Enphase Energy, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Enphase Energy's first quarter 2020 financial resource conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. And if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Adam Hinckley. Thank you, and please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2020 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer, Eric Branderes, Chief Financial Officer, and Raghu Ballor, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2020. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy's expected future financial performance, the capabilities, launch, and availability of our technology and products, our performance in sales and operations, and our expectations as to the impact of the COVID-19 pandemic. These forward-looking statements involve significant risks and uncertainties, and Enphase Energy's actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see the company's annual report on Form 10-K for the year ended December 31st, 2019, which is on file with the SEC, and quarterly report on Form 10-Q for the quarter ended March 31st, 2020, which will be filed during the second quarter of 2020. Enphase Energy cautions you not to place any undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in its 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. The company has provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the investor relations section of its website. Now I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Good afternoon, and thanks for joining us today to discuss our first quarter 2020 financial results. I hope all of you are staying safe and healthy. We had a good quarter considering the COVID-19 pandemic. We reported revenue of $205.5 million and shipped approximately 2 million microinverters. I am very proud of the fact that our global teams did an excellent job navigating the manufacturing and logistics disruptions in China due to COVID-19 in order to ensure on-time customer deliveries. We reached an all-time record for gross margin, driven by both disciplined pricing and cost management. We exited the first quarter at approximately 40, 14, and 26, outperforming our baseline financial model. This means 40% gross margin, 14% operating expenses, 26% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our target baseline financial model is 35, 15, 20. When we last spoke in middle of February, The general concern was primarily around supply disruptions in China due to COVID-19. At that time, our teams were on top of the situation on a daily basis and managed the situation very well. The demand in the U.S. remained strong through early March as distributors wanted to ensure they had adequate inventory. We were seeing excellent bookings for Q2 at that time and were poised to rebound well from a seasonally soft Q1. However, since early March, the spread of the pandemic worldwide has resulted in a significant downward pressure on worldwide demand due to current shelter-in-place restrictions. Even though solar installations have been allowed as essential services in some locations, the ability to generate new sales has been hindered due to social distancing and economic uncertainty. I'll give you more color on the regions later in the call. Let's now talk about how we are servicing customers in these times. I'm very happy to report that the customer service personnel in all four worldwide locations, U.S., Europe, India, and Australia, are fully supporting our installers and homeowners while working from home. We have not missed a beat in supporting them as all our systems are cloud-based. I am particularly pleased that our Q1 net promoter score in North America was 72% compared to 56% in Q4. This dramatic quarter-over-quarter improvement was a result of many initiatives, such as retraining our agents, matching orphan sites to active installers for better servicing, and improving our tools, processes, and systems. Our average call wait time increased slightly in Q1 to approximately 90 seconds. We have taken corrective actions such as optimizing customer notifications from our Enlightened Cloud, enhancing self-service and chat capabilities to reduce call volumes and lower our wait times to 60 seconds or less. In addition, we are working regularly on continuous improvement to the Enlightened mobile app for homeowners as well as installers. We are also very pleased with the momentum of the Enphase online store in the U.S., which now has got many of our latest products, including IQ7-based AC modules available for sale. I want to spend a couple of minutes on quality. We made excellent progress in 2019, dropping our IQ7 defects by a third and getting closer to our 0.05% annual failure rate target. Our always-on connectivity strategy combined with our semiconductor and software-defined architecture along with 8D problem-solving methodology were instrumental in making this happen. While we plan to continue these actions aggressively in 2020, we have started focusing on storage as well. For example, our quality teams have been intimately involved in the design and reliability of our in-charge storage system from day one. We believe that designing in quality and reliability up front will improve our top line due to better customer experience and bolster gross margins due to warranty expense reductions in the long term. Let's now turn our attention to Mexico contract manufacturing facility that continues to ramp nicely for us. The facility has been deemed essential and has not experienced any significant production disruptions to date. We manufactured more than 700,000 IQ7 microinverters in Mexico during Q1 and exited the quarter at a weekly run rate of more than 70,000 units. We feel very confident in the ability to produce over a million units by Q4 20 if justified by product demand. Let's touch upon overall inventory management. Given the reduced demand situation in Q2 of 20, We are working very closely with our contract manufacturing partners to optimize our inventory builds both in China and Mexico. Maintaining a tight lid on inventory is very critical for us, especially in times like this. However, it is important to note we are not compromising one bit on our in-charge storage ramp and are executing on all the necessary builds there. Moving on to the regions. Our U.S. and international mix for Q1 was 84% and 16% respectively, excluding safe harbor revenue. Europe, Asia Pacific, and Latin America all demonstrated sequential growth in Q1 compared to the U.S. that had a slight seasonal decline in Q1. We continue to make solid progress in acquiring new installers and growing our U.S. business in Q1. As a result, we have seen a strong increase in sell-through from our distributors to installers by approximately 37% over the last six months ending March. Recent installer wins include Peterson-Dean, Amicus Solar, RSI Energy, and a whole bunch of small and medium-sized installers. A number of these new installers also plan to offer storage in addition to solar. We are excited about bringing them on board and look forward to ramping the business with them as COVID-19 subsides. In the U.S., we are hearing industry reports of a 30 to 50 percent drop in residential installations in April. Some states like New York and California are experiencing even bigger drops. With the near-term demand disruptions to the industry, we are taking all necessary actions to keep our channel inventory in check. With the lower sell-through in April, we are working closely with installers and distributors to optimize their existing inventory. We believe that this will result in a healthier organic pattern when installer sales activities pick up after restrictions on shelter-in-place are relaxed. While the short-term is painful and uncertain, we see a few long-term benefits for Enphase and the solar industry. Let's talk about the first one. For example, San Luis Obispo County in California introduced electronic permitting for microinverter-based PV systems in early April 2020. We are pleased that the building department recognizes the safety advantages of our AC architecture. The second benefit is installers are rapidly adapting to the COVID-19 challenge by embracing virtual selling using digital tools. This is going to be a major trend in the future. Third, we also believe that the pandemic will bring self-sufficiency to the forefront of the homeowner's mind, particularly around energy storage. And we are in a great position to service homeowners especially as our high-quality solar and storage solutions can help them save money during difficult economic times, as well as providing energy security. Now let's talk about Europe. In Europe, we made nice progress in Q1, more than doubling the revenue from Q4. As previously discussed, we have tripled our sales force in that region, and we are working diligently with installers and distributors while leveraging our high-quality and customer service. We are excited by the opportunities in Netherlands, Spain, Germany, and Belgium. We also have a couple of AC module solutions that provide us with added differentiation. In fact, we expect Q2 sales to be in line with Q1 despite the pandemic, reflecting the nice progress we are making. We previously indicated that our goal this year was to double sales in Europe from the prior year. It's going to be a little bit difficult given the pandemic, but we have not given up on it yet. Both Asia Pacific and Latin America demonstrated revenue increases compared to Q4. In Australia, we secured RACV, the equivalent of AAA in the United States, with 2.2 million members as a new landmark customer. We also introduced a partnership with Rexel to expand our Australian solar distribution network. Again, our strategy here is pretty simple. Focus on the basics like increasing installer visits and training and promoting high-quality, safe AC. We do expect a slowdown in this region in Q2 due to the pandemic, but with our solid growth initiatives and a talented team in place, we believe we are well-positioned to grow for the long term. In Latin America, Q1 revenue sharply increased primarily due to sales of our IQ7 microinverters in Puerto Rico. We expect to make a lot more strides in this region with our in-charge storage product, which is coming soon. Let's now turn to new products. I want to talk a little bit about how our engineers are doing. Despite the restrictions imposed by the lockdown, our engineers have been working very hard to find ways to accelerate development, automate testing efforts, and implement remote debugging. In the U.S., we are in complete lockdown with the exception of very few engineers to support essential business activities or minimum basic operations. In New Zealand, the government imposed a complete lockdown and just allowed partial opening of offices in the last week of April. In India, a handful of engineers were able to get permission from the local authorities to do essential work. We acknowledge the effort from all of our employees for their tremendous dedication to NSAIDs in these times. I'm really proud of them. Nevertheless, the shelter-in-place rules implemented in March impacted our overall engineering activities, such as testing and compliance of our in-charge battery storage system. As a result, we were unable to ship beta units before the end of the quarter, first quarter as we originally planned. As of now, all testing is complete and we expect to start shipping beta units to installers shortly. Bearing any further impact from COVID, we do expect to have meaningful revenue in Q2 from production shipments of our in-charge battery storage systems. Installer training is critical for in-charge's success. We trained 654 people at our Fremont headquarters in Q1 and were limited in being able to train more due to shelter-in-place rules. We are switching over to online training in the coming weeks, and after completing all coursework online, installers will receive provisional certification and will have a video inspection of their first install by an Enphase field application engineer. We believe this process adequately ensures the skill verification that we require of our certified installers. As I mentioned in my recent letter to shareholders, new products are the lifeblood of Enphase. The IQ7 family of products has put us in a very solid position today. We have an incredible product lineup awaiting us. First, we are committed to launching IQ8, the grid agnostic microinverter for residential rooftops, which will add even more differentiation on top of IQ7. Second, our small commercial offering IQ8D, the 640-watt AC microinverter for two panels is coming along well. We expect this product to provide high-quality, rapid shutdown compliance in addition to outstanding CEC efficiency of 97.5%. Third, we are adapting the ensemble-in-a-box product we announced at our 2019 Analyst Day and expect to introduce it initially for the U.S., followed by India. This product will be portable with a battery capacity of 1.7 kilowatt hour, providing energy security inside the home as well as energy on the go for outdoor activities such as camping. The battery can be directly charged from the grid or from portable solar panels depending on whether the product is used indoors or outdoors. The product will have our trademark characteristics, high quality, always-on connectivity, and exceptional customer experience. We are looking forward to introducing the product later this year. Let me talk about another big initiative we are embarking on, digital transformation. Today, we are engaged digitally with our installed base of more than 1.1 million sites through the enlightened mobile and desktop applications, putting us in a unique position to understand our customers' energy needs well. Similarly, we work very closely with a few thousand installers and engage with them through the mobile app, training workshops, customer visitations, and installer newsletters. We want to create an incredible experience for both installers and homeowners by developing a comprehensive digital platform. It is our desire that both existing and new homeowners come onto our platform, are seamlessly connected to our great installer network, and have an efficient interaction all the way through installation, activation, and O&M, which stands for operations and maintenance. It is our vision that when done right, this platform will serve as a powerful catalyst, accelerating our solar and storage sales. In order to build such a powerful platform, we are planning to create several tools for the installers to make the entire installation process a lot more efficient. This involves building software expertise both organically as well as inorganically. We expect to make significant progress on this front in 2020. Although there is short-term uncertainty due to COVID-19, we have tremendous confidence in the strength of our business in the long term. Our supply chain is flexible and resilient, aided by our strong contract manufacturing partners. We are laser-focused on operational excellence and customer experience. We have a very strong balance sheet with additional cash from the recent convertible debt offering and good cash flow generation capability. Our strategy is to manage the current circumstances by investing in innovation and creating new products with unmatched value based on our three pillars of differentiation, semiconductors, software, and ensemble. In summary, we are pleased with the results of the first quarter considering COVID-19 pandemic. We extend our deepest sympathy to those impacted by this pandemic. While it is impossible to know how the crisis is going to unfold, our topmost priority is to ensure the health and safety of our employees, customers, and partners. We will also do whatever possible to ensure uninterrupted supply and support of our high-quality products to our customers and partners. With that, I will hand things over to Eric for his review of our finances. Eric?