Enphase Energy, Inc. Price & Performance (ENPH)

For a more complete discussion of the risks and uncertainties, please see our most recent Form 10 ks and 10 Qs, which filed with the SEC. We caution you not to place any undue reliance on forward looking statements and undertake no duty or obligation to update any forward looking statements as a result of new information, future events or changes in 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 furnished with the SEC on Form eight ks can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri? Good afternoon and thanks for joining us today. To discuss our first quarter twenty twenty five financial results. Reported quarterly revenue of $356,100,000 shipped approximately 1,530,000 microinverters and 170.1 megawatt hours of battery and generated free cash flow of $33,800,000 Our Q1 revenue included approximately $54,000,000 of safe harbor. As we exited Q1, our battery channel inventory was normal while our microinverter channel inventory was a little elevated.

For the first quarter, we delivered 49% gross margin 22% operating expenses, and 27% operating income all as a percentage of revenue on a non GAAP basis and including the net IRA Mandy will go into our financials later in the call. Our customer service, Enphase, has steady at 77% in Q1 as compared to 78% in Q4. The average call wait time increased slightly to three point five minutes, largely due to the winter storms in The U. S. We are continuing to invest in AI and machine learning, to make our support experience faster, smarter and more helpful. Let's cover operations. Our global capacity is around 7,250,000 microinverters per quarter. 5,000,000 of those are in The U. S. In Q1, we shipped approximately 1,210,000 microinverters from our U. S. Contract manufacturers, booking 45x production tax credits. Our domestically produced microinverters help residential lease flat PPA [indiscernible] and commercial asset owners to qualify for the 10% domestic content ITC error. We expect to ship approximately 1,000,000 microinverters from The U. S. In Q2. Q1 was our second quarter of building the IQ Batteries in The U. S. Using domestically manufactured microinverters, battery management systems and packaging while sourcing cell packs from China.

We shipped 44 megawatt hours of batteries from our Texas facility a strong step forward as we continue scaling U. S. Production. Let's cover tariffs. The newly announced 145% tariff on products from China along with the 10% reciprocal tariffs on imports from other countries is expected to have minimal impact on our microinverters and accessories. Thanks to the excellent work our team has done.

To diversify the supply chain. However, our batteries will be more impacted. As we currently source battery cell packs from China. These tariffs are expected to reduce our gross margin by approximately 2% in Q2 of twenty five. The effect of the tariffs is limited in Q2, due to us having pre tariff inventory. Starting in Q3, we anticipate a 6% to 8% total gross margin impact after accounting for pricing adjustments. We expect the gross margin impact to gradually lessen over the subsequent quarters as our mitigation efforts take effect. We are moving with urgency We have already identified tangible sourcing options outside China, and we are fast tracking the qualification These efforts are progressing quickly and we expect to fully offset the impact starting in Q2 twenty twenty six. As always, tariff policy remains fluid and may evolve with future government decisions. Let's come to the regions. Our U. S. And international revenue mix for Q1 was 7426%, respectively. In The U. S, our revenue decreased 13% in Q1 compared to Q4, primarily due to seasonality and softening in customer demand partially offset by safe harbor revenue of $54,000,000 The overall sell through of our product was down 18% compared to Q4.

In addition to seasonality, installation activity was negatively impacted by one of the large national lease providers facing financial challenges. The U. S. Solar market remains under pressure from high interest rates and many installers, lease providers and distributors are navigating through a tough environment. That said, there are some encouraging signs. In California, installers are growing more confident selling NEM three point zero systems. Supported by strong battery attach rates.

At the same time, power prices continue to rise across several key regions. We are staying focused on product innovation quality and customer experience. Our upcoming fourth generation battery is designed to lower total system costs for backup. Our complementary offerings like Busbar PCS and NIM expansion software help customers unlock even more value. In Europe, our revenue increase 7% in Q1 due to shipping the FlexPhase battery in Germany as compared to the prior quarter. While our overall sell through declined a little by about 9%. The overall business environment across the region is still challenging, but we are maintaining our discipline on controlling the channel as well as expanding our served available market by introducing a number of new products. I'll provide additional color on our key markets in Europe. The Netherlands, France, Germany and UK. In Netherlands, the demand softened slightly in Q1 in line with typical winter seasonality. The market continues to shift from solar only to solar plus battery solutions, help avoid export penalties and enable participation in retail energy markets. We started shipping our new IQ ED charger into the region and recently introduced backup capability for our batteries. Further strengthening the value proposition.

In France, the market has slowed down following the recent utility rate cuts and we expect the demand to be muted over the next two quarters. However, a significantly lower VAT is set to begin in October which should help spark a rebound in solar. France remains a key long term growth market for us. Given our leadership position and the country's low solar penetration. We started shipping our new IQEV charger into France and we also plan to introduce hot water heater compatibility the second quarter, allowing homeowners to increase their self consumption. We also added backup capability for our batteries, further strengthening resilience offering. In Germany, we are ramping sales of our new IQ battery 5P with FlexPhase. And the new IQ EV charger. Typical installations are three phase in Germany, and we are seeing a 30% backup backup attach for our batteries. A strong indicator of the growing demand for resilience. We are also preparing to launch our balcony solar product imminently in Germany in Q2, which expands our addressable market by approximately 400 megawatts annually. We believe these product introductions position us well for meaningful growth in both sell in and sell through over the coming quarters.

The UK market continues to perform well for us as we strengthen our relationships with the retail energy providers in the region. We already started shipping our newest IQEV charger, and we plan to introduce backup capability in Q3 of this year. Further expanding our energy resilience offering. We remain under penetrated in several European countries including Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden, Poland and others. And we see them as important pillars of our long term growth strategy. Over the coming months, we plan to introduce our full product portfolio across more of Europe, including IQ microinverters, IQ battery flex space with backup, our latest and the greatest EV charger, AI powered energy management software, and the SolarGraph installer platform. We continue to make steady progress in other regions. In Puerto Rico, we are seeing a very sharp rise in demand, for our higher domestic content battery driven by an increased need for resilience. In India, sales of our IQ 8T microinverters continued to grow we are also shipping our batteries into the region. We are encouraged by the early signs of strong product market fit in both the urban and rural areas. In Brazil, new fire safety recommendations such as rapid shutdown should support continuous growth of our IQ 8T microinverters.

Now let's turn to our Q2 guidance. We expect Q2 revenue to be in the range of $340 to $380,000,000 This includes approximately $40,000,000 in safe harbor revenue, which we define as sales made to customers who plan to install the inventory over more than a year. We are currently about 80% booked to the midpoint of our revenue guidance. For IQ Batteries, we expect to ship between one hundred and one hundred eighty megawatt hours during the quarter. Let's talk about new products. Starting with IQ batteries. Our fourth generation IQ battery is all set to ramp up production in this quarter. This system includes the IQ Battery 10C, the IQ Combiner 6C, and the meter color. The IQ battery 10E delivers the same 10 kilowatt hour capacity while using 60% lesser wall space. Thanks to its fully integrated battery management and power conversion. When paired with the IQ combiner and the collar, the system significantly simplifies backup. Eliminating the need to relocate loads, install current transformers, or run high current wiring. For both homeowners, and installers, improvement is substantial. What once took four boxes on the wall can now be done with just two. We have successfully completed the required meter collar testing with PG and E and four other utility companies.

We expect to begin pilots in May. We have now expanded the IQ microinverter family into 58 countries and plan to grow that number further by the year end. In Japan, we expect to begin production shipments this week through a distribution agreement with Hitochu Corporation. One of the country's largest trading companies. Recently, Tokyo became the first Japanese city to mandate rooftop solar on new home builds. Given the typically small roof areas in Tokyo system design can be complex, which is exactly where our Enphase IQ8 microinverter shine offering the flexibility and scalability needed to maximize production and reliability from every rooftop. In Q2, we plan to launch our IQ BALK solar product in Germany and Belgium. With additional countries in Europe and Asia to follow in 2025. The product offers a simple, efficient way for apartment dwellers to harness solar energy from their balcony. Built on our proven AC coupled architecture, the system allows the users to plug in one to four panels directly into a standard wall outlet. We plan to offer pre wired kits that include IQ microinverters, and the balcony gateway enabling fast setup and seamless monitoring through the Enphase app. In the event of a grid outage, the system also supports sunlight backup via an auxiliary socket located on the IQ Balcony Gateway product.

Let's come to our IQ 8P3P commercial microinverter, a product that is steadily gaining traction. We have over six fifty commercial sites live across The U. S. Averaging about 35 kilowatts per system. With consistent positive feedback from the field. These three phase microinverters now ship from The U. S. With increased domestic content that help qualify for the 10% IT add up.

A meaningful advantage for commercial asset owners. And we expect the momentum to grow with the upcoming IQ nine microinverter which is purpose built for four eighty volt three phase systems unlocking even more of the commercial market. Let's talk about IQ nine. So IQ nine microinverters are powered by cutting edge gallium nitride technology. These microinverters are engineered for the future. With support for 18 ampere DC input current higher AC voltages, and three phase configurations. Designed specifically for small commercial systems, IQ nine will support four eighty volts AC, the most common commercial voltage in The U. S. The first models will deliver peak output power of four twenty seven watts and 548W, making them ideal for pairing with today's most powerful residential and commercial solar panels. IQ nine uses GaN based bidirectional switches that allow us to reduce conduction losses and increase our density. While we are currently operating at similar switching frequencies, to maintain compatibility with our existing transformer design, gallium nitride gives us the foundation to enable much higher frequencies and even greater efficiency in future products like IQ 10. Thanks to GaN, IQ nine already delivers efficiencies that meet our exceed prior generations, with a sleek compact footprint.

We expect to begin internal installations at Enphase facilities soon, ahead of a full production launch in Q4. On the portable power front, we began shipping the IQ PowerPack 1,500 to customers in U. S. And Canada This compact 1.5 kilowatt hour solution brings together our core strengths Enphase in a box. Which is advanced power electronics, battery management and intelligent software into a smart portable product designed for home backup travel and emergencies. IQ PowerPack marks our entry into the portable consumer energy market. We see this as a meaningful growth vector and plan to expand the product family in 2025. To address many more use cases and reach many more countries. Let's dive into EV charging. In late twenty twenty four, we began shipping our next generation IQ EV charger into Europe. We are now active in 14 countries across the region. This is one of our most advanced residential chargers till date, designed to work seamlessly with the Enphase energy system or as a high performance standalone system. Smart features like green charging, help homeowners maximize solar usage while intelligent scheduling reduces energy costs during peak hours delivering both sustainability and savings. We are excited to expand the availability of the IQ EV charger throughout this year into more European countries as well as into Australia, Brazil, India, and The U. S, where we will position it as a premium feature rich offering.

With strong early momentum, we expect continuous growth this year and beyond. Our IQ energy management software supports grid services programs, VPPs, in regulated markets like The U. S, and energy market participation in deregulated markets like Europe and Australia. In The U. S, we are active in 26 programs across key states such as California, Colorado, Massachusetts, North Carolina, Texas. These programs discharge batteries during peak demand supporting the utilities. As electricity rates become more complex, we believe our AI powered software differentiates us, maximizing ROI and reducing the payback period. Let's cover SolarGraph, our all in one installer platform. We are investing in major enhancements, including a one click express editor for customized proposal, a GenAI powered in app assistant, integration with racking and expanded C and I capabilities all aimed at making SolarGraph even more intuitive. The platform is now available to residential and commercial installers in The U. S. Canada, Brazil, Germany, Austria, Netherlands and France with plans to expand into additional countries in the coming quarters. SolarGraph continues to evolve as a strategic part of our software ecosystem helping installers sell faster, design smarter as well as scale efficiently. Let me conclude. While the global policy environment remains fluid, with tariffs, with interest rates and subsidies constantly evolving, we are moving quickly to realign our supply chain to minimize downside across a range of scenarios.

While we cannot control the macroeconomic conditions, we can absolutely control our response. This means doubling down on what we have what has always made Enphase successful. Relentless product innovation, world class reliability, and exceptional customer service. Looking ahead, our strategy is clear, are driving revenue growth through a wave of new products. Starting with our fourth generation system which delivers the lowest installation cost of any Enphase solar plus battery solution to date. In Europe, our SAM is expanding rapidly with the launch of our FlexPhase battery with backup the IQEV charger the upcoming IQ Balcony solar kit. We are empowering installers with tools like NEM expansion software to expand legacy systems, busbar PCS software to avoid main panel upgrade, and dynamic tariff optimization software in European markets help save money for the homeowner. And with our upcoming IQ nine microinverters, we expect to unlock a 10 gigawatt opportunity in commercial solar while driving cost per watt improvement across our residential business. As the world faces rising power prices and increasing grid stability and phases becoming leaner, faster, and more innovative. We are energized by the future and firmly focused on delivering value for our customers, partners and shareholders.

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

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of twenty twenty five financial results. As well as our business outlook for the second quarter of twenty twenty five. We have provided reconciliations of these non GAAP to GAAP financial in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $356,100,000 We shipped approximately 688.5 megawatt DC of microinverters and 170.1 megawatt hours of IQ batteries in the quarter. Q1 revenue included approximately $54,000,000 of safe harbor revenue. In December 2024, we signed a safe harbor sales agreement for a total amount of approximately $95,000,000 to ship in the first half of twenty twenty five. As Badri mentioned, we define safe harbor revenue as any sales made to customers who plan to install the inventory over more than a year. Non GAAP gross margin for Q1 was 48.9%. Compared to 53.2% in Q4, primarily due to lower bookings of 45X production test credits and product mix. GAAP gross margin was 47.2% for Q1. Compared to 51.8% in Q4. Non GAAP gross margin without net IIA benefit for Q1 was 38.3% compared to 39.7% in Q4 primarily due to product mix.

GAAP and non GAAP gross margin for Q1 included $7,900,000 of net IIA benefit. Non GAAP operating expenses were $79,400,000 for Q1. Compared to $83,300,000 for Q4. The decrease was the result of restructuring actions initiated in the fourth quarter of twenty twenty four. GAAP operating expenses were $136,300,000 for Q1. Compared to $143,500,000 for Q4. GAAP operating expenses for Q1 included $50,900,000 of stock based compensation expenses. Dollars 2,900,000.0 of amortization for acquired intangible assets and $3,200,000 of restructuring and asset impairment charges. On a non GAAP basis, income from operations for Q1 was $94,600,000 compared to $120,400,000 for Q4. On a GAAP basis, income from operations was $31,900,000 for Q1. Compared to $54,800,000 for Q4. On a non GAAP basis, net income for Q1 was $89,200,000 compared to $125,900,000 for Q4. This resulted in non GAAP diluted earnings per share of $0.68 for Q1. Compared to $0.94 for Q4. GAAP net income for Q1 was $29,700,000 compared to $62,200,000 for Q4. This resulted in GAAP diluted earnings per share of $0.22 for Q1. Compared to $0.45 for Q4. We exited Q1 with a total cash cash equivalents, restricted cash and marketable security balance of $1,530,000,000 compared to $1,720,000,000 at the end of Q4.

We paid off the entire principal amount of $102,200,000 for our 2025 convert that came due on March 1, As part of our $1,000,000,000 share repurchase program authorized by our Board of Directors in July 2023, We repurchased 1,594,105 shares of our common stock in Q1 at an average price of $62.71 per share for a total of approximately $100,000,000 We have a remaining $298,700,000 authorized for further share repurchases. In addition, spent approximately $12,100,000 on withholding shares to cover taxes for employees to start investing and options in Q1. That reduced the diluted shares by 203,308 shares. We expect to continue this anti dilution plan. In Q1, we generated $48,400,000 in cash flow from operations. And $33,800,000 in free cash flow. As approximately $17,000,000 of revenue in Q1 was prepaid last quarter. Capital expenditure was $14,600,000 for Q1.

Compared to $8,100,000 for Q4. Now, let's discuss our outlook for the second quarter of twenty twenty five. We expect our revenue for Q2 to be within the range of $340,000,000 to $380,000,000 which includes shipments of 160 to 180 megawatt hours of IQ batteries. Q2 revenue outlook includes approximately $40,000,000 from a safe harbor sales agreement signed in December 2024. We expect GAP gross margin to be within a range of 42% to 45%, including two percentage points of new tariff impact. We expect non GAAP gross margin to be within a range of 44% to 47% with net NII benefit. And 35 to 38% before net IRIA benefit. Including two percentage points of new tariff impact. Non GAAP gross margin excludes stock based compensation expense and acquisition related amortization. We state the net IRA benefit to be between 30,000,000 and $33,000,000 on estimated shipments of 1,000,000 units of U. S. Microinverters in Q2. We expect our GAAP operating expenses to be within a range of 136,000,000 to $140,000,000 including approximately $58,000,000 estimated for staff based compensation expense, acquisition related expenses and amortization, and restructuring and asset impairment charges. We expect our non GAAP operating expenses to be within a range of 78,000,000 to $82,000,000 For the year of 2025, we set our GAAP tax rate of 21% to 23% and a non GAAP tax rate of 15% to 17 including IRA benefits.

With that, I will open the line for questions.

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, We ask that you please limit yourself to one question and one follow-up. For any additional questions, we ask that you please rejoin the queue. We will now pause for just a moment to assemble our roster. And your first question today will come from Praneeth Satish with Wells Fargo. Please go ahead. Thanks. Good evening. Maybe just starting with the Q2 guidance, So it includes two percentage points of gross margin headwind from the tariffs. Sounds like that could go to 6% to 8% in Q3. So it would seem as if you're not fully passing through the entire incremental tariff cost to customers. And I guess maybe if you could just talk about what's driving your decision to absorb some of these costs versus passing them through? Because I would imagine that many of your competitors are also sourcing battery cells from China. So maybe if you could talk through that.

You're right. Know, let me give a big big picture. First of all, due to these tariffs, and that is 145% tariffs on imports from China. And 10% tariff on imports from other countries. So due to that, we are glad that our microinverters and accessories aren't affected much, and that's because our supply chain has done a fantastic job of diversification. Global diversification. So that's the first good news. On batteries, you know, more than 90, and I would venture to say 95% of [indiscernible] made in the world they come from China. We are no exception. We use Chinese sources for the cell packs. We have two ways that we produce batteries. One, is we make batteries overseas. The full system. And the second is we get cell packs into The US and then we make the entire system, the rest of the system, inside The US. As you can see, when we bring it into The US, you have high U. S. Cost of manufacturing. But you have your tariff only on the CELPAC That Is Coming In. Plus Any Associated Raw Materials That Are Coming In From China or the other places. So, therefore turns out for us that whether we make it domestically or whether we make it outside, The US our costs are becoming approximately the same.

And the cost impact is significant. You know, why did we chose yes, are going to pass a portion of it but we are going to absorb majority of the impact. And why is because, first of all, we think we can recover this effect in a couple of quarters. Two to three quarters. That's what we mentioned. And what are we doing about it? Our job number one is to get cell sources outside China qualified. That's the job number one, which we have already identified the sources We are working in aggressive task force mode, and we expect to qualify these sources early next year. Therefore, considering that the impact is going to be only for couple of quarters, two to three quarters, not couple of quarters, two to three quarters. We decided we would pass on a portion to the installers, and we would absorb the majority ourselves. Now, I said 6% to 8% is the total impact in Q3. First of all, we aren't going to be that much impact beyond 2% in Q2 because we have pre tariff inventory. Then from Q3 onwards, that basically goes away. And we we essentially are going have an impact of about six to 8% as a result of all of these actions.

We expect that impact, the gross margin impact, to continuously improve as we go from Q3 to Q4 to Q1, and the impact becomes zero. In Q2. Got it. That's very helpful. And then just right or wrong, there seems to be a bit of paralysis on the customer side as we wait for clarity around IRA For the Q2 guide, are you accounting for any worsening of demand trends in Q2?

As we wait for clarity or making any adjustments for, Nova exposure in the guide. And then maybe on the flip side, do you think sell through could accelerate in the second half once we get IRA clarity guess what are you hearing from your dealers on any pent up demand? Thank you. [indiscernible] I said a few things. I said my bookings right now is about 80% so the guidance that we gave, we have accommodated that bookings in place, which is actually healthy. So that's that's the first thing. Yes. The lack of certainty is definitely a factor you know, one of the large national lease providers, as you mentioned, in financial trouble is another factor, What that financial trouble causes is basically our installers have difficulty in managing their cash flow. When our installers have very you know, difficulty in managing the cash flow, the originations [indiscernible] [indiscernible] Q1. Because the originations are for we did not see enough pull through from the distributors to the installers. Because as you must imagine, life must be pretty tough for them. In terms of cash flow. And but the good news is there are a lot of lease financiers now, today, compared to what they were two years ago.

So it is a matter of time where those installers pick up the alternate financiers and hopefully restart the business again. However, that basically created a gap in Q1. And that's what we talked about our sell through was a little lower than normal. Having said that, we are entering the best seasonal part of the year. Q2 normally is is the best in terms of seasonality. Q1 to Q2 is what I'm talking about. And for Enphase specifically, what we have going for us we expect to ramp our fourth generation batteries. In Q2. We expect to ship meaningful volumes in production this quarter, and we basically we expect that our costs for our backup installations will be equivalently as good as you know, almost as good as grid type. You know, we have done a great job in gaining market share till now, on our batteries, supporting grid tied installations with our third gen generation. This presents a huge opportunity for us to capture the backup market as well, with a solution that is low cost. Earlier, we used to have a lot more components in our third generation system for backup, Now those will get significantly lesser because of two things.

One is we have the collar The second is we have a 10 kilowatt hour battery now instead of a five kilowatt hour battery. Battery. So specifically to Enphase, we are well positioned to capitalize on the battery market We also the clarity in terms of the policy will definitely give us a boost. In the latter half.

Thank you.

And your next question today will come from Phil Shen with Roth Capital Partners. Please go ahead. You talked earlier, Badri, about the margin trajectory as we get through even the first part of next year. Can we talk about what the revenue cadence might look like So for Q3, is $375,000,000 on the table? Would you expect Q4 to be up quarter over quarter or down? And if you feel like you can share even Q1 of next year, that would be fantastic. Thanks.

Right. Phil, you know that we normally don't guide for Q3 or Q4. But we have a few vectors going for us I just talked about the fourth generation system. We believe that's a huge factor for Enphase. Then we know, specifically regarding The US, we have the IQ nine that is going to be turning on in Q4, Then coming to Europe, all of the new products, we have introduced a large array of new products which we are already seeing some good traction. Namely the flex phase battery, which provides three phase backup for many countries in Europe, [indiscernible] which basically we are about to introduce it this quarter, so it's no longer something out there. It's going to ramp in this quarter. Balcony Solar is going to address for example, the TAM in Germany alone is 400 megawatts, and after Germany we are going to go to Belgium and many other European countries. After that, we will go to Japan and India as well.

So we expect that new product to also be introduced in Q2, And the next one is our IQ EV charger, the latest EV charger we did a good job ramping up so that we can service all 14 countries in Q1, And now we've got to grow from strength to strength there in terms of installer partnerships, and EV charger partnerships in general through through other companies. There. So while you know, the policy situation, etcetera, is uncertain, and face is trying to control our destiny by introducing new products, by having discipline, and these are the new product vectors that we are relying on for growth.

Okay, thanks, Roger. Back to margins for a bit here. You talked about, I think, the six down 6% to 8% or six to 8% impact on Q3 margins. I think you mentioned that was the growth sorry, the net impact Can you share what the gross impact is on tariffs on Q3?

Well, no, I don't have the gross impact. All we are saying is we are passing a small amount of percentage increase the customers. We are taking a number of other actions to like, example, we do have some work that we can do on the raw materials for the batteries moving them out of China. So all of that work is going to happen. Those are what I call as improvements A lot of vectors there, a thousand little things we are going to do. In order to continuously improve our gross margin impact.

And your next question today will come from Brian Lee of Goldman Sachs.

Please go ahead. Hey, guys. Good afternoon. Thanks for taking the questions.

I guess first question would just be it sounds like you're passing through a little bit of the price on the tariff impact on batteries in the back half of the year. So you been doing pretty well, 170 megawatt hours of shipments quarter here to start the year. You've never had that kind strength in the first half, second half usually better. But given tariff impact uncertainty and maybe a little bit of you're having to pass through, like what's the view on shipment volumes for battery storage in 3Q and 4Q. Can you continue to grow into the second half? I guess that's also in the context of a new battery ramping. So just wondering kind of what's the volume view on top of what's happening with respect to cost and margins?

Yes. I mean, this is a great battery. You know, first of all, our third generation system was five kilowatt hours Fourth generation system is 10 kilowatt hours. We had separate battery management, separate power conversion, in the third generation system. We have combined it, and it got deep level of integration. Combination of power conversion as well as battery resulting in cost decline. And then we are talking about the balance of In the balance of system, you know, we have eliminated what was called the system controller, in the third generation, and now we have eliminated that box replacing it with a small meter collar, which is trivial to install. So bottom line, what I'm trying to tell you, Brian, is that the system cost for the Enphase installed with backup is going to be significantly reduced. And yes, the battery itself might go up a little bit in pricing, but the overall system cost reduction is quite good. And quite tremendous. So we expect to continuously grow on batteries. We also expect to grow on batteries in Europe.

For the first time, we have had [indiscernible] A full three phase backup.

And that was not available so far. I told you about the Germany Germany, the battery attaches 80%, 90%. But of that battery attach, how many have backup? 30% have backup. We are able to serve those 30% now. And we are extending that to everywhere in Europe, We expect our batteries to significantly improve. That is why we are taking very swift efforts to realign the supply chain to have non China cells in our source of supply. That's super helpful. Maybe just a follow-up on that then for you, Badri. So I think pre tariff, you guys were talking about doing something in the, you know, to 35% gross margin on battery storage. If you kind of back out the six to eight percentage point tariff impact in the back half here, it implies battery storage margins are going be zero or negative, definitely negative in The U. S. So to get to back to kind of that 35% level, which I think you're inferring by Q2 of twenty twenty six, like how gradual is that? Or is that all just going to happen in like a quarter or two as you basically switch to non China suppliers.

It sounds like over Q1 or Q2 or is it all going to just happen in Q2? Maybe a little bit more around the cadence, please. Thanks.

Yes. So, basically, I told you about the impact in Q2 being small. Which is clear. So the remaining quarters left you know, I also told you, sorry, Q2 twenty six, I told you the impact is zero. So we are talking about three quarters. Basically. And in these three quarters, the efforts we are going to be engaging are two. Two things. Are one is we are going to move the cells, the source of cells to outside China. And multiple sources. That's what we are already working on. Then the second is any raw materials used in [indiscernible] which we use a lot of raw materials that are sourced from China, those also we need to move away to low tariff countries.

And as you imagine, that the latter activity is a continuous activity, And the cell activity can turn on quickly, but that might need about three months to ramp.

So So basically, my guidance to you is these numbers are rough numbers, There's six to 8% impact in Q3, But every quarter, Q4 twenty five should be better than Q3. Q1 'twenty six will be better than Q4 'twenty five, and Q2 'twenty six should disappear to zero.

And your next question today will come from Mark Strouth with JPMorgan. Please go ahead.

Great. Thanks very much.

So, Badri, I just want to confirm on that last point with the battery adjusting the supply chain. The The raw material of the pack, it's still the same LFP chemistries, right? Or is there any any redesign or read a certain that would be needed of your product? And would that be added on top of this time line that you're talking about through 2Q of twenty twenty six?

Yeah, good question. It is The whole point is to keep our LFP.

We are not moving away from LFP So and also the trick is, how do we do this without redesigning everything?

And so right now our plan is mainly associated with the cell, However, the normal qualifications will be required. Because cell is the most basic entity of the battery. And we need to make sure we do the appropriate qualifications.

Okay. That's great. And then, just kinda near term, wanted to go back to the 2Q guide. You said you're 80% booked into the midpoint of the guide. And think you mentioned this in the past, it's been closer to 85% at least the last couple of quarters. Just kind of your thoughts on going with that 80% number instead of 85%, just kind of what gives you the confidence to go with that higher Last quarter, we reported two weeks late. That was February 4. This time, this April 22. So, we are fine. [indiscernible] good. We expect to be 100% booked soon.

Thank you.

And your next today will come from Colin Rusch with Oppenheimer. Please go ahead.

Thanks so much, guys. You know, given the the VPP functionality that you guys can enable, as well as some of the analytics, Can you talk a little bit about market share gains? How you're seeing that sales process? Evolve and whether you're using price as a lever to take up market share a little bit here as you go forward?

Yeah. Hey, Colin. This is Raghu. When you think about battery sales, as well as actually EVSCs as well, it's now more than just batteries being used for providing resiliency or time of use peak shifting. What you're seeing is this new value proposition that adds on to it, which is using your batteries to provide to either to participate in energy markets, in deregulated markets or a VPP construct where the utility can use your battery and discharge it and pay you for it. And so at the end of the day, what that means is just improves the ROI for the homeowner and reduces the payback period.

So the better that you can do it, is actually a value proposition. You can be better than the competition. What I mean by that is providing very high quality APIs for your partners and that they can then drive the battery and discharge the battery as needed, charge the battery as needed and participate in energy market. And all of that value proposition which is good for the homeowner, is the value proposition also that drives the adoption of your batteries. If we do it better than our competition, then clearly, we gain market share. And that's what we are driving towards. We see that number of our partners [indiscernible] Because of our VPP and market steering capabilities.

That's super helpful. And then just from a logistics perspective, looks like there's going to be some disruption in and around container ships you talk a little bit about how you guys are mitigating that that risk and what you're seeing in early returns on any of those elements so far?

Colin, can you kindly repeat [indiscernible] I mean, from a logistics perspective and shipping, like if you're still importing from Asia, on key components, what you're seeing from a logistics perspective in terms of disruption on available ships, space, getting through cost customs, any sort of incremental expenses that we could be thinking about just to make sure we're paying attention to all of those software costs?

Yes. I mean, we [indiscernible] we make you know, maybe all of the folks do not know on this call, 85% of our microinverters are made in The US. Today. 85% of our global microinverter shipments are from The US. So already there is a healthy logistics [indiscernible] of raw materials, etcetera, coming into The US, so that we can make our microinverter. So we don't expect any changes to that because we have diversified that well and we have not had any problems with logistics so far. On batteries also, 40% I would say, let me say, we shipped 170 megawatt hours in Q1. 44 megawatt hours were made in Texas. Approximately 25%. So how that works? Is we ship Celpaxin into Texas, We make microinverters in Texas. We make battery management in Texas. We make the enclosures at another state in The US. We make the chassis also in a neighboring state, So therefore, what is once again there is the raw materials for making all of those. And our supply chain is we established this over three to four quarters ago. So for us, although it is a disruption, for us it is not it's not that we have to learn everything from scratch.

We have already ramped up on a few areas. And we expect that 44 megawatt hours, which I said, a US US making batteries we expect that to keep going up as we proceed into the year.

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

Good evening. Thank you for taking my question. I was wondering, could you remind us what the manufacturing manufacturing plans were for 10C? I thought the initial rollout was going to have The U. S. Inverters shipped to China and then assembled there and shipped back to The U. S. Before all this tariff news And then the domestic content version was going to come out later. So first of all, is this correct? And if it is, are you changing these plans so that you're not importing the full battery into The U. S, which will be subject to a higher nominal tariff? And if that's the case, does this impact the rollout of 10C at all? If you do have to change plans?

No, it does not rule out the impact of 10C We are starting with the nondomestic version, and that is correct. They are know, the microinverters for the non domestic version will be made in The US, and the rest of the battery is made outside The US. But being shipped in. But we are quickly in about two to three months' time we will quickly realign the supply chain to have domestic content product also available for the 10C. So, you know, right now, we plan to ship in the second quarter will be the non domestic version, and in a couple of months from then, the domestic version will be available.

Okay. And then your guide for the 2Q quarter on top line and battery shipments are about the same as 1Q. And even if I am to add back the two percentage points of the tariff impact, would you imply your gross margins are still down about 150 bps at the midpoint? What exactly is driving that? And even though you talk about being diversified on the supply chain, for microinverters and having a lot of domestic suppliers. So maybe you might not directly be be seeing tariffs, but aren't your suppliers still seeing price increases on their raw materials in this inflationary environment?

Well, I mean, we said that the 2% increase was attributed to to the the tariffs for the current quarter. However, on batteries, I mean, what you said is right. We [indiscernible] you know, we plan to ship a smaller quantity than the usual full quarter quantity on batteries. While the the fourth generation battery is new. And let us say I ship let us say I ship and which I'm not getting to the number, let us say I ship 30 megawatt hours off the fourth generation battery, and that would come with the with a little more tariff. Compared to the inventory that we will have on the third generation tariff. Hence, we guided to the 2%.

That's all.

And your next question today will come from Andrew Percoco with Morgan Stanley. Please go ahead.

Great. Thanks so much for taking our questions. I do just want to again come back to this battery storage concept for a second. I'm just curious, you mentioned that the beginning of Q and A, I think 95% of LFP cells come from China. So presumably, a lot of your competitors and peers are also trying to get their hands on the supply you guys are working on. So just curious how you see the cost environment for that non China supply evolving over time? And the conversations you've had with some of those suppliers? And then second to that, just trying to figure out when you talk about getting to 0% gross margin impact by the second quarter of twenty twenty six, can much of that is dependent on just completely exiting China from an LFP perspective versus taking action on price? Just trying to get a sense for breakdown there.

Thank you. [indiscernible] 95% of LFP cells in China, yes, that that's right. Don't forget that there is there are some Korean suppliers who do make NMC. And we have never used NMC We've never liked NMC, That's our opinion. LFP is what we like in terms of safety.

So that's the first one. Then the question that you asked, it is the biggest the biggest factor that affects the battery dry is the cell. You cannot get away from that.

So if we cannot meaning if our plans do not materialize, for transferring the cells, that's a problem. And then we would have to look at passing more of the cost impact to our customers. But right now, is the right thing to do. Is we get you know, we get the battery cells diversified out of China and we are working, we are not talking about we are not talking about unnamed suppliers, We are working with two great suppliers and we have very tangible plans. We have tangible schedules. And since the timeframe we are talking about is two to three quarters, we thought the right thing to do is to basically absorb a fraction, significant fraction of it ourselves, and return back to normalcy very quickly.

Understood. Thank thank you for that. And maybe just to ask a higher level question here. I know you guys don't guide beyond one quarter, but guess how do you envision the market evolving over the balance of the year? You obviously have IRA uncertainty, which might not be resolved until 3Q, 4Q at some point. Obviously, tariffs have had an impact on recession concerns and consumer sentiment. So how do you expect the demand environment to evolve over the balance of the year just given the level of uncertainty and the impact that has had on broader consumer sentiment, which obviously could lead into and have an impact on end market demand for solar. So just curious how you're thinking about that at a higher level? Thank you.

Yeah, I mean, look, Q1 is usually the seasonally worst quarter. We are past Q1. Q2, Q3, and even Q4 to an extent, [indiscernible] you know, normally are are the good seasonal quarters. So we are expecting that In addition, you know, our our value proposition, the value proposition of solar and batteries relies a lot on utility rates. And it is not exactly that the utility rates are going down everywhere. They are in fact going up And so as long as that happens, the ROI [indiscernible] of tomorrow will be better than today. And so utility rates is an important factor. You saw what is happening to NEM three. Know, NEM three, just to remind you, did away with net metering. And there is a small feed and only small export compensation. That caused the battery a dead the battery attached in California to go to 90%. [indiscernible] it was a very difficult transition We don't like how abruptly the transition was done. But at the end of the day, things are looking more stable in California. In terms of solar and storage. With a very healthy value proposition. That healthy value proposition came from the fact that the utility rates are high.

So that's a factor that will always be going for us. Then you have then you have the explosion in AI. The explosion in AI, what it's going to cause is electricity is, you know, electricity supply is going to get stretched.

Both front of the meter as well as behind meter. And we are not here to argue which one is better. But you know, it is that what we do is behind the mirror, while a lot of capacity is put in place in front of the meter. You know, that's got a long cycle of approval at the front of the meter. So we think in order to be balanced, or in order to have proper energy security for America, we need to have a thriving behind the meter business in addition to front of the meter.

And behind the meter, we are talking about every home is a power mini power plant.

Solar plus storage, And so I think it is only a matter of time when people start seeing this, and there is clarity on [indiscernible] the ITC and PTC. And I think demand will will will be unlocked after that.

Your next question today will come from Maheep Mandloy with Mizuho. Please go ahead.

Hi. This is David Benjamin for Maheep. Thanks for taking our questions. Does your Q2 guide assume any negative impacts from higher tariffs on Southeast Asia modules and the impact on U. S. Sodiment?

No, we don't deal with modules from Southeast Asia.

Okay. So you you don't it's see any impact on overall solar demand. And then another question, [indiscernible] What are all fewer demand? Maybe utility scale may be impacted to an extent. We don't expect any demand, any impact on residential.

Okay. Thank you. And then you and then you did mention that channel inventory was slightly up Is that in Europe or is The U. S? And that imply like any potential new destocking No, the channel inventory is okay.

Is up because when your sell through when your sell through goes down, the channel inventory can go slightly up, out of our usual targets. Our targets are between eight and ten weeks. But when your sell through is down, more than what you anticipated, then that can go slightly up. The ways to recover it back are quite simple, not ship much into the channel. And then improve the sell through in a seasonal quarter like q two. Which is bound to have more sell through in Q2 than Q1.

So we believe it's a normal normal cycle, and we are disciplined to control the amount of material in the channel, with that discipline, it should come back quickly inbound.

Your next question today will come from Julien Dumoulin Smith with Jefferies.

Hey, good afternoon team. Thank you guys very much. Appreciate it. Maybe just follow-up on the last question a little bit further. Can you talk about what you're seeing in terms of end market demand, right? You talked about restocking and now destocking here and seemingly in the second quarter. What are you seeing in terms of year over year volumetric trends? I know you provided, second quarter, but can you talk about volumetric trends writ large, a? And then b, can you talk a little bit more about safe harbor as well?

It seems like you're implying that the substantive amount of the $95,000,000 is contemplated in the first half. And with fairly little safe harbor contemplated in the back half. But maybe you could talk about maybe early indications on that front.

Yes, I'll answer the second question first.

Safe Harbor, you're right, we have 54,000,000 was in Q1. We said $40,000,000 approximately in Q2. And you know, right now, we do not yet have safe harbor plans meaning our customers haven't yet asked for them but I'm sure that if they want to stock due to something else, we will advise in the second quarter call. Volumetric trends. So volumetric trends is know, we talked about it, you know, so far, The Q1 Q1 is the weakest in terms of demand. And now we had talked about a large national leasing provider basically having some financial difficulties. So because of that, our installers have stumbling blocks and they need to recover. And they will recover by going to new financiers. In that time, the installation starts. And so that's why we saw a little bit worse sell through from our distributors to installers in Q1. We believe that we believe that you know, there are a lot of financiers other financiers now who can really pick up the business. So we we believe that that trend will will stop and normal send through will take over. So we expect, you know, the normal seasonality to show up from Q1 to Q2.

In addition, these one time effects will take some time to clear. As for Q3 and Q4, I talked about it at length.

There is some policy clarity that has to come. For us, we are not stopping, like what I said, Our fourth generation system is we expect to ship our fourth generation system product in the current quarter. And that makes backup extremely easy. And extremely cost effective. So we expect to do that. We expect to introduce IQ nine in the fourth quarter, diversifying ourselves into the four eighty volt three phase small commercial business. IQ nine, by the way, will also, you know, I talked length about the innovation with GaN, With GaN, we are able to get our cost structure very similar to the prior generation. But provide 10% more power. So that means the cost per watt would be 10% down compared to our prior generation. So we have all of these vectors And, you know, then I talked about the utility rates, going up, So we expect general growth through the year.

Primarily due to our new products, and policy clarity will also help a little bit.

Your next question today will come from Kashy Harrison with Piper Sandler. Please go ahead. [indiscernible] Good afternoon. Thank you for taking the question. Just two quick ones for me. My first question on the topic of GAN, are there alternative sources for gallium outside of China? Just trying to think through risk mitigation in the event that the trade war potentially gets worse before it gets better.

Yeah, we have adopted this at length with our sources. We have more than one source. All of them are comfortable that they have it covered we are not worried about it.

Okay. And then my follow-up, you indicated that you excuse me, you indicated that Europe is still challenging but your sell through was down 9% which, you know, doesn't sound that bad from a seasonality perspective. And so I'm just curious, what are you seeing that makes you characterize the entirety of the region as challenging? Is it just France or is there some other dynamic that we need to be thinking about? Thank you.

No, I think we talked about that That is the piece, the sell through was a little down at nine But what I said is we introduced new products into the region. That's why our numbers were up. And we talked at length about all of the initiatives in Netherlands, In Netherlands, net metering will disappear in 2027. That means all of the customers are going to be looking forward to a battery solution in order to conserve or in order to lower their electricity bill. So it is it is a huge opportunity as well. But that will become a solar plus storage market. We are working with our installers and the retail energy providers to transition that market properly. And the second one is France. We talked about [indiscernible] going down. But there again, I think that it is a short term blip, for a couple of quarters. We expect the VAC to be reduced there. And we also expect the utility rates to go back up according to what we you know, the public news available. So I think that that one, you know, what we are doing, we are constantly introducing new products, Our three phase battery backup, we will introduce there shortly.

We will we have introduced her newest [indiscernible] We are introducing hot water heater capability there. That is today, today in France, feed in tariff is only €4 cents per kilowatt hour. And when you have €4 cents per kilowatt hour, it does not make sense to export energy. Would rather save energy And if I take that solar energy and I divert it, steer it towards the hot water heater, that is a much better use of the energy. So that solution will be available in this current quarter. So I talked about that Germany is really where we had a nice uptick in Q1, and that is because of the flex phase battery where we introduced three phase with backup. So what we are doing in Europe, although the market is isn't terribly strong yet, we, our SAM, has increased from strength to strength. [indiscernible] these new products. And that's why we are more positive on Europe. That's why you saw our revenue went up in Your next question today will come from Austin Moeller with Canaccord Genuity.

Please go ahead.

Good afternoon. Just my first question, given the administration's announced of new tariffs on panels in Southeast Asia, I assume that your supply chain team is not expecting that a trade deal with China or be it Vietnam will benefit inverter battery manufacturing and your you're just going to accelerate the diversification of your supply chain out of China?

Yeah, I mean, that's the general plan we are accelerating the move specifically for batteries. We've already completed for microinverters, like what I said, microinverters and accessories. They're almost done.

That's right.

Okay. And and just a follow-up.

So I mean, I the the general assumption here is US installers are advanced procuring inverters and batteries and waiting to sell products probably once interest rates go down. So do you think the persistent high interest rate level right now is limiting some of the demand from customers to install ahead of potentially the 30% investment tax credit being repealed in 2026? [indiscernible] You know, high interest rates is absolutely an important factor. You know, the residential solar business, percent of the business used to be loans. And now has changed to leases. And probably 30% is still with loans. And anything you do on the interest rates there will help. And will help for demand.

That's right.

Great. Thanks for your insight.

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

Hi, everybody. Hi, Badri. Thanks for taking my question. Sorry to belabor this question of cell supply, but are you saying say a year from now, that you think you'll be able to source from outside of China at the same price you can get it from inside China? Or are you saying that you're gonna pay what you have to pay and pass that on to customers? I'm trying to understand what your view of this is. The I mean, B, but meaning the second option that you said, [indiscernible] the prices of those cells aren't that high.

I'm sorry, don't follow. So you're saying that you think cells will be more expensive relative to your current? No. Management? Let me tell you what. [indiscernible] [indiscernible] You know, the cell pricing is is affordable.

Even if it, let us say, goes up by 20%. It is affordable.

But when you take a cell in China, and you put it into a into a product, for example, you assemble it in any place, even outside China, even outside The U. You have to pay the 10045% extra tariff because the cell is in China. Now, what you could do is, is again to diversify your supply chain. You could make yourselves and let us say, Eastern Europe, You could make your cells in Eastern Europe, LFP cells, You could bring it in to The US.

You could have a packing facility in The US. And you could get in other raw materials into The US. It will be significantly cheaper to do you no longer pay the 15045%. So even if those basic cells were 20% higher, it doesn't matter.

Okay, but clearly it's going be more expensive than the status quo was prior to the tariffs. And when you were able to source out of China, without 145%, right?

Yes, if you want to be legally right, is going to be expensive. But does it matter? It doesn't matter.

Okay. Thank you for clarifying.

That's right.

Concludes our question and answer session. I would like to turn the conference back over to Badri Cosanaradam, for any closing remarks.

All right. Thank you for joining us today. And for your continued support of Enphase. We look forward to speaking with you again next The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.