Enphase Energy, Inc. (ENPH) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Enphase Energy’s Fourth Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Christina Carrabino. Ma'am, you may begin.

Thank you. Good afternoon and thank you for joining us on today’s conference call to discuss Enphase Energy’s fourth quarter and year ended 2014 results. This call is also being broadcast live over the Web, and can be accessed in the Investors section of Enphase Energy’s Web site at www.enphase.com. On today’s call are Paul Nahi, Enphase Energy’s President and Chief Executive Officer; and Kris Sennesael, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter and year ended December 31, 2014. We are providing an accompanying presentation with our earnings call that you can access in the Investors section of our Company’s Web site. During the course of this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy’s financial performance, market demands for its microinverters, advantages of its technology, market trends, future products and future financial performance. These forward-looking statements are based on the Company’s current expectations and inherently involve significant risks and uncertainties. Enphase Energy’s actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties. Factors that could cause results to be different from these statements include, factors the Company describes in its press release of today, especially under the section entitled Forward-Looking Statements, as well as those detailed in the section entitled Risk Factors of the Company’s report on Form 10-Q for the quarter ended September 30, 2014. Additional information will also be set forth in those sections in Enphase Energy’s Annual Report on Form 10-K for the year ended December 31, 2014 which will be filed with the SEC in the first quarter of 2015. Copies of these documents may be obtained from the SEC or by visiting the Investors section of the Company’s Web site. Enphase Energy cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in its expectations. Also, please note that certain financial measures used on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. The Company has provided reconciliations of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the Investor Relations section of its Web site. Now, I’d like to introduce Paul Nahi, President and Chief Executive Officer of Enphase Energy. Paul?

Good afternoon and thanks for joining us today to discuss our fourth quarter and year ended 2014 financial results. We closed 2014 on a high note with an exceptional fourth quarter. We reported record financial results including revenue of $105.2 million an increase of 57% year-over-year. We also reported record non-GAAP gross margins of 33.5%. The combination of accelerated top-line growth and further gross margin expansion resulted in another quarter of positive operating income and net income along with non-GAAP diluted earnings of $0.07 per share. For the full year of 2014 we reported record revenue of $343.9 million up 48% over 2013. Non-GAAP gross margin was a record 33.1% and we recorded our first full year of non-GAAP profitability with non-GAAP net income of $2.7 million or $0.06 per share. Kris will review the fine points regarding our fourth quarter and 2014 financials, but I will say that I'm extremely pleased with our financial results. The revenue growth of almost 50% year-over-year was driven by strong demand in the U.S. residential and small commercial markets where Enphase is the leading inverter company, as well as market share gains in the UK and Australia. And Enphase has made great strides in positioning itself as a leading energy solutions company. In the U.S. market fourth quarter revenue was up 57% year-over-year as we continue to experience significant demand for our microinverter systems from both current and new customers. During 2014 we continued to increase our U.S. residential and small commercial market share which we estimated to be in the low-to-mid 40% range based on megawatts shipped and substantially higher based on revenue. We've been growing our business with our key customers and further diversifying our customer base with the addition of multiple large, medium and small accounts. We're currently selling into the seven out of the top-10 Tier 1 installers in the U.S. residential market. In addition, our market share is increasing with the Tier 2 installers as well as with the thousands of smaller installers across the country. We're also engaging with new entrants attracted to the fast growing U.S. market. As we continue to drive revenue from new go-to-market channels, including the new home builder segment, roofers, HVAC installers and new alternative financing providers. On the international front, we've made great progress in executing on a diversification and growth strategy as our fourth quarter revenue was up 59% year-over-year, primarily due to strong performance in the UK and Australia. In the UK, fourth quarter revenue increased $87% year-over-year as we continue to expand our distribution channel and grow our business with several major residential installers. We've also been very pleased with our progress in Australia and New Zealand we posted strong fourth approval with revenue up 25% sequentially At the beginning of 2014 we announced the expansion of our business in the Australian residential and commercial solar market. The local team executed extremely well and our market share has grown to an estimated 6%. We're excited about the growth prospects in this region and are targeting double-digit market share by the end of 2015. In addition, we continue to work on further geographic expansion within the APAC region. From an end market point of view, we're very pleased with our residential business which accounted for approximately 85% of revenue in 2014 and with the continued progress in our commercial business. We recently began shipping our C250 Microinverter Systems to commercial solar customers in the U.S. The C250 delivers on Enphase's successful track record of leading the microinverter market with unique and innovative systems that provide clear economic benefits for our customers including a better ROI and lower levelized [ph] cost of energy. The system offers both the technology as well as the O&M services capable of taking a commercial scale system from concept through implementation for long-term O&M. Now that we've started shipping the new system as part of Enphase's comprehensive commercial offering, we're seeing strong interest from both new and existing customers. Looking back, 2014 was a year of unparalleled technology innovation for Enphase as we took big steps forward in our evolution from a microinverter systems company to an energy technology company. During the year, we announced some groundbreaking and exciting new products and services including our distributed network, Enphase energy management system. This energy management system is built upon our fifth generation microinverter with groundbreaking new features including research including bidirectional power flow that enabled the development of our revolutionary AC Battery storage solution. The new system also includes improved Envoy-S Gateway with increased network, metering and control functionalities and new energy management capabilities through the Enphase Enlighten software platform. Also during 2014 we demonstrated that our high technology business model with outsourced manufacturing scaled very well. Our world-class operations team in close cooperation with our manufacturing partner Flextronics increased production volume of our microinverters from approximately 400,000 units per quarter in the fourth quarter of 2013 to over 1 million units in the fourth quarter of 2014. We are continuing to set ever increasing standards for quality and reliability. As a result of our technology innovation, Enphase is very well positioned to become a leading global energy technology company in the residential, commercial, utility scale and micro grid markets. In addition, all of our new products and features will be supported by Enphase’s world-class operations and maintenance services team. Enphase is leading the efforts to streamline solar PV asset management and O&M services while preparing for the broader based maintenance and productivity services requirements of future energy management systems. We recently announced a strategy initiative to accelerate the expansion of our Enphase energy services or EES program. With over 450 megawatts under management EES works with system owners, operators and installers to protect their solar investments with a scalable asset management and O&M offering. As part of this strategy initiative, we acquired the assets of Next Phase Solar, a leading provider of O&M services for the U.S. solar PV industry. Next Phase Solar offers comprehensive solar O&M and asset management services to owners, equipment manufacturers, financiers, installers and EPC contractors. This acquisition strengthens our existing capability to proactively operate and maintain residential, commercial and utility scale PV power plants within the U.S. regardless of manufacturer or brand. We'll also continue to leverage our data management cloud-based system Enlighten and are partnering with utilities to help strengthen and enhance good quality. As an example, we partnered with Hawaiian Electric to successfully upgrade the operating behavior of approximately 800,000 of our smart software defined microinverters and sold in Hawaii to better integrate the PV systems into Hawaii’s changing island grids. This unprecedented technological accomplishment came as a result of an ongoing collaboration between Enphase, Hawaiian Electric and other industry partners to find technical solutions for integrating high levels of PV in Hawaii at low costs to end customers. This collaboration provides a quantifiable example of how our distributed network’s technology with its robust bidirectional communications and software control can provide immense value and save rate payers millions of dollars in upgrade costs. By working closely with our utility partners like Hawaiian Electric, we are able to move the industry closer to achieving the full integration of solar on to the grid while illustration the broader smart grid capabilities that Enphase can provide. Our technology leadership was further validated when Frost & Sullivan recently awarded Enphase with its 2014 Global Award for technology leadership. Frost & Sullivan presents this award annually to the company that has demonstrated uniqueness in developing new technologies that raises the bar for product functionality and customer value. I will close my comments by acknowledging our outstanding results for the fourth quarter and full year 2014. We had a great year, marked with many milestones including record financial performance resulting in our first full year of profitability on a non-GAAP basis, many new customers and partners, global expansion, the announcement of our energy management systems, further leveraging of our data management cloud-based system, successful partnering for enhanced utility grid management and groundbreaking new product announcements. I'm very proud of what we accomplished which was made possible by the ongoing hard work and dedication of our entire Enphase team. Now, I’ll turn it over to Kris for his review of our financial results.

Thank you, Paul. I will provide some more details related to our financial results and then I will provide our business outlook for the first quarter of 2015. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis unless otherwise noted. As Paul already indicated we finished 2014 with a very strong fourth quarter. Total revenue for the fourth quarter of 2014 was an all-time revenue record of $105.2 million, an increase of 57% compared to the fourth quarter of 2013. We exceeded our revenue outlook of $98 million to $103 million that we provided last quarter. The large year-over-year growth was driven by overall strong demand for Enphase energy microinverter systems in our core U.S. residential and small commercial markets as well as further market share gains in the international markets, especially in the UK and Australia. We shipped 180 megawatts AC or approximately 207 megawatts DC during the fourth quarter of 2014, an increase of 67% on a year-over-year basis. The 180 megawatt shipped represents approximately 799,000 microinverters of which 88% was our fourth generation microinverter system. The Enphase M250 represented approximately 28% of all units shipped. Gross margin for the fourth quarter of 2014 was 33.5%, an increase of 120 basis points compared to the fourth quarter of 2013. Our gross margin of 33.5% was better than expected and exceeded our outlook of 31% to 33% that we provided last quarter, mainly driven by a stronger product mix including more M250 microinverter systems. In addition, the engineering and operations teams continue to execute very well on our cost reduction roadmap and we incurred less than expected freight and expedite costs as our operations team successfully handled the labor dispute at the port of Auckland. Pricing during the fourth quarter came in as expected. Operating expenses during the fourth quarter of 2014 were $30.4 million compared to $28 million in the third quarter of 2014. Operating expenses as a percentage of revenue decreased from 32% in the fourth quarter of 2013 to 29% in the fourth quarter of 2014 demonstrating the leverage we have in our business model in line with our balanced profitable growth strategy. R&D expenses were $12.1 million, sales and marketing expenses were $11.1 million and G&A expenses were $7.2 million. The increase in operating expenses was driven by higher R&D expenses in support of multiple projects, including the development of our AC Battery storage technology and energy management system, the recently launched commercial microinverter system, our fifth generation microinverter system and several new and innovative next generation technology building blocks. We also made further improvements to our Gateway and communications technology and continue to drive and focus on cost reductions. The increase in sales and marketing expenses was mainly driven by geographic expansion and a build out of our commercial sales team. In addition, during the fourth quarter we have some increased marketing spend resulting from our participation at SPI the largest solar trade show in the U.S. Total non-GAAP operating expenses excluded $2.5 million in stock-based compensation expenses and $176,000 of acquisition related charges. We reported record non-GAAP operating income of $4.8 million in the fourth quarter of 2014 compared to $400,000 in the fourth quarter of 2013. On a GAAP basis operating income for the fourth quarter of 2014 was $2 million. For the fourth quarter of 2014 net income was $3.5 million resulting in earnings per diluted share of $0.07 compared to a net loss of $725,000 or a net loss of $0.02 per share in the fourth quarter of 2013. On a GAAP basis net income was $400,000 or $0.01 per diluted share compared to a GAAP net loss of $2.8 million or a net loss of $0.07 per share in the fourth quarter of 2013. The financial results for the fourth quarter of 2014 illustrate our balanced profitable gross strategy. Strong top-line growth of almost 60% year-over-year combined with gross margin improvement and operating expense leverage resulted in bottom line improvement from breakeven during the fourth quarter of 2013 to an approximately 5% operating margin in the fourth quarter of 2014. At the same time, we were able to continue to invest in the future of the company focusing on R&D investment, technology innovation and the global expansion of our sales and marketing team. Turning to the balance sheet, we continued to see strong cash generation. As a result of improved profitability and focus on working capital management cash flow from operations during the fourth quarter of 2014 was $8.9 million. Capital expenditures were $4.2 and depreciation and amortization was $2.3 million. Capital expenditures increased from historical levels, but remained below 4% of revenue. The increase was mainly due to an increase in equipment needed to support the growth in production volumes as well as some technology driven capital expenditures that were required for the development and manufacturing of our next generation technology. During the fourth quarter of 2014 we paid $5.8 million to extinguish our term loan. As a result of this the company is currently debt free. Also during the fourth quarter we acquired substantially all the assets of Next Phase Solar for an initial consideration of $2.5 million. We exited the fourth quarter with a total cash balance of $42 million and continue to have excess to our working capital facility of up to $50 million. At the end of the year, the facility remained undrawn. Let's wrap up by looking at some of our full year 2014 highlights. 2014 was a great and amazing year. We had very strong growth for Enphase. Revenue grew 48% year-over-year to a record level of $343.9 million. We shipped 575 mw AC or approximately 660 mw DC, a 62% year-over-year increase. Units sold in 2014 increased to 2.6 million, which is 1 million more than the number of units sold in 2013. Since inception, we have shipped more than 7.2 million units. Our full year gross margin was 33.1%, up 400 basis points year-over-year. Our ability to expand gross margin based on our balanced pricing action and continued focus on cost reductions through innovation in our semiconductor based product platform is a clear differentiator for Enphase. During 2013 we held the line on operating expenses with very minimal year-over-year growth. In 2014 we made some significant investments in R&D and sales and marketing to further support the growth of the company. For the full year operating expenses were $108 million representing a 31% increase over 2013. However, operating expenses as a percent of revenue came down from 35% in 2013 to 31% in 2014 demonstrating the leverage in our business model. The combination of strong top line growth, margin expansion and operating expense leverage resulted in our first profitable full-year on a non-GAAP basis. We reported record non-GAAP operating income of $5.9 million in 2014 compared to an operating loss of $14.7 million in the prior year. On a GAAP basis, the operating loss for 2014 was $4.4 million compared to an operating loss of $22.2 million in 2013. Non-GAAP net income in 2014 was a record $2.7 million or $0.06 per diluted share compared to a net loss of $18 million or a loss of $0.43 per share in 2014. Finally, turning to the cash flow, we realized significant improvements and generated $24.2 million in cash from operations in 2014 compared to a negative $900,000 in 2013. In summary, I'm very pleased with both our fourth quarter and full-year 2014 financial results. Our record top line growth, record gross margin and operating expense leverage resulted in record non-GAAP profitability and EPS expansion. Now let's discuss our outlook for the first quarter of 2015. In line with normal seasonality we expect revenue for the first quarter of 2015 to be within a range of $84 million to $88 million. We continue to see strong business momentum and year-over-year growth in all our segments and geographies. At the midpoint of the revenue outlook range revenue would be up 49% compared to the first quarter of 2014. We expect gross margin to be within a range of 31% to 33%. As previously indicated, we do expect the gross margin to fluctuate in the low to mid 30% range depending on several factors including the timing of pricing actions, timing of cost reductions, mixed shifts, fluctuations in expedite and freight charges and changes in foreign currency. During the past few months, the U.S. dollar strengthened versus the euro, British pound and Australian dollar. Although we only have 15% of our revenue in those foreign currencies, it is expected to have a negative impact on our overall gross margin of approximately one percentage point. We also expect non-GAAP operating expenses to be up 2% to 5% compared to the fourth quarter of 2014 as we to continue to invest in research and development and sales and marketing to support the development of innovative new products including the Enphase Energy Management System and AC Battery storage solution, while further expanding our fast growing Microinverter Systems business into new markets and geographies. As the fourth quarter was a strong finish to a great year, the first quarter of 2015 is expected to be a strong opener to another great year for Enphase Energy. All the markets that we sell in are fundamentally healthy and expected to show strong growth. U.S. residential market remains on fire and is predicted to experience strong year-over-year growth. We are excited about our global opportunities in a strong U.S. commercial market, especially with the introduction of our commercial system offering. We expect to gain market share in the international markets that we currently sell in, especially in the U.K. and Australia. We also expect our gross margins to fluctuate in the low-to-mid 30% range and we remain confident in our ability to achieve our gross margin long-term target of 35% to 40%. We will also continue to make major investments in R&D and sales and marketing, adding new and innovative technology building blocks in support of our segments and geographic expansion strategy, all on our way to become the leading energy technology company. Paul, the management team and myself are committed to drive our balanced profitable growth strategy in which we continue to growth the top line as hard as we can while driving bottom-line improvements. I'm excited about our opportunities in 2015 and I'm looking forward to it. Now, I will open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Colin Rusch of Northland Capital. Your line is now open.

Thanks guys. Can you just walk us through the guidance for 60% revenue growth year-over-year roughly or I should say unit growth in your expectations and I know you are not guiding for the full year, but you've talked historically around kind of 30% to 50% growth, how do you reconcile that, are you expecting a slowdown through the balance of the year or given the weather in the Northeast you're expecting some sort of acceleration in end market segments throughout the balance of the year?

Well, as Kris just mentioned Colin, we are expecting all the markets that we currently play in to continue to remain strong, clearly seasonality has an effect and it has a disproportionate effect in the Northeast, but nevertheless we're seeing strong growth in the U.S. residential market. That's to be obviously offset by the normal price declines that we've seen year-over-year, but good strong growth in the U.S. residential market, strong growth in the commercial market as well as in our international markets. So, I think that as we look forward into 2015, we feel very good about the year in the different markets and the different segments and that's especially true when you consider the move towards a total energy management solution with the advent of the AC Battery storage solution as well as the load management capability. So, I would say just in general, we remain bullish on the year in every segment and in every geography.

Great, and then if we just take a clear look at pricing quarter-over-quarter it looks like you're about flat on a megawatt basis or a per watt basis. Can you just talk a little bit about the value sale that you guys are seeing right now? I think there's a lot of concern around competition with relatively low gross margin starting to chip away at pricing, but you guys have done a better than expected job with holding up pricing over the last several years. Can you just talk about the sale dynamics and how you're negotiating pricing with your customers and nearly continuing to capture what looks like a very healthy planned competition?

Well, there clearly is a class of cheap inverters out there whether generally string inverters with or without DC optimizers that have traditionally put a lot of pricing pressure on the market. But the value proposition that Enphase brings to the table and that is specifically the fact that we can provide a better return on investment for the owner of a system and we can create a simpler more efficient business model for an installer by simplifying the design, the installation and the operations and maintenance of solar system, that value proposition continues to resonate. Now that doesn't mean that we don't need to be aggressive on pricing, we certainly do and we're working very closely with many of our customers to make sure that we're providing them a solution that enables them to thrive, that helps them be and stay competitive in their environment. But let's remember while we have a very keen eye on costs and making sure that we're providing them with a very cost-effective solution, we continuously add features and functions. As an energy technology company, we are very much in our sweet spot when we're developing and innovating new products. So whether it is, we just talked about the AC Battery storage solution, which is absolutely revolutionary in its concept and initial interest and demand is far exceeding our expectation, whether it's the advent of more energy management solutions, now for both the commercial as well as the residential space. We're continuously driving our business by looking at both costs and future enhancements and building a more holistic energy solution so that our customers, our installer partners have the best solution that they can sell.

And then one just final quick question. Can you just talk about the growth prospects for the service business? Obviously, you know, with a growing fleet of systems out there and their growing capabilities that looks to us like a relatively high end margin segment that could be exceeding the overall growth of the company, can you just walk us through that opportunity?

Sure. So it is accretive to gross margin. It is definitely a very well-run business and we're very excited about what that means for Enphase. Remember that we provide what we believe to be world class, best in class service to our customers, whether that's the end customer or whether those are our installer partners and we fully expect to continue upon that and build upon that reputation. And as we move into more of an energy system as opposed to a solar system the OEM requirements are going to do nothing but grow. Even if you look at the numbers today, if we are around 500,000 solar roofs in the U.S., residential roofs in the U.S. we're moving to a point in time where there will be millions of solar roofs in the U.S. alone. And we are building an infrastructure that can support that, that can provide the services our customers, both the end-user and our solar partners need and want and we want to do so in a very profitable manner and I think that's the path that we're on will allow us to do that.

Great, thanks so much guys.

Thanks Colin.

Thank you. Our next question comes from Edwin Mok of Needham & Company. Your line is now opened.

Great, thanks for taking my question. Congrats for the great quarter. So first question I have is maybe touch on the U.S. commercial side of the business. I guess two part question. First is, it seems like based on your commentary, U.S. commercial grew in a similar rate as the U.S. residential or your total U.S. revenue which grew like 50% this year. Am I correct on that, or is it still growing at lower rate than that? That's the first part and the second thing is, with the C250 now commercially available right? Can you give us some color in terms of upticks on that product and if you expect that product is not start conquering growth in this quarter?

Sure. So the growth rate in the small commercial market, where we are the dominant inverter today with again somewhere in the low 40% market share range has grown at approximately the same rate as the residential market, give or take there are obviously fluctuations quarter-on-quarter, but we're definitely seeing some similar growth rates. The C250, very excitingly presents an opportunity for us to move into the large commercial market and the discussions that we've had with a lot of existing and new installers are really proving out the fact that we can provide a better LCOE, a better ROI for customers than the traditional string inverters, not to mention that we have a O&M package that makes the entire backend much simpler and we can take the entire solution from concept through installation through with the aid of Enlighten. The challenge in this market is that it is a fragmented market and the design cycles are longer than they are in the residential market. So the fact that it's a fragmented market is a good thing. It represented I think a very healthy business dynamic, but it does take a little bit longer to reach more installers and because the design cycles are longer that will naturally increase the amount of time between when we start some of the product and we start seeing meaningful revenue. So what we've said is that we are shipping today the C250. The reception has been outstanding. We expect to start seeing significant installs by the end of this year and then we expect to have the revenue to be very meaningful in 2015.

Okay, great and then I guess I'll have two questions to that and in terms of pricing on the ASP or blender ASP as well as gross margin, has that ramped, do you expect that to have some headwinds on your blender ASP, EPS versus your gross margin of your business?

Yeah, we've said before that the commercial product is at a slightly lower gross margin than the residential product, but again we have multiple cost reduction initiatives underway that are addressing that and when you look at the blended gross margin there's a lot to take into account there. And Kris enumerated many of these factors whether it's 4x whether it’s the product mix, whether it's freight and expedite charges, so clearly this - the gross margin on the commercial are today somewhat lower, but again we're working on that both on the cost level and as I said when you look at it inclusively, the aggregate gross margins our view doesn't change.

I see okay. I guess one more followup question on gross margin. You mentioned that M250 was 20% of unit shipment. Should we just ask forward a year or two for now that we expect that to be maturity or when do you expect that to become maturity

No, there will be a continuously gradually move to the higher power M250 is not going to jump in the next couple of quarters. We've seen a slow move to that higher power microinverter. It all depends on the availability of the higher power modules and the rate of our customers shifting to pay t o those higher power modules and so it will continue over the next multiple quarters.

I see. One last question, I'll let you guys go. On the OpEx increase this quarter, meaning sorry, in the fourth quarter as well as in the first quarter, is there any kind of one time that rate increase or anything that one time things that we should bake or put into our assumption?

In the fourth quarter we definitely have some one-time expenses related to SPI, the solar trade show and looking into Q1 of course you have the start of the social charges that pick up again, but absent of that there is no abnormal one-time elements in that.

Great, that's all I have. Thank you.

Thank you. Our next question comes from Philip Shen of ROTH Capital. Your line is now opened.

Paul, Kris, congrats on a great quarter.

Thank you.

Hey, I'd like to talk about or explore the international opportunity. It sounds like you guys had a nice growth in the quarter there for UK and Australia, can you tell us what the actual mix was of international sales in Q4 and then importantly, how you expect that to trend throughout 2015?

Yeah, Phil, So currently our U.S. versus international mix is 85:15, that has been for a couple of quarters and that was also the case in the fourth quarter. As you know, our U.S. business is growing so fast that it's really hard to outpace that growth internationally, but having said that in 2015, I do expect that mix to shift from currently 85:15 towards 80:20. And that of course you know that our longer term target model three to five years down the road is to further move that shift to a 50-50, meaning 50% from the U.S., 50% outside of the U.S.

And just to elaborate on that, I would say that the success that we're experiencing in these markets, whether it's the UK, whether it's Australia or France, where we're the number two residential inverter already, I think further validates the value proposition resonates in every country we're in. The question that we ask ourselves internally is, what is the rate of expansion that's still keeps in step our profitable growth strategy? But we're looking at several new countries for this year and for next. I'm going to continue that global expansion for the next couple of years.

Great and then I have a quick follow-up on pricing, historically you've experienced 7% to 10% year-over-year ASP decline. We actually saw some a sequential potential strength in ASP in Q4. Can you just talk about what you see for pricing throughout the year? Should we expect a 7% to 10% decline, I know you've addressed it in parts earlier, but any color on that would be helpful?

Right, so again, I would caution everyone not to over think fluctuations on a quarter-to-quarter basis, because as we talk about there's so many factors that go into that. It's hard to use that as an appropriate proxy for anything else. What I would say is, that to your point, we've seen, call it 8% to 12%, 8% to 14% price reductions over the past some number of years. Given the current environment we don't see that the general trend of price reduction is going to change and our job is to stay ahead of that through cost reduction as well as future enhancement.

Great. One last question, I'll jump back in queue. In terms of the next-generation I think it's the S275, can you give us an update on how that development is coming along and do you still expect a mid 2015 launch? Thank you.

The progress on our next generation, our fifth generation microinverter is going along extremely well. It is as you know the most advanced microinverter on the planet with full advanced grid functions, bidirectional power capabilities. It is really quite a little powerhouse and we are expecting to launch it on time.

Great, thanks Paul, congrats again.

Thanks Phil.

Thank you. Our next question comes from Krish Sankar of Bank of America Merrill Lynch. Your line is now opened.

Good afternoon guys. This is Andrew Hughes on Krish and congrats on another strong quarter.

Thank you.

Just quickly on the competitive landscape, curious if you're seeing it evolve at all in your favor as I think we've all seen SMA encounter some headwinds recently and AEIS looking to at least diminish their focus on that part of the businesses as well, have you seen it evolve in your favor or are you expecting it to as you look at towards 2015?

Well, we definitely see it evolving and clearly I think if we just look at the historical evidence we've been growing. We've been getting new customers. We've been growing in every market, every channel and every geography. And you're absolutely right. I think some other inverter companies are facing some very significant challenges. In the end I think what we provide, which is a very simple, straightforward design installation and operations and maintenance of a product allows that installer to have a more functional, a more profitable business, at the same time providing a consumer with a better return on investment. That value proposition definitely does resonate and we're definitely seeing customers, more and more customers interested in that, for exactly those reasons. Now at the same time your question about what we're seeing in 2015 and let's go out to 2016, we have to be very well aware that this market is very dynamic and it is changing and as proud as we are of the product and the solution and the presence that we have, we have to continue to innovate, that the energy market is changing and that storage will become an essential part of that energy mix. And with storage you have to have a comprehensive energy management solution on top of that. So, I do feel that we're in a very, very good position to leverage the brand and the technologies that we've developed so far and we accelerate our technology innovation to make sure that we are one or two steps ahead of where the market is going to be at any given time so we can continue to lead that space.

Great and then just another one on the O&M business. Can you give us a sense of who your customers are, whether there are any of the big integrators, installers or sort of the smaller group and where you, where that revenue is sort of percentage of the total is today, where you see it going and how big it might get before we see it broken out as a separate line item?

Sure, so I'll take the first part of that and I'll turn over the second part of your question to Kris. So the mix on O&M is really quite broad. We have some of the largest hardware manufacturers and developers. We also have a whole set of smaller ones and they expand the residential, the commercial, and even some beginning of utility scale business. We see it definitely very broad-based and we do see it growing. And I'll turn it over to Kris to talk about the specific financials.

Yes. So with the NPS acquisition, Next Phase Solar, their revenue was approximately $4 million during 2014 and growing fast substantially. So for Q1 we expect approximately $1 million of revenue. That number is actually too small to break it out separately, but we will in the next couple of quarters continue to provide some more color as the service business continue to grow and add more strategic value to our global offering.

Great, thanks guys. I'll jump back in the queue.

Good.

Thank you. Our next question comes from Pierre Maccagno of Dougherty & Company. Your line is now opened.

Hey Paul, Kris, congratulations on such a great quarter.

Thank you.

So, a little more feedback there on the O&M business, can you give us some idea of what type of the operating margins you have for that?

We haven't. We'll disclose that, but gross margins are slightly above Enphase Company average and the whole business is accretive to the bottom line from day one.

Yeah, but it requires R&D or is it just SG&A would you say?

No, it's they have approximately 30 employees service people. There is a very small management layer on top on that, but there is very, very minimal OpEx that goes with that business.

And part of the beauty behind this is that it does very exactly specifically leverage the R&D that we're already doing. When you look at what Enphase does right now, Enlighten is very likely one of the largest if not the largest solar O&M ecosystems on the planet. By leveraging Enlighten, by leveraging the O&M infrastructure that we already have we are actually developing products and software to support an O&M infrastructure. What Next Phase will do as part of EES is be able to leverage that both in the U.S. and globally.

Okay, then following up on Vivint, any feedback on them under second source, what are your thoughts there?

That's the same thing that we've been saying for well over a year now. They made it very clear that they are going to bring on a second source. We fully understand. I believe they're well on the way to doing that and we feel very comfortable about our position now. And importantly, if you look at our broader customer base, it continues to grow both domestically in the U.S. residential market, in the commercial market, internationally. We are feeling very good about the breadth and growth of our, both residential and customer installation base. In fact if you think about it, by entering the U.S. commercial market we really are effectively doubling our TAM and we're just trying to penetrate that market.

Great. Regarding the residential market, your opportunity there for further growth is about 10% to 15% of the market correct? I mean, do you believe you are going to capture a large share of that within a short timeframe?

Well, what we've said there is that we're obviously very proud of the market share that we currently have and we do believe that we're going to be able to increase market share, but at the same time with a finite amount of OpEx we're going to apply those resources where we feel we can get the most amount of leverage. So while we continue to grow share in the residential market, we are looking at getting to that same level of market share in the large commercial market in the UK and Australia and areas that we believe we can see more leverage with the OpEx. But having said that, remember that the U.S. market is growing and there are lot of new entrants entering this market. There are still customers that are outstanding customers for Enphase, but we may not be 100% of their revenue and we can work hard to earn their trust and become a larger percentage of their business as well. I would say even in the U.S. residential market there is a lot happening, it’s very exciting and we are continuously staying aggressive.

Great. And my final question is regarding the battery storage business, what is your estimate of the market size there and when do you think you are going to start shipping and what type of market shares do you think initially you might get?

Right. The storage market is a tough one, because it doesn’t really exists yet, and you can make the case that in the U.S. residential market today, there isn’t an economic case forward because we have that metering and I think that’s certainly true. At the same time we know that storage is not just about, there is not just, simple economic cause, but it’s also about grid stabilization, it’s about grid resiliency. It is very possible that we see in some areas of the U.S. people will adopt storage in order to be able to have a higher penetration of solar. We are seeing something very similar happen in Queensland in Australia. There are different initiatives going on in the UK as well. So, it’s a burgeoning market, it will require policy changes, it’s going to require different ways to look at financing. But having said all that, we do believe very strongly that the growth of renewables have to be associated with a storage solution and for the reasons that I've outlined in the past, we believe that our AC Battery solution is an absolutely revolutionary product in storage and I'm extremely confident that with that we will lead the storage market. In terms of how big it is, hard to say, as I said, but I'd would be surprised if it wasn’t in the tens of billions of dollars in the next five to ten years.

And do you think initially it’s going to be the U.S. and say you have net metering that’s a difficulty; could it be some other country that you start growing or any ideas there?

Oh, absolutely. I think, you know again, in the U.S. as you mentioned the economic case in the residential market is harder to make; however, there is an economic case in the commercial market, so it may be that the U.S. commercial market starts first. But then you are exactly correct, we are looking internationally for the storage solution and we are seeing demand for it come from the Asia Pacific region or EMEA so it is certainly not a U.S. only product.

Right. Thank you very much.

Thank you.

Thank you. Our next question comes from Vishal Shah of Deutsche Bank. Your line is now opened.

Thanks very much. Paul, do you may be talk about your targets economics of storage product that you are working on, your longer term targets that you may have in terms of cost per kWh of the solution and given the point you are making about the growth expectations of that product?

So, we're not announcing either cost or pricing yet, but what we have said is this, that we believe it can be margin accretive. We believe that the system itself can very likely be the simplest the most plug and play, the most cost effective solution for our installer partners and our customers and because of that we believe that we can take a very dominant position with the storage solution. Having said that, we are not really, we are not guiding either to price or to cost yet.

Okay, but you know some of the targets out there you know call for $150, $200 per megawatt hour, are you looking at that kind price range or are we looking at a much different number?

So as I said, I'm not guiding any specific prices, but I will say this, that you have to look at the entire system. You have to look at, if you like looking at a solar system and making a new judgment on the cost of solar system by the cost of the solar panel. You have to look at the storage, the chemistry. You have to look at the inverter technology. You have to look at the integration into the rest of the system. You have to look at mounting. You have to look at it holistically. No one element will drive this. And even when you look at, even when you look at chemistry, remember we're in the very, very early days of storage. Chemistry is going to change a lot. There is a lot of largest battery companies in the world are bringing on lot of capacity and there is some amazing young company some startups that we are tracking very closely with some technology that technology that could present could be quite revolutionary. So very early days and we have a lot to learn, but there is a lot happening here. But if you look at the entire solution, not just the chemistry, the entire solution, I do feel very, very confident that we can provide a vey cost effective solution.

That’s helpful. Can you may be talk about the mix of residential versus commercial products and then the guidance for the first quarter or may be even fourth quarter and what kind of margin differential you see right now?

So, resi versus commercial today is somewhere in the 85%-15% range. And again, remember the vast majority of that is small commercial. The C250 the product we just introduced is the product that is purposed built for large commercial market, it has the features and functions that we haven’t had before to address that. So, that will certainly change our presence in the large commercial market. And again, we said that gross margins on commercial are slightly lower, but blended with the rest of the company, coupled with the cost reduction plans that we have in place doesn’t change our view on our corporate gross margin.

That’s helpful. And then you know, when you think about OpEx you guys have done a good job on reducing the OpEx percent of revenue last year, how should we think about this year’s trajectory are we looking at further reduction in terms of absolute percentages in OpEx in 2015?

Yeah, absolutely Vishal, driving leverage in our operating expense remains big part of our balance profitable growth strategy. And we have an internal rule that we have communicated to the investor community as well where we allow our operating expense to grow at half the speed of revenue growth. And we are going to try to stick to that rule. It is a challenge because we have lot of opportunities to go and continue to further develop new technology building blocks and invest in the future of the company and we will not hesitate doing that, but we're also going to do it in a financially responsible way and stick to our guideline in terms of OpEx growth that we have communicated before.

That’s great, and one last question. I think you mentioned 80:20 U.S. versus international revenue mix in 2015, are you seeing any slowdown in any particular international markets such as the UK or are you seeing similar strong growth in all markets and what are the new markets are you guys looking at this year? Thank you.

Well, in general we are seeing strong growth in all these markets. Clearly, when you get to continental Europe it’s a country-by-country, but even there we are seeing good growth in the Netherlands and although France, the France residential market I think is a little bit subdued. The French commercial market looks like it’s getting some stem. We play in all these markets of course, so that’s what makes us confident that we can continue seeing that growth. And as we've said in the past we won’t announce a country before we land in it with one exception of Japan. Japan is definitely a country that we are very focused on. We are working away through the regulatory requirements. The progress there is looking very good and we're engaged in multiple discussions with multiple potential partners to help expedite their go-to-market strategy. So, Japan is definitely on our radar as are other countries, both in EMEA as well as APAC, but we'll be making those announcements throughout this year and next.

Thank you.

Thanks.

Thank you. [Operator Instructions] Our next question comes from Pavel Molchanov of Raymond James. Your line is now opened.

Hey guys, thanks for taking the question, first just a kind of a small housekeeping item, warranty obligations on the balance sheet barely budged from a year ago despite the revenue increase and I recall of course that you guys had the accounting change. Going forward, would you expect the trajectory of warranty to kind of follow the revenue number?

No, going forward we expect similar pattern as we had in 2014 so continuously small increase of the amount on the balance sheet.

So, it’s slower than revenue growth?

Yeah, absolutely.

Okay and then just quick follow up to the prior question specifically about the UK, as I understand that the UK ring new obligation credit come to an end March 31st,so how big a headwind is that kind of beyond Q1 as far as that market goes?

We're not seeing much in the way of that expression being a headwind. I think the UK actually has a very sensible policy. There is a regular reduction based on megawatt shipped every six months that policy has enabled the growth of the UK market. Oil prices continue to drop and oil subsidies continue to drop, so in fact if anything, it gives us confidence that the UK represents a very stable long-term market.

All right, I appreciate it guys.

Thank you.

Thank you. At this time, I’m not showing any further questions. I’d like to turn the call back to Paul Nahi for closing comments.

Thank you for joining us on our call today. Strong execution across the board in 2014, helped achieve our growth. We're carrying this momentum into 2015 and I'm very excited about the enormous opportunities in front of us, including the further growth of our microinverter systems business as well as the transition towards becoming a major energy technology company. I'm looking forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.