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.