Enphase Energy, Inc.

Good afternoon and welcome to the Enphase Energy Fourth Quarter 2023 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 2. We ask that you please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. 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 fourth quarter. On today's call are Batri Kothandaraman, 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 fourth quarter ended December 31, 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, market trends, the capabilities of our technology and products, and the benefits to homeowners and installers, manufacturing, customer service, and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions, and regulatory and tax matters. These forward-looking statements involve significant risks and uncertainties in 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, followed 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, which can also be found in the investor relations section of our website. Now I'd like to introduce Badri Kuthandaraman, our president and chief executive officer. Badri.

Good afternoon, and thanks for joining us today to discuss our fourth quarter 2023 financial results. We reported quarterly revenue of $302.6 million, shipped approximately 1.6 million microinverters and 80.7 megawatt hours of batteries, and generated free cash flow of $15.4 million. On our last earnings call, we said we would reduce channel inventory by approximately $150 million. We achieved a reduction of $147 million in Q4. For the fourth quarter, we delivered 50% gross margin, 29% operating expenses, and 22% operating income, all as a percentage of revenue on a non-GAAP basis and including the IRA benefit. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 77% in Q4, the same as Q3. Our average call wait time was one minute compared to 1.3 minutes in Q3. We have made good progress on solving customer issues by focusing on both automation as well as expanding our field service teams globally. Let's talk about operations. The overall supply environment for microinverters and batteries is quite stable. Let's come to microinverters. We shipped approximately 913,000 microinverters to customers in Q4 from our contract manufacturing facilities in the U.S. We announced in December that we are seizing operations at our contract manufacturing locations in Romania and Wisconsin. We will manufacture microinverters in the US with our two existing partners in South Carolina and Texas. The equipment currently located in Romania and Wisconsin will be redeployed for use at other facilities. Once the restructuring actions are complete in the first half of the year, We expect to have a global capacity of approximately 7.25 million microinverters per quarter, of which 5 million will be in the US. We expect to ship approximately 500,000 microinverters to customers from our US manufacturing facilities in Q1. We expect that our shipments from US facilities will be lower in the first half of the year as we reduce both factory as well as channel inventory. We anticipate a higher level of shipments in the second half of the year. For IQ batteries, we have two cell pack suppliers, both in China, which have sufficient manufacturing capacity to support our ramp in 2024. In addition, we will have the capability to manufacture IQ batteries in the US in the third quarter of 2024. Let's now cover the regions. Our U.S. and international revenue mix for Q4 was 75% and 25% respectively. For more visibility into our business, we are providing you regional breakdowns and sell-through dollar metrics by region until the channel is healthy. In the U.S., our revenue decreased 35% sequentially as we undershipped to the end customer demand. the overall sell-through of our microinverters and batteries in the US was down 9% in Q4 compared to Q3. Let's discuss market trends we are seeing in the US, split by non-California states and California. For non-California states, our overall sell-through was only down 1% in Q4 compared to Q3. The sell-through of our microinverters was flat and the sell-through of our batteries was down 8% in Q4. In California, our overall sell-through was down by 7% in Q4 compared to Q3. The sell-through of our microinverters was down 27% in Q4, primarily due to the NEM 3.0 transition. However, the sell-through of our batteries increased by 58% in Q4 due to the high attach rate of NEM 3.0 systems as expected. As we discussed on our last earnings call, it will take a few quarters for our installers to fully transition to NEM 3.0 and normalize sales. I'll provide more statistics on NEM 3.0 later in the call. In Europe, our revenue decreased 70% sequentially as we undershipped to the end customer demand. The overall sell-through of our microinverters and batteries in Europe was down 20% in Q4 compared to Q3. The sell-through of our microinverters was down 23%, and sell-through of batteries was down 2% in Q4 compared to Q3. I'll provide some color on our key markets in Europe, Netherlands, France, and Germany. In Netherlands, our overall sell-through in Q4 was down 37% compared to Q3. Customers are fearing an export penalty for solar. and there is confusion about the ending of net metering. We kicked off this new year with the Solar Next event in Netherlands where we hosted 800 plus installers across the country promoting a comprehensive solution with solar plus batteries and energy management software that will unlock the full potential of the Dutch energy market. We believe solar plus batteries are going to become the norm as dynamic tariffs and grid services become more prevalent. We are already seeing a steady ramp in batteries in the region and expect the trend to accelerate in 2024. In France, our overall sell through in Q4 was only down 1% compared to Q3. We see a lot of potential for this market to grow and evolve into a solar plus battery market as utility rates have moved higher and are expected to increase even more in 2024. In Germany, our overall sell-through in Q4 was down 32% compared to Q3. However, we saw sequential growth in activation for both solar and batteries as we continue to gain traction in the region. We are introducing our products into more countries in Europe. In the last few months, we have entered UK, Sweden, Denmark, Greece, Switzerland, Austria, Italy, and Belgium markets with our IQ8 microinverters and IQ batteries. In Australia, we are seeing growth for our Enphase energy systems powered by IQ8 microinverters and IQ battery 5P, our latest third-generation battery, which we introduced in June of 2023. In Brazil, our sell-through is stabilizing nicely as we focus on building the installer base. In India, we are starting to ship our IQ8HC and IQ8P microinverters to support high-power panels. In Mexico, we just recently started shipping IQ8P microinverters for residential applications. As a reminder, IQ8P is our highest-powered microinverter at 480 watts AC for both residential and commercial applications. Let me say a few words about our U.S. market share. We see stable share for our microinverters and batteries based on both internal as well as third-party data. We have a large and diverse customer base. Our value proposition is to provide installers the easiest installation process with high-quality and best-in-class service. We also have tools like SolarGraph, design proposal and permitting software, and lead generation through solar lead factory at our disposal to help our installers. As a result, our partnerships go even deeper during the downturn. Let's cover some NEM 3.0 statistics in California. Third-party data shows that the battery attach rate for NEM 3.0 systems is over 80%. Based on our system activations in January last month, approximately Half of our solar installations in California were NEM 3.0. Of our NEM 3.0 solar installations, about half of them use N-phase batteries. Our revenue per NEM 3.0 system is approximately 1.5 times our average NEM 2.0 system. The transition to NEM 3.0 has been a little slower than what we anticipated. Installers are still installing NEM 2.0 systems, and this has caused a delay for some of them to sell NEM 3.0 systems. The ones who started are finding the sales process a little more difficult given the complexity of the tariff structure, the added cost of batteries up front, and high interest rates. One particular challenge we hear is their lack of confidence in the payback of the systems they are selling. This is where SolarGraph software, our design and proposal software with NEM 3.0 support is critical because of its advanced modeling capabilities. In addition, installers are still coming up the learning curve on installing batteries. We are addressing this by making a lot of products improvement for ease of installation, commissioning, serviceability, and continue to offer in-person trainings and webinars on SolarGraph software. Let's now come to our Q1 guidance. We are guiding revenue in the range of $260 to $300 million. We expect the sell-through of our products to be seasonally down in Q1. We plan to undership to the end market demand for our products. by approximately $130 million in Q1. We are forecasting to undership in Q2 as well, although at a much reduced level, and expect the channel to be normalized by the end of Q2. Let's talk about new products, starting with IQ batteries. Our sell-through for batteries has been increasing steadily over the last few quarters. Our third generation battery delivers the best power specs and commissioning times of any Enphase battery today at a 15 year industry leading warranty. The battery adoption rates are on the rise globally and we are well positioned to grow our battery sales in 2024. Also, we expect our margins on batteries to get better throughout 2024. There are three factors in play here. Cell pack costs, which are coming down, Micro-inverter costs which are coming down for us due to U.S. manufacturing and other costs, product costs coming down due to improved architecture on our fourth generation batteries causing a lower bill of material. We are working on entering more countries in Europe and Asia with our third generation battery. We expect to introduce our new three-phase battery with backup. for Germany during the year. We plan to pilot our fourth generation battery later in the year. This battery will have a great cost structure and elegant form factor due to the integrated battery management and power conversion architecture. As previously discussed, we have entered many new markets with IQ8 family of microinverters and are now in 21 countries. We plan to enter many more new countries in Europe and Asia throughout 2024 with our microinverters. And we plan to increase our served available market by introducing social housing and balcony solar solutions to European countries during the year. Let's also talk about our latest microinverter for the residential segment. I already mentioned IQ8P, which delivers for 80 watts of AC power supporting panels up to 650 watts DC. We are currently shipping that product into Brazil, India, South Africa, Mexico, and Vietnam. We are on track to ship into France and Spain, followed by emerging markets in 2024. The other variant of the IQ8P microinverter with the new three-phase cabling system is well-suited for small commercial solar installations ranging from 20 to 200 kilowatts. We launched this product in North America in December and are seeing strong early adoption. We are very excited about this product and look forward to manufacturing all the flavors of IQ8P microinverters at our U.S. facilities shortly, further reducing our cost structure. Let's discuss EV charging. We shipped over 3,700 chargers in Q4 compared to over 3,500 chargers in Q3. We launched our IQ smart TV chargers in U.S. and Canada in Q4. The Wi-Fi-enabled charger is now integrated to the Enphase energy system. This enables use cases such as self-consumption and green charging and allows homeowners complete visibility into the operation of their system through the app. We are developing IQ smart EV chargers for many countries in Europe as well and expect to introduce them during the year. The team is also working on bidirectional EV charger, which will unlock use cases such as V2G and V2H as part of the Enphase energy system. The charger will have GAN-based bidirectional inverters, which will interface with EVs which have high voltages, high DC voltages. I've so far discussed our hardware products. Let's cover our energy management software. The importance of this software to deliver a superior customer experience cannot be overstated. The Enphase energy system is becoming more sophisticated with the addition of solar, batteries, EV chargers, heat pumps, et cetera. In addition, the utility tariffs, which were once fixed rates, are now becoming increasingly complex. with time of use rates, NEM 3.0, demand charges, dynamic tariffs, and our software is evolving to manage this complexity by leveraging artificial intelligence and machine learning for forecasting and optimization. We see this as an area of differentiation for us and are developing core IP towards that objective. We expect to release this software beginning in Q2, adding several features throughout the year. Let's now discuss our installer platform. We released new features in SolarGraph during Q4. We introduced electrical design and single line diagram features while continuing to offer NEM 3.0 functionality for solar and battery systems in California. The software platform is now available to installers in the US, Brazil, Germany, and Austria, and we expect to release it to more countries in the coming quarters. Let me conclude. We have been managing through a period of slowdown in demand. We think Q1 could be the bottom quarter. Europe is already showing early signs of recovery, and we expect the non-California states to bounce back quickly. California is the exception, as NEM 3.0 is having some hiccups in the near term. However, we remain very bullish about NEM 3.0 in the long term. The payback is very attractive for solar plus storage. The utility rates are going up steeply on an annual basis, and the sales teams are learning fast. We see that the demand is going to eventually bounce back up in California as well. I'll wrap up outlining our approach during these times. We are laser focused on ease of doing business on both high quality and great customer service. We are doubling down on operational excellence, correcting the channel and factory inventory concentrating on sell-through and installer count, reducing our expenses and product costs, and maintaining healthy gross margins. We are getting many new products out and diversifying our portfolio rapidly. We are expanding worldwide with full systems, comprising of IQ8 microinverters, IQ batteries, EV chargers, and energy management software. We are introducing products for the small commercial solar markets worldwide, and making continuous enhancements to our installer platform. In addition, we are innovating on GAN-based IQ9 and 10 microinverters along with bidirectional EV chargers, our fourth and fifth generation IQ batteries, and AI-based energy management software to position us well for the long term. With that, I will turn the call over to Mandy for her review of her financial results. Mandy.