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?