Good afternoon, everyone and welcome to the Enphase Energy’s Fourth Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the floor 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 fourth quarter 2024 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, 2024. 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, supply and demand, anticipated growth in existing and new markets, the timing of new product introductions, and regulatory and tax 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 fourth quarter 2024 financial results. We reported quarterly revenue of $382.7 million, shipped approximately 2 million microinverters and 152 megawatt hours of batteries and generated free cash flow of $159 million. Our overall channel inventory remained normal as we exited the fourth quarter. For Q4, we delivered a 53% gross margin, 22% operating expenses, and 31% operating income, all as a percentage of revenue on a non-GAAP basis, including the net IRA benefit. Mandy will cover the financials later in the call. Let's cover customer service. Our worldwide Net Promoter Score was 78% in Q4, the same compared to Q3. Our average call wait time decreased to 2.8 minutes from 4.4 minutes. We are working to further reduce wait times by leveraging AI and rolling out software fixes. Let's talk about operations. Our global capacity is around 7.25 million microinverters per quarter with $5 million in the U.S. In Q4, we shipped approximately 1.7 million microinverters from our U.S. contract manufacturing facilities, booking 45 times production tax credits. We also introduced a higher domestic content skew for two of our products, the IQ8X Microinverters and the IQ8P commercial Microinverters in Q4 to help the commercial asset owners qualify for a 10% domestic content IPC adder. We now offer higher domestic content Microinverters that cover both residential and commercial solar applications and continue to see good demand for these products from lease, PPA, and commercial markets. We expect to ship 1.2 million units of Microinverters from our U.S. contract manufacturing facilities in Q1. We also began shipping the IQ Battery 5P, our third-generation battery system from our U.S. contract manufacturing facilities during Q4, utilizing domestically made microinverters, battery management systems, and enclosures while sourcing cell packs from China. We shipped 6.7 megawatt hours of batteries from our Texas contract manufacturing facility in Q4. We continue to evolve our sourcing strategy to maximize domestic content opportunities and diversify our geographic exposure. Let's cover the regions. Our U.S. and international revenue mix for Q4 was 79% and 21%, respectively. In the U.S., our revenue increased 6% in Q4 compared to Q3, driven by an 11% increase in microinverter sales. This increase was due to strong demand for our higher domestic content microinverters. Our battery sales were down 8% in Q4 compared to Q3 due to lesser channel restocking as we had previously anticipated. Our overall sell-through of products was flat in Q4 compared to Q3. We are generally seeing stable demand in the U.S., both in California as well as outside of California. NEM 3.0 currently represents 66% of our installs in California with a 45% attach rate for our own batteries. The adoption of batteries is steadily increasing across the U.S. due to new tariff structures like Mentry, VPP programs, and the need for resilience. In Europe, our revenue was down 25% in Q4 compared to Q3, while our overall sell-through declined by 13%. The overall business environment across the region is still challenging, but we are maintaining discipline on controlling the channel and expanding our served available market by introducing new products. I'll provide some additional color on key markets in Europe, The Netherlands, followed by France, Germany, and the U.K. In the Netherlands, demand remains weak but has stabilized. The market is transitioning away from solar-only systems to solar plus batteries, which avoids export penalties and allows participation of residential solar plus battery systems in energy markets. We announced new collaborations with two retail energy providers during Q4 that enabled homeowner access to dynamic tariffs and participation in the imbalanced markets, both of which can improve payback to better than six years even without net metering. We expect to announce more partnerships with Dutch energy providers in the future and see gradual improvement in this market as we progress through 2025. We also started shipping our new IQ EV chargers into the Netherlands in the fourth quarter. In France, the market is slowing down due to the recent utility rate cuts. France remains a key long-term growth market for us, given our leadership and low solar penetration. We started shipping our IQ EV chargers into France in the fourth quarter. We plan to introduce hot water heater compatibility in Q2, enabling homeowners to do heating with excess solar and green heating. We also plan to introduce backup capability for our batteries, further enhancing resilience for homeowners. As the feed-in tariffs in France gradually reduce, the value of solar plus batteries along with home energy management continues to rise. In Germany, we are excited about a few new products that will expand our reach. In early January, we started shipping the IQ Battery 5P with FlexPhase to customers in Germany, Austria, and Switzerland. The early feedback has been very positive, and we see an opportunity to increase share in the region now that we have three-phase backup capability. We also recently started shipping our new IQ EV chargers into Germany. In addition, we expect to introduce our IQ Balcony Solar solution in Q2. We believe Enphase microinverters are ideal for small systems, and this product is expected to increase our served available market in Germany by approximately 400 megawatts per year. A bright spot for us is the U.K., where we are growing steadily. We recently announced that our systems are integrated into Octopus Energy smart import and export tariffs, such as the Intelligent Octopus Flux that is designed to optimize the charging and discharging of solar plus battery systems aiming to provide customers the best rates for buying and selling electricity. We expect to start shipping our new IQ EV chargers into the U.K. shortly in Q1. We are still under penetrated in many countries in Europe, including the U.K., Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, and Poland. While each country faces its own unique challenges and opportunities, homeowners are prioritizing safety, reliability, quality, savings, and an all-in-one app experience for their home energy system, which aligns well with our core strengths. We plan to introduce our entire suite of products, the IQ8 microinverters, both single and three-phase batteries with backup, the new IQ EV chargers, and the AI-powered home energy management software, along with the Solargraf Installer Platform across a lot more European countries throughout 2025. We continue to make incremental progress in other regions. In India, our IQ8P and IQ8HC, which are the high-powered microinverters, continue to ramp, and we began shipping the IQ Battery 5P in December. We also recently started shipping the high-powered IQ8P microinverters into Vietnam and Malaysia, further expanding into Southeast Asia. Additionally, we are building momentum in Thailand and the Philippines, steadily ramping up businesses in these growing markets as demand for high-quality, reliable energy solutions continues to rise. Let's cover Japan. We are especially excited about Japan's 1.3 gigawatt solar market where we recently began piloting installations and plan to ship IQ8HC Microinverters in Q2. The Tokyo metropolitan government subsidies for MLPC make the market even more attractive for consumers. The Japan solar landscape aligns well with small systems, 2 to 3 kilowatts complex roofs, and strong demand for quality. These are all well aligned with our strengths. Let's come to Q1 guidance. We are guiding revenue in the range of $340 million to $380 million. We anticipate recognizing approximately $50 million in safe harbor revenue in Q1, partially offsetting seasonality. We define safe harbor revenues as any sales made to customers who plan to install the inventory over more than one year. We are approximately 85% booked to the midpoint of our overall revenue guidance. We expect to ship between 150 megawatt hours and 170 megawatt hours of IQ batteries, slightly higher than Q4. Before we talk about new products, let's discuss the growing importance of energy market participation in many markets worldwide. Regional Energy Providers and Virtual Power Plant programs are offering homeowners attractive ROI by utilizing their solar plus battery systems to buy and sell energy. We believe Enphase Energy Systems offer best-in-class reliability, customer support, and API integration, which are important for Regional Energy Providers and Virtual Power Plant programs. We look forward to sharing with you our progress in these markets as we go through 2025. Let's cover new products starting with IQ batteries. Our third-generation battery continues to gain traction in the U.S. as well as worldwide. In the U.S., we introduced two key system enhancements to improve flexibility and reduce costs. The first is Busbar Power Control software, which allows homeowners to install larger solar and battery systems without costly main panel upgrades. The second is power control software for NEM expansion, enabling homeowners in California to expand legacy NEM systems without any penalty. These advancements provide homeowners with increasing flexibility and cost savings and are being well received by installers. We are making excellent progress with our fourth-generation IQ battery, which offers 60% less wall space, thanks to its integrated battery management and power conversion architecture. The battery pairs with our IQ Meter Collar and new Enhanced Combiner, reducing installed costs by approximately $300 per kilowatt hour for a typical backup system, making us highly competitive across all use cases. We have achieved UL compliance for the Meter Collar, and we are now working on getting approval from the California utilities. We expect to pilot our fourth-generation battery in the U.S. in the first quarter. The IQ8P-3P Commercial Microinverter with its new three-phase cabling system is ideal for 208 volts, small commercial solar installs between 20 kilowatts and 200 kilowatts. We have over 516 sites in the U.S. with an average size of 40 kilowatts, and the feedback so far has been positive. These three-phase microinverters are now shipping from the U.S. with increased domestic content, offering a 10% ITC added for commercial asset owners, which should drive up demand even further. One more positive thing to note is that our IQ8 residential and commercial microinverters are now in compliance with the Build America Buy America Act. Let me provide an update on IQ9, covered by gallium nitride technology. The IQ9 family is built for higher DC input current handling up to 18 amps versus IQ8, which handles up to 14 amps. IQ9 also supports a wide range of AC grid voltages, including 240 volts, 208 volts, and 480 volts for both residential and commercial markets, leveraging GaN high-voltage transistors. These microinverters deliver high AC output power of 427 watts and 548 watts at a lower cost. We remain on track to launch IQ9 in the second half of this year for both residential and commercial markets with a significant SAM expansion driven by compatibility with 480-volt AC commercial systems. Let's dive into EV charging. We started shipping our new IQ EV charger across several countries in Europe, tapping into a $1.4 billion annual market. The next-generation smart charger is designed to work seamlessly as part of our Enphase Energy system or as a powerful standalone charger. Key features of this new IQ EV charger include dynamic face switching and fine-grained current control for efficient green charging, dynamic load balancing, ISO 15118 support for AC bidirectional vehicle expansion, and compatibility with MID meter for Germany, as well as compatibility with OCPP cloud software 2.01, making it a very comprehensive and future-ready solution. In Q4, we began shipping the IQ PowerPack 1500 products to customers in the U.S. and Canada. This 1.5 kilowatt-hour smart portable energy system incorporates all of Enphase's core technologies of power conversion, battery management, and software; you should think about it as Enphase in a box. During the recent LA fires, Enphase donated PowerPack 1500, along with an organization empowered by light to support relief efforts with some firefighters who are using them to power their communications gear. We are excited to enter this growing consumer market and plan to expand the PowerPack globally in 2025. Let's talk briefly about Solargraf, our Installer Platform. We added a lot of new features to Solargraf in 2024 with the ease of doing design as a goal. Solargraf is now available to installers in the U.S., Canada, Brazil, Germany, Austria, Netherlands, and France, with plans to expand into more countries in the coming quarters. Looking ahead, we are working on key enhancements to Solargraf, including auto route detection, ultra-fast proposals, UI/UX overhaul, and expanded C&I features, making Solargraf even more powerful. Let me conclude. We successfully navigated a challenging 2024, generating strong free cash flow and profitability while bringing down channel inventory to normalized levels. We entered 2025 with a continued focus on operational efficiency, product reliability, customer service, product breadth, and geographic expansion. We have also doubled down on U.S. manufacturing for microinverters and batteries, which we believe is good for our customers, economy, and for Enphase. There is some uncertainty around government policies for our industry, both in the U.S. and abroad. But one trend is very clear: centralized grids need more support to keep up with the increased electricity demand. Unsubsidized free markets are increasingly turning to distributed energy systems to help balance the grids through our REPs and VPP programs. We see this trend increasing and getting stronger as we look ahead and believe we are well positioned there. We believe our new products will help drive gradual revenue growth throughout 2025, with safe harbor ordering in the U.S. having the potential to accelerate growth as we progress into the second half of 2025. We remain committed to delivering best-in-class solutions and are energized by the road ahead. With that, I will turn the call over to Mandy for her review of our financials. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2024 financial results as well as our business outlook for the first 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 Q4 was $382.7 million. We shipped approximately 878 megawatt DC of microinverters and 152.4 megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q4 was 53.2% compared to 48.1% in Q3. GAAP gross margin was 51.8% for Q4 compared to 46.8% in Q3. Non-GAAP gross margin without the net IRA benefit for Q4 was 39.7% compared to 38.9% in Q3. The non-GAAP gross margin for Q4 included $51.9 million of net IRA benefit. Non-GAAP operating expenses were $83.3 million for Q4 compared to $81.6 million for Q3. The increase was driven by higher R&D expense related to the launch of multiple new products in the first half of 2025. We continue to invest in new products, customer service, and geographic expansion. We implemented a restructuring plan in November 2024 to reduce our operating costs and align our workforce and cost structure with current market conditions. We expect to reduce our non-GAAP operating expenses to be in the range of $75 million to $80 million a quarter by the second quarter of 2025. Sales operating expenses were $143.5 million for Q4 compared to $128.4 million for Q3. Sales operating expenses for Q4 included $47.9 million of stock-based compensation expenses, $2.9 million of amortization for acquired intangible assets, and $9.4 million of restructuring asset impairment charges. On a non-GAAP basis, income from operations for Q4 was $125.9 million, compared to $101.4 million for Q3. On a GAAP basis, income from operations was $54.8 million for Q4 compared to $49.8 million for Q3. Our non-GAAP basis net income for Q4 was $125.9 million compared to $88.4 million for Q3. This resulted in non-GAAP diluted earnings per share of $0.94 for Q4 compared to $0.65 for Q3. G&A income for Q4 was $62.2 million compared to $45.8 million for Q3. This resulted in GAAP diluted earnings per share of $0.45 for Q4 compared to $0.33 for Q3. We exited Q4 with a total cash, cash equivalents, restricted cash, and marketable securities balance of $1.72 billion compared to $1.77 billion at the end of Q3. As our 2025 convertible is coming due in March this quarter, we plan to use our existing cash to pay off the entire principal balance of approximately $102 million. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 2,883,438 shares of our common stock in Q4 at an average price of $69.25 per share or a total of approximately $199.7 million. We have a remaining $398 million authorized for further share repurchases. In addition, we spent approximately $5 million by withholding shares to cover taxes on employee stock vesting in Q4, which reduced the diluted shares by 68,532 shares. With respect to continuing this anti-dilution point, in Q4, we generated $167.3 million in cash flow from operations and $159.2 million in free cash flow, including approximately $110 million of customer prepayments. Capital expenditure was $8.1 million for Q4 compared to $8.5 million for Q3. We expect our capital expenditure to stay within $50 million in 2025. Now let's discuss our outlook for the first quarter of 2025. We expect our revenue for Q1 to be within a range of $340 million to $380 million, which includes shipments of 150 megawatt hours to 170 megawatt hours of IQ batteries. In December 2024, we signed a safe harbor sales agreement for a total amount of approximately $95 million to ship in the first half of 2025. As Badri mentioned, we define safe harbor revenue as any sales made to customers who plan to install the inventory over more than a year. The first quarter of 2025 revenue outlook includes approximately $50 million from the safe harbor sales agreement. Although we received a lump sum of $95 million due to safe harbor for expected shipments in the first half of 2025, under normal circumstances, this would have been recognized organically over eight quarters at an average of approximately $12 million per quarter. Going forward, the $12 million should be considered as part of the baseline each quarter to reflect the true run rate of our business. Coming back to Q1 guidance, we expected gross margin to be within a range of 46% to 49%. We expect non-GAAP gross margin to be within a range of 48% to 51%, with the net IRA benefit and 38% to 41% before net IRA benefit. We expect the net IRA benefit to be between $36 million and $39 million, estimating shipment of 1.2 million units of U.S.-made microinverters in Q1. We expect our GAAP operating expenses to be within the range of $143 million to $147 million, including approximately $52 million estimated for stock-based compensation expenses, acquisition-related expenses and amortization, and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $81 million to $85 million. We expect our GAAP and non-GAAP annualized effective tax rate, excluding discrete items for 2025, to be at 18%, plus or minus 1% with IRA benefit. In closing, we managed well with our financial discipline through a difficult global environment in 2024. We maintained profitability and strong gross margins. In addition, we generated approximately $480.1 million of free cash flow in 2024 and exited the year with $1.72 billion in cash, cash equivalents, restricted cash, and marketable securities, while repurchasing 4.5 million shares of our common stock for approximately $391.4 million. With that, I will open the line for questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. Our first question today comes from Brian Lee from Goldman Sachs. Please go ahead with your question.

Hey, everyone. Good afternoon. Thank you for the question, and great job on the quarter. This is for Mandy or Badri. I’d like to clarify the guidance as there seem to be some moving parts with the safe harbor. If we exclude the $50 million, that suggests a baseline of 310 for Q1. Looking at the past three years, typical seasonality would indicate a high-single-digit increase into Q2. If we add $45 million on top of that for Q2 modeling, is there any visibility on additional safe harbor revenue as we progress through the second half of the year? What insights do you have from customer discussions on this?

Yes. So let me just give a brief on that. The way you should think about the $95 million safe harbor, we think, is this $95 million if it had not been for safe harbor, would have been recognized over eight quarters. That's approximately $12 million a quarter of core revenue. So when you talk about the $310 million, I would add another $12 million to it that makes it $322 million. So take roughly the $380 million in Q4, $382 million. And going down to $332 million, that is in line with about 15% seasonality that is typically expected from Q4 into Q1. To answer your question, is there any more safe harbor deals that will be done later this year? We don't know. But of course, there is some drive towards safe harbor. One is we saw the domestic content guidance basically reducing for inverters as well as for racking. So that's one incentive. The second incentive is, obviously, if there is anything on the step downs for ITC, for example, some customers may want to take that into consideration and do safe harbor. So we are having those discussions with the customers. And we will inform you, hopefully, in the next conference call, if there is anything more.

Okay, fair enough. And then maybe just a follow-up question on, you're starting off the year with some good momentum on the battery storage front just based on the volume guidance here for Q1, but you're also in the midst of, like you said, piloting the new 10C battery. And just wondering how much of this is sort of phasing out the older generation battery, what kind of visibility do you have on picking up new volume, maybe market share as you move through 2Q and beyond on the 10C? And should we expect a near pocket? Or are you expecting kind of sequential growth on battery storage volumes throughout the balance of the year, similar to what you've seen in past years? Thank you.

Yes, we anticipate continued growth in our battery segment throughout 2025. In 2024, we saw a steady increase in our sell-through. To highlight two key developments, internationally, we launched our third-generation battery specifically designed for grid-tied applications in Europe, where power stability is generally high. Additionally, we introduced a variant called FlexPhase, which operates in both three-phase and single-phase configurations and offers backup capability across all three phases. This makes it one of the smallest AC-coupled batteries with such capabilities. In markets like Germany, Austria, and Switzerland, there's a strong emotional aspect to the need for backup power, driven by concerns over energy security. We plan to transition Europe to the FlexPhase battery in 2025. Moreover, emerging markets will also require three-phase batteries with backup. The U.S. market presents a unique situation with its single-phase systems. Here, we are excited to be working on our fourth-generation battery, which features a significantly reduced footprint—60% smaller wall space—thanks to our integration of power conversion and battery management systems. This smaller design allows us to reduce installation costs. Notably, this battery will work alongside the Meter Collar for backup, which will coincide with a new combiner that we're releasing. We are replacing the previous system controller with a more cost-effective combination of the meter collar and combiner, simplifying installation and reducing costs by $300 per kilowatt hour. We have achieved UL compliance on the Meter Collar and are now seeking approval from California utilities, with plans to pilot our energy systems this quarter. We expect strong interest from installers, as feedback on the new battery has been positive, and we look forward to expanding our business.

Our next question comes from Phil Shen from ROTH Capital Partners. Please go ahead with your question.

Thank you for taking my questions. I have a few follow-ups regarding the safe harbor. Can you let us know if there was any safe harbor revenue in Q4? Out of the $50 million in safe harbor projected for Q1 and maybe a total of $95 million, what is the breakdown between micros and batteries? Additionally, can you inform us about who the $95 million in safe harbor is associated with? If you’re unable to disclose the name, could you at least give us an idea of the type of player involved? Thank you.

Yes. We are not going to share any customer names. The safe harbor is mostly on microinverters, and then the answer to Q4 is that we deliberately defined safe harbor this time as essentially what we expect will be installed over a one-year timeframe. There are a few small deals that are run-rate deals that will get consumed in one to two quarters. That happened at a much smaller rate. We do not consider them safe harbor. They are usual run-rate business. The $95 million is what we are considering safe harbor, and you should think about that as $12 million of core revenue for the third quarter.

Thank you. Moving forward, Brian mentioned that Q2 could see a growth of high single digits quarter-over-quarter in revenue. Do you think you can achieve a $400 million quarterly run rate in the latter half of the year to help reach your goal of around $1.5 billion in revenue for the year? I understand you don’t give official guidance, but I’d like to get a sense of the expected growth pattern for the remainder of the year. Regarding tariffs, we've learned a lot about the anode AD/VCD, where there may be tariffs as high as 850% on that part of the battery. How are you preparing for this, and what strategies do you have in place, especially considering that retroactive tariffs could take effect this month? Thank you.

We do not provide guidance for the second quarter or the rest of the year. However, I am very enthusiastic about our progress on new products. We are launching a range of new products. In Q4, we introduced the new EV charger in a $1.4 billion available market. We launched our IQ portable energy system, which we plan to expand into other regions. In January, we unveiled the FlexPhase battery, which is the smallest AC-coupled three-phase backup option. Our fourth-generation battery is progressing well, as I mentioned earlier. The Meter Collar has received UL compliance, and we are eager to start piloting that product. I'm also excited about the IQ9. It will deliver 10% more power at a similar cost, and early results are promising. We plan to finalize its design in the first quarter and begin verification and release. I expect to see growth throughout the year as we introduce many new products. We are diversifying; for instance, the IQ9 will enable us to enter the 480-volt market, which we have not been involved in until now, as we have only participated in the 208-volt market. The GaN technology facilitates this expansion. We plan to introduce that product later in the second half of 2025. Now, I'll turn it over to Raghu to address the question on anode AD/CD.

Yes. So with regards to anode AD/CD, obviously, it is something that's very new. We are tracking it closely. It's still an investigation. And there are still a lot of unknowns with regards to whether it is the anode material being imported in that gets the tariff or will the entire sell or sell back at the tariff. In general, our plan is from a supply chain point of view is to have geographic diversity, which we have done on the microinverter side and as well as we're prepared to do that on the battery side. So all of these things, given the tariff issues, the ADC issues, etc., we're being very proactive, which we have already started in diversifying the supply chain.

Our next question comes from Julien Dumoulin-Smith from Jefferies. Please go ahead with your question.

Hey. Good afternoon, team. Thank you guys very much. Appreciate the time. Maybe just following up on the last viewer's questions. I know it a little bit early to guide shall we say. But obviously, you've got a number of tailwinds here when you think about the IQ9 coming in the back half, also fourth gen introduction. In theory, you guys have alluded to potentially higher margins, maybe 60% of these new products, 45% of fourth-gen maybe or upwards of. I mean, as you think about those products leading into the back half of the year, can we expect a margin uptick? I noticed obviously in 1Q here, there's a little bit of a downtick here versus what you guys just put up. Is there a mix dynamic in 1Q? And really, as you think about the back half of the year, as those new products roll in, are there any offsets that you would otherwise see? And then related, is there a pricing dynamic that we should be watching as it pertains to the updated IRS cost allocation tables for MLPs? I know that dropped here from 36% to 25% of late. Does that change anything in the pricing and up-pricing potential we might have seen earlier? And could that be a headwind itself? Or conversely, could maybe the dynamics around Powerwall 3 and the separation between the solar qualification versus the battery piece help drive incremental sales and stabilize the backdrop a little bit? Sorry, a lot in there, but I wanted to squeeze it all in.

Our pricing strategy is straightforward. We focus on the value we add compared to our competitors, and we have a comprehensive cost management program. People have asked me about this consistently over the last six years, and my answer remains unchanged. We have dedicated teams for pricing and costs, and we are making significant strides in both areas. If we find it necessary to lower battery prices because the value added is limited, we will do so while continuing to seek cost reduction opportunities. Current results show that without the IRA benefit, our non-GAAP gross margin stands at approximately 39.7%. For Q1, our guidance is between 38% and 41%, which reflects regular fluctuations in our product mix. I do anticipate improvements overall. For instance, the IQ9 incorporates gallium nitride technology, allowing us to reduce from four silicon fabs to two gallium nitride fabs. By adopting a bidirectional switch instead of four unidirectional switches, we can achieve some cost savings. We expect to operate those FETs at frequencies above 100 kilohertz in the future, which eliminates the need for a large transformer. If we increase the operating frequency to 1 megahertz, we could potentially reduce transformer size by 66%. Although we are not there yet, we aim for significant enhancements that will provide ultra-compact inverters, benefiting both customers and our gross margin. Regarding the fourth-generation battery, we have made notable advancements, and it's expected to launch soon. As for the fifth-generation battery, we are aiming for its release in Q1 2026, which will also feature substantial cost reductions and utilize prismatic cells with a 50% higher energy density. I'll provide more details on that in our next call. Overall, we are advancing our products, which will enhance our cost structure. We plan to maintain attractive pricing based on the value we deliver to customers while ensuring continuous improvement in our costs. This combination will lead to a steady increase in gross margins for us.

Our next question comes from Colin Rusch from Oppenheimer. Please go ahead with your question.

Thank you, everyone. I want to discuss the current state of the channel in light of some recent activity and payments from the treasury as well as the weather. Are you observing any liquidity issues among your partners? What is the situation regarding payables and receivables, particularly with medium-sized installers you collaborate with?

We work with distributors, and most of our business goes through them, who are generally doing well. Our accounts receivable is in good condition, particularly in Q4 compared to Q3. However, regarding the health of the channel, while we closely manage channel inventory, installers are facing significant challenges. Cash flow issues for installers persist, especially as the industry shifts from loans to leases, with new players entering the market. This environment may benefit the industry by eliminating weaker participants, which can strengthen overall performance. To improve steadily in 2025, the industry needs enhanced quality, improved service, and better financing options. It's a challenging period, but there are some positive signs in California, where things have stabilized. The recent L.A. fires caused some disruption but only temporarily, and recovery is underway in the affected regions. About 500 homes with Enphase solar and storage were damaged, but overall, the impact was limited. Installers seem more confident in selling NEM 3.0, although outside California, challenges remain due to low utility rates, while the East Coast is performing relatively well with higher rates.

Thanks so much. And just as you transition to the IQ9 and change some of the componentry, can you talk a little bit about any sort of issues around tariffs and any sort of supply chain elements that you have to navigate here are at risk as you start looking at the production of the new product?

Yes. The remarkable achievement of our operations team is that we do not anticipate any impact from tariffs on microinverters. Over time, we have significantly diversified our supply chain. We are now manufacturing in the U.S., China, and India. Regarding the raw materials coming from China to the U.S., we have minimized that exposure to a very limited extent. Essentially, we have diversified our entire supplier base, making it a non-issue. I also expect it to remain a non-issue for IQ9. If your question pertains to gallium nitride, that too is a non-issue. Our main supplier is located in Europe, with additional suppliers in North America and Japan. So, our exposure is limited, and I can confidently say that we are not concerned about it for IQ9.

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

Great. Thanks so much for taking my question. Maybe just switching gears a little bit, Badri, you sound pretty confident in terms of the outlook for the industry and your business overall. I'm just curious, just given your balance sheet position, given where the stock is, is there an opportunity to maybe lean into buybacks more heavily or capital return more heavily just given maybe a dislocation in what you view the intrinsic value of the stock and where the stock is trading and just given the balance sheet and the outlook for the business that you've kind of portrayed over the balance of this call?

I've discussed our strategy before, and I'll outline it again. Our first priority is to address the needs of the business. We ensure that all capital requirements are met, whether it's purchasing equipment for manufacturing batteries in the U.S., producing microinverters, boosting capacity, diversifying through additional contracts, or acquiring new software to enhance operations. If there's any excess after meeting these needs, we then consider M&A opportunities that can enhance the overall value of the company. We're exploring new technologies in batteries and home energy management and are also interested in small commercial ventures. Our preference is for smaller, strategic acquisitions rather than large ones. After addressing these priorities, if our share price remains below a conservatively estimated intrinsic value, we will repurchase stock. Last quarter, we bought nearly 2.8 million shares, investing about $200 million in cash buybacks. Previously, we had allocated up to $100 million per quarter for this purpose, and we intend to maintain this strategy with guidance from our board. If we continue to believe the shares are undervalued, you can expect us to take similar actions in the future.

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

Good evening. Thank you for taking my question. You talk about piloting with the California utilities for the Meter Collar. I think I have heard that the back and forth between Tesla and the utilities had taken some time for their meter collar. And maybe it's just going to be longer because they were first. But how long are you expecting your pilot to take? And then I'm sure you need their approval, but can you just walk through what other steps are needed before you can start selling them and the expected timeline?

There is a prescribed timeline proposed by the Public Utilities Commission. I won't comment on anything that happened before, but our experience so far has been generally very positive. They have been very engaged with us, and we need to complete all our certifications first. The primary UL certification has been completed, which is a significant milestone. After that, there are additional tests required at both the Meter Collar unit level and the system level. We are currently in that process. There is extensive discussion with their engineering teams to explain how the entire device and system operate, followed by systemic testing with them. Each utility is somewhat different, so we are working simultaneously with all three Investor-Owned Utilities at various testing stages. That’s about what I can say at this point, but overall, our experience has been quite positive.

Okay, great. And then just moving on to the safe harboring. The $95 million that you mentioned, was that mostly in response to the domestic content updates that came out last month and the desire to safe harbor under the old DC table since you only have like 90 days to do that? Or was it driven by everything going from Section 48 to 48(e) or something else? So, just any color there would be helpful.

Yes, I think it was mostly a risk mitigation strategy overall. It could include domestic, it could include ITC, etc.

Our next question comes from Praneeth Satish from Wells Fargo. Please go ahead with your question.

Thanks. Good evening. Just on the fourth generation battery, I think you previously indicated that the pilot would start in Q4. Now it looks like it's starting in Q1 or March. I guess what drove that slight shift in timing? And then how should we think about the timeline for ramping battery sales? I guess at what point do you think you could see the next-gen battery cross over 50% of your battery mix? Could that happen in Q2 or Q3 of this year?

Yes, we have always mentioned that the first quarter is where we would be. We did not discuss the fourth quarter. Now, the question is when we anticipate ramping up and how much, as well as when we will reach 50%. We expect to begin ramping in the second quarter, provided the piloting goes well. Typically, it takes us a few quarters to reach the 50% level and possibly another quarter to achieve 80%. That’s been our experience. Since this is a new product, there could be unique factors involved, but that has been our track record.

Okay, that’s helpful. And then the timing between your battery generation from what I can tell, kind of looking historically, it's been around three, four years. But now you're talking about a fifth generation battery just one year after the fourth generation launch. I guess what's driving this acceleration in your product development cycle? Are you seeing competitors iterate at the same speed? And if not, if you're releasing new generations of batteries faster than peers, then can we expect to see the gross margin just continue to climb at least on the battery side over the next two to three years?

Yes. Just for reference, we released our third-generation battery in June of 2023. So, we are discussing Q1, which is about 18 to 24 months from now. To give you some background, we launched our first-generation battery in 2020, starting shipments in Q3 of that year. Approximately 18 months later, we launched the second generation, and then the third generation in June 2023. We have improved our ability to develop these batteries, supported by a skilled team that understands both hardware and software aspects. While there are challenges and occasional setbacks in meeting our commitments, we have generally gained more confidence. Our fifth-generation battery, which we are planning to release in Q1 2026, has been in development for over a year. The process typically begins with our CTO team assessing technology feasibility, after which a small team starts working on it before we officially launch the project. There is always some overlap in our development cycles, which is why we believe we can adhere to a timeframe of 12 to 18 months, with a consistent schedule of battery releases.

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

Great. Thanks for taking our questions. Helpful call. I just have one quick question remaining. When you look at the safe harbor activity that's in the 1Q and 2Q guide this year, and maybe even kind of your safe harbor activity pre-IRA. Is there anything to call out as far as both gross and operating margins? Should we assume that those kind of align with corporate average or anything that we should be adjusting for in our model? Thank you.

No, you should just be assuming they are at our usual gross margins.

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

Good afternoon and thanks for taking the questions. I just want to go back to the original questions earlier in the call, just to make sure we're all on 100% the same page. So, you mentioned $95 million of safe harbor that you booked at in 4Q. You highlighted $50 million in 1Q. So should we expect the rest of the $45 million to roll over in 2Q? Or are you saying that there's some other dynamic we need to be thinking about?

No, you're right; it will roll over into Q2.

Thank you. I have a follow-up regarding domestic content. Can you discuss the current net cost of your system now that it could potentially qualify for both solar and storage, and how that compares to the net cost of a Powerwall 3P, which may qualify for storage but not solar? I'm trying to understand if your system would be cheaper for backup today due to the domestic content benefit, or if you would still need the fourth generation to reach that cost advantage. Thank you.

We do qualify today; our domestic content is well more than 40% on batteries today. So we do qualify already. We are making those batteries in Texas. We shipped 6.7 megawatt hours of batteries in Q4. We expect to ship a lot more in Q1.

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

Thank you. Just one question for me as it relates to the return of capital. I'm curious if all you have contemplated simply just making a commitment to repurchase a certain amount of stock per year regardless of the level as opposed to some timing activity you've been engaged? And wouldn't that make more sense?

No. I think I told you our strategy is very simple, very clear. First, take care of the needs of the business, take care of M&As, and then if money is left, we look at buying a conservative amount below the intrinsic value.

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

Thank you for taking my question. Regarding the safe harbor, could you clarify whether it is financed through third parties or directly to the companies? Additionally, I am curious about the European gross margin, which appears to be slightly lower than that of the U.S. gross margin.

Yes. In the past, I've clarified it. The European gross margins are at similar levels as the U.S. gross margin, and our pricing strategy is the same. Our prices are also approximately the same list prices with distributors. So we don't see any difference.

Our next question comes from Dylan Nassano from Wolfe Research. Please go ahead with your question.

Yes, hi. Thanks for taking my question. Can you just talk a little bit about what kind of trends you might be seeing with market share across battery markets, solar-only markets, and then specifically within the TPO players?

We typically don't discuss market share. However, we can say that particularly with the upcoming Gen-4 product, it's not solely a battery; it includes new components like the combiner, which brings several new features. There has been significant integration, especially with the system controller that was previously handling the microgrid interconnect device function. This integration has simplified the process, leading to up to $300 per kilowatt-hour reduction in installation costs. This reduction comes from both labor savings due to the Meter Collar and decreased product costs. Transitioning to this new technology offers considerable savings, allowing us to be very competitive not only in grid-tied applications but also in backup scenarios, while preserving the reliability, safety, simplicity, and performance advantages of the Enphase System. I believe this next-generation product will significantly enhance our competitiveness, especially in backup situations.

And there are a few third-party reports if you are interested that if you want to take a look at our share, I would refer to those. And there are multiple of them and each of them having their way of looking at it. So, you should take a look at that.

Thank you.

Our next question comes from Gordon Johnson from GLJ Research. Please go ahead with your question.

Hey guys. Thanks for taking my question. A lot of them have been answered. But I'm just looking at some of the specific data for the California solar initiative. And it shows Tesla Powerwall gaining significant share in the storage space and then also taking share in the inverter space. And I just wanted to know if you guys are still seeing those trends continue or you're taking share back from them? And then I have another question.

We don’t comment on competition. Our focus is on creating best-in-class products. Our battery is quite popular for grid-tied applications in California. With our fourth-generation product, we aim to excel not just in cryptite but also in backup solutions, which has been a limitation for us until now, and we plan to overcome that very soon. We're excited about this development. Our batteries are modular, allowing customers to choose sizes like 15-kilowatt or 20-kilowatt instead of being locked into 13 or 26-kilowatt hours. This modularity makes our solution cost-effective. Regarding our microinverters, I've discussed their advantages in previous calls. They provide superior power production and effectively manage shading at the panel level, maximizing energy output. They also feature a 25-year warranty compared to the competition's 10-year warranty. For our batteries, we offer a 15-year warranty as opposed to the competition’s 10-year. Serviceability is crucial; traditional battery structures require replacing the entire unit, leading to prolonged downtime for homeowners. In contrast, 95% of the issues with our battery systems can be resolved on-site, allowing for quick fixes instead of replacing a complete battery. We enjoy various advantages in modularity, simplicity, warranty, safety, and serviceability. Additionally, we launched the Busbar Power Control Software, which can eliminate main panel upgrades 95% of the time, making installers very happy by optimizing solar plus storage system designs. We also enable users to expand their systems easily, even if their consumption increases, thanks to our power control software. This allows for expansion without sacrificing the benefits of legacy systems. We introduced several enhancements in the fourth quarter, and it's important for us to support our installers, ensuring we assist them during any supply shortages.

Our next question comes from Austin Moeller from Canaccord. Please go ahead with your question.

Hi. Good afternoon. So just my first question here, in Europe, the data that we've collected on electricity rates shows the key markets like France and Germany are still relatively stable. Where do you see electricity rates in Europe needing to go to catalyze the demand recovery there?

Yes. On February 1st, electricity rates in France decreased by 15%. This will pose a challenge for a while. However, the market remains attractive due to its low solar penetration thus far. There is increasing adoption of electric vehicles, and feed-in tariffs in France are gradually declining. This presents an opportunity for us, as we specialize in solar, batteries, EV chargers, and home energy management. In home energy management, hot water heaters play a significant role. We plan to introduce green heating options; with a low feed-in tariff, homeowners will want to use all the solar energy generated instead of sending it back to the grid. Therefore, we will redirect excess solar energy to the hot water heaters, enhancing self-consumption. We are working on providing comprehensive home energy management solutions across Europe because we believe this aligns with market trends. Although net metering has been beneficial for some time, it is likely to be phased out eventually. We can still help homeowners save money with solar, batteries, EV chargers, and home energy management, and I anticipate that this is the direction the market will take. While we may not see immediate changes, the trends indicate this evolution.

Great. And just a follow-up. In line with your discussion of a shortage of power in the near-term, do you think that there could be a demand for solar plus battery in states like Texas or Tennessee where they have an electricity cost of $0.15, $0.14 per kilowatt hour purely because there's a large number of data centers geo located there?

Of course, right, as we have talked about the demand environment has not changed for demand. So energy has not changed. There is both front of the meter demand due to data centers. But there is substantial demand behind the meter as well as people are electrifying with the combination of EV chargers and heat pumps. When you mention a state like Texas, as well as for that matter, even in Europe, those are deregulated markets. One of the big advantages of a solar plus battery system or solar plus battery plus charger system is for these distributed energy resources to participate in markets. So, if you think about a day-ahead market, for example, if you have a really smart AI-based energy management system like what we do, we can be very intelligent about when to discharge the battery, when to discharge the battery, when to charge your EV, when to buy it from the grid, when to sell to the grid, and we can generate substantial amount of savings as well as in the case of revenue for the homeowner. So you're seeing that as a pretty significant play in a number of countries in Europe, as well as in places like Texas.

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

Thank you. Just two quick ones, Badri. I was wondering that I think in Q4, there was 1.7 million microinverters that received a 45x credit and then you guided to $1.2 billion, but the safe harbor is ramping in Q1. So did you get paid on production? And then not on sell-through. I'm just trying to understand what's going on with the manufacturing credit, in particular, and the seasonality between Q4 and Q1.

Yes, our team tends to be a bit conservative with these estimates. We also have to consider the need to balance manufacturing globally. When we mention 1.2 million, that figure refers to production from the U.S. facility, with the remainder being accounted for from other locations, like India. While we aim to maximize profit, we must proceed with caution to ensure a balanced global manufacturing approach. That's the rationale behind our statements.

Is there any downtime in Q1 or anything? Or I'd imagine that would ramp up through the year? No?

No. I mean that number will fluctuate depending on how we are able to load and how we are able to provide best-in-class service to customers. For example, sometimes, we find that for short lead time orders, making it in our India factory and shipping it to Europe provides the best results. And we just cannot idle factories and expect them to start back up later. So, best practice is that you should view Q4 as a little more upside, and then you should view Q1 as conservative.

Got it. And the last question I had is, I think Mandy mentioned $110 million of prepayments in Q4, but the safe harboring was for $95 million. What are the other types of products that you receive prepayments for?

Well, in general, we do have prepaid customer prepayments depending on their credit terms. But however, in this case, there were some customers who did want to place small amounts of orders so that they can secure their capacity. And those we view as the run rate business to be consumed in the next one to two quarters. So that makes up for the balance.

And ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor 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 with that, ladies and gentlemen, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.