Good day, everyone, and welcome to the Enphase Energy's First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please also note that, today's event is being recorded. At this time, I'd like to turn the floor over to Karen Sagot. Ma'am, please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2023 Results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2023. 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 technology and products and the benefits to homeowners and installers; our operations, including manufacturing, customer service and supply and demand; anticipated growth in existing and new markets; the timing of new product introductions 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 most recent Form 10-K and 10-Qs filed with the SEC. 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 have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K and which can also be found in the Investor Relations section of our website. Now, I'd 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 Q1 2023 financial results. We had a decent quarter. We reported revenue of $726 million, shipped approximately 4.8 million microinverters and 102-megawatts hours of batteries, and generated free cash flow of $223.8 million. Approximately 65% of our Q1 microinverter shipments were IQ8. We exited Q1 at 46% gross margin, 14% operating expense and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Net Promoter Score worldwide was 75% in Q1 compared to 71% in Q4. Our North American NPS was 77% compared to 74% in Q4. Our average call wait time was 1.2 minutes compared to 1.6 minutes in Q4. We are focusing on route cost fixes of customer issues and improving our business processes rapidly to enhance customer experience. Let's talk about microinverter manufacturing. Our overall supply environment is quite stable. There are no major shortages right now. We began manufacturing at Flex Romania in the first quarter, bringing our quarterly capacity to approximately 6 million microinverters. Our European business is growing rapidly and many customers have asked us for local manufacturing, and we will be able to do that going forward. Let's come to US manufacturing. As we discussed last quarter, the IRA, Inflation Reduction Act, will help bring back high-tech manufacturing to the US and stimulate economy through creation of new jobs. We are opening manufacturing lines with three different manufacturing partners, adding a capacity of 4.5 million microinverters per quarter, bringing our overall global capacity to 10 million microinverters per quarter as we exit 2023. We expect to begin US manufacturing with one partner in Q2 and with the remaining two…

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2023 financial results as well as our business outlook for the second quarter of 2023. We have provided reconciliations 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. Total revenue for Q1 was $726 million, slightly up from the fourth quarter of 2022. We shipped approximately 1,957 megawatts DC of microinverters and 102-megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q1 was 45.7% compared to 43.8% in Q4. The increase was driven by increased IQ8 product mix and improved logistics. The gross margin was 45% for Q1. Non-GAAP operating expenses were $98.4 million for Q1 compared to $87.7 million for Q4. The increase was driven by international growth and R&D. GAAP operating expenses were $158.7 million for Q1 compared to $153.7 million for Q4. GAAP operating expenses for Q1 included $56 million of stock-based compensation expenses and $3.7 million of acquisition-related expenses and amortization for acquired intangible assets and $700,000 of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $233.6 million compared to $229.4 million for Q4. On EBIT basis, income from operations was $167.7 million for Q1 compared to $157 million for Q4. On a non-GAAP basis, net income for Q1 was $192.3 million compared to $212.4 million for Q4. This resulted in non-GAAP diluted earnings per share of $1.37 for Q1 compared to $1.51 for Q4. GAAP net income for Q1 was $146.9 million compared to GAAP net income of $153.8 million for Q4. This resulted in GAAP diluted earnings per share of $1.02 for Q1 compared to $1.06 for Q4. The decline for…

Ladies and gentlemen, at this time we will begin the question-and-answer session [Operator Instructions] Our first question today comes from Colin Rusch from Oppenheimer. Please go ahead with your question.

Thanks so much, guys. Can you talk a little bit about channel levels outside the US? And how much of the 2Q guidance is really about just selling into the channels? I get the channel is full to serve the markets in both Latin America and Europe?

Yes. Actually, in Europe, our channel is rather light. We've been tight on product in the last few quarters. And so the channel is light. By light, I mean, we consider channel to be normal between eight and 10 weeks of inventory and light means less than eight weeks. So basically, that's the situation there.

Okay. And then with the battery volumes decline sequentially and continuing in 2Q, can you talk a little bit about how much of that's related to the product cycle you guys are going through? And how much of that is just related to overall underlying demand?

Yes. On batteries, as an executive team, we are hyper focused on batteries as much as on our microinverters. Our learning curve on batteries has been tremendous. As we speak, our second-generation batteries are getting better and better every day in both their installation and performance. Our third-generation battery, like what I said is coming soon into the US and Australia in Q2, that will be even better with a wired communication can and with double the continuous power and triple the peak power and with enhanced modularity, as well as serviceability that helps us in dropping costs compared to the prior generation. And of course, it's LFP, so it's the safest battery. The demand in the US, that demand being down is temporarily. I described the dynamics due to the NEM 2.0 pulling in California, as well as the increased interest rates outside of California. We believe that's a temporary problem. Installers will figure out what to do outside. And California, we're incredibly bullish on NEM 3.0. We think our battery is going to be perfect for NEM 3.0, because the increased power of the battery will give the ability to export more energy during the time when the grid needs it in August and September, and people can get paid handsomely for it. And because of that, you see the payback for a solar plus storage system under NEM 3.0 is approximately six to eight years, depending on which utility you are in. So, we think NEM 3.0 will accelerate the attach rate of batteries, and it might take a little bit of time for the industry and for the consumers to realize it, but I have no hesitation that NEM 3.0 will be better for California. Now, let me come outside the US. So far, we've been shipping to Germany and Belgium in Europe. This quarter, I would say, in end of March as well as in the beginning of April, we introduced batteries to four more countries, basically, France, Netherlands and Switzerland -- actually, Austria, to correct myself, that was a month or two ago. So, we just introduced batteries in four countries. We are going to introduce our third-generation battery in Australia in Q2 in addition to the US. In both Q3 and Q4, we are going to target several more countries in Europe. We'll be in Italy and UK by Q4. So, on the batteries, we're just getting started in Europe. And I think the volumes will start ramping there. And in the US, it's a matter of time, the rest of the US recovers, the installers start selling batteries again. And in California, it will be a no-brainer with NEM 3.0. So the numbers are only going to get better from here on. The long answer, I just wanted to give you a full picture.

Thanks so much for real help. I’ll get back in the queue. Thanks guys.

Our next question comes from Maheep Mandloi from Credit Suisse. Please go ahead with your question.

Hey, good evening. Thanks for taking my questions. Maybe just on the battery question, just to elaborate on that. Do you see any opportunity for lower peak kilowatt battery, which is mostly used to -- as a rate arbitrage device versus a full home pack of solutions? Just any thoughts on that kind of a device, which -- where you could use your Gen 2 solutions as well?

Yes. I think both Gen 2 and Gen 3, if you look at Gen 3, as Badri mentioned -- this is Raghu, by the way. The power is double the max continuous power of the Gen 2 and three times the peak power. The peak power, as a reminder, is what gets used to manage heavy loads during start-up time. But to you -- answer your question, the power is -- can be modified. We can set the limits to what the power needs to be in software. So what that does is just makes the whole process very efficient for the installer. They have got one SKU to purchase. They can install that one SKU, which would be the five-kilowatt hour SKU. And then they can vary the power depending on what the homeowners' needs are, whether that is going to be an NEM 3.0 system, which could be just one battery with a PV system, and it happens to be grid tied, for example, or a 10-kilowatt hours of battery that could be providing partial loan backup or you could be doing 20-kilowatt hours and doing whole home backup. So all of that -- the beauty of the system is that it all can be configured in software and gives you a tremendous amount of flexibility and simplicity for the installer.

Got it, got it. And just a second question from me on ASPs. If you could just talk about how to think about ASP trends here. You talked about inventory being slightly light in Europe, but as we come out through the rest of this year and some of these component shortages and logistic issues slowed down, do you expect any reduction in ASPs in Europe or the US markets? Thanks.

We don't see any drop in pricing. In fact, we see our gross margin sequentially up a couple of percent from Q4 to Q1. And also, I broke out the gross margins in Europe because some of you had been asking me. The gross margins in Europe are incredibly healthy. They're over 45%. The gross margin in the US is incredibly healthy. Pricing is stable for us. Gross margin means both price as well as cost. And so we do value-based pricing, which is basically price products based upon the value they bring compared to the next best alternative like alkaline batteries, it may be increased power, increased safety. In microinverters, it may be increased quality, increased service. So that's on the pricing side. On the cost side, we have a world -- a task force that runs all the time called world-class costs. So we are constantly discovering ways to save a cent in the microinverter. For example, based on last year's shipments, last year, we shipped 15 million microinverters in 2022. So $0.01 reduction for us means $154,000. So it's very important for us, even $0.01 reduction, even $0.005 reduction is important for us. So we take it extremely seriously. On batteries, with a third-generation battery, which has got higher modularity as increased serviceability. Now I think we can reduce the overhead contribution and costs to a minimum. And on batteries, the gross margin for every generation will get better than the prior generation. So a long answer again, but ASPs, we do not see much change and our cost programs are going well.

Got it. Appreciate it. And thanks for taking my questions here. Thanks.

Our next question comes from Corinne Blanchard from Deutsche Bank. Please go ahead with your question.

Hey, thank you for taking my questions. Could you comment a little bit on competition in Europe versus China-based company and maybe the risk of margin erosion in that market?

Yes. This is Raghu again. Competition is strong everywhere. It's always been. It's nothing new, both here in the U.S. as well as in Europe. And so for us, we are always striving to make sure that we are providing value and providing a highly differentiated solution. So if you look at the solutions that we provide, both here as well as the U.S. from a product point of view, I'll talk about other stuff as well, from a product point of view, we are truly a distributed architecture that gives us much better performance, much better reliability. And because it's a low-voltage DC system, both solar and batteries, et cetera, it's arguably much safer as well in addition to being very simple to install, maintain and manage. The second thing we also look at very closely is that providing very high-quality, high-reliability products. And that's, again, a big differentiator, and it starts with the architecture as well as all of the work that we do in delivering a very high-quality product. And finally, it's customer service. Just making sure that, as Badri mentioned, if you look at what our NPS is, look at what I call wait times. Somebody calls us, we answer the phone immediately. It's one phone call to make because, typically, they're buying the entire Enphase system. And so delivering the best customer experience, both for our installer -- our distributor partners, installer partners as well as for the home owner. For the homeowner, they have just one app to look at, and they can -- they have the control of their entire system on the palm of their hand. So to summarize, it's highly differentiated products, high-reliability products and great customer experience. And that's how we manage -- that's how we deal with our competition and reflected in our -- in pricing and gross margin, as Badri mentioned.

Got it. Thank you. And a follow-up to a different topic, but coming back to California, you mentioned there's about a three to four-month backlog from the process that was done in 1Q. I know you do not provide like further than next quarter guidance, but do you expect like sequential improvement throughout the year, I mean, in the second half of the year better than the first half? Just trying to get a view there.

It's hard for me to say right now, but I know that NEM 3.0 has got great fundamentals in California. And contrary to what I've read from the reports, it is a change. Selling from NEM 2.0 to NEM 3.0 requires the installers to adapt. And now the storage attach is going to be a lot more, it is a change in selling. It is a change they are not used to yet. So the next three to four months will be probably well spent in training the installers on how to sell NEM 3.0, because with NEM 3.0 now, the consumption of the homeowner is important. NEM 3.0 has got tariffs for 24 hours during the day, times 365 days a year, so 8,000 plus points, 8,000-plus data points. So it's very important. Your consumption profile is important. So your savings obviously depends on the consumption profile. So we need to make a few things clear to the homeowner. And we need to clearly tell him that basically -- him or her that self consumption -- you're going to do self-consumption most of the time, which means what, your consumption is going to be met by either solar and/or storage. But during the month of August and September, we have all seen blackouts in California, during the month of August and September, why? Because the demand on the grid is higher than supply. There -- in August and September, under NEM 3.0, you get paid for actually helping the grid. You get paid handsomely. And at that time, battery is going to be your best friend. You're going to be making a lot of money on batteries. So I think, my personal opinion is NEM 3.0 -- of course, it requires a lot of evangelizing, a lot of selling, but NEM 3.0 will be a catalyst for solar plus storage. Like Germany, if you go look at Germany. Germany, the solar market is over 2 gigawatts, maybe 3 gigawatts right now. The attach rate is over 80%. That's a fuel self consumption market. And the tariff structure is similar. I think the import rate is €0.41 per kilowatt hour and the export is something like €0.11 per kilowatt hour, so a very similar construct. I think the result will be the same. Of course, it's not going to be overnight. It's going to take time, but great for the long term.

Thank you.

And our next question comes from Brian Lee from Goldman Sachs. Please, go ahead with your question.

Hey, Badri and team. Thanks for taking the questions. Maybe just a follow-up on that one. Just if we drill down on storage specifically, that hasn't really grown here for a number of quarters, and you're guiding sequentially down there on shipments. I know NEM 3.0, it sounds like you're going to take a little bit of time to filter through the market. But do you anticipate that your storage volumes will grow sequentially at any point moving through the rest of this year? That would be my first question. And then I have a follow-up.

Yeah. I think the storage volumes are going to go -- Q2 is probably the low. They're going to grow from here on and simply because of one reason. We are going to be introducing batteries to a lot more countries. We just introduced to four countries. And we are going to be introducing the third-generation battery in Q2 this quarter. Then, we are going to be introducing the third-generation battery into multiple countries in Europe. So NEM 3.0 is a part of the equation, but not the only thing in the equation. And eventually, the installers are going to figure out how to sell batteries in the rest of the US, despite the high interest rates. So like what I said, I think we are turning the corner on batteries. We have understood how to enhance the customer experience. Even our second-generation batteries are best in class right now. The third-generation batteries will obviously make things even better with double the power, double continuous triple peak. Yeah.

Okay. Understood. So Q2 is a low point. That's helpful. And then just my follow-up would be, I appreciate the additional commentary about sell-in versus sell-through and providing that context. But I was a little bit confused as to what it means for channel inventory situation and kind of what you're expecting? Because it almost sounds like with sell-through being down much more than sell-in that maybe inventory levels in the US are elevated. I know you said, it was on battery storage, but not micros, but when do you expect maybe sell-in and sell-through to kind of match up more aligned? And then I guess, what is sort of the viewpoint on whether there's some inventory drawdown that's impacting near-term sort of volume opportunity?

If you see a mathematic threat, if you see one week of channel inventory equals roughly 7.5%, right -- of the quarter, right? If you split the quarter into 13 weeks, so one week is basically 7.5%. So if something, let's say, if in one quarter if the sell-through is, let's say, 15% down that equates to two weeks of inventory. And so it's nothing over the top. It is if your normal channel inventory is somewhere around 10 weeks -- or 8 to 10 weeks, this would result in a slight -- instead of 8 weeks, you would be at 10 weeks. That's what you're talking about. So now having said that is we expect sequentially better sell-through. You know, Q1 is usually bad for sell-through due to a combination of weather plus now there is a macroeconomic effect on top of it. So Q2 is seasonally better plus with the installers getting little bit more adjusted to the situation. Things are going to be incrementally better in terms of sell-through in Q2 onwards.

Okay. Appreciate that. Thank you.

And our next question comes from Philip Shen from ROTH MKM. Please go ahead with your question.

Hey, guys. Thanks for taking my questions. First one's on pricing as a follow-up to a prior question. Our check suggest pricing through the US resi ecosystem is coming down rapidly. So US resi solar module pricing is down 15% to 30-plus percent. Powerwall pricing is down. Meaningfully some of your inverter peers have lowered inverter pricing. We've heard that you guys have -- you may have lowered pricing as well for specific larger customers on a one-off basis. I think, Badri, you just mentioned that you don't see any drop in pricing, but can you talk -- can you give us some more color on how you expect to maintain price, especially in this more difficult environment? And can you talk about price specifically in Q3 and Q4, if you expect it to hold, how does it hold? And if there is some risk, maybe talk about that risk? Thanks.

You can see our numbers. Gross margin is 2 percentage points better in Q1 than Q4. It basically comes because of our disciplined pricing management plus the conversion for us to IQ8. IQ8 comes with an outstanding cost structure. And right now, we are at 65% converted to IQ8. We expect to be at nearly 90% converted to IQ8 by Q3. So -- and we have an active cost reduction effort going on. So even if we do one-off deals, for example, in order to accelerate our market share, these are not going to cause a dent for us. So we expect pricing to be generally stable. The same thing is true on batteries. On batteries, we are learning rapidly. We are learning a lot on costs, especially the overhead costs on the battery returns. The serviceability of batteries are tough if you ask anybody in the industry. And I think we are getting better and better and better at those, basically improving the battery quality by root cost corrective action, by understanding defects, by eliminating the defects, by putting in permanent corrective actions in place. Then also building in serviceability into our new products. So why take down $3,000 products from the wall? Why not take down a $40 board from the wall instead? Why not repair it in situ? Why not service right there in 30 minutes? So there's a lot of money to be taken out of batteries from a cost perspective. That's what we are doing.

Great. Really appreciate that color. As a follow-up there, Badri, to what degree do you think you may be giving up on some volume? So I think Tesla is a string inverter, they're ramping up, and I think they're selling inverters only. And yes, I know your technology is meaningfully better, does many things that they can't do. But in this tough economic environment, installers may be prioritizing cost. So with the high gross margin where you are now, you may be able to maintain some share without giving much on price, but still keeping some of that volume. So how do you make that trade-off between price and volume as we get through the next few quarters?

Yes. I don't. For me, it is high quality leads to high price. And why? Because it's the entire cost of ownership. Installers have become smart -- smarter. Basically, they understand it is not about just the price of the inverter. The time, the money, it causes them to go and address the failure is so huge compared to a few dollars move on the inverter for high quality. So high quality is what we focus on, and installers have realized that. And they are continuing to work with us. And you can see the latest energy say the reports for the data. And the data is there. So we don't plan on changing our strategy there.

Great. Thank you so much for the color.

Our next question comes from Andrew Percoco from Morgan Stanley. Please go ahead with your question.

Great. Thanks so much for the time. I just wanted to follow-up, Badri, on some of your prepared remarks around the health of the customer base, specifically the long tail. Can you just maybe talk about what you're seeing from some of those customers? Talk a little bit about working capital needs? But just when it comes to the financing environment, the confidence level and their ability to get financing. And then maybe on the other side of that, to the extent the core long tail doesn't perform as expected, what's the optionality to sell to some of the larger players in the market? And what might that mean for pricing and margins?

Yes. Just to recap what I said -- and it's good for everyone to hear it again, is our overall sell-through of microinverters in the US was 21% lesser in Q1, compared to Q4. California was only 9% out of that because we understand the situation with NEM 2.0. So the NEM 2.0 rush basically compensated for any weakness due to the macro. On the rest of the US, the sell-through dropped by 25%, compared to Q4. And the most notable drops were seen in the states with the lowest utility rates, Texas, Florida, Arizona. Then -- we then did an analysis on how did the long tail installers do in comparison with the Tier 1 and 2 installers? We found in our analysis, the sell-through rate of long tail installers was quite better compared to the Tier 1 and 2 installers. Now I'm not exactly sure of the reasons, I can only speculate. Maybe they're local. There they do a better job of servicing the client, maybe they deal with high-value clients. But we thought from the questions we had that long tail was going to be a little more stressed, but we found the opposite in our data. But having said that, I mean all installers are affected by three things like what we said. The interest rates are high. That's the first thing. So basically, it's getting more difficult to -- solar with loans is getting a little more difficult to sell. Basically, earlier, they used to do low APR loans with high dealer fees. And that was common, whether it's long tail or Tier 1 and 2 installers. Now they are switching to higher APR with lesser dealer fees, sometimes no dealer fees. A cash flow issue. That is the milestone on payment is a lot…

Got it. That's helpful. And maybe just last one for me on net metering, officially took effect, I guess, a week or so ago. Any kind of first indications from the installers in terms of what they're seeing? In terms of, to your point, some of the friction potions around coating and installations. Are they -- any indications of how much growth might slow in California now that it's officially taken effect? I know it's only a weekend, but any color that you have there would be helpful.

It's only a week, as you said, we have talked to a number of installers. All of them are optimistic that their solar plus storage business can boom. They are all -- we shared solar graphs with them. We shared the designs. We showed them three examples per utility. We showed them how a pure solar case looks. We showed them that solar now in west-facing roofs is not bad. We showed them solar plus storage is actually better than NEM 2.0. or equivalent. So, now actually storage has got meaningful savings right now. Earlier with NEM 2.0, storage didn't have value in terms of savings, but had a lot of value on resilience. Now, storage provides economic advantage in addition to it. So installers are getting it. As I said, they do have a little time on their hands in order to start accelerating the originations. But I think the data is there, that's a put. And we do expect -- like in Germany, we do expect grid-tied batteries to become popular too because imagine you have 8-kilowatt solar system, and the crew is already there. They're installing the solar system. And all I need to do is to install one of Enphase's 5-kilowatt-hour battery. That battery is not big. It is small. It can be done very quickly on the wall. There is no partial home, whole home, nothing to worry about. There's no work on the main panel. It's a simple 5-kilowatt-hour battery and they provide savings right away. So, selling needs to pick that up. I'm sure they can sell it.

Understood. Thanks so much for your time.

Thank you.

Our next question comes from Jordan Levy from Truist Securities. Please go ahead with your question.

Thanks all. And thanks for all the commentary. Just a quick one for me to follow-up on a question of share. I'm just curious with the EU green deal industrial plan, have you seen any shift in the competitive environment over there? Any pop-ups of mom-and-pops trying to sell into the market or anything like that?

No, we haven't seen. I think the competitive environment is what has been there and it's consistent. And so -- and as I mentioned earlier on the call that given our differentiated solution or reliability, customer service, et cetera, we compete very effectively. So, I don't think that environment has changed, if I understood your question correctly.

And would you say that's true both on the battery and micro side?

Yes, it's a solution play, right? That's the most important -- short answer, yes, it's a solution play. When people buy solar there, if you look at countries like Germany as an example, when they say I'm installing solar system, what they really mean is they're installing solar and batteries and EV chargers and heat pumps. So, I think we have to provide the complete solution if you want to be an effective player in -- particularly in Europe.

Great. Thanks so much for that.

Our next question comes from Mark Strouse from JPMorgan. Please go ahead with your question.

Yes, good afternoon. Thanks for taking our questions. Getting late in the day here, so I'll just stick to one and take the rest off-line. I wanted to come back to the OpEx. The guidance for 2Q is kind of flattish quarter-over-quarter. Just from a high level, not necessarily looking for specific guidance, but from a high level, I mean, to the extent that the macro continues to deteriorate, California transition might take longer than expected. How should we think about OpEx going forward and kind of balancing near-term profitability with a lot of the investments that you're making in geographic and product expansion and everything else?

You should always think about OpEx at 15% of sales. That's the general model. All I said in Q2 that we're not going to be compromising on innovation. We're not going to be compromising our international growth. We're going to make generally the company better in other areas. But our baseline is 15% of revenue, and we don't plan on exceeding that.

Okay. Fair enough. Thank you.

Our next question comes from Christine Cho from Barclays. Please go ahead with your question.

Thank you for taking my questions. For the US manufacturing, I think you guys just said in your prepared remarks, shipments should be 4.5 million per quarter by the end of '24, assuming robust demand in the US. But in the event that your US demand is less than that, would you still want to utilize that capacity and export the product and back out some of your production elsewhere? How should we think about that?

Yes. We will most likely do that, but we don't do things just for profitability. We do have contract manufacturing plants that are worldwide. We have worked hard to establish balanced manufacturing strategy. So we just need to be careful in looking through and making sure that we make the best decision for both profitability and balancing manufacturing.

Okay. And then on the IQ8 rollout, that's been slower than expected. Could you just go into some more detail into what's driving that? Is it on the supply side with any of the components, or is it on the demand side, as customers sound like they've had to work through inventory over the last quarter or two? And I think on the last quarter call, you said you expected it to jump to 80% in 2Q. So is that still the expectation? And just with the gross margins, it's very high this quarter and the IQ8 drove that. But your 2Q guidance is lower and batteries are lower. So that's going to be less of a drag. So is this just conservatism, or is there anything one-off that we should be aware about in 1Q or 2Q?

There's nothing one-off. You're right, we are -- originally, I thought 90% by Q2, last earnings call, I told you 90% by Q3. That's the number, 90% by Q3. 80% by Q2 will be okay. We are -- for example, in Europe, 50% of our volumes are IQ8 right now. We're introducing IQ8 to many more countries as we speak. Yesterday, we introduced IQ8 to Spain and Portugal. Soon, we will introduce to Poland, Germany, et cetera. We plan on doing the bulk of those introductions. In this quarter, most of them, there will be some spillover in Q3 for a few, but we very much want to achieve 90% in Q3. That's our target.

Our next question comes from Kashy Harrison from Piper Sandler. Please, go ahead with your question.

Good afternoon. Just one quick one for me. So you're currently sitting on, call it, $600 million of net cash, generated around $225 million of free cash flow during the quarter. So just wondering what your thoughts are on using the free cash generated this year to perhaps more aggressively repurchase stock? Thank you.

Yes. I mean, we have stated our strategy. It is unchanged. Basically, first to make sure that we have plenty of cash for the needs of the business. The capital that we need for our portion of you is manufacturing, et cetera, we're doing exactly that. The next one we look at is -- we look at are there any M&As that we should be taking advantage of now? We look at a number of companies on a weekly basis in the areas of batteries, even in power conversion, in software, in home energy management, EV charging. We look at many, many areas. And that's the second priority. The third one is, if we -- basically, if we have cash left over from number one and number two, we will buy back stock assuming the share price is below conservatively estimated intrinsic value. So we will do that. Our Board looks at it very carefully. And that's our strategy.

Thank you.

Our next question comes from Eric Stine from Craig-Hallum. Please, go ahead with your question.

Hi, everyone. One here at the end for me. So I know a lot of moving parts. You've got a big revenue range on one hand, less seasonality on the other. Channel inventory that you've detailed, I'm just curious if you'd be willing to kind of go through a scenario that gets you to the high end of that revenue range and a scenario that gets you to the low end of that range and maybe how that breaks down between the US and international?

Yes. I mean, we are pretty conservative when it comes to our guidance. You should see our track record in general. And we do have -- like, what I said, we do have a lot of dry powder in terms of new products. This year is the year of new products, and we are going to be releasing new products constantly. And so, we think other than the base business, which we guided on in Q2, there is a lot more to come there. So our guidance is a little bit wider this time, plus/minus $25 million. It is to reflect a slightly more uncertainty compared to the last time. But our Europe business is doing incredibly well. We grew 25% in one quarter from Q4 to Q1. We have doubled -- we doubled from 2020 to 2021. From 2021 to 2022, we grew 132%. I just released my annual letter yesterday. You can see that 132% growth from 2021 to 2022. And so Europe is doing incredibly well for us. We are focused on entering a lot more countries there. We are focused on IQ8 microinverters. We're focused on IQ Batteries, lots of regions big market over 10 gigawatts compared to the US, which is 5 gigawatts right now. So bottom line, we are pretty conservative.

Got it. And then I mean, you do have the wide range, but it did seem in your commentary that you do expect improvement versus the first quarter. I mean, so is it fair to say that your expectation would be that the top half of that range?

I mean we gave $700 million to $750 million. And there's nothing else we say -- we cannot say, we are in the top half of the range.

Okay. Got it. Thank you.

Our next question comes from Joseph Osha from Guggenheim Partners. Please go ahead with your question.

Hi, there. I just wanted to return to some of the mechanics around the ramp of onshore manufacturing. Mandy said 50,000 units this quarter. and then two lines by the end of the year. So my first question is, does that 50,000 mean manufactured or shipped for revenue? And then secondly, looking at the end of the year, just wondering if you can tie those comments back to maybe a unit number or a run rate at the end of 2023, not 2024? Thank you.

Yeah, 50, 000 microinverters shipped to customers. That's what we talk about. We always talk about shipments. Then –

All right.

Therefore, you should take that number, you should take 4.5 million unit number by end of 2024, you can do some kind of an interpolation, you can work with us and a linear interpolation may be fine too.

Okay. All right. Probably even a sell-side analysts can handle that math, but -- so you're not giving me a specific number for end of 2023 at the moment, right?

Yes. And like what you said, you can really calculate it.

Okay. All right. Thank you.

Our next question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead your question.

Excellent. Thank you, guys. Good afternoon. I'll make it quick here. Just with respect to the commentary on temporary impacts, I just want to clarify that super quickly. Obviously, you've got this NEM dynamic for the next couple of quarters or so as you deal with the origination on NEM 2.0. How do you think about that squaring up against this temporary impact on installations? I know, you commented earlier, there's a transition period on sales. How much of a non-California improvement are you guys thinking about especially in the back half of the year as NEM 3.0 kind of rolls in more meaningfully?

I mean, we cannot predict what it's going to be in the back of -- all I know is Q1 is supposed to be seasonally a tough quarter. And on top of it, in Q1, installers had to face all of these uncertainties for the first time, Q1 as well as probably Q4 a little bit. So I think -- we said, and we hope this is true, is installers are going to adjust. Everybody is going to adjust. And of course, as long as interest rates are so high, we cannot -- we're not saying that, the numbers are going to return back to where it were. That is going to be stress on those numbers because interest rates were high, but there are going to be some innovation in financing, innovation in loans, innovation in leases that are going to come. It's going to provide more access to our long tail installers. The demand will unleash only when the interest rates are back to normal. But until then, it will get incrementally better compared to Q1.

And the things that we control -- we can control, right, for example, helping our installer partners, training them on how to sell NEM 3.0 system. This is where solar graft plays a very key role in helping them to show exactly what and how easy it would be to build a NEM 3.0 system with our R3 battery and show the payback period and bill offsets, et cetera, and how to sell that to the homeowners. And that we are doing right now as we speak. So I think there are things that we control, and then there are the macroeconomic trends. And there will be people who will be, as Badri mentioned, innovating on the finance side.

When you said temporary here and demand being down -- just to clarify that super quickly, I know you only guide one quarter forward. I'm just trying to understand how temporary?

What we said is in California, the point of sales, which is sell-through data can show as much decline because in California, the installers have their hands full with NEM 2.0 installations for the next three to four months. And now in this time, which is when the originations are happening for NEM 3.0, this is the time where we are working with those installers and helping them understand and pitch the value of NEM 3.0 to homeowners. So that's in California. Outside California, the situation is purely dominated by high interest rate environment. So there, we are talking about installers, first of all, getting used to working with reduced cash flow, number one; innovation on loans, which is they need to start selling high APR loans with lesser dealer fee, lease -- people offering leases to long tail installers, those innovations will -- we expect those innovations to start to come. But like what I told you, the demand will get unleashed to its original levels when the interest rates come back to normal. But until then, we expect the sell-through in non-California states to incrementally improve as installers get used to the situation. That's what we said.

Excellent. Thank you, guys.

Our next question comes from Pavel Molchanov from Raymond James. Please go ahead with your question.

Thanks for taking the question. Just one for me. In the 10-Q, you broke out revenue between products and services, and this may have been the first time you're doing that. Should we look at that $24 million service line as essentially the software slice of the revenue mix, or does that signify something else?

We'll give you more color on those basically, maybe in the -- after call. We wanted to break down, yes, some of the software acquisitions. We have done a few acquisitions on the installer platform. We have done a few on the EV charging side as well. Yeah, just to remind you, we have -- starting with the front end lead generation, we acquired a company called SolarLeadFactory that basically helps in providing leads to installers. And with that company, we are able to at least understand a little bit the origination side of things. And the name of the game for us there is to -- lead quality is a very big pain point for the industry. The statistics on leads are pretty bad, which is of every 100 leads that are sold, only two leads or three leads go and become a contract. So we would like to change that by software, by making sure that, that experience on lead management is done right. To take that 2% or 3% number to a 10% number. So that's the first acquisition. The second acquisition is Solargraf. Solargraf is design and proposal. Design and proposal means you have a home energy management system. That consists of solar storage, EV charger and especially as the tariffs get complex, it becomes difficult for anybody to estimate your savings. So it is vital that there is software that basically estimates what a homeowner can save and provide him most accurate payback calculations depending on its consumption. So that's Solargraf, and that is now helping us a lot. 1,000 installers are using it with NEM 3.0, it is helping us to sell the NEM 3.0 more clearly to our installers and show them the value of a solar plus storage system. So that's the…

Very useful context. Appreciate that.

Thank you.

Our next question comes from Jeff Osborne from TD Cowen. Please go ahead with your question.

Hey, Badri, thanks for squeezing me in. Just two quick ones. On the -- given the channel inventory somewhat normalized, I imagine your lead times are down. I was just curious what level of visibility you folks are getting from the distributors and if that's changed?

Well, yeah, as you can imagine, in good times, we will have nine-month visibility. In bad times, we will have approximately three-month visibility. Those are the ranges.

Got it. And I think in the prior several earnings calls, you had talked about being booked above the high end of guidance in response to, I think, Josh's question, I forget who it was that asked. But is that not the case anymore?

No. I mean I'm not saying that, but we have to be sensitive to installers. We -- even though our orders are non-cancelable, for that quarter, the installer situation, considering their cash situation is important, so we might accommodate push out requests, et cetera. So that's why even if we are fully booked, I don't -- I didn't -- I answered his question that way.

Got it. Thank you. That’s all I have.

Our next question comes from Sophie Karp from KeyBanc. Please go ahead with your question.

Hi. Thank you for taking my questions. So I wanted to ask you about California versus the rest of the country where the challenges are distinctly different and this seems like in California it's a transition to NEM and the rest of the country is more interest rates and diversity security rates equation. So if you were to speculate about where you're going to see the most meaningful improvement as it relates to your business in the second half of the year, would that driver be the rest of the country, or California adjusting to the new NEM regime that is going to pull you forward a little bit? Thank you.

A hard question for me to answer. I expect the rest of the country to get incrementally better as we go. I do expect -- I do see NEM 3.0, I do see that there is a simple, clear value proposition. I do see California having very high utility rates, I do see a clear payback of six to eight years with solar plus storage. So, -- but I also do see a time -- it will take us some time, maybe not much, to train installers in order to sell NEM 3.0. So, I'm optimistic on both fronts, actually.

Okay. And then if I may, on the battery, like the third-generation battery, would you -- was it fair to say that this is going to be the main product for California market at this point? Are you still training installers to use the current generation of the battery? Just kind of curious how you think about this, like double transitioning, if you will, right, the new NEM regime and the new battery that like -- or just start training them on the new generation of battery because it's a high-value proposition product, or how should we think about the timing of this?

Right. Both batteries are equally good in terms of quality, in terms of commissioning now, in terms of performance. The nice thing about the Generation 3 is the double -- the continuous power. What happens because of that, it allows you to export the same amount of energy in half the time. And therefore, when you have -- for example, when you have one particular hour in California, where your rates are going to be high, you maximize it with our battery. So, yes, to answer the question, over the long-term, I would expect this battery with a high charging rate to uniquely help California.

Okay. Thank you.

Thank you.

Our next question comes from Biju Perincheril from Susquehanna. Please go ahead with your question.

Thanks. Thanks for taking my question. Badri, you have some internal sort of top of the funnel indicators from the software platform that you just went through. And can you sort of talk about the trends that you're seeing from there as far as installer demand is concerned?

Yes, I mean we usually talk about them if they are meaningful enough. Right now, our solar graft platform, it is over 1,000 installers. We'll break out a lot more trends as we go through the year. But it's safe to say that, that platform showed -- I'm not sure how statistically representative that is, but that platform did show the originations in California for Q1 were quite high. It also showed that the originations outside California in Q1 was a little better than Q4.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I would like to turn the conference call back over to Badri Kothandaraman for any closing remarks.

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

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining today's conference call. You may now disconnect your lines.