Good day, everyone, and welcome to Enphase Energy's First Quarter 2023 Financial Results Conference Call. Please note that today's event is being recorded. Now, I would like to turn it over to Karen Sagot. Please proceed.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2023 Results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2023. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, the capabilities of our technology and products and the benefits to homeowners and installers; our operations, including manufacturing, customer service, and supply and demand; anticipated growth in existing and new markets; the timing of new product introductions and regulatory matters. These forward-looking statements involve significant risks and uncertainties, and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K and which can also be found in the Investor Relations section of our website. Now, I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Good afternoon, and thank you for joining us today to discuss our Q1 2023 financial results. We had a decent quarter. We reported revenue of $726 million, shipped approximately 4.8 million microinverters and 102-megawatt hours of batteries, and generated free cash flow of $223.8 million. Approximately 65% of our Q1 microinverter shipments were IQ8. We exited Q1 at 46% gross margin, 14% operating expense, and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Let's now discuss how we are servicing customers. Our Net Promoter Score worldwide was 75% in Q1 compared to 71% in Q4. Our North American NPS was 77% compared to 74% in Q4. Our average call wait time was 1.2 minutes compared to 1.6 minutes in Q4. We are focusing on addressing cost issues related to customer problems and improving our business processes rapidly to enhance customer experience. Let's talk about microinverter manufacturing. Our overall supply environment is quite stable. There are no major shortages right now. We began manufacturing at Flex Romania in the first quarter, bringing our quarterly capacity to approximately 6 million microinverters. Our European business is growing rapidly, and many customers have asked us for local manufacturing, which we will be able to accommodate going forward. Let's come to US manufacturing. As discussed last quarter, the IRA, Inflation Reduction Act, will help bring back high-tech manufacturing to the US and stimulate the economy through the creation of new jobs. We are opening manufacturing lines with three different partners, adding a capacity of 4.5 million microinverters per quarter, bringing our overall global capacity to 10 million microinverters per quarter as we exit 2023. We expect to begin US manufacturing with one partner in Q2 and with the remaining two in Q3. Now let’s cover the regions. Our US and international revenue mix for Q1 was 65% and 35%, respectively. In the US, our revenue decreased 9% sequentially due to seasonality and macroeconomic conditions and increased 28% year-on-year. The sell-through of our microinverters in Q1 decreased 21% sequentially compared to Q4, worse than the typical seasonality of 15%. Our microinverter channel inventory at the end of Q1 was relatively normal, while the storage channel inventory was a little elevated. I'll provide details later in the call. In Europe, our revenue increased 25% sequentially and more than tripled year-on-year. Our Europe non-GAAP gross margin is quite healthy, over 45%. Another point to note is that the sell-through of our microinverters in Europe reached an all-time high in Q1. We are now shipping IQ microinverters into France, the Netherlands, Spain, and Portugal, in addition to Germany and Belgium. We also recently started shipping IQ batteries to the Netherlands, France, Austria, and Switzerland. Let me provide some brief comments on Latin America, Australia, and Brazil. In Latin America, revenue decreased 2% quarter-on-quarter and increased more than 70% year-on-year. Our revenue in Australia increased 6% quarter-on-quarter, while our revenue in Brazil more than doubled. We are growing very rapidly in Brazil. Given the large market size, we are expanding the team and prioritizing new products. Let me provide additional context on the US followed by Europe. We typically recognize revenue when we ship products to distributors and large installers. Most of our installers buy our products from distributors. Thus, it's relevant for us to discuss the sell-through of our products from distributors to installers. As I stated earlier on this call, our sell-through of microinverters in the US was 21% lower in Q1 compared to Q4. Our sell-through in California was only 9% lower than Q4. There was some impact due to the weather in early Q1, but the NEM 2.0 rush in Q1 more than compensated for it. California installers took advantage of the NEM 2.0 rush and built up a solar backlog for the next three to four months. We believe when the stockholders aren't expanding their crews to accelerate installations, they're laser-focused on cash flow due to the high interest rate environment and are seeking clarity on the NEM 3.0 demand. Sell-through of our batteries in California was 23% lower in Q1 compared to Q4, as installers focused mainly on solar. We expect this trend to continue for the next three to four months. After that, we see NEM 3.0 as a net positive for California and expect strong demand to resume for solar plus storage. Let's cover the rest of the US. The sell-through of microinverters in non-California states was 25% lower in Q1 compared to Q4. We observed that the sell-through was even lower in states with low utility rates, such as Texas, Florida, and Arizona. In these states, the economics of loan financing has worsened due to rising interest rates. The sell-through performance in the Northeast US was a little better. Regarding IQ Batteries, the sell-through in non-California states was 28% lower in Q1 compared to Q4. Let's briefly discuss the health of our US customer base and some challenges related to financing. Our Q1 data shows higher sell-through rates for long-tail installers compared to Tier 1 and 2 installers. Our installers are generally navigating three key challenges: first, the rapid increase in interest rates over last year; second, the switch from selling low APR with high dealer fees to selling market-rate loans with low dealer fees; and third, delayed payments from loan originators, or as the industry calls it, reduction of M1 payments. Let's discuss the second and third challenges. We view the transition to high APR and low dealer fee loans as a positive for the industry. The demand for market rate loans remains strong. New capital providers who were unable to buy below market rate loans are now offering solar financing. Installers are adjusting their sales practices for a higher interest rate environment. We are also seeing new lease providers entering the market with a focus on servicing the long tail. We believe capital will be available for long-tail installers regardless of the mix of loans and leases. Regarding the reduced M1 payments, loan originators are providing less cash to installers at the time of contract signing and a greater percentage post-installation. This creates a working capital challenge for installers and is forcing them to become more efficient. As the installers adjust to this new reality, we expect the sell-through of microinverters and batteries to improve incrementally in Q2 compared to Q1. Q2 is seasonally stronger and should help the situation even more. Let's come to Europe. Our European business is performing very well. We expect healthy revenue growth in Q2 compared to Q1. Our business is growing much faster than the market. We plan to introduce IQ8 microinverters and IQ batteries into more countries in Europe throughout the year. Our value proposition is our differentiated home energy management systems combined with high quality and great customer experience. We are integrating products from our latest acquisition, GreenCom Networks, into our Enphase Home Energy System, starting in Germany this quarter. This will help network third-party EV chargers and heat pumps with Enphase solar plus storage systems. The benefit to homeowners is reduced electricity bills due to increased self-consumption in addition to having control via the Enphase app. Let's talk about new products. Internally, I say that 2023 is the year of new products, and it's coming at just the right time. We are preparing to launch our third-generation IQ battery in North America and Australia this quarter. In Australia, we will also launch the IQ8 microinverters. As I previously discussed, the IQ battery has a modularity of five-kilowatt hours and delivers double the continuous and triple the peak power compared to our prior generation of batteries. The higher charging and discharging rates of the third-generation battery will be uniquely beneficial for NEM 3.0 systems in California due to its capability to generate revenue by exporting into the grid at the appropriate time. Additionally, our third-generation battery is very easy to install and commission. We are currently piloting these third-generation batteries in Australia and the US with select installers and are very excited about the experience we are about to deliver to our customers. Next, let's talk about our latest new product for the residential segment in emerging markets. This product, the IQ8P microinverter, will deliver 480 watts of AC power, supporting panels up to 650 watts DC for Brazil, Mexico, Spain, India, and other emerging markets. We are on track to release IQ8P into production in the second half of the year. The other variant of the IQ8P microinverter, with the new three-phase cabling system, is well-suited for small commercial solar installations, ranging from 20 to 200 kilowatts, such as gas stations, schools, hospitals, churches, and small businesses. These microinverter systems offer the same grid compatibility, high quality, and rapid shutdown capability as our standard residential products. We expect to release this product into the US small commercial solar market in the second half of 2023. Let's discuss EV chargers. We shipped over 8,600 chargers in Q1, compared to 7,600 chargers in Q4. We are now shipping Enphase-branded EV chargers from Flex Mexico, which is helping us increase capacity and reduce costs. We are on track to introduce IQ smart EV chargers in Q2. These chargers will have WiFi connectivity, enabling use cases like green charging and allowing homeowners visibility into the operation of their Enphase solar plus storage and EV charger system through their app. Let's now discuss the installer platform. We released several updates to our solar graph design and proposal software, including basic NEM 3.0 functionality, battery design, document management, and other improvements requested by installers. We have over 1,000 installers using the software. NEM 3.0 incentivizes homeowners to use solar and battery systems to avoid energy imports while compensating homeowners for exporting energy when the grid needs it. The updated solar graph platform offers a simplified experience for designing an NEM 3.0 system by optimizing panel placements, configuring battery sizing, leveraging its modularity, and enhancing system operations for self-consumption and energy export to deliver the best possible payback. We see that solar plus storage under NEM 3.0 can achieve a payback period between six and eight years depending on the utility. As we said before, the higher power of our third-generation battery helps us export more energy to the grid, maximizing savings. Let me conclude. With the residential solar and storage market growing rapidly in Europe, we are positioned to significantly accelerate our business. The situation in the US is different, with NEM 3.0 in California and macroeconomic challenges in the rest of the US. Our strategy remains unchanged. We are focused on working closely with our installers to address their issues, developing new products, and entering new markets and countries. The fundamentals are intact for our industry; the 30% ITC for the next decade, rising utility rates, focus on climate change, and the desire for resilience are all going to increase the demand for solar plus storage more than ever. With our differentiated products, high quality, and exceptional customer experience, we are in a strong position to capitalize on this trend. With that, I will turn the call over to Mandy for her review of our finances. Mandy?

Thanks, and good afternoon, everyone. I will share more details about our first quarter of 2023 financial results and our business outlook for the second quarter of 2023. We have included reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, also available in the Investor Relations section of our website. Total revenue for Q1 was $726 million, slightly higher than the fourth quarter of 2022. We shipped approximately 1,957 megawatts DC of microinverters and 102-megawatt hours of IQ batteries during the quarter. Non-GAAP gross margin for Q1 was 45.7%, an increase from 43.8% in Q4, driven by a better IQ8 product mix and improved logistics. The gross margin was 45% for Q1. Non-GAAP operating expenses were $98.4 million for Q1, up from $87.7 million in Q4, attributed to international growth and R&D. GAAP operating expenses were $158.7 million for Q1 compared to $153.7 million for Q4 and included $56 million for stock-based compensation, $3.7 million in acquisition-related expenses, and amortization of acquired intangible assets, along with $700,000 in restructuring and asset impairment charges. Non-GAAP income from operations for Q1 was $233.6 million compared to $229.4 million in Q4. On an EBIT basis, income from operations was $167.7 million for Q1 versus $157 million for Q4. On a non-GAAP basis, net income for Q1 was $192.3 million compared to $212.4 million for Q4, resulting in non-GAAP diluted earnings per share of $1.37 for Q1, down from $1.51 for Q4. GAAP net income for Q1 was $146.9 million versus $153.8 million for Q4, leading to GAAP diluted earnings per share of $1.02 for Q1 compared to $1.06 for Q4. The decrease in both non-GAAP and GAAP net income was due to our higher effective tax rate as a significant US cash taxpayer. We ended Q1 with a total balance of cash, cash equivalents, and marketable securities of $1.78 billion, compared to $1.61 billion at the end of Q4. We did not execute any open market share repurchases against our $200 million share repurchase authorization, instead spending around $72 million to cover withholding taxes for employees divesting in Q1, resulting in a dilution of 338,000 shares. We plan to continue this anti-dilution program throughout the year. In Q1, we generated $246.2 million in cash flow from operations and $223.8 million in free cash flow. Capital expenditures totaled $22.5 million for Q1 compared to $16.4 million in Q4, primarily due to investments in R&D equipment and US manufacturing. Now, regarding our outlook for 2023, we expect revenue for the second quarter of 2023 to be between $700 million and $750 million, including shipments of 80 to 100 megawatt hours of IQ Batteries. We anticipate GAAP gross margin between 41% and 44%, and non-GAAP gross margin between 42% and 45%, excluding stock-based compensation and acquisition-related amortization. Our guidance does not factor in any IRA benefit. We estimate net operating expenses to be between $155 million and $159 million, which includes approximately $57 million for stock-based compensation, acquisition-related expenses, amortization, and restructuring charges for site consolidation. Non-GAAP operating expenses are expected to fall between $98 million and $102 million, with intentions to keep them flat in Q2. We will continue to invest in product innovation and international growth while striving for efficiency in other areas of the company. Regarding taxes, as we have utilized most of our net operating loss and research tax credit carryforwards, we are now a significant US cash taxpayer. We expect both GAAP and non-GAAP annualized effective tax rate for 2023 to be around 22%, plus or minus 1%, before any IRA impacts. Now, I would like to address how the advanced manufacturing production credits from the IRA will be reported in our earnings while we await implementation guidelines from the US Treasury. Based on current guidelines, the production credit can be claimed as direct pay or as a tax credit. Under direct pay, it will reduce the cost of goods sold, while under tax credit, it will be included in the tax expense line. The dollar impact on our earnings per share will remain the same as the production credit is nontaxable. We expect the production credit, net of any incremental costs for domestic manufacturing, to be between $20 and $30 per microinverter sold to customers, with plans to ship 50,000 US microinverters this quarter. We aim to have our US contract manufacturing facilities fully operational by the end of 2023 and estimate shipments to reach our US capacity of 4.5 million microinverters per quarter by the end of 2024, assuming strong demand. I will now open the line for questions.

Ladies and gentlemen, we will now start the question-and-answer session. Our first question today comes from Colin Rusch from Oppenheimer. Please proceed with your question.

Thanks so much, guys. Can you talk a little bit about channel levels outside the US? And how much of the Q2 guidance is really about just selling into the channels? I get the channel is full to serve the markets in both Latin America and Europe?

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

Okay. And then with the battery volumes decline sequentially and continuing in Q2, can you talk a little bit about how much of that is related to the product cycle you're going through? And how much of that is just related to overall underlying demand?

Yes. On batteries, as an executive team, we are hyper-focused on batteries just as much as on our microinverters. Our learning curve on batteries has been tremendous. As we speak, our second-generation batteries are getting better and better every day in terms of both installation and performance. Our third-generation battery, as I mentioned, is coming soon to the US and Australia in Q2. That will be even better with wired communication capability, double the continuous power, and triple the peak power, along with enhanced modularity and serviceability, which helps us reduce costs compared to the prior generation. Of course, it's LFP, so it's the safest battery. The demand in the US being down is temporary. I described the dynamics resulting from the NEM 2.0 pull-in California, as well as the increased interest rates outside California. We believe that's a temporary problem. Installers will figure out what to do outside. In California, we are incredibly bullish on NEM 3.0. We believe our battery is going to be perfect for NEM 3.0, as the increased power of the battery will allow for more exports and payment opportunities during high-demand periods in August and September. With that, you see the payback for a solar plus storage system under NEM 3.0 is roughly six to eight years, depending on the utility. So we anticipate the NEM 3.0 to accelerate the attach rate of batteries, and it may take some time for the industry and consumers to realize it, but I have no hesitation that NEM 3.0 will be a positive in California. Now, let me move outside the US. So far, we've been shipping to Germany and Belgium in Europe. This quarter, we introduced batteries to four more countries: France, Netherlands, and Austria. We will introduce our third-generation battery in Australia in Q2, and in Q3 and Q4, we are targeting several more countries in Europe with plans to reach Italy and the UK by Q4. Thus, in terms of batteries, we are just getting started in Europe, and I anticipate that volumes will start ramping there. In the US, it is a matter of time before the rest of the country recovers, enabling installers to start selling batteries again. And in California, it will be a no-brainer with NEM 3.0. Therefore, the numbers are expected to improve from here on. I wanted to provide you with a complete picture.

Thanks so much for that detailed response. I’ll get back in the queue. Thanks, guys.

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

Hey, good evening. Thanks for taking my questions. Maybe just on the battery question, do you see any opportunity for lower peak kilowatt batteries, that are mostly used as a rate arbitrage device versus a full home pack solution? Any thoughts on that kind of device, where you could use your Gen 2 solutions as well?

Yes. I think both Gen 2 and Gen 3 offer a good positioning for this. If you look at Gen 3, as Badri mentioned, the power is double the max continuous power of Gen 2 and three times the peak power. The peak power is used to manage heavy loads during start-up time. To answer your question, the power can be modified. We can set the limits in the software to meet specific needs. This makes the entire process more efficient for the installer. They have one SKU to purchase and can install that SKU, which could be the five-kilowatt hour SKU. They can then vary the power depending on the homeowner's needs, whether that is an NEM 3.0 system, which could be just one battery with a PV system, or 10-kilowatt hours of backup, or 20-kilowatt hours for whole home backup. The beauty of the system lies in this flexibility and simplicity.

Got it. And just a second question from me on ASPs. If you could just talk about how to think about ASP trends here. You mentioned that inventory is slightly light in Europe, but as we progress through the rest of this year, do you expect any reduction in ASPs in Europe or the US markets? Thanks.

We don't see any drop in pricing. In fact, we see our gross margin sequentially up a couple of percent from Q4 to Q1. Also, I broke out the gross margins in Europe because some of you had been asking. The gross margins in Europe are incredibly healthy, over 45%. The gross margin in the US is also quite healthy. Pricing remains stable for us. Gross margin encompasses both price and cost. We employ value-based pricing, meaning we price products based on the value they provide compared to the next best alternative, like alkaline batteries that may deliver increased power or safety. For microinverters, this could mean increased quality and service. As for the cost side, we run a constant task force focused on achieving world-class costs. We are always looking for ways to cut costs, even as slight reductions can significantly impact overall costs. For instance, $0.01 reduction could add up to substantial savings given our high volume of shipments. On batteries, we expect the gross margin for every new generation to surpass the prior one due to heightened modularity and serviceability. It's a lengthy response, but we do not anticipate significant changes in ASPs, and our cost management initiatives are progressing well.

Got it. Appreciate it. And thanks for addressing my questions here.

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

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

Yes. This is Raghu again. Competition is strong everywhere. It's been consistent, both in the US and Europe. Our focus is always on delivering value and providing a highly differentiated solution. Looking at our product line in both markets, we have a distributed architecture that offers superior performance and reliability. The low-voltage DC system with solar and batteries is arguably much safer and easier to install and maintain. The second pillar is offering high-quality, high-reliability products. We consistently strive for these differentiators through our design architecture and delivery. Finally, superior customer service is key; we ensure that phone calls are answered promptly, and it simplifies the buying process as installers typically purchase the entire Enphase system. In summary, our strategy comprises highly differentiated products, high-quality standards, and providing an exceptional customer experience, which reflects in our pricing and gross margins.

Got it. Thank you. And a follow-up to a different topic, but coming back to California, you mentioned there's about a three to four-month backlog from the process that was done in Q1. I know you do not provide guidance further out than the next quarter, but do you expect to see sequential improvement throughout the year, especially in the second half?

It's hard for me to say right now, but I know that NEM 3.0 has strong fundamentals in California. Contrary to reports I’ve read, we are transitioning from NEM 2.0 to NEM 3.0, and installers must adapt. The transition means that storage attachment rates will increase significantly. This transition requires time for installers to adjust their selling strategies. Over the next three to four months, a substantial investment in training for installers on effectively selling NEM 3.0 will be necessary. It's important to clarify to homeowners how their energy consumption profile affects savings under NEM 3.0. The framework introduces tariffs across 24 hours throughout the year, influencing significantly how the homeowner’s consumption will work. Factors such as summer peak demand and lower supply may offer significant financial incentives under NEM 3.0. Thus, I believe NEM 3.0 will ultimately function as a catalyst for solar and storage adoption in California; however, the journey will take time.

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

I believe the storage volumes will begin to rise; Q2 will be the low point. This expectation is driven by our introduction of batteries to additional countries and planned launches for our third-generation battery. With manufacturers in Europe focusing on the upcoming third-generation battery and its introduction into new countries throughout Q3 and Q4, we are positive about future trends. While NEM 3.0 certainly contributes to these dynamics, it is not the sole factor. Installers will adapt and find ways to market batteries outside California despite higher interest rates. We think we are reaching a turning point with batteries as we improve the customer experience.

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

You can look at a mathematical thread; one week of channel inventory equals roughly 7.5% of the quarter. If one quarter is 13 weeks, one week represents 7.5%. For instance, if the sell-through in a quarter drops by 15%, it equates to about two weeks of inventory. Thus, it’s nothing overly concerning. If the normal channel inventory is between eight to ten weeks, a slight increase means we’re at ten weeks instead of eight weeks. Additionally, we expect sequentially better sell-through in Q2. Typically, Q1 is not strong for sell-through due to a combination of weather effects and now macroeconomic conditions. Q2 is usually stronger, and with installers becoming more acclimated, I anticipate further positive developments in sell-through.

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

We are typically conservative with our guidance, as you can see from our track record. Our business is seasonal, and we have dry powder available in terms of new products. 2023 is significant for product launches, and we plan to continue our string of releases throughout the year. We believe there is growth potential beyond the base business we've projected for Q2. Our European business is also performing impressively; we recorded a 25% revenue increase in one quarter from Q4 to Q1. We doubled our revenue growth from 2020 to 2021 and experienced 132% growth from 2021 to 2022. Recognizing this trend, we are strategically entering more markets and focusing on the introduction of IQ8 microinverters and IQ Batteries. In summary, we are optimistic but cautious; therefore, we've provided a wider guidance range reflecting the prevailing uncertainties compared to last quarter.

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

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

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