The operator welcomes listeners to Enphase Energy's conference call to discuss their financial results for the third quarter of 2023. The call will include forward-looking statements and caution is advised due to potential risks and uncertainties. Financial measures will be expressed in a non-GAAP basis.

In the third quarter of 2023, the company reported strong financial results, with revenue of $551.1 million and 3.9 million microinverter shipments. The company also generated free cash flow of $122 million and saw a 77% worldwide NPS. Operations were stable, with manufacturing in the U.S. and two cell pack suppliers in China for IQ batteries. The company is making progress on customer issues and expanding their field service teams globally.

Enphase Energy has a manufacturing capacity of 300 megawatt hours per quarter and plans to bring manufacturing of IQ batteries to the U.S. by mid-2024. In Q3, their U.S. revenue decreased by 16% but their IQ battery sales increased by 34%. In Europe, revenue decreased by 34% but IQ battery sales were down by 14%. Enphase has entered new markets in Europe and Australia and launched new products in Brazil and India. For Q4, they are expecting revenue in the range of $300 to $350 million.

In the fourth quarter, the company experienced a $150 million inventory correction in the U.S. and Europe, leading to a decrease in demand and a need for decisive inventory changes. The company is being conservative in its assumptions and expects demand to recover in the second quarter. Despite the lower guidance, the company is maintaining its gross margin and has not made any significant pricing changes. In the U.S. market, there has been a stabilization of sales in non-California states, while in California, there has been a 25% decrease due to the transition to NEM 3.0, which will take a few more quarters to normalize.

The utility rates in California are increasing, with one utility requesting a 22% rate hike. However, the payback period for a solar plus battery system will be similar to a solar only system. The company's microinverter market share is stable, and they have various tools to help their installers and partnerships. In Europe, there are challenges due to weaker demand and oversupply of solar equipment, but the company remains bullish on the market. The Netherlands, France, and Germany are the company's largest markets in Europe, with a 40% decrease in Q3 sell-through compared to Q2 in the Netherlands.

The company experienced a down quarter due to customer fears and confusion around net metering and export penalties. However, the CEO is confident that this is a temporary setback and expects the market to rebound after the elections in November. They are well positioned to take advantage of changes in the market, such as the increasing popularity of total system solutions and dynamic tariffs. In France and Germany, sell-through was down due to seasonality but is expected to rebound quickly. The company's new product, the IQ battery, is seeing increasing adoption rates and they plan to expand into more countries with a fourth-generation battery in the future.

Enphase has recently entered new markets with their IQ8 family of microinverters and plans to continue expanding in Europe and Asia. They have also introduced the IQ8P microinverter, their highest power microinverter to date, for residential markets in emerging countries such as Brazil, India, South Africa, Mexico, and Spain. They have started shipping the product in Q3 and plan to release it in the US for small commercial installations. Enphase is also bullish about the small commercial solar business and their EV charging business, having shipped over 3,500 chargers in Q3 and launching their IQ smart EV chargers in the US and Canada. They are also developing EV chargers for Europe and expect to introduce them in 2024. Lastly, they discuss their installer platform, Solargraf, which now offers M3.0 functionality for solar and battery systems in California.

The company is expanding its software platform to more countries and is working on new features and functions. Despite a slowdown in demand, the company remains optimistic about long-term growth due to factors such as tax credits, rising utility rates, and increased adoption of electric vehicles. The company's strategy includes investing in customer relationships, innovation, and global expansion. They are also focused on reducing costs and providing a high-quality customer experience. The call will now be turned over to Mandy for a review of the company's financial results.

In the third quarter of 2023, our total revenue was $551.1 million and we shipped 1585.6 megawatts DC of microinverters and 86.2 megawatt hours of IQ batteries. Our non-GAAP growth margin was 48.4%, driven by increased net IRA benefit. Operating expenses were $99 million on a non-GAAP basis and $144 million on a GAAP basis. Income from operations was $167.6 million on a non-GAAP basis and $118 million on a GAAP basis. Net income was $141.8 million on a non-GAAP basis and $114 million on a GAAP basis. We ended the quarter with a total cash balance of $1.78 billion.

In the third quarter of 2023, Enphase repurchased shares of its common stock, reduced diluted shares, and generated healthy cash flow. They expect to continue this trend in the fourth quarter, with estimated revenue and gross margins within a certain range. Non-GAAP measures will exclude certain expenses. GAAP operating expenses are expected to be within a specific range, including estimated expenses for stock-based compensation and acquisitions.

The company plans to reduce non-GAAP operating expenses by 12% in Q4, while still investing in customer service, innovation, and sales. They expect their annualized effective tax rate for 2023 to be around 22%, and will receive a production credit of $26-28 per microinverter sold in Q4. They anticipate shipping 1 million microinverters this quarter and have all three of their U.S. manufacturing facilities operational. In terms of future demand, they expect to under-ship in Q1 by a similar amount as in Q3 and Q4, but this is contingent upon demand trends staying stable. The under-shipment in Q1 is expected to be around $150 million.

The speaker discusses the current state of the markets, specifically mentioning the stabilization of non-California states and the potential for a 10% decrease in California. They also mention the expected recovery of Europe in Q1 and the potential for normalized inventory levels in Q2. The speaker also mentions the expected revenue to approach $450 million to $500 million in the second quarter assuming no change in demand. They also note the recovery of sell-through rates in France and the need for education in the Netherlands due to political uncertainty.

The speaker discusses the potential for growth in the solar and battery storage market in the Netherlands. They explain that the dynamic tariff system and changes in net metering will create opportunities for solar plus storage in 7 million homes. The speaker also mentions a decrease in gross margins due to product mix, specifically a decrease in micro inverter sales. They clarify that there are no planned changes in pricing.

The speaker discusses the competitive pricing market and how their company has a disciplined business process in place. They have a pricing team that focuses on value and a cost team that works on reducing costs. Despite competition and underloading, they are confident in their gross margins and expect to drop costs by 10% per year. However, they acknowledge that some competitors may behave irrationally in the current market conditions.

The speaker explains that some customers may be tempted to switch to a lower cost provider without fully understanding the risks involved. However, most of the company's installers are experienced and well-trained, prioritizing distributed architecture, quality, and customer service. While choosing a lower cost option may save money initially, it can lead to higher costs in the long run due to potential quality issues and service calls. The speaker emphasizes the importance of considering the full system level and using tools like Solargraf to reduce soft costs. Despite some challenges, the company is seeing an increase in market share and interest from installers.

Badri Kothandaraman expresses cautious optimism about the California market, stating that as utility rates continue to rise, the payback for solar plus storage systems will become more favorable compared to solar-only systems. He also mentions the potential for batteries to provide resilience and grid services, as well as Enphase's strong position in the market with their microinverters and high-power batteries.

In California, the high discharge rate allows for the maximization of power. The company has solar plus storage, energy management software, and an optimization engine for homeowners to use. They are optimistic about the market due to increasing demand for electrification and rising utility rates, as well as their efforts to educate and provide tools for customers.

Badri Kothandaraman discusses the headwinds facing the company, including the importance of educating installers and the need for all companies in the energy space to train them. He also mentions that the company is cutting OpEx by 12% in Q4 through measures such as a hiring freeze and cutting out unnecessary expenses.

The company has taken actions to reduce their expenses and cut down on unnecessary costs. They have been able to cut down on 12% of expenses and are aiming to get back to their baseline of 15% of sales. They are aware of the temporary decrease in revenue and are striving to operate close to their model. The company's suppliers are also working with them to find solutions for the decrease in volumes and both parties are focused on being profitable. The company cannot disclose the specific actions they are taking with their suppliers, but they are reflected in their P&L.

The company will continue to work with their customers over the next few quarters and provide transparent financial guidance. The speaker, Badri, explains that SPA (special pricing adjustment) is a common business process at Enphase and is always happening. It involves adjusting prices based on volume and is accounted for in the same way as before. The questioner, Philip, asks about lower micro pricing under SPA agreements and how this is reflected in the company's financial statements.

The speaker discusses the company's performance in the last six years and addresses concerns about pricing adjustments. They mention that they will continue to use SPAs and that their accounting process for SPA rebates has not changed. The speaker also provides a logical trend for margins in 2024, with Q1 likely being similar to Q4 due to product mix and Q2 potentially returning to pre-undershipment levels. However, they do not give official guidance.

The company is expecting the microinverter mix to be higher in the current quarter. They are being cautious about making any acquisitions in the current market, but are constantly looking for strategic and cultural fits. They are currently beta testing their small commercial product.

The speaker, Badri Kothandaraman, discusses the company's plans to introduce a new product in the current quarter and expects to generate revenue from it in Q4. In response to a question about the impact of weaker demand and distributor issues in Europe, Kothandaraman explains that the market was more aggressive last year due to the Ukraine crisis, but that enthusiasm has since tempered. He also mentions that product availability, particularly for panels, is now high.

The paragraph discusses the current state of the solar panel market, focusing on the situation in the Netherlands. It mentions the issue of over-inventory and its impact on distributors, as well as the recent scare caused by an energy company's proposal to charge a penalty for exporting solar energy back into the grid. The paragraph also mentions the pressure being put on the government to evolve net metering into a system that allows for self-consumption of solar energy. Overall, the situation in the Netherlands is described as not so bad, with a payback period of six years and potential for growth in the solar and storage market.

The upcoming election in the Netherlands will likely bring clarity to the net metering policy, which will continue until 2025. After that, a combination of solar, storage, and dynamic tariffs will maintain good payback for consumers. Many European countries are following a similar trend, with Germany being ahead due to their early introduction of feed-in tariffs. Energy prices are also increasing in Europe, which will provide a tailwind for the solar industry. Despite these changes, the payback for solar remains attractive in countries like the Netherlands and France.

In the second quarter, there has been a small disruption in Europe due to inventory issues, but the company expects a quick recovery in revenue. The expected recovery is based on the assumption that there will be a normalization of inventory levels in the channel, which is typically around 8-10 weeks. However, with localized manufacturing, there is a possibility that this number could be reduced to 5-6 weeks. The calculation for "weeks on hand" is explained and it is emphasized that the number of units shipped into the channel and the number of units drained from the channel should be the same. If there is a decrease in demand, the number of units accumulated in the channel will increase.

The speaker discusses a scenario where a decrease in demand leads to an increase in weeks on hand for a product. They mention the possibility of blowing up disproportionately if the demand continues to drop and state that logic should prevail in managing inventory levels. The speaker also mentions the possibility of exporting US manufactured goods to international jurisdictions in the future. The questioner then asks about this possibility and the speaker confirms that they are not currently exporting but will consider it. The next questioner asks about a different topic.

The speaker discusses their exclusive deals with various customers and addresses the question of how locked in those deals are for the next year. They emphasize the value they place on their partnerships and their commitment to renewing contracts. They also mention their positive relationship with contract manufacturing partners and their flexibility in terms of volume fluctuations.

The company is aware of the short-term and long-term problems they face and is willing to restructure to alleviate any pain. They report all accounting in their P&L and view the current situation as temporary. They are also aware of the impact on their contract manufacturers and plan to share the pain with them. The demand backdrop is tough, but they have strong partnerships with leasing companies.

The speaker discusses the potential impact of loan moves on their business, mentioning potential product mix issues but stating that the business is not significantly affected. They also mention anecdotes about long-tail installers in California going out of business, but they do not have direct data on this. The company is trying to help these installers during this stressful time. The majority of their business is done through distribution partners, so they have less direct contact with the long tail installers. The speaker also mentions the potential growth from new markets such as the U.K., Greece, Denmark, and India, which could affect the timing of stabilization and potentially lead to growth above the 2Q timeframe.

Enphase Energy is expanding into new markets, such as Europe and Asia, and introducing new products, such as batteries and microinverters. This requires establishing infrastructure and training installers, which can take several months. They are also targeting the small commercial market and have recently introduced a connected EV charger to meet the growing demand for electric vehicles.

Badri Kothandaraman, CEO of the company, discusses the potential for their product to work with solar and batteries, allowing homeowners to optimize their energy use and do "green charging" for their electric vehicles. They are also introducing EV chargers in Europe and have plans to expand their home energy management software to include third-party EV chargers and heat pumps. This will give homeowners one app to manage all their energy needs. The company has multiple strategies in place to expand their products and services globally, which were not included in their recent financial report.

The speaker gives an update on the health of the business outside of California, specifically in the long tail market. They mention that the non-California business is stabilizing and the first 3 weeks of Q4 have been slightly up. However, it is still down by 30-35% compared to the same time last year. The speaker also mentions that they do not have information on installers going out of business, but they have not seen a trend of loans moving to leases. When asked about Texas and Florida specifically, the speaker states that they do not have any specific information on those markets.

The speaker discusses the disproportionate impact of utility rates and interest rates on certain states, such as Texas and California, and mentions the trend of companies like Sunrun, Sunnova, and Sunpower accessing ADS markets for third-party ownership. They also address the question of whether the company could generate higher earnings if they dropped prices and grew faster, but emphasize the importance of pricing based on value rather than cost.

Badri Kothandaraman, CEO of Enphase, discussed the company's strategy for innovation and maintaining high quality products. He mentioned the importance of adding value in microinverters, batteries, and software, and emphasized the company's philosophy of "innovate or die." In terms of the demand and supply dynamic in Europe, Badri stated that they expect to recover in the next two quarters, but this is based on the assumption that the demand will not change from its current level. He also mentioned that in the U.S., they have strong partnerships and are focused on defending their market share.

The company's executives are constantly visiting customers and working to gain market share. They prioritize innovation, quality, and customer experience, and are proud to offer made-in-America products. They also plan to bring their batteries to the U.S. and take advantage of domestic content. The company takes competition seriously and is always working to maintain market share. Their priorities for capital allocation may have changed due to the current stock price.

Badri Kothandaraman, CEO of SolarEdge Technologies, expects that the company will continue to buy back stock in a disciplined manner in the future. They have already bought back $310 million in the last two quarters. When asked about competition from Tesla's new Powerwall 3 offering, Raghu Belur, Co-Founder of SolarEdge, stated that competition is not new to them and they have a strong value proposition against string inverter technology. They produce more energy, have maximum power point tracking, and are more reliable due to their distributed architecture.

The paragraph discusses the advantages of using Enphase string inverters compared to traditional string designs. Enphase string inverters eliminate single points of failure, do not require stringing or string design, provide per module information, and are safer due to low voltage DC. The company also offers a 25-year warranty and the third-generation battery has a high sea rate, allowing for economic benefits for homeowners.

The speaker discusses the safety features of their technology, including the use of LFP chemistry, and how it sets them apart from competitors. They also mention their comprehensive solution, including their customer service and app, and their competitive position in the market. They then address the challenges in the California market, mentioning their efforts to educate installers and automate processes, but also acknowledging the ongoing difficulties with permits and waiting for market conditions to improve.

Raghu Belur, co-founder of Enphase, believes that the solar industry needs to continue educating installers and homeowners in order to drive growth. He also mentions that the tools and economics are in place, but it will take time to convince customers. He expects the California market to turn around and believes that competitors are also working towards educating the market. CEO Badri Kothandaraman thanks everyone for attending the call and looks forward to the next quarter.

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