home war.

Operator

And our next question will come from Sophie Karp with KeyBanc. Please go ahead.

Speaker 17

Hi, good afternoon. Thank you for taking my question. Just wanted to follow-up on the mix of IQ7, right? How what is Can you elaborate on the strategy of how you are shifting that mix in the U. S.

Speaker 17

And in Europe? In other words, is there more penetration of IQ8 in the U. S. Versus Europe, vice versa?

Speaker 2

All regions will move to IQ8 eventually. That's what I said. We will move to IQ8, 90% of our microinverters will be IQ8 by the Q2 of 2023. We have gotten started with the U. S.

Speaker 2

37% of our overall microinverter shipments this quarter We're IQ8 and primarily into U. S, North America, but we are soon going to start Introducing IQ8 microinverters into Europe later this year. We are going to start with We're going to start with Netherlands, France and then move on to Germany and the other countries. So Our plan is to get to 90% by Q2, 2023.

Speaker 17

Got it. So in the U. S. As you're rolling this out, have you seen any, I don't know, like pricing pushback on them from dealers? Maybe Is there any risk at all that the maybe losing share if you transition to IQ8 based on pricing to some

Operator

How should we think about that?

Speaker 2

Absolutely not. No share loss. It is that when we explain the value of IQ8 to people they do understand. And like what I said, there is sunlight backup, there is unlimited solar The storage ratio and the concept of Sunlight jump start when the battery is dead, the concept of Sunlight jump start which are Highly differentiated features from competition. So they do understand that now If they have a short term problem in terms of conversion that we aren't able to ship IQ7 to them for In the next few days, weeks, we do understand the situation and we work with So that the pricing is palatable for them for a short term until they Then start paying the full price for IQV.

Operator

And our next question will come from Cameron Lockridge with Stephens. Please go ahead.

Speaker 15

Hey, good afternoon. I appreciate you taking my questions. I guess I wanted to start really just on European price cost dynamics. Badri, I think I heard you say earlier, Europe gross margins are at parity with the U. S.

Speaker 15

And so I was just kind of wanted to unpack that a little bit. Is that are you able To comment on the pricing dynamics in Europe versus the U. S. That potentially allows you to maintain that gross margin parity? Is there something on the cost side that maybe comes out in Europe that enables that gross margin parity?

Speaker 2

There's nothing on the cost side. It's basically we work with long tail installers in Europe. They care about a lot of things. They do care about price, but they care about quality and service even more. And We are able to get we are able to price them appropriately for the value we provide.

Speaker 15

Got it. Thanks Brett. Thanks for that. Switching real quick to batteries. I think last quarter you mentioned that Your battery device is able to be paired with pretty much any inverter on the market.

Speaker 15

And correct me if I'm wrong there, but I guess if you could comment on what percentage of your battery sales right now go to 3rd party or pair with 3rd party inverter solutions versus your own and how you see that developing over time?

Speaker 2

That was specific to Europe where we what we did was we released We made our IQ batteries compatible to 3rd party string inverters and we are just Getting started there, we don't have much statistics right now to give you, but the name of the game was quite simple. Many of the homes in Germany and Belgium already had solar from string inverters and they were installed quite some time Yes, some time ago and they need batteries and they were not getting batteries. So it was a very popular it was a popular demand From the installers saying, why don't you make your batteries interoperable with other string inverters and we did that.

Operator

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

Speaker 2

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

Operator

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

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Earnings Conference Call
Enphase Energy Q2 2022
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