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spk10: Thank you for standing by, and welcome to the Enphase Energy First Quarter 2021 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. We ask that you please limit yourself to one question or one follow-up. You may get back in the queue as time allows. As a reminder, today's conference call is being recorded. And now I'd like to hand the conference call over to Adam Hinckley. Please go ahead, sir.
spk14: Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2021 results. On today's call are Badri Kothandaraman, Enphase's president and chief executive officer, Eric Branders, chief financial officer, and Raghu Ballor, chief products officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31st, 2021. 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, including availability and features, our operations, including in manufacturing and customer service, the anticipated growth in our sales and in the markets in which we operate and target, and the capabilities of our installation partners. 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, 2020, which is on file with the SEC, and quarterly report on Form 10-Q for the quarter ended March 31st, 2021, which will be filed during the second 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 statement as a result of new information, future events, or changes in its expectations. Also, please note that the financial measures used on this call are expressed on the 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.
spk11: Good afternoon, and thanks for joining us today to discuss our first quarter 2021 financial results. We had a good quarter. We reported revenue of $301.8 million, shipped approximately 0.45 million microinverters, achieved non-GAAP gross margin of 41.1%, and generated strong free cash flow of $81.5 million. We exited the first quarter at approximately 41, 14, 27. This means 41% gross margin, 14% operating expenses, 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 details about our financials later in the call. Let's discuss how we are servicing customers. Our Q1 Net Promoter Score worldwide was 63% compared to 62% in Q4, and our North America Net Promoter Score was 69% compared to 68% in Q4. Our average call wait time in Q1 was more than five minutes as we onboarded new installers and fielded calls related to our storage systems. We are working diligently to bring wait times down under a minute. We also expect our 24 by 7 global customer support to help reduce wait times. This round-the-clock support is another step forward towards delivering an outstanding customer experience and will supplement the Enphase community and training platform. Let's talk about manufacturing. As we discussed in the last call, the semiconductor supply chain is under stress. In Q1, we experienced constraints on the supply of A6 and AC fed drivers, which limited shipments. Our contract manufacturing facility in Mexico shipped more than 900,000 microinverters. Our contract manufacturing facility at Salcomp, India, shipped nearly 500,000 microinverters. We are very pleased with the production ramp, product quality, and manufacturing costs, of this fully automated facility in India. Given our strong demand, we are expanding manufacturing capacity in Mexico and India further. In Mexico, we are improving operational efficiency and expect to reach quarterly capacity of 1.5 million microinverters. At our facility in Chennai, India, production is around the clock, bringing quarterly capacity to 700,000 microinverters from one manufacturing line. We have already purchased equipment for the second manufacturing line, and expect to begin ramping in Q3. Looking to Q2, our shipment volumes will be constrained by semiconductor component availability. We have qualified new suppliers for our ASIC and AC fed drivers, which will result in increased shipments for Q2 compared to Q1, but the ramp from these new suppliers is slower than what we had anticipated before. We expect these component constraints to remain for the rest of the year. In terms of our in-phase storage systems, we shipped 42 megawatt hours in Q1, representing a sequential increase of 30% and in line with our expectations. Let's now move to the regions. The U.S. and international revenue mix for Q1 was 82% and 18% respectively. The U.S. market was quite strong in Q1 despite typical seasonality. U.S. revenue was up 14% sequentially. We achieved very good microinverter sell-through from our distribution partners. I am proud of our operations team for navigating the supply constraints and ensuring customers had continuous supply of product. With higher microinverter shipments in Q1, our channel inventory is better but still tight. With Q2 through Q4 being seasonally robust quarters, we expect the channel tightness for microinverters to continue. In Europe, we reported record Q1 revenue. Revenue increased 17% sequentially. We saw strength in Netherlands and France while building on new markets such as Germany, Poland, and Austria. Our AC module strategy is also gaining momentum in Europe. We expect to introduce NFA storage systems for the European market in the second half of 2021, first in Germany and then in Italy, adding yet another growth driver. I'm very pleased with our performance in Europe. In Australia, we had record revenue and record installer count. Q1 revenue was up 58% sequentially. The strong growth of the Enphase Installer Network, or EIN, and rapid market penetration of our IQ7A product contributed to our success. In addition, we are focusing both on installer and homeowner experience, launching 24-7 customer support, conducting technical training and collaborating on branding initiatives with installers in Australia. We expect to introduce entry storage systems to Australia also in the second half of 2021. In Latin America, Q1 revenue was down a little, 33%, from the prior quarter, which had benefited from large storage orders. Puerto Rico continues to be a solid market in terms of both microinverters and storage. We are also making plans to enter the Brazilian residential solar market, which is expected to be over a gigawatt this year. We have already hired Marco Crepels, an experienced sales leader, to accelerate our entry into Brazil. Now that we have covered the regions, let's discuss the overall bookings for Q2. Once again, our customer demand for Q2 significantly exceeds the higher end of our guidance range. We are We remain supply constrained for Q2, as I said before. The component availability is improving, but not at the rate of growth in demand. While it is very early to talk about Q3, our customer bookings are quite higher than what they would normally be at this time of the quarter. We are planning for much higher capacity in Q3 for both microinverters and storage. We are obviously pleased with the overall demand, but we are cautious about the supply situation, which is not very predictable today. Let's now move to our storage system rollout. We shipped 42 megawatt hours of storage systems in Q1, representing sequential growth of approximately 30%. Cumulatively, 623 unique installers commissioned at least one Enphase storage system by the end of Q1. We're also making good progress with the Tier 1 and 2 installers. We previously announced solar plus storage partnerships with Sunova, Momentum Solar, Solar Optimum, and Power. We expect to announce more partnerships soon. Let's now turn to training for our Enphase storage systems. By the end of Q1, we trained 1,776 installers cumulatively online, representing 1,035 unique companies. We plan to resume in-person training soon, beginning with our mobile van training in Texas. Other states will follow suit shortly. In addition, we are resuming the build-out of training centers at various distributor locations. As you're aware, we are laser-focused on customer service and making sure we are the easiest company to do business with. With these principles in mind, we started weekly installer roundtables in Q1 to understand how we can improve the Enphase storage product. The findings are clear, improving the commissioning experience for installers and making life easier for homeowners. By leveraging this feedback, we have made a number of updates to our software and commissioning process. Our engineering teams have been working hard to reduce commissioning time on our storage systems from many hours to approximately two hours through software improvements and training initiatives. Our goal is a 60-minute commissioning time, which will allow our installers to visit the site, install, and commission an Enphase storage system in a few hours. We expect to release a couple of new features for our Enphase storage system, as discussed in our last earnings call, and these include load control and generator support. Load control is the ability to turn loads on and off. We envision that most homeowners will opt for a full backup of their entire home rather than a partial backup with the capability to shed loads when needed. We have four circuits for load control designed into our NPower smart switch. Homeowners can choose up to four loads they want to control. For example, an air conditioner can be controlled through one circuit, and a pool pump can be controlled through another circuit. These loads will be on during the grid-type mode and can be shed instantaneously during the off-grid mode, simply via the app. In addition, excess solar can also be configured to be shed through one of these four circuits. This enables the homeowners to save money by not oversizing their battery storage systems. The next feature is generator compatibility. Unlike some of the others, there is no need to install a generator ATS when used with Enphase storage systems. The generator can plug into our smart switch called Enpower, which has built-in safeguards that ensure generator is only connected to the home when the home is off-grid. When the home is disconnected from the utility, Enphase microinverters in the battery seamlessly form a microgrid to ensure there is no disruption. The lights will not flicker. The clocks will not reset. Next, our smart switch starts the standby generator. Once the generator is stable, the system synchronizes the microgrid to the generator's voltage and frequency. Our smart switch then seamlessly connects the home to the generator. The Enphase solution provides increased resilience in the off-grid mode by enabling solar, storage, and the generator to run together. The generator control will also be integrated into our mobile app so that homeowners have full visibility and control from one app. There are two modes of operation. One is the basic mode where the generator simply turns on during an outage, and the other is when the generator can be configured to turn on depending on the state of charge of the battery during an outage. For example, when the battery charge goes below 20% in an outage, the generator turns on, charges the battery, supports the home loads, and once the battery reaches 90%, the generator turns off. These are two powerful features, and we expect to release them this quarter after beta testing with customers, which is underway. We are seeing a good amount of interest from customers, and these features can be enabled simply by over-the-air software upgrades for existing storage systems, along with some additional minimal work to be done by the installers. In summary, we are happy with our Q1 storage shipments reaching 42 megawatt hours. And as I said, we expect to introduce a couple of differentiated new features to improve the homeowner experience. We expect to reduce the commissioning times to improve the installer experience. And we expect to make significant go-to-market changes to improve the brand experience. We expect our storage shipment volumes between 40 and 50 megawatt hours in Q2. Let's talk more on upcoming new products. First, I'd like to cover more details on what else is new for storage. In addition to the new features we talked about, we are partnering with aggregators and utilities to enable grid services. This will enable utilities to leverage home battery storage systems instead of turning on peaker plants. And in doing so, the homeowners can get paid for providing that service. We have formed a 20% grid services team at Enphase now, consisting of software, product management, business development, and policy experts. This team has already made tremendous progress on technical and business fronts, and we plan to expand the team significantly to engage with more utilities and aggregators. Final point on storage. We are working hard to introduce the Enphase storage systems internationally, as I said before. We want to ensure that all learning from North America is captured, and that we are fully staffed to support customers. We expect to introduce Enphase storage systems first into Europe and then into Australia in the second half of 2021. Let's cover our upcoming IQ8 and IQ8D product launches. IQ8 is the world's first grid agnostic microinverter for residential solar, and IQ8D is a high-power microinverter capable of supporting two panels for small commercial solar. We are making good progress on the compliance, reliability, and system testing of these products. However, with the microinverter supply chain constraints due to semiconductor component shortages, we expect a slower ramp beginning in Q3. We also plan to introduce the Enphase portable power station consumer product in Q4, assuming component shortages are under control. Let's now turn to digital transformation. I'm excited about our two completed acquisitions, SoftDesk and the solar business of DIN Engineering. The former Swapdesk team, now known as Enphase Montreal, provide design and proposal software for solar and roofing companies. The team acquired from DIN Engineering, now known as Enphase Noida, provides proposal and permitting services to the installers. By providing these services to installers, we aim to simplify the sales process while reducing soft costs and providing an enhanced buying experience for homeowners. The obvious opportunity for Enphase is to expand both these offerings to our network of long-tail installers. This is an important initiative for us, and we will be integrating these two company operations into our digital platform. We have now onboarded 476 installers in North America and 138 installers in Australia to our Enphase installer network, EIN, through a highly selective process focused on quality and homeowner experience. We recently launched our EIN in Europe and India. Our EIN installers enjoy a variety of benefits, including branding, promotion, and tools and services on the digital platform to help make sales and installation process faster and easier. In summary, we are happy with our performance and we are pleased with the increased demand for our products. We look forward to introducing our new products, ramping our storage systems, supporting our customers better, and accelerating our digital transformation. As always, the health and safety of our employees, the customers, and partners remain our top priority as the world continues to be impacted by COVID-19. With that, I will hand the call over to Eric for his review of our finances. Eric?
spk15: Thanks, Padri, and good afternoon, everyone. I will provide more details related to our first quarter of 2021 financial results as well as our business outlook for the second 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. Total revenue for Q1 was $301.8 million, representing an increase of 14% sequentially. We ship approximately 830 megawatts DC of microinverters and 42 megawatt hours of storage systems in the first quarter, equivalent to 16.1 megawatts of power. Non-GAAP gross margin for Q1 was 41.1% compared to 40.2% for Q4. The increase was driven by discipline pricing and cost management. GAAP gross margin was 40.7% for Q1. Non-GAAP operating expenses were $43.7 million for Q1 compared to $34.2 million for Q4. The sequential increase was primarily due to R&D investments, increased hiring, payroll tax associated with employee stock investing, and first-time consolidation of soft desk operations in late January. Gap operating expenses were $61.6 million for Q1 compared to $42.8 million for Q4. Gap operating expenses for Q1 including $13.9 million of stock-based compensation expenses and $4 million of acquisition real estate expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations was $80.2 million for Q1 compared to $72.4 million for Q4. On a GAAP basis, income from operations was $61.4 million for Q1 compared to $79.1 million for Q4. On a no-GAAP basis, net income for Q1 was $78.7 million compared to $71.3 million for Q4. This resulted in diluted earnings per share of $0.56 for Q1 compared to $0.51 per share for Q4. GAAP net income for Q1 was $31.7 million compared to GAAP net income of $73 million for Q4. GAAP diluted earnings per share was $0.22 for Q1 compared to diluted earnings per share of $0.50 for Q4. The GAAP results in the first quarter included a non-cash loss of $56.4 million on the partial settlement of convertible notes due 2024 and 2025, or approximately $0.40 on a per share basis. Now turning to the balance sheet and the working capital front, Inventory was $34.9 million at the end of Q1 compared to $41.8 million at the end of Q4. The sequential decrease in inventory was driven by an increase in customer demand coupled with supply constraints. Days of inventory outstanding decreased to 18 days compared to 27 days in Q4. This sequential decrease was driven by the lower average inventory balance and higher shipment volumes. Our target is 30 days but we were hampered by supply constraints. Accounts receivable were $236.1 million at the end of Q1 compared to $182.2 million at the end of Q4. The sequential increase was due to the higher revenue in Q1 and shipments being weighted to the second half of the quarter. DSO of 56 days increased from 50 days in the prior quarter due to the timing of shipments. We exited Q1 with a total cash balance of approximately $1.5 billion compared to $679.4 million for Q4. The cash balance includes net proceeds of approximately $1.2 billion for the convertible notes, issuance in May 2021, which are partially offset by $304.8 million paid in principal amounts for the partial repurchase and conversions of the convertible notes due 2024 and 2025 and $65.4 million paid for the cold spread on the new convertible notes issuance. We did not make any share repurchases against our $200 million share repurchase authorization. In March, we issued green convertible notes in two tranches for total gross proceeds of approximately $1.2 billion. Both tranches have zero coupon. The five-year tranche due 2026 raised gross proceeds of $632.5 million. With a 70% conversion premium, these notes are in the money at the share price of approximately $307. The seven-year tranche due 2028 raised gross proceeds of $575 million with a 57.5% conversion premium. This tranche is in the money at the share price of $285. Concurrent with the notes offerings, we entered into a cold spread overlay, which effectively increased the overall conversion price to about $398 per share. The terms of this capital raise were some of the most favorable to an issuer in history. With a very strong cash position and a business that generates healthy free cash flow, we will invest in the business through organic and inorganic activities. We have a CAPEX-like business model which provides for continued investment in new product development, new market entry, and marketing to build our brand awareness with homeowners. On the acquisition front, we have an active pipeline, and we are careful to only pursue deals with the right strategic and cultural fit while meeting our return hurdles. In Q1, we generated $75.8 million in cash flow from operations, and $81.5 million in free cash flow. Capital expenditures was $9.9 million for Q1 to increase manufacturing capacity for both microinverters and storage, and costs related to enlightened software app development, corporate website development, and office space expansion. Now let's discuss our outlook for the second quarter of 2021. We expect our revenue for the quarter to be within a range of $300 to $320 million. We expect GAAP gross margin to be within a range of 37% to 40%, and non-GAAP gross margin to be within a range of 38% to 41%, which excludes stock-based compensation expenses. We expect our GAAP operating expenses to be within a range of $70 to $73 million, including a total of approximately $17 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. We expect non-GAAP operating expenses to be within a range of $53 to $56 million. All guidance estimates include the contribution from both Softdesk and DIM for the entire quarter. Let me provide some initial color on a few topics. First, given the component supply constraints, we are expediting components and finished goods in Q2 to ensure customers have an adequate supply of our products. Even as component availability starts to improve this quarter, we must rush to get those components into final products into our customer hands. As a result, our GAAP and non-GAAP cross-margin guidance incorporates a material-sequential increase in expedited expense. While we expect U2 to be the peak logistic cost, we likely remain elevated for the rest of 2021 due to the semiconductor supply chain constraints. Next, I would like to touch upon our OPEX guidance. Our non-GAAP operating expenses are increasing from Q1 to Q2 due to hiring to support our growth plus the consolidation of acquisitions and necessary investments in software, branding, and the development of IQ9 and IQ10 microinverters. It is possible that our OPEX may be slightly above our 15% target at times, but we will still expect to comfortably exceed our baseline financial model target of 20% operating income. Regarding the two acquisitions, not only do we have the operating expenses of those businesses, but we also include accruals for the payment of deferred cash consideration. These are cash expenses, which is why we include them in non-GAAP guidance, but they are non-recurring in nature beyond the specific earn-out periods for each acquisition. For Q2, accruals for deferred consideration are expected to be approximately $3.5 million. With that, I will now open the line for questions.
spk10: Certainly, ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. We ask, once again, that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question comes to the line. Art Lee from Bank of America. Your question, please.
spk06: Hey, good afternoon. Thanks for taking the time to I just have a question first and foremost around component constraints, if you can. So you talked about improving channel inventory in 1Q, but it seems like that's weighing on shipments for both solar and storage. Can you talk about, you know, when you expect those new suppliers to really help ease the component constraints? Would that be more into the back half, or would that not really be until 2022? And just how much lower is that going to drive channel inventory relative to the eight-week target?
spk11: Right. So let me first make a couple of things clear. First of all, the constraints are only on the solar side, which is solar microinverters. And although we are increasing the capacity of solar microinverters every quarter, and the demand is increasing every quarter, the supply is unable to keep up with demand because of semiconductor constraints, component constraints. The semiconductor component constraints are because of, mainly because of two specific components. One is the ASIC chip that we have. The other is an AC fed driver. that drives the gate of the 600-volt transistors. And what we have done is, on both of them, we have bought on multiple suppliers. For example, on the AC Fed drivers, we had two suppliers before. Now we are going to have three suppliers. On the ASIC, we were producing it in one foundry before. Now we are going to qualify an additional founder. However, our demand is so high for Q2, and we expect a similar demand situation for Q3, that even though our available supply is higher than the prior quarter, it is still not sufficient to meet our demand. This is on the solar side. On the storage side, it's pretty simple. shipped 32 megawatt hours in Q4. We shipped 42 megawatt hours in Q1. That is 30% higher. And we are making tremendous progress there. Our strength in storage is taking care, meaning introduce storage to our long-tail installers. And we have trained 1,776 installers, representing 1,035 unique installation companies. That's our bread and butter. These are the folks who are engaged with us on the solar side, and they have started buying storage. We are also engaged with the Tier 1 and 2 customers on storage, and we expect more progress here. In addition, like what I said, we have started round tables every week with our long-tail installers to understand all their pain points. And if I look at it, what are the installer pain points? The storage is still immature as a business for the installers. They have to make multiple trips for home because it is so new. The system sizing... tools aren't up to speed yet, which is something we are going to be working on with our soft disk acquisition. Every job is a custom job. We are trying to standardize that with load control, having whole home backup instead of partial home backup. The homeowners are demanding because all of a sudden you're now in the path of power. And so the Fields, meaning the customer service that the installers have to do, is much higher than the solar side. On top of it, we have permitting delays from the counties because, again, it's a new product and not everybody is used to it. And Enphase can help in all of the above. We are going to provide exceptional customer service We are going to have field service teams to help the installers. We bought a company to do solar and storage design software. We bought a company to enable permitting services. And so, you know, we have all of the tools to help the installers. However, this is going to take time. And that's why you see our growth is steady growth. that we are talking about. We grew. We grew 35% from Q3 to Q4. We grew 30% from Q4 to Q1. We are growing modestly from Q1 to Q2. But we have no doubt that we are doing the right thing. And in addition, the other thing that was per demand is international locations. It's gotta be similar. We are going to take care of long-tail installers internationally. We are going to introduce product imminently, second half of the year early, into Europe, and then into Australia in the latter part of 2021. And in addition, you know, I talked about the things we are doing. Doing on the homeowner side is introduce load control, which is the ability to turn on and turn off loads. The turning off loads is critical when you're in an off-grid situation so that the homeowner experience is pristine. So we are focused on those. And we are also going to up our game on the marketing side. I recently, you know, last quarter I announced our CMO, and we are going to, you know... We are going to go all out on that front in terms of promotions, branding, looking at multiple channels, looking at the way we go to market, partnering with loan providers, and 24 by 7 support, field service. We believe all of these tools are necessary, and it will help us make steady progress on storage every quarter.
spk06: Appreciate it.
spk11: Long answer, but I hope I answered the question.
spk06: Yeah, definitely. Just as a follow-up question specifically on storage, I believe you provided the guidance of 40 to 50 megawatt hours in 2Q. Is that right? Relative to 42 megawatt hours in 1Q. Can you just talk about expectations into the back half? Seemingly, I wasn't sure if there was some sort of chip constraint for the microinverters that would be used in the storage too, given the same product there. But could you just talk about expectations at the back half and perhaps, you know, bring additional suppliers and what that means for capacity into 2022?
spk11: Well, like what I said, we expect to make steady progress on storage every quarter. We gave you guidance for Q2. Q3 will be steady progress on top of that. In terms of constraints, on the storage systems, it's really yes, microinverters are also included, yes, in the storage system. Every 10 kilowatt hour battery has got 12 microinverters. But in the big scheme of things, it's a small number relative to our overall demand. So we don't expect that to play a big deal there. And we are comfortable with the capacity that we have on the storage site. And like what I always said, we will bring in additional suppliers in 2023. And we have two suppliers today.
spk10: Thank you. Our next question comes from the line of Brian Lee from Goldman Sachs. Your question, please.
spk01: Hey, guys. Good afternoon. Thanks for taking the questions. And maybe just big picture, you know, last quarter, Badri, Eric, you guys said that, you know, you sort of had visibility that the supply chain constraints, which everybody's been experiencing through the year, For you, you felt like April, you called out the month of April as being a potential, having line of sight that things would start to ease around then. Now you're saying you're expecting the supply constraints on the solar side to persist through the year. So just a simple question, kind of what's changed between then and now? Did you misread the market or what's kind of changed between the April view and now seeing this impact through the year? And then I had a follow-up.
spk11: It's pretty simple. The supply is not very predictable. Our demand is going higher and higher. We are increasing our supply every quarter. We are putting in much higher capacity in place for Q3 and Q4. But if you ask me today, you know, how confident are you on the supply? And it's tough because the situation is unpredictable. And the decommits are, you know, there are often decommits that we have to dance around. I am working with the CEOs of all three companies directly. And, you know, for example, on the AC Fed drivers. but the situation is stressed globally, and I don't think it is unique to us. Our architecture uses semiconductors. Right, so the supply is what it is. The good news is the demand has increased a lot for Q2 and Q3, stressing that supply situation even more. And that's what changed from the previous call. Yeah, that's the proof.
spk01: Okay, that makes sense. And so, I mean, it sounds like what you're saying is supply continues to be unpredictable, which makes sense, and then demand has actually probably gotten better. So a follow-up I had here was just maybe a little bit of numbers or quantification. This is the second quarter in a row where you're saying that you have bookings in excess of your guidance. You're basically undershipping demand. So maybe just a two-part question here on the quantification. Can you give us some sense, you know, how much you are under shipping demand? You know, would guidance have been $10 million, $20 million, you know, 10% higher? Just any sense on that. And then, you know, Eric also made some mention around margins. You know, Q2, you're going to have some peak pressure from a freight cost perspective, you but it doesn't get worse. What sort of margin impact is that in the quarter, 100 bps, 200 bps? It doesn't sound like it eases right away, but just trying to get a sense of what that is. And then just lastly, if you're seeing some of these cost increases, the tightness, are you raising prices? Are you having those negotiations or discussions with customers? And if not, you know, given your market share position and how critical you are to, you know, your customers, why not, you know, potentially start to raise prices. Thanks, guys.
spk11: Right. Although, you know, okay, you asked me for some numbers. I'm not going to say exact numbers, but I'm going to say one thing, that the demand is higher than all the numbers that you quoted, okay, which is the good news. The second question, what is the second question? Oh, the third question, pricing. I'm not changing pricing. The second question on gross margin. Our gross margin guidance non-GAAP is 38 to 41. We are not going to exactly break out what we did for expedite, but it's a big number. And you expect that because when you have supply chain problems, the factories are running hand-to-mouth. When the factories are running hand-to-mouth, there is no time to put product on a boat. The only way we can get product to customers is airships. Airships per unit pricing to put a microinverter on the plane is enormous. It's usually 10 times or 15 times the price that it takes to ship on the ocean, as expected. And these are all not new. They are standard. So hopefully I gave those numbers.
spk15: On the margins, Brian, I think that the comment about pressure, meaning we need to leave with expedites for a while, but, you know, we are pretty predictable on the way we manage our margins. On that front, on the cost reduction, you know, schedules and the way we negotiate the prices short and long term, I don't see a problem there, right? And I think using, you know, we've got a midpoint of the guidance that has been pretty consistent, and we just need a little bit of time to get these, you know, supply challenges in the industry, figure it out. And from the comment about April to today, adding to what Padre said, you know, things change. It changed quite a bit. I mean, the predictability on the level of inventories at the contract manufacturing level and even at the supplier level, it got depleted because of the V-shaped recovery, right? So that created a little bit more variations on the predictability now relying on purely what is on the line, right? So that created a difficulty for even them to forecast their commitments. So that's kind of where we are on that. But I think that the – I feel okay with the margins. I think we got a profitable business, and we don't – you know, we keep the eye on the ball here.
spk01: All right. Thanks, guys. I appreciate all the calling.
spk10: Thank you. Next question comes to the line. Philip Shen from Roth Capital Partners. Your question, please.
spk04: Hi, everyone. Thanks for taking the questions. Just as a follow-up on the chip shortage, and I know this was partially asked earlier, but just to put a finer point on it, are the three companies that you're working with, Badri, are they giving you a sense for, you know, hey, we think we can resolve this by Q1 of 22, for example, or is the situation even for them very unclear? So is this potentially a problem that could persist, for example, through a bunch of 2022. Thanks.
spk11: Yeah, I mean, like what I said, I don't have that much visibility right now, but I do expect the supply situation to get better every quarter, especially because we have bought on a third supplier, and that third supplier will eventually start ramping. So I do expect Q3 to get better. I expect Q4 to get even more better, but will that match our demand? I cannot predict it now.
spk04: Okay, good. All right, so shifting gears back to storage, you shared the megawatt hours for Q1 and the guide for Q2. Can you share revenue by chance? And also, what do you think the margin profile of the sales in Q1 and what you expect in Q2 is? Are you close to corporate average, or is it meaningfully different? Thanks.
spk11: We are not going to break out revenue. Now, with regarding gross margin, we will not enter any business unless we have a view to achieving our corporate gross margin.
spk04: Great. Okay. I'll leave it there. Thanks very much. I'll pass it on. Thank you.
spk10: Thank you. Our next question comes from the line of Colin Rush from Oppenheimer. Your question, please.
spk08: Yeah, thanks so much. Can we just talk about the pricing and the energy storage and the movement around that? So as you layer in these additional functionalities, are you able to charge higher prices, or is that really just about maintaining your current price levels, and does it ultimately expand the market short-term, or is this really a longer-term play around functionality that you think is important in the market?
spk11: It's a longer-term play, you know, load control, generator functionality, Grid services, these are all functions that we progressively want to introduce to existing homes. At this point, at least for load control and generator functionality, we are not charging for it. Grid services is a separate story because there is clear financial component there. So once we get ramped up there, we'll figure out how to properly do value-based pricing there. But in terms of storage, overall, our pricing strategy is always being value-based. Our pricing will be next best alternative plus the value we add on top of that. For example, in microinverters, for example, we compare to the competition. That's the next best alternative. And then we say, what do we do better? We do quality. Our PPM defective parts per million, that's much lower. And our customer service is much better. So similar things apply to storage as well. Of course, it's a maturing market, and so we need to be competitive. But we will always follow our value-based pricing story. And if we don't add value... then it's pretty clear, right? We are going to be competing against competition. There's going to be price competition. And we never want to be like that, so that's why we are adding these features. And these features are the differentiated features, which is load control, generation functionality, grid services, and a lot more soon.
spk08: That's super helpful. And then just shifting gears onto the commercial solar business, as you enter into that with IQIT, Can you talk a little bit about the maturity of the finance partners that you're working with who have qualified you and are ready to work with the solution, are comfortable with you, and how wide the geographic footprint will be as you start to roll out that product later this year?
spk11: Yeah, I mean, the story is we're making a lot of progress there, both in terms of the business as well as the product features and compliance. The problem there is mainly the supply situation uncertain. I don't want to, you know, ramp yet another new product with the same components while I'm not servicing my current customers proper. So that's why I made a decision on, you know, let's make sure that we cautiously ramp that product. But it's a fantastic product. You know, we are working with design tool partners. We are, you know, design and proposal partners. We are working with, you know, We are beginning to work with financiers. We haven't made too much progress there, but we are beginning to work there. And most of our business right now is focused on North America. That's the first product. And then in six months, we will introduce it in Europe as well as Australia, where there is even bigger time for small commercial.
spk08: Okay. That's incredible. Thanks so much.
spk10: Thank you. Our next question comes in line. Mark Stoss from JP Morgan. Your question, please.
spk09: Good afternoon. Thank you very much for taking our questions. I wanted to go back to your comments about expanding capacity in Mexico and India. I believe on the last call, you mentioned having between 4 and 5 million unit production capability per quarter by year end. Are the comments today incremental to that number?
spk11: No, the comments are consistent with that number. If I say, you know, you can break down the 5 million the following way. Mexico capacity is roughly, you know, will get to 1.5 million units a quarter. Salcomp India capacity will get to 1.5 million units a quarter, at least minimum quantities. China is already a couple of million units a quarter. So 1.5 plus 1.5 plus 2, 5 million units a quarter, all by the end of 2021. That's completely consistent with what I said. Now, that capacity, that's the capacity of the factory. That's got nothing to do with supply. The supply of the semiconductor components needs to improve, needs to become consistent, needs to become predictable for me to cater to such a big demand. And that, you know, today I do not have visibility to those numbers.
spk09: Okay. Yeah, that makes sense. Thank you. And then just a quick follow-up on the plans to enter the Brazilian market. Will that require any kind of new manufacturing capacity, local manufacturing capacity? And then can you just remind us what you've said as far as what the product roadmap within Brazil will be as far as solar and then solar plus storage and then potentially the commercial sales?
spk11: Yeah. we are not going to manufacture something locally yet in Brazil unless the demand builds up to a significant number. So for now, we will still manufacture remote, meaning not in Brazil. And, you know, first we will start off with solar. You know, Marco Krippels, whom we hired in order to enter Brazil, he is the GM of that business. He believes that there is substantial differentiation with IQA entering into Brazil. Of course, in the short term, we are going to be supply constrained. But we are talking about long term here. So first, I would start with solar. And then I would add on storage to that market. Yeah, basically. Raghu, you want to say something?
spk16: Yeah, just a couple of things. From a product point of view, again, it's leveraging the platform. So we don't have to build a new It's a hardware industry to service the Brazilian market. It's a software change for us. It's a firmware change for us to meet their grid requirements. In fact, today, IQ7 is already certified for a unique specific certification department called Inmetro, and we are already certified for the Brazilian market. So we are going to leverage... our platform, which is what we've been doing for every new geography and playing very well.
spk09: Yeah, makes sense. Very helpful. Thank you.
spk10: Thank you. Our next question comes in line of Jeff Osborne from Cowarding Company. Your question, please.
spk07: Hey, good afternoon, guys. I was wondering if you could rank order between the ACFETs and the ASICs. Which of the two is more acute in terms of the problem?
spk11: The ACFET by far.
spk07: Okay. And then the ASIC I always view as sort of the brain of your product. You're a fabulous company that uses a third party today, as you've flagged one, to do that. Typically, it's multiple quarters to qualify a new ASIC producer. Do you anticipate that to take multiple quarters, or have you been working on this for some time?
spk11: We've been working on this for some time. We have been working on this for some time. And our current foundry, it's I mean, we have talked about this before. This is not new. Our current founder is TSMC, and we are qualifying an additional founder.
spk07: Got it. Okay. That's all I have. Thank you. Thank you.
spk10: Thank you. Our next question comes in line with Kasia Harrison from Simmons Energy. Your question, please.
spk20: Thanks for taking my questions, and good afternoon. So my first question surrounds just the rollout of IQA. I was just wondering – How long do you think it would take or it could take to completely transition from selling majority IQ7 to selling majority IQ8? A year, two years, just some rough numbers would be great.
spk11: Yeah, IQ7 took four quarters. So IQ8 would take a similar time, and with the supply constraints, maybe you can add one or two quarters more, four to six quarters.
spk13: That's helpful. Thanks.
spk20: And then my second question, so, you know, I was reading your letter to the shareholders, and, you know, you talked about gallium nitride as you think about IQ9 and IQ10. You know, I know that's a long ways away, probably still early in development, but, you know, when you think about the opportunity there, you know, as you think about your product over the next several years, should we be anticipating step shift reductions in costs from the transition to the gallium, or do you think maybe we're getting close to the limit on your ability to take costs out of the manufacturing system?
spk11: Right. I mean, it's a good question. The reason why we are doing it is to reduce the footprint, to increase power, to increase efficiency, and drop costs. And I'll give you a quick example. Today, we have four AC you know, high voltage FETs. They are the 600 volt FETs. Four 600 volt FETs. And then we have two AC FET gate drivers, which is where all the shortage is. Those two AC FET gate drivers are driving the four 600 volt FETs. So we have four plus two, six components there. With gallium nitride, what we could do is to collapse two of those 600 volt FET into one, and we could integrate that AC gate driver also into the same package. So six discrete components will go to two discrete components. Of course, cost of helium nitrate will be a little bit higher, but the integration capability is very powerful. And what does that mean? I can run my AC FETs now at a higher frequency. Today I run them at 100 kilohertz. I can run them at a much higher frequency. If I run those FETs at a higher frequency, then all of a sudden I can drop my transformer size. My big transformer, which is there in the microinverter, can drop in size drastically, dropping the footprint drastically. So we are working concurrently on planar transformers in addition to gallium nitride FETs. That's the name of the game. If we're able to optimize that properly, that is huge wins for us. And, you know, it'll help us to increase the power of the microinverter while keeping the cost down, while keeping the footprint down, while keeping the economics intact. That's what we are working with multiple companies. And it is R&D. It's going to take us 2022 or 2023 to get an IQ 10 product. But IQ 9 will be a little bit before that. But it's R&D.
spk10: That's helpful. Thank you. Thank you. Our next question comes to the line of Tristan Richardson from Tourist. Your question, please.
spk02: Hi. Good evening, guys. Thank you for all the commentary on the supply chain constraint. Really appreciate it. Just one from me. I think we heard from a market participant yesterday on moving to almost an exclusively bundled model for solar and storage. I think the dynamics there sound somewhat company specific, but just wanted to ask, are you guys seeing any signs of that in your installer network, and do you see it as an opportunity for Enphase on the market share side for either a standalone storage product or otherwise?
spk11: Absolutely. I mean, that's the name of the game. Storage by itself, you know, some people say it makes sense, but in order to have a regenerative system that can function off-grid, you want solar as well. So solar plus storage is a big deal, and That is precisely why we are focused on our long-tail installers. Because we already, you know, they already sell Enphase microinverters for a living. And now, if they start selling Enphase storage systems and more actually home energy management systems, which are solar plus storage systems, that would be a big win. So all of our efforts are taking our Enphase installer network And even bigger than that, taking our long tail installers, which is much more than the Enphase installer network, work really closely with them, train them properly, remove their installer pain points, get, you know, help them with 24 by 7 support, help them with field service so that they can ramp solar plus storage with us. That's the opportunity.
spk02: Makes sense. But you're not necessarily seeing any installers kind of go for a mandatory bundle model, are you?
spk11: Mandatory bundle, not yet. But I'm sure it's coming.
spk02: Okay. Very helpful. Thank you guys very much.
spk10: Thank you. Our next question comes from Jim from Needham & Company. Your question, please.
spk03: Ty, just a question on the expediting costs that you're incurring. And, Eric, I may have misheard, but you seem to suggest that's going to improve in the back half. And I guess I know you're bringing on production, but by the same token, it looks like you're going to continue to be facing these supply constraints. So how confident are you that you're going to see those costs come down in the back half?
spk15: Yeah, I mean, the expedite is going to be around with us as long as we get these challenges associated with supply constraint, right? So we should kind of get used to the concept that those are going to be embedded. What I'm saying is that that is not going to get the margin worse. What I'm saying is we got a very credible, predictable cost reduction roadmap in the near term that gives me confidence that we can continue honoring our financial operating model and my comments associated with operating income, right? Which all is driven when you're thinking about, you know, OPEX may go up a little bit, right? Because we need to make the investments. That's what I said on my script. And then the question is, okay, so you have this expedite. What's going to happen with your operating income? Well, you know, we feel confident that the cost roadmap will be there to deliver their goods, right? As we continue ramping complicated products like storage and the new products that Badri has in mind for Q3 and Q4, right? IQA on the roof and IQAD. So there is one area that we should feel comfortable is that margins continue to be fairly predictable in the short term. And in the long term, you can always use the financial operating model that we publicized already, right? So that's the context within my comment.
spk03: And I wonder if you would just comment with respect to, you know, is there a point at which you might begin to calibrate your operating expense, the investments you're making in the business over the next couple of quarters, depending on, you know, whether this supply constraint issue potentially doesn't improve in the back half?
spk15: I mean... I'm not quite sure I kind of follow your question, but if I understand correctly, you're saying, Eric, you're planning to continue spending money on doing acquisitions and potentially your OPEX is going to go up, and then you're... Right.
spk03: What I'm suggesting is if it looks like we're in for a period of a couple of quarters of pretty acute component shortage issues? Is there a point at which you say we may dial back certain investments that we're making until the situation improves more market-like? And you may not because you feel like it's worth investing just as you think about the outlook for 2022, when presumably it's going to be behind us.
spk15: So let me clarify. We are in growth mode. And my message hopefully comes across very clear that we are not going to stop making the right investments at the right time, either by processing our pipeline of deals that we have as we continue evaluating M&A, or make the right OPEX investments, as I described on the script, on the prepared remarks, which are specific to go-to-market with products, including sales and marketing activities globally and so on. We did really well internationally, because we never compromise on making the right investments. The good news on that is despite of this and despite of the expedites, I have my margins there to deliver the goods so I can continue generating cash according to my model as I try to catch up with my revenue profile to fulfill my demand that right now is being hampered by the component supply constraint challenges that we have. I hope that answers your question.
spk10: Thank you. Our next question comes from the line of James West from Evercore ISI. Your question, please.
spk17: Hey, good afternoon, guys. So, Buddy, if I hear you correctly, the installer experience, the customer experience are getting better. You've got this product cycle that is underway. You're not meeting demand of your customers, and you're rapidly expanding into new geographies. So, When we get past this period of equipment shortage, you're going to have a lot more capacity because, as you mentioned earlier, you're going to keep investing. Will you at that point, let's say we're into 2022, will you at that point finally manage to catch up with demand? Do you think demand will still outrun you?
spk11: It's the same answer. I hope by the end of 2021 these problems go away. But, you know, right now I'm living from day to day. Supply is unpredictable. The semiconductor, it's not a situation only for me. It's a situation for every company who uses semiconductors. Yeah. I don't have a crystal ball to predict the future.
spk17: Okay. Understood. And then I guess one other question would fall for me with the situation in India right now with the pandemic. Is that having any I know you're pretty automated in that facility. Does it have any impact in your operations this quarter?
spk11: Yeah, I mean, it does. Many of the folks in our teams are affected by it. Either their families are affected or they are affected. They are all working from home, following all safety protocols. I mean, India, if you know, it is not in such a great shape today as a, you know, in general as a country. I mean, we are heartbroken by it. It's 300,000 plus new cases a day. So, yes, I mean, some employees are affected, but they are also, you know, it lasts for about 10, 15 days. And during that time, they have full freedom to take care of themselves, and we will do all it takes to support them. But usually they're back after a two-week, you know, break. And, you know, they are in the process of getting vaccinated, and I'm hoping within a quarter the situation will come back to normalcy. But we are taking care of all of our employees, absolutely.
spk17: Of course. Thanks, Padraig.
spk10: Thank you. Our next question comes to the line of George O'Leary from TPH and Company. Your question, please.
spk12: Good afternoon, guys.
spk11: Hi.
spk12: Just curious, you guys have built up an impressive cash war chest and the free cash flow generation continues. You don't have much need from an organic CapEx spend. Clearly, there's a big R&D budget that's ongoing. But just curious if there are some larger bites at the apple from an inorganic standpoint that you might be contemplating. You've done some M&A here recently, but smaller stuff. So just curious what you're thinking about on the M&A front and if there's anything on that medium or larger size front that piques your interest at this point.
spk15: I mean, I'm not going to comment on details, but, you know, I'm telling you Raghu right now and Adam both are in the cold. have, you know, have very ambitious plans, and they have great ideas, and they bring all sorts of very interesting stuff in front of Valerie and myself that we are evaluating carefully. The beauty about the having, think about it, right? I have $1.5 billion of cash, of which I need probably to run the company only $300 million, flowing cash, right? That's what, you know, maybe a little bit more now that we are getting bigger, but, you know, So the rest is available for us to take advantage of the best opportunities that are available in the market, right? When you see things like what's happening right now with the SPACs kind of contracting a little bit, that reopens the conversations very quickly, right? And suddenly the pricing on those conversations become much more reasonable to digest, I guess, right? And so we are aggressively looking at every opportunity and you know, on software, maybe selectively some hardware, R&D houses, ongoing businesses completely that we can buy, and we demonstrated that we can absorb them, integrate them, culturally fit, and then run them fairly well. And it's going well, for example, with the two we just did in Q1, right? It's smaller, but so I'm, you know, I think that everything is on the table.
spk12: Very helpful. And then just one more on an unrelated note, but you mentioned improving the installer and that the customer experience is a goal, which makes a lot of sense. Just wondering if there were any analogs from a geographic standpoint outside of your core markets today where that customer and installer experience is better, where you can take lessons learned from those installers and translate them to the U.S. or other geographies. I know Germany has much lower soft costs than the U.S., for example. Just curious if there's any pathway that's already laid out from any geographic analogs out there in the market.
spk11: Well, not really. 82% of our revenue comes from here. Yes, we need to diversify, but most of our product experience comes from here. But having said that, it is true that, for example, places like Europe Australia, even India, they do have an outstanding cost structure in general. And we need to really take costs out of all aspects, not just products, but things like permitting, things like design and proposal, look at all inefficiencies in the chain. That's something that We've just started doing with the acquisitions. We'll do a lot more. And the name of the game, once again, is to collapse and consolidate all of those services for the installers onto the digital platform so we can help them reduce the soft costs.
spk12: Great. Thanks for the call, guys.
spk10: Thank you. Thank you. Our next question comes from the line. Mahit Mandeloy from Credit Suisse.
spk13: Hey, thanks for taking the question. Just a quick on the battery supplier. I think you previously talked about the third supplier in the second half. Can you talk about the status of it and just add a follow-up on grid services?
spk11: Yeah, we have two suppliers today. The second supplier is ramping just now. The first supplier is what we are using right now. The second supplier is just ramping. The third supplier, we do have...
spk13: good plans however i think it will turn on only in 2022. got it thanks and uh just from grid services uh uh i know you said it's early in stay you know in early stages and you're ramping up the software and hardware capabilities for it but uh how when do you expect it to contribute any material revenues? And would that kind of a grid service optionality work with third-party batteries, or would it be predominantly for the end-phase storage product?
spk11: It would be predominantly, it would be 100% for end-phase storage. And we are already tightly engaged with a few aggregators in the East Coast. We are going to enable selling, meaning we are already enabling selling of storage systems there, and we will turn on grid services within the next three months for them. Additionally, we are working with a couple of utilities as well, who have directly approached us. And we are working with them both in the East Coast and elsewhere. here in the U.S. It does require a lot of software effort, and the name of the game for us is we have a long-tail installer network that can help sell grid services properly to the homeowner. We can integrate grid services to the ensemble home energy management system so that we take care of customer experience properly. At the end of the day, if we enable homeowners to save a certain dollars, you know, $500 a year while giving them this peace of mind, you know, that will be a big deal. So when we have an end phase, you know, storage population that becomes a few tens of thousands, then VPP, meaning virtual power plant, will be very meaningful at that time. We are probably a year or two away from that, but we are making a lot of progress in the interim with aggregators, with utilities, and we expect a lot more engagements with them.
spk10: Thank you. As a reminder, ladies and gentlemen, if you have a question at this time, please press star then 1. And we ask that you please limit yourself to one question and one follow-up. Our next question comes from the line of Eric Stein from Craig Hallam. Your question, please.
spk05: Hi, everyone. This is a quick question. Most have been taken, but I know it's a little bit longer play, but on the grid services side, is that something that you potentially can get a portion of those revenues as the enabler of that? Or is that something that, as you said, you price based on value that you would potentially just try to capture on the front end?
spk11: Yes, we can get a portion of it. The primary thing here is in the model where we work with a few aggregators who work with the utilities, there the homeowner reaps the benefit and we provide a service for a fee. And where we directly work with the utilities, financially, there may be more opportunities for us there. And like what I said, we are right now scratching the surface. We are working with aggregators who are working with the utilities. We are in some deep engagement, so we first understand the business properly and develop our home energy management APIs and microservices for the same. But it's not going to be that far off. In a few months, we would be able to work directly with the utilities.
spk10: Okay, thanks a lot. Thank you. Our next question comes to the line of Sean Milligan from Williams Trading. Your question, please.
spk18: Thanks for the time. I wanted to talk a little bit more about storage, I guess. Before you mentioned that storage, there were financing problems with storage, and so I wanted to just get your thoughts on where where that market was in terms of being able to finance storage, which might drive additional growth for you?
spk11: Yeah, I mean, look, solar is very mature. The industry has got 25 years of warranty. So extended loans really help the homeowner. And I think the rough breakdown in the industry between cash, loans, and lease is about 10% 60% and 30% respectively, which means loans are roughly about 30%, I mean, about 60% of the business. Now, we need to enable storage to also have attractive loans. In order for them to have attractive loans, solar bundling with storage is one option. Having the right warranty structure on storage It's another option. And we need to do both. And Enphase can help a lot here because this is what we are good at, power electronics, quality, and customer experience. So we are thinking hard on working with partners. We have a lot of partners we're working with. And we can change the, we can basically, we have to work on the product quality to increase the warranty. from 10 years to whatever we can. And once we do that, we will unleash loans to become more economical for the homeowners. It'll increase the demand. That's required for the long-tail installers. So it's a long range. Eventually this has to be done, but we are taking proactive steps to ensure product quality is right.
spk18: Great. And then just the competitive landscape in storage, like there's been new entrants and people are giving performance guarantees and I would expect storage to become even more competitive as additional battery cell manufacturing comes online over the next kind of three years or three to four years. So just to get your sense on kind of the competitive landscape within storage and how you're competing against people that are, you know, giving performance guarantees or competing on price?
spk11: Yeah, I mean, look, we believe we must add value. We are not seeing a major problem on cell packs. I think we will be competitive and we have the right procurement organization to drive those costs down. The name of the game in storage is how can we provide outstanding quality and customer experience. It's the same thing which I told you. The long tail installers need to not look storage as a drag on their margins. The storage needs to be a highly profitable business for them. Instead of going to the home multiple trips, multiple times for an installation, it should be one and done. The sizing needs to be clear. Installations need to be a cookie cutter model. Permitting needs to be streamlined. The expectations for the homeowners need to be met. So things like load control are extremely critical. So we are going to be working on all of those things, and we believe that quality and customer experience will ultimately win. And that's what we do for a living. That's a model that has worked well for microinverters. with our long-tail installers. And now we are going to ramp storage with our long-tail installers. And yes, it is tough. It takes time. It's slow and steady progress. And those are the kinds of businesses we like, healthy, profitable businesses.
spk10: Thank you. Our final question for today comes from the line. Pavel Machinov from Raymond James. Your question, please.
spk19: Thanks for taking the question. When you expanded the installer network into Europe, which, as one of the other questions asked about, has much lower soft costs. What's the main selling point of joining that network for an installer in, for example, the Netherlands or Belgium?
spk11: Yeah, you know, first of all, installer networks in Europe, there are going to be multiple of them. Because Europe, you cannot generalize Europe. think like what you said you know Netherlands our installer network there they need something else versus installer network in Germany versus the installer network in the UK you know versus the network in Spain versus the network in Poland that's the first thing to recognize the second thing to recognize is you know what do they want what is it it for them right what is it it for them The important thing is if they can have one platform on which they can get all kinds of services, that's extremely important for them. New product availability, extremely important for them. They want to differentiate themselves from other installers. So they want nothing but the best, right? Like that, I could go on. There are multiple services that they need. So depending upon the tier of the installer... You know, we have three tiers, platinum installers, gold installers, silver. And the way we categorize those three tiers is pretty simple. Based upon their quality and based upon how they rate on customer experience, that's measured not by us, by the homeowners. So we rate it like that, and then we make it attractive for platinum installers to be with us. In terms of pricing, in terms of services, we do. And we make sure there's healthy competition there. It's a much broader strategy, and we are very cautious in introducing installer networks to every region without adequate planning. So last year, we spent the entire last year introducing installer networks for the U.S. and Australia. This year, we just started in a... In Europe. And we will introduce in India as well. But a lot more to come in Europe.
spk19: That's helpful. My second question is about one more about component sourcing. Historically, there has never been a need for you to sign truly long-term supply contracts, let's say five, seven-year type of supply contracts with your key component players, do you envision going out to that long-term time frame, given what we're experiencing right now?
spk11: No, I mean, I'm wary of such deals. I usually not do such deals. I don't envision doing those. You know, I hope and pray this is... you know, this will be with us for a couple of more quarters and we'll be gone. And we'll be a better company because we have three suppliers instead of two or we might even add one more. And so we can always have supplier diversification. We'll learn best practices from it. We'll institute our business processes within the company and we'll become better.
spk19: Very clear. Thank you very much.
spk10: Thank you. This does conclude the question and answer session of today's conference call. I'd now like to hand the program back to Badri Kothan Dharaman.
spk11: All right. Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye.
spk10: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
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