Enphase Energy, Inc. (ENPH) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to Enphase Energy’s Second Quarter 2015 Financial Conference Call. At this time, all participants are in a listen-only mode. 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 like to introduce to you today's host for your conference 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 second 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 second quarter ended June 30th, 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 also can 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 second quarter 2015 financial results. I'll provide some key highlights and Kris will take through the second quarter financials and the outlook for the third quarter. After that we'll open up the call for Q&A. We delivered financial results for the second quarter of 2015. Demand for our solar energy systems was strong in our core US residential markets as well as in Europe and Australia resulting in a quarterly record of a 195 megawatts shift, an increase of 48% year-over-year. We reported revenue of a $102.1 million for the second quarter of 2015 an increase of 25% year-over-year and non-GAAP margin of 32.7%. We also reported solid bottomline results including positive non-GAAP operating income and net income along with non-GAAP diluted earnings of $0.06 per share. Since inception we've shipped approximately 9 million microinverters or 2 gigawatts of Enphase microinverter systems. There're currently over 340,000 Enphase systems in 97 countries. In the US market second quarter revenue was up 22% year-over-year as we saw continued strong customer demand for our microinverter system and the expansion of our customer base. Our market share in the US residential market excluding [indiscernible] continues to be strong and growing and with our customers and partnerships such as our recently announced strategic supply agreement with Sunrun we expect this trend to continue. As a preferred supplier of solar energy systems to Sunrun for its home solar installation business, Enphase will provide its microinverters to Sunrun's direct installation services business for the first time. Sunrun recognizes that Enphase offers a smart, differentiated and financially compelling approach to clean energy generation that delivers strong economics, excellent system performance over the life of the project. We look forward together with Sunrun not only as a preferred supplier but as a partner in delivering intelligent energy solutions. During the second quarter, we signed an agreement with REPOWER by Solar Universe that establishes Enphase as the primary solar energy system supplier for REPOWER’s unique integrated solar power and smart home energy system. In the commercial sector, we continue to make headway with our C250 commercial product solution. During the second quarter, Enphase and My Generation Energy completed and commissioned a 900 kilowatt commercial project featuring our C250 microinverter system. My Generation Energy and other commercial installers recognize and appreciate the Enphase C250 value proposition of optimal performance, less wiring and fewer balance of system components and significantly reduced design, labor and overall construction cost. Turning to our international business, revenue was up 37% year-over-year mainly driven by strong growth in Europe and APAC region. In Australia and New Zealand, second quarter revenue increased nearly 200% year-over-year. We continue to view the APAC region as a significant growth area. In addition, we are seeing increasing global interest for energy management system which consist of our microinverter, AC batteries and load control, all managed by our cloud based application Enlighten. I recently visited with current and potential customers in the UK, Europe and Australia and came away very impressed with the strong interest in our energy management system to address regulatory requirements, increased economic benefit of the total system and enable more energy independence. Interest in our AC battery solution is especially robust. After discussions with customers all over the world, we are confident that our AC battery with its modular architecture and seamless integration into Enlighten will be unique in its simplicity, its ease of installation, performance and cost effectiveness. It's important to note that the anticipated growth of energy storage will continue to increase the value of an energy management system. A home, building or grid including a system comprised of solar generation, energy storage and load management will require an energy management system to create a total solution. With hundreds of thousands of customers already using Enlighten, the path toward total energy management for Enphase customers has already been paved. We will start testing and begin certification activities of our AC batteries source solution later this year as we prepare for our market launch in early 2016. Now I will 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 second quarter of 2015 and then I will provide the business outlook for the third quarter of 2015. As a reminder, the financial measures that I am going to provide are on a non-GAAP basis unless otherwise noted. Total revenue for the second quarter of 2015 was $102.1 million, an increase of 25% compared to the second quarter of 2014 and an increase of 18% compared to the first quarter of 2015. The large year-over-year growth was driven by strong overall demand for Enphase energy microinverter systems in our core U.S. residential and commercial markets as well as further market share gains in our international markets. As you all know, our revenue growth has been affected by Vivint's transition from a single sourcing strategy with Enphase to a multi-sourcing strategy using multiple other inverter vendors. As a result of this headwind, our customer concentration with our historically largest customer has been reduced from approximately 30% of our total revenue in the second quarter of 2014 to approximately 14% of our total revenue in the second quarter of 2015. Due to this strategic shift, revenue from Vivint was down approximately 40% year-over-year but the revenue excluding Vivint was up over 50% on a year-over-year basis. Our impressive top-line growth outside of Vivint speaks to the continued strength of our business and value proposition. We have many large, medium and small customers in the residential and commercial solar markets worldwide. We shipped a new quarterly record of 195 megawatts AC or approximately 225 megawatts DC during the second quarter of 2015, an increase of 48% on year-over-year basis and an increase of 21% sequentially. Megawatt shipped excluding Vivint were actually up approximately 80% on a year-over-year basis. The 195 megawatt shipped represented approximately 859,000 microinverters of which substantially all were our fourth generation microinverter systems. The Enlighten M250 represented approximately 35% of all units shipped, up from approximately 30% last quarter. Inverter prices on a price per watt basis were down slightly at approximately 2% sequentially and down approximately 10% year-over-year on a constant foreign exchange basis, in line with our historical pricing trends. Gross margin for the second quarter of 2015 was 32.7%, exceeding our outlook of 30% to 32% provided last quarter. During the quarter, our engineering and operations team continue to execute very well on our product cost reduction plans. Operating expenses during the second quarter of 2015 were $30.3 million, a reduction of 1% compared to the first quarter of 2015. During the second quarter of 2015, R&D expenses were $11.6 million, sales and marketing expenses were $11.5 million and G&A expenses were $7.2 million. We have been able to keep operating expenses at the same level for three quarters in a row at approximately $30 million. While continuing to make great progress on many of our R&D projects; which including the development of our AC battery storage technology and energy management system; the fifth generation microinverter system; further product cost reductions; and other new and innovative next generation technology building blocks. Going forward, we will continue to practice rigorous discipline in managing our operating expenses. Total non-GAAP operating expenses excluded $3.3 million in stock based compensation expenses and $1 million in severance cost, offset by a favorable $1 million revaluation of the acquisition related contingent consideration liability. We reported another quarter of non-GAAP operating income with $3 million of operating income in the second quarter of 2015, a major improvement compared to non-GAAP operating income of $6,000 in the second quarter of 2014. For the second quarter of 2015, non-GAAP net income was $2.8 million or $0.06 per diluted share compared to a non-GAAP net loss of $400,000 or a net loss of $0.01 per share in the second quarter of 2014. On a GAAP basis, net loss for the second quarter of 2015 was $600,000 or a net loss of $0.01 per share compared to a GAAP net loss of $3 million or a net loss of $0.07 per share in the second quarter of 2014. In summary, I am pleased with our financial performance in the second quarter of 2015. The combination of strong top line growth, solid gross margin and flat operating expenses drove significant improvements to our bottom line and profitability. Turning to the balance sheet. We exited the second quarter of 2015 with a total cash balance of $31.9 million. Cash flow from operations was an outflow of $11.8 million, driven primarily by a sequential increase in accounts receivable of $21.4 million as the business was ramping up during the second quarter and as a result of the timing of shipments during the quarter. Inventory remained approximately flat sequentially at the level of $34 million. We will continue to take actions to drop down inventory levels during the remainder of the year. During the second quarter, capital expenditures were $2.6 million and depreciation and amortization was $2.5 million. Cash flow from financing activities was $19.1 million, which included a $17 million draw down on our working capital facility. During the remainder of the year, based on the seasonal patterns in our business and as we drop down accounts receivable and inventory levels, I expect to generate positive free cash flows and repay any outstanding amounts on our working capital facility. Now, let’s discuss our outlook for the third quarter of 2015. We expect revenue for the third quarter of 2015 to be within a range of $100 million to $105 million, which is an increase of 1% to 6% compared to the third quarter of 2014. In this outlook, we expect that the revenue was driven will be down to approximately $5 million in the quarter, which is a decrease of approximately 75% year-over-year. The non-driven at the midpoint of the outlook range is up approximately 25% year-over-year. We expect gross margins to be within a range of 30% from 32%. We also expect non-GAAP operating expenses for the third quarter of 2015 to be flat to up 3% compared to the second quarter of 2015 as a result of certain onetime development project expenses during the current quarter. And now I will turn the call back to Paul.

Thanks Chris. Before we go to Q&A, I’d like to take a moment to highlight the Enphase value proposition and our competitive strengths. We continue to grow our business in every geography and every segment. We have an impressive customer list worldwide and the demand for our products is strong and continues to grow. Our unique value proposition as well as the superior quality and reliability of our energy system resonates with customers globally. In the U.S. residential market, we currently have strategic partnerships with four out of the five top installers, NRG, Sunrun, SunEdison and Vivint. We also have strategic partnerships with many new and upcoming players, and in fact are seeing increasing momentum and growing market share with them. These customers continue to execute well on their growth strategies in the U.S. residential and commercial markets, as well as internationally. It's clear that with its ongoing inverter diversification strategy is putting downward pressure on our topline growth but despite this Enphase continues to grow. We believe that our share of Vivant's business will normalize this quarter after which we expect to continue to see overall growth. Our current customer portfolio is well balanced with large Tier 1 customers as well as with midsized and smaller installers and no one customer accounting for a disproportionate share of our revenue. Recently there's been a great deal of discussion about competitive pricing, we certainly recognize the increased pressure on inverter pricing that is affecting all suppliers. Pricing has been and will continue to be very important. While we've said this before it's worth restating that because of our advanced design semiconductor based technology and proven track record we have great confidence that the cost of our microinverter system will approach that of common string inverters and be lower than string inverters with optimizers. Enphase has an exceptional track record of cost reduction and we will continue to reduce costs even further. In fact our current cost reduction roadmap is more aggressive than ever. In addition to driving down product costs through innovation and semi conductor integration a microinverter is uniquely able to leverage its scale as well as the growing availability of higher power models to further accelerate costs and price reduction. We will be providing more details about our product cost reduction roadmap in the coming months. The combination of continued solid growth, aggressive cost reduction, ever increasing performance and reliability and the delivery of a complete energy management solution is proving to be very powerful and will continue to drive further growth with new and existing partners worldwide. We're more excited than ever about the many opportunities ahead. Now I'll open up the line for questions.

[Operator Instructions] At this time I am showing no questions, I would like to turn the call back over to Paul Nahi for closing remarks.

Well thank you very much for joining in the call today. There may be a mistake, I think there may be some questions on line.

Our first question comes from the line of Vishal Shah with Deutsche Bank.

Hey guys it's Jeremiah on the line for Vishal. Thanks for taking the question. I was just hoping you could expand a little bit more on the cost reduction front, I know you'd said that at some point you hope to be lower than inverter plus optimizer and you know competitive with inverters, is there any kind of general commentary you can give around that.

Well what we said is that we are going to be providing a lot more details about that in the coming months at a high level, what I would say is if you look at the history of silicon valley it is all about cost reduction as a result of semiconductor integration and innovation. Our device our microinverter is based on a very complex and sophisticated semiconductor design and I think that what we are seeing right now in terms of cost reduction is nothing dissimilar that we've seen for many years with many other products in Silicon Valley, so we're going to continue that trend and as I said we're going to be sharing with you a lot more details about this in the very near future.

Okay great, I'll look forward to seeing that and maybe on a separate topic, as you're expanding more internationally, I know you highlighted Asia Pacific specifically as a growth area, could you talk about the markets that are being more or less successful there and where the future growth may come from in A-Pac.

Well we have a very strong team that's actually doing extremely well in Australia and we've already expanded into New Zealand and we are still very early in that region so there's a tremendous amount of market growth specifically in Australia and a growing market share in New Zealand. Having said that and we do not preannounce the introduction of our product into new geography but I will say that as you look north in the Asia Pacific region there are up and coming markets that we are very excited about that our microinverter solution is extremely well suited for and we'll keep you informed as we have more details about that.

Great, thanks guys.

Thank you, our next question comes from the line of Edwin Mok with Needham Company.

Great, thanks for letting me ask a question so, first one, she's a fall on the A-Pac sorry on the international front. Two part question I guess, first is, there's recently some change in policy in UK, have you seen or do you expect to see any impact to your business there and then relate to Australia and New Zealand that you highlight, I note that you guys had announced commercial version of the inverter in the international market, did that help drive some at least small commercial growth in those markets.

So the answer to your first question there has been and I believe still will continue to be some policy shifts occurring in the UK, however it is not significantly impacting our business, where again, it's -- we are relatively young in these markets and there is a lot of market share ahead of us. So we are seeing tremendous success. The brand is growing. The teams are executing very well and I expect to see continued growth in the UK market. As for Australia and New Zealand and the commercial markets there, we are actually very active in both the residential and the commercial markets in Australia and New Zealand. The -- we have a slight advantage there and that the product is the same product as opposed to what's required in the U.S., so we are able to take advantage and leverage the technology we have, leverage the customers base that we have to see continued growth. So as we mentioned on the call, we have seen a 200% year-over-year increase and we expect to see continued growth in the Australian market.

Great, that’s helpful. And then, Kris I have a question OpEx. You mentioned that there was some one-time government expense on the third quarter. Is that we can quantify that? And also SPIs this quarter, did that also contribute to increased OpEx in this quarter?

Yes, and that’s why we guided operating expense to be flat to up 3%. And so it's not a huge amount but there are some one-time expenses in the third quarter that result in a potential small increase of the operating expense.

But do you expect that to reverse by the time we get to the fourth quarter then?

Potentially, yes, yes.

Okay. That’s helpful. Last question then I will let the other guys ask. In the U.S. market you guys announced a fewer new customer like Sunrun and Solar Universe, right? I was wondering those bigger contracts. Do you have to give any price concession for those contract and as those ramp-up, do you expect that to have some impact on your gross margin, any way you can give us some color on that?

So we are not going to comment on specific pricing for specific customers. We have a very competitively priced product and there is a recognition that the value of a microinverter is unique that a microinventer does produce more energy it's easier to design, easier to install, it's the most reliable product out there, and that value is recognized by our customers. The gross margin that you see reflects the tier 1 customers as well as tier 2s and tier 3s and I think we are going to continue to be able to extract the value of a microinverter as we attract both larger customers as well as smaller ones.

Okay, great. That’s all I have. Thank you.

Thank you.

Our next question comes from the line of Philip Shen with Roth Capital Partners.

Hey guys, thanks for taking my questions.

Good.

First off, why did you raise the 17 million debt in the quarter and what do you see ahead, what kind of share do you see of the U.S. residential market in 2016?

Well Phil first on the $17 million debt, as you know, we ended last quarter with $27 million of cash at the end of Q1, at the end of the second quarter we had $16 million of net cash, it's actually $30 million of cash with $17 million of debt. As you can see in the second quarter accounts receivable increased approximately $21 million mainly driven by the ramp of the business in the second quarter as well as the timing of shipments during the second quarter and we kept inventory approximately flat. And so as a result of that, that definitely have an increase in working capital requirements and we had a working capital facility there and we used it. As I said before, I do expect in the second half given the seasonality of the business and given that I expect to drive down accounts receivables as well as inventory levels to repay any of those outstanding amounts on the working capital facility.

In reference to the market share question, what I would say is that we are not going to guide to market share for 2016 but if you look at the existing performance we have been increasingly successful with small and medium size installers. We have added Sunrun most recently as a large installer customer and that trend we believe is going to continue.

Great. I have one more question and then I will jump back in queue. There has been a lot of discussion among investors comparing your storage solution with other offerings in the market place. Can you talk about the advantages and disadvantages of your offering versus competitors' since yours requires multiple stages of power conversion while others may only have one stage of power conversion? Thanks.

Sure. There certainly is quite a bit of noise about this. Let me start by saying that the modularity of our solution is very unique and incredibly valuable, when you talk to customers Australia, in the UK and Continental Europe, the ability to right size the storage solution for that specific application, for that specific customer is critical in optimizing the return on investment. With an Enphase solution you have the exact amount of source that you need, no more, no less. In addition the simplicity of our solution because we are not encumbered by being tied to the solar system, for an Enphase solar solution you simply one person can hang one device on a wall, plug it in and you now have storage. With our solution one person can install an entire storage system in just a few hours and because it’s not coupled with the solar solution, our installers can and are extremely interested in retrofitting existing installations with an Enphase storage device. So, the simplicity and the ease for the installer and the consumer I think are very pronounced and unique to our solution. In addition to that, there are other solutions out there and there are as an example some optimize their solutions there that in fact have seven stages of conversion. So if you look at the efficiency of our solution, we will always be more efficient and generate more energy than another solution out there. In fact, if you look at everything from the performance of our battery, which is north of 96% and close to 97% round trip efficiency compare that to some recently announced battery solutions that are down to 92% round trip efficiency. If you look at the number of cycles that we have over our lifetime somewhere in the neighborhood of 11,000 versus 5K for competitive solutions, it speaks to the support of our system to be able to do multiple cycles every day. So I think in terms of efficiency, we’re going to be far more efficient than any other solution. We’re going to be far easier to install and manage. And on top of everything, we will very likely be one of the most effective solutions out there. So our discussions with customers around the world are really very exciting and very positive and we’re very-very optimistic about the success of our storage solution.

Our next question comes from the line of Michael Morosi with Avondale Partners.

If I look at the revenue guidance that you imply with Vivint being down 75% year-over-year and your other customers being up I believe you said 25% or more, and Vivint flat, or Vivint’s share being flat in third quarter. What does that imply as far as fourth quarter? Should we expect that fourth quarter revenue should be up sequentially and would we think in same terms for margins?

Michael we typically only guide one quarter at the time. And so I am not going to make a change here. But historically if you look at our seasonal trends, we have seen that the fourth quarter is up slightly, flat to slightly up versus the third quarter. And so, based on the information that we have today and based on what we believe will continue in our Vivint business, as well as the non-Vivint business, that’s what we expect for the fourth quarter as well.

And then maybe just taking a step back, with respect to cost, you talk about potentially intersecting or bidding traditional inverter technologies. And as we look at the quarter, and if we just annualize your run rate of say 200 megawatts, we get to about 800 megawatts. And so that’s implying somewhere below 2% of the global installation run rate. So how do you think about just the segment of module level electronics and where segment market share should go over time, so just focusing on overall segment as opposed to share, maybe within the segment?

So it’s a good question. I think if you look at the advantages of microinverter and you look at the fact that we’ve had such tremendous success despite the fact that we have been priced at a premium and sometimes earlier on at a significant premium over string inverters, it’s clear that our customers value the microinterver and value what it brings to the table. As we talked about more energy production, simpler to design and install, the most reliable product out there, it has tremendous value. The only thing that has really held back yet again more market share adoption, has been pricing. And as I mentioned in the prepared remarks, we get it. That pricing is becoming increasing important. However, as we are able to close that gap and get closer to just playing another string inverters to get under string inverters with optimizers. We think that the penetration of microinverters in the overall market should increase very dramatically, not only with new markets and new segments open up but we should see a very significant increase in market share even in very well entrenched markets. So we’re very-very bullish that this is the future. And the microinverter, as you know, is also a precursor to an AC module where you have a microinverter attached to the back of the module, which will simplify the installation process yet again. So, you couple that with a complete energy management system, I think you have the foundation for the development of a very large portion of the market moving to microinverter solution.

Thank you our next question comes from the line of Krish Shankar with Bank of America Merrill Lynch.

Hello this is [indiscernible] [indiscernible] speaking on behalf of Krish Shankar. I have a couple of questions. For starters, can you speak a little about the margin differential between your domestic and international sales?

We've stated before that our margins on the international business specially taken into accounts some of the Forex headwinds that we've recently seen are slightly below average but there is not a big difference but it's I would say slightly below average.

Okay and moving forward, would you be willing to sacrifice profitability for growth or are there any situations where you would choose one over the other.

I would view that as these are business decisions that we make every single day that we're constantly looking to optimize the business which means growing the topline as hard as we can while maintaining profitability and increasing profitability year-on-year. Because of our aggressive cost reduction task, because of the value that we produce, because of the multiple markets that we're in we're able to go in and surgically make that decision on a customer by customer basis and we have done that. As a result you've seen the share growth that we’ve had while increasing profitability so I guess the short answer is absolutely we make those decisions every day and I'm very confident that we're going to be able to continue that path of profitable growth in the future.

And just one more on [indiscernible] your September revenue has improved sequentially from June and I have a question as to why this next quarter's guidance the mid point is kind of flat in comparison to this quarter seeing the sequential revenue has increased over the last three quarters.

Right and I think we try to explain that on the call, it’s mainly driven by Vivant's revenue that is down 75% year-over-year as well as drastically down sequentially as well, if you look at the non Vivant part of the business you can see that we expect strong year-over-year growth as well as sequential growth in the third quarter versus the second quarter.

Thank you, awesome quarter.

Thank you, our next question comes from the line of [indiscernible] [indiscernible] with Raymond James.

Hey guys, so you've talked about the headwinds relating to Vivant's still sourcing, now that they're getting acquired what do you think will be the impact of the new ownership.

We have a long standing relationship with Sun Edison that goes back years, they have been a great partner for us and we're working with them both domestically and internationally, as you know we have a very good relationships with Vivant as well, so we're optimistic that the, that the joint company that post the acquisition we should be in a very strong position to continue to grow both with the joint company as well as within, so our job right now is to make sure that we are supporting them both again domestically and internationally and providing whatever support we can, but we are very optimistic about the relationship going forward with the joint company.

Okay and in relation to the kind of broader inverter landscape and you mentioned that the pressure on pricing, how much of that is a reflective of the industry pushing to squeeze out costs in advance of the ITC cliff at the end of next year versus your just general competitive dynamics among the different vendors.

I think it is a little bit of both, I think there's clearly a sense that people want to take advantage of the ITC as long as it’s around and leverage their strength in the market. But I don't know that what we're seeing is necessarily just unique to the ITC, I think we're, I think the -- the nature of this market given the fact that we're effectively competing with coal and gas fired power is going to be cost competitive, is going to be, I think is going to challenge suppliers to be very consistent and very aggressive in the [indiscernible] deposits and price reduction strategy going forward. We don’t think it’s going to be necessarily uniquely a US phenomenon, we're going to see this worldwide and for us we welcome it, we think this is, we believe that as prices come down markets open up, as markets come down the overall TAM for the solar market will continue to increase. And we are better positioned than most to be able to leverage technology to help reduce cost, so I think just all in all I think you're going to see it globally and then I think certainly over time we will see prices sort of [indiscernible] to a particular level but I think that's probably a year or two out.

Right, appreciate it.

[Operator Instructions] Our next question comes from the line of Andy Natso with Dougherty & Company.

Hi, thanks for taking my call. I am calling on behalf of Andrew James. I was wondering if you could expand on the excitement you describe for the AC battery solution and also are there any plans to develop some kind of a solution that would allow Enphase's microinverters to connect to non- Enphase batteries?

So the excitement is really quite palpable. We are seeing it in Australia in Queensland, in New South Wales we are seeing in the UK, we are seeing in Continental Europe. What's exciting about it is that there is in these areas a real economic case for storage whether it's a zero export rule that's happened in Queensland, whether it's a reduction of the Feed-in-Tariff in New South Wales, whether it's taking advantage of the FIT program in the UK, the demand and the desire for self consumption in Continental Europe, all of this requires the coupling of solar generation -- to solar generation with storage. And because our solution is so simple, so cost effective and modular that can fit exactly the right place at the right time as we talk about the demand is just really stunning. And the demand coming for new systems we build as well as the desire to retrofit existing solar solutions with solar. That's very true in a lot of the regions we are in. In those areas we could very well be retrofitting or our partners could be retrofitting a solar system that's not Enphase with an Enphase storage solution. In fact we expect to see quite a bit of that. Obviously new installs will likely be a total Enphase solution but there are plenty of installs out there that don’t use Enphase that could benefit storage and because we are not coupled to the solar we can augment those solutions. You asked about the Enphase microinverter with other batteries, the fact is that we have a great battery partner but we are chemistry agnostic. There is no -- we don’t have to be with a particular chemistry. There are going to be multiple chemistries out there, some are going to be outstanding. There is going to be -- I think it's going to be a very contested space. I think we should see significant cost reductions, price reductions overtime. We want to stay nimble and loose. So while we have an outstanding partner right now that we are very excited to launch with, we are very much agnostic to the battery itself.

Great. Also on cost reduction, do you have a timeline on that end goal of being able to beat those traditional string inverters or at least be competitive with them and beat the DC optimizer based systems?

We are going to be providing a lot more data and a lot more specifics in the upcoming months.

Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Robert Sanders with Jet Equity Partners.

Hi guys. Thanks for taking my call.

Sure.

Just to follow on, on the last question about the cost reductions and the coming announcement. I had in my notes that the Gen 5, the bidirectional inverter should be coming to market some time second half '15, is it fair to assume that those cost reduction conversations will come alongside the launch of the Gen 5 product?

Not necessarily along the launch of the Gen 5 but leveraging the Gen 5 platform to get to those costs, absolutely.

And anything you can tell us about the early customer trials of that Gen 5 and how it's going and maybe the progress and timeline for the launch this year?

We are very much on track. The testing certification is going extremely well. We plan to launch in the second half of this year and we are right on track to do that. I think it represents a huge leap in technology for Enphase. And as you noted its bi-directionality is what allows for the creation of an AC battery storage solution. But in addition to that it has all of the advanced grid functions that we haven’t had in the past that now allow us to enter markets like Italy and Germany and a whole host of new markets as well. So we are obviously very excited about it and it's right on track.

Thanks so much guys.

Thanks.

Thank you. Our next question comes from the line of Michael Morosi with Avondale Partners.

Michael?

Yes, yes, thanks for taking my follow on. In the quarter, Kris called out a working capital drag and it looks like there is a lot of cash tied up in inventory quarter-over-quarter, I wondered if you guys can just provide a little more detail around the nature of that, I know you specified to online letter in the back half but pretty more color there would be appreciated?

Yes, so I have talked about that during the last call that as a result of the port issues we ended up with slightly higher than expected inventory levels in the first quarter. We have started to work inventory levels down in the second quarter but only little bit of a reduction it was less than $1 million. And so we expect to continue to do that in the second half and see further drastic reductions there on the inventory levels in the second half. The other reason of course was the increase in the accounts receivable which was actually a bigger impact on the increased working capital requirements there. But there as well given the seasonality of our business, we expect to drive down accounts receivable in the second half of the year. And as a result of that, generate positive free cash flows and repay all the outstanding amounts under the working capital facility.

[Operator Instructions] Our next question comes from the line of Peter Geis [ph].

I missed the first part of the call. Maybe you addressed this earlier. But why was the patent infringement lawsuit drop versus Enbridge?

I didn’t catch that question.

You may have addressed this earlier, why was the patent lawsuits drop versus Enbridge?

I don’t know where Enbridge is, so I think you may have the -- you made the wrong company.

Okay.

At this time, I am showing no further questions. I would like to turn the call back over to Paul Nahi for closing remarks.

First of all, I’d like to apologize. I think there has been quite a few technical difficulty this time, and I appreciate your patience and putting up with it. I know it’s difficult on this end. But I would like to thank you everybody for joining us on the call today. And we’re going to look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may all now disconnect. Have a great day.