Enphase Energy, Inc.

Good afternoon and welcome to the Enphase Energy third quarter 2022 financial results conference call. All participants will be in 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 on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Karen Saget. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third quarter 2022 results. On today's call are Badri Kathandaraman, our President and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Raghu Balur, our Chief Products Officer. After the market closed today, NSAID issued a press release announcing the results for its third quarter, ended September 30th, 2022. During this conference call, NSAID's 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, anticipated growth in existing and new markets, the timing of 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-Qs filed with the SEC. We caution you not to place 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 that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8K, and which can also be found in the investor relations section of our website. Now I'd like to introduce Badri Kathandaraman, President and Chief Executive Officer of Enphase Energy. Badri.

Good afternoon, and thank you for joining us today to discuss our third quarter 2022 financial results. We had a good quarter. We reported record quarterly revenue of $634.7 million, achieved quarterly non-GAAP gross margin of 42.9%, and generated free cash flow of $179.1 million. Approximately 47% of our Q3 micro-inverter shipments were IQE. We exited the third quarter at approximately 43, 12, 31. This means 43% gross margin, 12% operating expenses, and 31% operating income, all as a percentage of revenue on a non-GAAP basis. We will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Q3 NPS worldwide was 70% compared 68% in Q2. Our North American NPS score was 71%, the same as Q2. Our average call wait time was 4.8 minutes compared to 4.7 minutes in Q2. The elevated call wait times over the past few quarters are related to the rapid growth in our business. We're not happy with the call wait time and we are targeting to get our call wait times under a minute by more aggressive staffing of our teams in US, Europe, and Australia. We remain laser-focused on customer service. The emphasis on superior customer experience has further increased due to severe weather events. During the recent storm in Puerto Rico and Florida, our customer service team, field service technicians, and engineers were able to help customers with the issues they faced. While our systems performed well in general, there is some more room for improvement. Our focus is to ensure seamless installer and homeowner experience through such events. Our teams have shared many stories with us of their efforts to help customers, and customers have also expressed their deep gratitude for the help. I'm quite proud of our teams. Let's talk about microinverter manufacturing. Our situation remains quite stable right now due to diligent supplier management as well as qualification of multiple sources. Our quarterly capacity is around 5 million microinverters to date. We are on track to begin manufacturing at Flex Romania starting in Q123, enabling a global capacity of 6 million micros per quarter. The Inflation Reduction Act, or IRA, has extended the investment tax credit ITC for residential solar to 30% for another 10 years and also implemented a standalone storage ITC with the same terms. Both are very good for the industry at large. In addition, the IRA has a provision for $0.11 per AC watt production-based tax credit for domestic manufacturing of microinverters. Therefore, we have been actively looking at manufacturing in the U.S. We are working with three contract manufacturing partners, one new and two we have today already. We plan to open four to six manufacturing lines in the U.S. by the second half of 2023. Our thought process is that we will need the additional capacity anyway, considering our fast-paced growth globally. There are still a lot of questions to be answered regarding the actual implementation of the IRA for domestic manufacturing. The U.S. Department of Treasury is seeking comments from stakeholders in early November for clarification on these questions, and we are working with industry partners and stakeholders to provide comments. Once the IRA details have been finalized and the implementation is clear, the U.S. manufacturing could provide us substantial benefits in terms of the production-based tax credit. Let's talk about IQ batteries. We are on track to add an additional cell pack supplier from China early next year for a third-generation battery. Our lead times for batteries are 10 to 12 weeks, allowing us to respond a little more quickly than before for customers. Let's move on to the regions. Our U.S. and international revenue mix for Q3 was 71% and 29% respectively. We experienced strong growth in Q3 both in North America as well as in Europe. In U.S., our revenue increased 7% sequentially and 69% year-on-year. We had record quarterly revenue and record sell-through for microinverters in Q3. Our microinverter channel inventory in the U.S. was at a very healthy level at the end of Q3, while our storage channel inventory was a little elevated due to longer install times. I'll go into more details about our IQ batteries later in the call. In Europe, our revenue increased approximately 70% sequentially and 136% year-on-year, led by strong demand for our microinverters in Netherlands, France, Germany, Belgium, Spain, and Portugal. and for our IQ batteries in Germany and Belgium. Microinverter supply continues to be tight, and channel inventory continues to be below normal. We continue to invest heavily in Europe. We are expanding engineering, sales, and customer service teams, along with opening a manufacturing line in Romania in Q123. In addition, we expect to begin shipments of IQ8 microinverters into the Netherlands and France in the fourth quarter and rest of Europe in the first half of 2023. We also plan to introduce IQ batteries into Austria in the fourth quarter. We recently acquired Greencom Networks, a home energy management software company with headquarters in Germany. The acquisition allows us to add a local engineering team to service the accelerating clean energy transition in Europe, provide installers with a complete home energy management system integrating N-phase microinverters and N-phase batteries with third-party EV chargers and heat pumps, and enable homeowners to monitor and control all of these devices from the N-phase app. In summary, we are quite pleased with our growth in Europe. Look forward to the continued momentum. In Latin America, revenue increased 100% sequentially and 129% year-on-year. We had steady growth in our solar plus storage business in Puerto Rico during Q3 and expect continued growth in the region as demand for solar and storage has increased since the recent hurricane. The storage attaches nearly 100% in Puerto Rico. Our IQ8 microinverters as well as IQ batteries provide a differentiated solution invaluable to customers during a storm. Now I'll provide some general color on Australia, Brazil, and India. In Australia, the solar market continued to recover in Q3, and we believe the forecasted increase in electricity prices will drive demand. We expect to introduce IQ batteries in the first half of 23 in Australia. For Brazil, we had sequential revenue growth in Q3 due to a steady increase in demand for IQ7A microinverters. In India, we made progress on adding more installers in the end-phase installer network. The module power is substantially increasing in these emerging markets. We plan to introduce a 480-watt AC high-power residential microinverter in the first half of 2023 to match the increase in module power. Let's discuss the company's overall bookings for Q4. Our demand for Q4 is quite robust. and easily exceeds the higher end of our guidance range. As for Q1, it's a little bit early to comment, but we see that the bookings are quite healthy right now. On supply, the component availability is getting better. There are still some spots of tightness that keep coming up from time to time, and our operations team is doing a nice job closely managing the situation. The logistic situation has also improved a little bit with reduced shipping times. Let's talk about batteries. We have now certified approximately 2,100 installers worldwide since the introduction of IQ batteries into North America, Germany, and Belgium. We shipped 133.6 megawatt hours of IQ batteries in Q3. We are working hard to improve our customer experience as it is not yet up to our standards. We continue to host a weekly installer roundtable to deeply understand their pain points. Our installers in North America experienced a median commissioning time of 118 minutes exiting Q3. We have made substantial improvements in our software, which was just released a few days ago, to reduce commissioning times further and make grid transitions more robust. With these changes, we expect the median commissioning time to improve to 80 minutes exiting Q4. The third generation of our IQ battery product will have additional features which further addresses the installer pain points. Our installers are extremely busy given the strong demand. Any inefficiency in the installation process impacts their profitability. This means the battery installation experience must be as good as the microinverter experience, which is what we are working to improve. With the significant changes we are making in the product We are confident that storage installations will become as efficient as microinverter installations. And as a result, installer profitability will improve and storage deployment will accelerate. We expect to ship 120 to 135 megawatt hours of IQ batteries in Q4. And we expect steady progress throughout 23. On the new product front, we expect to generate our third generation IQ battery starting in North America and Australia in the first half of 2023. We then plan to introduce it into Europe and emerging markets in the second half. The battery will have wired connectivity to the IQ gateway and system controller via a CAN bus. The modularity of the battery is 5 kWh. The battery will have double the continuous and peak power compared to the second generation, enabling heavier loads such as air conditioners to start more easily. We are targeting commissioning times to be sub 30 minutes with this battery. With every generation of batteries, we expect to make steady improvement in the customer experience, just like what we did with micro inverters. We're already working on our fourth generation IQ battery to be introduced in 2024, which will result in a substantial energy density improvement compared to the third generation. Let's talk about our product for small commercial solar in the US. Based on customer feedback from pilot runs on IQ8D, which was our previous product, we are increasing the power of the microinverter by 50% from 320 watts to 480 watts AC. And we are reverting back to a single panel architecture. We understand this is a few more months of delay, but we think it is the right long-term decision as panel power continues to increase rapidly in the small commercial space. We expect to pilot this product in the first half of 23. This product is very closely aligned with the 480 watt residential microinverter for emerging markets, except for the three-phase cabling. We are bullish about penetrating the small commercial solar business shortly with this powerful new product. Lexus EV chargers. We ship more than 6,370 chargers in Q3 compared to 8,250. We are on track to manufacture Enphase branded EV chargers at our contract manufacturing facility in Mexico by the end of this year, helping us to increase capacity and cut down costs. As for new products, we expect to introduce smart EV chargers to U.S. customers in the first half of 2023, followed by Europe. We are excited about this product as it will provide connectivity and control, enabling use cases like green charging. and allowing homeowners visibility into operation of their Enphase solar plus storage plus EV system through the Enphase app. We are very bullish about our EV charging business and continue to invest in it significantly. Let me give you a quick update on our Enphase installer network, or EIN. We have now onboarded more than 1,200 installers to our EIN worldwide through a highly selective process focused on installation quality and an exceptional experience to homeowners across the globe. We have talked about our installer platform on previous calls, from lead management to design and proposal to fintech connectivity to automated permitting to installation and commissioning and operations and maintenance. We recently added battery design and document management features to our SolarGraph software. We are also making enhancements to our SolarGraph software to cut down permit plan set creation cycle time significantly. Next, I'd like to comment on NEM 3 in California. As of now, there is still no decision from the California Public Utilities Commission, CPUC. We hope the CPUC eliminates the grid participation charge while providing a glide path for the solar-only market as well as incentivizing the solar plus storage market. In summary, we are happy with our performance and strong demand for our products. We are working on several important initiatives to grow our business. fully ramping IQ8 microinverters across the world, fixing customer experience on our IQ batteries, accelerating our business in Europe further, and introducing high-power IQ8 microinverter variants for residential and small commercial solar markets. With that, I will turn the call over to Mandy for a review of her finances. Mandy?

Thanks, Padraig, and good afternoon, everyone. I will provide more details related to our third quarter of 2022 financial results, as well as our business outlook for the fourth 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 Q3 was $634.7 million, representing an increase of 20% sequentially. and a quarterly record. We ship approximately 1,709 megawatts DC of microinverters and 133.6 megawatt hours of IQ batteries in the quarter. Non-GAAP growth margin for Q3 was 42.9%, compared to 42.2% in Q2. The increase was driven by a favorable IQ8 mix, partially offset by the further strengthening of the US dollar against the euro. Our Q3 growth margin was negatively affected by 70 basis points from the Euro to USD FX rate decline from Q2. Gap growth margin was 42.2% for Q3. Non-gap operating expenses were $78.6 million for Q3, compared to $71.2 million for Q2. The increase was driven by investment in R&D, customer service, and sales. GAP operating expenses were $132.5 million for Q3, compared to $125 million for Q2. GAP operating expenses for Q3 included $49.1 million of stock-based compensation expenses and $4.8 million of acquisition-related expenses and amortization for acquired intangible assets and restructuring charges for site consolidation. On a non-GAAP basis, income from operations for Q3 was $193.9 million, compared to $152.4 million for Q2. On a GED basis, income from operations was $135.4 million for Q3, compared to $94 million for Q2. On a non-GED basis, net income for Q3 was $175.5 million, compared to $149.9 million for Q2. This resulted in non-GAAP diluted earnings per share of $1.25 for Q3, compared to $1.07 for Q2. GAAP net income for Q3 was $114.8 million, compared to GAAP net income of $77 million for Q2. This resulted in GAAP diluted earnings per share of $0.80 for Q3. compared to $0.54 for Q2. We exited Q3 with a total cash, cash equivalents, and marketable securities balance of approximately $1.42 billion, compared to approximately $1.25 billion at the end of Q2. In Q3, we generated $188 million in cash flow from operations and $179.1 million in free cash flow. Capital expenditure was $8.9 million for Q3, compared to $8.7 million for Q2. Now let's discuss our outlook for the fourth quarter of 2022. We expect our revenue for the fourth quarter of 2022 to be within a range of $680 to $720 million, which includes shipments of 120 to 135 megawatt hours of RQ batteries. We expect GAAP gross margin to be within a range of 39 to 42 percent, and non-GAAP gross margin to be within a range of 40 to 43 percent, which includes stock-based compensation expenses and acquisition-related amortization. We assume a conservative Euro FX rate in our Q4 guidance, and we don't expect significant impact to our financials from the USD strengthening, given most of our revenue is denominated in US dollars. We expect our gap operating expenses to be within a range of $152 to $156 million, including approximately $65 million estimated for stock-based compensation expenses, restructuring charges for site consolidation, acquisition-related expenses and amortization. We expect our non-gap operating expenses to be within a range of $87 to $91 million, As we discussed last quarter, with a 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 expect our non-GAAP tax expense for the fourth quarter of 2022 to be approximately 15% of our non-GAAP profit before tax. we expect GAAP tax expense to be approximately 22% of profit before tax for the fourth quarter of 2022. Moving forward to 2023, we expect to have our non-GAAP and GAAP tax rate at 22%, plus or minus 2%, before any IRA impact. If IRA is implemented with favorable terms to us for domestic manufacturing, our tax rate may be reduced from 22%. In closing, we are pleased with our financial performance. At the midpoint of our Q4 guidance, plus the first three quarters of 2022 actuals, we estimate 2022 year-over-year revenue growth of 67%, while extending our non-GAAP growth margin to 42%. and non-debt operating income to 29% of our estimated 2022 revenue. With that, I will now open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit your questions to one and a single follow-up. If you have additional questions, you may rejoin the queue. Our first question is from James West with Evercore ISI. Please go ahead.

Hey, good afternoon, Badri.

Hi.

Badri, I'm curious how you're thinking about potentially increasing your manufacturing expansion, in particular Europe, Given the strong growth there, do you think it's time to maybe go ahead with another? I mean, you're bringing one line on now. I understand that. But bring another line on. And then maybe secondarily, with the IRA, how are you thinking about U.S. manufacturing capacity?

Right. We talked about it earlier in the prepared remarks. So we are opening a line in Flextronics, Romania. And that will start production in Q1 of 23. That's got a fully automated line. The capacity is around 750,000 units. We'll review that and see if we need to add one more line immediately. Now, coming to the U.S., we explained the following. Because of the production... based tax credit of 11 cents a watt on microinverters manufactured in the US. We are planning for domestic manufacturing here. We are working with three contract manufacturing partners, two of which are existing and one of which is new. We are planning to add a total of four to six lines in the US At this time, we are planning that by the end of Q4-23. So four lines, you know, per line would be 750,000 units a quarter. Four lines would be 3 million units a quarter in the U.S. Six lines would be 4.5 million units a quarter in the U.S. We are going ahead with those plans because, you know, for us, anyway, we need the auto lines. regardless of where they are. So we are already going ahead with the capital because we need those lines no matter what. But then we are looking at the finer details of the ERA implementation plan. We are working with the Department of Treasury as well as all the stakeholders there. And basically there are some key details and clarifications that need to be finalized regarding domestic content, et cetera. Once all of those are clear to us, then we can tell you more precisely the financial impact of our actions.

Okay, very helpful. Thanks, Badri. And then one question on the battery side. You talked about the install, maybe issues there, the 118 minutes or so, and you're getting that down. Is that really purely a software and maybe modularity issue on the actual battery itself, or is there more to that?

Well, I mean, it's a complex system. And, you know, it's a mixture of both hardware and software. And basically, you know, first of all, to give you a big picture there, we introduced our batteries in the third quarter of 2020. We introduced batteries at that time. Our premise was it's an AC-coupled battery. It's an air-cooled battery. There is no liquid cooling. It's modular, 3.3 kilowatt hours added at a time. It is easy to use. And, you know, we plan to provide 24 by 7 support all in one system with solar plus storage. Where I think we needed to do better was installation experience of installers. The commissioning time. It's no secret. We have highlighted that in almost every call. The commissioning time was multiple hours before that. Now it's a lot better. It's a lot more stable. We have learned a lot. It's incredible. The amount of learning that that we got in the company. In addition to commissioning times, are there issues? Your question. Making the battery perform flawlessly through all types of grid transitions is by no means easy. We have learned that in places like Puerto Rico where the grid basically can have a very very deep slope, which is very high slope. Things can change drastically. The voltage and frequency can change. Yet, we need to make sure customer experience is right. And we have learned a lot. We made mistakes. We've learned from it from both our installer roundtables as well as customer calls. We have gotten better and better and better with every quarter. I think now we are in a great shape is what I would say. We just released software that will help in commissioning and a better experience on grid transition, like what I said. We are incredibly optimistic on storage. Our installers, when we meet with them on a weekly basis, they want to install more of Enphase batteries, and we need to help to improve their profitability. So I think that the improvements that we made will help a lot. In addition, we learned from one generation to another generation. Like how we are in our eighth generation of microinverters, we are going to be in our third generation of batteries pretty soon. There, we are going to go to a wired architecture. Today, our battery is based on a Zigbee wireless architecture We're going to go to a wired architecture that is similar to the automotive standard, which is the CAN bus. That will make communications quite robust. In addition, we are going to double the continuous and peak power, which means that it becomes... They don't need to buy more kilowatt hours for their air conditioner, for example. So... we'll be able to provide a lot more juice for the same kilowatt hour in terms of discharge power. So the combinations of all the things I said, I think we are in a fantastic shape. Our installers want to use us, and we are going to make steady progress throughout 2023. Okay, great.

Thanks, Madhuri. Thank you.

The next question is from Colin Rush with Oppenheimer. Please go ahead.

Thanks so much for the detail on the incremental functionality in the battery. I'm curious about the decision to add those features in. Is that coming from the field? Was that on the roadmap initially? And are those elements real drivers for incremental demand as you bring them forward in your view?

Yeah, I mean, they are coming both. Some were already planned Some are coming from the field. This is why we meet with our installers. They have a long list of requirements which we carefully review and we put into the features. We are already planning. I said about the third generation that will come in the first half of 2023. We are already working on the fourth generation, our Technology team, the CTO team, is already working on the fourth generation. That's got more feedback from the installers. Our product development cycle times are a little bit long, which is what I'm perennially working on. And so to answer your question, I mean, we are learning all the time from the field. Some things are just good to do that we have already planned prior, but a lot of things we learn from our installers.

That's super helpful. And then on the commercial rooftop market, you know, in terms of changing the approach, can you talk a little bit about the margin opportunity, you know, with the change in architecture and this approach versus what we had thought about before with the two models for microinverter and how we should think about that relative to corporate margins?

Yeah. I mean, our thought process when we talked about IQ8D before was, okay, we – we can get a 640-watt microinverter that addresses two panels. That means per panel, the microinverter will produce 320-watt AC. And yes, we have been a little bit delayed on that product. And when we did pilot testing a few months ago, our installers basically once again gave us feedback that the module roadmaps for small commercial is well beyond 500 watts right now. And if it is 500, you take 500 divided by 320. That's the DCAC ratio of 1.5. 1.5 is not ideal. We want to stay under 1.3. So for us, we thought about it hard. We said our installer feedback is critical. we need to change. We need to get a product with much higher AC power. Earlier, we were not that much advanced on GaN. Now, what we can do is to pack that 480 watt AC power into the same footprint for IQ9. So in IQ9, we plan to have that 480 watts of AC in the same footprint as IQ8. And how is that possible? It is possible because of innovative technology like GAN. So GAN stands for gallium nitride. Gallium nitride output transistors. Right now we use silicon transistors, 600 volt silicon transistors. These GaN transistors can basically, they have the thermal characteristics, can withstand high power. And so those will enable us to keep the footprint quite competitive and state-of-the-art. And then the additional benefits are the GaN allows us to operate the FETs at a higher frequency. Today we operate at 100 kilohertz. GAN allows it to operate a lot more up to one megahertz. We are planning to utilize one megahertz for IQ 10, but on IQ 9, we will probably be around 200 to 300 kilohertz. And then what happens is the transformer scales basically to one over the square root of the increase. So that means that the transformer can come down. The size of the transformer can come down. You know, the transformer is big. You've seen the round thing there in the top left of the microinverter. That's the transformer. So that footprint can come down. The volume can come down. The FETs can still be the same. And soon there will be an opportunity, although we are not planning to do in the DC stage yet, implement GAN in the DC stage, there is opportunity for us to implement again in the DC stage as well. So lots of optimization possible. Name of the game is to keep the footprint the same, not bloated. Size is important for us, and I think we can get the cost structure as well under control. And if we are able to pack in 480 watts AC punch into similar number of components, similar cost structure, then we directly get the cost benefit there, in terms of cost for what.

Okay, that's super helpful, Roger. Appreciate it.

Yeah.

Yeah, thank you.

I'll take it offline. Thanks, guys.

The next question is from Mark Strauss with J.P. Morgan. Please go ahead.

Yes, good afternoon. Thank you very much for taking our questions. I've got two questions. Maybe I'll just kind of roll them into one. The IQ8, I believe you mentioned that was 47% of shipments this quarter. I believe in 2Q that number was 37%. Just kind of what drove that, that seems like a relative kind of slowing in what I would have expected kind of progression over the coming quarters to be. And then the second part of that is kind of despite that relatively slowness in IQ8, Gross margins are still coming kind of ahead of expectations. So just a bit more color on those two metrics, please.

Yeah. If you see, you've got to look at it a little bit carefully. It's 37% of 3.3 million microinverters that we shipped in Q2. That's approximately one point something. Okay. in Q2, while now it is 47% of 4.3 million microinverters. So therefore, I would say the IQ8 microinverter volume has doubled from Q2 to Q3. What we have seen historically is the transition is complex. It can take over four to six quarters. That's what, I mean, around four to six quarters. This is what we told you before. We started Q1, was it 20, I think, or 19. Q2, 37. Q3, 47. We expect it to further climb in Q4. Our target is to get to 90% conversion in Q2. That's what our target is. You asked a question on gross margin. On gross margin, our product mix of IQE was higher, like what I told you, 47%. In addition, we do several initiatives on world-class cost. It's not that we are here only working on IQ seven to eight conversion. We are constantly looking at what are the opportunities for us to save money. It could be in potting price negotiation, It could be converting our bulkhead from a custom bulkhead to a standard bulkhead so we can eliminate cabling. It could be working on the cost of a heat spreader. It could be working on elimination of an IC, a small IC by integrating it into the ASIC. So we have a lot of cost reduction programs that are ongoing. at any point in time. And we are seeing some other benefits of that coupled with IQA.

Very helpful. I'll take the rest offline.

Thanks, Badri.

Thank you.

The next question is from Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Thanks for taking the questions. Maybe first one for you, Badri. Appreciate the color around the US manufacturing strategy here heading into 2023. Can you kind of speak to, I know you mentioned four to six lines and a number of units per line, but your megawatt capacity on the inverter product, the microinverter product has been going up steadily, you know, 320, 350, 390 is what you printed this quarter. But then, you know, you've got the commercial product that's going to be all the way up to 480. So as we kind of think about mixed implications for what the actual megawatt capacity or gigawatt capacity is going to be, can you kind of get a sense of You know, should we be thinking you're doing 130 watt micros on average out of the four to six lines, or are you going to be doing some commercial as well? So it'd be all the way up to 480. And then I guess consistent with, you know, on that same topic, the two to three contract manufacturers you're talking to in the U.S., What are the sort of early discussions around the credit? Is this going to be a credit you fully capture? Are you going to share some of the economics? What are some of the discussions you're having with those partners?

Yeah, I mean, the answer to your first question is quite simple. We believe the U.S. residential market as well as the Europe residential market will keep, you know, module requirements will keep going up. And we have the right products in the IQ8 family to take care of it. We have a product. The highest power family in the IQ8 family is IQ8H, and that is 384 watts AC. So we expect slowly our mix to move from IQ8 plus to IQ8H over the years. The emerging market, if you see India, if you see Australia, if you see Brazil, even pockets in France, etc., is there the module power is increasing disproportionally. And 550-watt panels sometimes are common there. So the 480-watt AC micro... will be able to address residential emerging markets for solar. Then I talked about small commercial. The same 480 watt micro with minor changes for three-phase cabling will be able to address the small commercial market for quite some time. Because there again, the panel power is climbing above 500 even if it goes to 600, this product will still have an outstanding DCAC ratio. So to answer your question, most of the volume will be closer to the 384 watts over time. There'll be, you know, a portion of it will be at 480. And this line, these lines I'm planning, and it's still early days, these lines I'm planning can produce product for everybody. Not just the U.S., could also produce product for other markets. Second question you asked, how are the financial discussions with the contract manufacturers? We are still in the early stage. We have signed a letter of intent with those. However, I think we still need a lot more clarifications from the US government on what kind of domestic content they need, and other rules, whether it's a direct pay or whether it's a tax credit. There are still many fine details that need to be ironed out. However, for us, the logic is we are anyway growing fast as a company. We have to build extra lines somewhere, and therefore these lines that I invest in they are not going to be wasted. They are not going to be extra. They will probably be required. You can think about it as I'm accelerating them by a few months. So stay tuned. As we know more, we will share a lot more details with you on the financial benefit.

Okay. Fair enough. Super helpful. If I could squeeze in a quick modeling one. I know this could be lumpy quarter to quarter, but if I look at the implied ASPs a lot, this was the first quarter in a while where it was down sequentially and by a decent amount versus the prior three quarters. Is there something in the mix here this quarter? How should we be thinking about that price trend into fourth year, especially after this three-year down?

Yeah, I mean, regarding pricing, the pricing remains stable. It must be mix-related, and I will have our team follow up with you after.

Okay, I'll take it offline. Thank you.

The next question is from Eric Stein with Craig Hallam. Please go ahead.

Yeah, hi. It's Aaron Spahalon for Eric. Thanks for taking the question. Thank you. Thanks. On the battery side, you kind of mentioned the China capacity coming on the first quarter. Can you just remind us what that gets you to and and then how you're thinking about capacity as we look forward. And then any thoughts on kind of U.S. as you think about that?

Yeah, I mean, the third generation battery is going to be released in the first half of 23. And for that battery, we are going to add an extra cell pack supplier from China. And in general, you should think about our battery capacity is going to be well north of 250 megawatt hours a quarter. That's what we are going to get to. Regarding U.S. manufacturing of batteries, we don't have any concrete plans at this point in time. We are looking at it, but we will share something when we are ready.

Understood, thanks. And maybe just one follow-up. You know, great growth in the EU. Can you just kind of talk a little bit about the competitive dynamics there with the growth you're seeing and then just, you touched on it a little bit, but maybe a little more on the investments that you're looking to make in those markets?

Yeah, so in Europe, we are very strong in Netherlands. We are continuing to win customers there. We are strong in France as well. We are starting to grow a lot significantly in Germany. We have had a healthy business in Belgium. Spain is also ramping for us. Spain and Portugal are ramping for us. We are starting to look at Poland, Austria. There we'll be starting to ramp a lot of our efforts there as well as Italy. That's the high-level view. what we realized from Germany is that sector coupling is very popular. So what does that mean? Why is it important? The natural gas crisis in Europe is causing people to consider full home electrification. When you want to electrify your home, you need everything to be connected. You need your mobility needs to be connected to your to your energy system, your heating equipment need to be connected. So sector coupling is basically the intersection of the renewable energy sector with the mobility sector and the heating sector. Therefore, any energy management solution that we provide needs to talk to these seamlessly. This is why we bought a home energy management software company called Greencom Networks. All they do is to efficiently network third-party EV chargers and heat pumps to our solar, meaning N-phase solar and storage. So that we can address, we can help in the full home electrification trend that is happening in Germany. So that's a big deal. It's a big deal, and it is accelerated due to the energy crisis. That's slowly spreading to the other regions as well. And I think eventually, although Europe is ahead, eventually it will come down. It will come to the US and other regions too. So that's big for us, and we are excited to have an engineering center in Germany now to cater to customers. We are also introducing, you know, as far as IQ8s are concerned, we are introducing IQ8s to all countries in Europe as well as Australia. We are introducing to Netherlands and France in Q4. And we will introduce to more countries in Europe by the first half of 23. As far as batteries are concerned, Today, Germany and Belgium are where we sell our batteries to. We are going to add Austria pretty soon. Austria, by the way, very interesting market. I think it is 800 megawatts of solar and with a very healthy attach rate, almost greater than 80%. So very interesting market. We'll be playing there pretty soon. I talked about Poland already. We are making plans So lots of things happening there. And because we started off from a small revenue base in Europe, we've been growing quite nicely. We doubled Europe revenue from 2020 to 2021. We are going to once again double the revenue from 2021 to 2022. And we expect very healthy, high double-digit growth from 2022 to 2023.

Great. Great. Thanks for all the call, Aaron, for taking the questions.

The next question is from Phil Shen with Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my questions. First one's on storage. I was wondering if you could talk through what your expectations for battery sales might be for next year now. how should we think about the growth trajectory of storage as we get through 2023? I know you haven't given official guidance, but was wondering if you might be able to just give a little bit of color on what the expectations might be now. Thanks.

Yeah, we usually do not guide for more than one quarter. We already told you the number for Q4, 120 to 135. We are doing the right things for the business. We, you know, based on our conversation with the installers They love using the product. We need to fix a few things, like what we talked about. We are going to be introducing our third generation battery pretty shortly. So we are incredibly optimistic on our storage volumes. We expect storage volumes to continuously improve through 2023. Europe is another good story as well. On storage, the volumes are low right now, but they are starting to ramp up and be meaningful. between the fixes that we did, the third generation coming out, Europe starting to ramp up heavily on batteries. I'm very, very optimistic on 2023.

Great. That's a great color. Thanks, Madhuri. As it relates to 2023 again, but just for the general micro business, I know there's not official guidance, but I was wondering if you could talk through, you know, how does a potential recession affect you know, maybe some potential for demand slowing and 23 for resi-solar in the U.S. How could that – how are you thinking about that? Are you seeing any initial signs of that at all? And, you know, I think you saw the 70% year-over-year growth in Europe this quarter. What kind of sequential growth can we see in Europe as we get through next year for the microinverter business? Thanks.

Yeah, I mean, you asked us do we see any slowdown. We don't. Our demand is very strong as we see it. It's, of course, too early to talk about Q1, but even Q1 bookings are right now quite healthy. So that's what we see today. There are a few factors that are in favor for us. The utility rates are continuing to climb. So that, you know, accelerates our business. The IRA, Inflation Reduction Act, and the ITC extensions for both our ITC, 30% ITC for solar and storage are fantastic. So those also provide a nice launch. And then for us, you know, this is not true in the U.S., but in Europe, The energy crisis in Europe is accelerating renewables big time. So these are the three things where we are seeing a lot of tailwinds from these three things, and our demand is strong.

Great. Thanks, Bashir.

The next question is from Steve Fleischman with Wolf Research. Please go ahead.

Yeah, hi. Good afternoon. Thanks. Badri, just in thinking about U.S. manufacturing, could you give us any color on what the cost difference might be in the U.S. and how much of the 11 cents that could offset in terms of just manufacturing costs here?

Yeah, I mean, it's too early to talk about it, Steve. But again, 11 cents per watt is a big number. If you do the economics, you see, let's say I ship an inverter with 384 watts of AC, 11 cents a watt means $43, right? And the manufacturing cost that, you know, of course, we have the total manufacturing cost, which is bill of materials plus value-added manufacturing. The bill of materials It will roughly stay the same regardless of the... There may be some small changes, but if domestic content is not required, the bill of materials will likely stay the same. So therefore, the variable here is value-added manufacturing and how efficient the contract manufacturers can set up the factories, what level of automation... They can have, how can we help in them achieving great levels of automation? That's the question. Those are the discussions we are having right now. But we see a very clear benefit at the end of the day, which is very meaningful. That's why we are going to go ahead and plan for this. But having said that, we do need clarification on a few things. points that I already said, the domestic content, the forms of credit, the way it will be given, etc. So we are going to iron out those details hopefully in the next three months and things will be a lot clearer. But for now, we are investing in it. Like what I said many times already, we are already, you know, our growth, we are growing sequentially quarter on quarter. So therefore, We need the additional capacity anyway, regardless of the location. So our investment will not be redundant or will not go away.

And just in terms of the U.S., the relative competitive position that you see, because I believe the string inverter credit is more like $0.06. Do you see, whatever the cost is, kind of a relative competitive position improvement in the U.S.?

Yeah, hi, this is Raghu. You know, really what it is is us from a price, if this year, I mean, I assume it's more like a pricing question than when you say competitive. Look, we'll always price to value, right, no matter what. And so what that means is that putting the cost issues aside, regardless of where we manufacture or if we manufacture in the U.S. and whatever offsets that we get from the production-based tax credit. The pricing, we are always going to do a price at value. And today, we are, you know, our competitive position is very strong with the current pricing where it is. And we'll never change that strategy of pricing that we are not changing market share by lowering prices. We are changing market share by adding value. And so that doesn't change. I hope I answered your question. I took a slightly different route.

No, that's helpful. Last very quick question. Just on you, Padra, you mentioned these positive drivers for demand, utility rates, IRA, Europe energy crisis. I guess the one negative might be higher financing costs. How much, if at all, are you hearing that as a concern from your for our network.

Like what I said, I mean, we haven't seen any slowdown in demand. Our backlog remains strong. Our Q1 bookings remain healthy. So, yeah, I can only react to the data points I see.

Just to add to what we said, bear in mind ITC has also gone up in the U.S. So what would have been 22% ITC next year is now back up to 30%. So that is an offset as well. That's right.

The next question is from Julian Dumoulin-Smith with Bank of America. Please go ahead.

Excellent. Hey, good afternoon, Bob, Gene, and team. Thank you. Congratulations again. So just on the cost side of this equation, right, I mean, I just want to make sure I heard you right on the U.S. manufacturing. I mean, How much of an incremental cost and or incremental need from U.S. content is it required? I'm just trying to understand the relative cost out of the ledger versus the 11 cents a watt that we're talking about. I get that you guys hold on to the 11 cents. I'm just trying to understand what the offsets would be, especially considering the fact that you still have a pretty good line of sight on U.S. growth and therefore being able to just serve U.S. demand from U.S. manufacturing and avoiding logistics at the same time. The net, net, net of the two of those, as best you understand it today. Obviously, considering IRNs, it's still pending.

Right. So, like what I said, maybe you did not hear what I said, is the production-based tax credit is 11 cents per AC watt. If we take a 384-watt microinverter, that is $43 of credit. Now, when we look at our microinverter, you have bill of materials, And then you have value-added manufacturing cost. And then you have overhead, which is warranty expenses and all of those. So if you see, all of those constitute the cost of the product. Now, the bill of materials, assuming there are no restrictions on domestic content, expect the bill of materials to be roughly staying the same. The value-added manufacturing cost is the one that's the variable cost depending on the country. And then the warranty expense and the logistics rate, et cetera, largely the same because now it is local and while the cost to ship raw materials to the U.S. may increase, but the cost to ship to customers will decrease. So that... is a wash. So really, if you consider those three components, we need to look at one portion of that which is value-added manufacturing. Now, our contract, it needs to be economical for our contract manufacturers as well. They also need to make, they also need to be profitable. It's not going to happen if they do not make any money. So therefore, we are working on finalizing You know, the agreements, we do have letters of intent which we think are reasonable constructs. And bottom line is with the constructs we have in mind, provided this IRA implementation is approved, I think, you know, the money to be made or the, you know, the credit that we can get would be significant and it will create a lot of jobs, which is really what we want.

I was just making sure I heard you right. It was a pretty bold and impressive statement. So excellent. And then just outside of that, obviously OPEX trends heading well here of late. Can you comment at all on that? Just, I mean, again, the sustainability of the trends that you're seeing of late and any comments on perspective as you continue to scale here, OPEX relative to rest?

OPEX, you know, we are growing so fast that it's impossible for OPEX, it's impossible for us to spend money. We have spent a lot of money, but that doesn't mean we are changing the model. Our model is 15% of sales. Sooner or later, it will settle down to that number. We will not compromise on any investment on microinverters, batteries, EV chargers, home energy management system, installer platform. All of them are very important for us. We will not compromise one bit on that.

Got it. All right, turn it up. Thank you, guys.

Thank you.

The next question is from Gus Richard with Northland. Please go ahead.

Yes, thanks for taking the question. Just wondering, you guys have been growing at 70%. Can you sustain that level of growth? And I'm not asking for a forecast. And if not, where do you see the limits of growth coming in? Is it your installer network? Is it availability of components? Could you just discuss that a little bit? It'd be helpful.

Right. When you start from a small base, of course, the growth is going to be high. And then when you build it to some respectable numbers after that, the question is, are we going to be able to sustain the growth? We think there are great drivers for sustaining the growth, which is the utility rates, even in Europe, for example, in Germany, are quite high. In the energy crisis, is accelerating renewables in Europe. So all of those are external drivers. They are tailwinds that are in our favor. So we think we can sustain good double-digit growth percentages in general. But we do need to maintain a focus on quality and customer experience. And many, many of the installers love the quality on microinverters. And our market share gain that we have is based upon our quality plus the customer service that we provide on microinverters. I talked about the, you know, some stumbling blocks on storage, and we are working on them, and we expect storage will be also providing a similar customer experience, enabling us to unleash that opportunity as well in Europe. So we're incredibly optimistic. Like what I said, we doubled from 2020 to 2021. We doubled again from 2021, or we will double again from 2021 to 2022. And 2022 to 2023, it may not be possible for us to double, but we will have very healthy double-digit, high double-digit growth percentage.

Got it. Thanks so much.

Thank you. The next question is from Joseph Osha with Guggenheim. Please go ahead.

Hello, hello. Two questions. First, Badri, you gave some very helpful sort of rates of increase for your different geographies. I'm wondering if you could just at a very high level give us a sense as to how the U.S. versus, you know, all of Europe versus everything else breaks down.

Yeah, we said in the prepared remarks, 71% of our sales came from North America. 29% came from the rest of the world.

Yeah, and I'm sorry to give you a hard time. I was kind of after how that 29% might break down.

Oh yeah, the 29% breakdown, most of it in Europe, you know, right now. Okay, thank you. Most of it is in Europe. If you ask which are the regions that are strong in Europe, they are Netherlands, France, Germany, and followed by Spain, Belgium, you know, Portugal.

Okay, no, thank you. I was just after the weighting of that 29%, and that answers the question. Thank you. And then I'm going to completely shift gears for the second question. Obviously, you know, wide band gap materials make great sense for that really high performance, you know, FET that you use in the switch. But I was interested to hear you say that you might, we might see some wide band gap stuff on the DC side as well. Can you give us a little more sense as to what you're thinking about there?

The same thing. The DC stages for GAN will also make the form factor very efficient. And the thermal is pretty efficient. So sometimes you can, today we have four FETs on the AC side. With GAN, you can do interesting things like make those four FETs two FETs, because we can combine two of them. GAN helps us to do a lot more things in the same footprint as we have today.

Sure, yeah, just that, yeah, and typically in these applications you see people using it in that application you just described, which is that high-performance bet on the switch. But I'm just curious on the DC side, you know, it's not, White is demanding, and it's an expensive thing to do. So I'm just wondering if you could talk a little bit about what you meant with that.

Yeah, if you look at the way the module power is increasing, one way that's happening is you're seeing the format of the cells increase from 156 millimeters to 180 to 210. And then they're moving to half-cut cells and sub-strings within the cells. So what that's driving is that the current out of the module is also going up, which means that we need to handle higher current on the input stage of our microinverters. So you want to make that stage as efficient as possible as well because you don't want to compromise the efficiency of the input stage. You're already doing a good, you know, we're going to move to GANFETs on the AC side, improve the efficiency on that side, but at the same time, we're going to make sure that we also improve the efficiency on the DC side as the module transitions. changes towards higher current. That's the other driver for driving towards using GaN on the DC side as well. So what that means overall is drive higher efficiency, driving higher efficiency has the benefits of obviously better yield, but more importantly, better reliability, better thermals. Better thermals means you can reduce the size of the part. GaN also obviously allows you to drive to higher frequency, which also shrinks all of the all of the components such as transformers, common mode chokes, inductors, et cetera. So all in all, it's a very positive trend when you move to GAN both on the DC side as well as the AC side.

Okay. Now, thanks. That point on the current is very helpful. Thank you.

The next question is from Kashi Harrison with Piper Sandler. Please go ahead.

Good afternoon, and thanks for taking the questions. So with respect to the line that you're adding in Romania, can you share any thoughts on how long you think it may take for that facility to be producing at peak capacity, maybe just using historical line additions as a reference? And then can you remind us if the COGS that you're going to be paying to flex is going to be in USD for that facility, or is it going to be in euros?

Yeah, we are going to start producing in Romania from Q123. Historically, it has taken us a very short time, one to two quarters to ramp to full capacity. We'll be able to do 750,000 microinverters a quarter. So by the first half, we should be by and large ramped up. And Mandy answered the question.

Yeah, the cost we pay flex is in USD.

Okay, helpful. Thank you. And then just one quick clarification from just the general discussion on the small commercial product. Badri, are you implying that the small commercial product is effectively IQ9 given the discussion on GAN or is it not IQ9?

Well, the small commercial product will start with what is called an IQ8P. The IQ8P product is IQ8 high power. That will be 480 watts AC, single panel, single micro. And we are utilizing all the work we did for the IQ8D, basically a larger form factor with silicon junction FETs. And then what we will do with IQ9 is to shrink that form factor to be identical to what we have today. yet achieve 480 watts of AC. That's the power of GAN.

Got it. Thank you.

The next question is from Pavel Malkinov with Raymond James. Please go ahead.

Thanks for taking that question. Two quick ones on M&A. You've done, I think, five deals in the past 12 months. What would your organic top-line growth rate be if you strip out the M&A?

It's hard to answer, but I'll give you some color. We started working on the installer digital platform. Our first acquisition was Solar Graph. We did that in Q1, January 26th of 2021. We did that. We then followed it... Actually, let me back up. SolarGraph basically provides software to installers to provide a proposal to the homeowners. It also has got connectivity to various financial partners, fintech partners. So that's the first acquisition we did. The second acquisition we did was we bought a company in India It's a company called BIN. And we bought a portion of that company which made or which created permit plan sets for installers in the U.S. and turned them around in quick time. So that's two. And then the The third one is basically 365 Pronto. 365 Pronto is a two-sided marketplace that brings service providers with customers, and the customer may be an installer wanting to do something like replacing a cellular modem at a homeowner's site, so he doesn't have the labor. He contracts the labor from a labor marketplace. That's 365 Pronto. The fourth one is Clipper Creek. That's more straightforward. We have already broken it out. And that's EV Chargers. And why we bought EV Chargers is because of why we made the Green Comm Acquisition tool. This is EVs are going to be ramping up. It takes a lot of power or energy to charge your electric vehicle. And EV will accelerate solar and storage even more. And the homeowners really need to be able to manage the EV they want. I mean, the way they want to. they should be able to say, I want to charge the EV through solar. I want to charge the EV at this particular time. So it needs deep interaction with the solar plus storage system. That's why we bought that company. The last one we bought was solar lead factory. And that is a gain for providing installers leads. Can we provide installers leads for an attractive price, and the name of the game is leads are so high quality that the probability of them converting to a final installation is a lot higher than competition. So that was the fifth acquisition, and then, yeah, sorry, the sixth one is the one I did recently, which is green comm networks in Europe, where, you know, once again, same concept. In order for full home electrification, renewable energy must be connected to mobility as well as heating. It's called sector coupling. Home energy management software is critical. Green Calm provides that software so that homeowners can see what they want through one app, one mobile app, not multiple sources. All of these together, we expect, for example, green comm to that home energy management system to accelerate the sales of our solar plus storage systems starting in Germany. Because now the installer has got a credible story. He can go to the homeowner and say that, look, I can connect solar 10-phase solar plus storage, and I can connect it with your heat pumps. I can connect it with your EV chargers. I can help you manage it from one app. So he's got a credible story. We expect that to drive demand. And so you can see even solar lead factory, where we help our installers with leads, is tightly coupled to our business. Same thing on solar graphs. That, again, is we have a large installer base, and they know that we do things with high quality, so they start using that as a service. That's our premise. That's why we bought it. And by offering installers a one-stop shop, having all of these services, it just becomes easy for them to not even think, just buy from us. Of course, the The flip side is we have to make them highest quality. It doesn't come for free. We have to work on it. We have to make it the highest quality, but our strong belief, if we do these right, the organic, meaning the core business, solar plus storage, will ramp even more. It's hard for me to break things out, and we cannot say this, you know, this installer purchased extra inverters because of this particular software. Hard to break out. But that's the rationale we have. And you're seeing some of the benefits you will start seeing, especially the Europe ramp. You'll start seeing some.

That's very helpful. And as you were saying now, each of those deals, it struck me how much more diversified your sales mix is versus two years ago. In that context, will you start breaking out revenue by product line versus just giving a micro-inverter in megawatts?

Well, I mean, we don't plan to right now, but when things get meaningful and big, Mandy will take a look at it. All right. Thank you. Thank you.

The next question is from Christine Cho with Barclays. Please go ahead.

Hi. Thank you for squeezing me in. On the battery side, I know you mentioned install times as kind of being an impediment to growth here on the deployment. But it also just looks like attach rates are down across the board in the US, not just for you, but for other batteries that are supposedly easy to install. And supply doesn't seem like it's an issue. So is it possible that pricing is at a place where it's negatively impacting demand and customers are just waiting for prices to come down? And kind of with that as a backdrop, how should we think about how battery prices will trend with your third-generation battery?

Yeah, I don't think it's a pricing issue. The demand remains strong. We have particular advantages. We do work with several thousandth of long tail installers. So we get direct feedback from them. They have limited time on their hands if they perceive storage as hard to do and not very profitable. They have to tilt their time towards solar where they know how to do it and they're profitable. So it's our job and the other companies too But that's where we need to improve. Enphase needs to improve. I'm not talking about others. Enphase needs to improve. We need to fix the installer experience. We need to make it easy to install. And we believe that pricing is not an issue. We think the storage ITC provides an enormous, enormous benefit. We also think that, you know, The power outages are becoming more common, and resilience is important for people. So demand is high. The labor is limited. We have to do a good job. Enphase has to do a good job in order for us to improve the volume significantly.

Okay. And the 130 megawatt hours that you guys did this quarter, is it possible to get a break of that across the U.S., Germany, and Belgium?

We don't usually break it out. Once again, we don't do that. But Mandy will take an action item to see if we will consider breaking out for the next year.

Okay. And then quickly, if I could just touch upon your euro exposure. I think in the prepared remarks, you said 70 bps on the currency deterioration. I'm not sure if I got that right. And I think in the past, you've potentially talked about evaluating hedges sometime in the future. What are your thoughts here, and especially as you continue to grow Europe? You've also said there's, I think, a partial offset on the cost side. I would assume that's mostly labor costs. Aren't your raw materials mostly denominated in USD? If we could just get a little color on what your mismatch in currency is.

Sure. First of all, most of our costs are in USD. Our exposure really is on the sales that are denominated in Euro. As I provided some color earlier, our FX exposure is still very limited, because most of our sales are denominated in USD. With that said, we are actually evaluating hedging program. We are watching the central bank's rate hike in both regions. When it makes sense, we would trigger the hedging against our Euro revenue.

That's what I will put. Bye.

This concludes our question and answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.