Enphase Energy, Inc.

Good day and welcome to the Enphase Energy's second quarter 2024 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 remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note that 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 2024 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Raghu Gallore, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its second quarter, ended June 3, 2024. 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, our operations, including manufacturing, customer service, and supply and demand, anticipated growth and existing and new markets, the 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 8K, 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.

Badri. Good afternoon, and thanks for joining us today to discuss our second quarter We reported quarterly revenue of $303.5 million, shipped approximately 1.4 million microinverters and 120 megawatt hours of batteries, and generated free cash flow of $117.4 million. The end market demand for our products was approximately $396 million in Q2. and we reduced our channel inventory by approximately $92 million. Our overall channel inventory returned to normal levels as we exited Q2. For the second quarter, we delivered 47% gross margin, 27% operating expenses, and 20% operating income, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefits. Mandy will go into our financials later in the call. Let's discuss how we are servicing customers. Our worldwide NPS was 79% in Q2, up from 78% in Q1. Our average call wait time was 2.5 minutes in Q2, compared to 1.9 minutes in Q1. We have several AI and machine learning initiatives drive automation and further reduce wait times. Let's talk about operations. Our global capacity is around 7.25 million microinverters per quarter. Five million units of those are in the U.S. In Q2, we shipped approximately 574,000 microinverters from our U.S. contract manufacturing facilities that we booked For 45x production tax credits, we expect to ship approximately 1.1 million microinverters from our U.S. facilities in Q3. Our U.S.-made IQ8 microinverters can help lease, PPA, and commercial asset owners qualify for the 10% domestic content ITC error. I'll discuss more on this later in the call. For batteries, our self-packed suppliers in China have sufficient capacity to support our ramp-up in 2024. We also plan to manufacture batteries in the U.S. starting in Q4 with power conversion, battery management, and enclosures made domestically while using cell packs from China. Let's cover the regions. Our U.S. and international revenue mix for Q2 was 65% and 35% respectively. For more visibility into our business, we are providing regional breakdown and sell-through dollar metrics for Q2. With our channel normalized, we will not be providing detailed sell-through statistics going forward. In the U.S., our revenue increased 32% compared to Q1. The overall sell-through of our products in the U.S. was up 8% in Q2, compared to Q1. Let's discuss the market trends in the US, split by non-California states and California. For non-California states, our overall sell-through was up 7% in Q2 compared to Q1. The sell-through for microinverters was up 6%, and the sell-through for batteries was up 10%. In California, our overall sell-through was up 7% in Q2 compared to Q1, indicating that our California business has stabilized. The sell-through of our microinverters was flat, and the sell-through of our batteries was up 14% in Q2 due to the high NEM 3.0 battery attach rates. I'll provide more statistics on NEM 3 later in the call. In Europe, our revenue was flat in Q2 compared to Q1. The overall sell-through of our products in Europe was up 3% in Q2 compared to Q1. The sell-through of our micro-inverters was flat, and the sell-through of our batteries was up 18% in Q2. I'll provide color on some key markets in Europe, the Netherlands, France, and Germany. In the Netherlands, our overall sell-through was down 15% in Q2 compared to Q1. The country's solar demand continues to be challenged by regulatory uncertainty. However, we are beginning to see battery demand pick up. This is a trend we expect to continue, especially as dynamic electricity rates become more prevalent in Netherlands. We launched our IQ energy management software in Netherlands during Q2. That will allow our installer to offer an end-phase system that can deliver healthy payback even without NEM. The modularity of our batteries allows homeowners to start either with a 3.5 or a 5 kilowatt-hour battery, along with their solar systems, making the economics work well. In France, the overall fill-through in Q2 was flat compared to Q1. We recently launched our third-generation battery in France and expect that solar plus storage system will become increasingly important for this market. as the spread between retail electricity rates and feed-in tariffs widen. We expect to introduce IQ EV chargers and IQ energy management software in France later in the year. In Germany, our overall sell-through in Q2 was up 7% compared to Q1, building on the growth we reported in the previous earnings call. In June, at Intersolar Munich, we unveiled some exciting products. our three-phase battery backup solution for Germany, Austria, and Switzerland. That will increase our served available market. In addition, we showcased our IQ balcony solar kit, which will also increase our served available market in Germany by approximately 400 megawatts a year. We believe Enphase microinverters are ideal solutions for these small systems, and we plan to roll out the balcony solution throughout Europe in the coming quarters. A general comment about Europe. We are still under-penetrated in markets like the UK, Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden, and more. Each country has its own challenges and opportunities. But homeowners increasingly seek safety, high quality, savings, and an all-in-one app experience from their home energy system, which aligns well with our strengths. We plan to introduce our entire product portfolio, IQ microinverters, batteries, IQ EV chargers, IQ energy management software, and the SolarGraph installer platform across more European countries and scale our sales, and support accordingly. Let's come to Asia. We are making incremental progress in Asia. Our revenue in India, although small, has doubled from a year ago with introduction of IQ8 family of microinverters. We are gaining solid traction in Thailand and Philippines where quality and safety are highly valued. In Brazil, we have a good team in place We work with approximately 600 long-tail installers through the help of some good distribution partners. We are currently shipping our 480-watt IQ8P microinverters into these emerging residential markets to support newer high-power panels. In Australia, there is interest in our Enphase energy system powered by IQ microinverters and the third-generation battery. We introduced this product approximately a year ago. Later this year, we will be introducing more products into Australia, including the IQ8X microinverters for higher DC input voltage panels and grid-type batteries. Let me come to M3 and provide some statistics there. As I said before, the end customer demand in California for us has stabilized in the second quarter. As of last week, 60% of our California installations were NEM 3.0. These systems have a high battery attach rate, over 90%, compared to NEM 2.0 systems which have an attach rate of 15%. Our data also shows that half of our NEM 3.0 systems are using Enphase batteries consistent with what I have reported in the last few earnings calls. Taking this data into account, our average revenue per NEM 3.0 system is approximately 1.5 times the average NEM 2.0 system. We believe this will contribute to stabilizing our California revenue in the back half of the year. Let me say a few words about market shares. In the U.S., our microinverters and batteries have stable market share according to both internal and third-party data. As batteries become more common in California, there is some interest in centralized inverter solutions. Our success continues to be driven by our unique AC coupled architecture, which offers significant advantages over legacy string inverter systems in terms of performance, reliability, and safety. We strongly believe in this value proposition. Our system will become even easier and faster to install for backup applications with further improvements we are making to our balancer system. They include our IQ meter caller, our fourth generation 10 kilowatt hour battery, and the enhanced IQ combiner, which are all expected to be available in early 2025. Additionally, we believe our AI-based is essential for helping homeowners maximize savings with a complex tariff structure like NEM3. Let's come to our Q3 guidance. We are guiding revenue in the range of $370 to $410 million. We expect to ship between 160 and 180 megawatt hours of IQ batteries. We anticipate incremental improvement in our U.S. business and a seasonal slowdown in Europe. We are over 85% booked to the midpoint of our overall revenue guidance. This is the healthiest backlog position we have had in the last year. Let's talk about new products, starting with IQ batteries. Our third-generation IQ batteries has been well-received and we have almost converted to the third-generation battery right now. It offers an industry-leading 15-year warranty, differentiated quality, serviceability, modularity, and power capability. We have expanded the IQ battery 5P, our third-generation battery, into more countries in North America and Europe. We recently started shipping to customers in Canada, Mexico, France, Netherlands, and Luxembourg. We plan to pilot our fourth generation battery in the U.S. later in the year and begin production in early 2025. This new battery will feature a better cost structure and a smaller form factor thanks to its integrated battery management and power conversion architecture. Additionally, the meter collar and the enhanced IQ combiner will be introduced along with the fourth generation battery to reduce our balancer system costs. As previously mentioned, we have expanded into many new markets with the IQE family of microinverters and are now present in 43 countries. We plan to enter many more new countries by the end of the year. We aim to further increase our served available market by simplifying installations of small solar systems and social housing and ruling out balcony solar solutions to more European countries, starting with Germany. The other variant of IQ8P microinverter with a new three-phase cabling system is well suited for small commercial solar installation ranging from 20 to 200 kilowatts. We launched this product in North America in December last year and have installed over 200 sites with an average of 45 kilowatts of solar per site. The feedback of this product has been quite positive and we expect the growth to accelerate in the coming quarters. We recently began shipping IQ8P commercial microinverters from our contract manufacturing facility in Texas. We are now producing both residential and commercial microinverters from our U.S. manufacturing facility. Some of our U.S.-made microinverter SKUs, which, when paired with select U.S.-made solar racking equipment, can allow lease, PPA, and commercial asset owners to qualify for the domestic content bonus credit. This credit is valuable for customers at 10% of the overall project cost. We think this will be a good opportunity for us on both microinverters and batteries. Let me provide an update on IQ9 microinverters with gallium nitride. The IQ9 family will support higher DC input currents, up to 18 amperes, and higher AC grid voltages, including 480 volts for the small commercial market, which is a brand new market for us. Using gallium nitride high voltage transistors, these microinverters will deliver higher output power at lower cost. We are on track to launch this product in 2025. Let's discuss EV charging. We showcased our upcoming EV charger for Europe at Intersolar Munich in June. The charger offers a 22-kilowatt three-phase option and 11-kilowatt single-phase option. It integrates seamlessly with N-phase solar and batteries, allowing homeowners to optimize cost by using excess solar energy. Green charging or charging from solar is what it's called. Other key features include dynamic phase switching from single-phase to three-phase and vice versa, an MID meter for a few countries, ISO 15118 support to talk to the car, OCPP cloud software support, and 1 ampere fine-grain current control to maximize green charging. We plan to introduce this charger in many European countries later in the year. Additionally, we recently launched our most powerful CS100 EV charger for commercial fleet electric vehicles in the U.S. Our team is developing a bidirectional EV charger that will enable V2H and V2G capabilities as part of the Enphase system. The charger will feature modular GAN-based bidirectional inverters providing up to 11 kilowatts for single-phase applications and 22 kilowatts for three-phase applications. The charger will be compatible with both 400 volts and 800 volt electric vehicles. We are targeting to release this product in late 2025. Let's now cover our IQ energy management software. Our software is rapidly evolving to handle the growing complexity of energy markets by using AI and ML for forecasting and optimization. We train our AI models with data from over 4 million systems. In Q2, we launched our latest software in Netherlands and Belgium to manage dynamic electricity rates, helping homeowners maximize ROI and reduce payback periods as electricity prices Plus, you wait hourly. We see AI as a crucial technology to scale and enhance our products and services. Let's discuss our installer platform. We recently introduced SolarGraph, our design, proposal, and permitting software platform to the Netherlands. With built-in support for dynamic electricity rates, SolarGraph software delivers the financial calculations that address the complexities of energy markets in the Netherlands. SolarGraph is also available to residential and commercial installers in the U.S., Canada, Brazil, Germany, and Austria, and we expect to release it to many countries in the coming quarters. Let me conclude. We remain dedicated to delivering best-in-class home energy systems with a strong focus on innovation, quality, and customer experience. Over the last year, we have significantly expanded our global reach and have an exciting pipeline of new products set to launch worldwide in the coming year. We have successfully normalized our channel inventory by the end of Q2. Our customer demand has increased by 5% in Q2 as compared to Q1. Our battery business is also doing very well with growth from quarter to quarter. Our bookings in Q3 are the healthiest that they have been in a year. Our early commitment to U.S. manufacturing is positioning us well with lease BPA and commercial asset owners. We also expect the Fed to lower interest rates later this year, improving solar economics for the U.S. consumers. Our efforts to capture market share in Europe and other international regions are also promising. Despite continued macroeconomic challenges, we are confident in our revenue recovery and remain bullish about our long-term growth prospects. With that, I will turn the call over to Mandy for her review of our finance. Mandy?