Enphase Energy, Inc.

Good day, everyone, and welcome to the Enphase Energy's first quarter 2023 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 your question, you may press star and then one on your touchtone phones. To withdraw your questions, you may press star and two. Please also note that today's event is being recorded. At this time, I'd like to turn the floor over to Karen Saget. Ma'am, please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter of 2023 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, Enphase issued a press release announcing the results for its first quarter, ended March 31st, 2023. 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, 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 Q1 2023 financial results. We had a decent quarter. We reported revenue of $726 million, shipped approximately 4.8 million microinverters and 102 megawatt hours of batteries, and generated free cash flow of $223.8 million. Approximately 65% of our Q1 microinverter shipments were IQ8. We exited Q1 at 46% gross margin, 14% operating expense, and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our net promoter score worldwide was 75% in Q1 compared to 71% Our North American NPS was 77% compared to 74 in Q4. Our average call wait time was 1.2 minutes compared to 1.6 minutes in Q4. We are focusing on root cause fixes of customer issues and improving our business processes rapidly to enhance customer experience. Let's talk about microinverter manufacturing. Our overall supply environment is quite stable. There are no major shortages right now. We began manufacturing at Flex Romania in the first quarter, bringing our quarterly capacity to approximately 6 million microinverters. Our European business is growing rapidly, and many customers have asked us for local manufacturing, and we will be able to do that going forward. Let's come to U.S. Manufacturing. As we discussed last quarter, the IRA Inflation Reduction Act will help bring back high-tech manufacturing to the US and stimulate economy through creation of new jobs. We are opening manufacturing lines with three different manufacturing partners, adding a capacity of 4.5 million microinverters per quarter, bringing our overall global capacity to 10 million microinverters per quarter, as we exit 2023 we expect to begin u.s manufacturing with with one partner in q2 and with the remaining two in q3 let's now cover the regions our u.s and international revenue mix for q1 was 65 and 35 percent respectively In the U.S., our revenue decreased 9% sequentially due to seasonality and macroeconomic conditions and increased 28% year on year. The sell-through of our microinverters in Q1 decreased 21% sequentially compared to Q4, worse than the typical seasonality of 15%. Our microinverter channel inventory at the end of Q1 was relatively normal. while the storage channel inventory was a little elevated. I'll go into details later in the call. In Europe, our revenue increased 25% sequentially and more than tripled year on year. Our Europe non-GAAP gross margin is quite healthy, over 45%. Another point to note is that the sell-through of our microinverters in Europe reached an all-time high in Q1. We are now shipping IQ microinverters into France, Netherlands, Spain, and Portugal. In addition to Germany and Belgium, we just recently started shipping IQ batteries to Netherlands, France, Austria, and Switzerland. Let me provide some brief comments on Latin America, Australia, and Brazil. In Latin America, our revenue decreased 2% quarter on quarter and increased more than 70% year on year. Our revenue in Australia increased 6% quarter on quarter, while our revenue in Brazil more than doubled. We are growing very rapidly in Brazil, and given the big market size, we are expanding the team and prioritizing new products. Let me provide some additional color on the US followed by Europe. We usually recognize revenue when we ship product to distributors and large installers. Most of our installers buy our products from distributors. It is therefore relevant for us to talk about the sell-through of our products from distributors to installers. Since we have a healthy market share in the U.S., our statistics are a meaningful representation of the business trends. As I said earlier on this call, our sell-through of microinverters in the U.S. was 21% lesser in Q1 compared to Q4. Our sell-through in California was only 9% lesser than Q4. There was some impact due to the weather in early Q1, but the NEM 2.0 rush in Q1 more than compensated for it. California installers took advantage of the NEM 2.0 rush and have built up a solar backlog for the next three to four months. We believe installers aren't expanding their crews to accelerate installation. They are laser-focused on their cash flow due to the high interest rate environment and are looking for clarity on the NEM 3.0 demand. Dell 2 of our batteries in California was 23% lesser in Q1 compared to Q4 as installers focused mainly on solar. We expect this trend to continue for the next three to four months. After that, we see NEM 3.0 as a net positive for California and expect strong demand to resume for solar plus storage. Let's cover the rest of the US. The sell-through of microinverters in non-California states was 25% lesser in Q1 compared to Q4. We observed that the sell-through was even lower in states with low utility rates, such as Texas, Florida, and Arizona. In these states, the economics of loan financing has worsened due to rising interest rates. The sell-through performance in the Northeast US was a little better. Coming to IQ batteries, the sell-through in non-California states was 28% lesser in Q1 compared to Q4. Let's briefly discuss the health of our US customer base and some trends in financing. Our Q1 data shows higher sell-through rates for long-tail installers compared to Tier 1 and 2 installers. Our installers, in general, are navigating three key challenges. First, the rapid increase in interest rates over last year. Second is switch from selling low APR with high dealer fees to selling market rate loans with low dealer fees. And third, the delayed payment from the loan originators, or as the industry calls it, reduction of M1 payments. Let's discuss about the second and third challenges. We see the move to high APR and low dealer fee loans as a positive for the industry. The demand for market rate loans remains strong. New capital providers who were not able to buy below market rate loans are now offering solar financing. Installers are adjusting their sales practices for a higher interest rate environment. We are also seeing new lease providers entering the market with focus on servicing the long tail. We think capital will be available for long tail installers regardless of the mix of loan and lease. On the reduced M1 payments, loan originators are providing less cash to installers at the time of contract signing and a greater percentage after installation. This creates a working capital challenge for the installers and is forcing them to become more efficient. As the installers adjust to this new reality, we expect the sell-through of microinverters and batteries to incrementally improve in Q2 compared to Q1. Q2 is seasonally stronger and should help the situation even more. Let's come to Europe. Our European business is doing very well. We expect healthy revenue growth in Q2 compared to Q1. Our business is growing much faster than the market. We plan to introduce IQ8 microinverters and IQ batteries into many more countries in Europe throughout the year. Our value proposition is our differentiated home energy management systems combined with high quality and great customer experience. We are integrating the products from our latest acquisition, Green Calm Networks, into our Enphase home energy system starting in Germany this quarter. This will help network third-party EV chargers and heat pumps with Enphase solar plus storage systems. The benefit to homeowners is the reduced electricity bills due to increased self-consumption in addition to having control via the Enphase app. Let's talk about new products. I say internally in the company that 2023 is the year of new products and it's coming in good time. We are getting ready to launch our third generation IQ battery in North America and Australia this quarter. In Australia, we will also launch the IQ8 microinverters. As I previously discussed, the IQ battery has a modularity of five kilowatt hours and delivers double the continuous and triple the peak power compared to our prior generation of batteries. The higher charging and discharging rate of a third generation battery will be uniquely beneficial for NEM 3.0 systems in California through its ability to generate revenue by exporting into the grid at the appropriate time. In addition, Our third generation battery is very easy to install and commission. We are currently piloting these third generation batteries in Australia and the U.S. with select installers and are very excited about the experience we are about to deliver to our customers. Next, let's talk about our latest new product for the residential segment in emerging markets. This product, the IQ8P microinverter, will deliver 480 watts of AC power, supporting panels up to 650 watts DC for Brazil, Mexico, Spain, India, and emerging markets. We are on track to release IQ8P into production in the second half of the year. The other variant of IQ8P microinverter with the new three-phase cabling system is well suited for small commercial solar installations ranging from 20 to 200 kilowatts, such as gas stations, schools, hospitals, churches, and small businesses. These microinverter systems offer the same grid compatibility, high quality, and rapid shutdown capability as our standard residential products. We expect to release this product into the U.S. small commercial solar market in the second half of 2023. Let's discuss EV chargers. We shipped over 8,600 chargers in Q1 compared to 7,600 chargers in Q4. We are now shipping Enphase branded EV chargers from Flex Mexico, helping us increase capacity and reduce costs. We are on track to introduce iQ smart EV chargers in Q2. These chargers will have Wi-Fi connectivity, enabling use cases like green charging, and allowing homeowners visibility into operation of their Enphase solar plus storage plus EV charger system through their app. Let's now discuss the installer platform. We released several updates to our SolarGraph design and proposal software, including basic NEM 3.0 functionality, battery design, document management, and other improvements as requested by installers. We have more than 1,000 installers using the software. NEM 3.0 incentivizes homeowners to use solar and battery systems for avoiding energy imports while compensating homeowners for exporting energy when the grid needs it. The updated SolarGraph platform offers a simplified experience for designing a NEM 3.0 system by optimizing panel placements, configuring battery sizing, leveraging its modularity, and enhancing system operations for self-consumption and energy export to deliver the best possible payback. We see that solar plus storage under NEM 3.0 can achieve a payback period between six and eight years depending on the utility. As we said before, The higher power of our third generation battery helps us to export more energy to the grid and maximize savings. Let me conclude. With the residential solar and storage markets growing rapidly in Europe, we are in a great position to significantly accelerate our business. The situation in the U.S. is a little different with NEM 3.0 in California and the macroeconomic challenges in the rest of the U.S. Our strategy doesn't change. We are focused on working closely with our installers to address their issues, making new products, and entering new markets and countries. The fundamentals are intact for our industry. 30% ITC for the next decade, the rising utility rates, the focus on climate change, and the desire for resilience are all going to push the need for solar plus storage more than ever before. With our differentiated products, high quality, An exceptional customer experience, we are in a strong position to capitalize on this trend. With that, I will turn the call over to Mandy for her review of our finances. Mandy.