Enphase Energy, Inc. (ENPH) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Enphase Energy's Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter 2020 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer; Eric Branderiz, Chief Financial Officer and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter ended December 31, 2020. During this conference call, Enphase management will make forward-looking statements, including but not limited to, statements related to Enphase Energy's expected future financial performance, the capability of our technology and products, our operations, including in the manufacturing and customer service, the anticipated growth in our sales and in the markets in which we operate and target, the performance of the tools we make available to and the capabilities of our installation partners and expected regulatory changes. These forward-looking statements involve significant risks and uncertainties and the 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, 2019, which is on file with the SEC and the annual report on Form 10-K for the year ended December 31, 2020 which will be filed with the SEC in the first quarter of 2021. 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 financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. The Company has provided a reconciliation 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 Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Good afternoon, and thanks for joining us today to discuss our fourth quarter 2020 financial results. We had a good quarter. We reported revenue of $264.8 million, shipped approximately 2.3 million microinverters, achieved non-GAAP gross margin of 40.2% and generated strong free cash flow of $78.5 million. We exited the fourth quarter at approximately 40%, 13%, 27%. This means, 40% gross margin, 13% operating expense and 27% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35%, 15%, 20%. Eric will go into greater details about our finances later in the call.

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2020 financial results as well as our business outlook for the first quarter of 2021. We have provided reconciliation of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. We are very pleased with the significant increase in demand for our microinverter systems in Q4 2020 despite the pandemic. Total revenue for Q4 2020 was $264.8 million which did not include any revenue from safe harbor shipments during the quarter. Total revenue increased 48% sequentially and we shipped approximately 762 megawatts DC of microinverters and 32 megawatt-hours of the storage systems in Q4 2020. The 32 megawatt-hours is equivalent to 12.2 megawatt-hours of power. As we previously discussed, some of our microinverter units met certain size and weight criteria, qualifying them for an exclusion to the Section 301 tariffs on prior shipments. We requested refunds totaling approximately $39 million plus accrued interest of which $23 million were approved in Q3 2020 and $16 million were approved in Q4 2020. This refunds have been accounted for as a reduction of cost of goods sold in the respective quarters where they were approved and the associated accrued interest was recorded in other expenses. We have excluded trust tariff refunds from non-GAAP financial results to present a more accurate picture of ongoing business performance. We don't expect any further refunds in 2021. Non-GAAP gross margin for Q4 2020, which excluded the $16 million tariff approved refunds, was 40.2% compared to $0.41 -- 41% for Q3 2020. The sequential decline was due to higher shipping and logistics cost compare -- logistics cost related to component supply constraint. GAAP gross margin was 46% for Q4 2020. Non-GAAP operating expenses were $34.2 million for Q4 2020 compared to $29.6 million for Q3 2020. The sequential increase was primarily due to the hiring of 85 employees during the quarter, mainly focused on engineering, cost of experience and innovation. GAAP operating expenses were $42.8 million for Q4 2020 compared to $43.2 million for Q3 2020. GAAP operating expenses for Q4 2020 including $7.8 million of stock-based compensation expenses and $684,000 of acquisition-related expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations was $72.4 million for Q4 2020 compared to $43.7 million for Q3 2020. On a GAAP basis, income from operations was $79.1 million for Q4 2020 compared to $51.8 million for Q3 2020. On a non-GAAP basis, net income for Q4 2020 was $71.3 million compared to $41.8 million for Q3 2020. This resulted in diluted earnings per share of $0.51 for Q4 2020 compared to $0.30 per share for Q3 2020. On an annual basis, we are pleased to report our record non-GAAP net income of $188.5 million. GAAP net income for Q4 2020 was $73 million compared to GAAP net income of $39.4 million for Q3 2020. GAAP diluted earnings per share was $0.50 for Q4 2020 compared to diluted earnings per share of $0.28 in Q3 2020. Now turning to the balance sheet and the working capital front. Inventory was $48. -- $41.8 million at the end of Q4 2020 compared to $37.5 million at the end of Q3 2020. The sequential increase in inventory was driven by the planned increase of raw materials for our Enphase Storage systems in anticipation of the production ramp in 2021. Although the dollar value of inventory increased sequentially, days of inventory outstanding decreased to 27 days, compared to 41 days in Q3. This sequential decrease in days of inventory was driven by the higher shipment volumes in Q4. Our target is 30 days nominally and we will always do what is right for customers. Accounts receivables were $182.2 million at the end of Q4 2020 compared to $122.4 million at the end of Q3 2020. The sequential increase was due to the higher revenue in Q4. DSO of 50 days decreased slightly from 52 days in prior quarter due to our collection management. We remain committed to efficient working capital management and driving down our cash conversion cycle. We exited Q4 2020 with a full cash balance of $679.4 million, compared to $661.8 million for Q3 2020. We did not make any share repurchases against our $200 million share repurchase authorization. However, we spent $16.3 million on withhold to cover tax transactions on employee stock vesting that prevented the issuance of approximately 132,000 shares in Q4. For the calendar year 2020, we spent $68.3 million at an average price of $50 per share on withhold to cover transactions and prevented the issuance of approximately 1.4 million shares. In Q4, we also spent $43.9 million on the partial repurchase of convertible notes due 2024. Since the end of Q4, we have received additional conversion request of $61.5 million as the notes are deep in the money compared to the commercial price. We expect to repay the principal amount of this conversion requesting cash and in the money amount in shares. Settlement will occur in Q1 2021. In Q4 2020, we generated $84.2 million in cash flow from operations and $78.5 million in free cash flow. For calendar year 2020, we generated our record 188 -- $198.9 million of free cash flow. Capital expenditure was $8.9 million for Q4, mainly for the Enphase Storage manufacturing capacity increase, IT enhancements, Enlighten software app development costs, and the production ramp with our second contract manufacturing partner. Capital expenditure for 2020 was $20.6 million. Now let's discuss our outlook for the first quarter of 2021. We expect our revenue for the quarter to be within a range of $280 million to $300 million. We expect GAAP gross margin to be within a range of 37% to 40% and non-GAAP gross margin to be within a range of 38% to 41%, which excludes stock-based compensation expenses. The gross margin guidance includes a further increase in shipping and logistics cost to ensure we are best service our customers and getting them as many units as possible. We expect our GAAP operating expenses to be within a range of $64 million to $67 million, including a total of approximately $22 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. We expect non-GAAP operating expenses to be within a range of $42 million to $45 million. All guidance estimates include the Sofdesk acquisition, but do not include the DIN's Solar Design Services business. I would like to touch upon our OpEx guidance. Our non-GAAP operating expenses are increasing quite a bit from Q4 to Q1. The increase is due to two reasons. Hire to support our growth plans and consolidation of acquisition, plus we lead in incentive accruals. The hiring is related to the new product development and investment in innovation to create best-in-class home energy management system. The Sofdesk and DIN Solar Design Services Business acquisition are building blocks that enable us to build a world-class digital platform for homeowners and installers. At the same time, we are not taking our eyes off the baseline financial model and plan to maintain operating expenses at 15% of revenue. Before turning the call back to the operator for questions, I would like to mention a couple of things. First, we publish our inaugural ESG report a few weeks ago. Sustainability is at the core of what we do at Enphase, and we are proud of our team as we continue to enable clean energy and energy-independence through innovation. Second, Enphase has recently added -- has been recently added to the S&P 500 Index and we are very proud of this accomplishment. I want to acknowledge the hard work and dedication of the entire Enphase team. With that, I will now open the line for questions.

Thank you. Our first question comes from Brian Lee with Goldman Sachs. Your line is now open.

Hey, guys. Thanks for taking the questions and congrats on a great quarter. Maybe first if we could sort of dig into the guidance a little bit. I know there is some shortages here on the micro side, I'm assuming there's some on the battery side as well. But can you give us a sense of sort of supply demand for both the micro side as well as the Encharge system, it sounds like you're leaving some business on the table here. Can you kind of quantify what impact that's having on Q1 and is that expected to also persist into Q2? And then related to that, I guess on gross margins, what percent hit did you see? Is it a 100 bps, is it more than that on Q4, given the additional freight and logistics costs you had to incur?

Yeah. So let me start with the microinverters. Demand is quite high, customer demand is quite high there, and I once again go back and attribute it to our high quality and high customer experience. So basically, while I'm not going to quantify how much the demand is higher compared to the high-end of the guidance I already said, it is significantly high. And our constraints basically are coming from the semiconductor components, that's an industry-wide issue right now. There are two specific components that we are constrained on, one is our ASIC that goes into the micro and the other is the AC FET drivers that actually drive the high-voltage FET. There the name of the game is, we are qualifying multiple more sources, so that we have more supply as well as expediting product, and I am in direct touch with the CEOs of those companies and they are helping as much as they can. We expect to get all caught up basically by -- yeah by early April. Our top priority through all of this is to ensure that we take care of customers. So we will do whatever it takes in order to ensure their lines are running and that they have not affected. So that's on the microinverter side. On the storage side, we have enough capacity. We already said that we will -- we have about -- as of last quarter, we had about 50 megawatt-hours of capacity and then as of Q3 of '21, we will have 120 megawatt-hours of capacity. We have enough capacity of the storage side. And on the storage side, once again reflecting back on how we did, we started shipping storage in the third quarter. I'm pretty happy with the ramp. Compared to the third quarter, I did about, or we did about 35% more megawatt hours in Q4 compared to Q3. And for Q1, we do expect to do a similar amount higher than Q4. So let me come to some more statistics on storage, so that you get a flavor for it. Essentially, like what I said, about 360 plus installation install a -- unique installation companies have installed at least one Enphase Storage system. We have trained over 650 unique installation companies. We have trained overall more than 1,200 installation personnel. We -- what we are seeing -- we've learnt a lot in the process, mainly from installers as well as a lot of homeowners, and we are improving them one by one. So although -- yeah, I said in the prepared remarks, I wish we achieved a little bit more, but I think we are doing the right things by fixing these problems. For example, our commissioning time needs work, and we are in the process of improving the commissioning time to sub-24 hours and it is all about -- for us, it is all about taking care of the installer, making sure that the installer's experience is seamless. Ease of doing business is what we are all about. Therefore we will never compromise on the short-term in order to achieve that. So more examples is, very often the installers usually struggle on storage with main panel rewriting and replacement. So that's a big pain point for the installers and we are working on steps to solve that. Ease of doing -- when it comes to other ease of doing business, the homeowners are still in their infancy on learning how to use storage systems. So while the transition from on-grid to off-grid is seamless, the fact it is seamless means that the homeowners do not change their behavior and Enphase needs to do a lot more there to educate the homeowner in the seamless way. This is intelligent notification, intelligent text messaging, intelligent load control, which we are actually working on. And to -- one more thing is to also go back and do the storage design right in the first place. Very often people miss that storage is all about taking care of power property and most of the people miss that. Once again it is we, Enphase needs to take responsibility to do whatever it takes to simplify the installer's ease of doing business. And of course, now I'm coming to the industry changes that are needed, which are permitting needs to be a little bit faster on storage, that's an industry-wide problem, which I'm sure many of our peers and us are going to be working on. And the last one is financing for storage. We need some kind of innovative financing schemes and storage, so that that also starts accelerating overall. And I hope I gave you some flavor, but if I were to summarize, we are growing at a very nice clip, 35% from -- in Q4 compared to Q3. We'll do similar rate in Q1 compared to Q4, and our focus is on the long-term. We will take care of our installers, training and making our storage system easiest to install, that's our focus.

Thanks Badri, that's super helpful color. Maybe just -- I had a second question on batteries and you touched upon some of this. But if I kind of back into the numbers, it seems like you did maybe $25 million, $30 million of Encharge revenue in Q4, and then that will be well into the $30 million plus range in Q1 based on the guidance. So first question on batteries is, fair to assume those are the right revenue ranges and there is no change to pricing in the near-term? And then second question is just on -- I know given it's a new product and the installation rates are not as sort of swift as what you're used to on the solar side, your shipments are not keeping up necessary with capacity. You've talked about 120 megawatt hours by Q2, kind of 35% surge capacity you want to have in place, so maybe 85, 90 megawatt hours really being the shippable capacity you're targeting. When do you think we'd get closer to shipments lining up with kind of your applicable capacity? Thanks guys.

Your ballpark for the revenue is right. The second one is, like what I said, I mean it's a long-term gain. So once we fix the ease of doing business for the installers, we expect to ramp. As you see, we are making significant progress with both the long tail installers as well as the Tier 1 and 2 installers. You saw all of the press releases, you will see a lot more going forward. So we continue to grow at a nice clip. You can do the math. If we continue to grow at this 30%, soon we will need a third supplier that might happen in 2022, and we are already talking to those people.

All right, thanks guys. I'll pass it on.

Thank you. Our next question comes from Moses Sutton with Barclays. Your line is now open.

Hi, thanks for taking our questions and congrats on the quarter. So you say you'll start shipping IQ 8 in 2Q. How should we think about IQ 8 standalone pricing versus IQ 7? What's -- what might be the range on the premium? And might you expect over time, a majority of installers shifting more toward IQ 8 versus IQ 7 or is the jury out on that question still?

Yeah, I mean, we're not going to talk about the exact pricing right now, but we are within a few months of going to market, so that will happen very soon. With regarding whether people are willing to adopt IQ 8 over IQ 7, we think the answer is a no-brainer, it's going to be yes. It's -- IQ 8 is a grid independent microinverter system. So therefore, I expect the adoption to be high when it is released. And there are obviously a lot of combinations with IQ 8. And in some cases people might prefer to buy IQ 8 with a smaller storage system and we will be promoting the heck out of it.

Great. Looking forward. What percent of U.S. installers using your products now still need to be trained on Encharge? I know you gave the number of installers trained already or system. How much is left in the U.S. training process?

Look, I mean, we work with a couple of thousand installers in the U.S. usually and we reported numbers of 650 unique installation companies. That number we are catching up on those numbers, very fast. So we expect within a couple of quarters to basically train everyone that matters.

Got it, got it. And just one more for me and I'll jump back in the queue. What's the annualized contribution from these two recent bolt-on M&As that you -- maybe on revenue and even gross profit, if possible?

We're not going to break out those numbers right now.

Got it. Understood. Thank you.

Thank you. Our next question comes from Mark Strouse with J.P. Morgan. Your line is now open.

Yeah, good evening. Thank you very much for taking our questions. So quite a bit has changed in a macro environment since your 3Q call. Can you just talk about how your customer conversations have changed, if at all since the ITC was extended? And then kind of a follow-up to that is -- who knows what's going to happen going forward, but if energy storage stand-alone is included in some kind of future revision to the ITC, what do you think that impact would be for Enphase? Specifically looking for retrofit activity. Thanks.

Yeah, hi, this is Raghu. Clearly change in administration is something that's very positive for us. Obviously, the first thing that happened was the ITC extension. As a result, you see all our numbers have no safe harbor in them. So that was a -- probably a very significant change that took place. With regards to some bills that are in Congress that are being worked on right now, the one that is really interesting is the one around standalone storage. And the nice thing about our architecture is the fact that we are AC coupled means that it lends itself very well to a standalone system. So the combination of a standalone storage device plus a safety device, the microgrid interconnect can now add substantial value to the homeowner both in terms of providing resiliency in the event of an outage plus -- as well as participating in value-added services such as grid services for example. One could even extend your thinking into our portable power station, but also someday we participate in that as well in terms of providing both resiliency as well as participating in value-added services. So we really are excited about the storage standalone discussions that are going on right now.

Okay.

In terms of ITC, I think that the idea that the ITC could be extended into a storage, potentially even a cash refund, that is very appealing, right. Because think about it -- I mean homeowners, they look at payments and Badri mentioned financing. All of those things help to create adoption and as cost keeps reducing and the cost per kilowatt hour and cost per watt keeps on going down, that ramp can we accelerated, right. So we welcome those things.

Okay, thank you. And then just a follow-up to Moses's question on Sofdesk in particular. Is the idea with an acquisition -- I mean financially anyway to create stickier relationship with your customers? Or is there financial rationale for these acquisitions as well in that, kind of standalone they would meet kind of your corporate target margin profile?

Yeah. So, you got it right. We love our long tail installers, we want to give them -- we want to make it easy to do business for them. Therefore, we would like to give them -- we'd like them to stay on our platform, buy our product, buy our software, buy our permitting services and a lot more that's coming.

Okay, thank you very much.

In terms of financially, we look at those transactions and they stand on their own feet. So rest assured that that is there.

Got it, thank you.

Thank you. Our next question comes from Aric Li with Bank of America. Your line is now open.

Hey, guys. Congrats on the quarter. Just a quick question on storage trend for revenue storage across the industry...

Aric you got a really bad connection there.

Can you hear me better now?

We cannot hear you well.

Can you hear me better now?

Yeah. Just keep it up top.

Slightly better.

Okay. First on storage. With the supply constraints across the industry right now, can you talk about your ongoing supplier discussions there? And is there any color you can provide around amount of storage capacity you would expect to expand to near-term with your third supplier beyond the two existing suppliers? And a follow-up question after that.

Okay. Yeah, so right now we have two qualified suppliers. The first one we have already ramped well with. The second one is in the process of ramping, they started shipping to us in the fourth quarter. And we said that basically in Q4, meaning the quarter that just passed, we had a supply of 50 megawatt hours. In Q3 of '21, we expect that supply between these two suppliers to go up to 120 megawatt hours. And if we find that we are short maybe by the time we get into 2022, we are already talking to a third supplier, rather multiple suppliers. And then it takes us usually anywhere from 6 to 12 months to qualify the product. We are starting those discussions right now.

Got it. And just to clarify, would you still expect to bring on a third supplier this year or are you saying that that's more going to contribute into 2022?

We will have a third supplier ready if we need it. So yes, we are starting those activities, that's correct.

Okay, thank you. And then just on the R&D cycle, are there any updates you can provide on the development of IQ 9, where that currently stands at this time? Is it still being developed or is it in testing phase? If you can provide any color there? Thank you.

Yeah, we are actually working on IQ 9 at this time. In IQ 19 our vision is basically obviously smaller, cheaper, faster, producing a lot more power than IQ 8. Right now we are focused on a few areas. One is, we'd like to see how to reduce the footprint of the transformers, the ECAPS, the 600 volt AC FET devices through some semiconductor process innovation. GaN transistors are becoming widespread, GaN on GaN, GaN on silicon, they are becoming widespread. The advantage that GaN gives is I can now run my AC FETs at a higher frequency. Because I can run it at a higher frequency, I can reduce my transformer sizes. And because I can reduce my transformer sizes the entire footprint can get a lot smaller. Of course, this is me speaking theoretically and we need to demonstrate that with both prototype vehicles as well as qualifying reliability, et cetera. I expect that to take the next 12 to 18 months. And we will also be working on the next-generation as well to think about maybe sophisticated cooling themes, alternatives to porting etc. Alternatives to meaning -- so today we have -- between our gate drivers and our AC FETs, and our DC FETs, we have a lot of components there. Using semiconductor packaging and GaN, I may be able to collapse all of those to substantially less number of components. We'll be looking at those as well. So lot of R&D is going on. We hired our CTO a year-ago, his name is Hans, he is an outstanding guy. And we have started all of those discussions and there is a team actually behind it. Whenever Eric Branderiz our CFO says innovation, he mean -- he means that investment in the CTO team. We're investing a lot more than before.

Got it. And one last question and I'll pass it on here. Could you just talk about any data points you can give us on traction or progress with the long tail installers in Europe? How is that training process going?

Long tail installers actually -- I mean, Europe is a great story. If you remember in the 2019 Analyst Day, I had reported that we only had five salespeople at that time in Europe. And now we have, I would say, increased, maybe quadrupled or even more, the number of sales folks. We have a great team there. That team is ramping in Netherlands, in Belgium, in France. We have recently opened up offices in Poland, Spain. We have sales and SAE teams there. We've also launched massive effort in Germany, where we are in the process of training a lot of installers and getting more and more and more installers onboard there. We will also introduce our storage solution into Europe in the third quarter. As you know, Germany is -- it's a big market, it's 1 gigawatt of PV with 80% attach rate because of the feed-in tariffs being so small. So we're very excited about that market, but having said that, it's -- say it's a matured market almost. There are a bunch of suppliers, and we have clear differentiation. It will take us a little bit of time but with our relentless focus on quality, customer experience supporting the long tail of installers, I'm sure we'll start making significant progress in that region.

Thank you.

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

Thanks so much, guys. Can you give us a sense of the progress that you're making in pre-selling the IQ 8D? And the activity you've got going in the commercial market right now?

Yeah. So clearly, as we talked about IQ 8D brings lot of value into the commercial segment. Just to remind everybody the IQ 8D -- two things, one, it's got 50 -- the inverted itself has 50% higher power density and it connects to two panels into one device. And the second thing is, we are not looking at this as a -- just as a stand-alone device itself. We're looking at it as a complete end-to-end solution and we want to leverage our digital platform, everything from the design services -- the design and proposal services that come with it along with permitting package, a very sophisticated O&M system fleet management, performance tracking etc. So we're looking at bringing a complete solution set to the market. We are in alpha right now, we have alpha installs happening. We are -- the installation process is much simpler. We were doing small commercial -- we are doing small commercials with IQ 7 as well, but it's a significant improvement from IQ 7 to the IQ 8D. So lot of progress there, more to come and we will report more as we make progress.

Great. And then just in terms of thinking about the integration of generators with the storage and solar. As you guys look at the competitive landscape, can you speak to the differentiation for the grid formation functionality that you have and how long you think it will take before anyone else has a similar sort of capability out in the marketplace?

So, yeah, the generator is your question, right. So I think the generator integration is a low unique to us. We are -- for instance, so we have the microgrid interconnect device or smart switch, because of that we don't need an automatic transfers switch, which is what you typically require with a generator integration. So that function is effectively done in software for us. So just by simply the act of connecting the generator into the device, the entire system is now managed by that device and managed by the energy management system. There are a few other advantages. As a result of the way we integrate everything into the AC domain is that the generator can now run in parallel to the storage system. So what that means is, the homeowner can configure up their system and the system will automatically make decisions such as, turn on -- for example, turn on when the grid fails instantly, turn the generator on instantly as soon as a grid fails. Or for example, once a grid fails, you only turn the generator on at -- when the state of charge is at a certain level and then it turns back off when the state of charge has reached another level. Another functionality there is for example a quiet period, right. You can configure it up all that in software, you can configure it all up saying, during this time of the night, don't start generators so you can reduce noise pollution. So it's a very rich experience. You can get to see exactly how the power flow is in real-time on your app. So much, much more well-integrated one-stop-shop solution with our integrating generator into a common platform.

All right. Thanks so much, guys.

Thank you.

Thank you. Our next question comes from Philip Shen with ROTH Capital Partners. Your line is now open.

Hi, everyone, congrats on the strong results. My first question is on when you think you might add the second line in India. So given how low channel inventory is in the overwhelming demand, have you already made the decision to ramp up the second line? And if not, why not and what else do you need to see?

No, we have already made the decision to add a second line. To remind everybody, we have half a million microinverter capacity. We are going to invest in adding another line, which is another half a million microinverters. Basically, that will take about six months to come on board, We have -- in the meantime, we have interim sources. We have China, which is -- we have a lot of capacity there in our Fuyong plant. Then we have Guard. Guard just reached a million microinverters and we are going to be investing in Guard as well in order for us to create a lot more capacity. Because what we see is, with IQ 8 going to come very soon in one to two quarters, we do see the necessity to increase our capacity. We are going to be working on it.

Okay. Thanks, Badri. So when do you expect the second line in India to come online, maybe fully, and by the end of the year, if you add up all the capacity, China, Mexico, India, what is the quarterly run rate you think we're at, maybe in Q4?

Well, on the India specific question, I would say, six months. On a number for your overall capacity by the end of the year, I -- this is not about demand, this is about purely capacity and so I would say between 4 million and 5 million units per quarter is what we'll be prepared for.

Okay, great. And then as relates to international, I think on the last quarter you talked about and by the end of this year, getting to 70%-30% U.S. international mix would be reasonable and you'd be perhaps even disappointed if you weren't there. What's your latest view on that mix, and what do you think it ends up being by the end of the year?

Right. We threw a curve ball in it by shipping the storage systems, which are entirely U.S. Now we have to ship the international system -- storage systems. In addition to ramping on the solar systems, we'll be doing exactly that. So 70%-30% maybe by the end of this year may be tough. But definitely, middle of next year, I see it as a possibility.

Okay, great. Thanks, Badri. I'll pass it on.

Thank you. Our next question comes from Eric Stine with Craig Hallum. Your line is now open.

Hi, everyone. Maybe just on -- given the really strong free cash flow, I mean your cash balance will soon be pushing $1 billion. I mean just on capital allocation, are there any areas on the acquisition front? And I know you've made a few seem like they're more strategic on the small side. Any acquisitions or areas in your business that might make sense from that perspective or is this more about just sticking with product development and organic growth?

I mean, both are going to be critical. The challenge with organic growth is that we also generate cash way more because our framework that we have. So the acquisition approach is going to be very active. We have a lot of things that we need to complement our digital platform. Actually Raghu and Adam, both of them are working around the clock. With our pipeline very healthy, the pipeline of M&A acquisitions, Badri is also -- has his own set of rules in which we need to find the right candidates or targets. So, we -- that's going to be a very active area, so you should see more throughout the year.

Yeah, Eric, okay. Any other details on, maybe not, but any details on areas that you think -- I mean I guess you mentioned the digital platform, but I mean anything, whether it's new geographies or just thinking about potential pass you may take.

Yeah, so I think internally we have a -- we have very clear view on what our long-term strategy is for how we're going to continue growing our business, right. We are talking about -- we've talked about this in the past, where we think about every home as being a micro-grid and then interconnecting microgrids and forming pools of microgrids and transacting energy across them. We talk about the significant electrification of homes that are going to happen, which will further increase the demand in electrification between all the appliances getting electrified, EV etc. So while we can't provide you specifics, we have an -- we have had, as Eric mentioned, a healthy pipeline of area that we are looking at, but that should give you some context about how we are thinking about our M&A plans. It's both a digital -- the digital transformation piece as well as product in order to meet our -- what we have with our strategic vision.

And there are no confines on companies within the space, right. So we are thinking now is expanding that into other sectors, software and other areas. So it's a very, very diversified pipeline from multiple sources, right.

And it's international as well. So just as he's saying, the two of the -- two acquisitions we have done, neither of those are actually in the U.S., but we are looking across the world, yeah.

And the other one is the ability of the company to absorb and integrate those acquisitions is going to be very important. So I feel very confident on Jeff McNeil's organization, in the finance organization, we are used to deal with acquisitions integration so it will be a very active place in 2021.

Yeah, no, that's very helpful. Maybe just last one from me. Just thoughts on updating the target operating model. I'm trying to think how many quarters it took for you to go from 30%, 20%,10% to the new 35%, 15%, 20%, I mean you're now at the 40%, 15%, 25%, I mean, any thoughts on how long you'd like to see that sustained before you officially update that?

Yeah, I mean we want to make sure that we conservatively provide a baseline and that's what we did, with the frame -- the existing framework. When you're launching new products and you are entering new markets, a lot of things happen. And when you are planning on the long-term, that's the right framework, right. In the short-term, the midpoint of the guidance of the current quarter that we are guiding is the responsible thing in the short -- mid-short term. But for the long-term, I think that framework is cash generating. Remember, we've got an OpEx to CapEx and other call slide business model in the company, right. We don't have manufacturing plans, our CapEx is going to be higher this year, but at the same time, we can continue operating with the control manufacturing approach. So this framework should stay like that until you can afford to get an update when we do Analyst Day, if there is an update.

Okay, thank you.

Thank you. Our next question comes from Jim Ricchiuti with Needham & Company. Your line is now open.

Hi, thank you. Good afternoon. I know it's early days for storage, but I'm just wondering -- given what you're seeing in terms of demand trends in the competitive landscape and I guess, potentially a more supportive government policy initiatives. I'm just wondering how you -- is this changing your view of how pricing might be trending in the market looking out over the next year or so?

I think our view is -- when it comes to things like particularly around pricing etc. and the trend, our view is, we have to continually add value, right. So what that means is that, it's not just thinking about storage as a widget or a storage as a battery, right. it has to be and it is an integral part of a complete solution -- an energy management solution that includes a solar, that includes storage, how does the whole thing -- entire system integrate, load management, generator integration. You saw we have -- you have seen the announcement where we are working with the fuel cell company, etc. So for us it's not about a specific widget and a specific widgets pricing, that's really not how we think about it. We think about it in terms of how can we do the complete solution and add value for our installer partners and the homeowner.

Okay. Fair enough. And is -- should we anticipate any change as we think about the mix with respect to storage long tail installers and your Tier 1, Tier 2 installers over the next one year or so?

No.

I think what we have today is right.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from Maheep Mandloi with Credit Suisse. Your line is now open.

Hi, thanks for taking the questions. Badri, maybe this question's for you. On the storage product you did say that there's some delays in installation as you -- it's taking time to train the installers. That seems to be more applicable to also with your other competitors, so just wanted to understand if you are seeing that for other products launched by your competitors in the market as well, or is there something specific to Encharge solution, which is impacting those delays?

I'm not going to comment on the other competitors, but our -- we take pride in supporting our long tail installers. Many of them may not even have done storage once, but they have a lot of demand as you can expect. And our job is to train them so that they can start doing storage installs seamlessly. Right now, we introduced this product in July. As of the end of December, 360 plus long tail installers, unique installation companies have installed one Enphase Storage system, that's a major win for us. We continue to add 10 to 15 installers every week, there. We have trained over 650 plus unique installation companies again. That's also a win, but I'm sure we can amp our game up there, because there are thousands of installers and I'm sure we can do a better job there, which we will be focused on. In terms of the people, assuming every installer has got at least two people to train, we have trained roughly over 1,200 folks. So I would say it's -- we do things -- we have a unique business model. We focus on the long tail. Our job is to make that installation smooth and seamless, that's what we will do, it's a long-term game. And we're not going to take away off the ball there.

Got you. Thanks for the explanation. And just on the new acquisitions and the digital strategy. Could you maybe talk about like what's the goal here in terms of reducing that soft cost? I think couple in the solar developers have talked about $7,000, $8,000 per customer of soft costs. So is the idea here to kind of like bring it down similar to probably what the soft cost is in Europe and Australia, or what's your thinking process here? And have just a quick follow-up after that as well. Thanks.

Yeah. So, soft cost is an outcome of what our goal is, our goal is to provide our installers partners with the best service possible. And so it's our partners actually, as well as the homeowner. So we have mapped out a very detailed journey of both how the entire installation process as well for both the installers as well as our homeowners, starting with leads all the way through design proposal, permitting, procurement, commissioning, installation commissioning, permission to operate O&M, etc. And so if we do an amazing job on that where we create a very powerful platform and these acquisitions that we're talking about are important elements of that journey, then I think the natural outcome of that is going to be reduction in the soft cost. But we are starting with a very clear focus that this is about bringing great value for our long-tail installer partners.

So Maheep this has been a focus of the industry for quite a long time. And everybody here it takes back into the easiest part of the value chain, which is reduce the cost of the panel, reduce the cost of the hardware, things that there are easy or tangible. When you're thinking about, for example simplifying and streamlining, permitting, you are talking about multiple counties, multiple different approaches, different timing, different locations. So is a much more complex problem to tackle and that's the problem that we are tackling. And as Raghu said it, we are tackling by understanding the problem from the standard point of view and solving that individual problem. And that incorporates pretty much every aspect of lead-gen all the way through commission and post that, the O&M process right, which we are digitizing in many fronts, right. And these acquisitions basically fill those gaps.

Yeah.

Got it. No, that's helpful. And then just last one, just housekeeping. So the megawatts shipped in the quarter, does that include microinverters shipped to the storage product as well, or that's just for the solar shipments?

We will have to get back to you on that. I think right now, my off-the-cuff answer is, it basically only includes the microinverters that are pure solar and it does not include the microinverters inside the batteries. But we will have to get back to you on that.

All right. Thanks for taking questions.

Thank you. Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Hi, there. Thanks for taking my question. I've got two completely unrelated questions. The first relates to dorms management as regards your storage business, you've kind of alluded to this a little bit Badri. We've seen Enbala get sold, AMS get sold then go out. Might we see you make an investment in sort of the software infrastructure to really offer a fully integrated dorms capability to your customers with the utilities?

So obviously we won't talk specifics, but in general here's our view. Clearly, we see that with a value added service any time with every single storage system that you sell. So given that and given that we already have a pretty powerful platform, I think our first step is ensure that at least that we have partnerships with -- that we can fit into existing platforms that are out there. There are number of people who are out there will fit into those platforms. There are number of programs, whether that's in the East Coast or even here in California that we can participate in those programs as we continue our ramp on storage. And I think for us it's a pretty natural extension on weather -- on how to incorporate what's called coordination of these DERs and management of these coordinated DERs onto our platform. I think that's a pretty natural extension for us.

Okay. And so that's interesting. You would not have a problem say, making sure that you operate well with AutoGrid or somebody like that?

Absolutely, if there are existing programs we would do it. Yes.

Okay.

There are -- in fact -- in cases etc. is getting standardized anyway.

And then the second completely unrelated question is, it's interesting hearing you talk about wide bandgap FETs, can we imagine a world where all of the high energy MOSFETs in your device or GaN or I was kind of surprised you didn't mentioned silicon carbide, is that the way this is headed?

No, I did not mention silicon carbide. GaN is -- I think we think GaN is the way to go, but obviously we are only scratching the surface. We're working with a few companies. GaN on GaN, and GaN on silicon are two interesting technologies. They will help us reduce our footprint, support high-power. I mean, everything that we want.

So I guess -- just overtime we -- and I assume obviously, at the moment you're probably silicon overtime, we can reasonably expect to see those individual little high-power sockets probably go wide bandgap over the next couple of years. Is that the idea?

Yeah.

Yeah.

All right, thank you so much.

Thank you. Our next question comes from Sameer Joshi with HC Wainwright, your line is now open.

Thanks. Thanks for taking my questions. Just a couple, digging into the storage. In terms of sort of bottlenecks or headwinds, do you see it more from like a slow draining of installations -- installers or is it because the customers are not educated enough, or maybe pricing is not right. And a corollary question is, do you find the Encharge 3 versus Encharge 10 demand different? And do you see any change in sizing of the products going forward?

No, like what I told earlier maybe even I answered Brian Lee's question, I went through the details. So let me cover them once again. Basically, there are several things that can go wrong for the installers on storage. There are some things that we are squarely responsible for Enphase. Like the installers want to come on to a job site and they want to finish their install and they want to leave within 12 hours. And if our commissioning time is excessive, we are going to place burden on installers, and we understand that. We are working with them to rapidly reduce that commissioning time, as an example. The second one is, very often installers have to come in and rewire the main panel and that is often several thousands of dollars. If we can help them create a solution, which does not need that, that's ease of doing business for the installers. That's number two. Number three, as homeowners start to experience these storage systems, they are going to be calling installers often. For example, when you switch from on-grid to off-grid if you haven't made any adjustments in your lifestyle, and your grid is out -- your external grid is out, utility grid is out, then you're going to quickly run out of storage in three or four hours because your air conditioner is going to be on. So therefore, people who do not even know that they are off-grid run out of storage they are out of power and they call installers and the installers have to go and help them. It's another -- a truck rule for them that means lost profit for them. So how can Enphase help there in order to eliminate all of those problems for installers? Make it so easy that and an Enphase system seamlessly provides intelligent notification for homeowners. How can an Enphase system seamlessly provide load control such that the homeowner can automatically set in the app saying, when I switch to off-grid do not turn on my AC? So you maximize your storage system's life, right. And then going back to it all is even when the storage system is being designed in the first place as a consultative sale between the homeowner and the installer, what can Enphase do is to make sure that complete transparency to the homeowner, so that it's simple, yet complete. And I think those are things that are entirely in Enphase's control and it would be remiss if we don't take responsibility there, that's one. Then I talked about the industry, overall industry. Overall industry there are problems with permitting cycle times are too long. It's not acceptable. And we all need to -- our peers all need to fight that battle. And the last one is the -- just as financing for solar is getting a lot more mature, financing for storage needs to attain that maturity. And then what happens is you start -- more people will start to -- they're comfortable with monthly payments, than cash -- yeah, cash upfront -- lot of cash upfront. So those two are industry problems that we'll be working on. So it's a combo of Enphase specific stuff which we are going to put a lot of energy on, and industry changes that we are going to try to influence. Those are the things we need to do in order to any -- in order to ensure we start ramping much more than our already nice ramp round -- now.

Understood. Thanks for that.

So Sameer. These are the -- many of the comments made by Badri are not unique to Enphase. We are approaching this like we are training installers that they never done an installation before, storage and they're doing really well with microinverter so, for them to say initial component or might salvage a new product convince the homeowner that in the -- this a great product. And then when they do that, after that, we get everything lined up with the crews, with the commissioning and do installation, completed training, and everything, it takes time, right. And right now, they are basically hand-to-mouth with the microinverter systems, right. So, we decided to launch with the long tail, that's an investment that we are making. Once they made the investment using our system, we believe they will have a hard time switching to a potential alternative, because they are all trained, they know our technologies, they know our pitch. And then -- with that, concurrently, we have interest from Tier 2s and in Tier 1s that they are sophisticated, they've done installs before. They've kind of completed the process with competitive products and they feel our product will be an easy trade, right. So, all of those things are being affected at the same time.

Yeah, no, it's certainly commendable actually that you have identified the exact problems that you're facing, sort of the teething troubles, and are actively addressing those. That's encouraging. Just switching gears a little bit, you mentioned that in your Q1 outlook the DNI revenues are not included. I thought that DNI was some sort of a back-office kind of a support for your -- improving your operational performance as against revenue-generating source. Am I looking at it wrong?

Yes, you're not right. DIN basically provides permitting services to installers, for revenue. In addition to permitting services, they also provide design and proposal services. The whole point is how can installers get the right paperwork, permit plan sets in 24 hours. Once again, it is -- for us the fit is obvious because that's what we care about. Anything that our long tail installers care about, we care about even more.

Right, right. And then last one, over the last several years you have -- had several instances of these supply constraints. And now that you are sitting on 700 -- approximately $700 million, is there any effort towards going upstream?

No, I mean, we're very clear. We're going to be CapEx light, OpEx light. In this case, this was because we never expected such a massive increase in demand coming out of the pandemic. Now, maybe we should have, but we didn't, and obviously it's because our product is well received. The high quality -- I've always told you to target is 500 DPPM and great customer experience. Those are our mantras. And we didn't anticipate the -- such a big increase. And so we are somewhat constrained because of that. But having said that, it's not as severe as what we had in the past and I think we are looking at adjustments in the way we run the company going forward on how to not allow situations like this to happen. That's what we do. We learn from our mistakes, and we are going to put in the right business processes. But there's no need to change our approach, it's a capital-light approach.

Thanks for taking the question.

Thank you. Our next question comes from Biju Perincheril with Susquehanna. Your line is now open.

Thank you. Thanks for taking my question. Obviously, very early in the rollout of the storage product, but from the initial trend -- demand trends that you're seeing, any thoughts on what level of attachment rates we can see looking out a few years, three or five years to?

When we refrained talking about attached rate, we actually gave you megawatt-hours, which is a lot better than attached rate, so you can calculate the attach rate. Because it's a complex function of the states you are in. For example, the storage may be more popular in California than in some other state. So the metrics are different. So we cannot just talk about attach rate without any context, which is why we gave you megawatt-hours. So I would not like to talk about attach rates, I'd like to talk about megawatt-hours. And like what we talked about, we are growing at a steady clip Q3 to Q4, 35%, Q4 to Q1 expect a similar rate and that -- that's what -- that's the progress we are making on megawatt hours.

On megawatt-hours, is there a number that we can sort of target looking out a few years or do you have that when you just lend -- low mid-term guidance?

It's hard for us. Right now this product is in the early stages of brand. It's hard for us to give a number right now. It'll take us a few more quarters.

That's fair. Thanks.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Badri Kothandaraman for closing remarks.

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again in the next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.