President and Chief Executive Officer at Enphase Energy
Good afternoon. And thank you for joining us today to discuss our second quarter 2022 financial results. We had a good quarter. We reported record revenue of $530.2 million, achieved non-GAAP gross margin of 42.2% and generated free cash flow of $192 million and 37% of our Q2 microinverter shipments were IQ8.
We exited Q2 at approximately 42, 13, 29. 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 35, 15, 20. 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.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 five million microinverters today. We're on track to begin manufacturing at Flex's factory in Romania starting in Q1 '23. This will enable a capacity of six million microinverters per quarter for us globally. We're 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 cell pack supplier early next year for our third generation battery. 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% and 20% respectively. 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. We are pleased to report record quarterly revenue in the U.S. and record sell through for our microinverters in Q2. We continue 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 install times.
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 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.
Sector coupling is the latest buzzword in Germany, and it denotes the integration of three 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 electrification. We're working towards sector coupling by making our solar plus battery systems seamlessly work with third-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're aggressively expanding the team. We expect this momentum to continue, supply is tight, the channel inventory continues to be below normal levels. We're 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.
Now, I will provide some color on Australia, Brazil and India. In Australia, we're 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. 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 two years ago in the third quarter of 2020. Since their introduction, we have grown battery shipments by an average of 28% per quarter over the last two years. We have certified more than 1,600 installers worldwide till date, and we are continuing to win around 15 new installers a week in the U.S.
In the second quarter of 2022, we shipped 132.4 megawatt hours of IQ batteries, a 10% increase from the first quarter of 2022. In addition to North America, we're also ramping up batteries in Germany and Belgium. We have learned a lot in the last two years, we have made several improvements to both the installer and the homeowner experience. Currently our installers in North America are experiencing two plus hours of commissioning time, which we would like to cut down by half.
We're also updating the device firmware at both our distribution centers as well as in the channel to 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 megawatt hours and 145 megawatt hours of IQ batteries. I recently visited the top installers in Puerto Rico in May and in Puerto Rico, the storage attach is 100%. I came away extremely excited about how our IQ batteries as well as IQ8 microinverters can 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.
While we're focused on providing a great experience with our current IQ batteries, we expect to introduce our third generation IQ batteries 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 cam protocol for seamless connectivity. We expect the third generation battery to have simple installation, leading to an improved customer experience.
Let's now talk about our small commercial product. As previously discussed, we piloted IQ8B with a few installers in the second quarter, 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 is significantly higher as manufacturers are moving rapidly to the larger format cell. Given this, we're 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. 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 ClipperCreek in December of 2021, and the team is now fully integrated. We shipped more than 8,250 chargers in Q2, at a healthy gross margin, and the business is quite profitable as well. 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 small TV chargers to customers in U.S. and Europe in the first half of '23. This will provide connectivity to the cloud through Wi-Fi 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 a 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. Before that some background. We acquired a total of five companies in the last six quarters. Four 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&M software platform for our installers.
Our latest acquisition we did in March is SolarLeadFactory, which provides lead generation services for installers. We want to provide high quality leads to our network of installers in a cost effective manner. 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 Sofdesk in January of 2021, 18 months ago, which provided us with solar design software capability. Our software business now has the record customer count in Q2 with approximately 950 installers using the solar graph software. We are making improvements to the software based on installer feedback and/or implementing new features including shading and 3D 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.
The next one, in December 2021, we acquired a company in Arizona called 365 Pronto. The company's software platform enables a two-sided marketplace, the buyers or customers consisting of installers, asset owners, or original equipment manufacturers, the sellers or 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 marketplace. 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.
Let me now give you a quick update on our Enphase Installer Network or EIN. We have onboarded approximately 1,200 installers to our 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 3.0 in California, we submitted our comments to the proceeding in late June. 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 feedback, we will be actively engaged over the next couple of months to 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 2022 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.
With that, I will turn the call over to Mandy for her review of our finances. Mandy?