Enphase Energy, Inc. (ENPH) Q2 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Enphase Energy's Second Quarter 2025 Financial Results Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Second Quarter 2025 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 second quarter ended June 30, 2025. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, 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 tax, tariff and supply chain 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, which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri?

Good afternoon, and thanks for joining us today to discuss our second quarter 2025 financial results. We reported quarterly revenue of $363.2 million, shipped 1.53 million microinverters and 190.9 megawatt hours of batteries and generated free cash flow of $18.4 million. Our Q2 revenue included $40.4 million of safe harbor revenue. As we exited Q2, our battery channel inventory was normal, while our microinverter channel inventory was slightly elevated. For the second quarter, we delivered 49% gross margin, 21% operating expenses and 27% operating income, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefit. Mandy will go into our financials later in the call. Our global customer service NPS was 79% in Q2 compared to 77% in Q1. The average call wait time decreased to 1.8 minutes, largely due to staffing and continued investment in automation. Let's cover operations. Our global capacity is around 7 million microinverters per quarter with 5 million in the U.S. In Q2, we shipped approximately 1.41 million microinverters from our U.S. contract manufacturers, booking 45x production tax credits. Our domestically produced microinverters help residential lease PPA providers and commercial asset owners to qualify for the 10% domestic content ITC adder. We expect to ship approximately 1.2 million microinverters from the U.S. in Q3. We grew our domestic battery production in Q2, shipping 46.9 megawatt hours compared to 44.1 megawatt hours in Q1. We are building the IQ Battery 5P in the U.S. using domestic -- domestically manufactured microinverters, thermal and battery management systems as well as packaging, while sourcing cell packs from China. These batteries with greater than 45% domestic content once again can help our lease and PPA customers qualify for ITC bonuses. We remain on track to have non-China cells by the end of this year, scaling into battery builds during the first half of 2026. Our U.S.-made batteries with non-China cells can help customers qualify for domestic content ITC bonuses and meet foreign entity of concern or FEOC compliance as the criteria become increasingly stringent every year. Let's cover tariffs. In Q2, we absorbed a 2% gross margin impact due to tariffs. The originally proposed 145% tariff on Chinese products was ultimately reduced to 30% in May. As a result, our expected 6% to 8% margin headwind in Q3 has improved to an estimated 3% to 5% even after accounting for new tariff increases on several non-China countries, which are going to be effective August 1. This progress is a direct result of our team's relentless execution in diversifying our supply chain. We are not only mitigating tariff risk, we are future-proofing our operations and positioning Enphase to lead under tightening FEOC compliance rules. Let's cover the regions. Our U.S. and international revenue mix for Q2 was 75% and 25%, respectively. In the U.S., our revenue increased 3% in Q2 compared to Q1, primarily due to higher seasonal demand, partially offset by lower safe harbor revenue of $40.4 million compared to $54 million in Q1. The overall sell-through of our products was up 17% in Q2 as compared to Q1. Let me make some brief comments on the market. The U.S. solar market is showing signs of improvement with rising battery attach rates and seasonal demand contributing to increased momentum. While we haven't yet seen a material rush related to the expiring 25D homeowner tax credit, we expect urgency to build later in the year as more consumers move to secure the credit. As we head into 2026, the U.S. solar industry must evolve rapidly in response to the recent tax reconciliation bill. First, we expect an accelerated shift towards leases and PPA anchored by the 48E tax credit through 2027. Second, batteries will become central to every solar sale propelled by declining installation costs, long-term credit -- tax credit support through 2033 and growing homeowner demand for energy resilience and participation in VPPs. Third, the industry must drive down customer acquisition and selling costs to remain competitive in a maturing market. We believe these structural shifts, coupled with the escalating utility rates and increasing grid instability create a tailwind for sustained demand in the residential solar plus storage. Enphase is executing a multipronged strategy to lead the industry through these transitions. We are partnering closely with third-party owners or TPOs to design innovative financing structures that maximize tax credit capture under the new rules. Our goal is to expand lease financing availability across a much wider installer base, including smaller and midsized players. By removing friction in financing and by broadening access, we aim to accelerate residential solar adoption and ensure that more homeowners can participate in the clean energy transition. Our battery technology road map has been advancing rapidly with a laser focus on driving down installation costs and unlocking scale. In June, we began shipping our fourth-generation battery systems in the U.S., cutting backup costs by several thousand dollars. Our fifth-generation battery is already under development and is expected to deliver a 50% increase in energy density and a major cost reduction, pushing the boundaries of performance and affordability. When paired with our next-generation IQ 9 microinverters, which are launching later this year, we expect to deliver one of the most compelling and integrated solar plus battery solutions in the industry designed to meet the needs of both homeowners and installers at scale. Finally, we are doubling down on our installer services platform to aggressively reduce soft costs across the industry. With Solargraf, our all-in-one design and proposal platform, SolarLeadFactory, our performance-driven lead generation engine and Enphase Care, our 24/7 expert-backed homeowner support program, we offer a unique integrated toolkit to streamline operations, cut acquisition costs and boost installer productivity. We believe these assets position Enphase not just as a technology provider, but as a full stack partner to help the industry scale more efficiently. We are executing with urgency and look forward to sharing the progress in quarters ahead. In Europe, our revenue increased 11% in Q2 compared to Q1, while our overall sell-through increased by 5%. The overall business environment across the region is still challenging, but we are maintaining our discipline on controlling the channel as well as expanding our served available market by introducing new products. I'll now provide some additional color on our key markets in Europe, the Netherlands, France, Germany and U.K. In the Netherlands, demand remained soft in Q2 as the market transitions from a solar -- from solar-only systems to integrated solar plus battery solutions. This shift is accelerating due to rising export penalties and the planned sunset of net metering at the end of 2026. We are uniquely positioned to lead in this evolving landscape with an installed base of approximately 500,000 residential solar systems. As net metering phases out in the Netherlands, we believe homeowners will increasingly turn to batteries, not only to maximize self-consumption and backup power, but also to participate in VPP programs that offer new value streams in retail energy markets. This transition can unlock a compelling $2 billion market and represents a strategic opportunity for us to deepen our utility partnerships, scale battery deployments and drive growth across the region. In France, the market remained subdued in Q2 as expected, with the industry anticipating a significant reduction in VAT on solar systems, which is set to take effect in October. This policy change is expected to reignite demand. Despite the current slowdown, France remains very critical for us, driven by our strong brand, technology leadership and the country's relatively low solar penetration. We are seeing a very meaningful uptick in battery demand spurred by low feed-in tariffs that make self-consumption far more valuable. Our IQ Battery 5P with full backup capability has been well received by both homeowners and installers. In May, we introduced intelligent hot water heater steering to further boost self-consumption and savings. This feature is expected to become a key driver in the French market where heating water represents a substantial portion of household energy use. With these building blocks in place, we believe we are well positioned to capitalize on the next wave of growth in solar plus battery adoption in France. In Germany, we are ramping sales of our IQ Battery 5P with FlexPhase and IQ EV charger 2, both of which are gaining strong momentum with homeowners seeking all-in-one solutions. We also launched our IQ Balcony solar systems in Q2, unlocking a fast-growing market segment for renters and apartment dwellers. These innovations, combined with our deep partnership with some of the top installers are helping us return to growth and expand our presence in a strategically important market. The U.K. market. The U.K. market continues to perform well for us as we strengthen our relationships with retail energy providers in the region and our robust API platform is proving invaluable in supporting them. We are shipping our IQ EV charger 2 into the market and plan to also introduce backup capability for our batteries in Q3 of this year, further expanding our energy resilience offering in the region. In Australia, momentum is building with the July 1 rebate from the government fueling strong interest in battery. We are gearing up to launch our IQ Battery 5P with FlexPhase in the country imminently, delivering powerful 3-phase backup and flexible power in order to meet dynamic DSO requirements. Our IQ8P microinverters are also set to launch soon, supporting the latest high-power solar modules in both residential and commercial markets. We have also introduced our next-generation IQ EV chargers, expanding our electrification offering. To simplify retrofit installations, we are enabling compatibility between IQ 7 and IQ 8 microinverters on the same branch circuit, improving installer productivity and accelerating adoption. Let's turn to our Q3 guidance. We expect revenue to be in the range of $330 million to $370 million. We anticipate continued growth in the U.S. and seasonal softness in Europe. We are approximately 75% booked to the midpoint of our revenue guidance. For IQ batteries, we expect to ship between 190 and 210 megawatt hours during the quarter. We are actively engaged with several TPO partners who are awaiting further clarity on safe harbor rules following the recent executive order, and we remain well positioned to support them once they finalize their plans. Let's talk about new products, starting with IQ Batteries. In June, we began shipping our fourth-generation battery systems to the U.S. The new battery delivers 30% more energy density, occupies 62% lesser wall space and reduces installation cost. Our IQ Meter Collar simplifies whole home backup by integrating MID functionality, while the new combiner unifies the connection of solar, batteries, EV charging and load control into a single enclosure. Together, these innovations simplify backup installation, improve reliability and deliver superior homeowner value. The meter collar is now approved by 29 U.S. utilities and growing. And as I noted earlier, we believe our aggressive battery road map beyond the fourth generation will continue to push boundaries on performance, integration and cost. Our IQ Batteries are built for more than just backup. They are designed to earn. With advanced APIs, our batteries can seamlessly integrate into VPPs in regulated markets like the U.S. and participate in wholesale energy markets in deregulated regions such as Europe and Australia. Together, we are actively engaged in over 50 VPP programs worldwide with 210-megawatt hours of Enphase batteries enrolled, unlocking new revenue streams for homeowners and accelerating the transition to a more flexible, resilient grid. Let's talk about microinverters. Our IQ8 microinverter family is now deployed in 58 countries and growing. Building on this global momentum, we are preparing to launch IQ9, our most advanced microinverter yet. Powered by cutting-edge gallium nitride technology, IQ9 is built for the future, supporting higher DC input currents, higher AC voltages and 3-phase compatibility. With 427-watt peak output, IQ9 is optimized for pairing with the most powerful residential and commercial panels on the market. Internal pilots are already running at Enphase facilities, and we remain on track for full-scale production in Q4. We believe IQ9 marks a major leap in performance and platform flexibility and importantly, unlocks a 2-gigawatt market opportunity by enabling us to serve 480-volt 3-phase commercial systems in the U.S. for the first time. Our commercial IQ8P-3P microinverters is building momentum with over 850 commercial sites deployed across the U.S., averaging 35 kilowatts per system and earning consistent positive feedback from the field. These 208-volt 3-phase microinverters now ship with U.S. domestic content, enabling the customers to benefit from the 10% ITC bonus adder, a significant edge for commercial asset owners. Both IQ8P 3P and IQ9 microinverters are expected to meet FEOC compliance, offering a powerful alternative in a market still dominated by Chinese equipment. The timing of IQ9 launch is strategic, delivering a high-quality, reliable and policy aligned solution as the industry pivots towards a domestically compliant infrastructure. Let me come to Balcony Solar. Our IQ Balcony Solar product is now shipping into Germany and Belgium with additional launches planned across Europe, Japan, India and Utah in the next few quarters. Built on Enphase's AC architecture, it enables homeowners to plug in anywhere between 1 and 4 panels directly into a standard wall outlet, no permits, no rewiring and no complexity. A standout feature is sunlight backup, which allows critical appliances to stay powered during daytime outages even without a battery, an industry first that sets us apart. On the portable power front, the IQ PowerPack 1500 marks our entry into the direct-to-consumer energy frontier. We expect to scale -- significantly scale e-commerce sales as the category opens a new channel for customer engagement and brand growth. In parallel, we plan to expand the IQ PowerPack family into new regions including Europe, India and Japan, while broadening use cases to address a wide spectrum of mobile energy needs. Let's talk about EV charging. We are now shipping our next-generation IQ EV charger 2 into 18 countries across Europe as well as Australia and New Zealand. This charger is designed to integrate seamlessly with Enphase solar and battery systems while also performing as a high-quality stand-alone solution. We recently earned EV Ready certification in France, one of the country's most rigorous standards, demonstrating our commitment to safety and performance. Over the coming months, we plan to expand availability into more European countries as well as Brazil, India and introducing it back in the U.S., supporting the global shift to electrification with a trusted proven solution. Let me now share an update on our IQ bidirectional EV charger, which is expected to launch in middle of 2026. This 11-kilowatt solution is powered by three high-performance microinverters built on a full GaN architecture, delivering exceptional efficiency and compact design. Paired with the IQ Meter Collar in the U.S., it enables seamless vehicle-to-home and vehicle-to-grid functionality with automatic black start. Together, they offer one of the lowest cost and simplest ways to provide whole home backup even without solar or stationary batteries. Homeowners can just start with an EV, our bidirectional charger and the meter car. and then later can add solar or Enphase batteries depending on their preferences and energy goals. Built to ISO 15118-20 standard and currently undergoing testing with multiple global OEMs, we believe this platform has the potential to redefine energy resilience by turning the EV into a flexible grid-aware energy asset for the home. Let's talk about Solargraf, our all-in-one platform purpose-built for installers. We are rolling out major enhancements, including seamless integration with our top TPO partners, powerful custom tariff builder, advanced dealer management tools and a dramatically simplified AI-driven design experience. Every upgrade is designed to make Solargraf more intuitive, intelligent and more indispensable. As it continues to evolve, Solargraf is becoming a strategic growth engine for us, empowering installers to sell faster, design smarter and scale with confidence. The signing of the tax reconciliation bill marks a turning point for the U.S. solar industry, but adapting to change is core to Enphase's DNA. Over the past several years, we have evolved from a single microinverter product company into a global energy technology leader. Today, we offer a full portfolio of microinverters, batteries, EV chargers and intelligent home energy management software. Our systems are deployed in more than 160 countries with over 4.9 million Enphase-powered homes worldwide. We are entering new consumer markets with products like Balcony Solar and portable energy systems. And with our upcoming IQ9 microinverters, we expect to unlock the 480-volt commercial solar market in the U.S., which is a major expansion of our addressable market and a key step into larger-scale energy applications. We believe we are strongly positioned to lead through the next phase of industry transformation. Our product road map is accelerating with next-generation microinverters and batteries focusing on lowering installation costs and simplifying installations. We are doubling down on our installer services platform to help drive soft costs and expand lease financing access across the industry. The long-term fundamentals for distributed energy remain powerful, rising demand, higher utility rates and growing homeowner interest in resilience and energy independence. As the market shifts, we will keep doing what we do best, innovating with purpose, moving fast and staying relentlessly focused on our customers. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our second quarter of 2025 financial results as well as our business outlook for the third quarter of 2025. 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 Q2 was $363.2 million. We shipped approximately 675.4 megawatt DC microinverters and 190.9 megawatt hours of IQ Batteries in the quarter. Q2 revenue included $40.4 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who claim to install the inventory over more than a year. Non-GAAP gross margin for Q2 was 48.6% compared to 48.9% in Q1. GAAP gross margin was 46.9% for Q2 compared to 47.2% in Q1. Non-GAAP gross margin without net IRA benefit for Q2 was 37.2% compared to 38.3% in Q1. Reciprocal tariffs impacted our gross margins by approximately 2% in Q2. GAAP and non-GAAP gross margin for Q2 also included $41.5 million of net IRA benefit. Non-GAAP operating expenses were $77.8 million for Q2 compared to $79.4 million for Q1. GAAP operating expenses were $133.5 million for Q2 compared to $136.3 million for Q1. GAAP operating expenses for Q2 included $49.5 million of stock-based compensation expenses, $2.9 million of amortization for acquired intangible assets and $3.3 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q2 was $98.6 million compared to $94.6 million for Q1. On a GAAP basis, income from operations was $37 million for Q2 compared to $31.9 million for Q1. On a non-GAAP basis, net income for Q2 was $89.9 million compared to $89.2 million for Q1. This resulted in non-GAAP diluted earnings per share of $0.69 for Q2 compared to $0.68 for Q1. GAAP net income for Q2 was $37.1 million compared to $29.7 million for Q1. This resulted in GAAP diluted earnings per share of $0.28 for Q2 compared to $0.22 for Q1. We exited Q2 with a total cash, cash equivalents and marketable securities balance of $1.53 billion, flat when compared to Q1. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 702,948 shares of our common stock in Q2 at an average price of $42.67 per share for a total of approximately $30 million. We have a remaining $268.7 million authorized for further share repurchases. In addition, we spent approximately $3 million by withholding shares to cover taxes for employees divesting in Q2 that reduced the diluted shares by 58,332 shares. We expect to continue this anti-dilution plan. In Q2, we generated $26.6 million in cash flow from operations and $18.4 million in free cash flow. Capital expenditure was $8.2 million for Q2 compared to $14.6 million for Q1. Now let's discuss our outlook for the third quarter of 2025. We expect our revenue for Q3 to be within a range of $330 million to $370 million, which includes shipments of 190 to 210 megawatt hours of IQ Batteries. We expect GAAP gross margin to be within a range of 41% to 44%, including approximately 3 to 5 percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within a range of 43% to 46% with net IRA benefit, and 33% to 36% before net IRA benefit, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect the net IRA benefit to be between $34 million and $38 million on estimated shipments of 1.2 million units of U.S. microinverters in Q3. We expect our GAAP operating expenses to be within a range of $130 million to $134 million, including approximately $52 million estimated for stock-based compensation expenses, acquisition-related amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $78 million to $82 million. For the year 2025, we expect our GAAP tax rate of 19% to 21% and a non-GAAP tax rate of 15% to 17%, including IRA benefits. With that, I will open the line for questions.

[Operator Instructions] And your first question today will come from Praneeth Satish with Wells Fargo.

Badri, I think you mentioned in your remarks partnering with TPO providers and introducing some creative financing structures that could help maximize the tax credit capture. Can you just elaborate on what those type of structures could look like and when you plan to launch that? And I guess is the goal here to kind of take your relationships with the long-tail installers and get them on to a TPO platform? And then maybe just a follow-up on that. What is -- just to level set, what is your market share with TPO providers today after the recent bankruptcies in the space? And I guess, how do you expect that to evolve in 2026?

Yes. So I'll start with the second question first. First of all, our overall market share in the U.S. is quite healthy, as you all know. and it is available in public, public analytic reports. We have a healthy share at both -- for both cash, loan customers as well as healthy share with the TPO customers. We have not broken it out, and we do have healthy share. We work with every one of these TPO customers. We work with every single one. And right now, we are in deep discussions with them because what we have is we know how to service long-tail installers. We have the relationships with the long-tail installers. And if we can bring lease financing access to the long tail. We can prevent a market erosion, overall market erosion. So that's what we are aiming to do. And we are working with a lot of the TPOs. We aren't ready to share more details yet, but we will share those very soon, perhaps in the next earnings call. And we are looking to move on it aggressively. So let me leave it at that. So I'll add a couple of more things. I've seen many of the analyst reports. They all say the U.S. TAM is about 4.5 gigawatts for solar in 2025. And I think it's approximately a couple of gigawatt hours for batteries in 2025. And what is the view for it to be in 2026. There are various numbers. Our -- my personal view is that we expect a 20% drop in TAM in 2026 due to 25D. So there are three things which we believe we need to do in order to mitigate the market reduction. One is what we just talked about, bringing lease financing to the long tail, how to facilitate that most effectively with our strong TPO partnerships. The second one, working on driving down installation costs. And there, we talked about batteries. We just released our fourth-generation batteries. Batteries in general, are ramping up in the U.S. They are getting more cost effective. I just told you that I'm working on my fifth generation battery scheduled to come out in exactly a year from now. And in that fifth generation battery, we are able to improve the energy density by more than 50%. And we, therefore, can make a major improvement in cost and hence, installation costs. And also IQ9 has got a lot of innovation on it with GaN in order to reduce the overall cost. So we are looking forward to basically introducing world-class products, which have a very efficient footprint and which will bring down the end installation costs. The third one is an interesting one is lead generation. The customer acquisition cost is very high in the solar industry and of the order of anywhere between $0.70 a watt to $1 a watt. And Enphase needs to do a lot more in order to reduce that. And I think we are taking up that. Once again, we are launching aggressive initiatives where we will be able to generate leads and pass on to our installers. The -- also note that we have a fleet that is 5 million homes. Earlier in the past, installation may not have had time -- installers may not have had time to focus on the upgrade market. But now it is going to be lucrative for them to focus on that market, too. So three things are -- which we are going to do well under our control while working with our partners is bring lease financing to the long tail, make world-class products, driving down installation costs. Third is help reduce lead generation costs across the industry.

Got it. That's very helpful. Maybe kind of switching gears, you mentioned that the micro channel is slightly elevated. We know demand is going to decline in 2026 once the 25D credit expires. I guess how do you intend on managing field inventories with distributors for the balance of the year? Do you plan to undership micros in either Q3 or Q4 to help reduce inventories? Or do you think inventories could just get rightsized more organically if we see maybe a pull forward of demand or some safe harbors in the second half?

I think you answered the question yourself. Basically, that's exactly what we expect. We expect 25D increase in demand, which will come from the channel and make the channel at reasonable levels by the end of the year.

And your next question today will come from Philip Shen with ROTH Capital.

In terms of the Q3 guide, sorry if I missed it, but did you share how much safe harbor you expect in the Q3 revenue? And then you talked about not yet seeing the pull forward of demand yet. How do you expect that to manifest? Would it be more of a Q4 element? Or do you think there could be an upside surprise to Q3? And then in terms of the elevated channel, how did we get to elevated channel levels? Was there a pause earlier in the year? Or did you overship into the channel? And what are the levels? Historically, you're -- when you got rightsized recently, you're at 8 to 10 weeks. I mean are we talking about 12 weeks now or something higher?

Right. So first of all, the Q3 revenue guidance does not include any safe harbor. As I said, we are working with several TPO partners, and they are all looking at recently -- at the recent Executive Order, and they are waiting for further clarity. And once they have that clarity, they will take the actions. From our side, what we are doing is to ensure that we are ready in terms of capacity. Any time that they want the product, we are going to be ready in order to service them. On your 25D question, I think we will see the 25D demand possibly in early Q4 is what we will start seeing. Right now, we aren't seeing it, but we still have August and September left. So that's what I expect that we'll start seeing it soon. I'm sure that installers -- some installers will have to make workforce changes. They may have to add temporary teams in order to feed the rush, and that -- those all take a little bit of time. And so I'm sure it's coming in Q4. The question on channel, we are completely transparent to you. It is -- we are actually in very good shape in channel management. We -- our experience in the last two years on the quantity of undershipment, et cetera, that we had, we have recognized that's an anomaly, and we will never get to that stage. So whenever I say slightly above, it should mean slightly above 8% to 10%. That's what it means.

Thanks, Badri. My follow-up question is on something you said earlier, you said your assumption for '26 is a TAM that's 20% lower. Can you walk us through the assumptions of how you get to the 20%, the baseline for loan versus TPO versus cash, et cetera? And then separately, can you -- if you can, I know you won't guide to Q4 and Q1, but how are you thinking about Q4 and Q1 from a cadence standpoint if you are able to share?

Yes. So we expect approximately a 20% reduction in TAM. The way I'm thinking about it, just to tell you simple straightforward is, let us say the -- I mean, the 4.5 has got 2 gigawatts of lease and 2.5 gigawatts of cash and loan. I expect basically the leasing market to be increasing a little bit and the cash and loan market to decrease by a lot. So the end picture will -- in our opinion, the end picture may look like 2.5 gigawatts lease and 1 gigawatt cash and loan in 2026. Of course, everybody's estimate is different. But our rationale is the following. There are -- the key markets in the U.S. are basically -- you take a look at California. If you take a look at California, the utility prices are high in California. Payback today is six to eight years in 2025. And with ITC not being there for a cash loan purchase or cash purchase, I should say, the payback is going to stretch by two years, 6 to 8 will become something like an 8 to 10, still very attractive economics with a 25-year product. We see the same economics in a similar economics even in the East Coast where the utility rates are high. And in the East Coast, VPPs are popular. Puerto Rico, for example, most of the business gets transacted on lease. So we see that market to be remaining intact. So the markets that probably will be hit hard is the Midwest, Central and even Southeast, where the utility rates are in general on the lower side. But that's the big picture, 4.5 gigawatts in 2025, we think it will go down to 3.5 gigawatts in 2026. The lease market will slightly expand 2 to 2.5. The cash and loan will go from 2.5 to 1. That's the math, and that's my opinion. It's not a fact.

[Operator Instructions] And the next question will come from Brian Lee with Goldman Sachs.

I guess, Badri, just following up on your strategic initiatives in a declining TAM environment. I appreciate you guys have an action plan already sort of in place. I mean when you talk about working with the long tail on TPO and financing and then the lead gen, can you maybe give us a sense how quickly you can implement those strategies? And then how much incremental cost you would have to incur? I would imagine maybe the OpEx has some incremental cost or some investment required to be able to start driving those two initiatives. And then I guess my follow-up would just be in this environment where you just outlined a potential 20% reduction in volume, you're looking at ways to maintain as much of that volume as possible. Would pricing actions to mitigate some of that TAM loss and capture more volume be part of the strategy? Maybe walk us through what you're thinking around pricing in that type of environment as well.

Yes. In terms of operating expenses, we don't anticipate any major change because what we are really doing is will be ultimately lucrative for the TPOs. It is -- we are essentially making sure that, that demand is not lost. The long tail has got access. So the TPOs should have more business. So the operating costs for us in order to facilitate this is not meaningfully higher. In terms of pricing actions, what I've told you is the following. Our -- the way we are going on batteries, for example, we are going to have -- we already reduced the installation cost, for example, with the fourth generation product. Now we are taking that and cutting it down by another big factor, basically increasing the energy density. We are going to prismatic cells. And so once we do that, what happens is our margins fundamentally improve. Similarly, on IQ9, when we go to the bidirectional GaN switch, what happens is once we start running GaN at an increased frequency, then what happens is we are able to optimize the rest of the bill of material. Ultimately, we are able to produce 10% power, maybe even 20% power at a similar cost structure as before. So innovation is the answer. Innovation is the answer. So we are innovating on batteries. We are innovating on IQ9. As I said, we are also going to get -- for the first time, we are going to introduce a 3-phase 480-volt product. So that's -- so coming back to pricing. So once we have fundamentally altered the cost structure, then the pricing action is simple. It is -- it allows us room to do the correct pricing for the consumer, depending on the value that we add.

And your next question today will come from Julien Dumoulin-Smith with Jefferies.

This is [ Dishant ] here for Julien. Maybe the first one, could you discuss how the dynamics will work for the 4Q safe harboring? As we understand it, the system needs to be installed by year-end to get the credit, right? So will we see loan originations in 4Q given that uncertainty on timing of install?

No. I think safe harbor, basically, the rules are that the TPO partners, and I'm speaking for them, the TPO partners have approximately a year until June 30th in order to finalize their safe harbor inventory and strategy. So what I guess you're talking about is the 25B.

25B, yes. Correct.

You're talking about 25B is where expenditure means it is both the customer has to pay -- the consumer has to pay for it as well as the system should be installed by the year-end.

Yes. So in that instance, do you think we will see -- because I know that you haven't seen installed yet in -- or you haven't seen that demand pull in yet in 3Q. So unless you expect to see that in 4Q, do you think that will actually happen because there might be some uncertainty on loan originations, right?

Well, our opinion is it will happen. Our installers are experts. They know what to do. And I think right now, they need to make sure they expand their crews so that they start to cater to the demand rush. But they have a lot of experience. They can get solar installations done quickly. So I do expect it to happen.

And your next question today will come from Colin Rusch with Oppenheimer.

Can you talk about your ability to upsell existing homeowners on either chargers or batteries and kind of what those unit economics look like as a combined sale and your access to those customers through your partners? Or can you go direct to those folks?

Colin, this is Raghu. Yes, as Badri mentioned, that is a very important segment of the market that we are looking at. Of course, the customer acquisition cost is significantly lower because it's already an existing customer. But I think from a product point of view, there is a fundamental advantage. We are AC-coupled. What that means is that we don't have to touch the existing solar system. You can come in and add a battery, you can come in and add an EV charger. And if you need to, which is very likely going to be the case, you may need to expand your solar system as well, which is also very simple with an AC-coupled solution. So intrinsically, it has significant advantages both for customer acquisition as well as from a product point of view. There's no rip and replace. You don't have to pull out any inverters, et cetera. You just leave them alone and you can come in and add the solution. And just by -- simply by adding the battery, if there's an existing -- if there's a VPP program that you want to participate in, the battery can get enrolled in that VPP program as well. So we see a lot of advantages that in that market for us is very large. I mean we have an installed base worldwide of about 4.9 million homes. And the majority of them are here in the U.S. So it is a very important market segment that we are going after.

And then my follow-up is on the non-EU, non-U.S. markets. Obviously, you've had some success in Latin America, Australia and other places. Can you talk a little bit about what growth looks like outside of those two main markets and how we should think about that as a contributor to the balance of this year and into next year?

Yes. In terms of Australia, for example, Australia was flat in growth -- I mean, flat to down in growth in the last year or so and even for the first 6 months of this year. But what happened is the new government. The new government came and introduced a battery rebate. And because it is a very lucrative battery rebate, the battery attach rate, everybody believes the battery attach rate is going to go up from like 30% to like 80%, 90%. So that's a huge opportunity for us. We are already seeing that in installations happening. And we are introducing a few products for them. For example, Australia needs 3-phase backup, and we are going to be introducing our flex phase battery imminently any day now in Australia. In addition, we are also introducing our high-powered microinverters to capitalize on commercial opportunities. And in fact, Australia is getting an entire facelift of products. So all of them will be available in Australia in the next couple of months. So we expect Australia to resume growth starting from Q3. India. India, I haven't talked about it too much. But in India, what we are doing is now we have an IQ8, full IQ8 P system, which is very cost effective for the high panel voltages that are available. In addition, we have the battery. And India, you lose power, for example, 5x a day in India. So resilience is top of mind for that. Having said that, these batteries are -- what we cater to is the premium client. For example, premium villas and those will have both IQ microinverters plus IQ battery. It's a beautiful system. It's compatible to 3-phase and give you complete energy independence. So we are seeing India growth steady. It's not a hockey stick, but every quarter, it's higher than the previous quarter. The next one I'll talk about is Japan. We introduced a product for Japan very recently in the middle of Q2, just a few months ago. In fact, last week, there was a round table. I met with all the Japan installers. As you know, Japan takes a little bit of time to ramp up. But once it is there, it's a big opportunity for us. So Japan is something we are very excited about. We expect to incrementally go there. We are already going to introduce new products there. The Balcony Solar product with the small systems gateway is going to be ideal for Japan. We will be introducing batteries into Japan next year. So we got a nice road map for Japan. Right now, they have microinverters and we are figuring out how to ramp those along with our installers. That's what we're doing.

And your next question today will come from Maheep Mandloi with Mizuho.

First one, just on the tariff impact. Could you quantify the tariff impact on the Q3 earnings guidance? And kind of follow-up on that on the Section 232 polysilicon investigation, it looks like there could be tariffs on silicon carbide, which I think is like 5% of the cost. Any thoughts on what tariffs could be expected on silicon carbide? And is IQ9 the way to kind of offset that or something else you have on that as well?

Just to answer that question first, we don't use silicon carbide. So that is not -- that does not affect us. Now -- the other question you asked is the tariff. So let me give you a full download on that. We had the 145% China tariffs in the last earnings call. So at that time, we projected an impact of 6% to 8% in the gross margin. Subsequently, in May, the 145% dropped to 30%. However, now effective August 1, there are reciprocal tariffs with a lot of countries. For example, Malaysia is 25%. Vietnam is 20% now -- I mean, basically, there is no safe haven to call it. So wherever we are, we got some kind of a tariff. And right now, I mean, when we said 3% to 5%, let me take the midpoint. 4% is our gross margin impact due to tariff. If I take that as a given, that 4%, if you break down, 1% is from microinverters. 3% is from batteries. So that 1% microinverters tells you that we have been working on this problem for a long time on microinverters, a couple of years ago. So we already diversified our supply chain in microinverters, and we can adjust yet there is still going to be a small component of the tariffs, but that impact is only 1%. On the battery side, we obviously have the impact on the cells. And so the only way we can avoid that is by making the cells, for example, in the U.S., but the labor cost in the U.S. being high, the cost is a wash between the two. So how do we get back? How do we get that 4%? How do we make that a very small number that doesn't matter. So the way we will do that is with our fifth generation battery, which is fundamentally going to alter our gross margin structure, essentially, our gross margins will be a step change better than the third or fourth generation battery. So the way you -- the way we should think about it as the tariffs right now is 4%. It might get a little smaller as you hit Q1 and Q2, 4 might become 3-ish and then would go away once we launch the fifth generation battery.

And your next question today will come from Eric Stine with Craig-Hallum.

Just curious, you mentioned that some of the TPO is waiting on guidance and set to figure out their safe harbor plans. I mean any thoughts on when the treasury might issue that guidance? I mean I've seen a number of potential dates, and it seems that no one really knows, but I would love your opinion of when that might be.

We are in the same boat as you. We do not know when the treasury is going to release their guidance. And that -- our TPO partners are a lot more experts at this. They are looking at it every day. And their plans, unfortunately, are changing, too. So right now, it is wait and see. to look for the nuances of the guidance from treasury and then execute on the safe harbor.

Your next question today will come from Dylan Nassano with Wolfe Research.

I just wanted to follow up and see if there's any additional kind of demographic information you could share about the TPO players that you're currently in discussions with. Are these like large existing players? Where do they sit kind of geographically? And then as a follow-up, have you identified any potential obstacles when it comes to helping the long tail shift to the leases? So just thinking about are there any customers saying they'd rather try to sell cash-only systems without the credits rather than maybe add the complexity of offering leases?

Yes. We work with every TPO, and we are having conversations with almost 80% of them right now on safe harbor. Your second question? Can you repeat your second question?

Yes. Sorry, yes. Just in terms of what your customers are saying, are there any that are kind of indicating they'd rather just try to sell cash systems without credits...

Of course, of course, there are a lot of them who think that, for example, in California, if -- especially -- yes, let me take actually San Diego, right? San Diego has got a 6-year payback today with solar plus batteries, and that might go to 8-year payback. So some of our installers, I mean, we are having -- just to tell you this, we are having installer roundtables every week. and every week is from a different region to exactly ask the same question. How are you managing this transition? Some of them are absolutely confident of selling cash and loans still. Some of them are pivoting towards lease and PPA. So the answer is mixed.

And your next question today will come from Mark Strouse with JPMorgan.

At this point, I'll just stick with one. A clarifying question on an earlier topic on the -- helping your tail customers get financing, I understand you're going to give us more details sometime soon, but is using your own balance sheet part of that potential scenarios that you're looking at? Or is it really just kind of data and partnerships and that kind of thing? I'm just curious about if you're looking to lever your balance sheet at all.

Yes. We are not looking at, at doing anything with the balance sheet. But if that changes, we'll let you know. However, what's important is we have a history of all of these installers. We know exactly how much volume they did. We know exactly the customer service, NPS, Net Promoter Score. We know everything about the installers. We know what drives them. We work very closely with them. So when it comes to vetting, vetting things, we are in an ideal position to do so. And of course, we -- since we design the products, we also can do the service, for example, the service and maintenance is easy. Most of the problems can be solved remotely, 90% of the problem. So we have our data analytics team, which can solve those problems. Let me leave it at that.

And your next question today will come from David Arcaro with Morgan Stanley.

I was just wondering if you might be able to elaborate as you look into 2026, you talked about a bunch of product innovation efforts to lower cost. I was wondering if there are any other kind of internal cost reduction efforts, potentially efforts to lower overhead, OpEx, for example, anything you're exploring there?

Absolutely. I mean, look, we -- the market has had a demand problem over the last couple of years. And over the last couple of years, where our demand has dropped, we have continuously adjusted our expenses without compromising on R&D or customer service. And we will always be doing that. For us, it is a process, not an event. And we think about expenses as -- don't think about expenses as only labor. We have to think about expenses as labor plus nonlabor. For example, we asked the question where do we need this software tool? Can we eliminate the software tool and do something else, which is more intelligent. We ask those questions all the time. So in light of any reduced demand, which we are trying to mitigate, but let us say we are not able to mitigate the demand drop, we will continuously adjust our expenses.

[Operator Instructions] And your next question today will come from [ Nicol Ghazi ] with Bank of America. And our next question today will come from Chris Dendrinos with RBC Capital Markets.

I wanted to go back to some of the comments on the strategy, and there's been a big focus here on marketing to the long tail and you've mentioned getting lease financing to them, improving lead generation. But I guess there's an argument that with the adoption of TPO, maybe there is additional consolidation in the industry. So maybe focusing on the other end, the maybe the fat part of the tail here. Is there any changes or anything you're doing in strategy to maybe expand your share with some of the bigger TPO providers? And how are you, I guess, maybe looking at those relationships? And is there anything you can do to improve those relationships?

Absolutely. I mean there is a myth that we don't work with the TPOs. That's totally wrong. We work with every TPO. We look for opportunities to make them successful. And what does that mean? It is basically total installation cost. It's total installation time. O&M, meaning taking care of servicing. So we are -- we work with every one of those TPOs on these issues. For example, the fourth-generation battery. And with the meter collar, our cost for backup -- and our cost for backup is similar, meaning slightly -- only slightly higher than the cost for no backup or grid tied option. So what I'm trying to tell you is that the products that we do, we collaborate closely with the TPOs. We collaborate closely with them on service opportunities. And since we work with every one of them, we have deep partnerships there and we'll be working on it even more aggressively in order to gain more market share.

[Operator Instructions] No further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.