Good afternoon and welcome to the Enphase Energy Fourth Quarter 2022 Financial Results Conference Call. Please note today’s event is being recorded. I would now like to turn the conference over to Karen Sagot. Please go ahead.

Good afternoon and thank you for joining us on today’s conference call to discuss Enphase Energy’s fourth quarter 2022 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 fourth quarter ended December 31, 2022. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, the capabilities of our technology and products, and the benefits to homeowners and installers of 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, 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 fourth quarter 2022 financial results. We had a good quarter. We reported record quarterly revenue of $724.7 million, shipped approximately 4.9 million microinverters and 122 megawatt hours of batteries and generated free cash flow of $237.3 million. Approximately 55% of our Q4 microinverter shipments were IQ8. We exited the fourth quarter at 44% gross margin, 12% operating expenses 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 Q4 net promoter score worldwide was 71% compared to 70% in Q3. Our North American net promoter score was 74% compared to 71% in Q3. Our average call rate time was quite down to 1.6 minutes compared to 4.8 minutes in Q3. We started our teams well, focused on root cause fixes of customer issues and improved our business processes. Let’s talk about microinverter manufacturing. Our overall supply environment remains quite stable in general. There are issues that crop up from time to time. Our teams are staying on top of them. Our quarterly capacity was 5 million microinverters exiting Q4. We are on track to begin manufacturing at Flex Romania starting this quarter, enabling us to service Europe better. This will enable a total quarterly capacity of 6 million microinverters exiting Q1. We are going to increase this capacity even more with U.S. manufacturing. Let’s cover that now. As we discussed last quarter, we are pleased that the IRA will help bring back high-tech manufacturing to the U.S. and stimulate the economy through the creation of jobs. We are excited to service U.S. customers better with local manufacturing. We plan to begin U.S. manufacturing of our microinverters in the second quarter of 2023 with a new contract manufacturing partner and in the second half of 2023 with our two existing contract manufacturing partners. We plan to open 6 manufacturing lines by the end of this year, adding a quarterly capacity of 4.5 million microinverters, bringing our total quarterly capacity to more than 10 million microinverters as we exit 2023. We continue to await the details of IRA implementation from the U.S. Department of Treasury. Let’s cover the regions. Our U.S. and international revenue mix for Q4 was 71% and 29% respectively. In the U.S., our revenue increased 15% sequentially and 59% year-on-year. We had record quarterly revenue, record quarterly sell-through for our microinverters and record quarterly installer count in the fourth quarter. Our microinverter channel inventory was quite healthy at the end of the fourth quarter, while our storage channel inventory was a little elevated. I will go into more details about our batteries later in the call. In Europe, our revenue increased 21% sequentially and more than 130% year-on-year, led by strong demand in the Netherlands, France, Germany, Belgium, Spain, Portugal, and the UK. We had record sell-through and record installer count in Q4 as we continue to grow our business. We started shipping our IQ8 microinverters into the Netherlands and France in Q4. We are working hard to introduce IQ8 into other European countries shortly. Also, we are currently shipping IQ batteries into Germany and Belgium. We expect to start shipping IQ batteries into Austria, France, Netherlands, and Spain in the first half of this year. Our GreenCom Networks acquisition, which closed in the fourth quarter helps to integrate Enphase microinverters and batteries with third-party EV chargers and heat pumps, enabling homeowners to control their devices from one app, which is the Enphase App. We are integrating the GreenCom offering with the Enphase ecosystem and expect to make it available to our European installers shortly. Now I will provide some color on Latin America, Australia, and Brazil. In Latin America, our revenue doubled year-on-year. We had steady growth in our solar plus storage business in Puerto Rico during 2020. In Australia, the solar market continued to recover in Q4 after a weak first half of the year. We expect to introduce IQ batteries in Australia, along with IQ8 microinverters in the second quarter of 2023. As for Brazil, we experienced significant quarter-over-quarter revenue growth as we saw increased deployment of our IQ7 family of microinverters. The residential solar market in Brazil continues to grow rapidly. We have a very strong team in place and we are excited about our future growth in the country. The emerging residential markets in Brazil, Mexico, Spain, and India are all moving to high-wattage panels. In order to service them better, we plan to introduce a high-power 480 watt AC microinverter in the second quarter. Let’s discuss our overall company outlook for Q1. We expect our Q1 revenue for the company to be within a range of $700 million to $740 million. We are fully booked for Q1 right now. Let me provide some additional information on the key regions, first about Europe, then about the U.S. Our Europe business is doing very strong as I noted. Note that we also doubled our revenue from 2020 to 2021 and more than doubled again from '21 to '22. We have a strong team in place and are quite bullish about 2023. We expect to introduce IQ batteries and IQ8 microinverters into many more countries in Europe as we progress through the year. Our value proposition is our differentiated home energy management systems, combined with high quality and great customer experience. As for Q1, we expect healthy growth compared to Q4, consistent with the overall growth in the European market. Let’s now cover the U.S. We expect our U.S. business to be slightly down in Q1 compared to Q4, primarily driven by seasonality and the macroeconomic environment. We are seeing that our distributor and installer partners are a little more cautious in booking orders. We normally have 6-month order visibility and that has been somewhat reduced as our partners watch their spending closely. On the sell-through of our microinverters, while December was quite strong for us, we saw a more pronounced seasonality in January than normal. There are a couple of interesting observations I thought I would share with you. Even with the pronounced seasonality and sell-through in January, we would like to point out that our activations are holding up. The second point to also note is that in conversations with our installers and distributor partners, they have started to see originations pick up in January when compared to December. Although the data we have is limited, these two points make us cautiously optimistic about Q2. We have also seen some analyst reports about a possible shift from loans to PPA due to the high prevailing interest rates. We work with thousands of installers every quarter. Our installer base is very diverse, both small and large installers that offer cash, loans, and PPA options to homeowners. Any shift from one type of financing to another only has a minor impact on our business, almost negligible. No matter what the conditions are, our approach at Enphase does not change. We manage for the long-term. The basic thesis on ongoing solar and storage remains intact, aided by a few factors: first, the utility rates, which are rising in many states across the U.S.; second, the 30% ITC tax credit, which has been extended for 10 years with the IRA; and third, the desire for energy independence and tackling climate change. At Enphase, we will continue to make best-in-class home energy systems with a laser focus on product innovation, quality, and customer experience. Let’s switch to talking about battery. We shipped 122 megawatt hours of IQ batteries in Q4. We have now certified approximately 2,300 installers worldwide since the introduction of IQ batteries into North America, Germany, and Belgium. Our installers in North America experienced a median commissioning time of 91 minutes exiting Q4 compared to 118 in Q3. We made significant software changes to improve communication, grid transitions, and commissioning time, and I am quite happy with the performance of the team. As a result, we saw slightly higher sell-through of our batteries in Q4 versus Q3. We have also received a number of feedback from the installers about the fact of improved performance in terms of commissioning. We plan to ship 100 to 120 megawatt hours of IQ batteries in Q1. We also expect to start ramping our third-generation IQ battery in North America and Australia in the second quarter. This battery has 5-kilowatt hour modularity, double the power compared to our existing battery, and a 30-minute commissioning time in addition to being easier to install and service. We expect the higher charge-discharge rate as well as the 5-kilowatt hour modularity to be uniquely beneficial to homeowners under the upcoming NEM 3.0 tariff in California. With the significant changes we are making to our IQ batteries, we are confident that storage installations will become as efficient as microinverters. As a result, the profitability for installers should get better. We expect our battery business to perform well in the second half of the year, both due to our third-generation battery as well as NEM 3.0 adoption in California. Let’s now talk about our product for the small commercial solar market in the U.S. We are on track to pilot the IQ8P product and release it to production in the second half of the year. As our panel power continues to increase rapidly, we are increasing the power of the microinverter by 50% from 320 watts to 480 watts AC while sticking to the single panel architecture. This product as well as the 480-watt residential microinverter for emerging markets share the same design. Let’s discuss EV chargers. We shipped approximately 7,600 EV chargers in Q4 as compared to 6,370 chargers in Q3. We began manufacturing Enphase branded EV chargers at our contract manufacturing facility in Mexico this quarter, helping us to increase capacity and reduce costs. We expect to introduce IQ smart EV chargers to customers in the U.S. in the second quarter. These chargers will provide connectivity and control, enabling use cases like green charging and will allow homeowners visibility into the operation of their Enphase solar plus storage plus EV charger system through the app. We recently demonstrated our bidirectional EV charger technology combining vehicle-to-home, vehicle-to-grid, and green charging functionality. This new bidirectional EV charger, along with Enphase’s solar and battery storage can all be controlled from the Enphase app, empowering homeowners to make use, save and sell their own power. We are working with standards organizations, EV manufacturers, and regulators to bring this technology to market in 2024. Let me give you a quick update on our Enphase Installer Network, or EIN. We have now onboarded more than 1,300 installers to our EIN worldwide through a highly selective process focused on installed quality and exceptional experience to homeowners across the globe. Let’s discuss the installer platform. We made several updates to the Solargraf design and proposal software during the fourth quarter, incorporating battery design and proposal, document management, consumption modeling, and several other improvements as requested by our installer partners. In addition, we made significant strides in automating the creation of permit plan sets with Solargraf software. We now have over 1,000 installers using Solargraf software. Next, I’d like to comment on NEM 3.0 in California. The CPUC has finalized its decision on NEM 3.0 in Q4. While we wish the export rates had been stepped down a little more gradually, the policy is generally in the right direction for incentivizing homeowners to adopt storage. The next step is for installers to educate homeowners to increase adoption of NEM 3.0 and companies like Enphase need to help in making this transition possible. That’s where Solargraf’s design and proposal engine comes in. Installers will be able to use Solargraf to provide homeowners with a proposal that optimizes their bills under NEM 3.0 tariff to minimize payback and maximize ROI. The advantage with Solargraf is that the underlying algorithm used by our software will be the same as what is used in the actual operation of the Enphase home energy system. As the system complexity increases with solar, batteries, EV chargers, and dynamic rate structures such as NEM 3.0, the tight coupling of Solargraf and actual product operation will maximize value to homeowners. In summary, we are quite pleased with our performance. As a reminder, our strategy is to build best-in-class home energy systems and deliver them to homeowners through our installer and distributor partners, enabled by the installer platform. We have many new products that are coming out in 2023 that will increase our served available market and positively contribute to the top line. We look forward to introducing IQ8 microinverters worldwide, introducing IQ batteries into more countries in Europe, launching our third-generation battery in North America and Australia, as well as introducing our highest power 480-watt IQ8P microinverter for both the U.S. small commercial and emerging residential markets. We are also excited about the upcoming Solargraf functionality, especially the NEM 3.0 functionality and finally, the work we are doing to bring both smart EV chargers as well as bidirectional EV charging capabilities to the market. With that, I will now turn the call to Mandy for a review of our financials. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2022 financial results as well as our business outlook for the first 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 Q4 was $724.7 million, representing an increase of 14% sequentially and a quarterly record. We shipped approximately 1,952.4 megawatts DC of microinverters and 122.1 megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q4 was 43.8% compared to 42.9% in Q3. The increase was driven by a favorable IQ8 product mix. GAAP gross margin was 42.9% for Q4. Non-GAAP operating expenses were $87.7 million for Q4 compared to $78.6 million for Q3. The increase was driven by international growth, customer service, and R&D. GAAP operating expenses were $153.7 million for Q4 compared to $132.5 million for Q3. GAAP operating expenses for Q4 included $59.4 million of stock-based compensation expenses and $4.9 million of acquisition-related expenses, and amortization for acquired intangible assets and $1.8 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q4 was $229.4 million compared to $194 million for Q3. On a GAAP basis, income from operations was $157 million for Q4 compared to $135.4 million for Q3. On a non-GAAP basis, net income for Q4 was $212.4 million compared to $175.5 million for Q3. This resulted in non-GAAP diluted earnings per share of $1.51 for Q4 compared to $1.25 for Q3. GAAP net income for Q4 was $153.8 million compared to GAAP net income of $114.8 million for Q3. This resulted in GAAP diluted earnings per share of $1.06 for Q4 compared to $0.80 for Q3. We exited Q4 with a total cash, cash equivalents, and marketable securities balance of $1.61 billion compared to $1.42 billion at the end of Q3. In Q4, we generated $253.7 million in cash flow from operations and $237.3 million in free cash flow. Capital expenditure was $16.4 million for Q4 compared to $8.9 million for Q3. The increase was primarily due to investment in additional contract manufacturing sites and R&D equipment. Capital expenditure for the full year of 2022 was $46.4 million. Now, let’s discuss our outlook for the first quarter of 2023. We expect our revenue for the first quarter of 2023 to be within the range of $700 million to $740 million, which includes shipments of 100 to 120 megawatt hours of IQ batteries. We expect GAAP gross margin to be within the range of 40% to 43% and non-GAAP gross margin to be within the range of 41% to 44%, which excludes stock-based compensation expenses and acquisition-related amortization. We assume a conservative euro FX rate in our Q1 guidance, and we don’t expect significant impact to our financials from fluctuations in FX rates. We set up our GAAP operating expenses to be within the range of $177 million to $181 million, including approximately $77 million estimated for stock-based compensation expenses, restructuring charges for site consolidation, acquisition-related expenses and amortization. We expect our non-GAAP operating expenses to be within a range of $100 million to $104 million. Moving to tax. Since we have utilized most of our net operating loss and research tax credit carry-forwards in 2022, we announced a significant U.S. cash taxpayer. We expect GAAP and non-GAAP annualized effective tax rate for 2023 to be at 22% plus or minus 2% before any IRA impact. In closing, we are pleased with our 2022 financial performance. We grew our revenue by 59% year-on-year, while spending on non-GAAP gross margin to 42.6% in 2022. We increased non-GAAP diluted earnings per share by 92% to $4.62 per share in 2022 and generated record free cash flow of $698.4 million, more than double from 2021. With that, I will now open the line for questions.

Our first question will come from Colin Rusch of Oppenheimer. Please go ahead.

Thanks so much, guys. I appreciate all the detail here. Can you talk about what your pricing strategy is evolving here as you move into different configurations for the devices, and you continue to try to monetize the value here? Are there areas where you can increase price a little bit? Are you trying to hold it flat? Just talk to us about how that’s evolving here.

Yes. The pricing in general right now is very stable. We do value-based pricing. We look at pricing versus the next best alternative, and we usually look at what value do we add in compared to that alternative. The things we focus on for microinverters are quality compared to the competition, customer experience compared to the competition, and ease of use compared to the competition. Is the product a lot easier to install? And that matters to the installers because once they install, they do not want to come back to that site again, so they need excellent support. If we look at all of these puts and takes, and we look at it versus the next best alternative, we price our products. We are extremely disciplined. We also have a segmentation strategy, which means that we look at different flavors of power and we price it according to the value those provide. In batteries, our strategy has been similar; with the first two products in our first and second-generation batteries, we fell a little bit short in terms of the differentiating features. Now with the third generation, I think we are going to be quite unique. We have modularity of 5 kilowatt hours, we will have double the power compared to the prior generation, which means a 5-kilowatt hour battery will have 3.84 kilowatts of continuous power and 7.68 kilowatts of peak power, which is amazing power. In addition, we will have a 30-minute commissioning time, the one aspect we didn’t get right on the first two generations. With batteries, we are back into the value space again, and we will price those products accordingly. So the short answer to your question is pricing is quite stable now.

Okay. Excellent. And then as you look at making a bigger push into the commercial rooftop market, can you talk a little bit about the preparation in the channel in terms of education and training on the product, what you’re seeing already in terms of sell-through with some of the legacy products as you prepare to really get into full swing by the middle or latter part of the year?

Right. This product, we had originally introduced 3 years ago, we started with the IQ8D product. At that time, it was a good idea. It was a 640-watt AC. That microinverter covered two panels, and we got excited about that. We’ve worked on it. It took us some time because not only did we have to get the microinverter right, but we also had to ensure the entire chain was right, including microinverter performance, gateway performance, and most importantly, software performance. We needed a proper design and proposal structure. It took us quite a bit of time, and we realized a few months ago that while we could release that product, it was going to fall short in terms of power because the panel power in the commercial business has moved to greater than 500 watts. So two panels will be 1,000 watts, and the ratio is going to be unacceptable. The right ratio is between 1.2 and 1.25. We regrouped and told the installers we would quickly change back to the single panel, single micro architecture. We are increasing the power on that basis to a product that can handle 480 watts AC, which can take care of panel powers of up to 650 watts. Accompanying that product, we need the entire platform. I’m talking about lead generation qualification because this is a design win business. It’s not like the residential business; there is some cycle time. We have to capture opportunities correctly. You must spend a lot of time analyzing ROI, and the tools need to be excellent for that. We are almost ready to introduce the product and plan to start ramping in the third quarter. It’s going to take several quarters to ramp up because this is a design win business, so we have to work with customers for an extended period of time and convince them of the value proposition. Our basic purpose is the same: product innovation, great quality, and excellent customer support.

Great. Thanks so much, guys.

The next question comes from Philip Shen of ROTH Capital Partners. Please go ahead.

Hi, everyone. Thanks for taking my questions. Congrats on the strong Q4 and Q1. Badri, one thing that I noted in your prepared remarks was that you talked about how some of your customers are experiencing more caution or are a little bit more cautious in booking orders. Normally, you have a 6-month order visibility, and that has been somewhat reduced as your partners watch their spending closely. Can you expand on that a little bit and help us understand when do you expect to get back to your 6-month visibility? You talked about originations improving in January. But based on some of the conversations we’re having in the industry, it seems like there is a fair amount of tumult and challenges out there with trade credit being pulled back and some bankruptcies and just some challenges. So how do you expect to navigate that overall, and perhaps share gain is one source of strength? But just wanted to understand how you expect the year to develop beyond Q1. Thanks.

Yes. I mean, look, seasonality has always existed in the solar industry from Q4 to Q1. Historically, that seasonality is a 15% number. The sell-through in Q1 is usually 15% down compared to Q4. Right now, our Q4 was very strong, including December. In January, we started to experience a little more than 15%. That’s why I said more pronounced seasonality. Of course, we think it is due to the macroeconomic environment. What we noticed is the activations remained mostly stable; they didn’t see much change, so the customer demand remained strong. That said, installers are quite cautious, so they are only purchasing what they need from their distributors, which is a stark difference from 2022 when they were focused on supply and maximizing what they had in their warehouse. Now they are worried about their spending, OpEx, and their cash flow, and they will only buy what they require. I think we are seeing some customers who used to book 6 to 9 months ahead now will be a little more conservative. Regarding your question on originations, we work with thousands of installers and have a very strong sample set. We frequently talk to distributors, some of whom service hundreds of smaller long-tail installers, and we don't see originations ourselves. What I've reported to you is anecdotal information. That said, some of our installers have observed that originations, particularly in California, are returning to strength in January. Hence, I cautiously view Q2 compared to Q1.

Okay. Great. Thanks, Badri. Shifting gears to the IRA historical, I think on the last call, you were talking about the ability to get the majority of that credit. I was wondering if you could comment on the latest you see in terms of the microinverter credits? Do you expect to get the vast majority of that? And then in terms of the timing of the Section 45X or manufacturing PTC guidelines, some of our checks suggest this could be released much later than originally expected, maybe a year later. I'm curious if that impacts your plans at all? And if you can talk about CapEx required for the facilities and factories, that would be great. Thanks.

Yes. So I'll answer the question in reverse. CapEx required for an auto line is roughly 750,000 units, and the auto line cost, including tax, is anywhere from $8 million to $10 million per line. So, if we have to do six lines, that’s anywhere close to $50 million to $60 million. On your question about expectations, yes, we do expect to get the vast majority. As for the announcement of the Treasury indication, it does not change our plans. We will start manufacturing in the second quarter and ramp up a couple of lines with a new contract manufacturer in the second quarter, and start the remaining lines. By the end of 2023, we will have six manufacturing lines with three contract manufacturing partners.

Great. Thanks very much for the color, Badri. I will pass it on.

The next question comes from Brian Lee of Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon. Thanks for taking the questions. Kudos on the solid execution. First question I had was just around NEM 3.0. I think there are different implications of that policy uncertainty near-term and medium-term from what we’re hearing. I wanted to get your thoughts on the near-term. Some believe there could be a pull forward on demand in California. I would be curious about what you’re seeing with respect to that? And then in the medium term, we’re hearing that the industry is still trying to figure out how to navigate this. I’m curious how you specifically see the second half of 2023 in the U.S. Considering your base case in California could be down significantly? How do you see yourself navigating that? Are you driving more product to other states or focusing more in Europe? I would love your thoughts on planning into that period of higher policy uncertainty in the back half. I also have a follow-up.

Yes. On NEM 3.0, we aren’t really seeing any pull forward right now. But in talks with a few installers in California, both big and small, like what I said, the originations are up strongly. They are all quite optimistic. And that’s why I talked about an optimistic Q2. Despite this, we haven’t seen any pull forward demand yet. Regarding NEM 3.0 in general, it is going to be incredibly positive for us. NEM 3.0 changes the export rates drastically. Previously, the import and export rates were the same, but now with NEM 3.0, the timing of export rates matters, which provides a significant difference. If homeowners have a pure solar system, their payback time increases to 7 or 7.5 years, but adding batteries brings it back to a 5 to 6-year window, making batteries financially attractive. This puts installers in the position to sell more solar plus storage. While we didn’t like the abrupt changes, we think it’s an acceptable long-term decision. We have the right batteries for it, offering modularity, which is expected to become popular.

I will add that the energy management engine will become increasingly critical. It will need to manage the flow of energy among all systems — solar, batteries, EV chargers — and through that, the complexities of the energy system are mitigated through our smart energy management software.

Yeah, I appreciate the color. Maybe two quick follow-ups. So, the long-term thesis I get, but on a shorter to medium-term basis, as you mentioned, the change is immediate and the industry is still trying to figure it out. Are you concerned there will be pretty significant friction for installers until they thoroughly understand these changes and the macro uncertainty settles out?

We think you should view NEM 3.0 positively. We are expecting growth linked to it. The third-generation battery for us means we are ready for sales uptake. Regarding installers, we recently spoke to many in California and they are optimistic about increasing their battery sales, as for the first time, with batteries, the return on investment shortens significantly. Many installers expressed concern about the initial cost but with the 30% ITC backing, they believe it can facilitate sales.

The next question comes from Mark Strouse of JPMorgan. Please go ahead.

Great. Thanks very much for taking our questions. So, a lot of focus on the U.S. markets, but I just wanted to go back to your comments about Europe. That’s obviously been very strong in the last couple of years, kind of doubling each year. I know you don’t guide annually, but how should we think about that market in 2023? Do you think kind of an approximate doubling is the base expectation?

Well, as you said, we do not guide annually, but the European market is indeed strong. Our internal reports indicate that the market's available solar capacity in 2023 is about 13 gigawatts. The growth drivers mainly come from the Netherlands, Germany, Spain, France, Italy, and even countries like Austria and Poland are starting to become significant. Attachment rates for batteries are also growing; in Germany, it is 80%, furthering the growth of solar plus storage. The geopolitical situation spurred growth last year and continues to influence the market positively. Our differentiated product lineup, strong customer service and ability to introduce our offerings in more countries will further help us. In summary, the European market is set to grow, and we have robust positioning.

The next question comes from Steve Fleishman of Wolfe Research. Please go ahead.

Yes. Thank you. Just you are growing your production capacity, you are doubling it from $5 million a quarter to $10 million. You said, I think, by year-end of 2023, just could you give us a sense of your conviction that the demand will be there to meet that doubling of production.

Yes. Look, if you look at our past growth rates, we grew 59% from 2021 to 2022. By the end of 2022, we just reported 5 million units per quarter. Our long-term thesis on solar is that we are extremely bullish. With our strong presence in the U.S. and expansion into Europe and emerging markets, we think it is the right call to invest in the right manufacturing capacity. Even if we don’t use all 10 million units per quarter, we will find a way to utilize them, eventually. The ROI is worth the investment, especially considering the net benefit we expect from the IRA.

Okay. No, that’s – so ultimately, expect obviously significant volume growth from that. And then on margins, you mentioned, I mean you have had the gross margin held up well, but then the $20 to $30 that you just mentioned, is that a gross margin benefit net of cost?

That’s the net benefit. The IRA gives you an incentive of $0.11 per AC watt. Every microinverter we produce has a cost that is associated with this benefit. After considering additional production costs and what we pass on to our manufacturing partners, the final net benefit for us is in the range of $20 to $30 per unit, which is all incremental to what we have presently.

The next question comes from Jeff Osborne of Cowen & Co. Please go ahead.

Hi. Good afternoon, Badri. I have two quick ones. You touched a lot on Europe, but I was wondering if you can specifically drill down on the visibility you have there in terms of Q1 and Q2.

Yes. Europe is actually the opposite. We do have good visibility. We have strong orders and partners that rely on us for supply. Many come to our headquarters quite routinely, and we also visit them often. So, I think we do have decent visibility.

Great to hear. And then either for yourself or Mandy, I didn’t know if there is a way of doing sort of a gross margin walk between Q3 and Q4. Certainly, the IQ8 cycle is helping. But wasn’t sure if that’s the complete story, if there is a mix issue in terms of ancillary equipment or softer battery sales that led to the strength in the quarter? And then how do we think about the gross margin walk to get to the high end of the range for next quarter?

Yes. It’s mostly about IQ8 mix. The IQ8 mix was 55% in Q4. That means out of the 4.8 million microinverters that we shipped worldwide, 55% were IQ8. That’s principally contributing to the gross margin. We expect that number to be a little greater than 60% in Q1, which explains the model.

I appreciate that. A very quick follow-up. As IQ8 grows in Europe, is that accretive or dilutive to the results that you just reported?

That will be accretive.

The next question comes from Ameet Thakkar of BMO Capital Markets. Please go ahead.

Good afternoon, Badri. Thanks for squeezing me in. Just I guess a follow-up on that last line of questioning. But I think you guys have targeted to get to 90% in terms of IQ8 mix by the end of the second quarter. I think you just said 60% is kind of what’s baked in for the first quarter. Are you guys running a little bit behind on that?

We are running a little behind, I would say. We are planning to introduce IQ8 into several countries in Europe in the near-term. So, in Q2, we should probably be a little lower than 80%. I think in Q3, we should catch up to that 90%.

Great. Thanks for that. And then last year around this time when we had this call, it was anticipated that battery uptake in California would increase, and that might change things. But you guys mentioned last year that California was roughly 20% of total revenues post the initial NEM 3.0 proposal. I was just wondering if you could refresh us on where '22 ended up in terms of California as a percent of total revenues.

Yes, those numbers are right. California revenue was approximately 20% of our total revenue. That’s correct.

And it’s still 20% in '22?

Yes. That’s right.

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

Thank you. Hi. Good afternoon to you. Thanks for the time, appreciate it. Just first off, I wanted to come back to the margin question and talk a little bit more about structural margin expectations. I know we talked about value pricing earlier. Can you elaborate a little bit on where you stand vis-à-vis your margin expectations for the course of this year? You talked about pricing integrity; maybe there is a little bit of mix here between storage and the other products. How do you think about the evolution of margins here through the course of the year, especially as you think about that mix? And also a little bit of a nuance from earlier, if I can follow-up. On utilization, obviously, you are fully utilized today. You think about bringing on that capacity. Is there any margin impact from underutilization as you bring on some of this, given the comments about the backlog dynamic?

Right. Regarding margin expectations, as we convert more of our mix to IQ8, margins will improve, and we cover that in our margin guidance. Margin is not only about pricing; it involves a lot of focus on costs. We continuously focus on every small aspect of our manufacturing process through an initiative we call world-class. We have teams working on various components. Our gross margin guidance reflects the positive shift due to the IQ8 transition combined with our ongoing cost reduction efforts. Additionally, new generations of batteries will contribute to improving costs; every step enhances our model. So, to answer your question, we expect our margins to improve as we ramp up production.

Got it. Alright. Great stuff. And then just if you can comment just quickly on obviously loans versus leases. What’s your ability to deviate and press volumes into the lease markets if you think about it that way versus just helping and enabling your loan customers?

We have business with installers who offer leasing. With some, we have 100% share; with some, we have a healthy mix. Overall, we are very well positioned there, and there is a significant shift between loan and lease. I don’t think we will miss a beat.

Next question comes from Eric Stine of Craig-Hallum. Please go ahead.

Hi, everyone. Thanks for sneaking me in here. So maybe just on the contract manufacturing coming back to the U.S. Obviously, with that, with Romania coming on, it’s about better servicing the customer and lead times. But I am just curious, I mean, is there any margin benefit to that as well? You have been servicing globally from Asia and Mexico to this point; any benefit from being closer to the customer?

Net-net, it is a wash because if you consider raw materials come from various locations. So while we are closer to customers, the total cost is ultimately a function of transporting materials to the factory. If we can move towards local supply chains, then we will realize some benefits, but for now, it balances out. As we scale, the distribution of our manufacturing will evolve alongside our growth.

Any indications that, that is starting to happen? Many suppliers coming into the U.S. given tax credits and that sort of thing?

Yes. As we grow, those shifts will occur. We are already observing this in Mexico with some suppliers establishing factories closer to manufacturing sites.

The next question comes from Maheep Mandloi of Credit Suisse. Please go ahead.

Hey, thanks for squeezing me in. This is David Benjamin on the line for Maheep Mandloi. I was wondering if you could give us a little insight into the mix for Europe in Q1?

We previously stated that the revenue mix between U.S. and international is 71% and 29%. Most of our international revenue comes from Europe. We typically do not discuss forecasts for any quarter, but we expect the mix for Europe to improve compared to previous levels because Europe is showing strong growth.

Okay. And that’s the same for Q1. Do you think that’s going to be in line for Q1 as well?

I believe it will strengthen.

Great. And just a follow-up on batteries, can you talk about what you think about the retrofit opportunity?

This is Raghu. The retrofit space for batteries is going to be better than before because of the IRA—30% standalone ITC means batteries can be decoupled from solar. Homeowners can add batteries later on, and they will still receive the 30% credit. With our AC-coupled technology, it’s straightforward for customers to add batteries even to older systems, making it easier to grow their storage over time while benefiting from the tax credit.

Great. Thanks very much.

The next question comes from Kashy Harrison of Piper Sandler. Please go ahead.

Good afternoon, and thank you for taking the questions. So Badri, in your prepared remarks, you mentioned that some of your distributors are starting to see a bit of recovery in January. I was just wondering if you could share some details on what those distributors are now seeing in terms of year-on-year growth and maybe how that compares to the prior quarters?

Those are not our data, so we cannot share specifics. I did mention that distributors and installers are now a little more cautious in booking orders, and normally we had 6-month visibility on orders which is now reduced as they monitor their spending closely. I mentioned that sell-through was strong in December but less so in January, with some anecdotal reports suggesting that originations picked up in January compared to December. Due to limited and so I stated this leads us to cautiously optimistic about Q2.

Fair enough. Thanks for the clarification there. My follow-up question is, if you’re the only major player that’s able to capture the microinverter credit. Can you speak to your willingness to use the manufacturing credits as a tool to gain market share? In other words, passing on these benefits to customers to drive market share expansion?

Yes. We normally don’t think like that. We are quite disciplined. The product must add value and must do so compared to the next best alternative. This is an incremental benefit and entails significant R&D and reliability work in qualifying factories and ensuring the operations run effectively. We will remain disciplined and not lose focus on maintaining pricing integrity while leveraging potential benefits.

Next question comes from Praneeth Satish of Wells Fargo. Please go ahead.

Thanks. When you look at the U.S. market, I think you mentioned more than the typical 15% seasonal slowdown in January. Can you unpack whether that’s more concentrated in California? Or is it more evenly distributed across the country?

The pronounced changes in January are primarily observable in California, especially, there were weather effects impacting our business. Other states are more evenly distributed and perform relatively consistently.

Okay, got it. And then just switching gears, I wanted to ask on the bidirectional charger and what you’re working on there. I guess how much demand do you think there’ll be for this product down the road? It’s small now, but how do you see the future demand and pricing?

This is Raghu. The bidirectional EV charger is a core part of our energy management system rather than a stand-alone offering. It integrates with solar, batteries, and grid management for a comprehensive solution. Customers with EVs would naturally want to engage with an energy system that includes these capabilities for resiliency and optimal functionality. It makes perfect sense for customers to invest in all aspects of their energy framework, and having this technology is crucial.

Great. Thank you.

The next question comes from Sophie Karp of KeyBanc. Please go ahead.

Hi, thank you for taking my question. A lot of my questions have been answered. Maybe just one last one, if I may. You are doubling your capacity, and presumably, the U.S. market will be served by that capacity going forward, right? So, is there any risk that these capacity additions in the U.S. cannibalize some of your existing lines outside of the U.S. that are currently important here? Or is the international growth that you expect so strong that basically your international capacity will just serve outside of the U.S. demand? Thank you.

Yes. As I clarified before, we are executing carefully and won’t shortchange our global locations. It needs to be carefully handled, and we have orchestrated appropriate plans. Fortunately, our business is healthy and ramping in both Europe and the U.S. It takes us about four to six quarters to ramp such lines, and we will distribute manufacturing appropriately.

The next question comes from Corinne Blanchard of Deutsche Bank. Please go ahead.

Hey. Thank you for taking my question. I just wanted to go back on the 1Q guidance and the range from $700 million to $740 million. How much of the softness have you embedded and incorporated into the 1Q guidance? And then I know you commented a little bit, but maybe if you can give even more color on what to expect in California in February and March? Thank you.

Yes. We provided the range of $700 to $740 million. We noted that Europe is growing quite well and expect growth compared to Q4, while our U.S. business will be slightly down. I cannot predict exactly how February and March will look; we continue to feel cautiously optimistic as we see a recovery in originations.

The next question comes from Pavel Molchanov of Raymond James. Please go ahead.

Thanks for the question. Two quick ones about Europe. Now that the European Union is talking about this net zero industrial plan, do you envision receiving any credits or other manufacturing subsidies for your operations in Romania?

No, we have not heard about that, nor are we expecting any credits for our Romanian plant. However, there are ongoing discussions in Europe about potential analogous benefits, and if they materialize, we will take advantage. But other than that, we don’t have anything specific.

Okay. And then I think other than Europe, your main international exposure is Australia. Can we get a quick update on that?

Yes. Australia had a weak first half of 2022, but it is recovering back to original levels. We are excited about introducing our third-generation battery and IQ8 microinverters there in the second quarter. Many Australian installers are looking forward to these products.

The next question comes from Sean Milligan of Janney. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. Could you address or help us understand what percentage of the battery storage sales are going internationally right now? And then I know you are introducing that in a number of new markets. Can you help us understand the pace of ramp-up in new markets over this year?

We do not typically breakout sales numbers between U.S. and Europe. However, I can share that we have introduced batteries in Germany and Belgium, with several other countries planned for this year, including Austria, Netherlands, France, and Spain. We expect swift growth in MEGawatt hours sold in Europe as battery sales ramp up relatively quickly.

Okay, great. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

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

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.