Thank you for standing by and welcome to the Enphase Energy’s First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Karen Sagot. Please go ahead.

Good afternoon. Thank you for joining us on today’s conference call to discuss Enphase Energy’s first quarter 2022 results. On today’s call are Badri Kothandaraman, Enphase’s President and Chief Executive Officer; Mandy Yang, Chief Financial Officer, and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2022. During this conference call, Enphase management will make forward-looking statements, including, but not limited to statements related to our expected future financial performance, the capabilities of our current and future technology and products, and the benefits to homeowners and installers, our operations, including manufacturing and customer service and supply and demand, the anticipated growth in the market and in ourselves and regulatory matters. These forward-looking statements involve significant risks and uncertainties and our 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 our Annual Report on Form 10-K for the year ended December 31, 2021 on file with the SEC and our quarterly report Form on 10-Q for the quarter ended March 31, 2022, which will be filed with the SEC in the second quarter of 2022. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in 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. We’ve provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings press release posted today, which can also be found in the Investor Relations section of our website. Now, I would like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Good afternoon and thank you for joining us today to discuss our first quarter 2022 financial results. We had a good quarter. We reported record quarterly revenue of $441.3 million, achieved non-GAAP gross margin of 41%, and generated free cash flow of $90.1 million. We ramped IQ8 Microinverters in the first quarter and started piloting IQ8D Microinverters to small commercial customers. We exited the first quarter at approximately 41, 15 26. This means 41% gross margin, 15% operating expenses and 26% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35%, 15%, 20%. We will go into our financials later in the call. Let’s now discuss how we are servicing customers. Our Q1 Net Promoter Score worldwide was 68% and compared to 69% in Q4, and our North American Net Promoter Score was 74% compared to 73% in Q4. Our average call wait time decreased to 3.2 minutes in Q1 compared to 8.9 minutes in Q4. We reduced call wait times through staffing and training. During Q1, we added field service technicians in the U.S. and Europe to provide on-site help to our installers, particularly for batteries. Let’s talk about microinverter manufacturing. As we have discussed in the past calls, the global supply chain situation is still under stress, but our situation is stable due to supplier management and qualification of alternate suppliers. With the growing demand for our microinverters, we remain vigilant regarding the global supply chain and logistics challenges due to COVID disruption. I’m very proud of our teams who have worked hard to manage this difficult situation. Currently, our quarterly capacity across all contract manufacturing facilities is a little more than 5 million microinverters. Mexico has a quarterly capacity of 2.25 million microinverters, India with Salcomp…

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2022 financial results, as well as our business outlook for the second quarter of 2022. We have provided a reconciliation of these non-GAAP to GAAP financial results in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $441.3 million, representing an increase of 7% sequentially and a quarterly record. We shipped approximately 1,029 megawatts DC of microinverters and 120.4 megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q1 was 41.0% compared to 40.2% in Q4. The increase was driven by favorable product mix and lower expedite costs. GAAP gross margin was 40.1% for Q1. Non-GAAP operating expenses were $66.3 million for Q1 compared to $68.2 million for Q4. The decrease was driven by lower marketing expenses, offset by continuous investment in R&D and customer service. GAAP operating expenses were $115.1 million for Q1 compared to $105.6 million for Q4. GAAP operating expenses for Q1 included $45.3 million of stock-based compensation expenses and $3.6 million of acquisition-related expenses and amortization for acquired intangible assets. On a non-GAAP basis, income from operations for Q1 was $114.5 million compared to $97.7 million for Q4. On a GAAP basis, income from operations was $61.8 million for Q1 compared to $57.7 million for Q4. On a non-GAPP basis, net income for Q1 was $109.7 million compared to $102.8 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.79 for Q1 compared to $0.73 for Q4. GAAP net income for Q1 was $51.8 million compared to GAAP net income of $52.6 million for Q4. This resulted in GAAP diluted earnings per share of $0.37 for both Q1 and Q4.…

[Operator Instructions] Our first question comes from the line of Julien Dumoulin-Smith from Bank of America.

Congratulations on the continued results and performance here. If I can, just kicking it off here, can you talk a little bit more about the European expansion that you guys just emphasized here a moment ago in the prepared remarks? Can you talk about what exactly you’re doing to infiltrate those markets, if you will? You obviously talked a lot about training. How should we expect that to filter through in terms of operating expenses and especially against your model on OpEx? And then, related to that, how should we expect that to filter through on top line as you think about your revenue mix here in Europe as well as gross margin impact?

Right. So, just quick on the background for Europe. In general, we are quite strong in Netherlands, France, Belgium and those businesses or those regions continue to grow pretty well on the solar side. The new regions, if we talk about actually, our Germany, Italy, Spain and Portugal. So, let me talk about Germany. Germany, extremely interesting market. The residential solar is well north of 1 gigawatt a year, maybe even up to 2 gigawatts a year right now on residential. Battery attach 80%. Most of our installers say, for a given home when they mean solar, they mean solar, battery, EV charger and heat pump. So, they are much more advanced, probably the most advanced, I would say, in terms of full home electrification. So, there’s an incredible opportunity there for us. And the companies that will be successful are companies that can manage all of these resources, solar, storage, EVs and heat pumps. That’s what we do. We make best-in-class home energy systems. Now with ClipperCreek, we have an EV charger, we are quite strong in solar and storage. And so, we are working on expanding our sales force in Germany. We are working on business development. We are working with a lot of installers. We are ramping things there at a pretty nice clip. And our natural advantage is that we do things with very high quality that Germans care about. We care a lot about customer experience, customer service. So, that’s on our side. So, we are very optimistic about Germany. I was there late February to early March with our team and it’s really, really clear that the opportunity is big and now. When you compare to that, the next biggest is Netherlands. Netherlands is primarily a solar market today, but storage is coming according…

Just super quick, if I can ask you to elaborate here as well. Just the 15-megawatt hour increase quarter-over-quarter on the battery side. Just what are you seeing on margins today? Do you feel comfortable, just given the macro that you elaborated on in the prepared remarks, especially relative to raw material inflation? I.e., do you think about price inflation again just to pass it along, or how are you thinking about the battery part of the mix, both in terms of the trajectory and acceleration as well as the price points that you’re entering at?

We don’t break out the individual products. We don’t break out what is the gross margin on microinverters and what the gross margin on batteries. But what we do is our baseline gross margin is 35%. We never launch a product that does not have the capability to hit 35%. And we are maniacal about costs. You see last quarter we guided 38% to 41%. We landed at 41%. So, with regarding your specific question on raw materials, yes, cell pack costs have been a little bit up because our suppliers are facing issues in their supply chain, too. And we already said we are doing a modest price increase effective March on batteries. So that will keep the gross margins in check. So, yes, we are quite healthy in overall gross margin as the company.

Our next question comes from the line of Mark Strouse from JP Morgan.

In the past, you have talked about how your order visibility into the coming quarter has either been in line or even exceeded at times what your guidance has been. I understand what you’re saying about your supply chain being stable at the moment. But just given AD/CVD, lockdowns in China that are happening, maybe in other areas of the value chain. Can you just talk about where your visibility into your 2Q guidance stands as of today?

Yes. We got a lot of visibility into the second quarter, and we got visibility into the third quarter in terms of backlog, too. So, we only guide this quarter, meaning the second quarter, and we are very comfortable with these numbers. Like what I said in the prepared remarks, our demand is quite north of the higher end of the guidance range. Regarding COVID shutdowns in general, we are also seeing some shutdowns in China, but our factories remain open. The shipping lines remain open. There are hiccups in raw materials, getting into manufacturing in China from time to time, but we are managing it. The situation regarding component availability is obviously much better than what it was last year for us. We have made all of the necessary adjustments there. We have a number of suppliers for each part. So, we have learned how to mitigate our risks a lot. So, I cannot predict what’s going to happen tomorrow. But I can say right now, our situation is quite stable.

And then just a quick follow-up to Julien’s question on Europe. So, you mentioned the new markets you’re entering into, you’re obviously signing up new dealer partners. I mean, the 40% growth that you’re talking about in 2Q, how should we think about that as far as kind of market share gains versus just market expansion?

I think it’s both. I mean, in places like Netherlands and Germany, I would say the market is growing so much. It’s part of market expansion. And, of course, we do take market share because of our quality and customer experience. I can’t quantify how much is each. But yes, I would say that it will be a healthy mix of both. Regarding new regions, like Spain, et cetera, they come to us because of our quality. Even in Netherlands, we continue to gain market share because of our service and quality. In Germany, we do gain market share from some string inverters because of -- one is we do supply all the components, we can do both solar plus storage, and we can manage the complete home energy system in the future, we can add an EV chargers in the future, we are able to work with heat pumps as well. So, they like our capability as energy management -- home energy management supplier, and sometimes we get the nod because of that. So, it’s a multitude of both.

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

Congrats on the strong quarter. As it relates to the lockdown in Shanghai, I was wondering if you could drill in a little bit deeper on the potential impact, if any, on the cell supply. And then, as another follow-up on batteries, with rising battery chemistry costs, can you talk through how much you can reduce your battery COGS ahead as you reduce the board count from 7 to 1 with the new chip? Can you keep margins flat, for example, without raising prices? Thanks.

Yes. So, as far as the cell supply is concerned, right now, we have two sources of cell packs, both of them are situated in China. And we are adding a third cell pack supplier in the second half of the year. You talked about the lockdowns, I explained it. In terms of the lockdowns, our factories are still operating in China, our shipping is still active, the batteries are generally on the board with a lot of weeks in advance. Now we are planning for a long cycle time, 14 to 16 weeks. We are able to absorb any minor disruptions. We don’t see a big deal on the battery side. On the microinverter side, I was mentioning about some of the connectors, some raw materials. We see some hiccups from time to time due to COVID disruptions. But so far, so good. Like I said, I cannot predict tomorrow, but so far, it seems to be okay. On the battery costs, there are a couple of ways that we are working on battery costs. First is obviously the cell pack cost. And for that, we have multiple sources of cell packs. And therefore, we do all the standard price negotiation, but we are also sensitive to their increasing costs. And so there is limited things we can do in the time frame, but there’s a lot of things we can do. partnering with them over the long term in terms of optimizing the battery pack. In terms of what we can do is what I call is the overhead, meaning you have the cell pack and then you want to convert that cell pack from DC to AC. This involves battery management, power conversion and associated electronics. And that’s where I think we can add a lot of…

Next question here is on IQ8 versus 7, our work a couple months ago suggests that you were and are forcing top customers to IQ8 from IQ7 starting this quarter in Q2, due in part, I believe, to some chip issues for the IQ7. Can you talk through that a bit and also the mix of IQ8 and 7 by quarter this year? And then, what exactly caused the IQ7 shortage? When do you expect it to get resolved, if at all? And does this possibly mean that there could be pent-up demand later? Thanks.

Yes. Just for the record, we never force customers. Customers have their own choices. They can make all these decisions. We are incredibly respectful of them. Sometimes, if the problem is entirely ours, we will be able to give them appropriate adjustments for the given time frame. For some customers, the movement to IQ8, they want it to be on the latest and greatest product, and they negotiate it for a good deal to transition faster. And each customer there is a story, each customer we -- is unique, and we don’t force anything wholesale on customers. That’s one. Then, number two, what caused the issue? IQ7 uses an ASIC, and that ASIC is made in a foundry in Taiwan, TSMC. And basically, in general, the foundries are on allocation. And so, we basically were short of that ASIC. But the beautiful thing is IQ8 uses another from another manufacturer, and there is plenty of supply there. So basically, we were able to mix and match IQ7s and IQ8s and were able to support customers. And we were happy that we supported customers for some customers. We gave them some concessions for that quarter where it -- in your language, it seems like we forced them. But in reality, we don’t. Then in terms of the customer conversion, I’ve always said, it takes us 4 to 6 quarters to convert from 7s to 8s. In the first quarter, our total shipment of overall microinverters, 20% of them was IQ8. This -- meaning, Q1 I’m talking about, so. And it’s just math, as I said. When you take 100% divide it by 5, that’s 20% a quarter. And so, next quarter, we roughly expect that. Sometimes it may take 5, sometimes it may take 6, sometimes it may take 4, it depends. So North America, we expect that transition. For Europe, we are going to introduce IQ8 in the second half of 2022. And so that will come with its own transition there. So bottom line, IQ8 is going quite healthy.

One very quick follow-up on EU. You already talked a lot about it. But I want to see if there is potential for a new line beyond the one you’ve already talked about, which is 750,000 units per quarter by year-end. When do you think you might make a decision on yet another line in Europe?

Well, I mean, it’s easy for. Now, once we have Flextronics, great partner, by the way, we have a great relationship. We started -- we are starting with an auto line, that’s 750,000 units. And if we think we need more, it only takes us three months. We are now very experienced. We know all the puts and takes it takes to order an extra auto line. So, if we need it, we’ll pull the plug on ordering it. So, we’re not worried about that. What’s interesting is and what’s exciting is our demand in Europe. I mean, this quarter, like what I said, I think we’ll ship more than 40% compared to last quarter. And we are very excited about Germany, Netherlands, like what I talked about.

Our next question comes from the line of Brian Lee from Goldman Sachs. [Operator Instructions]

Badri, just on the new battery, I was curious. It sounds like it’s going to be higher gross margin in the current battery product you’re shipping into the market. But, it also sounds like lower cost. So, are you going to be in a position in 2023 when you’re shipping the new battery to be more aggressive on price? So, you’re driving both volume upside as well as margins on the new battery? And then, also similar to how you give us the progression of new generations, like IQ8 versus IQ7, any sense of how much of your mix you would target for the new battery in ‘23 versus the current generation?

Yes. The good question on the next-gen battery, that’s a little bit out. So, it’s probably too early to give some numbers out. But the idea is generally that, meaning today, we have extraordinarily -- meaning the situation is extraordinary in terms of inflation, supply chain, et cetera. It’s not going to last forever. Eventually, batteries need to come down the cost reduction curve. And this provides us -- we are healthily placed there because we are reducing the fundamental cost structure of our product. And whenever you reduce cost structure, you basically integrate -- instead of 7 boards, you have 1 board, that’s all goodness. So, it depends upon the situation at that time. But you’re right, we may use it for market share gains while still retaining a healthy gross margin. And it will -- and once we come to that, we’ll make a decision. And with regarding the next-gen battery, I mean, there is no reason why that cannot follow a similar process like the microinverters. In fact, it can be accelerated. If it provides a lot of benefits for customers, like form factor is quite less and other things, we may be able to do the transition in 2 to 3 quarters instead of 4 to 5. So, we got to get there first. We’ve got to make sure our product is -- a new product is released. And then, I think our plans will get more firm.

Okay. That’s super helpful. And then, just my follow-up on Europe. I know there’s a lot of questions on Europe. But, the 40% growth sequential here for 2Q is quite robust. Is some of that a function of -- I know that’s a VAR reseller market. Are you kind of filling in the channels that you’re lure to some of these markets, and that’s the big growth? And so, how does that translate to kind of what you think sequentially is sustainable through the back half? Like, can you keep growing in Europe at those rates, or is this kind of a big first quarter fill-in and then things start to moderate? Thank you.

Yes. I mean, that’s a good question as well. Is it you’re feeling the channel for the first time is your question. That’s relevant for new markets. Usually, we are very-disciplined in filling the channel or not, and we always look at point of sales. Point of sales means regardless of what we ship from Enphase to a distributor, are the installers purchasing from the distributors? We have a very meticulous meeting, meaning review every week where we look at point of sales in Europe by country, by distributor. We look at that. So, there may be a little bit of creating a channel in some really regions where we have never shipped before, but that’s not the primary reason. The primary reason is, especially for countries like Netherlands, in general, booming solar, for countries like Germany is especially considering the Ukraine situation, everybody wants to go towards self consumption. And so, basically solar plus storage there. So, these two are the biggest markets by large, and of course, closely followed by utility, where the government is making it very easy. All of these three regions -- actually, Italy, you can argue that some of the channel thing is there. But at least in Netherlands and Germany, we are -- we’ve been present for some time. So I would say more robust growth. Of course, we cannot say whether we’re going to grow every quarter like that, but we’ll give you -- we’ll do the same thing next quarter. We’ll talk about the third quarter. We’ll take it one quarter at a time.

Our next question comes from the line of Colin Rusch from Oppenheimer.

Can you just give us a sense of where channel inventories are right now? I’m curious to understand a little bit better growth in the U.S. and Europe, how much of the guidance is really channel until at this point?

Historically, I’ve always said that a reasonable channel inventory is 8 to 10 weeks, and we don’t usually quantify it every quarter, but that’s a healthy inventory. U.S., I would say, is quite healthy. Europe, I would say, is a little bit less in terms of channel inventory, and they need product, and that should be obvious because of the demand increase.

Great. And then the change in the battery volume. I guess I’m curious what’s driving that change. Is there some cost reduction driving that? Is there an issue at the installer level in terms of placement event? But just the logic and kind of the purpose of that change and how quickly we can see that shifting to all the product that’s out in the field.

I mean, the logic is we release new products and new products get better and better over time. So, as simple as that, we -- today, our battery basically does 3.84 kilowatts of continuous power for 10-kilowatt hour battery and 5.76 kilowatts of peak power for a 10-kilowatt hour battery. And very often, when you have air conditioners and when you have pool pumps, et cetera, what you do is the tendency is to buy a lot more kilowatt hours to solve the kilowatt problem. Now, with this, we don’t need homeowners to buy kilowatt hours just for the heck of it -- for solving a power problem. Of course, if they need it for energy, they need it for energy. But at least what we take is right now, with the high-power battery, which is going to be released in the second half of this year, we will be able to support 7.68 kilowatts for a 10-kilowatt hour battery, continuous, and something like 11-point-something kilowatts peak power. So, we’ll be able to start some really nice loads with the 10-kilowatt hour battery, for example. And so, that’s a customer experience thing. And of course, when we did that design, what we said is, okay, our previous modularity -- our batteries that we are shipping today have a modularity of 3.3 kilowatt hour. These new batteries, if we have a modularity of 5-kilowatt hour, then you can amortize our overhead, what I call is anything other than the cell pack, over a higher kilowatt hour. So that gets better. The cost gets a little better, manufacturing cost. And then, you go to the next generation, which is in next year, 2023, is we talk about transforming the overhead to something that is -- was a lot to something that’s very less, 7 boards going to 1 board, which is integrate power conversion, integrate battery management all into one board, and making our microinverter a high-power microinverter. And that microinverter will be like approximately a 2,000-watt microinverter, single bolt. And that single word can be on the side of the cell pack. So, you can see a drastic volume reduction of 40%. So…

That’s incredibly -- yes, that’s super helpful. I’m sorry to cut you off there. But yes, I appreciate it.

Yes.

Our next question comes from the line of Kashy Harrison from Piper Sandler.

So, first one for me. There’s been just broader concern in the market about an economic deceleration entering Q2 and beyond just globally. You’ve already highlighted a meaningful 40% sequential revenue growth in Europe. So, we know demand is rocking and rolling over there. However, I was wondering if you could just give us a sense of what you’re hearing from your customers in the U.S., specifically in April? I’m trying to get a sense if you’re seeing any signs of deceleration in U.S. resi demand in April, or it seems like demand is still strong within the U.S., based on your most recent discussions?

Okay. Yes, demand is very strong in the U.S., as simple as that. And we -- that’s why we told you that our -- demand is well north of our higher end of guidance. And it is broad-based. We work with a number of -- we work with a number of installers of all shapes and sizes. We work with long tail installers. We work with big installers. And everywhere, the demand is up. And we are continuing to take market share in the U.S. So, that’s good. And then, we talked about Europe. So, those two are the biggest for us.

That’s good to hear. And then, maybe just switching gears to the battery side. You said you’re adding battery supplier in the second half of the year. Can you talk about how much capacity you are adding? And then, are you adding the third supplier because you anticipate demand up and beyond what your suppliers are -- currently capable of delivering? Or is this more so an attempt to get down to that 8- to 10-week target of lead times as opposed to where you are right now at 14 to 16 weeks? And that’s it. Thank you.

Yes. I mean, we are adding a third supplier. And when we actually add it, I’ll provide more details on the capacity. But I have no doubt it will be comparable to the others. Then, in terms of the motivation to add, it’s all of the above. We have noticed -- I mean, we have realized that based upon the last couple of years on supply chain for the microinverter, there are some products that we need five suppliers. And they are critical components. So like that, the battery is very -- the cell pack -- if we don’t get cell pack, we are dead, right? So, more number of suppliers, it helps us in terms of -- yes, it helps us in everything. Price negotiation, it helps us in supply. It helps us on delivery. It helps us on volume. So, it helps us on upside. So, this is a long-term strategy. It’s got nothing to do with the short term. And we’ll continue to add -- this supplier is also based in China. And we will continue to look for diversification opportunities elsewhere outside China. That’s a top priority for me. But right now, all of our three cell pack suppliers are in China.

Our next question comes from the line of James West from Evercore ISI.

So, you’ve made several acquisitions that are going to strengthen your installer platform, including the SolarLeadFactory, I guess, was the most recent one. Is the acquisition phase here done? And then, could you talk about the integration of these businesses and how quickly you can get an integrated product after the installer base?

Yes. The installer platform has got a few elements to it, lead generation and management, number one; design and proposal, number two, with the connectivity to the fintech partners. That’s number two. Number three is permitting. Number four is installation and commissioning. Number five is monitoring and number 6 is operations and maintenance. So, we have made acquisitions on lead management through SolarLeadFactory. They -- very healthy business, profitable business. They work with about 10 installers mostly, 90% of the revenue comes from 10 installers. They are very-competent in lead management. Those installers love them. The name of the game for us is to take that business, generate a lot more leads, increase the quality of leads, make sure those leads have a very high conversion rate into actual installs and kind of make sure we proliferate the long tail. So, that’s the name of the game on the first one, lead generation and management. Number two, design and proposal. We bought a company called Solargraf in January of 2021. The business is doing quite healthy. I would say, this quarter, that business will do 50% higher than one year ago. And essentially, the business service is 900-plus installers right now. But that design too, lacks shading capability, lacks 3D, lacks storage modeling, which we are all fixing. We are fixing right now -- we are piloting that. We are going to introduce it to many more of our installers. And all of them are waiting for it. And it’s an opportunity for them to utilize that platform there. Also, another important thing is Solargraf or Sofdesk, that software has got connectivity to various fintech partners. So, that’s important ease of access, fintech partners is very important for our installers. That’s true. So that business doing well. We have lots…

Our next question comes from the line of Maheep Mandloi from Credit Suisse.

Badri, you have a very large installer network, right, in the U.S. and have access to most developers and installers, right? So, is that something you could do to help installers with procuring these solar modules in the short term to ease some of these issues in the supply chain we’re seeing in the short term?

No, we are not in that business. No.

Got you. And just two other questions from me. Outside of Europe, how fast is the international business growing in Q2? And how should we think about the $1.1 billion of cash used this year in terms of M&A or buybacks? Thanks.

Yes. I mean, we made 5 acquisitions in the last 15 months. All of them are small ones, but they add up. The next -- so what are our priorities for cash? We have $1.1 billion, as you noted. Our first priority is to obviously take care of the needs of the business, make sure we have plenty of cash for working capital, make sure that we make the necessary capital investments on the software side, make sure we invest in anything on batteries that we need. So, take care of the current needs of the business. That’s number one. Number two, we do have a lot of interesting ideas, interesting pipeline in terms of mergers and acquisitions. And obviously, we are rounding out the digital platform. We are looking at energy management. Like what I talked about in Germany is leading the way in every home having solar, storage, EV, heat pump and other home loads. And effectively managing that requires a lot of software talent, a lot of software, including buying companies. And because the market in Germany is reasonably mature, like, for example, not all systems may use Enphase -- Enphase actually solar. Some may only use Enphase storage, might have third-party solar, might have someone else’s EV charger and somebody else’s heat pump. But Enphase has come to the -- Enphase needs to come to the party by having the comprehensive energy management software. That aggregates all of these together and presents a single interface to the homeowner. That’s extremely important. That’s what I call interoperability. So, we are going to do that. So that requires heavy investments in home energy management, which we are prepared to do. So, including considering acquisitions. Of course, we got into EV charging. We think most of charging is going to be done at home. 80% of charging is going to be done at home. So, we’re always looking for networking opportunities on EV chargers that enable -- that basically enables dynamic access, which is both inside and outside the home. So, we are looking -- we’re always interested in software companies there. And new technologies, where we’re interested, batteries are something that we are always also looking for how can we reduce cost, increase performance? Those are the areas where we will double down. So, once we look at that, make sure we have enough cash for the M&A pipeline, then, we look at okay, if we still have cash left over, how is our -- what’s the current share price, how is the current share price? And is the share price below a conservatively calculated intrinsic value. And it’s nothing more than taking a page from Warren Buffett’s book. We do exactly what he recommends and it just makes sense for us. So, we did -- for example, last year, we bought back -- Mandy, we bought back 3.2 million shares?

Right.

We bought back 3.2 million shares last year, bought back at $1.55 a share. And if the share price goes down, we will consider opportunistic scenarios like that to do more buyback, provided number 1 and number 2 are taken care of.

Just quickly on the other part on international business growth in Q2?

International, the biggest is Europe. The other areas that we are working on, as I said, Brazil is something that we are very excited about. I haven’t talked about it too much, but we have an outstanding guy running Brazil. We have a very strong team. And I think it’s a matter of time before which we start seeing meaningful revenues from Brazil. And they are going to get the IQ8D variant of the product, which will help them on the cost structure, that’s pretty soon. Other than that, we are ramping up on Australia. We have not introduced our storage yet in Australia, which we are working on and they should have their storage in the second half of this year. So, that will provide them some growth. And in addition, we are focusing on other Southeast Asian countries as well. All of them are small efforts and when they become meaningful, I will talk more.

Our next question comes from the line of Joseph Osha from Guggenheim Partners.

Two questions for you. First, just looking at your installer network, been hearing from different sources that just simple labor availability for the install process has been a bit of a challenge. So, I’m just wondering if you can comment on feedback that you’re getting from your network.

Yes, you’re right. I mean, the demand is quite high. Demand is very robust, like what I pointed out. So, installers are always looking for skilled labor. And when I say skilled, these electricians are very hot demand. Then there is a technician, which is slightly below electrician. So, labor is in hot demand.

Are you -- is that gating the ability of your dealers to get stuff done at this point, do you think?

I mean, from our case, you saw our guidance, you saw our demand. I’m sure they can do even more. But right now, they are limited by their labor. That’s right.

Okay. Fair enough. And then, the other question, we’ve talked a lot about M&A, but in particular as regards grid services, right, aggregating and bidding assets into frequency regulation markets or what have you. That’s pretty challenging. I’m just wondering if you feel like the current skill set you have inside Enphase is sufficient or if that is perhaps one area that you’re inclined to do additional shopping? And that’s it for me. Thank you.

Yes. Grid services really is focused on providing capacity, not necessarily frequency regulation at this time. That really is for front of the meter type application. So, we are focused on the residential market. And if you look at all of the grid services programs that we participate in are really focused around that, which means that during periods of stress typically around where the grid is stressed between 4 p.m. and 9 p.m., the batteries get a signal to discharge the batteries for the duration of that period. So, we really are focused on that market. We have a very strong team. They’re doing some very interesting work and how to enable utilities to provide this service very easily. We also have a very easy way for the homeowner to sign up for these programs through the app. So, we have a very strong team, both on the battery side to enable the battery to discharge the homeowner side for the homeowner to sign up simply as well as a platform or a grid services manager, as we call it, where the utilities are very clean, very simple access, one view access into all of the assets that are available to them. We, of course, work in some cases, with the utilities, but we also work with aggregators. And in that case, we provide them with API and API access for the entire fleet to allow them to discharge the battery. So, yes, a very strong team. As you can see, we have made a significant amount of progress with this team, and they’re developing very strong tools and products to meet the requirements.

Our next question comes from the line of Eric Stine from Craig-Hallum.

Maybe just on the IQ8D, you talked about it a little bit, but maybe if you could expand on expectations for the ramp here throughout 2022? And then, just curious, I mean, what percentage do you think C&I can be of your business if you look out 3 to 5 years?

Yes. I mean, so remember, this -- IQ8D only addresses the small commercial market. The small commercial market in the U.S. is -- we are talking about a TAM, maybe a little more than 1 gigawatt. And we are talking about small schools, churches, hospitals, small hospitals, gas stations. And when I say small commercial, it means 20 kilowatts to 200 kilowatts. So, we think our microinverters can be extended there with the use of IQ8D. Having said that, we just are getting started. We are piloting with about, I would say, 10-plus installers. And if the pilots go well, which we will find out in the next few weeks, we always make some changes. We always find issues invariably. We basically will do some tweaks, modifications, and then we will release the product to production. We expect that to happen in this quarter. And then, onwards, it is a business that will take some time to develop. But we are confident with our principles, quality, customer service, our wrap and shutdown capability, our easy-to-use product that this will get good adoption. And first, we’ll start off with North America. The market size I mentioned was primarily North America. And then, we will extend it to other regions as well. And if we are successful, and success means that we are like residential where we can capture significant share. And then, we will look at the next follow-on, which is the real commercial market. For that, we need a 480 [ph] product basically.

Our next question comes from the line of Sophie Karp from KeyBanc.

A couple of questions I have. So, you mentioned the whole home electrification. Obviously, you’ve been making acquisitions on the lines of -- you have an inverter product and storage and now you -- with ClipperCreek, you have EV chargers as well. And you mentioned heat pumps a bunch of times. So just kind of wondering if that is something that could make sense for you to add as the time progresses to your technology package. How should we think about that?

Yes. Hi. This is Raghu. So, the way we think about it is we have the technology -- energy management technology platform and its role is to manage a whole family or a disparate set of distributed energy resources. So, we obviously do solar today, storage. We manage the grid, we integrate generators. And now, we are integrating EV chargers as well. We are -- by making the EV charger very smart, so we can do green charging. But there are other elements also that we need to integrate, and that’s -- those are heat pumps. Obviously, we will not be selling heat pumps, but our goal is to develop -- either develop or buy companies that can -- that through software, integrate all of these other heat pumps, et cetera, and other loads as well and effectively bring them on to the platform. And when we bring them on to our energy management platform, we can then manage how the loads get serviced. What’s the most economical, what’s the most reliable and what’s the most green way of servicing the load. In the case of EV, for example, if the homeowner may choose I only want to charge my car from -- charge my car through green electrons, which is, obviously, the first choice would be your own solar system or if you get a signal from the grid says that the grid is green at this time, then you can charge from the grid as well. In general, it’s about managing all of these different type of resources, and we’ll do that with software primarily. And you’re seeing is a lot of standardization that’s starting to take place where all of these different kinds of loads, different types of heat pumps and different types of EV charges, et cetera, are starting to adopt certain standards, and those standards will make it easier for us to integrate them onto our platform.

And my other question was maybe taking another stab at the supply chain situation, right? You have managed the supply chain much better than your peers and competitors, right, not just your competitors, but other companies in other sectors, right, the large ones at that. What sets you apart? Like, what makes you more or less immune to these trends at this point? I guess, is that the fact that most of the components you use are more specialized and there’s less competition for them for maybe bigger industries? Is that just the relocation of where the manufacturing facilities are? Like, what should we think about here?

I mean, to tell you, you’re giving us a lot of credit. Last year, we didn’t, and we had a supply problem last year in 2021. And what we learned from that, the learning is what can we do? For critical components, we need to have multiple sources. How can we plan better for critical components, how can we make sure that -- short-term disruptions? There are always going to be short-term disruptions. How can we smoothen all of those into what’s right for the customer? So, we have just learned to plan better. And I think planning better and executing on multiple factories, multiple sources, and it also helps that we don’t have a lot of SKUs. We -- the way we design it is one single piece of hardware with -- we try all our microinverters to have one single piece of hardware. And then, so that every region we can load the appropriate grid profile and software so that can get functioning. In that way, we don’t need to make one SKU for one country. We try. It’s hard to do. It’s hard to reduce the number of part count. Many companies bloat up on part counts. But again, I think with the software-defined architecture that we have, it helps us a lot. So, to answer your thing, it is upfront product architecture, diligent supplier management, qualification of multiple sources, planning better and some luck too. So, yes, hopefully, we have had our -- hopefully, luck is on our side. Yes. We don’t know what’s going to come tomorrow in terms of COVID disruptions. But I think it’s safe to say that we anticipate and we are prepared for it.

Our next question comes from the line of Cameron Lochridge from Stephens.

Well, I was hoping we could start just very quickly on this Department of Commerce investigation. I understand this is on modules, and this is not where you guys play. But you mentioned residential was likely a little bit more insulated from any effects of this. It sounds like your customers are working on module procurement for the second half. If you could just offer just any kind of framework for how you’re thinking about the potential impact, if any, to your business in the second half? And -- or even if you want to take stab at it this way, if you think about your outlook for 2022, how has it changed now versus what it may have been 3 months ago?

Really, we are not -- as we sit here today, based on all of the discussions that we have had with our customers, based on what we see out in the marketplace, we don’t see any impact on our business. Obviously, we are expecting and we have heard that module prices are going up. So, in our opinion, can those module prices increase and module prices be absorbed by the residential customer, and we believe that magnitude of module price increase that we are seeing an easily be absorbed by the customer. So, our opinion is that we won’t see any impact on our business. And also bear in mind that most residential systems are financed systems. So, what the homeowner actually sees is a small increase in their monthly payment. And we believe that those monthly payments are not going to be larger than what the utility rate increases that they’re experiencing. So, all of those things point to residential segment that is probably going to be much more resilient segment than any other segment.

And then just switching gears to your European strategy, I was hoping you could talk a little bit about your installer strategy there. I mean, you’ve had tremendous success in the U.S., obviously, with the long tail installers. Maybe just talk about does the same dynamic exist in Europe? Is it different? And basically, just do you think you can replicate your installer strategy that you’ve had success with in the U.S., can you replicate that in Europe?

Yes. The same principles hold. If you say U.S. has got a lot of long tail installers, Europe is even more long tail. So, Germany, for example, has got 5,000 installers. And I think -- yes, I’m not sure about it, but I was told that the -- a top installer is an installer who does approximately 10 to 20 megawatts a year. So basically, it’s -- the same definition holds, the same principles hold for us. We think those installers will obviously care about quality, care about customer experience. So, as long as we do a good job there, good things will happen for us.

Our next question comes from the line of Pavel Molchanov from Raymond James.

Two quick ones also about Europe. Obviously, in the current geopolitical situation, all of the frontline states in the eastern portion of Europe are in the headlines. Do you see signs that rooftop solar in places like Poland, Czech Republic, Hungary is starting to develop? And if so, will you be playing in that geography?

Yes. Obviously, we do pay attention to the regions and pay attention to opportunities that lie, and we’ll continue to do that. At this time, we are very focused on the countries that we talked about. The market is really expanding very strongly and countries that we are already in, which is Netherlands, France, Belgium, Germany and the new markets, which include Spain, Italy and Portugal, and we need to bring all our products. We need to bring IQ8s there. We need to make sure we have batteries in all of those countries as well. And so, right now, we are focused on these, but we keep an eye out, right? We pay attention to what’s happening in the country that you referred to.

Okay. Last year, EV market share in Europe was 4 times higher than the United States, 19%. Is there room for ClipperCreek to get a slice of that infrastructure build-out?

There is always room for ClipperCreek. And the angle is what I said, which is when an installer basically goes to a homeowner and who is even thinking about an EV, the -- there are so many incentives that an installer actually told us saying, even if the homeowner doesn’t have an EV, I still install an EV charger. So, what that means is this. When an installer is there selling the homeowner solar, storage, EV charger and heat pump, in that sale, if Enphase can make life better by having a comprehensive home energy management system, ClipperCreek definitely has its place. And so, we are planning to introduce an EV charger basically into Europe in Q1 of ‘23. But in the interim, we are working hard to make our system interoperable with other EV chargers, so that the homeowner still gets the right experience.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Badri Kothandaraman for any further remarks.

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

Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.