Good day, and welcome to the Enphase Energy's First Quarter 2025 Financial Results Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2025 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results of its first quarter ended March 31, 2025. During this conference call, Enphase management will make forward-looking statements, including but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products, and the benefits to homeowners and installers, our operations, including manufacturing, customer service, and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions, regulatory tax tariff, and supply chain matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K, which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri?

Good afternoon, and thanks for joining us today to discuss our first quarter 2025 financial results. We reported quarterly revenue of $356.1 million, shipped approximately 1.53 million microinverters and 170.1 megawatt hours of batteries, and generated free cash flow of $33.8 million. Our Q1 revenue included approximately $54 million of Safe Harbor. As we exited Q1, our battery channel inventory was normal, while our microinverter channel inventory was a little elevated. For the first quarter, we delivered a 49% gross margin, 22% operating expenses, and 27% operating income, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefit. Mandy will go into our financials later in the call. Our customer service NPS held steady at 77% in Q1 as compared to 78% in Q4. The average call wait time increased slightly to 3.5 minutes, largely due to the winter storms in the US. We are continuing to invest in AI and machine learning to make our support experience faster, smarter, and more helpful. Let's cover operations. Our global capacity is around 7.25 million microinverters per quarter, 5 million of those are in the US. In Q1, we shipped approximately 1.21 million microinverters from our US contract manufacturers booking 45x production tax credits. Our domestically produced microinverters help residential lease/PPA providers and commercial asset owners to qualify for the 10% domestic content ITC adder. We expect to ship approximately 1 million microinverters from the US in Q2. Q1 was our second quarter of building the IQ Batteries in the US using domestically manufactured microinverters, battery management systems, and packaging while sourcing cell packs from China. We shipped 44 megawatt hours of batteries from our Texas facility, a strong step forward as we continue scaling US production. Let's cover tariffs. The newly announced 145% tariff on products from China, along with the 10% reciprocal tariffs on imports from other countries, is expected to have minimal impact on our microinverters and accessories, thanks to the excellent work our team has done to diversify its supply chain. However, our batteries will be more impacted as we currently source battery cell packs from China. These tariffs are expected to reduce our gross margin by approximately 2% in Q2 of '25. The effect of the tariffs is limited in Q2 due to us having pre-tariff inventory. Starting in Q3, we anticipate a 6% to 8% total gross margin impact after accounting for pricing adjustments. We expect the gross margin impact to gradually lessen over the subsequent quarters as our mitigation efforts take effect. We have already identified tangible sourcing options outside China and we are fast-tracking the qualification. These efforts are progressing quickly, and we expect to fully offset the impact starting in Q2 '26. As always, tariff policy remains fluid and may evolve with future government decisions. Let's come to the regions. Our US and International revenue mix for Q1 was 74% and 26% respectively. In the US, our revenue decreased 13% in Q1 compared to Q4, primarily due to seasonality and softening in customer demand, partially offset by Safe Harbor revenue of $54 million. The overall sell-through of our products was down 18% compared to Q4. In addition to seasonality, installation activity was negatively impacted by one of the large national lease providers facing financial challenges. The US solar market remains under pressure from high interest rates, and many installers, lease providers, and distributors are navigating through a tough environment. That said, there are some encouraging signs. In California, installers are growing more confident selling NEM 3.0 systems, supported by strong battery attach rates. At the same time, power prices continue to rise across several key regions. We are staying focused on product innovation, quality, and customer experience. Our upcoming fourth generation battery is designed to lower total system costs for backup. Our complementary offerings, like Busbar PCS and NEM expansion software, help customers unlock even more value. In Europe, our revenue increased 7% in Q1 due to shipping the FlexPhase battery in Germany as compared to the prior quarter, while our overall sell-through declined a little by about 9%. The overall business environment across the region is still challenging, but we are maintaining our discipline on controlling the channel, as well as expanding our served available market by introducing a number of new products. I'll provide additional color on our key markets in Europe, the Netherlands, France, Germany, and the UK. In Netherlands, the demand softened slightly in Q1 in line with typical winter seasonality. The market continues to shift from solar-only to solar plus battery solutions, which help avoid export penalties and enable participation in retail energy markets. We started shipping our new IQ EV charger into the region and recently introduced backup capability for our batteries, further strengthening the value proposition. In France, the market has slowed down following the recent utility rate cuts, and we expect the demand to be muted over the next two quarters. However, a significantly lower VAT is set to begin in October, which should help spark a rebound in solar. France remains a key long-term growth market for us given our leadership position and the country's low solar penetration. We started shipping our new IQ EV charger into France, and we also plan to introduce hot water heater compatibility in the second quarter, allowing homeowners to increase their self-consumption. We also added backup capability for our batteries, further strengthening the resilience offering. In Germany, we are ramping sales of our new IQ Battery 5P with FlexPhase and the new IQ EV charger. The typical installations are three-phase in Germany and we are seeing a 30% backup attach for our batteries, a strong indicator of the growing demand for resilience. We are also preparing to launch our Balcony Solar product imminently in Germany in Q2, which expands our addressable market by approximately 400 megawatts annually. We believe these product introductions position us well for meaningful growth in both sell-in and sell-through over the coming quarters. The UK market continues to perform well for us as we strengthen our relationships with the retail energy providers in the region. We already started shipping our newest IQ EV charger, and we plan to introduce backup capability in Q3 of this year, further expanding our energy resilience offering. We remain underpenetrated in several European countries, including Italy, Spain, Belgium, Luxembourg, Switzerland, Austria, Sweden, Poland, and others, and we see them as important pillars of our long-term growth strategy. Over the coming months, we plan to introduce our full product portfolio across more of Europe, including IQ Microinverters, IQ Battery FlexPhase with backup, our latest and greatest EV charger, AI-powered energy management software, and the solar graph installer platforms. We continue to make steady progress in other regions. In Puerto Rico, we are seeing a very sharp rise in demand for our higher domestic content battery, driven by an increased need for resilience. In India, sales of our IQ8P microinverters continued to grow, and we are also shipping our batteries into the region. We are encouraged by the early signs of strong product-market fit in both the urban and rural areas. In Brazil, new fire safety recommendations such as rapid shutdown should support continuous growth of our IQ8P microinverters. Now let's turn to our Q2 guidance. We expect Q2 revenue to be in the range of $340 million to $380 million. This includes approximately $40 million in Safe Harbor revenue, which we define as sales made to customers who plan to install the inventory over more than a year. We are currently about 80% booked to the midpoint of our revenue guidance. For IQ Batteries, we expect to ship between 160 and 180 megawatt hours during the quarter. Let's talk about new products, starting with IQ Batteries. Our fourth generation IQ Battery is all set to ramp up production this quarter. This system includes the IQ Battery 10C, the IQ Combiner 6C, and the Meter Collar. The IQ Battery 10C delivers the same 10 kilowatt hour capacity while using 60% less wall space, thanks to its fully integrated battery management and power conversion. When paired with the IQ Combiner and the Collar, the system significantly simplifies backup, eliminating the need to relocate loads, install current transformers, or run high current wiring. For both homeowners and installers, the improvement is substantial. What once took four boxes on the wall can now be done with just two. We have successfully completed the required Meter Collar testing with PG&E and four other utility companies. We expect to begin pilots in May. We have now expanded the IQ Microinverter family into 58 countries and plan to grow that number further by the year end. In Japan, we expect to begin production shipments this week through a distribution agreement with ITOCHU Corporation, one of the country's largest trading companies. Recently, Tokyo became the first Japanese city to mandate rooftop solar on new home builds. Given the typically small roof areas in Tokyo, system design can be complex, which is exactly where our Enphase IQ8P microinverter shines, offering the flexibility and scalability needed to maximize production and reliability from every rooftop. In Q2, we plan to launch our IQ Balcony Solar product in Germany and Belgium with additional countries in Europe and Asia to follow in 2025. The product offers a simple, efficient way for apartment dwellers to harness solar energy from their balcony. Built on our proven AC-coupled architecture, the system allows the users to plug in one to four panels directly into a standard wall outlet. We plan to offer pre-wired kits that include IQ Microinverters and the Balcony gateway enabling fast setup and seamless monitoring through the Enphase app. In the event of a grid outage, the system also supports sunlight backup via an auxiliary socket located on the IQ Balcony Gateway product. Let's come to our IQ8P-3P commercial microinverter, a product that is steadily gaining traction. We have over 650 commercial sites live across the US, averaging about 35 kilowatts per system with consistent positive feedback from the field. These three-phase microinverters now ship from the US with increased domestic content that helps qualify for the 10% ITC add-on, a meaningful advantage for commercial asset owners. And we expect the momentum to grow with the upcoming IQ9 microinverter, which is purpose-built for 480 volt three-phase systems, unlocking even more of the commercial market. Let's talk about IQ9. So IQ9 microinverters are powered by cutting-edge gallium nitride technology. These microinverters are engineered for the future with support for 18 ampere DC input current, higher AC voltages, and three-phase configurations. Designed specifically for small commercial systems, IQ9 will support 480 volts AC, the most common commercial voltage in the US. The first models will deliver peak output power of 427 watts and 548 watts, making them ideal for pairing with today's most powerful residential and commercial solar panels. IQ9 uses GaN-based bi-directional switches that allow us to reduce conduction losses and increase power density. While we are currently operating at similar switching frequencies to maintain compatibility with our existing transformer design, gallium nitride or GaN gives us the foundation to enable much higher frequencies and even greater efficiency in future products like IQ10. Thanks to GaN, IQ9 already delivers efficiencies that meet or exceed prior generations with a sleek, compact footprint. We expect to begin internal installations at Enphase facilities soon ahead of a full production launch in Q4. On the portable power front, we began shipping the IQ PowerPack 1500 to customers in the US and Canada. This compact 1.5 kilowatt-hour solution brings together our core strengths—Enphase in a box—which includes advanced power electronics, battery management, and intelligent software into a smart portable product designed for home backup, travel, and emergencies. IQ PowerPack marks our entry into the portable consumer energy market. We see this as a meaningful growth vector and plan to expand the product family in 2025 to address many more use cases and reach many more countries. Let's dive into EV charging. In late 2024, we began shipping our next-generation IQ EV charger into Europe. We are now active in 14 countries across the region. This is one of our most advanced residential chargers to date, designed to work seamlessly with the Enphase Energy system or as a high-performance standalone system. Smart features like green charging help homeowners maximize solar usage, while intelligence scheduling reduces energy costs during peak hours, delivering both sustainability and savings. We are excited to expand the availability of the IQ EV charger throughout this year into more European countries as well as into Australia, Brazil, India, and the US where we will position it as a premium, feature-rich offering. With strong early momentum, we expect continuous growth this year and beyond. Our IQ Energy management software supports grid services programs, VPPs in regulated markets like the US and energy market participation in deregulated markets like Europe and Australia. In the US, we are active in 26 programs across key states such as California, Colorado, Massachusetts, North Carolina, and Texas. These programs discharge batteries during peak demand, supporting the utilities. As electricity rates become more complex, we believe our AI-powered software differentiates us, maximizing ROI and reducing the payback period. Let's cover Solar Graph, our all-in-one installer platform. We are investing in major enhancements, including a one-click Express editor for customized proposals, a Gen-AI powered in-app assistant, integration with racking, and expanded C&I capabilities, all aimed at making Solar Graph even more intuitive. The platform is now available to residential and commercial installers in the US, Canada, Brazil, Germany, Austria, Netherlands, and France with plans to expand into additional countries in the coming quarters. Solar Graph continues to evolve as a strategic part of our software ecosystem, helping installers sell faster, design smarter, as well as scale efficiently. Let me conclude. While the global policy environment remains fluid with tariffs, interest rates, and subsidies constantly evolving, we are moving quickly to realign our supply chain to minimize downside across a range of scenarios. While we cannot control the macroeconomic conditions, we can absolutely control our response. This means doubling down on what has always made Enphase successful—relentless product innovation, world-class reliability, and exceptional customer service. Looking ahead, our strategy is clear. We are driving revenue growth through a wave of new products, starting with our fourth generation system, which delivers the lowest installation cost of any Enphase solar-plus-battery solution to date. In Europe, our SAM is expanding rapidly with the launch of our FlexPhase Battery with backup, the IQ EV charger, and the upcoming IQ Balcony Solar kit. We are empowering installers with tools like NEM expansion software to expand legacy systems, Busbar PCS software to avoid main panel upgrades, and dynamic tariff optimization software in European markets to help save money for the homeowner. And with our upcoming IQ9 microinverters, we expect to unlock a 10 gigawatt opportunity in commercial solar while driving cost per watt improvement across our residential business, as the world faces rising power prices and increasing grid instability. Enphase is becoming leaner, faster, and more innovative. We are energized by the future and firmly focused on delivering value for our customers, partners, and shareholders. 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 first quarter of 2025 financial results as well as our business outlook for the second 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 Q1 was $356.1 million. We shipped approximately 688.5 megawatt DC of microinverters and 170.1 megawatt hours of IQ Batteries in the quarter. Q1 revenue included approximately $54 million of safe harbor revenue. 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. Non-GAAP gross margin for Q1 was 48.9% compared to 53.2% in Q4, primarily due to lower bookings of the 45x production tax credit and product mix. GAAP gross margin was 47.2% for Q1 compared to 51.8% in Q4. Non-GAAP gross margin without net IRA benefit for Q1 was 38.3% compared to 39.7% in Q4, primarily due to product mix. GAAP and non-GAAP gross margin for Q1 included $37.9 million of net IRA benefit. Non-GAAP operating expenses were $79.4 million for Q1 compared to $83.3 million for Q4. The decrease was the result of restructuring actions initiated in the fourth quarter of 2024. GAAP operating expenses were $136.3 million for Q1 compared to $143.5 million for Q4. GAAP operating expenses for Q1 included $50.9 million of stock-based compensation expenses, $2.9 million of amortization for acquired intangible assets, and $3.2 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $94.6 million compared to $120.4 million for Q4. On a GAAP basis, income from operations was $31.9 million for Q1 compared to $54.8 million for Q4. On a non-GAAP basis, net income for Q1 was $89.2 million compared to $125.9 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.68 for Q1 compared to $0.94 for Q4. GAAP net income for Q1 was $29.7 million compared to $62.2 million for Q4. This resulted in GAAP diluted earnings per share of $0.22 for Q1 compared to $0.45 for Q4. We exited Q1 with a total cash, cash equivalents, restricted cash, and marketable security balance of $1.53 billion compared to $1.72 billion at the end of Q4. We paid off the entire principal amount of $102.2 million for our 2025 convert that came due on March 1st. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased 1,594,105 shares of our common stock in Q1 at an average price of $62.71 per share for a total of approximately $100 million. We have a remaining $298.7 million authorized for further share repurchases. In addition, we spent approximately $12.1 million by withholding shares to cover taxes for employee stock vesting and options in Q1 that reduced the diluted shares by 203,358 shares. We expect to continue this anti-dilution plan. In Q1, we generated $48.4 million in cash flow from operations and $33.8 million in free cash flow, as approximately $70 million of revenue in Q1 was prepaid last quarter. Capital expenditure was $14.6 million for Q1 compared to $8.1 million for Q4. Now let's discuss our outlook for the second quarter of 2025. We expect our revenue for Q2 to be within the range of $340 million to $380 million, which includes shipments of 160 to 180 megawatt hours of IQ Batteries. The Q2 revenue outlook includes approximately $40 million from a safe harbor sales agreement signed in December 2024. We expect GAAP gross margin to be within a range of 42% to 45%, including 2 percentage points of new tariff impact. We expect non-GAAP gross margin to be within a range of 44% to 47% with net IRA benefit and 35% to 38% before net IRA benefit, including 2 percentage points of new tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition related amortization. We expect the net IRA benefit to be between $30 million and $33 million on estimated shipments of 1 million units of US microinverters in Q2. We expect our GAAP operating expenses to be within a range of $136 million to $140 million, including approximately $58 million estimated for stock-based compensation expense, acquisition-related expenses, and amortization and restructuring, and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $78 million to $82 million. For the year of 2025, we expect our GAAP tax rate of 21% to 23% and a non-GAAP tax rate of 15% to 17%, including IRA benefits. With that, I will open the line for questions.

We will now begin the question-and-answer session. And your first question today will come from Praneeth Satish with Wells Fargo. Please go ahead.

Thanks. Good evening. Maybe just starting with the Q2 guidance, so it includes 2 percentage points of gross margin headwind from the tariffs. It sounds like that could go to 6% to 8% in Q3. So it would seem as if you're not fully passing through the entire incremental tariff cost to customers. And I guess maybe if you could just talk about what's driving your decision to absorb some of these costs versus passing them through, because I would imagine that many of your competitors are also sourcing battery cells from China? So maybe if you could talk through that.

Yes, you're correct. Let me provide an overview. First, the tariffs are quite high, with 145% on imports from China and 10% on imports from other countries. Fortunately, our microinverters and accessories have not been significantly impacted because our supply chain has effectively diversified globally. That's the good news. Regarding batteries, over 90% of the battery cells produced globally come from China, and we also source our cell packs from there. We have two methods for producing batteries: one is manufacturing them overseas as a complete system, and the other is receiving cell packs in the US to assemble the rest of the system domestically. Bringing components into the US involves high manufacturing costs, with tariffs applying only to the imported cell packs and any related raw materials. As a result, whether we manufacture domestically or overseas, our costs are roughly similar, and the cost impact is substantial. We have chosen to absorb the majority of this cost, passing only part of it to our installers because we believe we can recover from this situation in two to three quarters. Our primary focus is to qualify cell sources outside of China, which we have already identified, and we are working diligently towards this goal, anticipating qualification by early next year. Given that the impact will only last for a few quarters, we decided to pass some cost to the installers while absorbing most of it. I mentioned the total impact in the third quarter will be around 6% to 8%. We expect only a minor impact of about 2% in the second quarter due to pre-tariff inventory, but that will diminish in subsequent quarters, with the impact expected to improve from Q3 to Q4 to Q1 and potentially reach zero by Q2.

Got it. That's very helpful. And then just right or wrong, there seems to be a bit of paralysis on the customer side as we wait for clarity around IRA. For the Q2 guide, are you accounting for any worsening of demand trends in Q2 as we wait for clarity or making any adjustments for Nova exposure in the guide? And then maybe on the flip side, do you think that sell-through could accelerate in the second half once we get IRA clarity? I guess, what are you hearing from your dealers on any pent-up demand? Thank you.

Yes, I mentioned that my current bookings are around 80%. The guidance we provided reflects those bookings, which is actually a positive sign. The uncertainty in the market is definitely a contributing factor, and the financial difficulties of one of the large national lease providers are also impacting us. This financial strain is making it challenging for our installers to manage their cash flow. When installers face cash flow issues, it affects the origination numbers in the first quarter. As a result, we haven’t seen enough pull-through from distributors to installers. Life has been tough for them financially. However, the good news is that there are now more lease financiers available than there were two years ago, so it’s just a matter of time before those installers engage with alternative financiers and get back to business. This situation has created a gap in the first quarter, which we mentioned. Our sell-through numbers were a bit lower than usual. On a positive note, we are entering the strongest seasonal period of the year, with the second quarter typically being the best. For Enphase specifically, we are set to ramp up our fourth generation batteries in the second quarter, expecting to ship significant volumes. We anticipate that our costs for backup installations will be nearly as competitive as grid systems. We have managed to gain market share with our batteries, which support grid-tied installations using our third generation. This creates a significant opportunity for us to penetrate the backup market with a cost-effective solution. Previously, our third generation backup system had many more components, but now we’ll significantly reduce those due to two main factors: having the collar and upgrading to a 10-kilowatt-hour battery instead of a 5-kilowatt-hour one. Enphase is well-positioned to take advantage of the battery market. Additionally, clarity regarding policies will likely provide a boost in the latter half of the year.

Thank you.

And your next question today will come from Phil Shen with ROTH Capital Partners. Please go ahead.

Hi all, thanks for taking my questions. You talked earlier, Badri, about the margin trajectory as we get through even the first part of next year. Can we talk about what the revenue cadence might look like? So for Q3, is $375 million on the table? Would you expect Q4 to be up quarter-over-quarter or down, and if you feel like you can share even Q1 of next year, that would be fantastic. Thanks.

Phil, we typically don’t provide guidance for Q3 or Q4, but we have several positive factors at play. I mentioned the fourth generation system, which we believe is significant for Enphase. In the US, we’ll have the IQ9 launching in Q4. In Europe, we’ve introduced a wide range of new products and are already seeing strong interest, particularly with the FlexPhase Battery that offers three-phase backup in many countries. We're also set to launch the Balcony Solar this quarter, which targets a total addressable market of 400 megawatts in Germany alone. Following Germany, we plan to expand to Belgium and several other European nations, and afterward to Japan and India. We anticipate introducing additional products in Q2 as well. Our latest IQ EV charger has ramped up well, allowing us to serve all 14 countries in Q1, and we aim to enhance our partnerships in installations and with other companies in the EV charger space. Despite the uncertainties surrounding policy, Enphase is focused on shaping our future through the introduction of new products and maintaining discipline. These new product initiatives are key to our expected growth.

Okay, thanks, Badri. Regarding margins, you mentioned a 6% to 8% impact on Q3 margins. Could you clarify what the gross impact of tariffs is for Q3?

I don’t have the gross impact information. What we are indicating is that we are passing a small percentage increase to our customers. We are also taking several actions, such as exploring options to source raw materials for the batteries outside of China. All of these efforts are set to take place. These are improvements, and there are numerous small initiatives we are implementing to further enhance our gross margin.

And your next question today will come from Brian Lee of Goldman Sachs. Please go ahead.

Hey guys, good afternoon. Thanks for taking the questions. I guess the first question would just be, it sounds like you're passing through a little bit of the price on the tariff impact on batteries in the back half of the year. So you've been doing pretty well, 170 megawatt-hours of shipments quarter here to start the year, you've never had that kind of strength in the first half. Second-half usually better, but given tariff impact uncertainty and then maybe a little bit of price you're having to pass through, like what's the view on shipment volumes for battery storage in Q3 and Q4? Can you continue to grow into the second half? I guess that's also in the context of a new battery ramping. So just wondering kind of what's the volume view on top of what's happening with respect to cost and margins.

Yes, I mean this is a great battery. First of all, our third-generation system was 5 kilowatt-hours, our fourth-generation system is 10 kilowatt-hours. We had separate battery management, separate power conversion in the third-generation system. We have combined it and it's got a deep level of integration, a combination of power conversion as well as battery management, resulting in cost decline. And then we are talking about the balance of the system. In the balance of the system, we have eliminated what was called the system controller in the third generation. And now we have eliminated that box, replacing it with a small Meter Collar which is trivial to install. So bottom line, what I'm trying to tell you, Brian, is that the system cost for the Enphase installed with backup is going to be significantly reduced. And yes, the battery itself might go up a little bit in pricing, but the overall system cost reduction is quite good and quite tremendous. So we expect to continuously grow on batteries. We also expect to continue to grow on batteries in Europe. For the first time, we have had three-phase backup, a full three-phase backup. And that was not available so far. I told you about the Germany, the battery attach is 80%, 90%. But of that battery attached, how many have backup, 30% have backup. We are able to serve those 30% now. And we are extending that to everywhere in Europe. And we expect our batteries to significantly improve. That is why we are taking very swift efforts to realign the supply chain to have non-China sales in our source of supply.

That's super helpful. Maybe just a follow-up on that then, Badri. So I think you guys were talking about doing something in the close to 35% gross margin on battery storage. If you kind of back out the 6 to 8 percentage point tariff impact in the back half here, it implies your battery storage margins are going to be zero or negative, definitely negative in the US. So to get to back to kind of that 35% level, which I think you're inferring by Q2 of 2026, like how gradual is that? Or is that all just going to happen in like a quarter or two as you basically switch to non-China suppliers, it sounds like over Q1 or Q2 or is it all going to just happen in Q2? Maybe a little bit more color on the cadence, please? Thanks.

Yes. I mentioned that the impact in the second quarter is small. For the remaining quarters, specifically in the second quarter of 2026, the impact is projected to be zero. We are essentially discussing three quarters. During these three quarters, we will focus on two key actions. First, we plan to shift the source of our cells outside of China and diversify our suppliers, which we have already begun working on. Second, we need to relocate the raw materials used in our batteries, which are largely sourced from China, to low-tariff countries. This latter effort will be ongoing, while the cell sourcing can be activated relatively quickly, although it may take about three months to fully ramp up. Therefore, my guidance is that these projections are approximate, with an expected impact of 6% to 8% in the third quarter, and we anticipate improvements in each subsequent quarter: the fourth quarter of 2025 should be better than the third quarter, the first quarter of 2026 will improve upon the fourth quarter of 2025, and by the second quarter of 2026, the impact should be negligible.

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

Great. Thank you very much. So, Badri, I just want to confirm on that last point with the battery adjusting the supply chain. The raw materials, the pack, it's still the same LFP chemistries, right? Or is there any redesign or recertification that would be needed of your product? And would that be added on top of this timeline that you're talking about through 2Q '26?

Yes, that's a good question. The key point is that we are committed to our LFP technology and are not moving away from it. The challenge lies in implementing this without needing a complete redesign. Currently, our plans primarily focus on the cell. However, we will still require the usual qualifications since the cell is the fundamental component of the battery, and we must ensure we carry out the necessary qualifications.

Okay. That's great. And then just kind of near-term, wanted to go back to the 2Q guide. You said you're 80% booked into the midpoint of the guide. And I think you mentioned this in the past, it's been closer to 85% at least the last couple of quarters. Just kind of your thoughts on going with that 80% number instead of 85%, just kind of what gives you the confidence to go with that higher number?

Last quarter we reported two weeks late that was February 4th. This time, this is April 22nd. So which we are fine. There 80% is good. We expect to be 100% booked soon.

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

Thanks so much, guys. Given the VPP functionality that you guys can enable as well as some of the analytics, can you talk a little bit about market share gains, how you're seeing that sales process evolve, and whether you're using price as a lever to take up market share a little bit here as you go forward?

Yes. Hey, Colin, this is Raghu. When you think about battery sales as well as actually EVSEs as well, it's now more than just batteries being used for providing resiliency or time-of-use or peak shifting. What you're seeing is this new value proposition that adds on to it, which is using your batteries to provide either to participate in energy markets in deregulated markets or a VPP construct where the utility can use your battery and discharge it and pay you for it. And so, at the end of the day, what that means is it just improves the ROI for the homeowner and reduces the payback period. So the better that you can do it is actually a value proposition. You can be better than the competition. What I mean by that is providing very high-quality APIs for your partners and that they can and then drive the battery and discharge the battery as needed, charge the battery as needed, and participate in the energy market. And all of that value proposition, which is good for the homeowner, is also the value proposition that drives the adoption of your batteries. If we do it better than our competition, then clearly we gain market share. And that's what we are driving towards. We see that a number of our partners buy our batteries because of our VPP and market steering capabilities.

That's super helpful. And then just from a logistics perspective, it looks like there's going to be some disruption in and around container ships. Can you talk a little bit about how you guys are mitigating that risk and what you're seeing in early returns on any of those elements so far?

Colin, can you kindly repeat that question because....

Sure. I mean just from a logistics perspective and shipping, like if you're still importing from Asia on key components, what you're seeing from a logistics perspective in terms of disruption on available ships, space, getting through customs, any sort of incremental expenses that we could be thinking about, just make sure we're paying attention to all of those software costs.

Yes. We currently manufacture 85% of our microinverters in the US, which accounts for 85% of our global shipments. There is already a robust supply chain of raw materials flowing into the US for microinverter production, and we do not anticipate any changes to that since we have effectively diversified our logistics without encountering issues so far. Regarding batteries, we shipped 170 megawatt hours in Q1, with 44 megawatt hours produced in Texas, representing about 25%. Our operations involve shipping cell packs to Texas where we produce microinverters, battery management systems, and enclosures in different states. The essential factor remains the raw materials needed for production, and our supply chain was established over the past three to four quarters. While there are disruptions, we are not starting from scratch as we have already ramped up in certain areas. We expect the production of the 44 megawatt hours made in the US to continue to increase as the year progresses.

Thanks guys.

And your next question today will come from Christine Cho with Barclays. Please go ahead.

Good evening. Thank you for taking my question. I was wondering, could you remind us what the manufacturing plans were for 10C? I thought the initial rollout was going to have the US inverters shipped to China and then assembled there and shipped back to the US before all this tariff news, and then the domestic content version was going to come out later. So first of all, is this correct? And if it is, are you changing these plans so that you're not importing the full battery into the US, which will be subject to a higher nominal tariff? And if that's the case, does this impact the rollout of 10C at all if you do have to change plans?

No, it does not roll out the impact of 10C. We are starting with the non-domestic version and that is correct. The microinverters for the non-domestic version will be made in the US and the rest of the battery is made outside the US but being shipped in. But we are quickly in about two months to three months’ time, we will quickly realign the supply chain to have the domestic content product also available for the 10C. So right now, whatever we plan to ship in the second quarter will be the non-domestic version. And in a couple of months from then, the domestic version will be available.

Okay. And then your guide for the 2Q quarter on top line and battery shipments are about the same as 1Q. And even if I am to add back the 2 percentage points of the tariff impact, would you imply your gross margins are still down about 150 basis points at the midpoint. What exactly is driving that? And even though you talk about being diversified on the supply chain for microinverters and having a lot of domestic suppliers. So maybe you might not directly be seeing tariffs, but aren't your suppliers still seeing price increases on their raw materials in this inflationary environment?

Well, I mean, we said that the 2% increase was attributed to the tariffs for the current quarter. However, on batteries, I mean what you said is right. We plan to ship a smaller quantity than the usual full quarter quantity on batteries, while the fourth generation battery is new and let us say I ship and which I'm not guiding to the number. Let us say I ship 30 megawatt hours off the fourth generation battery, and that would come with a little more tariff compared to the inventory that we will have on the third-generation tariff. Hence, we guided to the 2% there. That's all.

And your next question today will come from Andrew Percoco with Morgan Stanley. Please go ahead.

Great. Thanks so much for taking our questions. I do just want to again come back to this battery storage concept for a second. I'm just curious, you mentioned at the beginning of Q&A, I think 95% of LFP sales come from China. So presumably, a lot of your competitors and peers are also trying to get their hands on the supply you guys are working on. So just curious how you see the cost environment for that non-China supply evolving over time and the conversations you've had with some of those suppliers? And then, second to that, just trying to figure out, when you talk about getting to 0% gross margin impact by the second quarter of 2026, how much of that is dependent on just completely exiting China from an LFP perspective versus taking action on price? Just trying to get a sense for breakdown there. Thank you.

Yes, 95% of the LFP sales in China, yes, that's right. Don't forget that there are some Korean suppliers who do make NMC and we have never used NMC we've never liked NMC; that's our opinion. LFP is what we like in terms of safety so that's the first one. Then the question that you asked is the biggest factor that affects the battery tariff is the cell you cannot get away from that. So if we cannot, meaning if our plans do not materialize for transferring the cells, that's a problem and then we would have to look at passing more of the cost impact to our customers. But right now, the right thing to do is to get the battery sales diversified out of China and we are working, we are not talking about unnamed suppliers, we are working with two great suppliers, and we have very tangible plans, and we have tangible schedules. And since the timeframe we are talking about is two to three quarters, we thought the right thing to do is to absorb a fraction, a significant fraction of it ourselves and return back to normalcy very quickly.

Understood. Thank you for that. And maybe just to ask a higher-level question here. I know you guys don't guide beyond one quarter, but I guess, how do you envision the market evolving over the balance of the year? You obviously have IRA uncertainty, which might not be resolved until Q3, Q4 at some point? Obviously, tariffs have had an impact on recession concerns and consumer sentiment. So how do you expect the demand environment to evolve over the balance of the year just given the level of uncertainty and the impact that has had on broader consumer sentiment, which obviously could lead into and have an impact on end-market demand for residential solar? So just curious how you're thinking about that at a higher level. Thank you.

Yes. I mean, look, Q1 is usually the seasonally worst quarter. We are past Q1. Q2, Q3, and even Q4 to an extent are normally, are the good seasonal quarters. So we are expecting that. In addition, our value proposition, the value proposition of solar and batteries relies a lot on utility rates and it is not exactly that the utility rates are going down everywhere; they are in fact going up. And so, as long as that happens, the ROI of tomorrow will be better than today. And so utility rates is an important factor. You saw what is happening to NEM 3. NEM 3, just to remind you, did away with net metering and there is a small feed-in, only small export compensation. That caused the battery attached in California to go to 90%, so it was a very difficult transition. We don't like how abruptly the transition was done, but at the end of the day things are looking more stable in California in terms of solar and storage with a very healthy value proposition. And that healthy value proposition came from the fact that utility rates are high. So that's a factor that will always be going for us. Then you have the explosion in AI. The explosion in AI, what it's going to cause is electricity supply is going to get stretched both in front of the meter as well as behind the meter and we are not here to argue which one is better but you know it is that what we do is behind the meter, while a lot of capacity is put in place in front of the meter. So we think in order to be balanced or in order to have a proper energy security for America, we need to have a thriving behind the meter business in addition to the front of the meter. And behind the meter, we are talking about every home being a power plant, mini power plant, solar-plus-storage. And so, I think it is only a matter of time when people start seeing this and there is clarity on IRA, the ITC, and PTC and I think demand will be unlocked after that.

Your next question today will come from Maheep Mandloi with Mizuho. Please go ahead.

Hi, this is David Benjamin for Maheep. Thanks for taking our questions. Does your Q2 guide assume any negative impacts from higher tariffs on Southeast Asia modules and the impact on US solar demand?

No, we don't deal with modules from Southeast Asia.

You don't notice any effect on overall solar demand.

Overall solar demand may be affected somewhat by utility scale. We do not anticipate any impact on residential demand.

Okay, thank you. And then you did mention that channel inventory was slightly up. Is that in Europe or is the US? And does that imply like any potential new destocking?

No, the channel inventory is up because when sell-through decreases, the channel inventory can increase slightly beyond our usual targets. Our targets are between eight and ten weeks. However, if sell-through drops more than expected, then it can rise a bit. The way to recover from this is straightforward: limit shipments into the channel and work on boosting sell-through in a seasonal quarter like Q2, which typically sees higher sell-through than Q1. We view this as a normal cycle, and with our disciplined approach to managing the amount of material in the channel, it should return to normal levels quickly.

Your next question today will come from Julien Dumoulin-Smith with Jefferies. Please go ahead.

Hey, good afternoon, team. Thank you guys very much. I appreciate it. Maybe just follow-up on the last question a little bit further. Can you talk about what you're seeing in terms of end market demand, right? You talked about restocking and now destocking here and seemingly in the second quarter. What are you seeing in terms of year-over-year volume metric trends? I know you provided obviously second quarter, but can you talk about volumetric trends were at large, A. And then B, can you talk a little bit more about safe harbor as well? It seems like you're implying that the substantive amount of the $95 million is contemplated in the first half and with fairly little safe harbor contemplated in the back half, but maybe you could talk about maybe early indications on that front?

Yes. I'll respond to the second question first. About safe harbor, you are correct that we recorded $54 million in Q1 and estimated around $40 million for Q2. Currently, we do not have safe harbor plans in place because our customers haven't requested them yet. However, if they do need stock for other reasons, we will provide updates in the second quarter call. Regarding volumetric trends, we previously mentioned that Q1 had the lowest demand. We also addressed the challenges faced by a large national leasing provider, which has contributed to our installers encountering hurdles. They plan to recover by seeking new financing options, which will lead to an increase in installation starts. This is why we experienced a slight decline in sell-through from our distributors to installers in Q1. We anticipate that this trend will stabilize, and normal sell-through patterns will return from Q1 to Q2. However, it may take some time to resolve these one-time effects. Looking ahead to Q3 and Q4, I have discussed the necessity for clearer policies. That said, we are continuing our efforts as planned. We expect to ship our fourth generation system product this quarter, which will simplify backup processes significantly and make them cost-effective. We also plan to introduce the IQ9 in the fourth quarter, expanding our reach into the 480 volts, three-phase small commercial sector. The innovation with GaN in the IQ9 allows us to maintain a cost structure similar to prior generations while offering 10% more power, effectively lowering the cost per watt by 10% compared to our previous models. We are also aware that utility rates are increasing, but we expect overall growth throughout the year, mainly driven by our new products and improved policy clarity.

Your next question today will come from Kashy Harrison with Piper Sandler. Please go ahead.

Hi, good afternoon. Thank you for taking the questions. Just two quick ones for me. My first question, on the topic of GaN, are there alternative sources for gallium outside of China? Just trying to think through risk mitigation in the event that the trade war potentially gets worse before it gets better.

Yes, we have talked about this at length with our sources. We have more than one source; all of them are comfortable that they have it covered; we are not worried about it.

Okay. For my follow-up, you mentioned that Europe remains challenging, but your sell-through was down 9%, which doesn't seem too bad considering the seasonality. I'm curious about what led you to describe the entire region as challenging. Is it primarily France, or are there other factors we should consider? Thank you.

No, we discussed this earlier. The sell-through was down slightly at 9%. However, we introduced new products in the region, which led to an increase in our numbers. We have also focused on various initiatives in the Netherlands, where net metering will be phased out in 2027. This change will drive customers to seek battery solutions to manage their electricity bills, presenting a significant opportunity. The market will evolve into one that combines solar and storage, and we are collaborating with installers and retail energy providers to ensure a smooth transition. Regarding France, while we mentioned a decline in utility rates, we believe this is just a temporary setback for a couple of quarters. We anticipate a reduction in VAT and an eventual increase in utility rates based on publicly available information. We are consistently launching new products there, including our three-phase battery with backup, which will be available soon. Additionally, we've introduced our latest IQ EV charger and are adding hot water heater capabilities. Currently, the feed-in tariff in France is only EUR0.4 per kilowatt hour, making it less appealing to export energy; instead, customers would benefit more from saving their energy. By redirecting solar energy to hot water heaters, it becomes a more efficient use of energy. This solution will be released in the current quarter. In Germany, we experienced a positive increase in Q1, largely due to the FlexPhase battery with its three-phase backup feature. Although the European market remains somewhat weak, our total addressable market has strengthened through these new product offerings, which is why we have a more optimistic outlook for Europe and why our revenue there has increased.

Your next question today will come from Austin Moeller with Canaccord Genuity. Please go ahead.

Hi, good afternoon. Just my first question, given the administration's announcement of new tariffs on panels in Southeast Asia, I assume that your supply chain team is not expecting that a trade deal with China, be it Vietnam will benefit inverter or battery manufacturing and you're just going to accelerate the diversification of your supply chain out of China?

Yes. I mean, that's the general plan. We are accelerating the move specifically for batteries. We have already completed for microinverters like what I said, microinverters and accessories; they're almost done. That's right.

Okay. And just a follow-up. So, I mean, the general assumption here is US installers are advanced, procuring inverters and batteries and waiting to sell product probably once interest rates go down. So do you think that the persistent high interest rate level right now is limiting some of the demand from customers to install ahead of potentially the 30% investment tax credit being repealed in 2026?

Yes, the high interest rates is absolutely an important factor. In the residential solar business, 60% of the business used to be loans. And now it has changed to leases and probably 30% is still with loans. And anything you're doing on the interest rates there will help and will help for demand. That's right.

And your next question today will come from Joseph Osha with Guggenheim Partners. Please go ahead. Yes, the high interest rates are absolutely an important factor. In the residential solar business, 60% of the business used to be loans. Now, it has shifted to leases, and probably 30% is still with loans. Any changes you're making regarding interest rates will be beneficial and will support demand. That's right.

Hi, everybody. Hi, Badri. Thanks for taking my question. Sorry to belabor this question of cell supply, but are you saying, say, a year from now that you think you'll be able to source LFP from outside of China at the same price you can get it from inside China? Or are you saying that you're going to pay what you have to pay and pass that on to customers? I'm trying to understand what your view of this is.

Yes, I mean, but meaning the second option that you said, but the prices of those fills aren't that high?

I'm sorry, I don't follow. So you're saying cells will be more expensive relative to your current.

No. Let me explain. The pricing for cells is reasonable, even if it increases by 20%. However, if you take a cell manufactured in China and use it in a product, regardless of where you assemble it, you will incur an additional tariff of 145% because the cell originates from China. One solution is to diversify the supply chain; for instance, you could produce LFP cells in Eastern Europe and then transport them to the US, where you could also set up a packing facility and source other raw materials. This approach would be considerably more cost-effective because you would avoid the 145% tariff. Therefore, even if the initial cell prices rise by 20%, it won't significantly impact the overall cost.

Okay. But clearly it's going to be more expensive than the status quo was prior to the tariffs and when you were able to source out of China without the 145%. Right?

Yes, if you want to be legally right, it is going to be expensive, but does it matter? It doesn't matter. That's right.

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

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

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