Enphase Energy, Inc. (ENPH) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for your patience, you've joined Enphase Energy’s First Quarter 2015 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 be given at that time. [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to introduce your host Ms.Christina Carrabino. Ma'am, you may begin.

Good afternoon and thank you for joining us on today’s conference call to discuss Enphase Energy’s first quarter 2015 results. 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 first quarter ended March 31, 2015. We are providing an accompanying presentation with our earnings call that you can access in the Investors section of our Company’s Web site at www.enphase.com. 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-K for the year ended December 31, 2014. 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 First Quarter 2015 Financial Results. As usual I'll start with my opening remarks and touch on some key highlights and this Kris will take us through the first quarter financials and the outlook for the second quarter. After that we'll open up the call for Q&A. After our groundbreaking year in 2014 we started 2015 with solid performance and continue to experience strong business momentum with all our customers in the domestic, residential, and commercial markets as well as international markets. During the first quarter we shipped 162 megawatts of microinverter systems, an increase of 74% year-over-year. We reported revenue of $86.7 million for the first quarter of 2015 an increase of 50% year-over-year and non-GAAP gross margin of 32.6% despite the fact that we lost approximately $1 million in revenue and one full percentage point of margin due to unfavorable foreign exchange fluctuations. Enphase continues to be the leading choice for residential and small commercial installers in the US and a growing number of installers in our international markets. In fact Enphase in installed in more than 90 countries worldwide. Since inception we've now shipped more than 8 million microinverters representing more than 2 gigawatts of installed generating capacity. Enphase Systems have reduced over 3 terawatt hours of clean energy. The demand for solar in the US remains very robust, according to GPM Research 2015 is expected to be another year of significant growth in the US with a forecast of 1.8 gigawatts of residential PV up approximately 50% year-over-year and a forecast of 1.5 gigawatts of commercial PV up 40% year-over-year. In addition outside the US solar continues to take a bigger share of the energy market and continues to grow. According to IHS Research the global solar including all residential, commercial and utility scale PV installation is expected to be 56.5 gigawatts in 2015 up 30% year-over-year. Our continued success in the US and global markets is a result of several factors, one of which is the unique value proposition of our microinverter systems. Our proposition benefits the entire eco system. We address the system owner by providing a lower levelized cost of energy and therefore a better return on investments and their ease of design installation and management helps our installers to create a more efficient and profitable business. By providing better economics to all our customers, we've been able to see a dramatic rise in revenue and market share over the past several years. Our value proposition is predicated on quality and reliability. The quality and reliability in every component we select, every product we manufacture and every system we monitor. Our system offers high performance, safety, reliability, simplicity and intelligence. In addition, our distributed networked architecture will make mainstream access to clean affordable energy a reality. Last year, we discussed our commitment to local job communities and job reservation through our American size microinverters, which were assembled in America. We're pleased to our recently partnered with PetersenDean Roofing & Solar, the largest privately held the roofing and solar company in the U.S. to provide products assembles in America. Under the agreement Enphase will supply American size microinverters for deployment in PetersenDean residential and commercial installations. The partnership brings together two leaders in the fast growing U.S. residential and commercial solar market, who share a strong commitment to American technology, domestic job creation and the emerging clean energy economy. We began shipping our C250 microinverter systems to commercial solar customers in the U.S. during the first quarter and seeing strong interest from both new and existing customers. This C250 system delivers optimal performance and enables installers to use less wiring and few our balance of system components thus significantly reducing labor and overall installation costs. The C250 launch was accomplished by the growth of our Enphase Energy services business, which provides system owners, operators and installers with scalable asset management and O&M services. We've recently increased geographic coverage adding service teams in the Northeast region of the U.S. along with Arizona and Florida. Turning to our international business, revenue was up 52% year-over-year. In the U.K. we extended our distribution channel and grew our business with residential and commercial installer, including Pretty Green Energy. We're working with Pretty Green Energy, a leading installer of PV systems to offer high end solutions in the residential and small to medium commercial PV market. Relationships such as this are critical to ensuring that customers have access to the unsurpassed value and quality both company is offered. In continental Europe, we've recently enhanced our local sales operations and added resources in the Netherland to provide leading edge services and support to our expanding base of Dutch customers. Also in Europe we continue to build our customer base and we're working with partners such as MyLight Systems a company in the solar self-consumption space based at France, good partnership focused on advanced energy management will integrate the Enphase envoy, the intelligent networking half of the Enphase system into MyLight monitoring systems bringing installers a new level of energy management integration for residential and commercial buildings. In the APAC region, we've been pleased with our progress in Australia and New Zealand where first quarter revenue increase was over the 300% year-over-year. During the quarter, I visited with several customers in Australia and New Zealand and came away with confident that we are poised for continued success in these markets. Our market share continues to increase and the Enphase brand is becoming more well-known and respected in the market we've entered. As an example, we formed the partnership with EnergyAustralia, one of the country's leading utility to provide microinverter systems to Australian customers. This is a big win for APAC operation because it is not only the first strategic partnership with an Australian utility but also offers Enphase access to approximately 10% of the Australian market. As we discussed last quarter, Enphase took big steps forward in our evolution from microinverter Systems Company to an energy technology company with the announcements of our distributed network energy management system. This system will not only be able to generate, store and manage energy, it will also collect and utilize valuable grid level data, this data will provide impressive inside into the grid and will help us work for the utility to strengthening it. An Enphase system provides the best return on investment for the owner and the most of for corporate grid operators. A great example of this is a recent work in Hawaii were our data, software and grid edge analytics saved Hawaiian electric company tens of millions of dollars by improving the stability of the grid. As a service provider, we worked with Hawaiian Electric, to clean the backlog of solar customers awaiting inter connection on the island of Oahu. We're very proud with part of Hawaiian Electric’s pioneering work in developing the blueprint for the next generation electrical grid and the mass adoption of solar. This is just the beginning of our exciting collaboration with utilities and it demonstrates how utilities and innovative solar technology companies such as Enphase can work together to the benefit of rate payers while making the large sale grid integration of solar a reality. As the density of solar grows in any particular utility area, the necessity to work well with the grid and take comply with the other increasing complexity as grid requirement will becoming increasingly critical. We were honest to be recently named as to Greentech Media is Grid Edge 20 for the second consecutive year as one of the most innovative companies work into architect, the electric power industries future. Awardees were selected based on the contribution to Grid Edge technology, which has increasingly important at of time when utility business models are [indiscernible] and more distributed energy resources are coming online. As solar energy continues to thrive storage will become an increasingly important part of the total solution and it's important to note that storage must be accompanies with an energy management system to control the charging and discharging of the battery while taking into account energy generation and usage. In discussions with customers all over the world the Enphase AC battery is being extremely well received and we are well over subscribe for our initial system tests to begin later this year. We are increasingly confident that our AC battery with its modular architecture and seamless integration into Enlighten, our energy management system will unique in its simplicity, ease of installation performance and cost effectiveness. I'll close my comments by noting 2015 is off to a great start for Enphase. We're encouraged by the positive industry outlook and are excited about the many opportunities ahead. We are as committed as ever to enhancing our core products and services and moving forward with bold initiatives that will trend the face of energy production storage and management. 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 for the first quarter of 2015 and then I'll provide the business outlook for the second quarter of 2015. As a reminder the financial measure that I'm going to provide or on a non-GAAP basis unless otherwise noted. Total revenue for the first quarter of 2015 was $86.7 million an increase of 50% compared to first quarter of 2014. The large year-over-year growth was driven by overall strong demand Enphase energy microinverter systems in our core U.S. residential and commercial markets as well as further market share gains in the international markets. We have been able to grow our top line by an impressive 50% year-over-year despite the reduction in customer concentration. A year ago in the first quarter of 2014 our largest customer accounted for 22% of our total revenue and in the first quarter of 2015 this was reduced to 17% of our total revenue. This speaks to the strength of our business not only with our largest customer but even more so with many other large, medium and small customer in the residential and commercial solid markets. On a sequential basis [indiscernible] down 18% from the fourth quarter 2014 which is better than the 20% to 25% seasonally decline that we have historically experienced during the first quarter of each year despite the fact that there were some harsh winter conditions this year with a lot of snow especially in the North Eastern United States. We shipped 162 megawatts AC or approximately 186 megawatt DC during the first quarter of 2015, an increase of 74% on a year-over-year basis. The 162 megawatt shift represented approximately 719,000 micro inverter of which substantially all were our fourth generation micro inventor systems. The Enphase M250 represented approximately 30% of all unit shipped. Gross margin for the first quarter of 2015 was 32.6% despite the fact that we lost approximately one full percentage point of margin compared to the fourth quarter of 2014 as a result weaker euro, British pound and Australian dollar. Our engineering and operations teams continue to execute very well on our cost reduction roadmap and we incurred less than expected freight and expedite cost. Inverter pricing came in as expected. Revenue from accessories during the first quarter of 2015 was soft resulting in a decrease of our total revenue per watt but this was offset by a similar decrease in total cost per watt. Operating expenses during the first quarter of 2015 were $30.7 million approximately flat when compared to the fourth quarter of 2014 despite the fact that we continue to make major investments in research and development not only to support the development and further cost reductions of our microinverter systems but also to make significant investments in the development of our AC battery storage technology, energy management system and grid edge analytics. R&D expenses were $12.3 million, sales and marketing expenses were $11.1 million and G&A expenses were $7.3 million. Total non-GAAP operating expenses excluded $2.8 million of which $2.7 million are stock based compensation expenses. We reported a non-GAAP operating loss of $2.5 million in the first quarter of 2015 compared to non-GAAP operating loss of $3.8 million in the first quarter of 2014. On a GAAP basis the operating loss for the first quarter of 2015 was $5.5 million compared to a GAAP loss of $5.8 million in the first quarter of 2014. For the first quarter of 2015 the non-GAAP net loss was $3.2 million or a net loss of $0.07 per share compared to a non-GAAP net loss of $4.1 million or a net loss of $0.10 per share in the first quarter of 2014, on a GAAP basis the net loss was $6.3 million or a net loss of $0.14 per share compared to a GAAP net loss of $6.2 million or a net loss of $0.15 per share in the first quarter of 2014. Turning to the balance sheet, cash flow from operations during the first quarter of 2015 was a negative $11.5 million; cash flow was impacted by 2014 bonus payments during the first quarter of 2015. Inventory increased to $34.7 million as the labor dispute in the Port of Oakland was resolved quicker than expected resulting in a temporary increase of our inventory levels. Capital expenditures were $3.6 million and depreciation and amortization was $2.5 million. We exited the first quarter with a total cash balance of $27.1 million and continue to have access to our working capital facility of up to $50 million. At the end of the quarter the facility remained undrawn and the company remains debt free. Now let's discuss our outlook for the second quarter of 2015. We expect revenue for the second quarter of 2015 to be within a range of $100 million to $105 million. We expect gross margin to be within a range of 30% to 32%. As foreign exchange rates continue to deteriorate we have included in this outlook a negative impact on revenue of approximately $2.5 million to $3 million and a negative impact on gross margin of approximately 2 percentage points. We also expect non-GAAP operating expenses for the second quarter of 2015 to be flat to up 2% compared to the first quarter of 2015. And now I will open the line for questions.

Thank you sir, [Operator Instructions] our first question comes from Krishna Shankar of Bank of America, your question please.

Two quick ones, Paul or Kris. First one, how do you see some of your smaller customers who have a much higher cost structure position themselves for the post ITC world, what do you think the implications are for them for a high [AFC] product because post ITC the attention is going to turn to cost. And I had a follow up after that.

True, so I would say our smaller customers today are focused on cost, I don't think a whole lot's going to change post ITC, the advantage that some of our smaller customers have is that they have an intimate relationship with their customers, they have an ability to sell the value proposition. It's interesting when you look at the bifurcation of our customer base it is actually the smaller customers that are asking us for more and more features, more and more functions and more and more things that they can sell to their customers. So I think actually the post ITC world from a pricing sensitivity standpoint is going to look the same as it is now with a deep focus on making sure that we continue to reduce our prices but I think the smaller customers are going to be able to leverage their relationships with their local customers and provide more and more services and more and more features.

Got it, and then as a quick follow up you guys introduced your storage technology last October at SPI. You didn't disclose the cost of kilowatt hour, I'm just kind of curious, do you have any updated thoughts around it, is there any number you can give or if you cannot disclose this how do think the battery system compares to what some of your competitors have announced of late?

So, the, you're absolutely right, we announced our storage solution back in October, it was very well received and has since been increasingly more enthusiastically received. We have a very modular approach, one kilowatt hour systems, they're very simple to install, you basically take -- one person to hang them up on the wall and just plug it in. It seamlessly integrates and automatically integrates into the Enlightened Energy Management system. So because of all that we feel that the installation -- the ease of installation, the cost of installation is going to be much less than with some potentially competing solutions. In addition to that as we look at the total system cost we are very-very comfortable that we'll be extremely cost competitive with what's out there.

Thank you, our next question comes from Colin Rusch of Northland Capital, please go ahead.

Can we just get a little more detail in terms of the accessory sales? What I'd like to really be able to back into is, your cost on a per watt basis and it looks like the cost program has actually been more aggressive than we might have expected in going from late last year into this year so just give us a little bit more color on those accessories so I could start to triangulate those numbers.

Yes, Colin this is Kris here so, in the past we have not disclosed or given a breakdown of our revenue between inverters and accessories and we are not planning on doing that going forward either, but we have seen some big fluctuations quarter-to-quarter, just to give you a range of fluctuation you have from, on the low end 17% revenue towards the high end more like 25% of revenue. So we definitely have seen some fluctuations there quarter-to-quarter part of that is seasonal as well. Q1 2015 was definitely a soft quarter in terms of accessory revenue and as a result that you see a substantial drop in the revenue per watt having said that pricing of inverters as I mentioned before pricing of inventor is our normal trends that we have disclosed before of approximately 10% on a year-over-year basis.

And then just can you just give us the currency assumptions that you're working with for the second quarter guide? Just so we have a sense of how that might trend through quarters the currencies most.

Foreign exchange is definitely something that we watch very closely and there has been hefty fluctuation starting beginning of the year. But it was much worse in March and April. We have based our forecast on euro exchange rate of approximately 1.10; currently we're trading a little bit better there, so that is good news. But of course we have to see how that all plays out for the rest of the quarter.

And then just quick question on the inventory. How long do you think it will take you to clear of that and then get back to a more normalize level? Is that something that just a matter of weeks or is it going to take quarter or two to kind of work all that through the system.

We target to finish that by the end of the second quarter there might still be a little bit of spill over there into the third quarter. But most of it will be clear by the end of the second quarter.

Our next question comes from Edwin Mok of Needham & Company. Your question please.

First actually a housekeeping can you have any other [10%] customer view on the last one?

I'm sorry can you repeat that.

Did you have any other 10% customer beyond the first and the largest customer?

So we do and interestingly enough the other large customers are all distributors. So in fact you could look at those customers as proxy for the thousands of small, medium and large installers that we currently support.

Actually that’s good point there. And then in terms of this impact of the port strike that we saw last quarter. Does that cost rechanneling is going to go up a little bit also in the quarter. Can you get some color on that?

The port issues was definitely a big issues and just to put out in little bit perspective as we know we ship our product from Flextronics in China to the port in Oakland and normal transportation time before the labor issues was approximately 30 days, that’s stretched out all the way up till almost 90 days. So that was definitely causing some balancing act there to manage our inventory levels. The issues got resolved late February as a result of that 10,000 of microinverter that was floating around on board go off loaded and become part of our inventory and so that resulted in spite of the inventory levels as reported at the end of Q1 and as I’ve stated before we expect to bleed that off towards the end of the second quarter.

I see so no impact on general -- thanks for the color on the international market, looks like you guys are doing really well especially in Australia. Can you give us some idea about your percentage of revenue coming from those markets right now I was little surprised frankly kind of the magnitude to FX impact, because I thought international is only been 10% or 15% of U.S. sales. So maybe give us some color and how do we kind of think about that because it seems like it’s growing faster in the company. If that’s got the growth driver, but impact by FX it might be [indiscernible].

Our mix between U.S revenue and outside of the U.S our international revenue has not really changed, it's still 85 to 15 split or 85 in the U.S 15% outside of the U.S. Despite the fact that our international revenue is growing extremely fast in Q1 we had 52% year-over-year growth. But obviously our U.S. business continues to grow also extremely fast and so it's difficult for now to outpace the revenue that we see in U.S.

Last question on I'll let other guys to ask. Your commentary around PetersenDean and your partnership with them right kind of led me to think that maybe on this some of these non- traditional solar installers could be a growth area for you guys. How do you kind of think about those customers? Is it an area that you believe is will allow you to drive more growth in U.S is there any way that you think you can target more? That’s all I have, thank you.

Our current customer base really ranges from the largest Tier 1 all the way to the smallest installers. It is true that the environment is very volatile right now, they're lot of new entrance and I think they've been lot more new entrance in the upcoming years. Some of these are going to be may be specialty in solar; some of them may be more generalist. What is very clear is that the ability with an Enphase system to a very quickly get up and running to be able to simplify they're backend office logistic, the simplicity of the design, the simplicity of the installation, the simplicity of O&M does enable a lot more people to get into solar and then they could have before and that is a unique characteristic of microinverter. So certainly we're going to do our best to attract to those customers as well. But I would view that as one part of our much broader initiative to continue our market share growth in the U.S. residential market.

Thank you. Our next question is come from Philip Shen of ROTH Capital Partners. Your question please

First one is on pricing. I think, I heard you mentioned that pricing outlook has not changed and you still expect 10%, can you extend on that and talk about the current competitive dynamics in the market place potentially and provide some additional color what you're seeing out there?

So the competitive environment today it doesn't look very much different than it did last year, the year before. Our competition is primarily [string] inverters with or without DC optimizers and we continue to increase our market share against the [string] inverters; again because of the value proposition of a microinverter, as Kris has mentioned, we've been on it fairly consistent price reduction path year-on-year for pricing time now, it's a bit variable but I’d say that we're pretty much on that same path as we look forward to 2015 and even 2016. There is a result of where we are in the technology curve on microinverter, there is tremendous amount of room in front of us for further cost reduction, we're actively engaged in that, that's helping us to reduce our prices very aggressively, while maintaining very healthy gross margins. And in addition to that we're adding new features, new functions that are unique and [generic] to microinverter that will also help us I think on the pricing side. So we have -- there is a lot of work going on both in the area of cost reduction and future enhancement to help support the current and the future pricing expectations that we have.

And then shifting here to your, Kris, I know you mentioned international outlook or the international mix of sales is about 15%. I was wondering if you can comment on the full year 2015, so what do you expect the mix of international sales to be as well as commercial sales.

So as you pointed out the breakdown between U.S. and international is 85:15, the breakdown between residential and commercial is also 85:15. We of course continue to grow our business in the U.S. residential market which is 75% of our business. We see a tremendous amount of growth of the total available market and we continue to defend, grow ourselves in that market and that is fueling a lot of the overall growth. In addition to that of course we have a strong focus on growing internationally; U.K. and Australia and many other markets from Canada, Mexico to other continental European countries and other countries and APAC region. As a result of that we do expect our international revenue to grow faster than the U.S. revenue and so we will probably move more towards an 80:20 towards the end of this year from that perspective. And then if I look beyond that 2016 and 2017 of course we will continue to look at entering into new countries and there is a lot of action going on within the company to prepare for that. Similar on the commercial side, as you know, we have launched our dedicated commercial product the C250 that has 480V, three-phase, 60 cell and 72 cell. So now we have a dedicated product to go and attack the commercial markets, that product is very well received in the market. It's a little bit of longer sale cycle. But as I said, the product is very well -- we expect that as well to grow towards the end of the year closed to 80:20 relationship rising commercial than currently 85:15.

Great. So, it sounds like direct 85:15 split today, but as you transition through the year or quarter by quarter your end, potentially end up in Q4 at that 80:20 split?

Thank you. Our next question comes from Vishal Shah of Deutsche Bank. Your question please.

May be Paul, can you talk about, you are assuming the largest customer, I believe there has been of transition -- that customer from maybe one supply to two, I mean that's been a busy headwind in your sales. Do you expect that headwind to continue or you going to think that your market share that customers stabilized in the near term?

So we've been talking of this for well over a year now. They’ve indicated that they were go to move very likely to beyond two vendors or more than that that is on track. It's very hard for me to comment on what's going to happen in the future, we need to talk about one large customer. But I can say is that despite the fact that our percentage share in that customer has decreased the actual revenue dollar has increased, but the revenue dollar outside of that customers has increased even faster. It's very easy to forget that there are many worldwide customers that we have not yet selling to. As Kris just noted we have far more markets in front of us than we're currently selling in. So while we are -- and we treat every customer very, very importantly and we recognized how the importance of our larger customers at the same time we also are very focused on growing our presence not just in the U.S residential market but the U.S commercial market which is a very fragmented market and in international market as well. So all of the number that we’re giving for Q2 take into account the fact that we're assuming that there is going to be more and more vendors in our top customer.

And just one of the question on the margin. As we think about the rest of the year second half do you expect your margin to stabilize to these levels or how should we think about the product mix, particularly the fourth gen product impacting margins and where you think margins can go from here?

So what we've said is that we have a financial strategy of balanced profitable growth which means we're to push the top line as far as we can while increasing profitability year-on-year. We've been doing that for many years consistently we're going to continue to do that. Our target gross margin of 35% to 40% remains our target gross margin and we are more confident than ever that we can achieve that; however that is not our focus right now. We said that gross margin are going bounce around in the low 30 and we very comfortable with it, we're not trying to optimize the gross margin number right now. What we are very focused on is that the continued development of new technologies is increasing the features and functions of the energy system which includes the microinverter cell, storage, energy management providing an aggressive cost reduction roadmap to our customers and doing all of this while increasing the profitability. Remember that our R&D expenses include a lot of new product that we're not shipping. As Kris had mentioned things like our AC battery solution, things like Grid Edge analytics, our energy management, even some services that are part of the Enphase Energy services offering, our under development that we're not shipping and we're able to invest in this and increase in profitability because of the growth in revenue and because of the healthy gross margins.

Our next question comes from Michael Morosi of Avondale Partners. Your question please.

Obviously there is some pretty big news recently as it relates to the store’s opportunity in the industry and I just like to see if you guys can walk us through on how you're thinking about Enphase within the storage market and how the microinverter technology stacks up against other technologies yield in the resource context.

We certainly share other company's optimistic view on the global storage market. In fact would be accurate to say that as per our growth storage will become an essential part of the total energy mix. We have often said that in the future we will not be selling sold systems, we'll be selling energy system which will consist of generation, storage and energy management all wrapped into one package. Having said that it's clears that storage needs to be important part of the mix and it is because of our fifth generation microinverter that is uniquely capable of bidirectional power flow that we’re able to create the AC battery solution. This is a solution that’s around 40 pound you literally hang it on a wall very much like a picture frame, you plug it in and both the chemistry the battery itself as well as the invertors all in that box. There is no additional material that’s needed. So you hang it on the wall, you plug it in and because it's our communication system Enlighten will automatically see it, automatically configure it and come up with a charging and discharging profile for it. That simplicity of installation and simplicity of design we think is extremely unique and it's going to be extremely valuable. But having said that they're going to be a multiple solutions out there and we welcome all of it, we believe firmly that the storage market is a tens of billions of dollar market in the making and there certainly is going to be more than one competitor. But the enthusiastic response that we have receive from customers all over the world has really given up a great deal of confidence that we are on the right track. In fact if you look at the market that we are currently in let's say Australia specifically, the demand for storage there is robust and it's driven by a very clear economic model. Our current presence in Australia is going to give us a tremendous launching platform for the AC Battery solution as well as other countries included.

[Operator Instructions] Our next question comes from Paul Coster of JPMorgan, your question please.

Thank you for taking my questions, it's probably a pretty naïve one since this is my first around but clearly your nearest competitor with the DC Optimizers solution has claimed a very significant cost advantage and I'm just wondering if the improvements that you have in mind, of course the year -- next year or so close the gap materially. Do you even accept that the gap is as wide as they say and -- let's leave it at that for now? But there's sort of a second question really is, is it -- are you tempted to lower your gross margins a bit to recapture some market share?

To address the first part of the question, it's not at all clear to me that they have a cost advantage today. I do not have any data to support that today, but that I do have doesn’t support it. What's interesting is that if you look at our cost reduction roadmap going forward, it is extremely aggressive; it addresses every part of the system. As I said earlier in the call we're still in the very early days of technology development for a microinverter, there's a lot of work in front of us in terms of semiconductor development, semiconductor integration, system levels design, cabling, mechanical engineering and we are investing heavily in all of these areas. The decision that we have to make is where do we apply our R&D dollars. I could certainly apply all of them on cost reduction and get there sooner rather than later but at the same time we are looking at some very new and exciting markets. Japan, is one of them. We said many times that we're very excited about the potential for Enphase to enter Japan and we are right now going through the certification process. We're looking at as we talked about already at length the AC Battery solution, the energy management system. So we're balancing our development dollars between ongoing cost reduction coupled with feature enhancement and we believe that that balance that we've struck between the two will allow us to maintain or increase our cost competitiveness against string inverter and continue to increase the features and functions that we believe consumers all over the world are going to be demanding.

Does the [inspection] of fifth generation products actually reduce the cost significantly or is it all part of a smooth curve here?

What we have seen in the past and what we don't guide specifically to cost in the future, but I can tell you what we did in the past, is that when we introduced a next generation product we generally see a cost reduction but it, maybe marginal, and then that gives us a new platform with which to apply a lot of cost reduction activities, to continue to get that cost down. We've seen that four generations in a row and I don't see any reasons why that would stop.

Okay, thank you very much.

Thank you, [Operator Instructions]. As there are no further questions in the queue I'd like to turn the call over to Paul Nahi for any closing remarks, sir.

Thank you. I'd like to close by acknowledging our recognition as one the 2015 best places to work in the San Francisco Bay area by the San Francisco Business Times and the Silicon Valley Business Journal. We’ve always been proud of our corporate culture of creativity, collaboration and technology innovation and believe our employees are truly best in class. I want to thank our entire Enphase team for their continued hard work, passion and dedication. We look forward to speaking with you again next quarter.

Thank you Mr. Nahi and thank you ladies and gentlemen for your participation that does conclude Enphase Energy's First Quarter 2015 Financial Results Conference Call. You may disconnect your lines at this time, have a great day.