Enphase Energy, Inc.

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

Adam Hinckley Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth 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 fourth quarter ended December 31st, 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 capability of our technology and products, our operations, including in manufacturing and customer service, the anticipated growth in our sales, and in the markets in which we operate and target, the performance of the tools we make available to, and the capabilities of our installation partners, 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 annual report on Form 10-K for the year ended December 31st, 2020, which will be filed with the SEC in the first quarter of 2021. 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 fourth quarter 2020 financial results. We had a good quarter. We reported a revenue of $264.8 million, shipped approximately 2.3 million microinverters, achieved non-GAAP gross margin of 40.2% and generated strong free cash flow of $78.5 million. We exited the fourth quarter at approximately 40, 13, 27. This means 40% gross margin, 13% operating expense, and 27% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35-15-20. Eric will go into greater details about our finances later in the call. Let's now discuss how we are servicing customers. Our customer experience personnel in all four worldwide locations, the US, Europe, India, and Australia, are still working from home while supporting installers and homeowners. Our Q4 Net Promoter Score worldwide was 62% compared to 67% in Q3, and our North America Net Promoter Score was 68% compared to 71% in Q3. Our average call wait time increased in Q4 to more than five minutes as we onboarded new installers and fielded more calls relating to our storage systems. We are not happy about this increase in wait times and are working to bring them back to under a minute. The ramp of our end-phase storage system has also increased call volumes as our installers are learning how to commission the system and homeowners are learning about the system's features. Let's now talk about manufacturing. Our operations team did a great job flexing manufacturing as 2020 played out. When the pandemic began, we cut manufacturing in Q2 of 2020. and then had to quickly ramp back up to meet the surge in demand in Q3 and Q4. The production in Q4 was more than two times the level in Q2. I'm very pleased with the ramp of our Mexico factory that met our target of producing more than 1 million units in Q4. As part of our supply chain strategy to diversify production to tariff-free and cost-competitive locations globally, began microinverter production at Salcomp India in October of 2020 and started shipping to customers during Q4. We have a high-quality, state-of-the-art automated line with a quarterly production capacity of half a million units and the space to add a second line with the same capacity. The production ramp is going very well, and we expect to produce approximately 400,000 microinverters in India in Q1. We have seen a strong increase in demand for our microinverter systems over the past several months as we continue to onboard new installers. At the same time, the uptick in broad economic activity has stressed the global semiconductor supply chain. We are seeing a constraint on a few semiconductor components used in our microinverters. Our existing suppliers are working very hard to increase the availability of components for us. which coupled along with the new suppliers we are qualifying should help easing the constraints into the second quarter of 2021. To put the supply constraints into perspective, we see this as a more manageable situation than the high-voltage AC FET shortage we experienced in late 2018, early 2019. In terms of our battery pack supply, our second supplier began delivering cell packs in Q4 as planned, and will be ramping capacity throughout the first half of 2021. We expect to have 120 megawatt hours available to us in the third quarter of 2021. We have adequate supply of cell packs with two suppliers, although we are continuing discussions with additional suppliers for geographic diversification. Let's now move on to the regions. Our U.S. and international revenue mix for Q4 was 82% and 18% respectively. We saw sequential revenue growth in all regions during the quarter and record sell-through from distributors to installers. The US market was quite strong in Q4. US revenue was up 55% sequential. The sell-through of microinverters from our distributors to installers increased nearly 40% from Q3, which was also a record. As a result, the channel inventory for microinverters at the end of Q4 remained slightly lower than our target range of 8 to 10 weeks. We expect channel inventory to remain at these low levels through the end of Q1 due to strong demand and the semiconductor supply constraints. We continued ramping shipments of our storage systems nicely. We shipped 35% more megawatt hours in Q4 compared to Q3. In Europe, we reported record revenue for Q4. Revenue increased 10% sequentially. On an annual basis, the revenue from Europe increased 32% in 2020. Annualizing the Q4 revenue from Europe would have put us close to achieving our pre-pandemic target of doubling the revenue in the region. I am very pleased with our team's performance and I'm excited about the region's projected growth in 2021 as the new markets we recently entered continue to gain traction. We will also be introducing our Enphase storage system for the European market later in the third quarter of 2021, adding yet another growth driver. In Australia, we built on our strong Q3 results and achieved record quarterly sell-through and record installer count in Q4. The results were fueled by the launch of our N-phase installer network, or EIN, as well as growing demand for our high-power IQ7A microinverters, plus a favorable competitive environment as regulations continue to shift towards safer and smarter solar. We expect to introduce our Enphase storage system for the Australian market during the fourth quarter of 2021. In Latin America, we reported record quarterly revenue. Puerto Rico showed strength for our microinverter systems as well as our storage systems. Now that we have covered the regions, let's discuss overall bookings for Q1. Our customer demand for Q1 significantly exceeds the high end of our guidance range for Q1. We are constrained by the semiconductor component availability as we discussed earlier. Our top priority is to take care of our installers and our teams are working hard to minimize customer disruption. We have already factored in expedite costs into our Q1 guidance to ensure We put maximum number of units in customer hands. Let's cover our storage rollout. We shipped 32 megawatt hours of storage systems in Q4, representing a growth of approximately 35% compared to Q3. Around 360 unique installers had commissioned at least one Enphase storage system by the end of Q4. We are learning tremendously from the installers and homeowners and are thankful to them for enduring with our earlier mistakes and errors. We have made many updates to our software as well as our release process as a result of their feedback. Overall, we are very pleased with the market interest in our storage system, although we did fall a little bit short of our internal shipment expectations for Q4. I attribute this to growing pains in ramping a new product as we actively work with installers on selling, installing, and commissioning this new product category that is much more complex and time-consuming than solar-only systems. With the strength of the micro-inverter system demand being so good, long-tail installers naturally default into prioritizing solar-only systems that they know how to service best. Enphase has a responsibility to therefore ensure a best-in-class installer experience and ease of doing business for both solar plus storage installs. In addition to the long-tail installers, we are working with a number of large installers. We recently announced storage agreements with Sunova, Solar Optimum, and Momentum Solar. These announcements provide confidence in a continued steady ramp in shipment volumes into 2021. We expect storage shipments to grow nicely in Q1 at a similar rate as Q4, despite the negative seasonality of the industry in each Q1. Coming back once again to long-tail installers, they are our top priority, and we have made major modifications to our commissioning process to reduce installation and commissioning times for storage to sub-24 hours. This helps crew scheduling be more predictable and helps the installers profit on storage installs. With the installers facing labor constraints, the improved commissioning times should help incentivize them to sell solar plus storage than just focusing on solar only. Let's talk about more new products that we are coming out with. We recently announced that our storage systems are now compatible with existing M215 and M250-based solar systems. The expanded compatibility provides approximately 300,000 additional Enphase system owners in the U.S. with the possibility of achieving energy resilience through the Enphase upgrade program. We're also working on additional features to our Enphase storage system to make it a lot more powerful. These include generator compatibility, load control, power control, and 200% overload. We expect to release these features shortly. Let me cover them quickly one by one. Homeowners can add generators to their in-phase system. With our system, a generator ATS, an automatic transfer switch, is not necessary, thereby driving down cost and simplifying the install. Homeowners can configure the generator's behavior from their Enphase app. The system can turn the generator on when the grid fails either immediately or when the battery charges below a certain level. Next is load control. With this new feature, a homeowner will be able to control up to four critical loads by connecting them up to the Enphase system. The homeowner can then reconfigure the behavior of the system via the Enphase app. He or she can identify non-critical loads such as cool pump to automatically turn off when the grid fails or based on the state of charge of the battery. This ensures that the home does not black out during a grid outage, thereby providing a good customer experience. The next feature is called PCS, power control system. It's a software capability in our system to regulate its output in a manner that which does not increase the amount of current on the homeowner's main load center. This avoids an expensive upgrade of the main load center when a homeowner wants to add both solar and storage. The last feature and an important one is the 200% overload. Motor loads such as ACs and well pumps have a significant power need during startup, which if not met, will black out a home. One way to solve the problem is to throw more dollars at it, which is to oversize a storage system which is expensive. We solved this problem with an intelligent hardware and software-based function called PowerStart. In addition, we have increased the capability in our microinverters to supply up to 200% of the rated power for short duration in order to start motors, ensuring that the home does not black out. An Enphase storage system with this feature will help the homeowner optimize his system size and maximize value. Next, we are making progress on our IQ8 grid-independent solar microinverter. We already have IQ8 alpha systems with and without in-phase storage running at various sites. We expect to complete beta installations and expect to begin shipping production in Q2. Our small commercial based on IQAD 640-watt AC microinverter is making similar progress. Similar to a residential solution, we expect to provide a complete solution that includes the microinverter system and a comprehensive digital platform to capture the entire journey of the installer and the system owner. The platform will provide a sophisticated design and proposal tool, permit package development services, commissioning, activation software, tools for operations and maintenance, performance tracking and fleet management. We have begun alpha installations here and expect to start shipping production in Q2. Let me next talk about our portable power station, previously referred to as ensemble in a box. We are a little bit behind here, but have a good plan going forward. This will be our first consumer product. It will provide Energy security indoors as well as energy on the go when you go outdoors. It is cloud connected and controlled via the Enphase app. We view this as a starter product for homeowners who are not yet ready to invest in a full solar or storage system. The product will support up to 1.3 kilowatt hours of storage, provide 1.6 kilowatts continuous and 3.2 kilowatts of peak power. It will keep the home's basic appliances such as lights, mobile devices, refrigerators on for a few hours during an outage. We expect to release this product during the fourth quarter of 2021. Let's now cover digital transformation. I'm excited about our two recent acquisition announcements. The first one is SoftDesk. Headquartered in Montreal, SoftDesk provides design and proposal software for use by solar and roofing companies. The second announcement is the proposed acquisition of the solar design services business of DIN Engineering. Based in Noida, India, the business provides rapid and cost-effective proposal drawings and permit plan sets to installers. We expect to close this acquisition by the end of Q1. These two acquisitions will add significant capabilities to our digital platform. By providing such tools and services to the installers, we aim to simplify the sales process while reducing soft costs and providing an enhanced buying experience for homeowners. Turning to the other aspects of our digital platform, we have now onboarded 440 installers in North America to our Enphase Installer Network, or EIN, through a highly selective process focused on installation quality and homeowner experience. We launched our EIN in Australia during Q4 and look forward to launching EINs in Europe and India next. Our EIN installers can enjoy a variety of tools and services on Enphase's digital platform to make the sales and installation process faster and easier. In addition, we have modified our highly interactive Enphase system estimator tool to enable accurate sizing of storage systems in various home appliances. Installers can leverage this tool to provide an improved homeowner experience. We recently announced that Alison Johnson has joined Enphase as our CMO, Chief Marketing Officer. Her experience at some of the world's leading brands is key as we look to accelerate our growth and establish Enphase as a recognized consumer product leader in the global transition to home electrification and full energy independence. In summary, We are happy with our performance. We are excited about the strength in worldwide demand, the ramp of our storage systems, our upcoming new products, and our digital transformation efforts. 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 fourth quarter of 2020 financial results, as well as our business outlook for the first quarter of 2021. We have provided reconciliation of these non-gap-to-gap financial measures in our earnings release posted today, which can also be found in the IR section of our website. We are very pleased with the significant increase in demand for our micro-inverter systems in Q4 2020, despite the pandemic. Total revenue for Q4 2020 was $264.8 million, which did not include any revenue from safe harbor shipments during the quarter. total revenue increased 48% sequentially, and we shipped approximately 762 megawatts DC of microinverters and 32 megawatt hours of storage systems in Q4 2020. The 32 megawatt hours is equivalent to 12.2 megawatt hours of power. As we previously discussed, some of our microinverter units met certain size and weight criteria, qualifying them for an exclusion to the Section 301 tariffs on prior shipments. We requested refunds totaling approximately $39 million plus accrued interest of which $23 million were approved in Q3 2020 and $16 million were approved in Q4 2020. These refunds have been accounted for as a reduction of cost of goods sold in the respective quarters where they were approved and the associated accrued interest was recorded in other expenses. We have excluded trust-tariff refunds from non-GAAP financial results to present a more accurate picture of ongoing business performance. We don't expect any further refunds in 2021. Non-GAAP gross margin for Q4 2020, which excluded the $16 million tariff-approved refund, was $0.402 compared to 41% for Q3 2020. The sequential decline was due to higher shipping and logistics costs related to component supply constraints. GAAP gross margin was 46% for Q4 2020. Non-GAAP operating expenses were $34.2 million for Q4 2020 compared to $29.6 million for Q3 2020. The sequential increase was primarily due to the hiring of 85 employees During the quarter, mainly focused on engineering, customer experience, and innovation. Gap operating expenses were $42.8 million for Q4 2020 compared to $43.2 million for Q3 2020. Gap operating expenses for Q4 2020, including $7.8 million of stock-based compensation expenses and $684,000 of acquisition-derailed expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations was $72.4 million for Q4 2020 compared to $43.7 million for Q3 2020. On a GAAP basis, income from operations was $79.1 million for Q4 2020 compared to $51.8 million for Q3 2020. On a non-GAAP basis, net income for Q4 2020 was $71.3 million compared to $41.8 million for Q3 2020. This resulted in diluted earnings per share of 51 cents for Q4 2020 compared to 30 cents per share for Q3 2020. On an annual basis, we are pleased to report a record non-GAAP net income of $188.5 million. Gap net income for Q4 2020 was $73 million compared to gap net income of $39.4 million for Q3 2020. Gap diluted earnings per share was 50 cents for Q4 2020 compared to diluted earnings per share of 28 cents in Q3 2020. Now turning to the balance sheet and the working capital front, inventory was $41.8 million at the end of Q4 2020 compared to $37.5 million at the end of Q3 2020. The sequential increase in inventory was driven by the planned increase of raw materials for our space storage systems in anticipation of the production run in 2021. Although the dollar value of inventory increased sequentially, days of inventory outstanding decreased to 27 days compared to 41 days in Q3. This sequential decrease in days of inventory was driven by the higher shipment volumes in Q4. Our target is 30 days nominally, and we will always do what is right for customers. Accounts receivables were $182.2 million at the end of Q4 2020 compared to $122.4 million at the end of Q3 2020. The sequential increase was due to the higher revenue in Q4. DSO of 50 days decreases slightly from 52 days in prior quarter due to our collection management. We remain committed to efficient working capital management and driving down our cash conversion cycle. We exit the Q4 2020 with a total cash balance of $679.4 million compared to $661.8 million for Q3 2020. we did not make any share repurchases against our $200 million share repurchase authorization. However, we spent $16.3 million on withhold to cover tax transactions on employee stock vesting that prevented the issuance of approximately 132,000 shares in Q4. For the calendar year 2020, we spent $68.3 million at an average price of $50 per share on withhold to cover transactions and prevented the issuance of approximately 1.4 million shares. In Q4, we also spent $43.9 million on the partial repurchase of convertible notes due 2024. Since the end of Q4, we have received additional conversion requests of $61.5 million as the notes are deep in the money compared to the conversion price. We expect to repay the principal amount of this conversion request in cash and in the money amount in shares. Settlement will occur in Q1 2021. In Q4 2020, we generated $84.2 million in cash flow from operations and $78.5 million in free cash flow. For calendar year 2020, we generated a record $198.9 million of free cash flow. Capital expenditure was $8.9 million for Q4, mainly for the in-phase storage manufacturing capacity increase, IT enhancements, enlightened software apps, development costs, and the production ramp with our second contract manufacturing partner. Capital expenditure for 2020 was $20.6 million. Now let's discuss our outlook for the first quarter of 2021. We expect our revenue for the quarter to be within a range of $280 to $300 million. We expect gap gross margin to be within a range of 37% to 40%, and non-gap gross margin to be within a range of 38% to 41%, which excludes stock-based compensation expenses. The gross margin guidance includes a further increase in shipping and logistic costs to ensure we are best serving our customers and getting them as many units as possible. We expect our gap operating expenses to be within a range of $64 to $67 million, including a total of approximately $22 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. We expect non-gap operating expenses to be within a range of $42 to $45 million. All guidance estimates include the soft desk acquisition, but do not include the DIN solar design services business. I would like to touch upon our OPEX guidance. Our non-GAAP operating expenses are increasing quite a bit from Q4 to Q1. The increase is due to two reasons. Higher to support our growth plans and consolidation of acquisitions plus related incentive accruals. The hiring is related to the new product development, and investment in innovation to create best-in-class home energy management systems. The soft desk and DIN solar design services business acquisition are building blocks that enable us to build a world-class digital platform for homeowners and installers. At the same time, we are not taking our eyes off the baseline financial model and plan to maintain operating expenses at 15% of revenue. Before turning the call back to the operator for questions, I would like to mention a couple of things. First, we published our inaugural ESG report a few weeks ago. Sustainability is at the core of what we do at Enphase, and we are proud of our team as we continue to enable clean energy and energy independence through innovation. Second, Enphase has been recently added to the S&P 500 Index, and we are very proud of this accomplishment. I want to acknowledge the hard work and dedication of the entire MFA team. With that, I will now open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey, guys, thanks for taking the questions, and congrats on a great quarter. Maybe first, if we could sort of dig into the guidance a little bit. I know there's some shortages here on the micro side. I'm assuming there's some on the battery side as well, but can you give us a sense of sort of, you know, supply demand for both the micro side as well as the in-charge system? you know, it sounds like you're leaving some business on the table here. Can you kind of quantify what impact that's having on Q1, and is that expected to also persist into Q2? And then related to that, I guess, on gross margins, what percent hit did you see? Is it 100 bps? Is it more than that on Q4, given the additional freight and logistics costs you had to incur?

Yeah. So let me start with the microinverters. So demand is quite high. Customer demand is quite high there. And I once again go back and attribute it to our high quality and high customer experience. So basically, while I'm not going to quantify how much the demand is higher compared to the high end of the guidance, I already said it is significantly high. And our constraints basically are coming from the semiconductor components. That's an industry-wide issue right now There are two specific, you know, components that we are constrained on. One is our ASIC that goes into the micro, and the other is the AC FET drivers that actually drive the high voltage FET. There, you know, the name of the game is we are qualifying multiple, you know, more sources so that we have more supply as well as expediting product. And I am in direct touch with the CEOs of those companies, and they are helping as much as they can. We expect to get all caught up basically by early April. Our top priority through all of this is to ensure that we take care of customers. So we will do whatever it takes in order to ensure their lines are running and that they are not affected. So that's on the microinverter side. On the storage side, we have enough capacity. We already said that we have about As of last quarter, we had about 50 megawatt hours of capacity. And then as of Q3 of 21, we will have 120 megawatt hours of capacity. We have enough capacity on the storage side. And on the storage side, once again, reflecting back on how we did, we started shipping storage in the third quarter. I'm pretty happy with the ramp. Compared to the third quarter, I did about, or we did about 35% more megawatt hours in Q4 compared to Q3. And for Q1, we do expect to do a similar amount higher than Q4. So let me come to some more statistics on storage so that you get a flavor for it. Essentially, like what I said, about 360 plus installation hours unique installation companies have installed at least one end-phase storage system. We have trained over 650 unique installation companies. We have trained overall more than 1,200 installation personnel. The What we are seeing, we have learned a lot in the process, mainly from installers as well as a lot of homeowners, and we are improving them one by one. So although I said in the prepared remarks, I wish we had shipped a little bit more, but I think we are doing the right things by fixing these problems. For example, our commissioning time needs work. And we are in the process of improving the commissioning time to sub-24 hours. And it is all about, for us, it is all about taking care of the installer, making sure that the installer's experience is seamless. Ease of doing business is what we are all about. Therefore, we will never compromise on the short term in order to achieve that. So, more examples is... Very often, the installers usually struggle on storage with main panel rewiring and replacement. That's a big pain point for the installers. We are working on steps to solve that. When it comes to other ease of doing business, the homeowners are still in their infancy on learning how to use storage systems. While the transition from On grid to off-grid is seamless. The fact that it's seamless means that the homeowners do not change their behavior, and Enphase needs to do a lot more there to educate the homeowners in a seamless way. This is intelligent notification, intelligent text messaging, intelligent load control, which we are actually working on. And, you know, one more thing is to also go back and do the storage design right in the first place. Very often people miss that storage is all about taking care of power properly. And most of the people miss that. Once again, it is we, Enphase, needs to take responsibility to do whatever it takes to simplify the installer's ease of doing business. And of course, now I'm coming to the industry changes that are needed, which are permitting needs to be a little bit faster on storage. That's an industry-wide problem which I'm sure many of our peers and us are going to be working on. The last one is financing for storage. We need some kind of innovative financing schemes on storage so that that also starts accelerating overall. I hope I gave you some flavor, but if I were to summarize, we are growing at a very nice clip, 35% from in Q4 compared to Q3. We'll do similar rate in Q1 compared to Q4. And our focus is on the long term. We will take care of our installers, training, training and making our storage system easiest to install. That's our focus.

Thanks, Bhaji. That's a super helpful caller. I had a second question on batteries, and you touched upon some of this, but if I kind of back into the numbers, it seems like you did maybe $25 million, $30 million in charge revenue in Q4, and that will be well into the $30 million plus range in Q1. based on the guidance. So first question on batteries is fair to assume those are the right revenue ranges and there's no change to pricing in the near term? And then second question is just on, I know given it's a new product and the installation rates are not as sort of swift as what you're used to on the solar side. Your shipments are not keeping up necessarily with capacity. You've talked about 120 megawatt hours by Q2, kind of 35% surge capacity you want to have in place, so maybe 85, 90 megawatt hours really being the shippable capacity you're targeting. When do you think we get closer to shipments lining up with kind of your applicable capacity? Thanks, guys.

So your ballpark for the revenue is right. The second one is like what I said. I mean, it's a long-term game. So once we fix the ease of doing business for the installers, we expect to ramp. As you see, we are making significant progress with both the long-tail installers as well as the tier one and two installers. You saw all of the press releases. You will see a lot more going forward. So we continue to grow at a nice clip. You can do the math. If we continue to grow at this 30%, you know, soon we will need a third supplier. That might happen in 2022. And we are already talking to those people.

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

Thank you. Our next question comes from Moses Sutton with Barclays. Your line is now open.

Thanks for taking our questions and congrats on the quarter. So you say you'll start shipping IQ8 into Q. How should we think about IQ8 standalone pricing versus IQ7? What might be the range on the premium? And might you expect over time a majority of installers shifting more toward IQ8 versus IQ7? Or is the jury out on that question still?

I mean, we're not going to talk about the exact pricing right now, but we are you know, within a few months of going to market. So that will happen very soon. With regarding whether people are going to, you know, adopt IQ8 over IQ7, we think the answer is a no-brainer. It's going to be yes. If IQ8 is a grid-independent microinverter system, so therefore, you know, I expect the adoption to be high when it is released. And there are obviously a lot of combinations with IQ8, and in some cases, you know, people might prefer to buy IQ8 with a smaller storage system, and we will be promoting the heck out of it.

Great. Looking forward. What percent of U.S. installers using your products now still need to be trained on nCharge? I know you gave the number of installers trained already or haven't acquired a system. How much is left in the U.S. training process?

Look, I mean, we work with a couple of thousand installers in the U.S. usually, and we reported numbers of 650 unique installation companies. That number, we are catching up on those numbers very fast. So we expect, you know, within a couple of quarters to basically train everyone that matters.

Got it, got it. And just one more for me, and I'll jump back in the queue. What's the annualized contribution from these two recent fall-time M&As that you know, maybe on revenue and even gross profit, if possible?

We're not going to break out those numbers right now.

Got it. Understood. Thank you.

Thank you. Our next question comes from Mark Strauss with J.P. Morgan. Your line is now open.

Yeah, good evening. Thank you very much for taking our questions. So quite a bit has changed in a macro environment since your 3Q call. Can you just talk about how your customer conversations have changed, if at all, since the ITC was extended? And then kind of a follow-up to that is – you know, who knows what's going to happen going forward, but if energy storage standalone is included in some kind of future revision to the ITC, what do you think that impact would be for Enphase, specifically looking for retrofit activity? Thanks.

Yeah, hi. This is Raghu. Clearly, change in administration is something that's very positive for us. Obviously, the first thing that happened was the ITC extension, as a result, you see all our numbers have no safe harbor in them. So that was probably a very significant change that took place. With regards to some bills that are in Congress that are being worked on right now, the one that is really interesting is the one around standalone storage. And the nice thing about our architecture, the fact that we are AC-coupled, means that it lends itself very well to a standalone system. So the combination of a standalone storage device plus a safety device, the microgrid interconnect, can now add substantial value to the homeowner, both in terms of providing resiliency in the event of an outage, as well as participating in value-added services, such as grid services, for example. You know, one could even extend their thinking into our portable power station, but also someday we will participate in that as well in terms of providing both resiliency as well as participating in value-added services. So we really are excited about the storage standalone discussions that are going on right now.

In terms of the ITC, I think that the – The idea that the ITC could be extended into a storage, you know, potentially even a cash refund, that is very appealing, right? Because think about it, I mean, homeowners, you know, they look at, you know, payments and you mentioned financing. All of those things help to create adoption and as cost keeps reducing and the cost per kilowatt hour and cost per watt keeps on going down, the ramp can be accelerated, right? So we welcome those things.

Okay. Thank you. And then just a follow-up to Moses' question on SoftDesk in particular. Is the idea with that acquisition, I mean financially anyway, to create a stickier relationship with your customers, or is there a financial rationale for these acquisitions as well in that kind of standalone they would meet kind of your corporate target margin profile?

Yeah, so you got it right. We love our long-tail installers. We want to make it easy to do business for them. Therefore, we would like them to stay on our platform, buy our product, buy our software, buy our permitting services, and a lot more that's coming.

In terms of financially, we look at those transactions and they stand on their own feet. So, rest assured that that is there.

Got it. Thank you.

Thank you. Our next question comes from Eric Lee with Bank of America. Your line is now open.

Hey, guys. Congrats on the quarter. Question on...

Eric, you got a really bad connection there. Can you hear me better now?

We cannot hear you well.

Can you hear me better now?

Yeah. Let's give it a try. Slightly better.

Perfect. Just on storage, the supply constraints across the industry right now, can you talk about your ongoing supplier discussions there? And is there any color you can provide around the amount of storage capacity you would expect to expand to near term with your third supplier beyond the two existing suppliers? And a follow-up question after that.

Okay. Yeah. So, you know, right now we have two qualified suppliers. The first one we have already ramped well with. The second one is in the process of ramping. It started shipping to us in the fourth quarter. And we said that basically in Q4, meaning the quarter that just passed, we had a supply of 50 megawatt hours. In Q3 of 21, we expect that supply between these two suppliers to go up to 120 megawatt hours. And if we find that we are short, maybe by the time we get into 2022, we are already talking to a third supplier, or rather multiple suppliers, and then it takes us usually anywhere from six to 12 months to qualify the product. We are starting those discussions right now.

Got it. And just to clarify, would you still expect to bring on a third supplier this year, or are you saying that that's more going to contribute into 2022?

We will have a third supplier ready if we need it. So yes, we are starting those activities. That's correct.

Okay. Thank you. And then just On the R&D cycle, are there any updates you can provide on the development of IQ9, where that currently stands at this time? Is it still being developed, or is it in testing phase? If you can provide any color there. Thank you.

Yeah, we are actually working on IQ9 at this time. And IQ9, our vision is basically, obviously, smaller and cheaper. faster, producing a lot more power than IQ8. Right now, we are focused on a few areas. One is we'd like to see how to reduce the footprint of the transformers, the eCAPs, the 600-volt AC FET devices through some semiconductor process innovation. GaN transistors are becoming widespread. GaN on GaN, GaN on silicon, they are becoming widespread. The advantage that GaN gives is I can now run my AC FETs at a higher frequency. Because I can run it at a higher frequency, I can reduce my transformer sizes. And because I can reduce my transformer sizes, the entire footprint can get a lot smaller. Of course, this is me speaking theoretically, and we need to demonstrate that with both, you know, prototype vehicles as well as, you know, qualifying reliability, etc. I expect that take the next 12 to 18 months. And we will also be working on the next generation as well to think about maybe sophisticated cooling themes, alternatives to potting, et cetera, alternatives to meaning. So today we have between our gate drivers And our AC FETs and our DC FETs, we have a lot of components there. Using semiconductor packaging and GAN, I may be able to collapse all of those to a substantially less number of components. We'll be looking at those as well. So a lot of R&D is going on. We hired our CTO a year ago. His name is Hans. He's an outstanding guy. And we have started all of those discussions, and there is a you know, team actually behind it. Whenever Eric, you know, Brenda is our CFO, says, you know, innovation, he means that investment in the CTO team. We're investing a lot more than before.

Got it. And one last question, and I'll pass it on here. Could you just talk about any data points you can give us on traction or progress with the long tail installers in Europe? How is that training process going?

Long-tail installers, actually, I mean, Europe is a great story. If you remember in the 2019 analyst day, I had reported that we only had five salespeople at that time in Europe. And now we have, I would say, increased, maybe quadrupled or even more, the number of sales folks. We have a great team there. That team is ramping in Netherlands, in Belgium, in France. We have recently opened up offices in Poland, Spain. We have sales and FAE teams there. We've also launched massive effort in Germany, where we are in the process of training a lot of installers and getting more and more and more installers on board there. We will also introduce our storage solution into Europe. in the third quarter. As you know, Germany is a big market. It's one gigawatt of PV with 80% attach rate because of the feed-in tariffs being so small. So we're very excited about that market. But having said that, it's a mature market almost. There are a bunch of suppliers. And we have clear differentiation It'll take us a little bit of time, but with our relentless focus on quality, customer experience, supporting the long tail of installers, I'm sure we'll start making significant progress in that region. Thank you.

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

Thanks so much, guys. Can you give us a sense of the progress that you're making in pre-selling the IQ8D and the activity that you've got going in the commercial market right now?

Yeah, so clearly, as we talked about, IQ8D brings a lot of value into the commercial segment. Just to remind everybody, IQ8D, two things. One, the inverter itself has 50% higher power density than and it connects two panels into one device. And the second thing is we are not looking at this just as a standalone device itself. We are looking at it as a complete end-to-end solution, and we want to leverage our digital platform, everything from the design and proposal services that come with it, along with permitting package, a very sophisticated O&M system, fleet management, performance tracking, et cetera. So we're looking at bringing a complete solution set to the market. We are in alpha right now. We have alpha installs happening. The installation process is much simpler. We were doing small commercial. We are doing small commercial with IQ7s as well, but it's a significant improvement from IQ7 to the IQ8D. So a lot of progress there, more to come, and we'll report more as we make progress.

Great. And then just in terms of thinking about the integration of generators with the storage and solar, as you guys look at the competitive landscape, can you speak to the differentiation for the grid formation functionality that you have and how long you think it'll take before anyone else has a similar sort of capability out in the marketplace?

The generator is your question. I think the generator integration is a little unique to us. For instance, we have the microgrid interconnect device or smart switch. Because of that, we don't need an automatic transfer switch, which is what you typically require with a generator integration. That function is effectively done in software for us. Just by simply the act of connecting the generator into the device, The entire system is now managed by that device and managed by the energy management system. There are a few other advantages as a result of the way we integrate everything into the AC domain is that the generator can now run in parallel to the storage system. So what that means is the homeowner can configure up their system and the system will automatically make decisions such as, Turn on, for example, turn on when the grid fails instantly. Turn the generator on instantly if the grid fails. Or, for example, once the grid fails, you only turn the generator on when the state of charge is at a certain level, and then it turns back off when the state of charge has reached another level. Another functionality there is, for example, a quiet period. You can configure it all in software. You can configure it all up saying, hey, during this time of the night, don't start the generator so you can reduce noise pollution. So it's a very rich experience. You can get to see exactly how the power flow is in real time on your app. So much, much more well-integrated, one-stop shop solution with an integrating generator into a common platform.

All right. Thanks so much, guys.

Thank you.

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

Hi, everyone. Congrats on the strong results. My first question is on when you think you might add the second line in India. So given how low Channel Ventura is and the overwhelming demand, have you already made the decision to ramp up the second line? And if not, why not? And what else do you need to see?

No, we've already made the decision to add a second line. Like, to remind everybody, we have half a million microinverters capacity. We are going to invest in adding another line, which is another half a million microinverters. Basically, that will take about six months to come on board. We have, you know, in the meantime, we have interim sources. We have China, which is we have a lot of capacity there in our Fuyang plant. Then we have GWAD. GWAD just reached a million microinverters, and we are going to be investing in GWAD as well in order for us to create a lot more capacity. Because what we see is with IQA going to come very soon in one to two quarters, we do see the necessity to increase our capacity. We are going to be working on it.

Okay. Thanks, Badri. So when do you expect the second line in India to come online maybe fully? And by the end of the year, if you add up all the capacity, China, Mexico, India, what is the quarterly run rate you think we're at maybe in Q4?

Well, on the India specific question, I would say six months. On a number for your overall capacity by the end of the year, You know, this is not about demand. This is about purely capacity. And so I would say between 4 and 5 million units per quarter is what we'll be prepared for.

Okay. Great. And then as it relates to international, I think on the last quarter you talked about by the end of this year getting to 70-30 U.S. international mix would be reasonable and and you'd be perhaps even disappointed if you weren't there. What's your latest view on that mix? What do you think it ends up being by the end of the year?

We threw a curveball in it by shipping the storage systems, which are entirely U.S. Now we have to ship the international storage systems. In addition to ramping on the solar systems, we'll be doing exactly that. So 70-30, maybe by the end of this year, may be tough, but You know, definitely middle of next year I see it as a possibility.

Okay, great. Thanks, Bhajan. I'll pass it on.

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

Hi, everyone. Maybe just on, I mean, given the really strong free cash flow, I mean, your cash balance will soon be, pushing a billion dollars. I mean, just on capital allocation, are there any areas on the acquisition front? I know you've made a few, you know, seem like they're more strategic on the small side. Any acquisitions or areas in your business that might make sense from that perspective? Or is this more about, you know, just sticking with product development and organic growth?

I mean, both are going to be critical. The challenge with organic growth is that we also generate cash away, right, because our framework that we have. So the acquisition approach is going to be very active. We have a lot of things that we need to complement our digital platform. Actually, Raghu and Adam, both of them are working around the clock with a pipeline, a healthy pipeline of M&A acquisitions. Padre also has his own set of rules in which we need to find the right candidates or targets. So that's going to be a very active area, so you should see more throughout the year.

Got it. Okay. I mean, any details on, you know, maybe not, but any details on areas that you think, I mean, I guess you mentioned the digital platform, but I mean, anything, whether it's new geographies or, you know, just thinking about potential paths you may take.

Yeah, so I think, you know, internally we have a very clear view on what our long-term strategy is for how we're going to continue growing our business, right? We're talking about – we've talked about this in the past where we think about every home as being a microgrid. and then interconnecting microgrids and forming pools of microgrids and transacting energy across them. We talk about the significant electrification of homes that are going to happen, which will further increase the demand, electrification between all the appliances getting electrified, EV, et cetera. So while we can't provide you specifics, we have, as Eric mentioned, a healthy pipeline of solutions of areas that we are looking at, but that should give you some context about how we are thinking about our M&A plans. It's both the digital transformation piece as well as product in order to meet what we have as our strategic vision.

And there are no confines on companies within the space, right? So we are thinking now is expanding that into other sectors, software in other areas. So it's a very diversified pipeline from multiple sources, right?

And it's international as well. So just as you say, the two applications we have done, neither of those are actually in the U.S. But we are looking across the world.

And the other one is the ability of the company to absorb and integrate those acquisitions is going to be very important. So I feel very confident on Jeff McNeil's organization and the final organization we are used to you know, deal with acquisitions, integrations. So it will be a very active, you know, place in 2021. Yep.

No, that's very helpful. Maybe just last one for me, you know, just thoughts on updating the target operating model. I'm trying to think, you know, how many quarters it took for you to go from 30-20-10 to the new 35-15-20. I mean, you're now at the 40-15-25. I mean, any... Any thoughts on how long you'd like to see that sustained before you officially update that?

Yeah, I mean, you know, we want to make sure that we conservatively provide a baseline, and that's what we did with the existing framework. When you're launching new products and you're entering new markets, a lot of things happen. And when you're planning on the long term, that's the right framework, right? In the short term, the midpoint of the games of the current quarter that we are guiding is the responsible thing in the short-mid, short-term. But for the long-term, I think that framework is cash-generating. Remember, we got an OPEX, CAPEX, and other cost-light business model in the company, right? We don't have manufacturing plans. Our CAPEX is going to be higher this year, but at the same time, you know, we can continue operating with the contract manufacturing approach. So, you know, this framework should stay like that until... you can probably get an update when we do analyze it, if there is an update. Okay, thank you.

Thank you. Our next question comes from Jim Rashudi with Needham & Company. Your line is now open.

Hi, thank you. Good afternoon. I know it's early days for storage, but I'm just wondering, given – Given what you're seeing in terms of demand trends and the competitive landscape and, I guess, potentially more supportive government policy initiatives, I'm just wondering how you, you know, is this changing your view of how pricing might be trending in the market looking out over the, you know, the next year or so?

You know, I think our view is when it comes to things like particularly around pricing, et cetera, and the trend, our view is we have to continually add value, right? So what that means is that it's not just thinking about storage as a widget or a storage as a battery, right? It has to be an integral part of a complete solution, an energy management solution that includes solar, that includes storage, you know, power, How does the whole thing, entire system integrate, load management, generator integration? You saw we have, you know, you've seen the announcement where we are working with a fuel cell company, et cetera. So for us, it's not about a specific widget and a specific widget's pricing. That's really not how we think about it. We think about it in terms of how can we do the complete solution and add value for our installer partners and the homeowner.

Okay. Fair enough. And, you know, should we anticipate any changes as we think about the mix with respect to storage long-tail installers and your tier one, tier two installers over the next one year or so?

No. You know, I think what we have today is right.

Okay. Thanks very much.

Thank you.

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

Hi, thanks for the questions. But maybe this question for you on the storage product, you did say that there's some delays in installation as it's taking time to train the installers. That seems to be more applicable to also your other competitors. I just want to understand if you're seeing that for other products launched by your competitors in the market as well, or is there something specific to Enchart solution which is impacting those delays?

I'm not going to comment on the other competitors, but we take pride in supporting our long-tail installers. Many of them may not even have done storage once. But they have a lot of demand, as you can expect. And our job is to train them so that they can start doing storage installs seamlessly. Right now, we introduced this product in July. As of the end of December, 360 plus long tail installers, unique installation companies, have installed one-in-phase storage system. That's a major win for us. We continue to add 10 to 15 installers every week there. We have trained over 650 plus unique installation companies again. That's also a win, but I'm sure we can amp our game up there because there are thousands of installers, and I'm sure we can do a better job there, which we will be focused. In terms of the people, assuming every installer has got at least two people to train, we have trained roughly over 1,200 folks. So I would say, you know, we do things, you know, we have a unique business model. We focus on the long tail. Our job is to make their installation smooth and seamless. That's what we will do. It's a long-term game. and we're not going to take away of the malware.

Gotcha. Thanks for the explanation. And just on the new acquisitions and the digital strategy, Could you maybe talk about, like, what's the goal here in terms of reducing that soft cost? I think a couple of the solar developers have talked about $7,000, $8,000 per customer of soft costs. So is the idea here to kind of, like, bring it down similar to probably what the soft costs in Europe and Australia are? put your, you know, thinking about process here and had just a quick follow-up after that as well. Thanks.

Yeah. So, you know, soft cost is an outcome of what our goal is. Our goal is to provide our installer partners with the best service possible. And so installer partners actually as well as the homeowner. So we have mapped out a very detailed journey of both how the entire installation process as well for both installers as well as our homeowners starting with leads all the way through design, proposal, permitting, procurement, commissioning, installation, commissioning, permission to operate, O&M, et cetera. And so if we do an amazing job on that and where we create a very powerful platform and these acquisitions that we're talking about are important elements of that journey, then I think the natural outcome of that is going to be a reduction in the soft cost. But we are starting with a very clear focus that this is about bringing great value for our long-tail installer partners.

So, Mahit, you know this has been a focus of the industry for quite a long time, and everybody gravitates back into the easiest part of the value chain, which is reduce the cost of the panel, reduce the cost of the hardware, things that are easy or tangible. When you're thinking about, for example, simplifying and streamlining permitting, you're talking about multiple counties, multiple different approaches, different timing, different locations. It's a much more complex problem to tackle. And that's the problem that we are tackling. And as Raghu said, we are tackling it understanding the problem from the installer point of view and solving that individual problem. And that incorporates pretty much every aspect of lead gen all the way through commissioning and post that, the O&M process, right? Which we are digitizing many forms, right? And these acquisitions basically fill those gaps.

Got it. That's helpful. And then just the last one, just housekeeping. So the megawatt shipped in the quarter, does that include microinverters shipped to the storage product as well, or is that just for the solar shipments?

We will have to get back to you on that. I think, you know, right now my off-the-cuff answer is it basically only includes the microinverters that are pure solar, and it does not include the microinverters inside the batteries. We will have to get back to you on that.

All right. Thanks for the questions.

Thank you. Our next question comes from Joseph Osher with JMP Securities. Your line is now open.

Hi there. Thanks for taking my question. I've got two completely unrelated questions. The first relates to DERMS management as regards your storage business. You've kind of alluded to this a little bit, Audrey. We've seen Envala get sold, AMS get sold, STEM go out. Mike, we see you make an investment in sort of the software infrastructure to really offer a fully integrated DERMS capability to your customers or to utilities.

So obviously we won't talk specifics, but in general, here's our view. Clearly, clearly we see that it's a value-added service anytime with every single storage system that you sell. So given that, and given that we already have a pretty powerful platform, I think our first step is ensure that at least that we have partnerships that we can fit into existing platforms that are out there. There are a number of people who are out there will fit into those platforms. There are a number of programs, whether that's in the East Coast or even here in California, that we can participate in those programs as we continue our ramp on storage. And I think for us it's a pretty natural extension on how to incorporate what's called coordination these DERs and management of these coordinated DERs onto our platform. I think that's a pretty natural extension for us.

Okay. And so that's interesting. You would not have a problem, say, making sure that you operate well with AutoGrid or somebody like that?

Absolutely. If there are existing programs, we would do it, yes. In fact, communications, et cetera, is getting standardized anyway.

And then the second completely unrelated question, it's interesting hearing you talk about wideband gap sets. Can we imagine a world where all of the high-energy MOSFETs in your device are GaN, or I was kind of surprised you didn't mention silicon carbide. Is that the way this is headed?

No, I did not mention silicon carbide. GaN is, I think we think GaN is the way to go, but obviously we are only scratching the surface. working with a few companies. GAN on GAN and GAN on silicon are two interesting technologies. They will help us reduce our footprint, support high power, everything that we want.

Just over time, and I assume obviously at the moment you're probably silicon, over time we can reasonably expect to see those individual little high power sockets probably go wide band gap over the next couple of years. Is that the idea?

Yeah.

All right. Thank you so much.

Thank you. Our next question comes from Samir Joshi with HC Wainwright. Your line is now open.

Thanks. Thanks for taking my question. Just a couple digging into the storage. In terms of sort of bottlenecks or headwinds, do you see it more from like a slow training of installations, installers, or is it because the customers are not educated enough, or maybe pricing is not right? And the corollary question is, do you find the in-charge 3 versus in-charge 10 demand different, and do you see any change in sizing of the products going forward?

No, like what I told earlier, maybe when I answered Brian Lee's question, I went through the details. So let me cover them once again. Basically, there are several things that can go wrong for the installers on storage. There are some things that we are squarely responsible for in FACE. Like the installers want to come onto a job site, and they want to finish their install, and they want to leave within 12 hours. And if our commissioning time is excessive, we are going to place burden on installers. And we understand that. We are working with them to rapidly reduce that commissioning time. That's an example. The second one is very often installers have to come in and rewire the main panel. And that is often several thousands of dollars. If we can help them create a solution which does not need that, that's ease of doing business for the installers. That's number two. Number three, as homeowners start to experience these storage systems, they are going to be calling installers often. For example, when you switch from on-grid to off-grid, if you haven't made any adjustments in your lifestyle, and your grid is out, your external grid is out, utility grid is out, then you're going to quickly run out of storage in three or four hours because your air conditioner is going to be on. So therefore, people who do not even know that they are off-grid run out of storage, they're out of power, and they call installers, and the installers have to go and help them. It's another truck rule for them. That means lost profit for them So how can Enphase help there in order to eliminate all of those problems for installers? Make it so easy that an Enphase system seamlessly provides intelligent notification for homeowners. How can an Enphase system seamlessly provide load control such that the homeowner can automatically set in the app saying, when I switch to off-grid, do not turn off my AC, so you maximize your storage system's life. And then going back to it all is even when the storage system is being designed in the first place as a consultative sale between the homeowner and the installer, what can Enphase do is to make sure that complete transparency to the homeowner so that it's simple yet complete. And I think Those are things that are entirely in Enphasis control and it would be remiss if we don't take responsibility there. That's one. Then I talked about the industry, overall industry. Overall industry, there are problems with permitting cycle times are too long. It's not acceptable. And we all need to, our peers all need to fight that battle. And the last one is just as financing for solar is getting a lot more mature, financing for storage needs to attain that maturity. And then what happens is more people will start to, you know, they're comfortable with monthly payments than cash, you know, a lot of cash up front. So those two are industry problems that will be working. So it's a combo of Enphase-specific stuff, which we are going to put a lot of energy on, and industry changes that we are going to try to influence. Those are the things we need to do in order to ensure we start ramping much more than our already nice ramp.

So, Samir, these are many of the comments made by Badri are not unique to Enphase. We are approaching these like You know, we are training installers that they've never done an installation before, storage, and they're doing really well with micro-inverters. So for them to say, I need to incorporate on my cell page a new product, convince the homeowner that it's a great product, and when they do that, after that, get everything lined up with the crews, with the commissioning and do the installation, complete the training and everything. It takes time, right? And right now, there are basically hands to mouth with the microinverter systems, right? So we decided to launch with Longtail. That's an investment that we are making. Once they made the investment using our system, we believe they will have a hard time switching to a potential alternative because they are all trained. They know our technology. They know our pitch. And then... With that, concurrently, we have interest from tier twos and tier ones that they are sophisticated. They've done installs before. They've kind of completed that process with competitive products, and they feel our product will be an easy trade, right? So all of those things are being attacked at the same time.

Yeah, no, it's certainly commendable, actually, that you have identified the exact problems that you're facing, sort of the teething troubles, and are actively addressing those. That's encouraging. Just switching gears a little bit, you mentioned that in your Q1 outlook, the DNI revenues are not included. I thought that D&I was some sort of a back office kind of a support for improving your operation performance as against revenue generating source. Am I looking at it wrong?

Yes, you're not right. D&I basically provides permitting services to installers for revenue. In addition to permitting services, they also provide design and proposal services. The whole point is, how can installers get the right paperwork, the permit plan sets, in 24 hours? Once again, it is for us, the fit is obvious, because that's what we care about. Anything that our long-tail installers care about, we care about even more.

Right, right. And then last one, over the last several years, you have had several instances of these supply constraints. And now that you're sitting on approximately $700 million, is there any effort towards going upstream?

No. I mean, you're very clear. It's going to be capex-light, opex-light. In this case, this was because we never expected such a massive increase in demand coming out of the pandemic. Maybe we should have, but we didn't. And obviously, it's because our product is well-received. It's high quality. I've always told you the target is 500 dppm. And Great customer experience. Those are our mantras. And we didn't anticipate such a big increase. And so we are somewhat constrained because of that. But having said that, it's not as severe as what we had in the past. And I think we are looking at adjustments in the way we run the company going forward. on how to not allow a situation like this to happen. That's what we do. We learn from our mistakes. And we are gonna put in the right business processes. But there's no need to change our approach. It's a capital light approach.

Thanks for taking my question.

Thank you. Our next question comes from Biju Panchero with Susquehanna. Your line is now open.

Thank you. Thanks for taking my question. obviously very early in the rollout of the storage product, but from the initial demand trends that you're seeing, any thoughts on what level of attachment rates we can see looking out in a few years, three or five years out?

We refrained talking about attachment rates. We actually gave you megawatt hours, which is a lot. better than attach rate, so you can calculate the attach rate, because it's a complex function of the states you are in. Like, for example, the storage may be more popular in California than in some other state. So, you know, the metrics are different, so you cannot just talk about attach rate without any context, which is why we gave you megawatt hours. So I would not like to talk about attach rates. like to talk about megawatt hours. And like what we talked about, we are growing at a steady clip, Q3 to Q4 35%, Q4 to Q1 expect a similar rate. And that's the progress we're making on megawatt hours.

On megawatt hours, is there a number that we can sort of target looking out a few years, or? or are you that ready to give long-term guidance?

It's hard for us. You know, right now this product is in dirty stages of ramp. It's hard for us to give a number right now. You know, it will take us a few more quarters.

That's fair. Thanks.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Bhaji Kothandaraman for closing remarks.

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again in the next quarter. Thank you.

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