Enphase Energy's Second Quarter 2023 Financial Results Conference Call was held to discuss the company's results for the quarter ending June 3, 2023. On the call were President and CEO Badri Kothandaraman, CFO Mandy Yang, and Chief Products Officer Raghu Belur. The call included forward-looking statements regarding the company's expected future financial performance, capabilities, operations, and growth in existing and new markets. Non-GAAP financial measures were used on the call and have been adjusted to exclude certain charges.

The company reported quarterly revenue of $711.1 million, shipped approximately 5.2 million microinverters and 82.3-megawatt hours of batteries and generated free cash of $225.5 million. The company's worldwide NPS was 74% in Q2 and North American NPS was 77%. The company also focused on root cause fixes of customer issues and expanded customer service and field service teams globally. The company shipped 50,000 microinverters to customers in Q2 and is on track to begin with the third contract manufacturer in Q3. They expect to ship approximately 600,000 microinverters to customers in Q3 from their U.S. manufacturing facilities.

In the second quarter, the international revenue mix was 59% and 41%, respectively. The U.S. revenue decreased 12% sequentially and decreased 1% year-on-year. In Europe, the revenue increased 25% sequentially and more than tripled year-on-year. In Australia, the revenue more than doubled year-on-year. In Latin America, the new battery was introduced in Q2, and in Brazil, the solar graph software platform was introduced. In the U.S., the overall market is experiencing a slowdown due to high interest rates, and the Q2 sell-through of microinverters was only up 2% compared to Q1 and 2% year-on-year.

In the U.S., the Q2 sell-through of microinverters was 6% lower than Q1 and 11% lower year-on-year, with disproportionately worse sell-through in Texas, Florida, and Arizona due to rising interest rates and lower utility rates. In California, the Q2 sell-through was 20% higher than Q1 and 34% higher year-on-year, driven by high backlog of NEM 2 installations. The sell-through in the first half of 2023 was 20% lower than the fourth quarter of 2022 due to the high interest rate environment, and the company is taking aggressive actions to manage down the channel inventory. Despite competition, the company has relied on its differentiated technology, product quality, and customer service to maintain a stable high market share.

By the end of Q2, the company had shipped 1-gigawatt hour of battery systems for storage. They reduced pricing for their second generation battery and expanded the warranty to 15 years. They anticipate increased sell-in and sell-through in Q3 due to the new price point and warranty, as well as strong early customer adoption of the new battery. In California, NEM 3.0 activity is increasing with healthy storage attach rates. For cash systems, homeowners can expect a bill offset between 70-90% and a payback between 5-7 years. In Europe, their business remains strong with year-on-year growth trend.

Enphase launched its IQ8 microinverters and batteries in Europe during Q2, and saw strong growth in countries such as Netherlands, France, and Germany. They also launched their IQ router family of devices in Germany and Austria to enable the integration of third party EV chargers and heat pumps into Enphase solar and battery systems. They plan to launch their third generation IQ Battery 5P in Europe by the end of the year. Self-consumption is becoming the norm in Europe as consumers want energy independence, and Enphase's complete home energy management system solution is well-positioned to meet this need.

IQ Energy is releasing a third generation battery with a modularity of 5-kilowatt hour and double the continuous power and triple the peak power. They are also releasing an IQ8P microinverter with 480 watts of AC power and a 3-phase cabling system for small commercial solar installations. They shipped over 6,600 EV chargers in Q2.

Enphase released updates to their Solargraf design and proposal software platform in Q2, including NEM 3.0 functionality. In Q3, they plan to introduce IQ smart EV chargers with Wi-Fi connectivity, enabling green charging and full visibility into operation of their solar, battery, and EV charger system. Long-term drivers, such as the 30% ITC tax credit, rising utility rates, grid instability, climate change, and increasing EV adoption, are expected to drive meaningful solar plus battery growth. Enphase is focusing on innovation, quality, and customer experience to manage for the long term.

Enphase announced a new $1 billion share repurchase program and provided details on their Q2 financial results. Revenue was $711.1 million, and they shipped 2,121.3 megawatts DC of microinverters and 82.3 megawatt hours of IQ batteries. Non-GAAP gross margin was 46.2%, and GAAP gross margin was 45.5%. Non-GAAP operating expenses were $98.2 million, and GAAP operating expenses were $153 million, including stock-based compensation expenses, acquisition-related expenses, and restructuring and asset impairment charges.

In Q2, Enphase reported income from operations on a non-GAAP basis of $230.5 million compared to $233.6 million in Q1, and on a GAAP basis of $170.3 million compared to $167.7 million in Q1. Net income on a non-GAAP basis was $205.6 million compared to $192.3 million for Q1, resulting in non-GAAP diluted earnings per share of $1.47. GAAP net income was $157.2 million compared to $146.9 million for Q1, resulting in GAAP diluted earnings per share of $1.09. The company repurchased 1.25 million shares of Enphase common stock at an average price of $159.43 for a total of approximately $200 million, and spent approximately $12.7 million by withholding shares to cover withholding taxes for employees divesting in Q2. Enphase generated $269.2 million in cash flow from operations and $225.2 million in free cash flow, and capital expenditure was $44 million for Q2. The company expects revenue for the third quarter of 2023 to be within a range of $550 million to $600 million, including shipment of 80 to 100 megawatt hours of IQ batteries.

The company is expecting GAAP and non-GAAP gross margins to be between 41-44% and 42-45% respectively, while their GAAP and non-GAAP operating expenses are expected to be in the range of $159-163 million and $101-105 million respectively. The company will be a significant U.S. cash taxpayer with a GAAP and non-GAAP annualized effective tax rate of 21%, plus or minus 1%, with IRA benefit. The company is expecting to claim a production credit by direct pay and account for it as a reduction in cost of goods sold. The production credit is expected to be in the range of $24 to $28 per microinverter sold in Q3. The company plans to have their U.S. contract manufacturing facilities fully operational by the end of 2023 and expects shipments to reach 4.5 million microinverters per quarter by the end of 2024.

Enphase has been competing with string inverters since its inception, offering distributed architecture with less components, higher quality, and a 25 year warranty. They also provide 24/7 customer service and 74% NPS. Despite this, they are still facing pricing pressure, but are not planning any microinverter pricing reductions. They believe in AC coupled architecture, which combines Enphase systems for solar and storage.

Philip Shen asked Badri Kothandaraman about pricing for microinverters and batteries. Badri explained that pricing for microinverters is normal and there is no planned reduction. For batteries, the company has introduced a third-generation battery which is priced appropriately for backup, and they have upper pricing protection for their channel partners. These pricing decisions are made with extensive planning.

In order to reduce costs in the supply chain, the company has implemented various initiatives, such as tactical negotiations and design in multisource. These initiatives have allowed the company to procure components more efficiently, and have resulted in significant savings. Price protection for storage has already been accounted for in the company's earnings, and there will be no further impact in Q3 or going forward. If the company decides to lower its ADLP for micros, it will provide price protection to distributors.

The company runs extensive qualifications on their microinverters to ensure quality. They also have a program called World-Class Cost to save money on batteries. This program has allowed them to reduce costs and increase their gross margins. Additionally, they are introducing serviceability on batteries, so that instead of replacing the entire battery, only the power electronics need to be replaced. This has made their batteries more reliable.

The company has taken action to reduce customer downtime and replace batteries in situ, as well as reduce component count and cost for the fourth generation of batteries. In Q3, they will also introduce a combiner box to help installers save time and money. The company has been taking action for the past six years and wants to have 8 to 10 weeks of channel inventory in the U.S.

Badri Kothandaraman discussed the company's capital allocation strategy, which prioritizes internal investments such as domestic manufacturing, R&D, and battery supply chain, before looking at potential M&A opportunities. The company is currently focused on a $1 billion buyback and is exploring opportunities in the small commercial space.

Badri Kothandaraman explains that they are looking for active M&A opportunities and have cash available for share buyback. He also states that they are expecting NEM 2.0 systems to continue through Q3 and NEM 3.0 systems to start in Q4. The Board has authorized $1 billion for share buyback and they will be disciplined about it.

The speaker believes that California will move towards a majority of grid-tied systems, similar to Germany, and that NEM 3.0 will become easier to sell. Installers need to be educated on NEM 3.0, but when they understand the economics, they become more confident in selling it. With a 10-kilowatt hour battery, the payback time is reduced from 7-8 years to 5-6 years. The speaker believes that solar and storage will normalize in 2024.

Badri Kothandaraman discusses the expected volume in the third quarter for Europe and the US. He explains that Europe is underpenetrated and they are entering multiple new regions. In the US, the revenue for Q2 decreased 12% compared to Q1 and they are expecting a 20% drop in overall US sell-throughs compared to their peak in Q4. They are taking a one-time correction in the US and the revenue will mimic the percentage demand drop on a quarterly basis.

Inventory levels in Europe are currently at 10 weeks, which is higher than normal. As a result, the company expects Q3 revenue to be slightly lower than Q2. However, the company is introducing new products in countries where they are currently nonexistent, so they are not worried about the inventory levels or revenue. In the US, inventory levels are lower than normal.

At the end of Q4 '22, the sell-through rate was the highest and the channel inventory was healthy, but the sell-through rate declined in Q1 and Q2, leading to two quarters of extra inventory. In response, the company is throttling shipments into the channel and not making aggressive assumptions about demand. Gross margin guidance is between 42-45%, and the company saved $8 million in logistics last quarter.

Badri Kothandaraman is confident in the trajectory of gross margins for microinverters and batteries. He has implemented initiatives to save on costs, such as second source qualification and negotiation, and has improved learning from one generation to the next. He has also integrated battery management into power conversion, reducing the number of boards from 7 to 2. Julien Dumoulin-Smith asked if sell-through in non-California markets would bottom by 3Q, but Kothandaraman did not provide a definitive answer.

Badri Kothandaraman reports that sell-through of NEM 3.0 is expected to start in Q4, based on anecdotal evidence. The Solargraf software platform has been helpful in observing design and proposal activity for NEM 3.0, with an impressive battery attach rate of over 70%. Raghu has visited 1,000 installers to train them on NEM 3.0, showing them the payback and how to sell to homeowners.

Badri Kothandaraman explains that the company has three contract manufacturers, two of which they have had a long-term relationship with. They plan to steadily ramp up from 50,000 units in Q2 to 4.5 million units in Q4, depending on demand. If demand is not healthy, they will work with the contract manufacturers to make the appropriate decision on how to load the factories.

Badri Kothandaraman discusses the progression of the company's EV charging business. They bought ClipperCreek and moved the manufacturing of EV chargers to Flextronics in Mexico. They have also developed an IQ smart TV charger with connectivity and integration into Enphase solar plus storage, and they plan to expand to Europe in Q1 and Q2 of 2024. Finally, they have demonstrated bidirectional EV charging which is closely aligned with their Ensemble architecture.

In this paragraph, Badri and Raghu discuss the importance of the connected EV charger that will be released in the current quarter. This charger will play an important role in the home energy management system, allowing homeowners to avoid charging their car at certain times and to discharge power into the grid at certain times, especially during the summer. This will help deliver great savings for the homeowner in terms of bill offset and payback period.

Brian Lee asked Badri Kothandaraman about destocking and the quarterly cadences they have experienced. After doing the math, it appears that they are resetting the channel all at once in 3Q and will be looking at a normalized environment in 4Q. Kothandaraman explained that they are not assuming any optimistic demand for 3Q and that they would like to bring the channel back to a healthy place at the end of 3Q. They are also assuming continued weakness and a little bit on NEM 3.0 for the rest of the year.

Badri Kothandaraman discusses how the company is entering new markets in Europe and the U.S. with new products and initiatives to diversify revenue. He mentions that the company is well-received in countries like Netherlands and France, and they are able to manufacture high-power microinverters in the U.S. for which they receive production tax credits. He further mentions that they are always thinking of new areas to enter and pricing strategies to gain market share.

Badri Kothandaraman is confident that the second quarter will be the bottom for battery volumes. He is also discussing the third-generation battery, which has a much shorter commissioning time and provides double the continuous power and triple the peak power of the previous generation. This is beneficial for powering air conditioners.

Sunrun is introducing their third generation of power and battery technology, and they are expecting to see more activity in the fourth quarter due to the introduction of their product in the U.K., Italy, Poland, and Greece. They are also doing well in Germany, where 80% of their business is battery-related. Sunrun is guiding their third quarter revenue to be between 80 and 100 million, which is lower than the previous quarter, with 85% of that decrease coming from the U.S. due to channel inventory and third seasonality in Europe. Sunrun's strategy is to expand into as many geographies as possible quickly.

Badri Kothandaraman explains that when entering a new geography, a cross-functional team is required. This team should include a sales leader, account managers, field application engineers, training personnel, customer service staff, and field service technicians. This team should be staffed up with five to six people, and the process of staffing up is already in motion.

Badri Kothandaraman explains that the company's guidance for Q3 is lower due to a one-time inventory correction and seasonality in Europe. He states that they are close to their customers and that the fundamental drivers remain the same, so they are not concerned about inventory talks. He also mentions that Europe is a "blue ocean" for the company, as they are under-penetrated in the region and have opportunities for solar plus storage in Italy.

The net benefit from the IRA in the second quarter ended was $1.6 million and is estimated to be between $14.5 million to $16.5 million for the third quarter. The net benefit per unit is estimated to be between $20 and $30. If demand is robust, 4.5 million units per quarter will be reached in Q4 of 2024, resulting in a net benefit of $112.5 million.

Badri Kothandaraman explains that their go-to-market strategy focuses on installers in the U.S. as they are the front for the homeowner. However, they also use social media tools to reach the end consumer and provide cover for their installer partners.

Enphase allows their installer partners to be the main face of the company's products, and they are seeing some of their installers shift from cash or loan sales to PPA (Third-Party Owned) sales due to the lower interest rates and IRA benefits. Badri Kothandaraman thanked attendees for their continued support and concluded the conference.

This summary was generated with AI and may contain some inaccuracies.