Good day, ladies and gentlemen and welcome to the Enphase Energy’s First Quarter 2016 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 is being recorded. I would now like to introduce your host for today’s conference, Ms. Christina Carrabino. Ms. Carrrabino, you may begin.

Good afternoon and thank you for joining us on today’s conference call to discuss Enphase Energy’s first quarter 2016 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 close today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2016. We are providing an accompanying presentation with our earnings call that you can access in the Investors section of our company’s website. 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 current and future products, advantages of its technology and market trends. These forward-looking statements involve significant risks and uncertainties and Enphase Energy’s actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties please see the company's Annual Report on Form 10-K for the year ended December 31, 2015 and in Enphase Energy's quarterly report on Form 10-Q for the quarter ended March 31, 2016 which will be filed with the SEC in the second quarter of 2016. Enphase Energy cautions you not to place any 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 website. 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 2016 financial results. We reported revenue of $64.1 million for the first quarter of 2016. We shipped 143MW or 611,000 microinverters and 11% sequential increase resulting from the expansion of our existing worldwide customer base and new customer wins that drove our market growth during the first quarter. Enphase continues to be a leading choice for residential and commercial installers in the U.S. and a growing number of installers in our international markets. There are currently over 460,000 Enphase systems deployed in over 100 countries. Since inception, we've shipped approximately 11 million microinventers representing more than 2.8 GW of installed generating capacity. Enphase systems have produced over 5 TW hours of clean energy. As we discussed last quarter, the second half of 2015 proved challenging as pricing pressure in our U.S. and international businesses increased affecting our year-over-year revenue growth. However, we continued to drive the adoption of the microinverter technology by providing our customers with more features and functionality and ever-increasing quality and reliability, all while we continue to simplify design and installation and we did all this at very competitive prices. In fact we're seeing the effectiveness of our new pricing strategy with multiple new customer wins increasing share with existing customers. We're currently selling to seven of the top 10 tier one installers in the U.S. residential market and in addition our market shares increased with tier two installers as well as with thousands of smaller installers across the country. We also continued to drive revenue from other go to market channels including the new homebuilder segment, roofers, HVAC installers and new alternative financing providers. In addition, our work with multiple module manufacturers to develop an AC module, a solar module with an integrated…

Thank you, Paul. I will provide some more details related to our first quarter 2016 financial results as well as our business outlook for the second quarter of 2016. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis unless otherwise noted. Total revenue for the first quarter of 2016 were $64.1 million in line with the business outlook we provided last quarter. We shipped 143 MW AC or approximately 168 MW DC during the first quarter of 2016 an increase of 11% compared to the fourth quarter of 2015. The megawatts shipped represented 611,000 microinverters, all of which were our fourth and fifth generation microinverter systems. Gross margin for the first quarter of 2016 was 18.8%. As we have previously discussed, we have been reducing our prices ahead of product cost reductions. Revenue per AC watt for the first quarter of 2016 was $0.45 down 16% year-over-year and down 12% sequentially. Revenue from accessories during the first quarter of 2016 decreased 15% from the fourth quarter of 2015 contributing to the sequential decrease of our revenue per watt. Operating expenses during the first quarter of 2016 were $28.1 million including $500,000 of bad debt expense. During the first quarter of 2016 R&D expense were $11.9 million, sales and marketing expense were $9.6 million and G&A expenses were $6.6 million. Total non-GAAP operating expenses excluded $2.7 million almost all of which was stock based compensation expense. We reported non-GAAP operating loss of $16 million and a net loss of $15.7 million in the first quarter of 2016 resulting in a loss of $0.34 per share. On a GAAP basis net loss for the first quarter 2016 was $18.8 million or a net loss of $0.41 per share. Turning to the balance sheet, we exited…

Thank you. [Operator Instructions] Our first question comes from the line of Philip Shen with ROTH Capital Partners. Our line is open.

Hey guys, thanks for taking my questions. In terms of your competition, can you talk about how your competitors are reacting to your recent price cuts? Have you seen corresponding price cuts from them and can you break out the, I guess in so far as you can break out the answer between string inverters and DC optimized inverters that would be helpful?

So, as you've correctly noted, we are taking very pricing actions and we’ve been tremendously successful with it in terms of gaining market share. What we've seen as a result of that, is that the microinverter architecture is definitely the preferred architecture that we can be at or slightly above competitive pricing. In doing so, we have seen some very aggressive moves from our competitors. The good news is that despite those moves we continue to win share with our current pricing as it is. So I think the existing pricing strategy is working very well. I think the thesis is playing out nicely. In terms of the specifics between string inverters string inverters with optimizers we actually don't make that distinction. For us it's micros and then our competitors are one form of string or another, so we're seeing the reaction to our pricing sort of across the board.

Okay, thanks Paul. And in terms of ASPs, can you talk about how you expect them to trend perhaps beyond Q2, so we saw down 16-ish percents year-on-year in the first quarter, how do you guys see the ASPs evolving throughout the rest of the year? And when do you expect you may need to take your next price action?

So we are again very encouraged by the success of the pricing action, and while we do not guide to future price moves, what we can say is this, the confidence that we have in the cost reduction roadmap, today we have the product that will be introduced at end of this year. It is up, it is running, it is in trials. It is going through our QA testing as we speak. It is on track at the target cost. That provides the confidence for us to be able to continue to be aggressive on pricing throughout the end of the year. The specifics as I mentioned I am not going to be able to provide for you, but I can say that we are very well positioned and poised to continue on with the current strategy.

Okay great. One last question here from me. In terms of the balance sheet Kris, you just talked about how your existing line of $20 million plus the existing cash and so forth can - is enough to get you guys through this process. I was surprised that cash kind of fell to $13 million in the quarter. Can you just walk was through in more detail on how you manage through in the next few quarters?

Yes Phil, definitely happy to answer that question and I'll take maybe a little bit more time. The way I look at it is three basic parts to that question. First of all, we are improving the financial performance of the company. Secondly, we are driving further working capital improvements especially on the inventory side and then thirdly, it's all cash and having access to cash. And let me start with the first one, improving the financial performance of the company. First of all, we continue to see strong overall growth of the total available market and the markets that we play. The U.S. residential market continues to be strong as well as many other markets that we play in. So the strong overall growth and since we've adopted our new pricing strategy we are back to gaining market share in markets that are growing very strong, so that results in top line growth as you can see by the guidance that we provided for the second quarter. We do expect the revenue to continue to grow and further improve not only in the second quarter but also in the second half, also in part because in the second half of 2016 we will start adding revenue from the AC battery storage solution that will go on sale there as well. In addition to that, as Paul just pointed out we see some good production on our cost reduction roadmap that will over time gradually result in margin improvements and of course we will continue to manage our operating expenses as we have done now and have got a couple of quarters in a row now by keeping them relatively flat. And so I do expect over time, here quarter after quarter top line improvements and bottom line improvements and…

Okay, thank you Kris. Thank you Paul. I'll pass it on.

Thank you.

Thank you. Our next question comes from the line of Jeff Osborne with Cowen and Company. Your line is open.

Hey good afternoon. I just want to follow up on that line of questioning. Is there any covenants that we need to be aware of, I can look it up later tonight, but on the line of credit or the accordion and in the cash balances minimum margins, anything like that?

No, on the working capital facility there is a $15 million minimum liquidity of which $5 million is coming from availability under the line and so that's the major and I would say only covenant that we have under that $50 million working capital facility.

Go it. And then Kris you've called out, you've done a very nice job on the OpEx control over the past couple of quarters you highlighted, but you've called out inventory being high for a couple of quarters in a row. Can you just talk about in hindsight what the issue has been and what you are doing to rectify it?

On the OpEx?

Inventory.

No I was saying you've done a nice job on OpEx, but you've also for the past three quarters highlighted inventory being a bit higher than normal and unfortunately it is still moving in the wrong direction. So can you just talk about in hindsight what actually transpired and then what are you doing about it to accelerate the coexists? Are these just new customers that don't pay their bills or it the people in financial distress. I'm just trying to understand what the actual variables at play are?

So if we talk about receivables of course as the business goes up receivables will go up as well. we don’t see any major issues in terms of collectability or anything like that. So that's receivable as the business goes up the goals of the business goals up receivables will go up as well we don't see any major issues in terms of collectability or anything like that. So that's on the receivables side and as I said as business will go up receivables will go up. On the inventory side, we definitely saw some softness in the second quarter of 2015, but we also adopted this more aggressive pricing strategy which is resulting now in market share gains. And so we currently have too high of inventory, but we are going to burn that off as the unit growth and the revenue growth now starts in the second quarter and then the second half of 2016.

Got it, and the last question I had is just can you explain the 9% delta on the revenue guidance and he megawatt shipment guidance, is there an acceleration of pricing or is there a mix shift to accessories, I mean just what are the dynamics at play as it relates to the guidance?

There is no real shift there in the guidance Q2 versus Q1. Obviously megawatts is always grower faster than revenue as there is ongoing price erosion.

Got it, so accessories should be pretty consistent. There is no one-time items like you've called out in the past?

There is always some fluctuations on accessories, and so some quarters are stronger and other quarters are a little bit less, but for the second quarter we don’t expect any major shift there.

Thank you very much. I appreciate it.

Thank you. Our next question comes from the line of Edwin Mok with Needham & Company. Your line is open.

Hi thanks for taking my questions. So follow up to Jeff’s question, last question, so I noticed your gross margin is also guiding top flattish sequentially, so does it imply that you are expected to drive your cost down by manipulating [ph] my math tells me down 7% sequentially for you to hit the mid-point of gross margin and I thought that all your cost reductions comes through new versions, so what helps you to drive that cost down?

Yes, so your math is somewhat in the ballpark there right, so we definitely have been able to drive down our cost per watt in the mid teens on a year-over-year basis and sometimes you see some acceleration when you look at one quarter versus another quarter. So we definitely continue to see some major improvements in driving down our product cost. Keep in mind that the vast majority of the products that we ship right now is our fourth generation and we have done in driving down the cost on that fourth generation. We continue to drive down and execute on product cost reduction on the fourth generation as well as the introduction of the fifth generation in the fourth quarter where we continue to drive down the cost and then later on the sixth generation which will become available late 2016 and then eventually the next generation in 2017 as well.

To underscore Kris’s point that what he just described has been sort of the process of cost reduction for us from day one where with the introduction of a next generation product we will often times see a step function decrease in price, but then throughout the life of that product we will continuously refine it and pull costs out and that is exactly what we are seeing right now with the fourth generation product.

Okay, great that is helpful Paul. Paul, in your prepared remarks you talked about gaining share and I think you call out international is an area that is of strength, can you guys give us roughly where, how much of revenues come from international right now and amounted to various markets you are selling to which market are you seeing the strongest strength or share gain you seeing?

So our share in the international has remained relatively stable around 15%, but that is in large part because we are seeing good growth in the U.S. market. But if we look at individual markets like Australia, we saw we doubled our market share from 2014 to 2015 and we expect to see something very dramatic this year in terms of share gain as well. In France I think we are likely the number one residential inverter with market share in the low 30s, so those are very strong markets for us, we are seeing very good growth in the Netherlands right now as well. So in terms of the European markets I think France, Netherlands and then we’re looking at some other countries. We have seen strong growth in Latin America as well. Mexico is doing very well for Enphase as well as the Caribbeans. I think in Puerto Rico we’re again the number one residential inverter down there and we are seeing good share growth in both of those geographies as well as other Latin American countries like Panama and Central America and others. And if you look at different growth areas for us in the Asia-Pacific region, we’re looking north to some of the island nations as well as potentially Southeast Asia. I mentioned that we’re moving sort of looking at different European countries and different Latin American countries. So I would say good, well balanced growth in all the major geographies.

Okay, great. That is helpful. Any updates on the commercial product you have?

So we continue to see good success with our commercial product. In fact, you may have heard about the NRG win with Whole Foods that is a very significant commercial design win that NRG Renew will be using Enphase for, it is something we are very excited about both our partnerships with NRG as well as the Whole Foods agreement. I think it is certainly exemplary of the type of projects that we are winning on the commercial side. Now that is in the U.S. We are also winning multiple commercial deals in international countries as well, so again a sort of a well balanced approach to resi versus commercial.

Okay, great. Last question I have on the AC Battery, I think you guys talking about launching product summer of this year in Australia and potentially other markets sometime next year. Is there any way you – have you guys done some estimates in terms of sizing the opportunity for how much you expect, how much food you expect initially in the second half of 2016 or anywhere you can size opportunity any color would be helpful? Thank you.

So it’s a difficult question to answer because the market is very nascent. Now clearly storage is going to be an instrumental part of this total energy solution. You are not going to be able to see the penetration in solar as we expect without commensurate increase in storage. The storage product is part of the larger home energy solutions for us which includes the generation to solar cells, the storage, load control and energy management system that manages that system for the consumer. For obvious reasons I can’t give any forward-looking numbers on specific battery sales. What we can say is this, that we’re getting an increasing amount of demand from our installer and distributor customers to start taking free orders because the demand is certainly increasing. The demand is increasing I think for two reasons, one is that the overall demand for storage is increasing and two, now that we have some competitive products that are out there in trials the clear differentiation between Enphase system in terms of our simplicity, modularity, ease of installation, ease of use is more pronounced than ever which is driving up demand. So while I expect to see significant demand this year in the second half in the Australian region, we do expect that the storage revenue and the revenue from Home Energy Solutions to be meaningful in 2017.

What kind of margins that you expect to generate from the storage products once it is ramped up, is it similar to corporate average or above or below?

We expect initially to be at around corporate average.

Okay, great. That is all I have. Thank you.

Thank you.

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

Hi guys, thanks for taking my questions. Are you seeing any changes in the competitive dynamics coming from the lower end of the market, I’m thinking specifically of Chinese competitors?

We are definitely seeing the competitive dynamics changing. What I would say though is that in the residential segment, we are not seeing as much in the way of offshore products. I think we are seeing that more in the commercial segment, but in the residential segment while there is plenty of pricing pressure it is coming from either domestic or European products.

And then to the extent that you’re beginning to ship the AC Battery solution in the second half of the year and that should help with margin absorption, how likely is it do you think that Q1, Q2 will represent your gross margins bottom for the sale?

As we talked about I’m not ready to provide longer term guidance on gross margin. What I would repeat is that we are gaining more and more confidence in our cost reduction roadmap. As I mentioned the product for this year is already in test, so we have a very good view on that. There is a lot of great work that has been done on the cost reduction activities that we will see in 2017 which is providing yet again more confidence in our ability to meet the 2017 targets. Both of these targets by the way as we noted before are very aggressive. So meeting these targets is very exciting and it gives us the ability to use pricing as necessary to maintain and grow our share in the markets that we’re in. So it’s hard to predict exactly where pricing is going to land. But for us with the success that we’re having on the cost production and the success we’re seeing in gaining market share as a result of more aggressive pricing, we’re confident that we’re going to be able to continue to gain share, while we over time increased gross margin.

Thanks and then finally do you have any exposure to SunEdison?

Right, so SunEdison is less than 2% customer of which the majority of that is actually outside of the U.S. mainly in Australia which is not part of the Sun Edison bankruptcy. So our exposure is limited. We did take some reserves and we will if we are appropriately reserved for any remainder exposure that we have on SunEdison.

Thanks guys.

Thank you.

Thank you. Our next question comes from the line of Vishal Shah with Deutsche Bank. Your line is open.

Okay. Thanks for taking my questions, this is [Rakesh] on behalf of Vishal. Just wanted to check on the Chinese string and order size, do you see these companies offering remote disconnect options and if so how does this impact the market share of microinverter and optimizer companies?

So it is very clear the remote shut off is a necessity right now in the Northeast and it will very soon be a necessity across the continental U.S. It is a safety feature, it's the right answer for solar. For string inverters, the vast majority of them do not currently support that remote shut off and that has kept them out of the market for the most part. There are various potential solutions to that that we are - that we've seen and heard of. All of them are really quite expensive. They are rather clunky. They require additional hardware on the roof which is something that string inverters are not used to. So I think that they are going to have to respond if they want to play in the U.S. market. However, it is something that is very foreign to them. Their current architectures or current systems were never built to support that. So I think we're going to see sort of a clunky perhaps a bit of some clue solutions to it. It is certainly going to increase pricing. It's going to increase the labor cost. It's going to force them to increase their reliability because now they have units on the roof that need to last the duration of the warranty. I think it's going to be interesting to see how this plays out, but clearly with products like end Enphase that are correct by construction, not only do we comply to all the other current regulations, but we comply with regulations that will be in place all the way through 2019 because of the architecture of the microinventor, that it is correct by design. So for us it's just natural evolution of where the market is going.

All right, thank you. Would it be possible to quantify the cash flow you expect to see in the next few quarters just a ballpark figure?

We don't provide guidance from a cash flow point of view, but as I stated before combination of improving top and bottom lines working on the working capital side and reducing inventory will result in further reduction of the cash burn.

All right. That’s helpful. Thank you.

Thank you. Our next question comes from line of Colin Rusch with Oppenheimer. Your line is open.

Thanks so much guys. Can you to talk a little bit about how you're totaling pricing and margin as we go forward, obviously you're talking about cost reduction, but if you for some reason are going to pass all that cost reduction down and maintain gross margins, we have to see revenue nearly double a little bit more to get your breakeven level even on a non-GAAP basis. So as you guys go through the balance of the year can you talk about how that decision making process is happening and kind of what the response time is versus market signals to when you can respond?

Sure. So the strategy hasn't really changed. That we are focused on top line growth, market share growth, while moving as aggressively as we can tend towards profitable growth which means that we need to moderate our pricing to ensure that we are competitive that we can pull market share away from competitors, again both domestically and internationally. And because of the confidence we have in our cost reduction efforts we – it is a tool in our tool box and we'll use it as necessary. It's impossible to know how aggressive that pricing will need to be. I think we are very well positioned to address whatever comes up. We as I mentioned before we've already seen some very, very aggressive counter moves by many of our competitors. The good news is that it hasn't been successful and we've been able to with our new pricing continue to grow and take market share. But the goal right now is profitable growth which means top line growth, market share growth and heading towards profitability. So, that strategy, which we outlined back late last year has not changed.

Okay then on the far side are you seen any of your suppliers get nervous about it did the cash burn or look for letters of credit or anything like that changing with the suppliers?

Not in a particular way. I mean we definitely need to address that and I've talked about it already today. I think we have the right plan in place and we feel that the cash we have as well as access to cash we have as well as all the other stuff that we're working on are sufficient and that is not the major issue for our suppliers.

Ok great, thanks a lot guys.

Thank you.

Thank you. Our next question comes the line of Krish Sankar with Bank of America-Merrill Lynch. Your line is open.

Yes, hi thanks for taking my question. I had couple of them. Paul I'm just kind of curious if look at your pricing I mean obvious it is done like 15% last year delivered $0.45 cents a lot. I mean is this a race to the bottom at what point you say that you know we can cut our price anymore or is there any kind of bogie for that with maybe it gets like $0.10 or $0.15 of what or lower than that where you say below than that sale like doesn't make sense. A – Paul Nahi : So is the pricing extremely competitive right now? You bet. And I think we're going to see a very competitive environment throughout rest of this year. However, we have to recognize that the $0.45 of what that you noted is really not representative of our actual price and is that includes or could include many of the peripherals, the envoy [ph] the AC combiner box, cable and whatever else. The actual inverter price is actually considerably less than that. It is very much our belief that as we approach the cost/pricing of string inverters and now I am talking about low cost string inverters that the decision becomes very, very simple for our customers that for pricing that it at or nearly at string inverter pricing they can have a quality the reliability of an Enphase system, the extra production that Enphase provide the simplicity of design installation, the simplicity of working capital management for our customers they get all of that with the Enphase support for a normal increase. So while we see and have seen a sort of a rather precipitous drop in ASPs we do think that it definitely does start to ask them to start to flatten out as we get as we get lower on price. At that point the full benefit of the Enphase system can be realized for a very, very marginal premium. And more importantly, I think we're moving into an era where it's not about the inverter it's going to be about the energy system, and the Enphase system is not only going to be the highest quality the most sophisticated system out there, but it will also be one of the most competitively priced.

Got it. All right. So how big is the gap today between you guys and string inverter guys in terms of absolute pricing?

It's a really hard question to answer. The range is very, very broad. And remember that with remote shut off now all of a sudden the string inverters have to add a lot of complexity more products they have to significantly change their design in order to simply comply with the regulations that are occurring. So again it is varied, it's hard for me to give you a specific answer, but as we've said before we believe we've got to cost parity or maybe slightly below cost of optimizers by the end of this year by the second half of this year and then significantly below that and approaching for at low cost string inverters by the end of 2017.

Got it, got it. All right that's all I had, thank you very much.

Thank you.

Thank you. And our next question comes from the line of Pavel Molchanov with Raymond James. Your line in open.

Sorry to mention other troubled companies, but following up on the SunEdison question, talking about Vivint, this was 12% of your revenue last year. Obviously there's quite a bit of turbulence at that company can you give an update on where the business relationship currently stands?

I probably would take issue with the comment other troubled companies. What I would say is that the market is undergoing a great deal of volatility right now. That shouldn't be terribly surprising given that the solar market is really a very disruptive force on a long term energy market and in the process businesses and business models need to be adjusted to accommodate what is a growing and evolving market. We have an outstanding relationship with Vivint. We think very highly of the company and were have a great deal of confidence that they're going to be able to continue to see success. We also have a great deal of this fact for all the other companies out there. We recognize that the environment right now is challenging. Whether it's pricing or whether it's a customer acquisition cost, there's just a lot of change going on, but the dynamics of this market simply gets better. We can't forget that there's an underlying foundation to solar, the solar market and that people are buying solar today because it is less expensive than utility energy and we know that solar prices keep coming down and we know that utility prices are going to continue to rise, though the amount, the number of people that are for whom solar will become a more interesting product will continue to increase. What we need to do is make sure that we build our businesses around that evolving market which means getting our cost down, keeping our OpEx low, so we can compete very competitively with existing forms of energy which is coal and gas, but that is occurring. That is occurring worldwide and we see a very, very strong evolving market. But in the meantime it is going to be a little bit volatile and I think that's what we are experiencing right now.

And along those lines, can you share what percentage of your Q1 sales came from Vivint?

Yes, it is less than 10% consistent with what it was last quarter.

Okay, I appreciate it guys.

Thank you. [Operator Instructions] This concludes today's Q&A session. I would now like to turn the call back over to Paul Nahi for any closing remarks.

Thank you all for joining us on our call today. We look forward to speaking with you again next quarter.