Enphase Energy, Inc.

Good afternoon, everyone, and welcome to Enphase Energy's second quarter 2026 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 and then one on your touchtone phones. To withdraw your questions, you may press star and two. Please also note this event is being recorded. At this time, I'd like to turn the floor over to Zach Freedman with Enphase. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's second quarter 2026 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its second quarter, ended June 30, 2026. 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 in existing and new markets, including the TPO market, Thank you for joining us. Thank you for joining us today to discuss our second quarter

We reported quarterly revenue of $291.9 million, shipped 1.59 million microinverters and 113.8 MWh of batteries, and generated free cash flow of $25.9 million. Our Q2 revenue included $84.3 million of Safe Harbor revenue. We exited the quarter with channel inventory normal for batteries and slightly elevated for microinverters. On a gap basis, we delivered gross margin of 60%, operating expense of 42.3%, and operating income of 17.7%, all as a percentage of revenue. On a non-gap basis, we delivered gross margin of 46.8%, operating expense of 27.3%, and operating income of 19.4% all as a percentage of revenue. Mandy will cover the financials later in the call. Our global customer service NPS was 80% in the second quarter as compared to 82% in the first quarter. Our average call wait time remained approximately two minutes. We also made our AI assistant available to 1.5 million homeowners worldwide. This gives our customers faster access to personalized system-specific support and making their energy systems easier to understand and manage, ultimately reducing the number of costs. Let's cover operations. In the second quarter, we shipped approximately 1.58 million U.S.-made microinverters and battery inverters from our Texas and South Carolina manufacturing facilities and booked and the associated 45X production tax credits. We also shipped 43 MWh of IQ batteries from our Texas facility in the second quarter. We offer IQ batteries that meet domestic content and FIOC requirements, helping lease and PPA customers qualify for ITC bonuses. Let's now cover revenue and regional performance. Our global Q2 revenue increased 3% compared to Q1. Our global sell-through was approximately flat as compared to Q1 as growth in Europe offset the softness in the U.S. Our revenue mix was 78% from the U.S. and 22% from international markets. In the U.S., revenue declined 3% sequentially. Safe Harbor revenue increased to $84.3 million in Q2 as compared to $34.5 million in Q1. The U.S. revenue declined primarily due to us undershipping into the channel. Our U.S. sell-through in Q2 decreased 7% as compared to Q1. Excluding one-time orders in Q1 that did not recur in Q2, the sell-through was approximately flat sequentially. Our Q2 26 sell-through declined 34% as compared to one year ago. in Q2-25, reflecting continued pressure from higher interest rates and transition following the expiration of the 25D tax credit. Third-party market reports suggest that the broader U.S. residential solar market has stabilized with industry-wide permits in June increasing 4% from May and upstream sales activity rising 5%. Both remain about 30% below prior year levels. Higher electricity cost markets are performing better while several sun-belt states remain under pressure. The stronger industry-wide signals are for storage and commercial solar. National residential battery attachment remains near 40% with materially higher levels in key markets, while the U.S. commercial battery Solar permit activity increased 36% year-on-year in June. Taken together, these third-party data points suggest that the next phase of U.S. market growth will be shaped by storage economics, the commercial demand, financial availability, and utility rates. In Europe, our revenue increased 35%, Thank you very much. to expand over time into the broader home energy system including solar, EV charging, and VPP. In the Netherlands, our battery activations increased approximately 102% from the first quarter as rising export penalties and the planned phase-out of net metering at the end of 2026 strengthened self-consumption. Lower feed-in tariffs are similarly shifting the market towards self-consumption and driving greater interest in batteries, particularly with new solar installations. The battery activations in France increased approximately 34% sequentially. In Germany, the growth was broad-based with both micro-inverter and battery activations increasing approximately by 35% and 27% respectively. We are intensifying our focus on battery retrofits in both Netherlands and France where we have a combined installed base of nearly 900,000 Enphase customers. Building on the success of our initial programs, we have increased the cadence of homeowner events and direct marketing campaigns. Our newly established Insight sales team, supported by an improved lead management platform, is helping convert this demand into revenue. We also showcased our fifth generation battery at InterSolar Munich, where customer feedback was positive and we expect initial shipments before the end of this year. Let's now discuss our outlook for the third quarter. We expect revenue of $290 to $320 million, representing approximately 5% growth at the midpoint. Our Q3 revenue guidance includes approximately $75 million of safe harbor revenue. We are currently over 70% booked to the midpoint of our guidance. We expect global sell-through in Q3 to increase 10% as compared to Q2. Distributors remain cautious amid broader macroeconomic uncertainty including interest rates and our guidance assumes Thank you very much. Further targeted pricing actions as necessary to improve system economics and support demand. Turning to Safe Harbor, we have executed year-to-date agreements with third-party owners, totaling approximately $1.1 billion, $202 million under the 5% ITC Safe Harbor method, and $878.6 million under the physical work test These agreements provide two important benefits. They secure meaningful multi-year volume for our micro-inverter and accessory business. And second, they create a strong foundation for future battery attach opportunities as these systems are installed from 2028 through 2030. Moving to financing, Propel is entering a new phase of growth. Just to remind you, Propel is a TPO offering from SolSource Solutions that combines end-phase equipment, financing, loan financing provided by TriBeam Financial through the Concert Finance Platform, and national distribution through Green Tech Renewables. Purpose-built for the long tail of installers, Propel has expanded from four states to six states with recent launches in Pennsylvania and Colorado. and plans to reach a total of 12 states during the third quarter. Installer participation has grown to about 290. The propeller originations are running at approximately 200 per week with battery attachment at roughly 75%. We expect this will begin to grow again as installers in new states start to ramp up. SolSource is targeting 500 originations per week by the end of the year and scaling by securing sufficient warehousing capacity and tax credit buyers. In today's higher interest rate environment, Propel offers homeowners and installers a compelling alternative to conventional solar loans and can help restore a meaningful portion of the cash and loan market affected by the 25D expiry. Let's talk about products, starting with IQ batteries. We showcased our fifth-generation IQ battery G5 at Intersolar Munich in June, where it received a strong response. Built from stackable AC-coupled 5-kilowatt-hour modules that can scale up to 30 kilowatt-hours in one stack, the G5 uses 100-ampere-hour prismatic cells and is designed to deliver 50% Thank you very much. should make it highly competitive across the US, Europe, and Australia. We are also making good progress on our commercial battery called IQVault, targeted for both three-phase 208 and 480 volt market. The first product called IQVault 80 is an 80 kilowatt-hour battery, again, three-phase 480 and 208 volts with 40 kilowatts of continuous power. Basically, it is a two-hour battery. Each outdoor cabinet uses five field-serviceable 16-kilowatt-hour LFP modules built with 314-ampere-hour prismatic cells, and up to 25 cabinets can scale the system to 2-megawatt-hours. The 480-volt three-phase configuration is designed for larger commercial buildings, while the 208-volt three-phase configuration will address Small Commercial and Multifamily Properties, including applicable California projects driven by Title 24 requirements. The distributed architecture provides module-level fire suppression and is designed for self-consumption, peak shaving, time of use, BPP, and backup. We have completed the functional system demonstration in the last quarter, and we expect to open pre-orders soon. with initial shipments planned for Q127. Turning to microinverters, we launched our GAN-based IQ9N residential microinverter across the U.S. and key European markets in June, followed by Australia and New Zealand earlier this month. We are also gaining traction in the U.S. commercial market with several promising national opportunities advancing with large retail customers. During the second quarter, we began shipping the IQ9S3P microinverter, our highest power microinverter till date, 548 watts, based on gallium nitride, GaN, for 480 volt systems. This is designed to support solar panels up to 770 watts. With U.S. manufacturing, and Fiat Compliant Products, we believe our commercial business is well positioned for continued growth. We recently opened pre-orders for our smart thermostat, a new control point for the Enphase energy system. By bringing HVAC into the system, Enphase can optimize one of the home's largest energy loads alongside solar and batteries to improve savings, preserve backup capacity and support VPP. The integrated display on the device also gives homeowners a simple way to view their solar, battery, and home power live from inside the home. We expect shipments next month. Moving on to EV charging. We are making strong progress on the DC-based IQ bidirectional EV charger, which we showcased at Intersolar Munich. Built on our GaN power platform, this is designed to support both 400 volt DC and 800 volt DC EV architectures and deliver up to 11.5 kilowatts of bidirectional power. ISO standard 15118-20 enables standardized communication between the vehicle and the charger while our expertise in utility interconnection, grid code compliance and distributed energy management supports V2H backup, V2G, and use cases like green charging. We are collaborating with three leading automotive OEMs in the U.S. and one in Europe with additional engagements underway. Subject to the successful completion of applicable compliance testing, we expect to begin pilot shipments in the fourth quarter alongside vehicle launches from one U.S. OEM and one European OEM. Finally, let me provide a more detailed update on our IQ Solid State Transformer or IQSST. The rapid build-out of AI infrastructure is reshaping data center power architecture as rack densities rise from approximately 150 kilowatts today towards one megawatt and beyond. Delivering power at that scale will require a more fundamental will require a fundamentally more efficient, responsive, and reliable way to move medium voltage power directly to the computer app. IQ-SST is designed to meet that need by converting 13.8 kV or 34.5 kV medium voltage AC directly to 800 volt DC through a modular single stage architecture. At the core of the platform is our IQSST power module, which utilizes our predictive control enabled by the custom silicon, GAN, which enables high-frequency switching, and innovation in medium voltage transformer design. Built on more than 20 years' experience in distributed power electronics, we are targeting approximately 98.5% efficiency, 5 9ths reliability, and Sub Millisecond Response Time. That response time is a key differentiator. AI workloads can create rapid swings in power demand and IQSST is designed to respond in real time to help stabilize the load as seen by the data center power system. This could allow most of the energy storage to be centralized in a BESS located in the data center's black space rather than placed beside every compute rack, freeing up valuable white space. This configuration would utilize a second SST for the BESS, effectively doubling our data center opportunity. For customers that still require storage near the rack, the same platform can also support a DC-DC configuration that charges and discharges a local high C-rate battery and many more. can be as important as product performance. Our new and existing customer engagements continue to deepen. We have advanced a few of these opportunities to the RFI and RFP stages representing potential demand totaling multiple gigawatts. These engagements are directly shaping our roadmap across power level, input voltage, footprint, cooling, battery connectivity, and serviceability. Importantly, we have been able to address evolving customer requirements without changing the fundamental IQ SSD power module, underscoring the flexibility of our platform. We have also made substantial technical progress over the last three months towards a fully working system later this year. Our team has now grown to about 120 people. We have begun testing the second revision of the IQSST power module and the results give us confidence that the next revision can become our production candidate. We have completed the build-out of our medium voltage lab and validated the medium voltage transformer design. We are now optimizing it for manufacturability and cost. This work has already generated meaningful IT, particularly around the transformers. At the system level, our power modules are connected in series on the medium voltage input side and in parallel on the regulated 800 volt DC output side. Managing stability and balancing power across the series stack are mission critical. Through modeling and hardware experimentation, we have demonstrated that our proprietary droop control architecture can robustly manage the series stack and maintain balanced power across the modules. Specifically, we have demonstrated 15 IQ SST power modules operating in series and are now advancing the complete first-generation system, including the thermal architecture, rack-level controls, and mechanical design. The first-generation platform is designed to scale from 1.25 MW to 2.5 MW across 13.8 kV and 34.5 kV configurations. We remain on track for a fully working system later this year, customer pilots beginning in 2027 and commercial shipments in 2028. Beyond AI data centers, we are evaluating the broader applicability of the IQ SSD platform across utility-scale solar, storage, and DC fast charging. In each of these markets, we believe IQ SSD can connect directly to medium voltage AC. Eliminating the need for a conventional transformer and simplifying the overall power architecture. This can reduce the number of stages, system complexity, footprint and cost while preserving the same core advantages of high efficiency, fast control and modular redundancy. While these applications are at an earlier stage, we believe that the same underlying platform can ultimately support a much broader set of power conversion markets. Let me conclude. Our next phase of growth starts with residential energy systems. Across the U.S. and Europe, IQ9 microinverters, our upcoming fifth-generation battery, and the IQ bidirectional EV charger significantly expand the value of the Enphase home. Together, they position us to win new battery-led systems, deepen engagement with our install base, and address standalone bidirectional EV charging. In the U.S., prepaid lease programs like Propel add an important financing lever to support that growth. Beyond residential, we are expanding into small commercial energy systems. Our three-phase microinverter portfolio now spans both 208 volts and 480 volts applications. The IQ board with the 80 kilowatt hour battery adds commercial storage and our EV charging portfolio broadens the opportunity further. Together these products give us the foundation for an integrated small commercial energy system spanning solar, batteries, EV charging, controls, and energy management. The next frontier is data center infrastructure that we talked about with IQ SST. and the same architecture can extend into utility scale solar, battery and high power DC fast charging. These markets require the same fundamental capabilities. Direct medium voltage connectivity, high efficiency, fast control, modular redundancy, compact design and competitive system cost. Our expansion from residential to commercial, two data centers and ultimately two utility scale is built on the same core technology foundation. Single-stage power conversion, custom silicon-enabled control, high-frequency GAN switching, and innovation in transformer design. We believe this position is in phase to compound growth across progressively larger markets while leveraging the same differentiated architecture, technology, and execution capabilities that established our leadership in residential energy systems. With that, I will turn the call over to Mandy for her review of her financial results. Mandy.

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our second quarter of 2026 financial results, as well as our business outlook for the third quarter of 2026. We have provided reconciliations of this non-gap to get financial measures in our earnings release process today, which can also be found in the IR section of our website. Total revenue for Q2 was $291.9 million. We shipped approximately 725.2 megawatt DC of microinverters and 113.8 megawatt hours of IQ batteries above the high end of our battery guidance. Q2 revenue included $84.3 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install the inventory over More than a year. Non-GAAP growth margin was 46.8% in Q2, compared to 43.9% in Q1. GAAP growth margin was 60% in Q2, compared to 35.5% in Q1. GAAP growth margin was positively impacted by 15.6 percentage points for the IEPA tariff refunds received. Recipical tariff negatively impacted gross margin by 2 percentage points in Q2. Non-GAAP operating expenses were $79.8 million for Q2 compared to $77 million for Q1. The increase was driven by higher investment in R&D spending. GAAP operating expenses were $123.5 million for Q2 compared to $130 million for Q1. Here, operating expenses for Q2 included $39.7 million of staff-based compensation expenses and $4 million of acquisition-related expenses and amortization, restructuring, and asset impairment charges. On a non-GAAP basis, income from operations for Q2 was $56.7 million, compared to $47.3 million for Q1. On a GAAP basis, Income from operations was $51.5 million for Q2, compared to loss from operations of $29.6 million for Q1. On a non-GAAP basis, net income for Q2 was $61.5 million, compared to $62.3 million for Q1. This resulted in non-GAAP devoted earnings per share of $0.46 for Q2, compared to $0.47 for Q1. GAAP net income for Q2 was $36.1 million compared to GAAP net loss of $7.4 million for Q1. This resulted in GAAP diluted earnings per share of $0.27 for Q2 compared to diluted loss per share of $0.06 for Q1. We ended the Q2 with a total cash, cash equivalent and marketable securities balance of $937.7 million compared to $930.6 million at the end of Q1. In Q2, we generated $40.3 million in cash flow from operations and $25.9 million in free cash flow. Capital expenditure was $14.4 million for Q2. compared to $19.9 million for Q1. As of June 30, 2026, after monetizing the PTCs generated in 2025 and Q1 2026, we had approximately $193.5 million of PTCs on our balance sheet. This included $108.3 million related to US-made microinverters shipped to customers in 2024 and $85.2 million related to shipments in the first half of 2026. We elected direct pay for the 2024 PDCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to IRS processing. As a reminder, In March 2026, we revoked our direct pay election. Going forward, we plan to sell PDCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business, and the impact of this approach is included in our quarterly gross margin guidance. We announced a tax credit transfer agreement to sell $150 million of PDCs generated in 2026 to a leading financial institution, with four quarterly payments from April 2026 to January 2027. We received tariff refunds of approximately $41 million from U.S. Customs and Border Protection, or CBP, in the second quarter, with another $11 million received after the quarter end. Second quarter GAAP results were impacted by $52 million, of which $45.4 million was recognized as an increase to GAAP gross profit, $1.6 million was recognized as GAAP interest income, and $5 million was capitalized as a cost of inventory as of June 30, 2026. We have submitted additional refund claims that remain subject to CPP's review and validation. Now let's discuss our outlook for the third quarter of 2026. We expect Q3 revenue to be in the range of $290 to $320 million, including shipments of 130 to 150 megawatt hours of battery. For the remainder of 2026, we anticipate recognizing $136.2 million of step-up revenue. with $75 million in Q3 and $61.2 million in Q4. We expect GAAP growth margin to be within a range of 42% to 45%, including approximately 2 percentage points of reciprocal tariff impact. We expect non-GAAP growth margin to be within a range of 44% to 47%, including approximately 2 percentage points of reciprocal tariff impact. Non-GAAP gross margin includes stock-based compensation expenses and acquisition-related amortization. We set our GAAP operating expenses to be within a range of $120 to $124 million, including approximately $44 million estimated for stock-based compensation expenses, acquisition-related amortization, and restructuring and asset impairment charges. We set our non-GAAP operating expenses to be within a range of $76 to $80 million. With that, I'll open the line for questions.

Ladies and gentlemen, at this time we'll begin the question and answer session. To ask a question, you may press star and then 1 on a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. We do ask that you please limit yourselves to a single question and one follow-up. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Praneeth Satish from Wells Fargo. Please go ahead with your question.

Okay, thanks. Good afternoon, everyone. Maybe on SST, recognizing it's early, But just conceptually, how are you thinking about balancing a margin capture versus market share adoption? I guess based on our understanding, if you include 45X credits, the SSTs could potentially support very, very high gross margins. But then on the other hand, you've talked about in your prepared remarks, ultimately selling the product into other markets like utility scale, solar, which presumably would imply setting maybe a more competitive ASP. Just trying to understand at a high level how you plan on navigating that.

We're not going to give you actual numbers, but we are going to tell you how we are thinking about it. We are going to be extremely competitive. But we are going to clearly focus on our value drivers. There are a lot of competitors also developing SST, so therefore the focus for us is what does Enphase do different and better compared to Our value drivers are like what we stated, fast response times. And because the SSD can respond within sub-millisecond, we think the battery storage can move to the facility space, which is called the data center black space. That will be a key differentiator for our solution. Our modularity, our redundancy, reliability, U.S. manufacturing are all other value drivers. Like what I said, I'm not going to give out numbers, but I just told you how we are thinking about it. Plus, you are correct on the 45X PTC. We are finalizing those details, but that will also help us to be highly profitable.

Got it. And then maybe shifting gears on Propel. So last quarter, if I remember correctly, you said originations were running at roughly 200 per week. And then it sounds like they're still tracking at around that same level today. So should we interpret the relatively flat sequential trend there as a function of financing capacity or other supply side constraints? And I guess what's going to be the driver there that gets you to Thank you. Yeah, I think we were clear.

We said Propel is running its pilot. We started with four states. We were conservative. And SoulSource is basically responsible in what they do. They are in the process of securing You know, financing so that they can scale every phase deliberately, you know, properly. So it is simply a function of how many states we are in. For example, if I look at the first four weeks of this month, would say the numbers are running a little bit higher than the 200. Got it. Thank you.

Our next question comes from Brian Lee from Goldman Sachs. Please go ahead with your question.

Hey, everyone. Good afternoon. Thanks for taking the questions. I guess, Badri, for you, I'm curious. The Safe Harbor revenue, you know, it's pretty significant both in the third quarter and appreciate you giving us the fourth quarter number as well. And it seems to be tracking higher than you've been guiding to. So, Is this market share gain amongst TPO's or maybe can you speak to what's driving that momentum? And then I add a follow-up.

Yeah, I think we have, like what we said, we are always, I mean, we have strong relationships with a lot of our TPO partners and some of our TPO partners are healthy, they are supported by a strong balance sheet in their parent companies. There are some New TPO partners as well, who I'm sure you will see, they're going to show up. So basically, it's just the confidence that they have in either pursuing a 5% safe harbor strategy or a PWT, which is the physical work test safe harbor strategy. And for us, I think we said approximately $1.1 billion is the agreements that we have executed till date. Of that, the $202 million under the 5% method and $878.6 million under the physical work test. So it's just we have a strong relationship with the TPO guys.

Fair enough. And then maybe just related to that, you sounded... A little bit more positive on kind of a return of growth in resi, even in the near term. But if we adjust for the undershipping in 2Q and exclude, say, Farber, you're implying flat revenue from 2Q to 3Q. You're still undershipping, you said. So I guess why undership in 3Q when demand is seemingly improving based on some of your comments? And then How should we think about also 4Q seasonality? Do you expect to still be undershipping into 4Q? Should 4Q revenue, including safe harbor, be higher than 3Q, including safe harbor? All in. Thank you.

Yeah. So basically, just to break it, our Q3 guidance at the midpoint is about 305. Out of that 75 million safe harbor, So core revenue of 230. Let's say I expect sell-through to be 10% higher in Q3. We are talking about a sell-through approximately in the 245 million range. And we are talking about a modest undershipment of about $15 million. We are just cautious and we'd like to make sure we have a healthy channel inventory. Like we focused Q2 on on getting healthier in the channel. That's why we said we are fine on batteries and slightly elevated on micros, and we are going to bring that down. But if you look at apples to apples, the core revenue, if you say the core revenue from Q2 to Q3, excluding safe harbor, that is increasing by approximately 10 plus percent. And in Europe, as you know, Q3 is a is usually the summer holidays. Despite that, we think we'll be flat Q2 to Q3 in Europe. So all of that growth is coming from the US. Then I also told you about third party reports talking about an increase of 5% on the permit side. So we talked about that. In addition, as a company, we have and a platform called SolarGraph as you know. SolarGraph basically also monitors all of the proposals for both solar as well as storage. And we are able to see an increase in proposals in Q2 as compared to Q1. That will reflect as installations in Q3. So triangulating all of these We think with the third-party reports, with our own internal data, and what we see on a sell-through basis, plus what we have on Propel, we think we will grow by approximately 10% in Q3.

And our next question comes from Phil Shen from Roth Capital Partners. Please go ahead with your question.

Hey, everyone. Thanks for taking my questions. First one is very topical. Just when your release hits for Q2 results, the FCC announced that they're working on a plan to ban Chinese inverters in the U.S. And so I wanted to check in with you on your views on this. It doesn't really impact your resi segments too much, given the limited exposure or mix of Chinese inverters, but was curious how much share do you think you could take in your commercial business as a result of this? Of course, you have been addressing Just a limited portion, and now you're going to expand that to a larger portion of the CNI market. And so, you know, how much Chinese inverters do you see out there, and then how much do you think you could grab of that? Thanks.

Yeah, I think there are two opportunities for us. One is, like you rightly pointed out, you know, the residential is not really there, you know, not an issue because of fiat, et cetera. So the two topics are Small commercial as well as utility scale solar. So I'll focus on small commercial for now because we haven't yet introduced any products for utility scale. In the small commercial, basically, we are seeing lots of opportunities, especially with big retail providers, both in terms of small size installations as well as big size installations. Our revenue that I expect in Q3 for small commercial in the U.S. is approximately $10 million. And I expect that number to grow from strength to strength as we advance through the year. We have introduced two products in the last six-month period. We introduced one product in December. That is the IQ9N with GaN. It's a three-phase 480 volt, you know, addresses the three-phase 480 volt market. And that's got a power of 427 watts. That can go up to, let's say, approximately 600 watt panels. We just introduced in June an IQ9S three-phase product. That is 548 watts. That will be able to go up to 700 watts. So from a product portfolio, we are We are fully covered. We are having the right discussions with everybody. In addition, I talked a little bit about small commercial storage. Small commercial storage is a fantastic opportunity for us. The market is a little tough to estimate. It is anywhere from one gigawatt hour to two gigawatt hour. It's a very diverse set of installations in small businesses, you can say, schools, hospitals, churches, gas stations, retail, shops. The product we are introducing is ideal for that. 80 kilowatt hour cabinet can be scaled. 25 of these can go to a site, can do two megawatt hours. For example, in the building that we are in in Fremont, we are going to have... We have a megawatt hour of storage very shortly, you know, comprised of 12 80 kilowatt hour cabinets. So there, for example, there, for example, same concept, FIAC compliant, you know, domestic content and U.S. manufacturing. So we have the portfolio. both small commercial solar. We have small commercial storage, and we expect to be ramping not only this year, but 2027 could be big there.

Okay, thanks, Badri. Shifting over to the core U.S. resi solar market, the challenge that I see here, the root cause is and some challenges with the TPOs. In turn, they're slowing down the amount that they're investing in. And so the root cause of that is driven by tax equity and their caution with the FEOC and effective control guidance that Treasury has still not issued. We published back in March That could be by the end of the year. They're waiting to see how different Chinese companies are adjusting their corporate structures as well as their IP. And then they may want to close those loopholes. And then we wrote recently that it might not come out till the first half of 2027. So is there a scenario where the U.S. Resi Outlook could still be challenged even as we get through a bunch of 27. And how do you guys manage through that? Thanks.

Yeah, it is a good question. Like you said, I mean, there is limited visibility on the treasury guidance. But, you know, the market is adjusting. The FIOC guidelines, et cetera, are reasonable. Our TPO partners are becoming a lot more matured. Yes, there have been some hiccups, but those hiccups are being solved. We are hearing that tax equity, although it is tight, but we are hearing it is likely to improve. For us, our opportunity is a few things here. Our opportunity is, I talked about sole source and propel. That's a fantastic opportunity for us because it basically makes... You know, the 25D loan market, which was getting approximately a 30% ITC, now has a chance to be replaced with the prepaid lease, that one. So that's a big opportunity for us. The second big opportunity for us is we are getting a lot better on batteries. So we are going to be introducing the fifth generation product and Q4 into the U.S. and that will be at a much reduced cost structure. So while we will make good gross margins, that will enable us to help installers. With the positive reduction in tariffs that we got, we took the opportunity to make more pricing adjustments in order to drive volumes with our fourth generation product. Our fourth generation product is also ramping from strength to strength. The meter collar is now qualified at 69 utilities, including Canada. It is by far the highest of any supplier. And we expect the same to continue, meaning with our fifth generation battery, all of these 69 can be reused. and they are also going to be a big differentiator for a standalone bi-die because a standalone bi-directional charger can, you know, consists of the bi-directional EV charger which has got 11.5 kilowatt inverter. That's what we have. In addition to that, we have a meter collar. Just two components which will enable V to H, V to G in a seamless manner. For us, we are not stopping and waiting. We are not waiting for things to improve. We are taking matters into our own hands. It is about innovative financing. It is about innovative new products. It is about extending our range into commercial. And, of course, the big one is data centers.

Great. Thanks, Vajray. I'll pass it on.

Our next question comes from Colin Rush from Oppenheimer. Please go ahead with your question.

Thanks so much. Bobby, can you talk a little bit about the elasticity of demand on the batteries? You talked about dropping prices a little bit. Just want to get a sense of how much volume you feel like you can start dragging as you make those pricing adjustments.

Yeah. I mean, what we are doing is is basically just to tell you some background here. There are two actions that we specifically took. One was in Europe where we were high-priced. There is no question. And we were high-priced relative to the value we were generating. And that was clear to us. So earlier in the year, we did a pricing adjustment in Europe. In addition, in Europe, what we are You know, extremely excited about is a business model change that we are driving. In addition to the B2B sales, which is Enphase selling to installers through distributors, we are actually generating organic demand from organic battery demand from our own install base. And we are doing that in Netherlands. We are doing that in France. We are Doing right now, you guys may not believe, six homeowner events a week in Netherlands. Each homeowner event is attended by approximately 150 sites or 150 families. And the yield on these is quite good, up the order of 50%. So what we are able to do is we are able to close these very quickly and then pass the leads to Our installers, and of course, that requires sophisticated lead management to make sure the installers, you know, after taking the lead, do not do any funny business and install only in-phase product. So we are doing that and we are seeing a lot of success in Europe, both in Netherlands and France. So to answer your question, the actions in Europe are due to are not just due to pricing, but what we are doing to generate organic demand. While the actions in the U.S., very similar. So pricing is only part of the equation. Product stuff, for example, the meter collar, which I said, we are qualified at 69 utilities. The other big one is Propel. Propel, by definition, has got There we have a 75% battery attachment propeller. So we expect that to be driving more and more battery volumes. So that is why in Q3 we expect shipments between 130 to 150. And then the big ramp will come from G5. The fifth generation product has got 50% energy density. What does that mean for you? If you compare, for example, our third generation product and the fifth generation product. Why third generation? Because that's the one in Europe. The fifth generation product will be roughly 40% in height as compared to the third generation product. And similarly, it is also 50% higher demand More energy density compared to the fourth generation product. So all of these improvements are going in. The fifth generation product we expect will start to drive even more demand, especially with the same, you know, major color qualifications, et cetera. So not just pricing action, but pricing plus a few other actions to drive demand.

Thanks so much. That's super helpful. And then looking at the data center opportunity, it sounds like you're making a meaningful impact on the actual design of the facilities. I'm just curious how mature pricing conversations are at this point and how mature some of those designs really are that would embed the Enphase solution.

Yeah, so just to give a quick, complete overview, we're making very strong internal progress in our data center development, meaning IQ SST development for data centers, I mean. Our team, now we have about 120 full-time engineers. We are building the power module, and we are finalizing the design there. Interestingly, we demonstrated a 4.16 kV AC series stack. What does that mean? We can stack 15 power modules in series. So 15 times 277, approximately 4 kilovolts AC. We demonstrated proof of concept there. And importantly, we have achieved significant milestone on the feasibility of the medium voltage transformer. So that's on the technical side. We are making a lot of great progress there. On the active engagements there, we are engaged in conversations with hyperscalers, neoclouds, colos, EPCs, and the full ecosystem. We are engaged in a few RFI, RFPs. In fact, some of the learning that we got on the product were from those RFPs. I mean, it was massive learning for us. But then we realized how powerful our platform was because we were able to get the product requirements, understand the product requirements from these customers and then we were able to quickly rework our plan without any changes to the power module because ours is a modular structure. And for example, we were able to quickly adapt, you know, we talked about supporting two kinds of storage. One kind of storage, which is where your question value proposition comes in, is because our SST is super fast in terms of response time, sub millisecond response time, we envision the, you know, storage can be in the facility space or in the black space. But there are people who have a current architecture who might not be willing to deviate from that, who would want to put high C-rate batteries closer to the rack. And for those hyperscalers, we enabled a DC-DC product in conjunction with the SSD. and we were able to repurpose the same SSD, the same power module in order to get that DC-DC product as well in addition to the SSD. So our architecture is very flexible. We are learning a lot. We are adapting a lot. We understand what our value drivers are very clearly. Like what I said, it is the first response time. It is the power module flexibility It is the high reliability which is yet to be proven. It is US manufacturing. What is the next big milestone? The next big milestone is to build a full product. Building a full product by approximately end of the year, likely November, and showing it to some of these customers will open The Gates for much bigger conversation and pilots. So we are looking forward to that. And right now, as I see here, we are on track to getting that done.

Our next question comes from Eric Stein from Craig Hallam. Please go ahead with your question.

Hey, Badri. I'm just wondering, can you just talk a little bit about your thoughts on Europe or expand on that? I know last quarter... Thank you for joining us. You know, just how are you thinking about that here, I guess, over the remainder of 26 and going forward?

Yeah, so just to recap, in Europe, we increased revenue by approximately 35% in the second quarter. And more importantly, our sell-through grew 30% with strong performance across both solar as well as batteries. What markets am I excited about in Europe? Three markets. which is basically Netherlands, France, and Germany. And in Netherlands, as you know, because net metering is expiring at the end of 2026, there is a huge interest in batteries and that is starting to materialize. And our activations basically increased by about 100% compared to The activations in Q2 compared to Q1 have increased by 100%. We have staffed our internal sales representative team, about 10 people and 10 sales folks who manage leads that come from the homeowner events. These homeowner events we haven't done before, but we are now ramping up on those We started them nine months ago. We are now ramping up on those in a systematic fashion. We are talking six homeowner events a week, which is approximately something like 75 to 80, 80 a quarter, 78 a quarter. So that is generating a lot of interest and it is a flywheel because once we help installers, installers are likely to reciprocate. So there I think the inflection can be very big because the deadline is approaching. NEM is going to go away. And the only way that customers, consumers can be protected is if they have self-consumption, which is solar plus storage. Now coming over to France, one more thing which I left out in Netherlands. We have a base of half a million solar homes there. So that is how we are able to do the homeowner events. That is how we are able to generate the battery leads, which we will continue to do. In the case of France, we have about 400,000 solar base in France. This is Enphase homes. And in France, the economics are slightly different. In France, feed-in tariff is quite small for new installations, but for existing installations, they are still grandfathering net meter. But, however, there is high sensitivity, maybe because of the war, I'm not sure, but high sensitivity on energy independence. So in France, we find that it is almost to the same level as Netherlands, if not higher, and we have exactly the same model there too. We are driving both demand organically from homeowners as well as working with our installers. And that's going fine. So those are the two most, you know, two most exciting things that generate a lot of results. In the case of Germany, very attractive market, we have, you know, I should say we have Not yet exploited that to our fullest potential. Of course, we do have some fantastic partners there who are helping us. And I think we are going to grow from strength to strength there with our fifth generation battery, which is going to help us everywhere. So we are quite bullish. And the last one, I have an excellent management team in Europe. We put an Enphase veteran in there. and he understands how to work with the internal teams to get products as well as understands customers very well. So part of our performance is attributed to him in addition to his sales team as well. So we are extremely bullish about Euro.

All right, thank you.

Our next question comes from Dylan Nassano from Wolf Research. Please go ahead with your question.

Yeah, hi. Thanks for taking my question. I just wanted to check if you had any updated views on the kind of shape of the cash flows from that $880 million physical work test backlog. Just for modeling purposes, should we be amortizing that over the next couple years? Is it more back-end weighted? And then how much, if you could... in the forward guidance for 3Q and 4Q, how much of that is 5% rule versus physical work test?

We already told you that, but let me repeat. So the 5% physical work test, essentially, just to give you a full context, in Q1-26, we did approximately $34 million. In Q2-26, we did approximately 84 million. In Q3-26, we are guiding to 75 million. And in Q4, we already gave you a number that it's about 61 million of safe harbor. So that is the 5%, and the 5% is done then. More exciting thing is physical work test. Physical work test, according to what we said, we have about 878.6 million is what we have signed this year, plus we signed one agreement last year too. We haven't recognized any revenue from any of the physical work test shipments yet. Any of the physical work test that is signed this year, we haven't recognized any revenue yet. That revenue, when will it be recognized? According to me, likely beginning 2028, because that is the whole point of safe harbor. The tax credits remain open until the end of 2027. And From 2028, they would have to utilize this PWT inventory, physical work test inventory, and they would ask us to make microinverters with that physical work test product. So we will see normal microinverter run rate. We will see accessory run rate. We will see battery run rate if they decide to attach batteries. So it's a long answer. It's quite difficult for us to predict. However, we think it will be linear. We think it will start 2028.

Okay, great. Thanks for clarifying that. And then just a quick follow-up on the tariff impacts in the guidance specifically for batteries. So I know in the past you had talked about kind of shifting your cell supply. Can you just update us? Have you completed that? Is there any more cells that you're getting from China? Yeah, thanks.

Yeah, in general, the tariffs have come down under control. We talked about our, you know, we had base tariffs, let's say approximately a year ago, we had base tariffs. And then we had this reciprocal tariff. Thank you very much. What we have done, again, we are taking our own actions. Our microinverter supply chain has diversified quite nicely. So if there is any further tariff, for example, in a region, we can always move to another one. To answer your question, yes, we have, other than China, we have a non-China cell source as well. which we are able to leverage in the event it is, you know, in the event the Chinese batteries have a much higher tariffs, we can always leverage that. So that is, we bought that into production. And as we go more, we are looking at, we are looking very hard at US sources as well as we get into more commercial battery, as we get into the Our fifth generation and sixth generation battery, we are also looking at U.S.-made cells. And we have a lot of suppliers there who want our business.

Thank you. Our next question comes from Corinne Blanchard from Deutsche Bank. Please go ahead with your question.

Hi, good afternoon. My question is coming back to the SST and Maybe this has been already a little bit addressed, but I want you to come back on what has been the feedback you have received from customers, and maybe if you can share some details on which kind of customer relationships you're trying to look for and achieve. And then I would have a question on the European market after.

I think I have this struggle. What we mentioned, we are talking to the entire ecosystem of SSD, of the data center market, which includes, of course, the hyperscalers, the colos, the neoclouds, EPCs, etc., all the way even down to some of the servers, server providers as well, because we want to make sure that the solution that we are providing is not just a product, it's an entire solution set from medium voltage to rack, as Buddy mentioned, is covered that we are addressing the entire issue. And the feedback has been quite positive. We have a very unique solution relative to what others have done and what's been done in academia is that we have a fully distributed architecture where we have hundreds of these power modules. And each power module is undersubscribed by about 10%. So the key value proposition of reliability plays very well. Plus, we also point out our history of almost 90 million microinverters shipped to date with a 500 DPPM failure rate. So the combination of historical performance plus this architecture, which is fully distributed, really resonates very well with a lot of the players. in terms of reliability. Now, we also talked about we have some intrinsic structural advantages in terms of cost. The components that we use in our products are all off-the-shelf, generally available parts, almost commodity parts, including GAN. We consider GAN to be any more commodity. So that helps us a lot on cost. We do what's called soft switching, and soft switching enables us to have a very, very light EMI footprint. And a light EMI footprint means that we can package this device, this power module, in an engineered plastic enclosure, and that again drives cost. And since it's only 4 kilowatts and very, very efficient, thermal management is also very easy. Combine all of that with High Volume Manufacturing, and that is a standard line that we use today to manufacture microinverters. We have some intrinsic cost advantage as well. So the combination of the value drivers that we talked about in terms of reliability, in terms of response time, which is some millisecond response time that can help eliminate the need for that high C-rate battery, from the 800-volt section and rely on the BESS to do all of the work. Those are the things that are resonating very well. And, of course, U.S. manufacturing and a FIAT-compliant supply chain are all very positive feedbacks that we are getting.

Great. Thank you. Maybe the second question. Can you talk about the European Cyber Act? I think we met with your team yesterday, in Munich in June, and I think there was a lot of focus during the inter-sora on the Cyber Act 2.0, but just wondering what's your latest view and how do you think it could impact you?

I think we are fully tuned in to all of the developments that are happening there. I think the key here is to make sure that we are ahead of any of the compliance requirements, and so far, We are giving this incredible amount of importance. We have a person there who's exclusively focused on all of these new requirements that are coming. And we've already met a number of the requirements. And any new requirements that are coming around cyber, we continue to meet, both in Europe as well as in the U.S. as well. We understand that both inverters, SSDs, etc., or anything what are called as inverter-based resources are going to be classified as critical infrastructure. And so they will have an additional layer of scrutiny in terms of communication layer that each one of these devices have and how are they managed and all of the other security requirements or cyber requirements that are needed. So we feel like we are on top of it. We feel like we are ahead of the curve there in meeting all of the requirements.

Right, thank you so much.

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Vikram Bagri from Citi. Please go ahead with your question.

Hi, it's Ted on for Vic. Thanks for taking the questions. I wanted to just go back to the guidance, if we could maybe just touch on some of the assumptions there. The Netherlands storage activations were over 100% this quarter. Could you share what the guidance assumes for activations in 3Q? and then just going back to the comment about undershipments, could you just elaborate on what the source of that caution is? Is it to do with EU demand? Is it a seasonal slowdown? Is it interest rate driven or is there anything else in there? And then I have a follow-up.

Yeah, so typically in Q3, you know, there is summer seasonality in Europe. So basically... No, we expect more or less flattish performance from Q2 to Q3. However, we think from Q4 onwards, particularly in regions like Netherlands, which are seeing the expiration of net metering, there is going to be a big breakout on batteries. And we don't usually break out volumes by region. That's why we gave you a percentage. and the moment it becomes big enough, we will start breaking that down. But that's what we are the most excited about. Enphase has got half a million solar homes and all of them are going to be scrambling. Many of them, or I should say a small fraction of them, have converted or added batteries and many of them are going to be scrambling between now and the end of the year so that they can be ready when net metering goes away. Thank you. I have another question that you asked in terms of the undershipment. Look, what I said, this question was asked before, what I said is Our sell-through basically is approximately $245 million forecasted in Q3. And we have a modest undershipment there, so approximately $15 million. That's why our core number is 230, plus Safe Harbor is 75. So that's how you get the 305. It assumes a modest level of undershipment, not a lot, and it's just out of caution, that's all.

Got it. Thank you.

And then in terms of the SST product line, is there any clarity on what you could recognize from a 45X standpoint? And then just to clarify in terms of expected

We have previously said this volume shipments in 2028 and pilots in 2027. Regarding 45X, we are working through the details and once we have a good understanding, we will be able to share more information in the upcoming quarters.

Thank you.

And once again, if you would like to ask a question, please press star and 1. And in showing no additional questions, I'd like to turn the conference call back over to Badri Kothandaraman for any closing remarks.

Thank you all for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter.

Thank you for attending today's presentation. You may now disconnect your lines.