The operator welcomes participants to the Enphase Energy Fourth Quarter 2023 Financial Results Conference Call and introduces the speakers. The Enphase management team will make forward-looking statements about the company's financial performance, market trends, and operations. These statements involve risks and uncertainties, and the company cautions against relying too heavily on them. Financial measures used on the call are expressed on a non-GAAP basis.

In the fourth quarter of 2023, the company reported strong financial results with revenue of $302.6 million, 1.6 million microinverters shipped, and 80.7 megawatt hours of battery generated. They also achieved a reduction of $147 million in channel inventory and delivered 50% gross margin. The company's worldwide NPS was 77% and they have made progress in solving customer issues. Operations for microinverters and batteries are stable, and the company has decided to manufacture microinverters in the U.S. and redeploy equipment from their contract manufacturing locations in Romania and Wisconsin to other facilities.

The company expects to have a global capacity of 7.25 million microinverters per quarter, with 5 million in the U.S. They anticipate lower shipments in the first half of the year but expect a higher level in the second half. They have two cell pack suppliers in China and will begin manufacturing in the U.S. in 2024. In Q4, U.S. revenue decreased by 35% and overall sell-through was down 9%. In non-California states, sell-through was only down 1%, while in California it was down 7%. The sell-through of microinverters was flat in non-California states and down 27% in California due to NEM 3.0 transition. However, the sell-through of batteries increased by 58% in California due to high attach rates in NEM 3.0 systems.

The company's revenue in Europe decreased by 70% in Q4 due to lower demand from customers. Sell-through of microinverters and batteries also decreased in Q4 compared to Q3. The company is focusing on key markets in Europe, such as Netherlands, France, and Germany, where they are promoting a comprehensive solution with solar plus batteries and energy management software. They believe that solar plus batteries will become the norm in these markets as dynamic tariffs and grid services become more prevalent. The company has also entered new markets in Europe with their IQ8 microinverters and batteries.

Enphase Energy is experiencing growth in Australia, Brazil, India, and Mexico with their microinverter and battery systems. In the US, they have a stable market share and offer tools to help installers with the installation process. In California, their battery attach rate for NEM 3.0 systems is over 80% and their revenue per NEM 3.0 system is 1.5x higher than their average. However, the transition to NEM 3.0 has been slower than expected due to installers still focusing on NEM 2.0 systems and challenges with the sales process.

In this paragraph, the speaker discusses challenges faced by installers in the solar industry, such as lack of confidence in the payback of their systems and the learning curve for installing batteries. They address these challenges by improving their Solargraf software and offering training. The company's Q1 guidance is also discussed, with plans to undership in order to meet end market demand. The speaker then mentions the increasing adoption rates for their third-generation IQ batteries and plans to expand into more countries. They also expect margins on batteries to improve throughout the year due to lower costs. The company plans to introduce a new three-phase battery for Germany and pilot their fourth-generation battery later in the year.

Enphase Energy's new battery will have a cost-effective design and sleek appearance thanks to its integrated battery management and power conversion systems. The company has expanded into 21 countries with its IQ8 microinverters and plans to enter more in Europe and Asia in 2024. They also plan to introduce social housing and balcony solar solutions in European countries. Enphase Energy's latest microinverter, the IQ8P, is currently being shipped to Brazil, India, South Africa, Mexico, and Vietnam and will soon be available in France, Spain, and other emerging markets. The company has also launched a three-phase cabling system variant of the IQ8P for small commercial solar installations and has seen strong early adoption in North America. Enphase Energy is also making strides in the electric vehicle charging market, with over 3,700 chargers shipped in Q4 and the launch of their IQ smart EV chargers in the US and Canada. They are also developing EV chargers for European countries and are working on a bidirectional charger that will allow for V2G and V2H capabilities.

The company's charger will use GaN-based bidirectional inverters to interface with EVs, and their energy management software is crucial for providing a superior customer experience. The software is evolving to manage the increasing complexity of utility tariffs and will be released in Q2 with new features added throughout the year. The installer platform, Solargraf, has new features and is now available in multiple countries. The company expects Q1 to be the bottom quarter for demand, with Europe showing signs of recovery and non-California states bouncing back quickly. The company remains optimistic about NEM 3.0 in the long-term despite some near-term challenges in California.

The company is confident that demand will bounce back in California and is focused on improving their business operations and expanding worldwide. They have introduced new products and are working on innovating for the long-term. In the fourth quarter of 2023, they had a total revenue of $302.6 million and shipped over 660 megawatts of microinverters and 80.7 megawatt hours of IQ batteries. Their non-GAAP gross margin was 50.3%, driven by increased net IRA benefit.

In the fourth quarter, the company's non-GAAP gross margin decreased by 400 basis points due to a change in product mix, but remained stable in terms of average selling prices. This quarter also included a net IRA benefit of $25.8 million for microinverters made in the U.S. and shipped to customers. The company implemented a restructuring plan to reduce operating costs, which will result in a global workforce reduction of 10%. Non-GAAP operating expenses decreased from the previous quarter, while GAAP operating expenses increased due to stock-based compensation expenses, restructuring charges, and amortization for acquired intangible assets. On a non-GAAP basis, income from operations decreased, while on a GAAP basis, there was a loss. Non-GAAP net income and diluted earnings per share also decreased, while GAAP net income and diluted earnings per share decreased significantly. The company ended the quarter with a total cash, cash equivalents, and marketable securities balance of $1.7 billion.

In Q4, Enphase repurchased 1,183,000 shares of common stock for $100 million and spent $27.5 million on employee stock options. They generated $35.5 million in cash flow and $15.4 million in free cash flow, despite economic challenges. For Q1 2024, they expect revenue of $260 million to $300 million, GAAP gross margin of 42% to 45%, and non-GAAP gross margin of 44% to 47%. They also expect a net IRA benefit of $12 million to $14 million and lower microinverter shipments in the first half of 2024. They plan to increase U.S. microinverter shipments in the second half of 2024.

The speaker discusses the company's expectations for operating expenses and taxes in the upcoming year, as well as their performance in the previous year. They also mention their focus on financial discipline and generating free cash flow. The speaker then opens the floor for questions from listeners.

The speaker is confident that Q1 could be the bottom and that Q2 will see a significant pickup in revenue compared to Q1. They expect end customer demand to be around $450 million to $500 million and plan to undership by $150 million. Q1 is expected to have a 10% decrease in sell-through demand and an undershipment of $130 million. The speaker believes that Q2 will be better than Q1, assuming nothing unexpected happens.

The speaker discusses the company's inventory and demand, stating that they expect to see improvement in sell-in numbers and seasonally better sell-through numbers in the second quarter. They also mention seeing progress in Europe and the introduction of new products in various countries. The speaker expects excellent revenue numbers in June, with the only potential issue being the uncertainty of California's market. The second question pertains to the battery storage segment, with the speaker noting that the mix is heavier on batteries in the first quarter but overall margins are holding steady due to expected expansion throughout the year.

In paragraph 15, Badri Kothandaraman discusses the sell-through of batteries in Q4, which was the highest it has ever been at 140 megawatt hours. The sell-in lagged behind because the company wants to clean up the channel. The sell-through was driven by an increase in California due to NEM 3.0, and there is also momentum in Europe. The company plans to improve gross margins by reducing cell pack costs, which is applicable for third-generation batteries, and by introducing fourth-generation batteries.

Enphase is transforming its supply chain to manufacture microinverters in the U.S. and assemble batteries in China, resulting in a $75 per kilowatt hour benefit. The company is also reducing the number of boards in their batteries from nine to three, leading to lower costs and a more elegant form factor. This, along with the advantages of cell pack costs and microinverter manufacturing in the U.S., is expected to increase gross margins. The company is also optimistic about the future of their gross margins and mentions a question about OpEx and compensation plans from a caller.

The company has announced a restructuring which affected 10% of their workforce and resulted in a decrease in non-GAAP operating expenses from $95 million to $100 million per quarter to a desired range of $75 million to $80 million in the second half of 2024. They have also shut down operations in Romania and Wisconsin, reducing their capacity from 10 million to 7 million microinverters per quarter. The company has been reducing discretionary spending and implementing a hiring freeze throughout 2023. The restructuring will result in additional charges in Q1 and Q2.

The speaker discusses the company's reduction in operational expenses from $99 million to $86 million due to a restructuring plan implemented in December. They also mention a 10% reduction in worldwide headcount and contractors, which will bring the company's quarterly run rate to $75 million to $80 million. The speaker also mentions that there has been no significant change in the pricing environment and that the company manages special pricing adjustments tightly. In regards to scaling up production to reach a capacity of $5 billion, the speaker mentions that 900,000 units were shipped from U.S. factories in the fourth quarter and does not provide a specific timeline for reaching the capacity goal. The speaker also does not mention any specific plans for increasing demand, but notes that the company shipped 0.5 million units in the first quarter.

The company is aiming to reduce inventory levels in the first half of the year and expects lower shipments as a result. In the second half, they anticipate two-thirds of their microinverters to be made in the U.S. and the remaining one-third in Europe. The undershipment of $130 million is expected to be split between the U.S. and Europe in a similar ratio. The company's production and inventory levels are dependent on demand and they aim to balance their factories accordingly.

Badri Kothandaraman, speaking on a conference call, explains that for Q4, the undershipment was roughly 50-50 between the U.S. and Europe, but for Q1, it will be more tilted towards 60-40 U.S./Europe. He also discusses the probability and confidence in their call that the destocking will truly end by the end of Q2, and how recent shutdowns and bankruptcies of other companies in the industry may impact their ability to reach their projected $450 million to $500 million run rate. He also mentions the potential impact of the SunPower situation.

The speaker states that they do not expect to make $130 million in Q2, but they expect to be at a reduced level. They believe the problem will go away by the end of Q2 and they are sticking with that prediction. The speaker also mentions that bankruptcies are causing some friction in the short term, but the industry is resilient and other installers will pick up the demand. The speaker believes that Europe will recover earlier than the US, with both regions being normalized by Q2. The speaker also mentions that the Netherlands is still weak, but it is improving gradually.

The speaker discusses the situation in the Netherlands where end consumer demand for solar has decreased due to an energy company charging an export penalty for solar. Customers are worried about this penalty and the uncertainty surrounding net metering in the country. The speaker mentions a recent solar mixed event where they gathered installers, energy providers, and transmission line operators to discuss a comprehensive solution for the market, including solar plus batteries with energy management software. The goal is to unlock the full potential of the market and manage excessive export from solar reducing homes.

Badri discusses the potential for growth in the solar and battery market in the Netherlands, citing intelligent energy management and the potential for a quick payback period. He also mentions the upcoming decision on net metering and the company's efforts to educate homeowners on the value proposition. Badri believes that the bottom has been reached in the market and predicts a pickup in both solar and battery sales. He also mentions that the company has a general alignment with energy providers in the country. Badri does not provide specific numbers for each country, but suggests that the Netherlands, France, and Germany are all important markets for the company's growth.

The top three revenue-generating countries for the company in 2023 are expected to be Netherlands, France, and Germany. The current situation in Netherlands is expected to improve, while France is experiencing steady demand and growth. Germany is facing inventory problems, but the company's activations are increasing, indicating a potential for growth. The company also has a strong presence in Italy and the UK, with high attach rates for storage solutions.

The company has recently entered the European market and expects to see growth in the five main markets of Germany, France, Italy, Netherlands, and the UK. They are also working on improving their microinverters and batteries in smaller markets such as Spain, Austria, Switzerland, Greece, and Poland. The company already has a presence in Sweden and Denmark and is optimistic about the potential for growth in these countries. The transition to solar plus battery in these markets highlights the importance of energy management software, especially in dynamic tariff environments where homeowners can benefit from negative pricing and grid services programs.

The company is seeing a trend of solar plus battery plus energy management plus grid services creating value for homeowners. They expect battery shipments to increase in the second half of the year, potentially reaching 200-megawatt hours. The IQ8P product, introduced in December, is expected to generate meaningful revenue this year and targets the US market for small businesses.

The company expects to see a return to normal in the second half of the year as inventory in the channel is cleared. They are also confident in their product and expect to see continuous growth in shipments. They are optimistic about the potential for growth in 2025, even in a higher interest rate environment.

The company is planning to diversify their product portfolio by introducing microinverters and batteries in various countries, including Europe, Asia, and Latin America. They also plan to focus on social housing and balcony solar in countries like the Netherlands and Germany. These initiatives have the potential to tap into 250-megawatt markets.

The speaker discusses plans to address 500 megawatts and introduce EV chargers in several European countries, including the U.K., Netherlands, Germany, and France. They also mention working on GaN-based bidirectional chargers and energy management software. They aim to increase revenue per home and have a lot of potential revenue ahead. The next question asks for more information on the Netherlands and dynamic rates.

The speaker explains that the Dutch market is focused on converting to renewables and expects solar plus battery to be the predominant market. They believe that all systems will eventually be energy systems, rather than just solar or storage. They also mention the need for sophisticated software to manage dynamic tariffs and various energy sources such as EV chargers and heat pumps.

The Dutch market is moving towards grid services and participation in an imbalanced market, with solar being a key element. Solar plus battery self-consumption has a payback of 8-9 years, which can be reduced by dynamic tariffs and imbalance management, resulting in a payback of 6-7 years. The Netherlands has relaxed rules for permitting solar and storage, and since there are not many outages, the focus for batteries will likely be on load shifting rather than backup power.

The company offers backup options for their batteries, but customers have been requesting grid tied batteries. These batteries are simpler to install and do not require additional equipment. The battery sizes are typically between five and ten kilowatts and the attach rates in the Netherlands are high. The company plans to start manufacturing batteries in the US later this year, which will help improve their supply chain and lower costs.

In paragraph 33, the speaker discusses the assembly of the company's battery in the U.S. and how it will qualify for an additional 10% in ITC for EPO customers. They also mention that both parts of the battery will have similar gross margins and continuously improve as costs decrease. They then address the potential impact of the upcoming election on their investments and job creation. In the following question, the speaker is asked about the mix of NEM 2.0 and NEM 3.0 activations in January and when the NEM 2.0 backlog is expected to run out.

Badri Kothandaraman, CEO of Enphase Energy, discusses the activation process for their solar systems and how it differs from the sell-through process. He also shares the ratio of NEM 3.0 and NEM 2.0 systems in January and the expected ratio for the first quarter. In response to a question about distributor inventory, Kothandaraman explains that shorter lead times from U.S. manufacturing will benefit the company by reducing inventory costs and increasing end customer demand.

The speaker discusses the positive impact of upcoming changes and negotiations with SunPower on the company's revenue. They also mention the high attachment rate of batteries to NEM 3.0 solar systems, which has increased to 50% for the company.

Enphase's market share is not at 100% because customers have a choice in whether or not to install Enphase batteries. However, the company is constantly working on improving their product to increase battery attachment rates. The biggest challenges in selling storage, particularly in California, are the added cost and complexity of batteries.

Enphase has developed a high-quality third-generation battery that is easy to commission and can be used for both grid-tied and backup purposes. The battery is designed for easy servicing, with most issues being related to battery management and power electronics, which can be easily replaced by service personnel. This serviceability is a major differentiator for Enphase and helps installers focus on sales rather than troubleshooting.

The company's batteries are best-in-class and have superior commissioning, quality, serviceability, and modularity. They use LFP lithium ion phosphate and have UL 9540A certification. The company also has a design tool called Solar Graph that helps installers create customized proposals for customers. The company acknowledges that they need to do more to educate dealers and regain their trust in order to achieve widespread adoption of their batteries. They plan to do this through events and other efforts.

The company plans to simplify their software to make selling easier for their team in the coming months. They also expect a decrease in gross margin due to a mix of factors, including underutilization. They have cost downs coming in the next few quarters, particularly with their new battery products, which they believe will improve gross margins. They also mentioned the use of GaN technology in their products.

The company is planning to release their next generation inverter, IQ9, with two power flavors. The challenge is to reduce costs and fit 427 watts of power in the same form factor as their current product, IQ8. They believe this is possible due to their bidirectional GaN technology which allows for smaller transformers and overall smaller inverters. The company is also considering the shifting demand for their products and how it will affect their sales in the second half of the year.

The speaker discusses the seasonality factor in non-California states and believes that microinverters will bounce back after a flat Q4. They also mention the potential for growth in Europe and the limited downside in California due to the higher revenue from NEM 3.0 systems. The speaker also addresses the possibility of a modification to the 45x credit and states that they will analyze the data and make decisions accordingly, including potentially shifting manufacturing locations. They emphasize their commitment to transparently reporting gross margin without IRA and mention their two contract manufacturers and their ability to ship worldwide. The speaker concludes by stating that they will make the best economic decisions for the company.

Maheep Mandloi asks about the gross margin and the impact of the 45x tax credits on Q1 guidance. Mandy Yang explains that the non-GAAP gross margin is in line with Q4, but drops by five points due to the reduction in IRA benefits from shipping only 500,000 units. Mandloi also asks about the possibility of getting the IRA benefits on microinverters in the IQ batteries going forward. Raghu Belur confirms that this is the expectation. Tristan Richardson asks about the threat of competition with integrated central soul of inverters in high attached geographies. Badri Kothandaraman and Raghu Belur both emphasize that competition is not new for the company.

The speaker discusses the competitive environment they face against string inverters and centralized topology, but notes that they have a strong value proposition and a complete solution sale. They also mention the importance of upfront design tools and customer service. The speaker acknowledges competition and their efforts to continually improve their product. The questioner asks about pricing and the potential for gaining market share in new markets and with battery launches.

The speaker discusses the company's pricing strategy and how it is based on value rather than competing on price. They believe that their high quality products justify their premium prices and do not plan to drop prices to gain market share. The question is raised about the use of cash and buybacks, and the speaker mentions that they have already bought back $100 million and plan to continue with similar buybacks in the future.

The company is disciplined in their share buyback strategy and looks for opportunities to acquire technology companies to integrate into their system. They are not interested in acquiring installation companies but are open to opportunities in home energy management software and innovative battery technologies. They are constantly looking for these types of acquisitions.

Enphase is looking at various companies for potential acquisitions, but they are being very selective and only choosing ones that fit well with their company and have strong integration potential. In the U.S., interest rate changes may affect demand for both microinverters and batteries, particularly in California. The conference call has now ended.

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