Enphase Energy, Inc.

Good day and welcome to the End Phase Energy's second quarter 2022 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Karen Zagat. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's second quarter 2022 results. On today's call are Badri Kassandaraman, our President and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Raghu Balur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its second quarter ended June 30, 2022. During this conference call, Enphase Management will make forward-looking statements, including but not limited to statements related to our expected future financial performance, the capabilities of our technology and products, and the benefits to homeowners and installers, our operations including manufacturing, customer service, and supply and demand, the anticipated growth in sales and the market, new product introductions, and regulatory matters. These forward-looking statements involve significant risks and uncertainties, and our 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 our most recent form 10-K and 10-Q filed with the SEC. We caution you not to play any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. Also, please note the financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges We have provided a reconciliation of these non-GET financial measures to GET financial measures in our earnings release posted today, furnished with the SEC, and which can also be found in the investor relations section of our website. Now, I'd like to introduce Badri Kassandaraman, President and Chief Executive Officer of Enseys Energy. Badri.

Good afternoon, and thank you for joining us today to discuss our second quarter of 2022 financial results. We had a good quarter. We reported record revenue of $530.2 million, achieved non-GAAP gross margin of 42.2%, and generated free cash flow of $192 million. And 37% of our Q2 microinverter shipments were IQ8s. We exited Q2 at approximately 42, 13, 29. This means 42% gross margin, 13% operating expenses, and 29% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35-15-20. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Q2 Net Promoter Score, or NPS, worldwide was 68%, the same as in Q1. and our North American NPS was 71% compared to 74% in Q1. Our average call wait time increased to 4.7 minutes in Q2 compared to 3.2 minutes in Q1, primarily due to an increase in call volume related to the growth in the business. During Q2, we added customer service agents and field service technicians in US, Europe, and Australia. focused on customer service and ensuring that we are easy to do business with. Let's talk about our microinverter manufacturing. Our supply chain situation is quite stable due to diligent supplier management as well as qualification of alternate suppliers. With the growing demand for our products, we remain vigilant regarding the global supply chain and logistics challenges. Our quarterly capacity across all contract manufacturing facilities is around 5 million microinverters today. We are on track to begin manufacturing at Flexis factory in Romania starting in Q123. This will enable a capacity of 6 million microinverters per quarter for us globally. We are also working on reducing manufacturing costs by adding more fully automated lines instead of semi-automated lines. Let's talk about IQ batteries. We are on track to add an additional cell pack supplier early next year for our third generation battery. Our lead times for batteries are still around 14 to 16 weeks due to global logistics challenges. Let's move on to the regions. Our US and international revenue mix for Q2 was 80 and 20% respectively. We experienced strong growth in the US and even stronger growth in Europe. In the US, revenue increased 15% sequentially and 66% year-on-year. We are pleased to report record quarterly revenue in the US and record sell-through for our microinverters in Q2. We continue to win both large and small solar and storage installers. Our microinverter channel inventory was at a healthy level at the end of Q2, while our storage channel inventory was a little elevated due to longer install times. In Europe, the revenue increased 69% sequentially and 89% year-on-year, led by strong demand for our microinverters in Netherlands, France, Germany, Belgium, Spain, and Portugal. We are starting to see good demand for our IQ batteries in Germany. Homeowners want self-consumption as the region not only faces energy prices that are rising, but also a growing demand for home electrification driven both by electric vehicles proliferation as well as natural gas shortages. We plan to introduce IQ batteries into a few more European countries later in the year. We also expect to ship our IQ8 family of microinverters into Netherlands and France later this year. Sector coupling is the latest buzzword in Germany, and it denotes the integration of three sectors. The heating and cooling sector, the transport and mobility sector, along with the power producing renewable sector. All three of them are required to achieve full home electrification. We are working towards sector coupling by making our solar plus battery systems seamlessly work with third-party EV chargers and heat pumps, and providing a single interface for homeowners to monitor and control their energy through the Enphase app. Bottom line, we are quite happy with our progress in Europe. We are aggressively expanding the team. We expect this momentum to continue. Supply is tight. The channel inventory continues to be below normal levels. We are working hard to get supply into the region. In Q3, we expect to grow revenue more than 40% compared to Q2. In Latin America, revenue increased 22% sequentially and 61% year-on-year. We had steady growth in our solar plus storage business in Puerto Rico during Q2. Now I'll provide some color on Australia, Brazil, and India. In Australia, we are starting to see the market beginning to recover from COVID interruptions as well as federal election. We remain optimistic about our growth in the country and expect to introduce IQ batteries in early 2023. As for Brazil and India, we continue to ramp IQ7A microinverters in Q2 and and are starting to see a steady increase in demand quarter on quarter. Let's discuss the overall bookings for Q3. Our customer demand for Q3 is very robust and exceeds the higher end of our guidance range. The component availability is certainly better than what we have experienced in the last 18 months. This has enabled us to meet the growing demand But there are still global logistics challenges that are not unique to Enphase. Let's discuss batteries. We introduced IQ batteries into North America two years ago in the third quarter of 2020. Since their introduction, we have grown battery shipments by an average of 28% per quarter over the last two years. We have certified more than 1,600 installers worldwide till date, and we are continuing to win around 15 new installers a week in the U.S. In the second quarter of 2022, we shipped 132.4 megawatt hours of IQ batteries, a 10% increase from the first quarter of 2022. In addition to North America, we are also ramping up batteries in Germany and Belgium. We have learned a lot in the last two years. We have made several improvements to both the installer and the homeowner experience. Currently, our installers in North America are experiencing two plus hours of commissioning time, which we would like to cut down by half. We are also updating the device firmware at both our distribution centers as well as in the channel to avoid updates by installers on site. We expect a commissioning time of 90 minutes as we exit Q3 and 60 minutes as we exit Q4. We also plan to release several software improvements for homeowners during Q3 for enhanced outage performance. For Q3, we expect to ship between 130 and 145 megawatt hours of IQ battery. I recently visited the top installers in Puerto Rico in May. And in Puerto Rico, the storage attached is 100%. I came away extremely excited about how our IQ batteries as well as IQ8 microinverters can provide a very highly differentiated solution compared to the competition. Both the sunlight jumpstart feature and the unlimited solar to battery ratio are really valuable to our installers, particularly in Puerto Rico where outages are quite frequent. Our focus is to make the installer and homeowner experience seamless throughout these outages. While we are focused on providing a great experience with our current IQ batteries, we expect to introduce our third generation IQ batteries starting in North America in early 2023. We expect this battery to deliver double the power, enabling homeowners to start heavy loads. The product will also use the robust wired CAN protocol for seamless connectivity. We expect this third generation battery to have simple installation, leading to an improved customer experience. Let's now talk about our small commercial products. As previously discussed, we piloted IQ8D with a few installers in the second quarter in order to receive feedback. The product has been working well and the feedback that we got was quite useful. The installers have told us that the module power for the small commercial business significantly higher as manufacturers are moving rapidly to the larger format cells. Given this, We are going to increase the AC power of the microinverter in order to avoid potential clipping. We think it is prudent to do this now and introduce the product in early 2023. We understand this is a few more months of delay, but we are confident it's the right long-term decision. We are extremely bullish about the small commercial market, where we can add tremendous value to business owners and installers with our high quality rapid shutdown capable, and micro-grid forming capability of our micro-inverter systems. Let's discuss EV chargers. We acquired Clipper Creek in December of 2021, and the team is now fully integrated. We shipped more than 8,250 chargers in Q2 at a healthy gross margin, and the business is quite profitable as well. We introduced EV chargers to our solar distributors and installers in Q2, and we also strengthened our digital marketing efforts to consumers. We are on track to manufacture Enphase branded EV chargers at our contract manufacturing facility in Mexico this quarter. This will help us scale capacity and drop costs. As for new products, we expect to introduce smart EV chargers to customers in U.S. and Europe, in the first half of 23. This will provide connectivity to the cloud through Wi-Fi as well as local connectivity to the home energy management system, allowing homeowners full visibility into monitoring and control of their Enphase solar plus storage plus EV system. As I've stated before, Our strategy is to build best-in-class home energy systems and deliver them to homeowners through our network of distributors and installers enabled by our installer platform. So far, we talked about the key products on this call, microinverters, IQ batteries, EV chargers. Let's now talk about the installer platform. Before that, some background. We acquired a total of five companies in the last six quarters. Four of those companies are geared to help installers become efficient. The companies we acquired provide lead generation services, solar design software, proposal and permitting services, and an O&M software platform for our installers. Our latest acquisition we did in March is Solar Lead Factory, which provides lead generation services for installers. We want to provide high-quality leads to our network of installers in a cost-effective manner. Currently, the quality of the leads in general in the solar industry is not very good. We therefore think we have a tremendous opportunity to improve the situation as it is a big pain point for the U.S. installers. We acquired a company called SoftDesk in January of 2021, 18 months ago, which provided us with solar design software capability. Our software business now has a record customer count in Q2 with approximately 950 installers using the SolarGraph software. We are making improvements to the software based on installer feedback and are implementing new features including shading and 3D modeling for better accuracy, adding batteries and EV chargers into proposals, and integrating electronic signature capabilities for contracts. We acquired a business in Noida in April of last year. This gave us the capability to provide proposal and permitting services to installers. Today, we service large installers, and most of the work here is highly manual. We'd like to change that and are working on automation to scale the business and provide these services to our entire network of installers. The next one, in December 2021, we acquired a company in Arizona called 365 Pronto. The company's software platform enables a two-sided marketplace. The buyers are customers consisting of installers, asset owners, or original equipment manufacturers. The sellers are service providers consisting of Technicians and third-party installers providing services for residential and commercial solar storage and EVs. Our vision is to simplify maintenance for our installer network by using the software platform and getting them access to a labor marketplace. With these acquisitions now in-house, we have the right tools that we are combining into one platform to offer our installer network. We recognize the problems that the installers face, such as soft costs, disparate tools, and manual processes, and are committed to building the platform to help minimize those. Let me now give you a quick update on our Enphase installer network, or EIN. We have onboarded approximately 1,200 installers to our EIN worldwide through a highly selective process focused on install quality and an exceptional experience to homeowners across the globe. Next, let's talk about policy. I'd like to comment on a recent policy issue that is impacting the solar industry. As it pertains to NEM 3.0 in California, we submitted our comments to the proceeding in late June. We hope the CPUC will review the feedback from all stakeholders and eliminate the grid participation charge while providing a glide path for the solar-only market and incentivizing the solar plus storage market. With regarding the federal reconciliation package, despite the recent setback, we will be actively engaged over the next couple of months to continue pushing for a climate deal that includes a solar ITC extension and a new storage ITC. In summary, We are happy with our performance for the first half of 2022 and the strong demand for our micro inverters and batteries. Our markets in North America and Europe are growing at a tremendous rate as reflected in our numbers. We remain focused on our products and platform to deliver a superior customer experience for our installers, distributors, and homeowners. With that, I will turn the call over to Mandy for her review of our finances. Mandy.

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our second quarter of 2022 financial results, as well as our business outlook for the third quarter of 2022. We have provided reconciliations of this non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q2 was $530.2 million, representing an increase of 20% sequentially and a quarterly record. We shipped approximately 1,213 megawatt DC of microinverters and 132.4 megawatt hours of IQ batteries in a quarter. Non-GAAP growth margin for Q2 was 42.2%, compared to 41% in Q1. The increase was driven by favorable product mix. GAAP growth margin was 41.3% for Q2. Non-GAAP operating expenses were $71.2 million for Q2, compared to $66.3 million for Q1. The increase was driven by increased investment in R&D, customer service, sales, and IT infrastructure. GAAP operating expenses were $125 million for Q2, compared to $115.1 million for Q1. GAAP operating expenses for Q2 included $49.9 million of stock-based compensation expenses and $3.9 million of acquisition-related expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations for Q2 was $152.4 million, compared to $114.5 million for Q1. On a GED basis, income from operations was $94 million for Q2, compared to $61.8 million for Q1. On a non-GED basis, net income for Q2 was $149.9 million, compared to $109.7 million for Q1. This resulted in non-GAAP-diluted earnings per share of $1.07 for Q2 compared to $0.79 for Q1. GAAP net income for Q2 was $77 million compared to GAAP net income of $51.8 million for Q1. This resulted in GAAP-diluted earnings per share of $0.54 for Q2 compared to $0.37 for Q1. We accessed Q2 with a total cash equivalence and marketable securities balance of approximately $1.25 billion compared to approximately $1.06 billion at the end of Q1. In Q2, we generated $200.7 million in cash flow from operations and $192 million in free cash flow, which is more than double from Q1 as a result of our record revenue and improved cash conversion cycle in Q2. Capital expenditure was $8.7 million for Q2, compared to $12.4 million for Q1. Now let's discuss our outlook for the third quarter of 2022. We expect our revenue for the third quarter of 2022 to be within a range of $590 to $630 million, which includes shipments of 130 to 145 megawatt hours of IQ batteries. We expect GAAP growth margin to be within a range of 38 to 41 percent, and non-GAAP growth margin to be within a range of 39 to 42 percent, which includes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $137 to $141 million, including a total of approximately $60 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. The estimated stock-based compensation expenses include approximately $4.9 million accrued for the earn-outs that are tied to certain performance targets to be paid in the company's stock for the acquisition. We expect our non-GAAP operating expenses to be within a range of $77 to $81 million. With the year-to-date profit reported, we expect to utilize all of our net operating loss and research tax credit carried forward in 2022 and become a U.S. cash taxpayer. As our non-GAAP tax expense reflects cash tax expense and reserves, we set our non-GAAP tax expense for the third quarter of 2022 to be approximately 10% of our non-GAAP profit before tax. and approximately 15% for Q4 of 2022. We expect GAAP tax expense to be approximately 24% of profit before tax for both third and fourth quarters of 2022. With that, I will now open the line for questions.

Thank you. And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We kindly ask that you please limit yourself to one question and one follow-up and may re-queue for additional questions. And at this time, we'll pause momentarily to assemble the roster. And our first question today will come from Brian Lee with Goldman Sachs. Please go ahead.

Hey guys, good afternoon. Thanks for taking the questions. Kudos on the great execution here. First question I had was just on the gross margin guidance. It's the first time since 2020 that you've raised the non-GAAP gross margin range upwards to now 39% to 42%. So just wondering how much of that is simply IQ8 mix and better margins on that product? Or are you also seeing better, I guess, battery storage margins versus expectations? And then maybe finally, is Europe also helping on the margins in terms of expansion? Just maybe some of the puts and takes there on the gross margin guide and what's driving it and then how to follow up.

Yeah, I mean, mainly it is IQ8. It's as simple as that. And Europe margins and U.S. margins are equivalent for us.

Okay, fair enough.

And then, you know, you're clearly doing well in Europe. It seems like you're gaining share. Can you speak a little bit, Badri, as to kind of where you're seeing the share gains, who you're gaining share from? And then can you kind of talk about, it sounds like the 69% sequential growth was microinverters as opposed to battery. And so, Is this a number where as batteries start to become a bigger part of the mix and given the higher ASPs, you could actually see another kind of tailwind in the region? I know you're talking about 40% sequential here into 3Q, but as we look beyond, I guess, the next couple quarters, could you even see an acceleration once batteries become a bigger part of the mix in that region? Thanks.

Yeah. A few answers here. The growth mainly came, you know, comes from Netherlands and Germany. And basically, you're right that Q2 growth is more growth comes from solar. But, you know, storage also grew quite well. For Q3, it's actually quite balanced. We expect growth to be equally good on solar and storage. And what's happening in Netherlands, right? So Netherlands, we are quite strong there. We service the long tail of installers. They like us because of our quality. And many of the other suppliers have been unable to ship product in these times. And in addition, the utility rates are also rising, so there is a natural momentum in Netherlands. And considering the geopolitical situation, it's even more accelerated. So we're extremely happy about Netherlands. And the name of the game for us is to get a lot more supply into the region. That's why we embarked on building the flex plant in Romania where we can have the microinverters coming out in Europe versus getting shipped from elsewhere. On Germany, it's fascinating. We are quite small in Germany, let me say that first. But the German market is a big market. The last I heard is it's roughly 2 gigawatts residential time. I'm talking solar. And I'm hearing 80% attached. So two gigawatts times 80% is 1.6 gigawatt hours of batteries. That's the market. So very, very healthy market. And there are about 5,000 long tail installers in Germany. And what they need is they need high quality They need reduced installation time because they always have labor issues. And every installation is accompanied, every solar installation is accompanied by a battery, by an EV charger, which is virtually free due to the rebates, and then normally heat pumps as well. So they require us to... basically work with third-party EV chargers, third-party heat pumps, which we are working very hard to have that capability, and we expect to have that shortly. So it's very similar to what we have told you for the U.S. We'd like to provide that single interface for the homeowner where everything shows up in its app Solar, storage, home loads, EV, heat pumps. He has the capability to monitor and control the things he wants. And with the utility rates being so high and the feed-in tariff in Germany, the only option is self-consumption. Self-consumption means you utilize all solar energy. Figure out ways to utilize also, which is store it in a battery, use it later. Do green charging for electric vehicles. Do green charging for heat pumps. So lots of interesting opportunities. Lots of work for us to do on home energy management. But I think this is our strength. And so this is where we have tremendous opportunities. And that's why, you know, we expect to grow disproportionately in that region. And, in fact, Germany is going to go grow. Although the numbers are small, Germany, the numbers are quite big in terms of growth from Q2 to Q3. Percentage growth is quite big. So that's the story.

Right. I appreciate all this.

Netherlands, Germany. Yep.

That's great. I'll pass it on here.

Thank you. And our next question will come from Phil Shen with Roth Capital Partners. Please go ahead.

Hey, everyone. Congrats on the strong results. Wanted to dig in deeper into Europe. Specifically, if you could talk through the FX headwind there. In spite of that, you guys delivered an amazing guide Just wanted to understand to what degree FX impacted Q2 and even the Q3 guide. Can you quantify that at all? And then can you talk through how you expect to manage that going forward as Europe grows over time? Thanks.

Sure. So our FX exposure currently is very limited. Even we generate 80% of our revenue in the U.S. and 20% from international. And also, if you look at our expenses, right, certain international expenses actually are in the foreign currencies. So we have a little bit of natural hedge there for our revenue. But with that said, we are actually evaluating FX hedging programs for our European revenue, given we are growing very fast there. In terms of our Q3 guidance, we have factored in our Q3 revenue and growth margin guidance using very conservative Euro FX rates. So we are good there. So our exposure currently is very limited.

And our next question comes from Julian Dumoulin-Smith. Please go ahead.

Hey, congratulations, Tim. Very nicely done again. If I can, just following up on some of the Q3 commentary here, just looking at the storage numbers, 130 to 145, how do you think about the exit run rate? I marked down earlier 180 was kind of the earlier contemplated rate. How do you think about that ramp here? Can you talk about some of the nuances that you alluded to in the script here earlier?

Yeah, I mean, we are incredibly excited about batteries. Let me say that. We have grown at an average rate of 28% per quarter over the last two years, and we are proud of certifying more than 1,600 installers worldwide. Long-tail installers are our focus, and we continue to win 15 installers a week in the U.S. In the second quarter, we were 10% higher than the first quarter. We did about 132 megawatt hours. And we are shipping into three countries, North America, Germany, as well as Belgium. We've learned a lot. We have made a lot of improvements. I would say still our commissioning times need to improve. We still have two plus hours of commissioning time. And because of that, what happens is we do have a little bit more inventory in the channel than what I'd like. So we are going to get to the bottom of it. We are confident of getting that under control. And we are going to unleash the demand back up again. And so we are extremely confident. I talked about our trip to Puerto Rico. And there is huge opportunities for us, and we expect to get our fair share of that. So, you know, bottom line is we expect to grow on batteries. We expect to get the commissioning times fully under control in Q3. And, you know, although we don't guide to the 180 number that you talked about, we expect to continuously grow.

Got it. At the similar trajectory of that 28%.

Yeah. We're not going to guide, you know, when you're... Okay. When you're going from... Yeah, let's say, for example, when you go from, you know, 10 megawatt hours to 20 megawatt hours, that's a 50% increase. But then the next quarter you go from 20 to 30, that's only, you know, that's a lesser increase, basically, right? So... you need to understand that even a 10% growth quarter on quarter is very healthy. That's 40% for the year. And I'm not saying we'll grow at 10% every quarter. It may be more, it may be less. But we love the business. We think we are well positioned. Our market is the long tail of installers. The moment we make it a lot easier for them in terms of commissioning time, the floodgates will open. And we expect to continuously grow.

Hey, and just a quick clarification to the earlier question here, just related to the gross margins. I mean, obviously, it's just very impressive here. But as it pertains to IQ8 and where you are, I mean, I think you're not even at 40% on IQ8 deployment, and you're already hitting, you know, this increasing gross margin trajectory. In the art of the possible, where can we go on gross margins here, also considering, obviously, ramping geographies that could weigh here, et cetera? But can you elaborate a little bit?

Yeah, I mean, the IQ8 provides a lot of value. Three things. Sunlight backup. Basically, when the grid is out, IQ8 continues to work and provides power. One. Number two, it removes any limit on solar to storage ratio, which is which is a limiter today. In other words, you can have a lot of solar with very tiny storage, and the extreme end being zero storage. That's number two. Number three is sunlight jumpstart, which means that in other batteries, when you completely drain the battery because you use it overnight and you accidentally drained it, you accidentally drained it, in the morning, IQ8 can come independently jump start the batteries because it can it can provide it can generate its own micro grid and kick start the battery so there is three big differentiators and we do you know we do value-based pricing which is since we are different since we add value we expect to get the right price for it now So as the IQ8 percentage increases in North America, we expect the margins to kind of track that, which is going up. The second thing is in Europe, for example. In Europe, the grids are quite stable. Like, for example, in Germany, the installers weren't even interested in backup. They only wanted self-consumption. So the value that they associate with sunlight backup is a little bit less compared to the U.S. So there we may not get as much value, but we'll get a little bit. So to answer your question, as the percentage of IQAs become more and more, our gross margins will go up and we will guide them appropriately. That's why we increased up the gross margin by a point right now.

Okay, we shall see. Thank you, guys.

And our next question will come from Colin Roosh with Oppenheimer.

Please go ahead. Thanks so much, guys. Could you talk a little bit about the competitive landscape from a technology perspective around grid formation and the batteries? Obviously, that's been a point where you guys have led the market, but are you seeing folks start to catch up with you or find workarounds for some of that functionality?

Hi, this is Raghu. The way, again... What we provide is important. With the home energy management solution that we have, we are providing a very comprehensive solution. This is not just about the solar part, not just about the battery part, or just about the EV part, or managing the heat pump, et cetera. Our goal is to provide a one-stop shop, a completely comprehensive solution, and everything is managed from software with a home energy management system. This is true in Europe. And actually, and it's true here as well. So for us, our value add when we think about relative to competition is not look at any one single piece, although we have to be better than them in every individual component that we are building, but it is about looking at the overall solution. So the homeowner has a great experience where they have one app and they see they get unprecedented visibility into the performance of their entire system. Same thing true for an installer partners as well. They get trained by one company to deliver all of the different components on how to install them, how to commission them, et cetera. And if there is any problem, there's one phone call to make. If there are any warranty issues, they go to one company. So it's that entire end-to-end solution is how we differentiate ourselves from everybody else. And we feel like we have done a good job vis-a-vis the competition.

I'll take it offline. I want to just get in a little bit more specific on that. So my follow-up is really about new geographies in the U.S. Can you talk about the number of installers that you're training in new geographies and how some of those emerging markets within the U.S. are developing and potentially driving growth on your core business here?

Like what I said, we We certify a lot of installers. I think the last earnings call I said 1,300. I don't remember. And now it is 1,600. So we certify a few hundreds of installers a quarter. We work with the long tail of installers in all geos, all regions in the US. Like what I said, Puerto Rico, great market. Very interesting market. Only when I went and saw there, it was quite eye-opening for me on the number of times they had a power shutdown every day. And there the requirements, for example, are a little bit different from California where the grid is by and large stable. So this basically gave us a completely new perspective on hey, we need to make sure the homeowner experience through outages, the outage performance of our app needs to be flawless. And the installer experience and the homeowner experience have to be good. So those are the kinds of things we learn. And we do it across all the states. We have salespeople, we have FAEs, We have field sales technicians. They are the ones who will help these 300 installers that we certify. By certification, we mean they have to do the training course, plus they have to complete the first install. And we do have some challenges on the commissioning, so we do initial hand-holding with the help of our field service technicians, and then we unleash the installers. And we got to get better, like what I said. I would call it nirvana when I do a half an hour commission, and I don't even need to train the installers. That's where we are trying to get to, because we recognize that all of the installers will install batteries if they make money on batteries. And in order for them to make money, we, Enphase, needs to take the lead and help them with standardizing the workflow with streamlining the way the product works and take care of any problems they have immediately. So we are doing all of them with upfront training and roundtables and field service technicians and FAEs and our sales people.

Okay. Thanks so much, Padraig. I appreciate it.

And our next question will come from Kashi Harrison with Piper Sandler.

Please go ahead. Good afternoon. Thanks for taking the questions and congrats with another strong update. Badri, you mentioned in Germany that sector coupling across heating, cooling, transport, power has become the topic du jour. Obviously, core business is power, and you're now participating and expanding into the transport mobility side via EV charging. But I was wondering if you could share any commentary on the heating and cooling space. Do you see any opportunities for Enphase to add value within that sector, or is that somewhere where it may not be as enticing to you at this point?

No, at this point, sector coupling is quite complex. We are scratching the surface here. by basically providing the capability for the solar plus storage system to connect to heat pumps and electric vehicles. And for electric vehicles, there is a fairly reasonable standard called as OCPP, which we need to be compliant with. and then we can connect to all third-party electric vehicles. On heat pumps, it is still a rudimentary standard called as SG-ready standard. There are four modes of operation, which are relatively trivial to implement. All of them, the EV, the heat pump, solar, storage, home loads, when you integrate all of them, then you provide complete control to the homeowner at their fingertips. We, at least for now, we don't plan to go and do anything as far as the heating and cooling sector is concerned. We just want to make sure that we enable the sector coupling by achieving interoperability with EV chargers and heat pumps. That's what we are looking at now.

Got it. That makes perfect sense. And then as my follow-up, it's quite evident that you're showing excellent operating leverage in both 2Q results and 3Q guidance based on non-GAAP OPEX as a percentage of sales. I was just wondering if your views on the appropriate levels of non-GAAP OPEX investments are evolving as the company gains increasing scale. And then maybe part and parcel with that, you know, we've obviously, it sounds like the labor market in Silicon Valley is cooling. Just wondering if you're seeing any opportunities to optimize that on the corporate G&A side. Thank you.

Right. Our baseline, 35, 15, and 20, that 15 stands for operating expenses as a function of revenue, non-GAAP. We don't plan to deviate from that. We are well under that baseline. One of the advantages that we have is we are able to get talent at – we are able to have the right people at the right places, which means we are able to get a lot of good talent in places like India, in places like New Zealand, in Austin, in China. We are able to get the talent that we need. And because we are growing fast, we are able to – keep our operating expenses under control. So we don't plan to deviate from 15%. We don't plan to compromise on any new products. We will get everything that is necessary. Regarding what you said on interesting opportunities created by the recent layoffs in Silicon Valley and other places, I mean, we are always looking for talent at the same time. We are always cautious. We don't like to go overboard. If we see people who are outstanding, we won't hesitate to pick it up. But it's easy to get fat here. And we are very disciplined. You can expect us to always meet the 15% with margins and still not compromise in R&D because we are growing so fast.

And our next question will come from Mark Strauss with JP Morgan.

Please go ahead. Yeah, good afternoon. Thank you very much for taking our questions. Most of them have been asked. First one, though, just given Europe is accelerating beyond what you were calling for just even a few months ago, just curious if you can go back to kind of the manufacturing expansion there. So Romania is still on track for For 1Q23, I believe you've said that's about 750,000 micros. When do you think you need to make a decision to potentially increase that or move elsewhere in Europe? And can you talk about the opportunities to expand your manufacturing in Europe but do it profitably, perhaps outside of Romania or Eastern Europe?

Yeah, I think the decision is daring at our face. I mean, it's kind of obvious we... should get a lot more than 750,000 microinverters. We are going to make that happen. But first, let's get our manufacturing and production done by Q123, and I think we can immediately add another full-auto line, and we can take it up to a couple of million units very quickly.

From Romania. From Romania, okay.

then just a quick follow-up audrey i'm sorry if i missed this but the uh previously you've been talking about adding a third battery supplier in the second half of this year just time and magnitude yeah today we have two suppliers a123 and atl and we are on track to add a third supplier and for our third generation battery and that will start to ship hopefully in the first quarter of 23, and that time we will have a third supplier qualified.

Okay, fair enough. Thank you.

And our next question will come from Eric Stein with Craig Hallam. Please go ahead.

Hi, everyone. Thanks for taking the questions. So you mentioned the supply chain started to show some improvement, but I know that as is been the case in past quarters and 3Q Guide is still well below demand. Just wondering if you're able to quantify that, how much below the demand level or at least how that's trending quarter over quarter.

Yeah, we usually don't quantify that. It's a matter of lead times. Basically, our battery lead times are 14 to 16 weeks. That means if an order comes today, It's going to take us 16 weeks to service it. Our microinverter lead times are almost, I would say, 8 to 10 weeks. So that's a little bit better. Yeah, I mean, the balance for us is to make sure that we always look at channel inventory all the time for microinverters and storage and do not get ahead of ourselves. The one place where I wish I could ship more is Europe because the channel inventory there is quite dry. But, you know, it takes cycle time for us to do that. We have to get product there without compromising our schedules to other customers. That's always a challenge. And we are very determined to not, you know, to not upset other customers who have already placed orders. So we are very strict in all of that. Yeah, that's how we work.

Okay, that's helpful. And then maybe just, you know, on the manufacturing footprint, I know that when Romania comes on, you'll have the ability, you're targeting 6 million microinverters a quarter. I think you did, what, 3.5? four in this quarter i mean i know it's dependent on geography um but i mean do you have kind of a time frame or maybe big picture when you think you'll be pushing up against that six million and then um you know potentially obviously need to add more well i mean if you look at it if you look at our guidance midpoint of guidance for q3 that's uh 610.

And if you look at what is the percentage growth from Q2 530 to 610, that's basically roughly around 15%. So you see that's a proxy for microinverter growth from Q2 to Q3. So you correctly pointed out 3.3 million micros in Q2. So you apply 15%, that becomes something like 3.3. maybe 3.9 million micros in Q3. And of course, I mean, I'm not going to break what future quarters growth rate, but you can do the math. Within a few quarters, we will run up against the six. Like what I said, it's a no-brainer for us to basically make the decision on the Flex Romania plan to add one more line. Of course, we are going to do that. We'd like to get, you know, some data from the plant on the current, you know, microinverters first, and then we'll make those decisions. But, I mean, it's easy for us to, or we have sufficient time to make these decisions because we evaluate these every quarter. And we have options to add. We can add in Chennai, Cellcomp. We can add in Guard, you know, Mexico for servicing U.S. customers. We can add in Flex Romania for servicing Europe customers, and we can also add in Fuyang China for servicing Australia customers if we need. So everything is flexible. Everything can be expandable, and all we need to do is to make the decisions at the right times.

Okay, thanks.

Thank you. And our next question will come from James West with Evercore ISI. Please go ahead.

Hey, good afternoon, Badri.

Hi.

I have a question on your EV charging business, the Clipper Creek EVs. You talked about two things. One is moving to the contract manufacturer in Mexico, and I'm curious how much scale you might be able to add to the production by doing that. And then secondarily, you're making the chargers smarter, integrating them into your home energy management system. Curious on the timeline to achieve that.

Yeah. Basically, we should be able to do several multiples of the number I gave you.

Okay.

So that's why we are doing it, to achieve a lot of scale. Then with regarding the making the chargers smart, we expect that to be done by the first half of 2023 for both chargers shipping into the U.S. and Europe.

Okay, that's helpful. And then a follow-up for me on the cash balances here. I mean, great free cash flow during the quarter. You've got a billion two or so. what do you expect to do with that capital going forward? Is there more M&A on the horizon? Is there other return of capital to shareholders, things like that you're contemplating?

Yeah, I mean, again, the answers are very similar to what I've given in the past. The first thing for us is take care of the needs of the business. If we need a different If we need an auto line, if we need something special on the batteries, if we need to buy software, take care of the needs of the business. That comes first. Have plenty of cash to do that. If we need to expand a facility, for example, in the U.S., if we need to build a new reliability lab, so I can go on and on. So that's number one priority. Number two priority is... evaluate a continuous pipeline of acquisitions. The areas that we are interested are, for example, EV charging is a potential area we are interested mainly on the software side to get more software capability. Number two, or the second thing we are interested in as potential acquisition targets are anything interesting in in batteries, right? Anything interesting, not manufacturing of batteries, but, you know, battery systems, innovation there, we're interested there. That's two. And then third is home energy management systems. The ability to not only network to things outside the home, such as EV chargers or heat pumps, the ability to network things inside the home. to provide that comprehensive experience to the homeowner. So these three are the things we will be continuously looking at. We might still do some more acquisitions on the platform side of things in order to round it up. That's my next priority to basically look at the acquisitions in those areas. And then the last one is If we take care of number one and number two, which is have plenty of cash required for the business, have plenty of cash for M&A in certain key specific areas, if those two are taken care of, then we look at buying back shares. There we look at is our share price. Do we believe our share price is below a conservatively estimated intrinsic value. And it's not my idea. This is Warren Buffett has taught everybody. So it's quite logical there. And the key question is always, how do you estimate your intrinsic value? How do you be conservative? So we have our own formulas for that. And then if we feel that's the right time, we'll buy shares. If not, no.

Okay. Very helpful. Thanks, Patrick. Yep.

And our next question will come from Amit Thakkar with BMO Capital Markets.

Please go ahead. Hi. Good afternoon. Thanks for squeezing me in, and congratulations on the quarter. Just one quick one for me. I think on the third quarter earnings call last year, you guys talked a little bit about ocean freight being, I think, eight times more. Looks like some of the data suggests that ocean freight rates have actually come in. I was just wondering, have you guys seen any benefit in that, and was any of that reflected in the quarter? Certainly, your lead times haven't really shrunk yet, but just on the ocean freight rates.

Yeah, the lead times haven't shrunk, but you are correct. The ocean freight rates have gotten a little better, not a lot better. We are expecting them to continuously come down.

All right. Thanks, guys.

And our next question will come from Maheep Mandeloy with Credit Suisse. Please go ahead.

Hey, good evening, and thanks for taking the questions. I think most of the questions have been asked. Maybe one on the policy side on the Section 301. Are you hearing anything around that as we come to potential hearings against renewing that later this year? Any expectations on what could happen on that end?

No, we are not hearing anything specific. There's just some general news that we are hearing about. Will there be some relief from tariff given the situation, given the economic situation right now? But there is no specific action that we have come across that says that there will be any specific relief on 301. Thanks.

And just a last question from me on... The revenue growth here, could you talk about how much we're seeing from Europe, Latin and other regions versus U.S. and Q3? Anything to help us understand the top line beat here? Thanks.

Well, we, you know, so Mahip, are you asking about Q3 or are you asking about Q2?

Q3.

Q3, we already said, we already gave you specifically on Europe that we do expect to grow revenue in Europe by 40% compared to Q2. So basically, in the US, we will grow at very healthy levels. Our US contribution, obviously, is very high proportion of revenue. So we will grow at very healthy levels in the US. In Europe, due to the geopolitical issues, utility prices that are rising, many of our competitors unable to supply we have an incredible opportunity in europe and we grew 59 no six yeah 69 percent from q1 to q2 in europe and we are forecasting to grow by at least another 40 percent from q2 to q3 gotcha i appreciate the clarification thanks a lot thank you

And our next question will come from Joseph Osha with Guggenheim Partners.

Please go ahead.

Hi, everybody. Coming back to the storage business, I know this might be a hard question to answer. If you weren't supply constrained, looking at the remainder of this year, just maybe the current quarter, how much do you think you could ship? I'm just trying to understand what you think underlying demand here is, and then I have a follow-up.

Well, I mean, like what I said, we are incredibly bullish about the demand, and our installers are incredibly bullish about using Enphase. What we need to get under control is what I talked about. Our channel inventory is a little bit high. Our commissioning times are a little bit high. We are going to work on them, and this will unleash the demand. So we're not worried about demand. We are growing quarter on quarter. We expect to grow. We continue to expect that the growth will be healthy in the coming quarters.

So to be clear, it's really more about commissioning time and channel inventories than necessarily cell constraints per se. Is that a correct way of putting it?

Yeah. I mean, we do have longer lead times. 14 to 16 weeks, but we have made, we don't think sell will be a constraint, and we have lined up the right capacity that we need for the future once we solve these issues.

Okay, thank you. And then an unrelated question. Cassie, I think, was kind of touching on this a little earlier. To what extent do you think V to H or maybe even further down the road, B2G functionality could become a part of your EV charging offering. And that's it for me. Thank you.

Absolutely. It has to be a core part of our offering because we see that it brings a significant amount of value to the homeowner by doing that. So, for example, in the case of V2H, where you're in a situation where you may have a grid outage, Now, not only will you have, say, 10 or 20 kilowatt hours of stationary storage to help you through that outage, you will have IQ8 on the roof that will also support you through that outage. You will have an additional 80 to 100 kilowatt hours of storage available to significantly expand out the outage period that can be supported. So, absolutely, V2H is going to be a key part of our strategy. We want to bring that vehicle onto our ensemble platform so that we can effectively manage it. With regards to vehicle-to-grid, you know, we are the guys who really understand very well how to connect power systems to grids. You know, things such as grid profiles, things such as dynamic requirements around how grid profiles are going to change, all of those things we are extremely good at. And so with vehicle-to-grid, if we can, again, if the right structured business model and business structure is available where the homeowner can be compensated for allowing the car to be discharged onto the grid in order to provide things like grid services and grid support, absolutely that's a good business model and we will support it with all the technology. And like I said, we are absolutely the right guys to do it. Now in order to get there eventually, to make that car completely bi-directional, there has to be some standards development work, not necessarily technology development. We feel like the technology is available, whether that is done through a DC to AC conversion that occurs externally or onboard by making the level two charger that's within the car bidirectional. We feel like we are very well positioned to do all of those. And with regards to standards, we are actually actively participating in the standards body to drive drive standards to allow for bidirectionality. I think it's going to take some time, but we are actively involved. We are also engaging very closely with a number of EV manufacturers. We are working on some, you know, developing some highlights with them. So we are very actively involved. That's part of our What Badri mentioned, the connectivity part and the control part is just that smart EV charger. That's only the very first step on a much broader roadmap that we have for EV chargers.

Okay. Thank you very much.

Thank you. And our next question will come from Gus Richard with Northland. Please go ahead. Yes.

Thanks for taking the question. I think the guide for battery this quarter was 130 megawatt hours to 145. And I was just wondering if you could talk a little bit about what would cause you to fall on the low end of that range and or the high end of that range. And that's it for me.

Yeah, I mean, we are typically conservative in our guidance. We like to make sure that one of the things we look at is we look at channel. We look at inventory. We are hawks. monitoring that they're extremely disciplined so we gave ourselves a slightly wider range this time but like what I said we are incredibly bullish about our business we you know the installers love using our product we meet with 10 to 15 installers every week we we take down all of the issues that they have and all of the things that Enphase needs to do in order to make sure their life becomes easier we take we take those actions we go execute them so Yeah, I mean, we are quite happy with where we are. We have grown at a 28% rate, an average rate in the last two years. That's not too shabby. And we are forecasting, you know, continuous increase. Got it.

Thanks so much.

Thank you.

And our next question will come from Praneeth Satish with Wells Fargo. Please go ahead.

Thanks. Obviously, very strong growth in Europe. I want to touch briefly on the Netherlands. I think there's some new net metering rules that are going to go into place there next year. Can you talk about how that will impact end phases, good or bad, and will you see an acceleration due to more battery deployment where it could attach rates go? Just curious for your thoughts on that.

Yeah, so this, Raghu, as a means of clarification, it was, net metering was supposed to, there was a glide path out of net metering starting at the end of next year. But right now there are discussions that that net metering could be pushed out by an additional couple of years. So the good and the bad there is, of course, we would, you know, of course, solar continues to expand and net metering is a fantastic incentive program. And solar is going to continue to expand at the rate that's happening as we speak. And for the reasons that Padri alluded to, which is a whole home electrification and the need for self-consumption. So the flip side to that, of course, is that we were expecting battery deployment in Netherlands to increase starting in 2023 in preparation for the sunsetting of next metering, and I think that's going to get pushed out probably by another 12 to 24 months. But all in all, Netherlands is growing, and we are very strong in Netherlands, and Netherlands is growing at a very, very good rate for us. It's solar-centered around solar. And Netherlands, if you look at it, it's one subset of sector coupling in that its EV adoption is extremely high in Netherlands. And so it's a combination of solar and EV. And now there is heat pump adoption also increasing there as the government is pushing to sunset the use of natural gas. And of course, natural gas is obviously in shortage as well. So all in all, Netherlands is an excellent market for us with solar and then eventually EV and storage as well.

Got it. And then just staying on Europe, I mean, it sounds like you're gaining share partly because competitors don't have supply. So I guess what happens when competitors, their rebuild supply, do you think that'll impact your growth? Or do you think once an installer tries an end phase product, they don't go back to competitors? Like it's just how durable is the growth?

Thanks. We cannot be arrogant. We need to create, meaning we need to provide value to the installers, which is high quality, which we think we are quite good there when compared to to competition. So we are good there in terms of customer experience. We pride ourselves on net promoter score and answering the calls. We need to continue to do that. That's a big differentiator for Enphase. The last one is what I said, the sector coupling, making sure that we take care of the homeowner to not have disparate things in his home which are unconnected. It is one experience. Manage your energy. Ensure that things like EV chargers and heat pumps are connected seamlessly to the home energy management system. Do that flawlessly. Take care of customers. We need to earn that business. So I have no qualms that this business is here to stay. But we will focus on quality and customer experience. And usually if we get that right, the customers will stick.

Thank you.

And our next question will come from Jeff Osborne with Cowan & Company.

Please go ahead.

Hello, Jeff. Your line is open.

Yes, sir. Sorry about that. Thanks for squeezing me in. I appreciate the commentary so far. I was wondering if you can comment on the IQ8 mix over time, where you think that can go. I know there's some customers like SunPower that are still using IQ7. Is there a possibility that that can go to 80% or 100% over time, or what's the ultimate destination in terms of mix?

Yeah, I mean, we're not going to comment on specific customers, but our target is to get to 90% by the second quarter.

Got it. And then quick one for Raghu. Is there any progress that you can share on the gallium nitride development for IQ9?

Yeah. I don't have any specific details to share, but in terms of technology, absolutely, we are continuing to develop the gallium nitride-based microinverter. So, yeah, probably at the next Analyst Dave, you may have more things to share, but right now, development's happening. Yeah, I'll give you some color.

I think we understand whom to work with. We are, you know, the devices come in a similar form factor that we are used to for the high-voltage FETs today, silicon FETs, which is great. We need to do work on the transformers, which we understand, and it's well underway. We need to work on the gate drivers, which we understand that's well underway. So I think it is a matter of 12 to 18 months, and I think we are going to have the first gallium nitride product.

And our next question will come from Biju Perencho with Susquehanna. Please go ahead.

Thanks for taking my question. I had a question on the US micros. So based on some of the checks that we've done, it looks like the long tail installers are maybe able to control their costs a little better than some of the larger installers. So are you seeing any indications that the installers on EIN, are they gaining market share when you look at them as collectively just wondering if that's a tailwind for the domestic business?

We don't see exactly what you said. We do see that the demand is very strong. We do see both installers doing well, the big installers as well as the small installers. Small installers usually they understand, they are local, they understand what the homeowners, they understand about the area. They can give more personalized service and that kind of business, the long tail of installers is where we add the most value because they don't want to be on call reference to quality issues or service issues. So we had the most value there. But we aren't seeing, you know, one category versus the other category, you know, changing much, you know, right now.

Okay. Got it. And I had a follow-up on battery shipments. I think in the past you had some installers may be waiting on features like load control and things like that. So is there sort of a similar dynamic now with, I think, the 5P product, I think, still coming out second half of the year, and then you mentioned the next generation battery coming out next year?

Yeah, just to say that, you know, we We already have load controllers that are available to our installers, first generation load controllers. We have generator compatibility available to our installers. So all of those are fully available today. The IQ Battery 5P is our third generation battery that's going to be available in the early 2023 is what I said. And that's the first quarter of 2023 is what I said. And that The focus for that battery is high power, double the power, both continuous and peak power, and is to basically do some more improvements in overall commissioning and go to a wired form of connectivity versus wireless. Just focus on removing any pain points for the installer and homeowner.

And our next question will come from Sophie Karp with KeyBank. Please go ahead.

Hi. Good afternoon. Thank you for taking my question. I just wanted to follow up on the mix of IQ7, right? Can you elaborate on the strategy of how you shift in that mix in the U.S. and in Europe? In other words, is there more penetration of IQ8 in the U.S. versus Europe?

All regions will move to IQ8 eventually. That's what I said. We will move to IQ8. 90% of our microinverters will be IQ8 by the second quarter of 2023. We have gotten started with the U.S. 37% of our overall microinverter shipment this quarter were IQ8 and primarily into U.S., North America. But we are soon going to start introducing IQ8 microinverters into Europe later this year. We are going to start with Netherlands, France, and then move on to Germany and the other countries. So our plan is to get to 90% by Q223.

Got it. So in the U.S., as you're rolling this out, have you seen any, I don't know, like pricing pushback on them from dealers? Maybe is there any risk at all that they may be losing share if you transition to IQ8 based on pricing to some cheaper alternatives? How should we think about that?

Absolutely not. No share loss. It is that when we explain the value of IQ8 to people, they do understand. And like what I said, the sunlight backup that is unlimited solar storage ratio and the concept of sunlight jumpstart when the battery is dead, the concept of sunlight jumpstart, which are highly differentiated features from competition. So they do understand that. Now, if they have a short-term problem in terms of conversion, that we aren't able to ship IQ7 to them, for example, in the next in the next few days, weeks, we do understand the situation and we work with them so that, you know, the pricing is palatable for them for a short term until they then start paying the full price for IQA. So, yeah.

And our next question will come from Cameron Lockridge with Stevens. Please go ahead.

Hey, good afternoon. I appreciate your taking my questions. I guess I wanted to start really just on European price-cost dynamics. Badra, I think I heard you say earlier, Europe gross margins are at parity with the U.S., and so I was just kind of wanting to unpack that a little bit. Are you able to comment on the pricing dynamics in Europe versus the U.S. that potentially allows you to maintain that gross margin parity? Is there something on the cost side that maybe comes out in Europe that enables that gross margin parity?

There's nothing on the cost side. It's basically we work with long-tail installers in Europe. They care about a lot of things. They do care about price, but they care about quality and service even more. And, you know, we are able to get, you know, we are able to price them appropriately for the value we provide.

Got it. Thanks. Thanks for that. Switching real quick to batteries. I think last quarter you mentioned that your battery device is able to be paired with pretty much any inverter on the market. And correct me if I'm wrong there, but I guess if you could comment on what percentage of your battery sales right now go to

um third party or paired with third-party inverter solutions versus your own and how you see that developing over time that was specific to europe where we what we did was we released uh you know we made our iq batteries compatible to third-party string inverters and we are just getting started there we don't have we don't have much statistics right now to give you but the name of the game was quite simple you know um Many of the homes in Germany and Belgium already had solar from string inverters. They were installed quite some time ago, and they need batteries, and they were not getting batteries. So it was a very popular demand from the installers, saying, why don't you make your batteries interoperable with other string inverters? And we did that.

And this will conclude our question and answer session. I'd like to turn the conference back over to Badri Khosran Dharaman for any closing remarks.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.