Earnings Call Transcript - ENPH Q1 2026

Operator, Operator

Good day, and welcome to Enphase Energy's First Quarter 2026 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Zachary Freedman, Investor Relations

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2026 results. On today's call are Badrinarayanan Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2026. During the conference call, Enphase management will be making 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 demand anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax tariffs 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 Badrinarayanan Kothandaraman, our President and Chief Executive Officer.

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Good afternoon, and thanks for joining us today to discuss our first quarter 2026 financial results. We reported quarterly revenue of $282.9 million, shipped 1.41 million microinverters and 103-megawatt hours of batteries and generated free cash flow of $83 million. Q1 revenue included $34.5 million of safe harbor revenue. We exited the quarter with channel inventory above normal levels for both microinverters and batteries. On a non-GAAP basis, we delivered gross margin of 44% and operating expenses of 27% and operating income of 17%, all as a percentage of revenue. Gross margin was above the midpoint of our guidance range. Mandy will cover the financials in more detail later in the call. Our customer service NPS, Net Promoter Score was 82% in Q1, a record for Enphase compared to 79% in Q4. We are laser focused on customer experience for the last few years, and our average call wait time in the first quarter was approximately 1.4 minutes. We have also begun a soft rollout of our Enphase AI assistant in the homeowner app to approximately 100,000 homeowners, and we expect this to expand over time. The AI assistant is trained on Enphase product knowledge, historical service cases and relevant customer support data with access to Salesforce information, to help answer specific system-specific questions more accurately. It also supports multiple languages, helping homeowners get faster, more intuitive help wherever they are. We expect to pilot a similar AI assistant for installers during this quarter to help them do fleet management in a much more efficient manner. Let's cover operations. In Q1, we shipped approximately 1.39 million microinverters from our Texas and South Carolina manufacturing facilities and booked the associated 45X production tax credits. These U.S.-made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the 10% domestic content ITC bonus. We shipped 49.5 megawatt hours of IQ batteries from our Texas manufacturing facility in Q1. We offer IQ batteries that meet domestic content and other compliance requirements, helping lease and PPA customers qualify for ITC bonuses. Let's cover the regions. Our U.S. and international revenue mix in Q1 was 83% and 17%, respectively. In the U.S., our revenue declined 23% sequentially, primarily due to lower residential solar and battery demand following the expiration of 2025 residential tax credits and typical seasonality. Safe harbor revenue increased to $34.5 million in Q1 compared to $20.3 million in Q4. Our overall sell-through declined 48% sequentially as Q4 was elevated by significant demand pull forward ahead of the tax credit expiration. On a year-over-year basis, which better reflects the underlying impact of the policy change, Q1 2026 sell-through declined 18% compared to Q1 2025. Our U.S. commercial microinverter sales more than doubled in Q1 as compared to Q4, driven by positive market reception for IQ9 microinverters. We now serve both major U.S. three-phase commercial grid types, the 480 volts as well as 208 volts. In Q3, we expect to begin shipping our high-power 548-watt IQ9s microinverter for 480-volt three-phase systems, which can support solar panels up to 770 watts DC. We also expect to see near-term safe harbor demand from customers placing orders between now and early July. With U.S. manufacturing, domestic content eligibility and other compliance-compliant products, we believe our commercial business is well positioned for continued growth. In Europe, our revenue increased 36% in Q1 compared to Q4, primarily because selling levels rose towards sell-through levels after we undersupplied the European channel in Q4. We are beginning to see green shoots in April with solar and battery activations up healthy double digits across multiple European markets compared with the monthly averages in Q1. This is being driven by rising power prices and increasing battery adoption. Europe is increasingly becoming a battery-critical market. As self-consumption, dynamic tariffs and VPP become more important, the company that wins the battery relationship is well positioned to win the broader home energy system over time, including solar, software and VPP. In the Netherlands, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1, as rising export penalties and the planned phaseout of net metering by the end of 2026 strengthened the case for self-consumption. In France, the reduction of feed-in tariffs is also shifting the market towards self-consumption and increasing the interest in batteries, especially for new solar installations. Our battery activations in France increased approximately 20% in April from the monthly run rate in Q1, a more modest but positive trend. In Germany, our battery activations rose approximately 27% in April compared to Q1's monthly average. We have approximately 475,000 installed residential solar systems in the Netherlands and approximately 400,000 in France, creating a meaningful retrofit opportunity in both markets. We are increasing homeowner events, doing direct marketing to consumers and working with the retail energy providers, along with strong support by our technologies such as Power Match technology and our upcoming fifth-generation battery. We have also built strong inside sales teams and the lead management platform across France and the Netherlands in the last three months, and we are hoping to convert this demand into revenue with a much higher throughput. Competition remains intense across Europe, particularly from low-cost string inverters and battery providers. In response, we are reducing our distributor list prices for batteries by approximately 10% in May, which follows a 20% reduction for microinverters already implemented in December last year. In addition to this sharper pricing, we are instituting a stronger homeowner demand engine and a more competitive product roadmap, which includes IQ9 and our fifth-generation battery, which is coming very soon. Together, these actions improve our competitiveness today and position us for stronger growth as Europe shifts towards self-consumption, VPP and flexible storage. In Australia, we are bullish on the battery opportunity. Australia is one of the world's most mature rooftop solar markets with more than 4 million rooftop solar systems in place, which is roughly one in every three homes already using solar. Battery adoption is now accelerating, supported by the federal Cheaper Home Batteries program, which provides an upfront discount for eligible small-scale batteries connected in new or existing rooftop solar. The program is evolving on May 1 to better support rightsized systems and reduce incentives for oversized batteries. We believe this plays directly to our advantages, including our upcoming fifth-generation battery which has a stackable and scalable architecture that gives homeowners flexible capacity and the ability to add more over time. Let's now discuss our Q2 outlook. On the last earnings call, we said we expected Q2 revenue to be higher than Q1, driven in part by strong safe harbor demand. In line with those comments, our Q2 revenue guidance is $280 million to $310 million, including approximately $85 million of safe harbor revenue. Since we exited the channel with a high inventory in Q1, we are under-shipping approximately $25 million compared to the real demand. At this point, we are approximately 85% booked to the midpoint of our guidance. We expect modest underlying sell-through growth in Q2 as compared to Q1. That said, our Q1 sell-through results and Q2 sell-through expectations are roughly 10% to 15% below our prior view, a weaker start to the year, primarily due to unfavorable weather conditions and TPO financing challenges. We expect to offset some of these pressures in the second half of this year through prepaid lease adoption, which I'll talk about soon, U.S. commercial growth and potential international recovery. For batteries, our guidance is 100 to 110 megawatt hours. We recently lowered our battery list prices to distributors in the U.S. by approximately 12% to 14% in March, supported by the recently reduced reciprocal tariff rates. Combined with our pricing changes in Europe, we expect higher battery sales volumes in the second half of this year. And just to repeat our Q2 revenue guidance anticipates us under-shipping end-market demand by $25 million in order to correct for Q1's over-shipment. Let's talk about safe harbor. We have executed new agreements year-to-date with third-party owners for approximately $843.6 million of product: $89.6 million under the ITC 5% safe harbor method and $754 million under the physical work test method. This is in addition to the $67.7 million physical work test orders secured in Q4. These microinverter orders create two important benefits for Enphase. First, they secure a significant multiyear volume for our microinverter business. And second, they position us very well for future battery-attached sales from 2027 to 2030 when these systems are expected to be installed. These also underscore our strength with TPO providers. Moving to financing. Prepaid lease adoption continues to build momentum. Prepaid leases give homeowners a lower upfront cost today and the option to own the system after five years. The TPO initially owns the system, claims the investment tax credit (ITC) and shares that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. This lowers the homeowner's effective cost and helps restore the economics closer to the 30% tax credit era. We continue to support Propel, a TPO-led prepaid lease program that exclusively uses Enphase equipment and is being field tested with our loan and distribution partners. The pilot is designed to service the long tail of installers and has expanded from 40 installers at the time of our February earnings call to more than 200 installers to date, across four states. We are now seeing a run rate of approximately 200 net originations per week and are encouraged by early customer adoption trends. It must be noted that the battery attach to those originations is approximately 84%. That's not very surprising because one of the states Propel is now being piloted in is California. We expect to complete the pilot this quarter and expand the program more broadly beginning in July after validating customer experience, installed execution, which is happening now, and financing performance at scale. Let's talk about products, starting with IQ batteries. Our fourth-generation IQ battery pack delivers a smaller footprint, higher energy density and simpler installation with the IQ Meter Color. The Meter Color is now approved by 64 U.S. utilities and growing, covering approximately 34 million customer accounts. In California, the color is approved by all three major investor-owned utilities and the largest customer-owned utility. We believe this gives Enphase the broadest utility approval for Meter Color of any major battery provider today. Our fifth-generation AC-coupled battery is built from stackable 5-kilowatt-hour modular blocks, that can scale up to 30-kilowatt-hour. This battery uses 100-amp prismatic cells and targets roughly 50% higher energy density than the fourth-generation battery and about 40% lower cost. Paired with our Power Match software we believe it will deliver a compelling combination of performance, flexibility and value for installers and homeowners. We expect to begin pilots in Q3 and begin shipping in Q4. We are also making strong progress on IQ Board, our commercial battery. The first product here is an 80-kilowatt-hour AC-coupled commercial battery designed for small and medium commercial markets in the U.S. Our internal estimates indicate that this small commercial market represents an annual opportunity of approximately 1 gigawatt-hour. The IQ Board uses prismatic cells in a compact building block architecture and will be even more cost effective. It can scale up by stringing up to 25 units together for approximately 2-megawatt-hours of capacity. The platform is designed to support backup, self-consumption, load shaving, time-of-use optimization as well as VPP participation all managed through Enphase software. We believe IQ Board brings our distributed architecture, our electronics expertise and system-level intelligence into commercial storage, giving customers a flexible, high-quality platform for resilience and cost savings. We expect to begin pilots in Q1 2027. Turning to microinverters. We began shipping our IQ9 three-phase commercial microinverter in December, built on our GaN architecture. IQ9 opens up the 480-volt three-phase U.S. commercial segment for Enphase for the first time, representing a new TAM of approximately $400 million annually. The installer feedback has been strong with customers valuing Enphase quality, our panel-level monitoring, simpler system design, lower installation cost and balance of system costs and higher system efficiency. We expect to introduce the higher power IQ9s three-phase product in Q3, supporting 548 watts of AC power and pairing with solar panels up to 770 watts DC. We also expect to introduce IQ9 for global residential markets this quarter. Moving on EV charging. We are making excellent progress on our IQ bidirectional EV charger, which is built on our 650-volt GaN power platform and engineered to work with 800-volt DC EV architectures. This is a clear example of our ability to move power efficiently and bidirectionally between grid-facing AC and high-voltage DC systems with tight control and protection. The product is especially compelling because it simply pairs with the Meter Color in the U.S. or a backup switch in Europe, enabling streamlined home backup and VPP participation. We are in advanced discussion with multiple auto OEMs, including two partnership opportunities that are progressing well. We will share more as these discussions mature. We are targeting initial availability in Q4, starting with limited deployments as we complete the certifications, utility coordination and vehicle compatibility validation. So finally, we are excited to announce today the development of our IQ solid-state transformer product for AI data centers. AI is driving rack-level power from roughly 150 kilowatts to more than 1 megawatt. The industry is moving towards higher-voltage DC architectures, including 800-volt DC, as outlined in NVIDIA's white paper last September. We estimate the initial annual U.S. addressable opportunity for IQ SST in AI data centers to exceed 11 gigawatts by 2031, creating a significant new market for a high-efficiency medium-voltage power conversion. The IQ SST product is designed to convert medium-voltage AC directly to low-voltage DC in a single stage, creating the potential to eliminate site-level batteries and rack-level backup while improving efficiency, reducing cost and complexity. IQ SST will be built as a distributed modular architecture. It is expected to deliver approximately 1.25 megawatts through a super cluster of 342 power modules with 800-volt DC output for next-generation AI racks. At the core of each power module will be our custom silicon, ASICs and a high-frequency GaN-based power platform which enables precise control, high efficiency and fast response on the order of 1 to 3 milliseconds. This fast response will enable advanced grid functions, improved handling of load and grid transients and support centralized energy storage at the facility level. IQ SST is designed for reliability and serviceability. It is modular, includes built-in redundancy and supports hot swapping without shutdown. It is also expected to deliver cost and supply chain advantages through fewer components, standard high-volume parts, automated manufacturing and U.S.-based production. Our SST platform will be able to scale from a single 1.25-megawatt rack to multi-megawatt systems, supporting multiple grid voltages and extending beyond data centers into other adjacent high-power markets as well. We are now engaged with more than 20 prospective customers and are expanding our partner ecosystem. We have completed product feasibility, built working power modules and converged on the system design. In Q1, we restructured the company to fund SST within our existing operating framework and create room for the strategic program. More than 80 engineers are now working on SST across power electronics, ASICs, software, mechanical design, manufacturing and reliability. As we continue to drive productivity with AI across the company, we are targeting to fund the SST program within our current operating expense structure. We expect a full system demo later this year, pilots with customers in 2027 and volume shipments in 2028. We also expect revenue to build over time. But the strategic logic is clear. IQ SST is a direct extension of our core strength in distributed power electronics, custom silicon, software-defined control and high-volume U.S. manufacturing. We believe this architecture is the right way to power the next generation of AI infrastructure and positions Enphase to lead in this transition. Let me conclude. The market is going through a transition, especially in the U.S. residential sector, but we are focused on what we can control: execution, cost, innovation, financing solutions and customer experience. We are seeing early traction in several important areas. Prepaid leases are gaining momentum in the U.S. Europe is beginning to show signs of recovery, with batteries becoming increasingly critical to the customer decision. In the U.S., commercial solar is starting to ramp, supported by IQ9 microinverters and our domestic manufacturing position. Our roadmap is also strengthening. Our fifth-generation battery, bidirectional EV charger, our IQ Board commercial battery and the IQ9 family of microinverters all expand what Enphase can deliver to homeowners, installers and commercial customers. These products strengthen the core and open new growth opportunities. Finally, we believe IQ SST can give Enphase access to significantly larger end markets. It is a natural extension of what we have built over the last 20 years — reliable power electronics, semiconductor innovation, software intelligence and distributed system design. We believe Enphase is well positioned for the next phase of growth. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Mandy Yang, Chief Financial Officer

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2026 financial results, as well as our business outlook for the second quarter of 2026. 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 $282.9 million. We shipped approximately 627.6 megawatts DC of microinverters, and 103.1 megawatt hours of IQ batteries in the quarter. Q1 revenue included $34.5 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install their inventory over more than a year. Non-GAAP gross margin was 43.9% in Q1 compared to 46.1% in Q4. GAAP gross margin was 35.5% in Q1 compared to 44.3% in Q4. The gross margin was negatively impacted by 6.7 percentage points from the sale of our 2025 PTCs, which totaled $235 million and were sold at 93% of their value. This resulted in a discount of approximately $16.5 million, plus approximately $2.5 million of transaction-related fees. Reciprocal tariffs also impacted our gross margin by 4.3 percentage points in Q1. Non-GAAP operating expenses were $77 million for Q1 compared to $78.8 million for Q4. GAAP operating expenses were $130 million for Q1 compared to $129.6 million for Q4. GAAP operating expenses for Q1 included $45.4 million of stock-based compensation expense, $3.8 million of acquisition-related expenses and amortization and $3.8 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $47.3 million compared to $79.4 million for Q4. On a GAAP basis, loss from operations was $29.6 million for Q1 compared to income from operations of $22.4 million for Q4. On a non-GAAP basis, net income for Q1 was $62.3 million compared to $93.4 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.47 for Q1 compared to $0.71 for Q4. GAAP net loss for Q1 was $7.4 million compared to GAAP net income of $38.7 million for Q4. This resulted in GAAP diluted loss per share of $0.06 for Q1 compared to earnings per share of $0.29 for Q4. We exited Q1 with a total cash, cash equivalents and marketable securities balance of $930.6 million compared to $1.51 billion at the end of Q4. The five-year convertible notes we raised in 2021 were due on March 1, 2026, and we settled all the outstanding principal amount of $632.5 million with our cash on hand. As part of our anti-dilution program, we spent approximately $18.7 million in Q1 repurchasing shares to cover taxes on employees divesting, reducing diluted shares by 441,448 shares. We did not repurchase common stock during the quarter as we are prioritizing disciplined cash allocation and preserving flexibility for strategic investments and potential acquisition opportunities. We had approximately $269 million remaining under our share repurchase authorization and remain confident in our long-term business outlook. In Q1, we generated $102.9 million in cash flow from operations and $83 million in free cash flow, including proceeds from the sale of the 2025 PTCs. Capital expenditure was $19.9 million for Q1 compared to $9.7 million for Q4. The increase was primarily due to continued investment in U.S. manufacturing. As of March 31, 2026, after monetizing the PTCs generated in 2025, we had approximately $162.9 million of PTCs on our balance sheet. This includes $108.3 million related to U.S. main microinverters shipped to customers in 2024 and $54.6 million related to shipments in Q1 2026. We elected the rate pay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2026. However, we have limited visibility into the timing of receipt of the $108.3 million due to extended IRS processing timelines. In March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business. The impact of this approach is included in our quarterly gross margin guidance. In addition, on February 20, 2026 the U.S. Supreme Court issued a ruling embedded in certain tariffs previously imposed under the International Emergency Economic Powers Act (IEEPA). On April 20, 2026 U.S. Customs and Border Protection launched an online portal for companies to submit IEEPA tariff refund requests. As of today, we have submitted approximately $50 million of refund claims through the portal. Subject to approval, we currently expect to receive the refund within the next 90 to 120 days. Now let's discuss our outlook for the second quarter of 2026. We see our revenue for Q2 to be within a range of $280 million to $310 million, which includes shipments of 100 to 110 megawatt hours of IQ batteries. The revenue guidance includes approximately $85 million of safe harbor revenue. We see gross margin to be within a range of 42% to 45%, including approximately 3 percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within a range of 44% to 47%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $120 million to $124 million, including approximately $45 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 $75 million to $79 million. With that, I'll open the line for questions.

Operator, Operator

The first question will come from Brian Lee with Goldman Sachs.

Brian Lee, Analyst (Goldman Sachs)

First one, just on the safe harbor as it's so lumpy here. Can you kind of give us any sense on what the safe harbor expectations are for 3Q and then I know you said, Badri, 10% to 15% below run rate you originally expected due to the start of your weakness — can you kind of give us a sense of where you think core revenue trends are into 3Q and 4Q? Are you going to recapture that kind of volume in the back half of the year? Are you any sense on payments from here ex the safe harbor? And then I had a follow-up on the FET.

Badrinarayanan Kothandaraman, President & Chief Executive Officer

So Brian, our safe harbor revenue for Q2, the estimate is $85 million. That's what we said. Your question is safe harbor estimate for Q3. It is difficult for us to estimate right now. But if I were to give you a number, between $40 million and $50 million is what I expect for safe harbor revenue for Q3. And that's my opinion there. Then, yes, I talked about we expect modest underlying sell-through growth in Q2, the current quarter we are in compared to Q1. That said, like what I said, Q1 and Q2 sell-through expectations are roughly 10% to 15% below our view. The weaker start is basically due to the challenges we are seeing in general, TPO financing and unfavorable weather for us. But what we are very excited about is Propel, which is our prepaid lease offering through our partners. And I gave you some color on the prepaid lease offering. Basically, at the last earnings call, I told you we had 40 installers from Propel, now we have, as of last week, 200 installers. We still have the same four states because we are disciplined in not entering additional states until we finish the pilot. But our originations have increased at a very, very healthy rate — 200 net originations a week. In fact, that is a very nice number. That amounts to roughly a 90 to 100-megawatt annual run rate if I freeze that 200 per week as of today. So extraordinary reception for Propel, and we have to thank our partners to make that happen. So for us, Propel is something we are very excited about. The other one that I'm excited about is in Propel, our battery attach is 84%. Obviously, California drives a lot of battery attach. So when we expand it to other states, it might be a little bit less than that. So we are excited about that because that means for us more megawatt hours very soon. And we expect that in the second half of the year, for sure. Then the other one we talked about is what we are seeing in Europe. We gave you color. In fact, we gave you a lot of color on Europe, saying that what we are seeing in April compared to the monthly run rate in Q1. For example, we are seeing double-digit increases for most European regions compared with the monthly average that we saw in Europe in Q1. And that's being driven by rising power prices and increasing battery adoption. In the Netherlands alone, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1. In France, that number was 20% in April from the monthly run rate in Q1. In Germany, 27% in April compared to the monthly run rate in Q1. So a long answer to your question is basically we are very encouraged by Propel. We are very encouraged by the fact that we are seeing some green shoots in Europe. But having said that, the market is fickle right now. You're seeing a lot of dynamics in the market. We don't want to answer a guess for Q3 and Q4, but this is what we are doing from our side. And I haven't talked about the new products, but we are actively working on four new products. And to be brief, that's the fifth-gen battery, the bidirectional charger, the commercial battery as well as the IQ9 high-power version for commercial. And of course, the big announcement we made is the SST and that one is more a 2028 revenue opportunity.

Raghuveer Belur, Chief Products Officer

Let me take the second one first. This is Raghu. Brian, so I think we are fundamentally different from at least some of the announcements that we have seen in the market, in that we leverage our 20 years of experience in developing a distributed architecture product. So think about it in a single-stage rectifier/converter, which is our core technology that we have developed since the inception of the company: high frequency design, soft switching, custom ASICs and new wide bandgap devices. We were the first guys in 2008 to deploy wide-band silicon carbide diodes as an example; now we are doing GaN. So when you are a completely distributed or a decentralized architecture, it enables 342 power modules that in the supercluster really brings a tremendous amount of value. What it does is, for example, you get sub-millisecond response times. And when you have sub-millisecond response time, now you can target how to get rid of the site-level battery completely. So no BBU or no storage anywhere in the low-voltage system. You can now move all your storage to the medium-voltage section. We all know this. When you're a completely distributed architecture, you get very, very high reliability. When you have 342 of these devices, we have built in 10% redundancy. So you can achieve very high uptime, and our target there is five nines which is very good and serviceability of that device without having to take the entire rack down. We talked about U.S. supply chain and volume manufacturing. It leverages the same platform that we already have from a manufacturing point of view. And then on the cost, again, people don't appreciate this very much: the technology that we have, the single-stage power converter we do what's called soft switching, which means that electromagnetic interference or EMI signature is extremely low. We don't have to build big metal enclosures to enclose these devices to reduce EMI. That's why this power module is in a polymeric enclosure. So we really drive the cost down. The single-stage power conversion means very few components. We drive the cost down. Of course we'll price to value, but our costs are going to be very, very low. So very good response time, which means we can target completely eliminating the site battery, eliminating the site battery means you can replace that with a compute rack, more compute rack means more revenue. We talked about rail and you have a supercluster of 342 of these power modules, you get architecturally correct redundancy and you get very high reliability, and you can target five nines uptime, supply chain, volume manufacturing and, of course, cost.

Operator, Operator

The next question will come from Praneeth Satish with Wells Fargo.

Praneeth Satish, Analyst (Wells Fargo)

So we've seen some changes on the installer landscape recently, Sunrun exiting their affiliate channel, Freedom Forever filing for bankruptcy. From what I can tell, neither were really major Enphase users. So I guess do you see an opportunity for Enphase to pick up share as that demand kind of reallocates? And are you seeing any early indications of that today? Or is that something that could play out over the next quarter or two?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

We are not going to talk about our customers. Today Sunrun is our customer. We have a very good relationship with them. We're not going to discuss that. But on Freedom Forever, we do zero business with them. So we view that the market will redistribute itself amongst the existing installed base, and we do expect to get our fair share of it.

Praneeth Satish, Analyst (Wells Fargo)

Got it. And then maybe shifting gears to C&I. So I think for Q1, you previously indicated potentially generating around $5 million or so of revenue for C&I. Maybe I missed it, but is that — can you share where C&I revenue landed in Q1? And then what is your — what's embedded in the Q2 guide for C&I? And should we expect C&I revenue to increase every quarter this year based on the pipeline that you're seeing?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Yes. We did in Q1 a little more than $5 million. We did in the high single digits, a little more than $5 million. Having said that, C&I is a very lumpy business. And at least for us, until we have a nice pipeline established we do expect it to be lumpy. But the opportunity for us is that C&I installers, C&I developers do have a safe harbor window as well. And that safe harbor window will be closing in. They have to make their plans by early July. And for that, we have two things, we have actually three products for that. One is our already existing 208-volt three-phase product, which we have been supplying for some time. The other is our brand new IQ9 and 427 product, which is what we introduced very recently. The third one, which is coming, and we plan to start shipping in Q3, is the 548-watt even higher-powered version. That is suitable for safe harbor, because if they are going to be using these later in the years, the panel sizes are going to be even more. Today, for example, the panel sizes are between 595 watts and 650 watts in the commercial business. It's going to keep going up a little more. So that's why the 548-watt is also exciting. So we're very excited by the C&I business. In general, directionally, we expect it to continuously grow until we establish a pipeline. But in terms of quarterly, it is going to be a little lumpy at the beginning.

Operator, Operator

The next question will come from Colin Rusch with Oppenheimer.

Colin Rusch, Analyst (Oppenheimer)

Can you talk a little bit about the geographic distribution of where the channel inventories are? Is it primarily in the U.S.? Are you seeing some channel inventories built up in the EU as well?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

It's mostly the U.S.

Colin Rusch, Analyst (Oppenheimer)

Okay. And then can you talk about the customer maturity with the solid-state transformer, how soon can we start seeing some pilot in that product? And how many customers are you engaged with now in terms of potential testing here over the near term?

Raghuveer Belur, Chief Products Officer

Yes. We have talked to on the order of 20 customers or so prospective customers. And I think the most important thing is to get a demonstration system ready, which is what we are targeting for this year. Once that's done, the natural following step is customers wanting to test the system, and there are enough prospective customers who will be willing to do so. But we need to get to the demonstration system, which is what we will be ready with this year. And that's what we are singularly focused on. And then followed up by 2027 will be about customer pilots and then 2028 will be about volume shipments. So that's the sequence of events.

Badrinarayanan Kothandaraman, President & Chief Executive Officer

We do have a detailed investor presentation, which is on the website as well as on the SST page. One of the things I'd like to highlight is we started working our team, Raghu and the CTO team, they basically recognized the opportunity that we have in the SST data center space about nine months ago, and we started working on feasibility nine months ago. And so since then, over time, we have gradually assigned approximately 18 engineers in the company to be working on SST and they're all working full time. We also took the opportunity to think strategically and said, how do we create a lot more room for SST. So we restructured the company in Q1, basically to focus on SST without changing our operating expense structure. And so we got that done. And then we have worked on the basic power module. We have it functional, and now the next step is to basically put together the full system, which is a lot more complex, and we expect to demonstrate that by the end of the year. Once we do that, the customer engagements are going to be there, and we target customer pilots throughout 2027 and volume shipments in 2028.

Operator, Operator

The next question will come from Philip Shen with ROTH Capital Partners.

Philip Shen, Analyst (ROTH Capital)

Badri, you said that the Q2 sell-through was 10% to 15% below expectations. You cited TPO challenges. We've been talking about tax equity pausing and there's just a fair amount of challenge out there. So I was wondering with the core revenue for Q2 being down to about $210 million, down from $250-ish million in Q1, what does Q3 and Q4 look like? This is a seasonally strong time, Q2 and Q3, but this TPO challenge with this tax equity pause may endure or linger for a bit. So I know you can't guide or you haven't guided for Q3, but I was wondering if you might be able to give us some qualitative color or quantitative on Q3 and Q4?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Yes. At this point, I will tell you what I see, but that's basically like what I told you the last time. That's my opinion. As we said, we expected Q1 sell-through to be around the $250 million range, and we were 10% to 15% below that number. We overshipped approximately $25 million in Q1. That's why I said we ended the channel with a little more inventory than what we would have liked. We are correcting that immediately within one quarter itself by under-shipping in Q2 by that number. We do expect the native sell-through in Q2 to be a little better than Q1, driven by the usual seasonality. What could surprise us in Q3 and Q4 are a few factors that I highlighted a few minutes ago. What could surprise us is Propel could surprise us. There, we are proceeding with some caution. We are piloting in four states now. We are at a run rate of 200 originations a week, which is a nontrivial number. The originations per week percentage increase is fast. I mean, we are very happy with the percentage increase. We are also very happy with the number of installers. Our vision with Propel was to give prepaid lease access to our long tail of installers. And I won't declare success right now because we are still in the pilot, but it is going in the right direction. Propel comes with an 84% storage attach. Of course, that's a high number because of California. But that's a very encouraging number for our batteries as well. So that's one vector. The other vector is basically what I talked about in Europe. We talked about the business starting to show some signs of strength on batteries in the Netherlands, in France and in general, even for solar. So we are already seeing that in April compared to Q1. So that's the second thing. The third one is the IQ battery ramp. The volumes in Q1 were a little light due to the 2025 abrupt cut off, but we are making a lot of progress on the IQ battery qualification. We are approved by 64 utilities for the Meter Color. And with the Propel ramping, IQ batteries will also be ramping with new installers who haven't used them before. And then on the small commercial front, I talked about more opportunities in small commercial in terms of safe harbor before the safe harbor window closes: commercial developers are going to need a solution for 2027 through 2030. So I expect both steady increase in the commercial business as well as some potential safe harbor orders that will be shipped in Q3 ordered hopefully by the end of Q2. So as you can see, there are a lot of moving parts. We see the challenges in the last few weeks, like you correctly pointed out, tax equity challenges, installer bankruptcies, they are never good for the business, but we are not the ones to complain. We try to do whatever we can. And I think all of these initiatives are something that we'll be working on.

Philip Shen, Analyst (ROTH Capital)

Okay. Secondly, as it relates to a quick housekeeping question. In your 10-Q, you guys had commentary about how you entered into a $30 million secured revolving credit facility with a probably related party. I'm wondering if this might be the same partner that you guys do Propel with? And then back on SST for a moment, Badri, I think you talked about pricing to value with your low cost structure. Just was wondering if you could share what margins you guys might be targeting for this SST product?

Raghuveer Belur, Chief Products Officer

It's very early to tell, Phil, about what our price and cost will be. We have a rough estimate, but it's way too early to tell. Right now, we are focused on continuing the development so we can get to that customer demo by the end of this year. And we're also investigating because we are using a very similar module to what we already do for solar, we are looking at if there are any IRA advantages here for us as well. So too early to tell. Right now, the focus is on getting this 1.25-megawatt customer demo by the end of this year. But over time, as we get deeper into the design, we'll be happy to share with you the details.

Badrinarayanan Kothandaraman, President & Chief Executive Officer

And on the $30 million line, we are not breaking out the counterparty.

Operator, Operator

The next question will come from Julien Dumoulin-Smith with Jefferies.

Julien Dumoulin-Smith, Analyst (Jefferies)

Maybe I should just pick it up off where Phil left it off. Maybe just to pick up on the tax equity piece and the target. You talked about 200 originations a week. I mean what are you thinking quarter-over-quarter into 4Q, what that target installer partnership would look like? I mean, how many are you pursuing? How do you think about tax equity as a limitation on the Propel program to ramp? What are the other factors when you think about continuing to get this program up and going, if you can speak to it in those terms. In theory as part of your conscious ramping?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Right. Yes, Propel is offered through our partners. So we are working very closely with them. Having said that, my wish is to basically get up to a run rate of 500 originations a week by the end of Q4. And that's my wish. Today, we have 200 installers that are using Propel. Again, my desire on why we launched Propel is that that number should be a healthy multiple — that's why we launched. That's one of the reasons us and our partner, distribution partner, launched this TPO-led program Propel: we wanted to bring that access to the long tail of installers with an ease of doing business. The tax equity question is a better question for the Propel partner. We are not going to make any comments on that right now.

Operator, Operator

The next question will come from Eric Stein with Craig Hallum.

Eric Stein, Analyst (Craig-Hallum)

So maybe just sticking with Propel. Can you just talk about — I know you're piloting in four states. I mean what is the limiting factor to expanding that to other states? I mean, is this — I would assume when you're piloting it you are going hand-in-hand with your TPO partner to installers, educating those installers. I mean am I thinking about that correctly? And what would that time frame be to expand to different states?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Right. Yes, once again, I'm answering on behalf of our TPO partner. So basically, what we want to look at is that entire chain: you want to start from originations, you want to look at installations, you want to look at M1, M2, M3 then you want to be able to appropriately monetize the tax credits. So that takes time. Therefore, the usual time from originations to monetization could be four to five months. And we are still — that's why we are still in the pilot. All of that needs to execute flawlessly. Ease of doing business for the installers is very critical. We cannot keep changing parameters on the installers. We need to be able to monitor and monetize the tax credits properly. Again, I am not trivializing their work. They have a lot of work to do. So we need to prove that the entire chain works properly. And until then, we will not be doing a broad launch. Having said that, what are we piloting for? We are piloting to see if we can support a lot of installers. And the answer to that is yes. Since the last earnings call, at that time, there were 40, now there are 200. The last earnings call, the number of originations was an order of magnitude lower. Now it is 200 a week, and that's climbing rapidly. So we are closely monitoring it. We are working with our partners. And the moment we are ready to launch, we'll be transparent about it.

Eric Stein, Analyst (Craig-Hallum)

Yes. Is it — I know that you — that Propel is one of the things that potentially means improvement in the second half of the year. But I mean, fair to say that this is much more about 2027 and beyond than potentially positively impacting the second half?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

That's right. I think you're thinking about it right — positively impacting the second half and also in 2027. That's right. And don't forget the other things, which are what we do day-to-day: Europe is a big one. We are doing well there, especially the Netherlands has picked up steam. France has picked up steam. And there, we are actively doing things. Once again, we are holding two to four homeowner events a week. Each of these homeowner events are attended by almost 150 homeowners each. And our target for every event is to at least generate 0.5 megawatt hours. So basically, if you do four events that should generate 2 megawatt hours a week and that should only compound as we go. So we are going to replicate the same thing in France as well, where we have a 400,000 installed base. And we are introducing our fifth-generation battery. The form factor is very, very small. It's 50% higher energy density using 100-amp prismatic cells, and about 40% lower internal cost, and we expect to translate that into a lower price for our distribution partners. So that's another very exciting product. The other one, I didn't talk too much about, is the bidirectional EV charger. It is a very simple product which, along with the Meter Color and a backup switch, can provide V2H — vehicle-to-home resiliency — and V2G — vehicle-to-grid. We have two partnerships with North American OEMs which we will announce when we are ready. So that's that. And then, of course, IQ9: we are launching IQ9 in residential markets. We have already launched for the commercial market. We are going to introduce a higher-powered version. So that business, especially with our domestic content compliance and U.S. manufacturing, all of that is a very big advantage. That business takes a little time; it's a design-in business, and so we expect to make steady progress there. The last one, which I talked about, is the commercial battery. The commercial battery TAM is gigawatt-hours, and we are talking about batteries for small and medium businesses, schools, hospitals, churches, small businesses, gas stations, convenience stores — all of those typically need battery sizes anywhere between a 50-kilowatt-hour system and 250 to 300-kilowatt-hour systems. Now we will be able to offer that along with IQ9 on the solar side, and now we will have an 80-kilowatt-hour battery, and you can string 25 units of those, you can go up to 2-megawatt-hours. So we are extremely excited by that offering as well. So we're doing lots of things, and we expect sequential growth. Of course, it's a turbulent market, but we are controlling what we can. And of course, the IQ SST, which we talked about.

Operator, Operator

The next question will come from Dylan Nassano with Wolfe Research.

Dylan Nassano, Analyst (Wolfe Research)

Badri, I would just love to get your take, I guess, on Europe, just in terms of how durable you think this bump is. I mean, that market went through a boom for similar reasons back in 2022 and it was followed by a pretty severe destocking cycle. So just wondering if you could kind of compare and contrast where we're at today?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Yes. I mean it is anybody's guess. Yes. I shared the concern. Last time it was an extended Ukraine crisis that basically led to an explosion of demand; this one may be more modest. But nevertheless, we are seeing an increase. I'm not sure how long it will last. But there are some fundamentals there: batteries are good in general. Europeans are a little more advanced, and many regions are accelerating to a battery-first market. Battery-first pulls through solar, EV chargers, energy management — it pulls everything. And what we are going to be doing there is, of course, we are going to get more competitive. We already made necessary pricing corrections on microinverters in December. We are making pricing corrections on batteries in May, which is next month. And we already made battery pricing corrections in the U.S. in March. So we are laser-focused on expanding our battery business. I talked about that. In Europe, we are going to go from our current battery to our fifth-generation battery in Q4. And so that will be a massive leap there in terms of cost, in terms of pricing, in terms of installation and in terms of space. One of the things we do before finalizing the design is show it to installers and get feedback. So we did that in the first quarter in France, the Netherlands and Germany, and we got a lot of feedback on the battery and mostly very positive. So for us, it is all about batteries there and batteries will pull through solar, and I think we are taking the right necessary steps for us to grow through 2026.

Operator, Operator

The next question will come from Vikram Bagri with Citi. There is a gap in terms of cost, pricing, installation and space. Before finalizing the design, we show it to installers and get feedback. We did that in the first quarter in France, the Netherlands and Germany, and we received a lot of feedback on the battery, mostly very positive. For us, it is all about batteries there, and batteries will pull through solar. I believe we are taking the necessary steps to grow through 2026.

Unknown Analyst (Ted on for Vik), Analyst (Citi) - Substitute

It's Ted on for Vik. I wanted to ask about the guidance for 2Q. It looks like it still includes tariff impact. Are you able just to share how much of the inventory roughly is still impacted by those tariffs? And would there be any interplay between the possible refunds that you may receive on that? And then could you just also talk about the progress being made on ramping the non-China battery cell supply? What's the outlook for that mix?

Badrinarayanan Kothandaraman, President & Chief Executive Officer

Yes. In terms of tariffs, like what Mandy said, we have applied for about $50 million of refunds and we do expect that the decision and the refund could come within 90 to 120 days. As far as we are concerned on our gross margin guidance for Q2, that guidance incorporates the impact of tariffs. There is a benefit for us of a couple of percent — roughly 2% improvement in gross margin — due to the change in reciprocal tariffs. Note that most of the categories are at 10% right now. So incorporated in our current guide is a benefit in gross margin of approximately 2%. And as we said in our prepared remarks, this tariff reduction helps us to be a little more aggressive on our batteries, and we have taken advantage of that to increase our demand by adjusting pricing to be sharper in both Europe as well as the U.S. On non-China cell supply ramp: we are actively qualifying multiple sources, and our aim is to diversify the cell supply chain to support local manufacturing and to meet domestic content requirements. We have been making progress, but it's a multi-step qualification and ramp process and we'll share more details as we get closer to volume ramps.

Unknown Analyst (Ted on for Vik), Analyst (Citi) - Substitute

Got it. That's very helpful. And I have one follow-up. Just going back to the prepaid lease offering, do you have a view on where you think prepaid lease products could be as a portion of the total TPO market this year? So not necessarily for Propel, but just looking at the market as a whole.

Badrinarayanan Kothandaraman, President & Chief Executive Officer

It's hard to say, and my comments should be taken with a grain of salt because we are still in a pilot. Right now, we are at a run rate of approximately 200 originations a week; it corresponds to something like 90 to 100 megawatts a year. So that's the number at a 200 originations-per-week run rate. You can do your math on how that compares to the total TPO market.

Operator, Operator

Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Badrinarayanan Kothandaraman for any closing remarks.

Badrinarayanan Kothandaraman, President & Chief Executive Officer

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

Operator, Operator

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