Enphase Energy, Inc.

Good day and welcome to Enphase Energy's second 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 a question, you may press star then one on a touchtone phone. 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 Zach Friedman. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's second quarter 2023 results. On today's call are Badri Kothandaraman, 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 3rd, 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, 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, timing of new product introductions, and regulatory and tax 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 8-K, which can also be found in the investor relations section of our website. Now I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer.

Good afternoon, and thank you for joining us today to discuss our second quarter 2023 financial results. We reported quarterly revenue of $711.1 million, shipped approximately 5.2 million microinverters and 82.3 megawatt hours of battery, and generated free cash flow of $225.2 million. Approximately 78% of our Q2 micro-inverter shipments were IQE. We exited the second quarter 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 the financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 74% in Q2. compared to 75% in Q1. Our North American NPS was 77%, the same as Q1. Our average call wait time was 1.1 minutes compared to 1.2 minutes in Q1. We continued to focus on root cause fixes of customer issues and expanded our customer service and field service teams globally. Let's talk about microinverter manufacturing. Our overall supply environment remains quite stable, and there are no major shortages right now. Let's come to IRA. We expect the IRA to increase the overall solar demand in the U.S. and accelerate domestic production. We are pleased to be part of creating new jobs in the U.S. and advancing the country's clean energy economy. We shipped 50,000 microinverters to customers in Q2 from two of our contract manufacturers, Flex in South Carolina and Foxconn in Wisconsin. We are on track to begin with the third contract manufacturer in Q3. We expect to ship approximately 600,000 microinverters to customers in Q3 from our U.S. manufacturing facilities. Let's now cover the regions. Our U.S. and international revenue mix for Q2 was 59% and 41% respectively. Q2 was a record quarter for our international revenue, primarily due to the growth in Europe and Australia. In the US, our revenue decreased 12% sequentially and decreased 1% year-on-year. The overall sell-through of our microinverters in the US was up 2% in Q2 compared to Q1. In Europe, our revenue increased 25% sequentially and more than tripled year on year at healthy gross margin. Our sell-through of microinverters in Europe was 13% higher in Q2 compared to Q1. We are now shipping IQ8 microinverters into Germany, France, Netherlands, Spain, Portugal, and Poland. In addition, we are shipping IQ batteries into Germany, Belgium, France, Netherlands, Spain, Portugal, Austria, and Switzerland. I'll now provide some brief commentary on Australia, Latin America, and Brazil. Our revenue in Australia more than doubled year on year. We started shipping our new IQ Battery 5P to Australia during the second quarter. In Latin America, we introduced the new battery in Q2, while in Brazil, we introduced our Solar Graph software platform which will help installers with design and proposal for their residential customers. Let me provide some additional color on the US followed by Europe. We recognize revenue when we ship product to distributors and large installers. It is therefore relevant to talk about the sell-through trends of our products from our distributors to installers. Since we have a healthy share in the US, our statistics are a meaningful representation of business trends. The overall U.S. market is experiencing a broad-based slowdown due to high interest rates. As I said earlier, our Q2 sell-through of microinverters in the U.S. was only up 2% compared to Q1 and only up 2% year-on-year. The second quarter is typically stronger than the first quarter But that did not happen this year due to the market environment. Let's now discuss the market trends we are seeing in the U.S. split by California and rest of the U.S. For non-California states, the Q2 sell-through of microinverters was 6% lesser as compared to Q1 and 11% lesser year on year. The sell-through was disproportionately worse in Texas, Florida, and Arizona. In these states, the economics of loan financing has worsened due to the combination of rising interest rates and lower utility rates. In California, the Q2 sell-through of microinverters was 20% higher compared to Q1 and 34% higher year-on-year. The higher sell-through was driven by high backlog of NEM2 installation, which is expected to last through this summer. We expect NEM3.0 will have a greater impact on results beyond Q3, and I will speak more on what we are seeing there later. I'd like to provide some more context about our revenue guidance for Q3. Our microinverter sell-through in the US peaked in the fourth quarter of 2022. The sell-through in the first half of 2023 in both Q1 and Q2 was approximately 20% below the fourth quarter due to the high interest rate environment in the US. Our sell-in to the channel was only 10% down in the first half of 2023 relative to the fourth quarter. We were expecting a seasonally up Q2-23, but that didn't materialize. This has increased the inventory in the channel. Plus, we are assuming the same level of uncertainty continues going forward. Therefore, we are taking aggressive and prudent actions in the U.S. to manage down the channel inventory. And this is reflected in in our light third quarter guide. Let me say a few words about market share. We see stable high market share today for microinverters based on both internal and third-party data. Competition is not new for us, and we have always relied on our differentiated technology with distributed architecture, product quality, and customer service to WinShare, and we expect to continue doing so. We have many tools at our disposal for installers, and our partnerships go even deeper during the downturn. For storage, we have shipped approximately one gigawatt hour of battery systems cumulatively by the end of the second quarter. We continue to manage our storage channel inventory in Q2 and expect further improvement in Q3. As we introduced our third generation IQ battery 5P to the US market in Q2, we reduced pricing for our second generation battery. We also expanded the warranty for both batteries to 15 years. We see the new price point and warranty for both batteries as well as strong early customer adoption of the new battery driving increased sell-in and sell-through during Q3. We believe there will be a bigger inflection for Q4 and beyond as California battery attach rates increase with NEM 3.0. Before moving to Europe, I'd like to speak a little bit about NEM 3.0. Early anecdotes on NEM 3.0 activity from our installers are encouraging. Since the crossover date in April, We have seen an increasing rate of NEM3.0 California proposal activity with healthy storage attach rates. We offer a comprehensive NEM3 solution, which includes a smart battery, power control system to avoid main panel upgrades, and energy management system that maximizes ROI for homeowners. The smart battery can do both backup as well as utility rate arbitrage. Grid-tied batteries require less labor and fewer balance of system components, making them significantly easier and faster to install. Our solar graph design and proposal tool can model the complex interactions between solar, batteries, consumption, and tariffs, and provide a simple proposal. Our financial analysis shows that for a cash system, homeowners can expect a bill offset between 70% and 90%, and payback between five and seven years. We think installers can effectively sell these economics to consumers. Let's now cover Europe. Our European business remains strong. Q3 is typically down due to summer vacation, but our year-on-year growth trend is very robust. We plan to introduce IQ8 microinverters and batteries into more countries in Europe. such as Sweden, Denmark, Greece, UK, and Italy later this year. We saw strong broad-based growth across Europe in Q2. Netherlands and France continue to be very strong for us. We are starting to gain real traction in Germany in both residential solar and batteries. The residential solar market in Germany, the biggest in Europe, is roughly... 3 gigawatts, and the attach rates for batteries is approximately 80%. We saw strong quarterly sequential growth in installer count, sell-through, and activations of both solar and batteries in Germany during Q2. During Q2, we also launched our IQ router family of devices, which is part of our home energy management system. in Germany and Austria to enable the integration of select third-party EV chargers and heat pumps into Enphase solar and battery systems. There is a great push towards whole-home electrification in Europe, and countries like Germany are leading the way in adopting renewable technologies to support heat pumps, EVs, and other home loads. Self-consumption is the norm, as consumers want energy independence. As we think about our competitive positioning in Europe, we see increasingly complex power markets and home energy management needs playing right into our strengths. Our complete home energy management system solution delivers use cases like self-consumption and green charging, along with newer software features which we plan to release this year, are key differentiators in addition to our quality and service That will help strengthen our market position. Let's cover more new products. We launched our third generation IQ battery 5P in Australia, US, and Puerto Rico in Q2, with plans to launch in Europe by the end of the year. As I previously discussed, the battery has a modularity of 5 kilowatt hour and delivers double the continuous power and triple the peak power for the same kilowatt hour compared to our prior generation of batteries. The higher charging and discharging rate of our 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 appropriate time. In addition, our third generation battery is easy to install and commission with the targeted sub-30 minutes commissioning times. We are excited about the positive feedback we have received from our Australian and U.S. customers. We have now certified over 3,500 installers worldwide to install our IQ batteries. Let's now 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 watt DC for Brazil, Mexico, India, Spain, and other emerging markets. We are on track to release this IQ8P microinverter variant into production later this year. The other variant of the IQ8P microinverter with the new three-phase cabling system is well suited for small commercial solar installation ranging from 20 to 200 kilowatts. These microinverter systems offer the same grid compatibility, high quality, rapid shutdown capability as our standard residential products. We expect to release this product into the US small commercial solar market later this year. In general, we see the global commercial opportunity as greater than 11 gigawatts. We are extremely bullish about this small commercial solar market where we believe we can add tremendous value to business owners and installers in Europe and U.S. with our high-quality rapid shutdown capability and microgrid forming capability of our microinverter systems. Let's discuss our U.S. EV chargers. We shipped over 6,600 EV chargers in Q2 compared to 8,600 in Q1. We expect to introduce IQ smart EV chargers in Q3. These smart chargers will have Wi-Fi connectivity, enabling use cases like green charging and allowing homeowners full visibility into operation of their Enphase solar plus battery plus EV charger system through the app. Let's now discuss the installer platform. We released updates to our SolarGraph design and proposal software platform in Q2, including NEM 3.0 functionality. The updated SolarGraph platform offers a simplified experience for designing a NEM 3.0 system by optimizing panel placements for both grid-tied as well as grid-agnostic systems, configuring battery sizing by leveraging modularity, and enhancing system operations for time-of-use management and energy export to deliver the best possible electricity bill offset and payback. Let me conclude. We are managing through a correction in the U.S. solar market after three years of phenomenal growth, a period in which the residential solar market doubled and Enphase sales tripled. Even so, Residential solar has only achieved 4% to 5% penetration in the U.S. We believe there are several positive long-term drivers which will accelerate adoption, such as the 30% ITC tax credit, the rising utility rates, increased grid instability, climate change, and increasing EV adoption. There is no doubt that these will drive meaningful solar plus battery growth over the long term. Our strategy is clear and unchanged. We manage for the long term. We will make best-in-class home energy systems with a laser focus on innovation, quality, and customer experience. We are doubling down on our relationships with customers. We are driving down installation times and investing in our service teams. We are investing even more on new product innovations. We are expanding our IQ8 microinverters and battery reach globally, accelerating our business in Europe, introducing IQ8P microinverters for the small commercial solar and emerging residential markets worldwide, and making continuous enhancements to our installer platform. Before I turn the call over to Mandy, I'm happy to announce that our board of directors has authorized a new share repurchase program. Given our confidence in Enphase's future growth, free cash flow generation, and the value we see in our stock, our board has authorized an additional $1 billion for share repurchases. With that, I will turn the call over to Mandy for her review of our finances. Mandy?