Enphase Energy, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Enphase Energy third quarter 2020 financial results conference call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, then one on your telephone keypad. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Mr. Adam Hinckley. Please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third 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 third quarter ended September 30, 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 availability of components and manufacturing capacity, the availability and market adoption of our products, the performance of the tools we make available to, and the capabilities of our installation partners, safe harbor shipments, the impact of the COVID-19 pandemic, and expected regulatory changes. 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 third quarter ended September 30th, 2020, which will be filed during the fourth 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 statement 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 third quarter 2020 financial results. I hope all of you are staying safe and healthy. Our team continued to do a great job managing the impact of COVID on our business. We reported revenue of $178.5 million, shipped approximately 1.4 million microinverters, achieved record non-GAAP gross margin of 41% and generated strong free cash flow of $63.6 million. Our non-GAAP gross margin excluded a $23 million refund on tariffs, which we previously paid on microinverters imported to the U.S. from China. In addition, we began volume shipments of our in-charge storage system to customers in North America. We exited the third quarter at approximately 41, 17, 24. This means 41% gross margin, 17% operating expenses, and 24% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35, 15, 20. I'm happy to report that our worldwide demand significantly improved in Q3. I'm proud that our employees continue to do an excellent job during the pandemic while working from home. I'm also thankful for the strong support from our suppliers, customers, and partners worldwide. Due to these combined efforts, we were able to increase our Q3 revenue by 42% sequentially. Let's talk about how we are servicing customers. Our customer experience personnel in all four worldwide locations, U.S., Europe, India, and Australia, are still working from home, supporting installers and homeowners. We have not missed a beat as our systems are cloud-based. Our Q3 NPS was 67%, and our North America NPS was 71%. Our average call wait time increased in Q3 to more than three minutes as the steep growth in installations resulted in more calls from installers and homeowners. In addition, the launch of uncharged storage system during U3 created more calls as our installers were learning how to install the product. We are working hard this quarter to bring back the call wait times under a minute by hiring additional customer support personnel and improving self-help services through enhanced installer toolkit, chat functionality on the Enlighten app, and the online Enphase community. Let's now discuss manufacturing. With the increased demand, we ramped production back up in Q3 and expect higher levels of production in Q4. Our factory in Mexico is doing well, producing more than 75,000 microinverters per week, putting us on track to achieve our target of a million units from Mexico in the fourth quarter of 2020. As I discussed on last quarter's call, we have completed the qualification of Salcomp, our second contract manufacturing partner for microinverters based in India. We began microinverter production at Salcomp earlier this month, and we are expecting to start shipping to customers later in the quarter. We have a high-quality, state-of-the-art automated line with quarterly production capacity of half a million units and have the space to add a second line with the same capacity. This is our second tariff-free manufacturing location for microinverters after Flex Mexico. In terms of battery capacity, we qualified our second supplier, ATL, a leading global supplier of lithium-ion batteries based in China. ATL provides the cells, and their subsidiary, PowerAim Technology Limited, provides the cell pack. We will be taking first deliveries from ATL late this quarter, And when A123, our first qualified cell pack supplier, and ATL are fully ramped up in the first half of 2021, it will bring our available capacity to 480 megawatt hours a year. Moving on to the regions, our U.S. and international revenue mix for Q3 was 78% and 22% respectively. We saw sequential revenue growth in all regions during the quarter despite COVID-19. The U.S. market rebounded pretty nicely in the third quarter. Revenue was up 39% sequentially, partially aided by in-charge storage system shipments. In addition, sell-through from our distribution partners was particularly strong for microinverters, reaching new records. The sell-through in the month of September was 49% higher than in the month of June. Due to the record sell-through, we ended our We ended Q3 with our microinverter channel inventory slightly lesser than our target range of 8 to 10 weeks. We started production shipments of in-charge storage systems to installers in the U.S. during Q3. 528 installer personnel have completed online courses to achieve provisional certification in Q3. The demand for the product is strong and feedback from the installers and homeowners is positive. as they appreciate its modularity, reliability, and safety. It is important to note that in-charge storage systems contributed about 10% of our overall revenue in Q3. We were constrained by new product introduction ramp in Q3 and are looking forward to easing this constraint as our suppliers ramp up their deliveries. In Europe, our revenue increased nicely by 67% sequentially. We added several new installers and distributors during the quarter, including top distributors in Belgium and Netherlands. We are well-staffed in Europe and are continuing to hire as we see opportunities. We launched the IQ7A microinverter, our highest-power product in Europe, during Q3. We announced a strategic partnership with Sonnenstrom Fabric to develop a high-efficiency Enphase energized AC module with IQ7 plus microinverters. In addition, we expect to ship our IQ7A microinverters for Maxion's AC modules this quarter. I'm pleased with our team's performance in Europe and I'm excited about the region's projected growth. In Australia, we achieved record quarterly sell-through and installer found despite COVID restrictions in metropolitan Melbourne. We introduced the IQ7A microinverter similar to Europe, and this IQ7A microinverter is ideal and cost-effective for high-power panels up to 450 watts. We also expect to ship IQ7A microinverters to Maxion starting this quarter. On the policy front, the South Australian government's new rooftop solar installation rules present a favorable competitive environment and hint to the future regulatory landscape for solar nationwide. Not only are we fully compliant with South Australia's new regulations, but we also remain one of the few inverter manufacturers who have submitted test reports as evidence. Revenue from Latin America increased sequentially, quarter on quarter. In Latin America, Puerto Rico witnessed a strong rebound in activity during Q3. We expect continued growth in this region due to our in-charge storage systems. Activity in Mexico also started to rebound well. In September, we were honored to welcome the U.S. Ambassador to Mexico, Christophe Orlando, to our Made in Mexico event, where he received a tour of the Flex manufacturing facility in Guadalajara, along with an overview of Enphase's investment in Mexico. Now that we covered the regions, let's discuss the overall bookings for the quarter. At this point, we are already 100% booked to the midpoint of Q4 revenue guidance. We cannot predict how COVID-19 is going to play out in November or December, so that's always a risk. However, we feel very good about the progress we are making and the demand that we are seeing for both microinverters and in-charge. Resiliency is top of mind for people working from home. Let's talk a little bit about our in-charge system rollout. We started shipping the product in July after extensive alpha and beta testing. We introduced online training and certification in July for our long-tail installers. We had our engineering field application engineers and customer service teams working around the clock to support the installation. We had a few issues early on, which were solved relatively quickly, but in general, the rollout has been pretty smooth. We have developed metrics and dashboards to track problems reported by installers and homeowners and are making them highly visible across the company. We are treating every issue that a homeowner or installer reports as a defect. I am really proud of the tremendous progress our teams have made in a very short amount of time. We have always been very clear that long-tail installers are our number one priority. We see them acting as consultants to homeowners and influence their buying decisions. Many of these installers are doing their first storage installations. Therefore, the cycle of learning is understandably high. Our job is to make the entire process seamless and quick in the installation for the installer. Within the first few weeks of the product rollout, we have identified a few things to iron out in the installation process and are laser focused on leaning out the process to maximize the installer's productivity. We expect to get this activity done in the fourth quarter through software upgrades to our Enlighten platform, both on the installer as well as homeowner apps. I would now like to provide some color on our battery cell pack supply. In Q4, this quarter, we have approximately 50 megawatt hours coming from A123 systems, and we have customer orders for most of that capacity. We expect to start shipping in-charge storage systems with ATL battery packs only in the first quarter of 2021. We expect A123 to be fully ramped in Q1 2021 and ATL to be fully ramped by the end of Q2 2021, positioning us with full capacity in the back half of 2021. The reception from our long-tail installers has been very encouraging. However, these customers are going to take some time to scale as more and more of them get trained and finish their first few installations. We are receiving a lot of interest for in-charge storage systems from Tier 1 and Tier 2 installers and have been working very closely with these important customers. Our philosophy on value-based pricing is unchanged here, and we are confident that larger installers will see a benefit that our product and platform brings. We will share updates on these developments as and when appropriate. Let's talk about our upcoming products and features. Our in-charge storage system is compatible to the installed base of IQ6 and IQ7 microinverters on the roof. This corresponds to more than 300,000 homes. On our last earnings call, we discussed making the in-charge storage system compatible with the installed base of M-series microinverters on the roof. This adds another 300,000 homes to our third available market. We expect to release a software upgrade in Q4 this quarter to make this happen and already have alpha systems running today. The other feature is generator integration, once again made possible through the power of Ensemble. We expect to allow various generators to be plugged into our nPower smart switch, obviating the need for a separate generator ATS. Our Enlightened mobile app will seamlessly integrate the generator functionality, providing a single comprehensive view of all distributed energy resources to the homeowner. We expect this feature to be released through Enlightened NQ121. We are making great progress on launching IQ8, our grid-agnostic solar microinverter. We already have IQ8 alpha systems with and without in-charge storage systems installed at various sites. As a reminder, IQ8 is the world's first grid-independent microinverter. We expect to complete beta installations on this system in the first quarter of 2021. Our small commercial product, the 640 watts AC IQ8D microinverter is also making good progress The design and reliability testing of the microinverter is already complete. The focus is now shifting on full system testing and performing diligent alpha and beta testing. Similar to IQA, we expect beta installations on the IQAD system in Q1 of 2021. Let's now briefly cover digital transformations. Our approach here is pretty simple, to provide a great experience for homeowners and installers through a comprehensive digital platform. Installers can leverage the platform to accelerate the installation process and improve the homeowner experience. We have onboarded more than 400 installers in North America to our Enphase installer network through a highly selective process focused on installation quality and homeowner experience. These installers can benefit from N-phase lead generation, priority access to new products, and a variety of tools on the digital platform to make the installation more efficient. Regarding tools, we are currently piloting permitting services for installers and SGIP, application services for homeowners. We are working on introducing more tools in the near future, namely for solar and storage design, financing, as well as grid services. In summary, we are pleased with our results for the third quarter. We are excited about the rebound of customer demand worldwide. As we look to close the year, we are focused on ramping in charge storage systems while providing a superior customer experience, introducing the new products which I talked about, and accelerating our digital transformation. As always, the health and safety of our employees customers, suppliers, and partners remains our topmost priority. With that, I will hand the call over to Eric for his review of our finances. Eric?

Thanks, Babri, and good afternoon, everyone. I will provide more details related to our third quarter of 2020 financial results, as well as our business outlook for the fourth quarter of 2020. We have provided reconciliation of these non-gap-to-gap financial measures in our earnings release posted today, which also can be found in the investor relations section of our website. During the third quarter of 2020, we had our first significant revenue and margin contribution from in-charge storage system sales. This reflects the beginning of a new era in Enphase history, which allows homeowners to begin their journey towards full home electrification and energy independence. Nothing is more exciting than successfully introducing an industry-leading software-defined product to the market while continuing to support our profitable growth. We are also very pleased with the rebound in micro-inverter demand and our distribution channel management despite the impact of the pandemic in the third quarter of 2020. As I will discuss later in our four-quarter guidance, we remain focused and on track for continued profitability. Total revenue for the third quarter of 2020 was $178.5 million, which did not include any revenue from Safe Harbor shipments during the quarter. Total revenue increased 42% sequentially, and we shipped approximately 478 megawatts DC in the third quarter of 2020. We are very pleased to have returned to year-over-year revenue growth after excluding Safe Harbor revenue from the prior year despite the challenging microeconomic environment resulting from the pandemic. As we discussed on our last earnings call, certain of our microinverter products met an exclusion to the section 301 that we have been paying on imports to the US from our China contract manufacturing since September 24, 2018. The fact that our microinverter met certain size and weight conditions for exclusion is a testament to our proud innovation. We requested refunds totaling approximately $39 million plus accruing interest, of which $23 million were approved so far and have been accounted for as a reduction in cost of goods sold in the third quarter of 2020. We have already collected $16 million to date and have excluded tariffs refunds from non-GAAP financial results to present a more accurate picture of ongoing business performance. The Section 301 tariff exclusion expired on August 7, 2020, once again making those microinventor products subject to tariffs. No gap gross margin for the third quarter of 2020, which included our first significant contribution from in-charge storage system sales and excluded the $23 million tariff refund. was a record 41% compared to 39.6% for the second quarter of 2020. The record gross margin was achieved despite rapid production of its in-charge storage systems, which generated a healthy gross margin for the quarter. The sequential improvement was driven by stable pricing on microinverters and continued cost reduction efforts. Gap gross margin was 53.2% for the third quarter of 2020. Non-GAAP cooperating expenses were $29.6 million for the third quarter of 2020 compared to $26 million for the second quarter of 2020. The sequential increase was primarily due to engineering and regional self-help count additions to support our innovation and growth. Overall, we hired 113 new employees during the third quarter. Gap operating expenses were $43.2 million for the third quarter of 2020 compared to $37.5 million for the second quarter of 2020. Gap operating expenses for the third quarter of 2020 included $13.1 million of stock-based compensation expenses due to higher headcount and $546,000 of amortization expenses for acquired intangible assets. On a non-GAAP basis, Income from operations was $43.7 million for the third quarter of 2020 compared to $23.7 million for the second quarter of 2020. On a gap basis, income from operations was $51.8 million for the third quarter of 2020. On a no-gap basis, net income for the third quarter of 2020 was $41.8 million compared to $23.5 million for the second quarter of 2020. This resulted in diluted earnings per share of 30 cents for the third quarter of 2020 compared to 17 cents for the second quarter of 2020. GAAP net income for the third quarter of 2020 was $39.4 million compared to GAAP net loss of $47.3 million for the second quarter of 2020. Just to remind everybody, due to GAAP Q2's gap net loss was driven by a non-cash charge in fair value of derivatives related to our convertible notes due 2025. The derivatives were re-measured at fair value and reclassified to additional paid-in capital on the balance sheet in the second quarter of 2020, resulting in no income statement impact in Q3 2020 or future periods. GAAP diluted earnings per share was $0.28 for the third quarter of 2020 compared to diluted loss per share of $0.38 for the second quarter of 2020. Now turning to the balance sheet and the working capital front, inventory was $37.5 million at the end of Q3 2020 compared to $31.2 million at the end of Q2 2020. Days of inventory outstanding, excluding the $23 million tax credit, decreased to 32 days compared to 37 days in Q2. The sequential dollar increase in inventory was driven by the purchase of battery cells for the projected increased shipments of in-charge in Q420 to support our new product ramp, as well as, to a lesser extent, a higher level of micro-inverter shipments. Account receivables were $122.4 million at the end of Q320, compared to $89.5 million at the end of Q2-20. The sequential increase was due to the higher revenue in Q3. DSO of 52 days increased slightly from 50 days in the prior quarter. We exceeded the third quarter of 2020 with a total cash balance of $661.8 million compared to $607.3 million for the second quarter of 2020. We did not make any share repurchase against our $200 million share repurchase authorization. However, we spent $52 million on withhold to cover tax transactions year-to-date through September 30 on employee stock vesting that prevented the issuance of approximately 1.2 million shares. We generated $57.5 million in cash flow from operations and $63.6 million of adjusted free cash flow for the third quarter of 2020. Capital expenditure was $3.9 million for Q3 2020, mainly for the in-charge battery manufacturing capacity increase, IT enhancements, enlightened software app development costs, and production ramp with our second contract manufacturing partner. Now let's discuss our outlook for the fourth quarter of 2020. We expect our revenue for the fourth quarter of 2020 to be within a range of $245 to $260 million. Our revenue guidance does not include any sales hardware shipments. Turning to margins, an additional $16 million of tariff refunds has been requested but not yet approved. As a result, both our GAAP and non-GAAP guidance for the fourth quarter excludes any tariff refunds. We expect GAAP gross margin to be within a range of 37 to 40%, and non-GAAP gross margin within a range of 38 to 41 percent, which excludes the stock-based compensation expenses. We expect our GAAP operating expenses to be within a range of $51 to $54 million, including a total of approximately $16 million estimated for stock-based compensation expenses and acquisition related amortization. We expect non-GAAP operating expenses to be within a range of $35 to $38 million. The sequential increase in operating expenses is due to continued hire to support our growth plans and the expectation of resuming bonus accruals and payments, which have not occurred during the past two quarters. Before opening the call to questions, I would like to discuss the potential for safe harbor shipments. Discussions around safe harbor shipments have picked up recently, and there may be some modest safe harbor sales in the first quarter of 2021. Exact magnitude is still uncertain, but it will be a fraction of the $44.5 million self-harvest revenue in the first quarter of 2020. Recall that to satisfy the self-harvest provisions, customers will have to take delivery before the year end or prepay for this product before year end. With that, I will now open the line for questions.

As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Eric Lee with Bank of America Merrill Lynch. Your line is now open.

Hey, good afternoon. Thanks for taking the question and congrats on the quarter. Hey, so first off here, Maybe to touch upon nCharge a bit more, you mentioned that this was about 10% of their quarter revenue. Could you talk about how much volume on a megawatt-hour basis was shipped for nCharge and perhaps what the gross margin associated with that segment might be tracking at?

Yeah. We have been very clear that nCharge will fall in line with our corporate revenue gross margin targets, which is 35, 15, 20. And then we are not breaking out the exact megawatt hours, but what we have done for you is told you that it is about 10% of revenue, and also we have given Q4 capacity, saying that we have Q4 capacity of 50 megawatt hours, and we are mostly booked to it.

Okay, gotcha. No worries if you can't provide further granularity there yet at this time. Could you talk about what your expectations for battery capacity on a forward basis might be? I know you talked about the 480 megawatt hours, but I believe you have mentioned a third supplier in mid-2021. How should we think about the potential capacity increase associated with that, or is that something... still up for determination based on how demand trends into that decision?

We obviously need to look at how demand is going to come, but to simply answer your question, from Q3 onwards, we will be at a capacity of 120 megawatt hours a quarter with our current two suppliers, which is A123 and ATL. Then from then onwards, we are talking to a third supplier Third supplier of batteries and, you know, right now the plans aren't solid. We will share those plans with you when they are finalized. But we expect to have somebody on board by the end of 2021, a third supplier.

Remember that the supply information that we are providing is contextualizing our capacity availability in the event of demand being available, right? So it's not a statement of demand, it's a statement of supply. Also remember that we are CAPEX and OPEX flex because we use contract manufacturing. So we are in a great position here to flex that capacity up and down as we consider the demand into the future. And finally, I don't know if you remember, we always talk about having a 36% surge capacity available. That also is including the number that Badri just mentioned that we need to have in case the demand remains very strong, right? So all of those things are baked into the number that you just heard from Badri as we ramp our capacity exit in this quarter.

Okay, and one last question for me and I'll jump back into the queue here. Could you just talk about where attach rates are currently standing? I know you have provided the eight to 10% attach rate guidance for fourth quarter, but what was that number for third quarter, if you may?

A lot of the folks in our industry talk about the attach rate. We talked about the attach rate last quarter, but then it started to get confusing because we ship product to all the states in the U.S. Many of the states are still ramping up on storage, so we have to really give you you know, much more granular data and an overall attach rate is almost meaningless. That's why what we did was we provided even more visibility to you in terms of megawatt hours. That's why for Q4 we said, you know, look, we have a capacity of 50 megawatt hours. We're almost full to that capacity, and that will give you, you know, easier modeling. But having said that, we've always been clear that long-tail installers are our number one priority. Our attach rate is extremely healthy with the long-tail installers. And now what we have going for us is we are in talks with several tier ones and twos who basically want to get on board because Ensembl is an extensible platform. When you have a platform which is capable of giving... you a long life cycle, which is you can start with solar and what is called an n-power smart switch. You can start with IQ8 solar and n-power smart switch. Then you can add batteries. You can come back after a year, you can add generators. You come back after some more time and say, okay, I don't want a generator, I want to add a fuel cell. Fine. Then you can add EV chargers soon. So we are thinking about an extensible architecture, capable of load control. And so when we share our product roadmap with all of these tier ones and twos, that is enormous interest. And so we are working closely with them. We're not going to compromise on our value-based pricing like what I said. And we'll inform you if there are significant developments in that front.

Got it. Thank you.

Thank you.

Our next question comes from Mark Strauss with JP Morgan. Your line is now open.

Yeah, good evening. Thank you very much for taking our questions. Baudry, I hope I'm not splitting hairs here, but just wanted to go back to your comments about the IQ8D. I think you said shipments or revenues starting in 1Q of 21. I think previous comments were kind of testing that product out later in 2020. Just wondering if there's any change in the timing of that product, and if not, how we should take your comments about 1Q. Should we just expect that to be kind of testing revenue, or could there be kind of more material volume shipments?

Thank you. Sure. Look, I mean, we've always been very clear. Even on our storage product, I refuse to go to market until we are absolutely ready. Quality and customer experience is our number one priority. That's how we go to market. That's how we even market share. And that has been our success story on the microinverters. It's going to be no different on IQAD. In IQAD, the great news is that treating it like a micro-inverter, the work is almost done, which is the design and reliability. But it is no longer a micro-inverter. It is a complete, full system. And, you know, it is a cultural change for us in the company in order to make sure everybody thinks about it like a full system. So therefore, what we are doing this quarter is there are alpha systems, which are pretty big alpha systems, We expect anywhere from 50 kilowatts to 200 kilowatts real alpha system installed. We are going to be hammering on those. Based upon the learning of our in-charge storage systems, we think, you know, we think applying the same best practices, we will be able to start beta installations in the first quarter of 2021. And that's why I gave you that number, I mean, that date. And, you know, that's our expectation. If there is a change, we will let you know.

I just want to add one more thing on this. Back last year when we did analyst day, I actually mentioned that there will be some beta revenues potentially in Q4, very small. So you're right. We said that. Normally beta revenue is very small. It will not make a mark. I think that what Valerie is doing now is spending more time on the software element of the RAP and looking at this as a system And it's taking more time on the testing side, so the beta revenue will come in Q1 instead of Q4. But it was never meant to be materially important, more symbolically important for the company about having the new product introduction in the quarter, right? But I just want to clarify that because that's correct. You said some revenue in Q4, and that is slipping into Q1.

Yeah. Yeah. Yeah, grand scheme of things, not that big a deal. Just want to make sure my model's right, so thank you for that. And then just, Eric, real quick, and I apologize if I missed this, did you give the split of U.S. versus international, either for megawatts or revenue?

Yeah, we did it for both, I think, right? We provided the international. We didn't do it by region. 78% is domestic, which is actually... Pretty impressive if you think for because we were over 80% or 90% actually last quarter. And now the presence of Europe and Asia-Pacific, especially Europe, is becoming very prominent, even though we also have ensemble shipments in Q3. So that's providing that the growth in Europe is helping on the regional diversification of revenue. Right.

So the answer is 78-22, 78% revenue in the U.S. and 22% international.

Excellent. Okay. Thank you very much.

Our next question comes from Brian Lee with Goldman Sachs. Your line is now open.

Yeah. Hi, guys. Thanks for taking the questions. I hopped on a little bit late, so apologies if you've already covered this. But did I hear that 10% of revenues were from battery storage and Q3 and that you're – switching over from the 8% to 10% attach rate guidance for Q4, and you're just talking about it in capacity terms. Maybe asking it a different way, are you basically saying you had a little less than $20 million of revenue from batteries in Q3, and based on 50 megawatt hours of capacity and being sold out in Q4, that seems to imply more than doubling the $40 million of revenue in Q4, if my math is right. Is that the right part?

Well, you're obviously good in math. You're approximately right. And, yes, we did a little bit more than 10%, you know, for overall revenue and storage, which is fantastic for a new product in the first quarter.

Okay. That's great. I appreciate that additional clarity. Maybe two more questions and I'll pass it on. But the gross margin bump for the guidance in Q4, I know it's, you know, subtle, but you guys continue to kind of move it up and to the right. How much is that from the mix of end-charge revenues in the quarter increasing sequentially, and how much of that is just organic margin expansion on the micros? And then secondly, now that you're talking about this sort of in capacity terms, can you remind us sort of from the 50 megawatt hours in Q4, you know, where the interim targets are for maybe early 21, and then as we move through the back half, where you'd be in the back half of 21? Thanks, guys.

All right. Right. Okay, thank you for the question. So first is the gross margin question. Gross margin depends upon pricing and cost, and we are extremely disciplined in both. Pricing is value-based pricing. Cost is we hammer on costs on microinverters, accessories, storage accessories, you know, in-charge storage systems. So all of that, you know, we've just started hammering on the storage costs because we just introduced the product Yeah, pretty recently. So most of our cost reduction so far has been coming from the microinverters, which is fantastic. And we believe we have long legs there because we've already started to focus on IQ9, which will probably come out in 2022, early 2022. But there, IQ9, we are focusing on a very advanced materials plus an ASIC architecture. that will substantially reduce both the footprint as well as the cost and the efficiency. So we're working on that. It's a lot of innovation there, so we're going to take some time there. With regarding the question on capacity of batteries, so we said Q4 is roughly 50 megawatt hours. We think, like what I said in the script, by the end of Q2 21, our capacity will be around 120 megawatt hours per quarter with our existing two suppliers. That's the answer.

All right. Thanks, guys. Appreciate it. I'll pass it on. Thank you.

Our next question comes from Jeff Osborne with Cowan & Company. Your line is now open.

Good afternoon, and congratulations on the results. Just two questions on my end. I was curious, Eric, on the safe harbor comment around the early visibility there. Is there any dependency on the outcome of the election? For example, if Trump wins, do you anticipate more safe harboring as opposed to less?

Yeah, I think there is, and there is also an element of I've done it before, I know how to do it, and I wait and see. So there is less complication on figuring out the mechanics, and the legalities, right? Remember, these were specific contracts with a lot of special language, a lot of logistics, order fulfillment, the warehousing requirements, labeling requirements. All of those are learnings from the past. So now these guys are probably waiting probably until the last possible time in order to make a decision. We don't see a lot of activity for Q4 this time. If there is some, we will probably see it in Q1, and it will be at not as big as it was last year or this year actually, early in Q1 this year. So we should expect to see some but maybe not as many.

Then speaking of Q1, what visibility do you have lined up to that just given the rampant recovery in the market and some projects seem to be pushed for a variety of reasons, labor shortages, etc. Are you hearing from your distributors or customers that projects are being pushed to Q1 at this point or no?

No, I mean, we normally don't comment about Q1 beyond the core, right, Jeff? And frankly, on the same harbor, what I told you is all I know, right, at this point.

Okay. Maybe one that you will answer. You certainly have ample cash. Can you just talk about what your thoughts are on M&A, either in software or other adjacent areas, just given there's been some activity in your space?

Yeah. We have actually deep thoughts on that area, and Raghu is actually working with Adam around the clock with a very healthy pipeline of M&A opportunities that we are evaluating. And you know how we are, right? We look at every detail. We look at every angle. We see the multiples that some of these opportunities are commanding, and we want to make sure that we do the right thing for the company at the right time, right? So, yes, it's very active, very visible, and it's part of the development of the digital strategy of the platform that Badri mentioned earlier.

So, yes. Got it. Thank you. Sure.

Our next question comes from Colin Rush with Oppenheimer. Your line is now open.

Thanks so much. I just wanted to get a little bit into the customer awareness and understanding of the value of the grid formation capability that you guys have. You know, you talked about the pricing strategy, but where are you at in terms of really educating the customers in terms of that functionality and the flexibility that you have over time with it?

Yeah, I think, this is Raghu. So, you know, as we mentioned, the installers still have a pretty big influence in selling the product to the homeowners. So they do a lot of education. And for us, we do extensive amount of training with the installers as well and educate them on the importance of grid forming, not only with, obviously with energy storage, but also with the IQ8 TV that's coming soon after. And to a great extent, as we mentioned, right, today people working from home, resiliency is top of mind. So they want to have systems that are backup systems. And, of course, all the challenges that we're seeing here in California, it is on everybody's mind is that, you know, how do I provide a backup solution? And the conversation naturally leads into okay, can I do that with solar and storage? So it's a lot of training, a lot of education that happens, and then, of course, the environment itself is such that people are quite aware anymore.

Thanks. And then just thinking about the OpEx spend, specifically in R&D, I mean, as you guys start to scale up revenue in a more substantial way and you've got some financial flexibility in terms of the target model, I mean, how should we think about R&D spend and target areas? Obviously, you just answered the question about M&A, but, you know, thinking about the internal team and where you're focused, you know, focusing resources, how should we think about the scale of that spend and where you're focusing in terms of the development of the technology platform?

Yeah. You know, like what we have told you before, 35, 15, 20 is our model. The OPEX model model is about 15% of sales. So we have to grow, you know, if sales grows faster, we have a little bit more room on OPEX. Having said that, we live and die by innovation. We basically, you know, the stuff I told you on IQ9, we are working on. It requires a lot of engineers, you know, trying out various things. So our R&D centers of excellence are in India and are in New Zealand. with management oversight from the U.S. We are investing very heavily. That's why, you know, Eric said this, 113 new hires in one quarter. And of these, 65 people are from the top universities in India. That's called Indian Institute of Technology, outstanding engineers, software engineers, hardware engineers, our conversion engineers. And we expect to be hiring more such people. In fact, you know, I I can't, yeah, I don't have enough engineers in the company. And, you know, we are going to, we are going to hire in a hurry there. But we are going to be disciplined, you know, making sure our, you know, we are going to be around that model at all times.

All right. Thanks, guys. Thank you.

Our next question comes from Amit Dayal with HC Wainwright. Your line is now open.

Thank you. Hi, Basri. Hi, Basri. Could you talk about some of the deployment challenges you may be facing? Just any examples to help us visualize what are the issues and how you are addressing those?

When you said the deployment challenges, you mean with respect to storage?

Yes, yes, yes.

With respect to storage, many, many times people, for example, they switch When they switch to off-grid product, and let's say it happens and they don't even know because their product seamlessly switches from on-grid to off-grid, if they don't change their user patterns, then what happens is the batteries can deplete quickly. And so by the time the night is over, the batteries may deplete and the house may not have power. And so in those cases, obviously our next generation product will take care of those cases because it is going to have load control. And when it has load control, when you switch from on-grid to off-grid, we will make sure the critical loads are on first. Right now, the product that we introduced doesn't yet have that feature. So therefore, we have to educate people that Sometimes this happens, and that education cannot come manually. It has to be some form of push notification that comes on their devices, phones, iPads, et cetera, saying that you're now off-grid. Start to reduce your consumption. Conserve your consumption so that in the morning, sun comes up and your batteries are automatically charged. Education like that, you might think about it as pretty simple, but remember the people we are selling this product to, they belong to various demographics, various in the 20s to in their 70s. And so we have to make sure this product works seamlessly. While we are on that product development cadence, in the short term, We have to educate people, and we have to educate people with our customer service team, our engineering team needs to do some quick containment, which we are actually working on. I gave you an example, but those are the types of things we are doing right now.

Understood. Thank you for that. Just maybe one more question on the guidance for the fourth quarter. With 50 megawatt hours coming from potentially the storage side, Is microinverter roughly flat year over year then for the fourth quarter?

No, microinverter, we said, if you take a look at it, the, I mean, think about it like this. My revenue in Q2 was, you know, Q2 was in the 120s. Q3 is 178. Q4 is 200, midpoint is 253. This cannot happen with the microinverter revenue flat. The microinverter point of sales has gone up by 49% in the last three months. Our sell-through for microinverters in September is 49% higher than in June. It is a record point of sales for microinverters. We are continuing to take share, I believe, on microinverters, and especially I talked about the long tail of installers before. The quality is the customer experience. As long as we are leading on that front, we believe this will continue to happen.

Amit, remember that we have 50 megawatt hours of capacity and if you are, let's say, hypothetically fully booked, that, based on the dollar per kilowatt hour assumption, gives you a number minus the 252.5 midpoint of the guidance. That shows you a growth from 178.5. That is pretty big, right? So if you do it that way, the math, whatever number you use per kilowatt hour on ASP. So it's a good year for micros, right?

I was comparing it to 4Q19.

Well, I mean, think about it. 4Q19, we have had the pandemic. We're at the pandemic. So what we are looking is, if you look at the revenue, you know, approximately in 4Q, we had a lot of safe harbor at that point in time. And if we had excluded safe harbor in 4Q19, that number is roughly in the 160s for Q419. Now we take that number, now we compare it. with our midpoint of guidance, which is 252.5 minus the 40 megawatt hours, and if you apply, or minus the 50 megawatt hours, you apply the model, you will see that there is still very significant growth, even in microinverters year on year.

Yeah, I was in fact doing the safe harbor for 2019.

That's critical for you to track, because safe harbor is, like, you guys know it better than me. It is a lot of

You know, forward bullet. And we made a special mention on Safe Harbor on our guidance. We actually were the first ones that came up with Safe Harbor, carving out the numbers to make it clear for you guys. So, I mean, anytime.

Yeah, understood. Thank you, guys.

Appreciate it.

Our next question comes from Eric Stein with Craig Hallam. Your line is now open.

Hi, everyone. Thanks for taking the questions. Hi. Hey, so I guess, you know, asking this question in the context of the resurgence we're seeing in COVID right now and thinking back to the second quarter, really tough quarter for the industry, but there were also a number of positive steps taken, installers and other industry participants, you know, just starting to do business differently. So, I mean, when you think about going forward and if things do trend again, to where things get worse? I mean, how do you think the industry, or does it give you comfort that you think that the impact to your business would not be as severe as it was in the second quarter?

You know, I think one of the things that we have seen is how quickly the industry adapted to the environment, right? One of the things is that there were a lot of things went online. And the second thing is, again, resiliency has become such a key and important top-of-mind issue for a lot of the homeowners. So in some sense, you know, as unfortunate as COVID has been, it's been actually a really big advantage for resiliency products such as energy storage. Second thing also is if you look at what we are doing with our digital transformation, We are building out a comprehensive platform that is helping our installer partners, you know, have a very efficient journey all the way from leads through design, through permitting, through contract, you know, commissioning, interconnection, etc., So I think even if a situation like what you're saying occurs with a resurgence, the combination of the adaptability of our installer partners plus all the tools that we are bringing to bear, I think the industry will be pretty resolute in getting through it.

Got it. Good to hear. Yeah, I mean, obviously hoping that is not the case, but good perspectives. Maybe last one for me, just on the upgrade program, I know that, you know, in the past you've talked about this as a pretty substantial opportunity and the thought that you would upgrade the M-Series or see if homeowners wanted to upgrade the M-Series to the IQ series. What you talked about earlier, I just want to confirm, I mean, how should we think about that upgrade program if you are targeting software that would make the M-Series compatible with to end charge. Is there any change to that or have things changed? I mean, it's a little different when we think about it going forward.

It's a massive opportunity for us. I mean, when do you get 300,000 homes additional when you've already served them once? This one is an opportunity to seamlessly add storage to their existing solar installations. But, you know, having said that, we've got to make sure we get our capacity issues solved and then we're going to, I mean, the beautiful thing is We know exactly where they are located. We know their consumption patterns. We also know that we can specifically target those people for whom resiliency is top of mind, which is places like California, Florida. We can target those very easily when we have the right capacity. So it's very much in our mind, and it is applicable for IQ also, M-series also. And like what I said, we are planning to release that software upgrade in the fourth quarter. And, you know, we'll start the promotions.

Yeah, so is it fair to then to think about it's just more, it's better for Enphase if you are deploying Encharge systems on those houses where, you know, they're M series microinverters, but they've gotten the software upgrade rather than going to IQ6 and IQ7. Okay. Very helpful. Thanks a lot.

It depends also on the extent of the warranty. Remember that some of these M series people bought it a long time ago. So some of them, they may say, I may as well change and switch. Many homeowners actually, to our surprise, they actually use the opportunity for doing a reassessment of their energy requirements. How many people are getting EV? You know, so the opportunity to upgrade to IQ-based system with ACMs in many cases is still there, right?

Right. But, I mean, the short answer is we don't need them to do it. That's a huge barrier that is gone. And, you know, some people, like what Eric pointed out, M190, their warranty, original warranty was only 15 years. So they're basically, they're almost running out. But there are some folks with M250 whose warranties, they're only four years into their warranty, five years into their warranty. For them, you know, many of them will not want to move to IQ. And so even for them, it is no problem. You can buy in charge. It is seamless. No issue.

Got it. Thank you.

Thank you. Our next question comes from Philip Shen with Roth Capital Partners. Your line is now open.

Hey, guys. Thanks for the questions. So the mix of U.S. international was 78-22 in the quarter. As you think through 2021, how could this mix evolve? Do you think Europe and other international markets could grow faster? Could we see 70-30 next year, or do you think it stays similar to this 80-20? Wow.

We are making huge progress in Europe. Europe grew 67% in Q3 compared to Q2. And the areas of growth are the obvious ones, Netherlands, France. We are starting to make some serious inroads into Germany. We have hired sales folks in many countries. We are going to introduce our product in Italy. Very soon, we have engaged. I mean, we have partnerships with Sonnenstrom Fabric, which is an ACM partner. We have not yet talked about our second ACM partner. We will soon. And then we have our third ACM partner with Maxion. So that's good. And again, it is the foundation is quality and customer experience. That's why people, you know, that's why we are expanding rapidly. One big thing which will come we will introduce by Q3 of 2021, will be basically storage systems in Germany and Italy. We are going to be introducing in charge in Germany and Italy and the other countries that need it in Europe. And that's going to happen. We are also, I mean, we are working on that product as well. So I think I'll be disappointed if we don't get to 70-30, you know, at least as we exist. you know, 2021.

Male Speaker 1 Interesting. Thanks, Badri. Do you think the supplier for Germany and Italy would be the same two that you have now, or could it be a third? I know you talked about earlier, or possibly even a fourth that supplies Europe.

Badri Tendulkar Well, yeah, let's walk before we run first. So, we, you know, the current two suppliers, the design would be compatible to the current two suppliers. And then if we are demand constrained, we will obviously recognize that fast and make sure we add a third supplier quickly. And we do have plans to do that by the end of the year anyway.

Okay, fantastic. In some of our checks, we picked up that there might be some components that may be short for you guys. I just want to see if you might be able to talk through this. It's not the microinverter or in-charge. Well, in-charge certainly is short and there's a lot of demand there, but just kind of peripheral components. Do you expect this to sustain? Do you think you can catch up? Do you think, or is this not really an issue? Any thoughts on that? That would be great.

Yeah, I mean, look, the nice thing is the channel is very lean right now. We talked about our normal channel inventory is 8 to 10 weeks, but we are much tighter than that. Yes, you're right. The channel is running light. But, you know, we have the capacity to catch up very quickly. Like right now, I have three sources right now. I have Flextronics Mexico, which produces tariff-free product up to a million units a quarter, and I can expand that easily. I have Salcom's Chennai that produces tariff-free product to 50,000 units, you know, 200 to 50,000 units annually. Q1 of 21 and probably half a million units per quarter, Q2 of 21. And then I always have China, which can go more than, you know, 1.5 to 2 million units. And, of course, there the downside is we pay tariffs. So we have enough capacity, microinverter capacity. We have systematically built the company such that we don't, I mean, we are not limited by demand for microinverters. And so, you know, there may be some short-term constraints here and there, but we are working furiously. Our long-tail installers and all our installers are top priority for us, and we are operationally excellent. Our chief operating officer's job is to make sure no customer is unsatisfied, especially in these times. We will continue to work with them, and we are going to solve these issues. Great. Thanks, Bajri.

Keep it up. Great work. Thank you.

Our next question comes from Mike Sikos with Needham & Company. Your line is now open.

Hi, guys. Thanks for taking the questions here. Just one for you on this digital transformation initiative that you guys are talking through with the Enphase Installer Network. I think I heard that you guys have now 400 installers onboarded. And I'm just going through my notes here. I think you work with, call it, about 1,500 of these long-tail installers in the U.S. per year. So I wanted to get a sense of first, how big do you plan on growing that network? And then secondly, can you kind of walk us through how you guys are putting together these leads and packaging these tools for that network? Just curious from a competitive dynamic what the response is, and can you guys actually get visibility on your end then as far as how close rates and other items like that are tracking?

Yeah, so we view it very strategically when we think about this comprehensive digital platform that we were talking about, right? Historically, the involvement of Enphase and Enliven specifically, the tools, started at the time of commissioning and then commissioning and interconnection, permission to operate, and then operations. What we have done now is extend that to the beginning of the process, which is starting with leads and lead management. That's one. It also interweaves both the installer journey, if you may, which includes design, proposal, contract, permitting, and so on and so forth, as well as full visibility into how the interaction occurs between the homeowner as well as the installer. So we have mapped out that journey. The goal being to provide an excellent customer experience both for the homeowner and as well as the installer, and the journey begins right from the beginning. And, of course, what enables this is the Enphase installer network, and that's a worldwide network. It's U.S. as well as in all the regions that we are in. And we qualify. They have to go through a pretty stringent selection process. So even though we start with 1,500 installers, based on the quality of their installation and, most importantly, the customer experience. In the U.S., as an example, we have now 400 installers in our EIN. So we'll continue to provide, as we continue developing additional tools for them, et cetera, there will be metrics that we are going to track. And, of course, at the appropriate time, we'll share some of those metrics similar to what we have done, you know, as we track NPS as an example. We'll do something similar at the appropriate time.

Just to clarify, we do business with more than 2,500 installers at any given year, right? So this EIM, or Enphase Installer Network, is a very exclusive, unique, you know, group of installers that there are meet a particular defined criteria of excellence with customer experience, installation designs, and they get access to the full suite of the digital platform tools, including leads and other benefits, right? So they are classified into three categories. We have a very clear way to define that, and that's what we are doing. But we continue doing business with pretty much that kind of All of these installers, right? Right.

And if you actually go to our website, and if you go look at a particular zip code, and if you type that in, you can see the platinum, gold, and silver installers in that area. You can actually see how they are sorted. You can see the ratings, public ratings that they have. Now, your question was, how is it embedded into the platform? We are in the process of releasing the platform. We haven't released it yet. It's going to take us a little bit more time. But the way we are thinking about is, for example, if a homeowner from a particular zip code, he approaches Enphase, Enphase would give him, would show the Enphase installer network in that area. The Enphase installer network, the way we will prioritize this, obviously by the people whose service the homeowners with the highest Netremoter score, you know, highest customer experience. So therefore, what we would do is we would have an algorithm which, you know, picks the right installers, a few of them, maybe three or four, to show the homeowner so that the homeowner makes the right decision on what is good for him, but it will be based upon the Enphase installer network. It's also important to know that These installers have actually, you know, given all of the details that a homeowner would like to see when they are making a decision. And the details means, for example, which zip codes they service, what is their pricing, upper end and the lower end of pricing per watt for solar. What is their pricing? storage. What are their preferences? Are they, is the installer okay to utilize AC modules? You know, what, if we do upgrade programs, what are the, you know, rates that he's going to charge the homeowner? So, we are building a comprehensive database. The 400 installer database is going to be very comprehensive because that will be the basis of the digital platform. When a lead comes, the data will be automatically taken from the platform, from those installers, and that installer data will be directly shown to the homeowner without interference from Enphase. All we choose is the best homeowner experience, nothing else. So that's our philosophy, and we do need to do more. I mean, we do need to do more work before we release it. And we need to add several tools. Our installers, our EIN, Enphase Installer Network, they get priority to tools that we have. For example, if we have a solar and storage design software, they will receive special priority depending upon their tier, whether it's platinum, gold, or silver. Similarly, if we introduce a permitting service, they will get special priority. That's the whole point. We want to build a very high-quality network. Their job is to service the homeowner with the best customer experience.

Thank you for that level of detail. Sounds like a compelling opportunity there. And then one more, if I may, just picking through the baseline financial model that you guys laid out, that 35-15-20, given how you guys have been outperforming that model, Maybe you can talk us through how you think about that model moving forward or the opportunity to increase those margins over time.

I think that what we normally say to investors is think about the immediate midpoint of the guidance as a very short-term view of our performance and forecast the immediate quarters, thinking on those lines. We also need to think through that the concept of growth requires significant amount of flexibility, and we want that flexibility, we need that flexibility. And as we continue wrapping up new products, on the introductions of new products, or continue to increase the volume on existing products like Ensembl, we'd like you folks to focus on that the baseline model is the right model for the long term. When we feel comfortable To improve on that model, we will communicate that one as we did it before, right? But in the short term, midpoint of the next quarter guidance sounds about right. In the, I would say, you know, midterm, midpoint, midterm scenarios, I think you should think through the 35% gross margin as a good baseline. It's cash generating. We have very flexible operating models in terms of the business, right?

All right, very helpful again. Thank you, guys. Good luck.

Our next question comes from Sean Milligan with Williams Trading. Your line is now open.

Hey, guys. Thanks for taking the question. If we think about where you're exiting this year at 50 megawatt hours on the battery on the storage side from capacity and where you're heading mid-year next year, what are kind of the biggest gating factors to hitting sales that are equivalent to that 120 megawatt hours mid next year? Is it bringing on additional installers? Is it just a matter of having the capacity because the demand is there? Just trying to understand if there's some kind of gating factor in the first part of next year.

Yeah, thank you for the question. So basically, like what I talked about, we focus on long tail installers. And we have been clear long-tail installers is number one priority. And that business does not happen overnight. It is hard for us to build it installer by installer. The installers have to go through online training because right now that's the way to do things. They have to do their first installation. We have to be patient with them. We have to make sure that installation experience is a seamless experience. We lean out all efficiencies in the process. We need to get that installed to less than one day install. And make sure that we are on top of those long tail installers. That's one. That is a multi-quarter process. Like how we built our microinverters over the microinverter business. It took us a long time to build. one brick at a time. Storage business, especially with the long days, will take time to build. However, once built, it is an extremely healthy business to have because our foundation is based upon outstanding quality, outstanding customer experience. Therefore, our desire is they look nowhere else for buying products. Now, having said that, We also want to work with the tier one and two installers who like Ensembl, who like the fact that IQ8 is going to be the first grid independent microinverter in the world. They want to engage on our platform. And so we like to work with the tier one and two installers. And like what we said in the script, the prepared remarks We are working with several of them and getting them on board with Encharge and Ensemble. And that is, you know, it may not take the same time to, you know, ask the long tail. Expect that to happen relatively quickly, but still that's a time-consuming activity. So those are the two things that need to happen. We are so far, within three months, we are extremely happy at at the number of people who have gone through training, at the way we have managed the installation so far. We are not perfect, but when we had problems, we jumped on them right away. We treated every homeowner, every issue as a defect. I look at it. My entire executive staff looks at it. We start the executive staff meetings with the focus on homeowners for Ensemble. So I'm very happy with the progress we have made. There's more to be done on both fronts, getting more long-tail installers and getting Tier 1 and 2 installers.

Okay, great. Thank you, guys, for the question.

Thank you. Our next question comes from Mahit Mandeloy with Credit Suisse. Your line is now open.

Hey, thanks for having me. And just on end charge, could you talk about, like, are these installations for new solar installations, or are you getting any retrofit demand for older solar installations, either from your MCGs or other IQA 7, 6 series customers or from the customers?

I'd say it is a pretty healthy mix. I would say many are new installations. many are retrofits. Our statistics is limited so far. I think it will be meaningful if we give something to you next quarter. Right now our statistics aren't meaningful enough to give you, I mean to draw a conclusion. But I see healthy trends on both sides.

Just to be clear, the M-series attached will be That product will be launched at the end of this year. That's a software upgrade for our system to enable it to work with the M-Series product.

Very helpful about that. And just on the in-phase installer network, just quick thoughts on how does that compete with the tier one, tier two installers who probably are also offering their own services similar to what you have over there. And last, just what could we expect at the analyst day later this year? Thanks.

Yeah, I mean, it's... We've always been clear on our strategy. While we go absolutely all out to take care of our tier one and two customers, our bread and butter has always been the long-tail installers. The long-tail installers do not have a clear, comprehensive platform to work today. And our objective, while not being arrogant, is If we can create such a platform where we generate leads, we transfer to the installers, we track the entire installation, or we even manage the leads that the installers actually bring, and we give them several tools during that process, we think we will make these installers, you know, we will have a sticky experience with them. And that's our philosophy. to build in highest quality, to take care of both homeowners, and to keep installers, homeowners, and Enphase continuously connected at all times. That's the digital platform. So, yes, you're going to hear more in the analyst day, which will probably be sometime soon. And, you know, we'll keep you informed.

All right. Thank you.

Our next question comes from Joseph Osha with JMP Group. Your line is now open.

Wow, I made it. Hello, everyone.

Hey, how are you doing?

Just fine. Hi, Joel. Two questions for you, one sort of easy one and one more complicated one. On the easy side, I'm wondering if you can share with us on Encharge sort of where your typical – customer configuration is ending up in terms of size. That's the first question. And then the second question is, you know, as IQ8 starts to show up and these grid capabilities start to show up, how do you think about the potential for working with, you know, installers on grid services? And obviously that might inform the type of installers that you're going to work with. How do you think about that? about that once IQA is out there. Thank you.

The first part of the question, I think it is anywhere between 10 and 15 kilowatt hours.

Okay.

Then the second part of the question.

Grid services, as storage becomes more prevalent out there, particularly behind-the-meter storage, which is what we service, the coordinations of coordinating all these DERs is going to become more and more critical, and that's the opportunity, and what we are doing, what our plan is to offer grid services as an integral part of the solution that we are providing. So it will be available to any installer, anyone in our EIN and anyone of our installers to offer it to their homeowner customers so they can sign up or opt in to taking advantage of, because they have their storage solution, and if there's a program available for grid services, then they can opt in and sign up for it. So we are going to make it an appropriate and broadly available.

Okay. And as a follow-up to that, I'm just wondering, and this kind of follows on one of the questions about M&A, or you will have seen that Generac has bought Mbala, Fluence bought AMS. I'm wondering, as you look at this, do you feel that there are any sort of derms you know, management, you know, skill sets you need to acquire, or do you have what you need at this point?

Obviously, we don't get into any such details at this time, but in general, we have a very, you know, powerful platform with Enlighten And so whether that's done through, you know, there are multiple opportunities available, you know, provide APIs to provide grid services, the entire Ensembl system is always on, which means it's fully connected. Ordination of all of these DERs is going to be launched off of the existing Enlightened platform itself. So how we go about doing it, the details of it, we won't share it this time. But suffice it to say that we see that DER coordination is extremely important, and we offer that to all of our installer partners.

Thank you.

Our next question comes from Marshall Carver with Heikkinen Energy Advisors. Your line is now open.

Yes, thank you. You saw really impressive sequential growth internationally, particularly in Europe and 3Q. Any comments on 4Q20 growth rates, U.S. versus international, or give us the anticipated approximate revenue split, U.S. versus international?

Usually don't break that out, but, you know, our team is doing a really nice job in all the regions. We are very strong in basically Netherlands. We are continuing to grow. We just added distributors, top distributors in Netherlands and Belgium as an indication. We are making a lot of progress in Germany. As I said, we will introduce IQ7 hopefully in Italy very, very soon in Q1. And then there are several other countries in Europe that we have actually hired salespeople before. We only had five salespeople last year at this time. In Q4 of 2019, we only had five people. I think now we have north of 15 or 20. So we have increased. And we plan to increase even more going forward. So in general, I think, you know, things look good there. The one big market there is storage, especially Germany and Italy. And I think we'll be ready for that, like what I said, in the third quarter of 2021.

Okay, thank you.

Thank you.

Our next question comes from Pavel Mokhanov with Raymond James. Your line is now open.

Thanks for taking the question. You mentioned the safe harbor playing a much less noticeable role versus a year ago. I'm curious, if the ITC were to be extended as part of a post-election stimulus package in Congress, which the trade groups, of course, have been lobbying for, How would that impact kind of the trajectory of the business into next year vis-a-vis Safe Harbor?

I think, yeah, so obviously if ITC gets extended, then there will be no real need to Safe Harbor anything. So you will obviously see that at least the Safe Harbor contribution will be non-existent. Actually, I expect it to be non-existent. In general, our view on Safe Harbor is that there's a lot of learning from last year, and so I think people now know what to do and how to go about executing on Safe Harbor, and if somebody does want it, we'll be ready for it.

Okay. One more question about M&A, if I may. A lot of interesting comments from you guys about software, which is fascinating. Is there a target in your mind, whether dollar value or percentage, of the revenue mix that you would like to have recurring over time? So SaaS, managed services, etc.? ?

That's not how we think about it. We think about it as, hey, is it a good strategic fit for what we do? Is it very complementary with what we are providing? And are we bringing real value to our homeowners in order to provide the best homeowner experience? So that's kind of the criteria that we use. Of course, we do an incredible amount of diligence in terms of how much we are paying for it, the valuations, and so on and so forth. But at the end of the day, It's all about making sure we deliver the best homeowner experience and a good strategic fit.

We are in a good position. We've got an incredible architecture within SAMBO. We've got plenty of optionality there on how we want to play that out if the event that we want to play it out. No matter what, we need to think about this from the homeowner's point of view. That's what we are thinking. That backwards into us, right? And through our healthy relationship with our partners, distributors, and installers, right? And so everybody wins in the process, especially the homeowner, which buys our products, right? But we have not discarded any possibility, right, on how we're going to approach our go-to-market strategy on providing different services through our platform, either Enlightened or our digital platform outside Enlighten as well.

Thanks very much.

You're welcome.

Our next question comes from the line of Amit Dayal with H.C. Wainwright. Your line is now open.

Hi, Barbara. Sorry, I just had one follow-up. The 120 megawatt hours per quarter, you know, by the second half of next year for the storage site, Are you going to rely on the long-tail network to deploy this, or should we expect maybe some partnerships to come through between now and then to help support that deployment?

You know, it's too early to tell, but I'll just go back to the microinverter business. You know, microinverter business today is a nice, healthy mix of long-tail as well as, you know, tier one and two installers because everyone wants to work with us due to high quality and high customer experience. So, If we do a good job on the storage side, then all of this capacity can turn out to be positive for us, but we need to execute.

Thank you.

That concludes today's question and answer session. I'd like to turn the call back to Badri Kathandaraman for closing remarks.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.