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Enphase Energy’s Growth Outlook Amidst European Market Challenges

Enphase Energy is optimistic about future growth opportunities. The company is strategizing closely with its distribution partners to ensure a strong position when the market rebounds. They are particularly focusing on key European markets such as the Netherlands, France, and Germany.

A Shift in the Netherlands’ Solar Market

In the Netherlands, the solar industry is moving away from solar-only systems due to regulatory uncertainty surrounding NEM, which is set to expire in early 2027, along with new export penalties from energy suppliers. These challenges have led to increased adoption of battery systems, which help homeowners avoid penalties and participate in energy markets alongside solar power.

This transition is in its early phases, but Enphase has noted strong cooperation with local energy providers. With their microinverters and battery solutions, plus upcoming EV chargers and AI-powered IQ energy management software, Enphase is well-positioned to lead the market recovery in the Netherlands.

Market Dynamics in France and Germany

In France, Enphase experienced a seasonal slump in Q3, with expectations for a further slowdown in solar demand due to anticipated utility rate cuts in 2025. Despite this, France remains a crucial growth area for the company, bolstered by their market leadership and the country’s low solar penetration. Enphase plans to launch several new products in France, including EV chargers and backup batteries for hot water heaters.

Germany presents an exciting opportunity with several product launches on the horizon. The introduction of their three-phase battery backup solution, initially revealed at Intersolar Munich, has garnered positive feedback. The IQ Balcony Solar is set for launch soon, targeting a 400-megawatt market, and the IQ EV charger is expected to be released in Q4.

Growth in the UK and Other European Opportunities

The UK market has been a silver lining, with approximately 80% growth in sell-through compared to Q2. However, Enphase acknowledges their potential for greater penetration in this market. Other countries in Europe, such as Italy, Spain, and Sweden, present similar opportunities, each with unique challenges. Homeowners across Europe increasingly value safety, quality, and integrated technology solutions, which aligns with Enphase’s strengths.

Expanding Product Offerings Globally

Enphase plans to roll out their entire product line, including the IQ8 series of microinverters and AI-driven energy management software, across additional European nations. They are also gaining momentum in other global markets, including India and Brazil. Pre-orders for batteries in India will start soon, with shipments scheduled for December. In Brazil, the company is introducing the 480 watts IQ8P microinverter to support higher power panels, while in Australia, a 25-year limited warranty is now standard for all IQ8 microinverters.

Q4 Revenue Guidance and Market Dynamics

For Q4, Enphase projects revenue between $360 million and $400 million, anticipating improvements in their U.S. operations alongside a continued slowdown in Europe. Currently, 85% of the revenue guidance is already booked, similar to last quarter. The company expects to ship between 140 to 160 megawatt hours of IQ batteries in Q4, with battery demand showing signs of a slight uptick.

Evolution Towards Integrated Energy Systems

The industry is shifting from single hardware components to comprehensive energy systems. Enphase’s solutions now include microinverters, batteries, EV chargers, and advanced energy management software. The interconnected nature of these products positions the company favorably in a competitive market.

Innovating with New Battery Designs

Enphase’s third-generation IQ Battery 5Ps is receiving positive market feedback, boasting an industry-leading 15-year warranty. A fourth-generation battery is on track for pilot testing in the U.S. soon, with mass production expected in early 2025. This new model will minimize wall space usage and reduce installation costs, making it more competitive across various applications.

Strategic Expansion in Japan and Commercial Offerings

With plans to introduce their IQ8HC microinverters in Japan, targeting a 1.3-gigawatt market, Enphase is capitalizing on local subsidies for MLPE products. Meanwhile, the IQ8P microinverter, designed for small commercial solar installations, continues to receive positive feedback across over 380 U.S. sites.

New Developments in EV Charging Technology

Enphase is preparing to launch the second-generation IQ EV charger in multiple European markets. This product integrates seamlessly with the company’s solar and battery systems, offering homeowners the chance to reduce electricity costs effectively. With features like dynamic phase switching, the new charger is poised to enhance the user experience.

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Company Charts Future Growth Amid Industry Slowdown

Strong performance despite challenges showcases resilience.

In the evolving landscape of electric vehicle (EV) charging, the company is set to future-proof its offerings. New developments include support for AC bidirectional charging and compatibility with the MID meter in Germany, alongside adherence to OCPP 2.0.1 software for external control. This positions us as a comprehensive, forward-ready solution. Now, let’s turn our attention to our software capabilities.

Our IQ Energy Management Software plays a vital role in grid services programs and Virtual Power Plants (VPPs) across various markets, including the regulated U.S. and deregulated landscapes in Europe and Australia. Currently, we are participating in around 25 active programs, particularly in key states like California, Massachusetts, Texas, and North Carolina. This engagement has seen over 10,000 customers enroll, collectively representing 120 megawatt hours of battery capacity. These programs empower homeowners to discharge batteries during peak demand, supporting utility providers effectively. Moreover, in deregulated markets, our software enables individuals to earn up to $1,500 annually via energy providers. Given the increasingly complex electricity rates, our AI-powered software distinctly positions us for maximized return on investment (ROI) and improved payback periods.

Next on our agenda is Solargraf, our installer platform. In the third quarter, we rolled out significant enhancements, including a refined battery design tool and a do-it-yourself permit plan set tailored for U.S. customers. Solargraf is now accessible to both residential and commercial installers across the U.S., Canada, Brazil, Germany, Austria, and the Netherlands, with plans in place to expand to additional countries in the near future.

In conclusion, we’ve made substantial efforts to navigate an industry slowdown. Our midpoint revenue guidance for Q4 remains stable compared to Q3, reflecting a 44% increase from our low point of $263 million in Q1 ’24. Although we anticipate Q4 may be affected by the bankruptcy of a major U.S. client, we are optimistic that a significant volume of this revenue will rebound through our distribution networks in subsequent periods. Over the first nine months of 2024, we achieved approximately $321 million in free cash flow, sustaining robust gross margins amid the downturn. Throughout the past year, we have broadened our global presence in microinverters and batteries, while also developing a compelling pipeline of innovative products nearing launch. Our upcoming three-phase battery, the IQ Balcony Solar, and the new IQ EV charger for Europe are projected to enhance our market reach by $4 billion.

We are looking forward to introducing our fourth-generation battery system that features the IQ meter collar and improved combiner, which is anticipated to significantly lower installation costs for backup systems. Additionally, our GaN-powered IQ9 microinverters will help us tap into new three-phase commercial markets and further enhance power output while lowering costs for residential applications. We remain excited about advancing our AI-powered energy management software, especially in collaboration with retail energy providers in the Netherlands, while addressing complex energy markets globally. Looking ahead to 2025, we expect to see a more favorable U.S. market landscape driven by lower interest rates, ITC adders, and rising power prices in strategic regions, facilitating promising growth. Our top-tier microinverters paired with our next-generation battery system should support both the retention and growth of our market share in the U.S. Internationally, we believe we are well positioned for growth once the solar market stabilizes, thanks to our expanded geographic and product offerings. We remain committed to delivering best-in-class solutions, energized by our path forward.

Now, I will hand over the call to Mandy for insights into our financial performance. Mandy?

Mandy Yang — Executive Vice President, Chief Financial Officer

Thank you, Badri, and good afternoon, everyone. I will share a detailed overview of our third-quarter 2024 financial results and outline our expectations for the fourth quarter. We have included reconciliations of our non-GAAP financial measures to GAAP in our earnings release, which is also available in the Investor Relations section of our website. For Q3, total revenue reached $380.9 million.

During this quarter, we shipped approximately 730 megawatts DC of microinverters and 172.9 megawatt hours of IQ Batteries. Our non-GAAP gross margin for Q3 stood at 48.1%, slightly up from 47.1% in Q2, while the GAAP gross margin was recorded at 46.8% for Q3. Excluding the net IRA benefits, the non-GAAP gross margin was at 38.9%, a decline from 41% in Q2.

Notably, our gross margin figures were adversely affected by a one-time 3.3 percentage point charge related to battery costs. The non-GAAP gross margin for Q3 also included $35.2 million from net IRA benefits. Non-GAAP operating expenses were reported at $81.6 million, which is relatively stable compared to $81.7 million in Q2. We continue to invest strategically in new products, customer service, and expansion initiatives.

For Q3, GAAP operating expenses totaled $128.4 million, down from $135.4 million in Q2, which encompassed $43 million in stock-based compensation, $3.1 million in amortization of acquired intangible assets, and approximately $677,000 in restructuring-related expenses. The non-GAAP income from operations for Q3 was $101.4 million, a notable increase from $61.1 million in Q2. On a GAAP basis, we also increased our income from operations to $49.8 million from just $1.8 million in Q2. We saw non-GAAP net income reach $88.4 million compared to $58.8 million in Q2.

This resulted in non-GAAP diluted earnings per share of $0.65 for Q3, up from $0.43 in Q2, while our GAAP net income for Q3 was $45.8 million, compared to $10.8 million in Q2, leading to a GAAP diluted earnings per share of $0.33, versus $0.08 in Q2. However, both our non-GAAP and GAAP diluted earnings per share were impacted by a $0.09 per share, net of tax, related to the impairment of an investment in a private company.

As we entered Q4, our total cash, cash equivalents, and marketable securities stood at $1.77 billion, an increase from $1.65 billion at the end of Q2. Under our $1 billion share repurchase program approved by our board in July 2023, we repurchased 434,947 shares at an average price of $114.48, totaling approximately $49.8 million. We still have $598.3 million available for further repurchases. In Q3, we also allocated around $6.3 million to cover taxes from employee stock vesting and options, resulting in a decrease of 59,607 diluted shares.

Continuing this anti-dilution strategy remains a priority for us. In Q3, we recorded $170.1 million in cash flow generated from operations and $161.6 million in free cash flow reflecting effective management of our working capital. Capital expenditures amounted to $8.5 million in Q3, contrasting with $9.6 million in Q2. Let’s now discuss our outlook for Q4 of 2024.

We project our Q4 revenue within a range of $360 million to $400 million, which incorporates shipments of 140 to 160 megawatt hours of IQ Batteries. We anticipate GAAP gross margin to range between 47% and 50%. Non-GAAP gross margin is expected to fall between 49% and 52%, including the net IRA benefit, while without that benefit, it is projected at 39% to 42%. The net IRA benefit is predicted to be between $38 million and $41 million based on the estimated shipment of 1.3 million units of our U.S.-made microinverters in Q4.

For GAAP operating expenses, we estimate a range of $135 million to $139 million, with around $54 million forecasted for stock-based compensation, acquisition-related expenses, and amortization. Non-GAAP operating expenses should fall between $81 million and $85 million. We expect an annualized effective tax rate, excluding discrete items for 2024, of around 18%, give or take 1%, with IRA benefits included.

With that, I will now open the floor for any questions.

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Enphase Energy Q3 Insights: Shipping Strategies and Future EV Charger Plans

Key Financials and Market Performance Overview

Operator

We will now begin the question-and-answer session. [Operator instructions] Also, please limit yourself to one question and one follow-up; requeue to ask additional questions. The first question comes from Christine Cho with Barclays. Please go ahead.

Christine Cho — Analyst

Thank you. Good evening. I would like to begin by discussing your batteries. You indicated that you expect sell-through for batteries in the U.S. to see a slight increase quarter over quarter. However, shipments are down due to restocking efforts during the quarter. Can you clarify what the sell-through was in Q3? Does the Q4 guidance align with actual sell-through levels? Additionally, could you provide a rough breakdown of shipments to the U.S. versus other regions?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Yes, certainly. We previously mentioned 90 days ago that the battery channel was light, and our goal was to achieve equilibrium in this area. Our recent adjustments have addressed that issue, so shipments into the channel now match the sell-through at approximately 140 to 160 megawatt-hours. For the revenue split, you can expect it to mirror the 75-25 distribution we see overall, which applies similarly for batteries.

Christine Cho — Analyst

As a follow-up, you noted that U.S. revenue increased by 43% quarter over quarter, while sell-through has been in the single digits across all channels. Was this discrepancy primarily due to battery sales, or was there also restocking on the microinverter side? Furthermore, regarding Europe, it appears that your sell-through there may have underperformed relative to sell-in. Could you explain this dynamic and provide guidance for Q4?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

The 43% increase in revenue is straightforward. We addressed under shipping issues from Q3, bringing us back to normal revenue levels.

In the U.S., we now maintain balance, where sell-in aligns with sell-through, allowing us to keep a healthy inventory, which we define as around 8 to 10 weeks. This discipline ensures our revenues reflect actual market health. Overall, across all channels in the U.S., sell-through was up 6% in Q3 compared to Q2, increasing despite a significant U.S. customer declaring bankruptcy in the same quarter. Distribution channels saw an impressive 13% increase in sell-through; California and other areas performed similarly with increases of 13% and 14%, respectively.

In Europe, however, our scenario is more cautious. We saw a revenue decline there because overall sell-through dropped by 34%. This has led us to under ship in that market once again. Although weeks on hand remain slightly elevated, we are committed to this disciplined approach and expect to quickly adjust as conditions improve. Therefore, we’re incorporating a cautious outlook for Q4 given the current European market dynamics.

Operator

Thank you. The next question comes from Colin Rusch with Oppenheimer. Please go ahead.

Colin Rusch — Analyst

Thank you. It seems there is some progress with your EV chargers. Can you discuss your strategy for increasing sales of these products and what trajectory you anticipate for attach rates into 2025?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Absolutely. Our EV chargers are gaining traction in two primary markets: the U.S. and Europe.

We acquired ClipperCreek, a reputable charger manufacturer, at the end of 2021. They have a solid market presence in the U.S. We streamlined their manufacturing process and enhanced the product by integrating Wi-Fi connectivity. Last year, we launched the IQ Smart EV chargers in the U.S. Meanwhile, European adoption is also promising, and we plan to introduce our IQ chargers in 14 countries on that continent.

Our served available market (SAM) for these products is estimated at around $1.4 billion. Notably, the European chargers will feature smart technology, differentiating them from U.S. models. For instance, the EV chargers can begin charging with lower solar power before switching to higher capacity when needed – a significant advantage.

Additionally, we are exploring bidirectional EV charging options. This includes both AC and DC charging systems. Our latest IQ EV chargers align with the ISO 15118 standard, allowing communication between the charger and vehicle to optimize energy use.

We are actively developing AC bidirectional chargers for both the U.S. and European markets. These designs will integrate seamlessly with our existing solar and battery systems, enabling real-time, user-friendly monitoring through an application.

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Enphase Energy Poised for Growth in EV Charging and Commercial Solar Markets

Enphase Energy is actively launching its second generation IQ EV charger across 14 European countries, tapping into a significant market potential of $1.4 billion. The company is also advancing its AC and DC bidirectional charging technology in Europe and the U.S.

Colin Rusch — Analyst

Thank you. Could you provide an update on your presence in the commercial sector and the capacity of systems you’re targeting for 2025? Are you moving towards the 100 to 200 kW systems, or are you still focusing on smaller commercial units?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Absolutely. Our IQ8P microinverter is designed specifically for commercial applications, suitable for solar installations ranging from 20 to 200 kilowatts with a three-phase cabling system. Commercial projects typically have a longer lead time. We began shipping this product approximately nine months ago, and demand has been strong. Just 90 days ago, we reported a couple of hundred installations, and that figure has now increased to over 380.

I can monitor the system on the Fremont building’s roof with 396 panels. This allows me to quickly identify any inverter issues, which is highly valued by installers. The total system is 214 kilowatts, using 550-watt panels, and operates with our microinverter that performs at 480 watts.

Looking ahead, we aren’t yet addressing the 480-volt market, which we will tackle with our upcoming IQ9, set to launch in the second half of 2025. This product will feature a gallium nitride design and is expected to offer high power at a lower cost. Additionally, our U.S.-made IQ8P microinverters qualify for a 10% ITC (Investment Tax Credit) bonus due to increased domestic content, which should boost demand further.

Colin Rusch — Analyst

Thanks. Now, about RE+, we’ve heard an optimistic outlook for 2025, largely due to expected interest rate decreases. However, rates have recently risen. Have you had any recent discussions with customers about this potential slowdown in the industry?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Based on our sell-through data for Q3, things are trending positively in the U.S. In California, concerns regarding NEM 3.0 have lessened, and many installers are adapting to the new regulations while finding solar combined with storage to be economically viable. Overall, we’ve seen an increase in sell-through data by about 14% in the past six weeks.

We anticipate further improvements in 2025 for the U.S. market, aided by potential rate cuts and the boost from the 10% domestic ITC adders. This translates to about $0.40 per watt that can be redirected to either installers or demand-generation efforts, aligning well with rising utility prices.

Mark Strouse — Analyst

That’s encouraging news. Now turning to Europe, you’ve noted some industry hurdles, but also anticipated growth through new products and market expansion. What are your thoughts on what 2025 might hold for Enphase in that region?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

In Europe, we believe Q4 may face some challenges, but we see signs of stabilization. Key markets like the Netherlands, previously affected by NEM uncertainties, are gradually transitioning from solar to a solar-plus-storage framework. We’re engaged with around ten energy providers there to facilitate this shift.

Historically, France has been a strength for us with over a 50% market share. While there might be some initial headwinds caused by utility rates, the overall forecast remains optimistic as we approach the end of 2025.

Germany has faced some setbacks, including a few installer firm bankruptcies, mirroring U.S. trends. Yet, we are focused on introducing new offerings, including a three-phase battery for the DAC (Germany, Austria, and Switzerland) regions and our new IQ Balcony Solar product, which can be utilized across various European countries.

The potential for Balcony Solar in Germany stands at 400 megawatts alone, alongside our IQ EV charger initiative. Our presence in Europe is still growing, and we are committed to introducing innovative products and working closely with both small-scale and leading installers. We remain optimistic about rebounding market conditions in the near future.

Operator

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

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Navigating Challenges: Company Forecasts Sluggish Growth Amid Key Market Headwinds

Brian Lee — Analyst

Thank you for the opportunity to ask questions. I have two queries, both concerning the revenue guidance. First, at the midpoint of your guidance for the fourth quarter, you’re forecasting flat revenue.

Several factors contribute to this outlook: Battery Storage, Europe, and SunPower. You’ve identified a $15 million headwind from battery storage. Additionally, Europe had a drag of $5 million to $10 million in the third quarter.

Will this downward trend persist into the fourth quarter? SunPower’s performance, at less than 50 megawatts per quarter, might still lead to a revenue impact of $10 million to $15 million for you. In short, can you elaborate on these significant challenges as they pertain to sequential growth for Q4? I have a follow-up question as well.

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

In the fourth quarter, our overall sell-through of microinverters is improving compared to the third quarter. We’re heading in a positive direction there. Regarding battery storage, we project approximately 140 to 160 megawatt-hours, compared to the previous 170 megawatt-hours.

Your numbers align with our estimates. SunPower indeed presents a headwind of $10 million to $15 million. While we don’t anticipate recovering this in Q4, we are engaged with installers to mitigate this challenge in upcoming quarters.

To summarize, we expected potential growth from improved microinverter sell-through. While battery sales remain stable, a one-time channel destocking is causing some disruptions, and Europe still shows moderate weakness compared to Q3.

Brian Lee — Analyst

Thank you, Badri, that’s very insightful. For my second question, you mention that battery storage and microinverter sales will rise about 5% or so in your fourth-quarter guidance at the midpoint. However, stripping away other influences like SunPower and Europe, it seems there are U.S. seasonal trends and domestic content adjustments to consider. You also indicated potential price increases in the U.S. Can you discuss these possible tailwinds and whether they are expected to impact Q4, or perhaps later?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Currently, we are not increasing prices in the U.S. Although our new domestic content product does come with an additional cost, it is indeed a driver for us. We remain optimistic about increased domestic content and microinverter sales contributing positively. Our battery sales are healthy, and we anticipate stronger performance as we launch our fourth-generation system in Q1 2025.

To put it succinctly, if microinverter sales show moderate strength, it should help offset the weaker areas.

Operator

The next question comes from Phil Shen with ROTH Capital Partners. Please proceed.

Philip Shen — Analyst

Thank you for taking my questions. My first question relates to your previous comments on reaching a $450 million to $500 million sell-through demand run rate. Back in May, you indicated this might be achievable in Q4. What are your current thoughts on the timeline for reaching this quarterly target? Could it be as early as Q2 in 2025, or is that more likely in the later half of the year?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Reflecting on our earlier discussions, we’ve faced some setbacks including a few installer bankruptcies, which we did not anticipate. While growth in the U.S. is on track, Europe presents distinct challenges. A few months ago, we were not forecasting the current downturn but now acknowledge these realities.

The U.S. distribution market, especially in California, shows promise, as does non-California markets. Although one major customer’s bankruptcy impacted revenue, we expect to recover those losses. It’s difficult to offer precise guidance for 2025, but we see growth opportunities on the horizon with our upcoming fourth-generation system.

This new system aims to reduce costs and enhance competitiveness, particularly in backup applications. From Q2 to Q3, our battery shipments increased by over 40%, and our sell-through is steadily improving.

For grid-tied systems, efficiency during installations has also improved significantly. Our upcoming system features enhancements that will lower costs by $300 per kilowatt-hour, stimulating growth prospects in backup battery sales.

U.S. growth looks promising with improving sell-through numbers, coupled with rising utility rates and favorable domestic content policies. In Europe, conditions remain uncertain, but we’re implementing a clear plan to introduce new products and engage with key partners.

We are focused on not merely waiting for market recovery; we are actively rolling out new products and maintaining strong relationships with our installers.

Philip Shen — Analyst

Thank you for the insights, Badri. Now, shifting gears to Powerwall 3 and Tesla.

Recent reports suggest substantial and widespread demand for the Powerwall 3. I recognize it operates as a string inverter, but I also know you mentioned how your technology represents considerable advancements. What feedback have you received from customers regarding their plans for the Powerwall 3? Are you surprised by the volume of business it is generating?

Enphase Energy Discusses Competitive Landscape and Pricing Strategies

During a recent discussion, Badrinarayanan Kothandaraman, the CEO of Enphase Energy, addressed concerns about competition from the new Powerwall 3 and the company’s sales performance. With keen attention to California’s market dynamics, Kothandaraman shared insights into the company’s strategies and future plans.

Competitive Share and California Sales Growth

Kothandaraman acknowledged the question regarding potential market share loss to Powerwall 3. He confidently stated that, according to recent data and third-party reports, Enphase is maintaining its market share. Specifically, he highlighted a 13% quarter-over-quarter increase in sales in California, where grid-tied installations make up 70% of their total. Kothandaraman emphasized that installing an Enphase battery is cost-effective, particularly comparing two 5P batteries used alongside their microinverters.

Innovations and Upcoming Products

Looking ahead to the first quarter of 2025, Enphase plans to release an advanced 10-kilowatt-hour battery. This new battery design will occupy 60% less wall space and eliminate the need for a previous system controller, making installations simpler and more efficient. As part of their new approach, they will also seek utility approvals for an updated combiner box featuring enhanced functionalities that will reduce installation costs by approximately $300 per kilowatt-hour for typical backup systems.

Technical Reliability and Customer Support

Enphase’s offerings include multiple benefits such as increased power production, especially in shaded environments, and superior reliability. According to Kothandaraman, when a microinverter malfunctions, 95% of the system continues to operate, highlighting Enphase’s commitment to preventing single points of failure. Additionally, the company provides a competitive warranty of 15 years for batteries and 25 years for microinverters, compared to the typical 10-year warranty for string inverters. They pride themselves on their customer service, addressing issues efficiently without removing batteries from walls, thereby minimizing downtime.

Pricing Approaches and Market Reactions

Analysts also inquired about Enphase’s pricing strategies, particularly regarding Europe. Kothandaraman clarified that there has been no price drop in the European market. The company relies on a pricing team established in 2017 to ensure a value-based approach. While occasional price adjustments may occur for loyal customers, these instances are part of their ongoing business process, rather than a systematic trend.

Challenges and Responses in the European Market

Addressing broader market trends, Pavel Molchanov raised questions about declining power prices and their potential effect on module pricing and battery costs. Kothandaraman’s insights into these dynamics suggest that while cheaper electricity could impact battery pricing strategies, Enphase is fully equipped to navigate these changes.

Overall, Enphase Energy is positioning itself to effectively counter competitive challenges and optimize customer experiences. The upcoming product releases and commitment to strategic pricing reflect a proactive approach as they look to expand their market presence in the rapidly evolving energy sector.

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Enphase Energy’s Strategic Focus on Growth: Insights from Leadership

Raghuveer R. Belur — Co-Founder, Senior Vice President, Chief Products Officer

Hi, this is Raghu. Looking at recent market developments, we can see distinct patterns emerging, especially in Europe. In the Netherlands, for instance, a previous reliance solely on solar energy has faced challenges. Factors like NEM uncertainty and penalties for homeowners exporting solar energy into the grid have hindered growth. However, we believe that implementing battery storage solutions will greatly benefit the Dutch market.

The combination of solar energy and batteries creates opportunities for homeowners to enhance their return on investment (ROI). Recently, there has been a shift in urgency; the immediate pressures triggered by the Ukraine crisis and soaring energy prices have diminished. Alongside these changes, the overall economic situation also appears less favorable. We attribute this slowdown in Europe to these circumstances.

As Badri highlighted, the third quarter could mark a turning point for us. With the launch of our new products and a $4 billion expansion of our Serviceable Addressable Market (SAM), we are optimistic about revitalizing our performance in Europe.

Pavel Molchanov — Analyst

I have a question regarding India which hasn’t been touched upon yet. You recently introduced a product targeted at this market, which notoriously prioritizes cost. How do you plan to stay competitive on pricing?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

In India, our new battery solution targets the premium segment of the market. Many households, including single-family homes and villas, experience frequent power outages, often up to five times a day. Currently, backup systems largely rely on traditional lead-acid batteries, which have proven inefficient. Our shift to lithium-ion technology offers a significant advancement.

We have introduced a 5-kilowatt-hour battery, ideal for Indian consumers who typically use 10 kilowatt-hours of energy daily. It features a backup switch that ensures smooth operation, making transitions to backup power seamless. This technology is particularly appealing to luxury builders who are incorporating these systems into high-value homes, which can range from $200,000 to several million dollars.

By integrating our technology, these builders can increase property values and ensure energy independence. Although we are monitoring volume growth closely, the Indian market presents a unique opportunity due to its ongoing power issues.

Raghuveer R. Belur — Co-Founder, Senior Vice President, Chief Products Officer

India is an excellent solar market due to its high levels of solar irradiance. Furthermore, the government is currently offering substantial incentives for small solar systems of two to four kilowatts, making this an ideal environment for our products. We remain very positive about our prospects in India.

Operator

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

Dylan Nassano — Analyst

Hello, good afternoon. I’d like to discuss market share from a different angle, particularly in the TPO market. You indicated that this could be an area for incremental growth, especially in the fourth quarter. How is that progressing?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

We maintain strong relationships with all TPO providers, allowing us to achieve a market share exceeding 50% in the U.S. This has been accomplished through partnerships with various tiers of installers. With a limited number of TPOs, our collaboration with these partners ensures they have reliable domestic content in our products.

We are already shipping domestic content microinverters as part of our mainstream product line called IQ8HC. This November, we will also introduce batteries with domestic content, meeting the current demand for reliable sourcing in the market.

Dylan Nassano — Analyst

If possible, I’d like to ask about managing the battery channel as you prepare to launch the fourth-generation battery. What considerations are you making for this transition?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

As we roll out batteries to additional regions, particularly in underrepresented markets like Germany, we expect a significant increase in battery volumes. We are still distributing our third-generation battery globally while planning to switch to the fourth-generation model in the U.S.

This transition will enable substantial reductions in material and installation costs. It also allows for a smoother inventory transition as we ramp up production of the fourth-generation battery without drastic changes. We aim for an efficient rollout that minimizes disruptions in the channel.

Operator

The next question comes from Dimple Gosai with Bank of America. Please go ahead.

Dimple Gosai — Analyst

Thank you, Badri. I understand that rising average selling prices (ASP) and benefits from the IRA have helped offset domestic manufacturing costs. Was this a deliberate strategy, and what is your outlook for sustaining these higher ASPs?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

The approach is straightforward. Higher manufacturing costs in the U.S. can increase our expenses by about 10% to 15%. We factor this into our pricing strategy. Although there is a slight increase in cost, it generates value for our customers, about $0.40 to $0.50 per watt. This value can be reinvested into the business, contributing to profitability for installers and incentivizing various pricing strategies among TPOs.

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Dimple Gosai and Enphase Executives Discuss Future Growth Amid Challenges

Dimple Gosai — Analyst

Understood.

Operator

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

Kashy Harrison — Analyst

Good afternoon and thank you for taking my questions. My first question is about the recent distribution growth in Q3. You mentioned it was higher than sales from all channels because of the SunPower bankruptcy. How can you confirm that this growth isn’t just existing distribution customers taking market share from SunPower?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

That’s a valid concern. However, we believe that the time frame is too short for installers to change their purchasing strategies significantly. Installers usually need time to adjust their inventory levels. We anticipate some changes in Q4, but we expect the majority to materialize starting in Q1.

The positive aspect is that we’re actively collaborating with nearly all of our installers, who are already familiar with our offerings. They are planning to ramp up orders with us.

Kashy Harrison — Analyst

Thank you. For a follow-up, I’d like to discuss cost management. A key part of Enphase’s story has been reducing costs year after year and then passing those savings onto customers. Recently, it seems there haven’t been significant cuts in inverter costs due to various market pressures. With the upcoming release of IQ9, how do you plan to manage costs and potentially restore prior levels of cost savings to customers?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Our aim with the IQ9 is to provide more watts at the same price for installers. We plan to utilize advanced GaN (gallium nitride) technology to enhance power output while reducing costs.

For instance, in our current microinverter model, the IQ8HC, we use four silicon AC FETs (600-volt transistors). In the IQ9, we will replace these with just two bidirectional GaN switches, enabling us to increase operational frequency as part of our design. This change will reduce costs and the size of several components, proving advantageous for both us and our installers.

To illustrate, the IQ8HC produces 384 watts, whereas the upcoming IQ9 is projected to deliver around 427 to 432 watts—about a 10% to 12% power increase without a price hike for installers. This will result in a more efficient cost per watt for them.

Furthermore, in our battery solutions, costs are on a downward trend as well. According to market studies, cell pack costs are expected to drop below $100 per kilowatt hour. We’ve also simplified our battery installation process by designing it to need fewer components, thus lowering overall costs.

Additionally, we’re exploring ways to streamline other system elements, such as eliminating certain components under our balance of systems approach. This could potentially save customers thousands of dollars by integrating advanced technologies.

Raghuveer R. Belur — Co-Founder, Senior Vice President, Chief Products Officer

Software improvements, particularly AI-powered solutions, can also enhance homeowners’ return on investment (ROI). By making intelligent real-time decisions regarding energy usage, storage, and grid interactions, we add significant value for consumers. Our goal is to continually innovate across all system components to drive costs down and improve performance.

Operator

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

Maheep Mandloi — Analyst

Hi, Maheep Mandloi here. Thanks for the opportunity to ask a question. Could you clarify the timing for the IQ9 launch? Is it commercial first, or will residential options be available at the same time?

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

We will initially launch the commercial microinverters, which will have capacities of 427 and 548 watts of AC power, targeting three-phase systems at 208 volts and 480 volts. Notably, we’ve identified that 75% of the small commercial market operates at 480 volts, while 25% operates at 208 volts. Currently, we only cater to the 208-volt sector, but plan to expand to 480 volts in the second half of 2025. Following that, residential microinverters will be introduced, with options for both 427-watt and 548-watt outputs aimed at high-power panels in emerging markets.

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Enphase Energy Eyes Growth with Strategic Plans and Robust Cash Reserves

At the recent earnings call, Badrinarayanan Kothandaraman, the President and CEO of Enphase Energy, outlined the company’s plans for product expansion and financial strategies, aiming to enhance their market position.

Future Product Launches and Market Adaptation

The expected power solutions for the emerging markets like Brazil and Mexico will range from 650 watts to 700 watts. In contrast, the U.S. and Europe will see a focus on a 427-watt solution. Enphase is gearing up to introduce these products in the second half of 2025.

Cash Management and Strategic Investments

As of now, Enphase has nearly $1.8 billion in cash. Kothandaraman elaborated on three main areas for deploying these funds: expanding manufacturing capabilities, exploring mergers and acquisitions (M&A), and conducting stock buybacks. He expressed particular interest in energy management software and bidirectional EV chargers, which will integrate more closely with solar and battery technologies.

While Kothandaraman emphasized a selective approach to acquisitions, he noted the ongoing opportunities in commercial batteries as well. “We are casting a wide net, but our standards are very high,” he stated.

Impact of Tax Credits on Growth Projections

Analysts also raised concerns regarding the potential changes to the 30% residential tax credit from the Inflation Reduction Act (IRA). Raghuveer R. Belur, Co-Founder and Chief Products Officer, pointed out that any disruption to this tax credit could hinder overall market growth. As demand for electrification continues to rise, including purchases of electric vehicles and heat pumps, the importance of the ITC remains critical.

Belur noted that if the tax credit were to be weakened, it could negatively impact jobs and manufacturing that the IRA helped to establish. However, he expressed confidence, stating, “We expect the probability of the ITC going away to be very, very low, maybe zero.”

Summing Up

As the call wrapped up, Kothandaraman expressed gratitude for stakeholder support, looking forward to further discussions in upcoming quarters. The company’s strategies revolve around maintaining financial strength while adapting to a rapidly changing market landscape.

Operator

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

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

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

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Zach Freedman — Head of Investor Relations

Badrinarayanan Kothandaraman — President, Chief Executive Officer, and Director

Mandy Yang — Executive Vice President, Chief Financial Officer

Christine Cho — Analyst

Badri Kothandaraman — President, Chief Executive Officer, and Director

Colin Rusch — Analyst

Mark Strouse — Analyst

Brian Lee — Analyst

Philip Shen — Analyst

Jordan Levy — Analyst

Pavel Molchanov — Analyst

Raghuveer R. Belur — Co-Founder, Senior Vice President, Chief Products Officer

Raghu Belur — Co-Founder, Senior Vice President, Chief Products Officer

Dylan Nassano — Analyst

Dimple Gosai — Analyst

Kashy Harrison — Analyst

Maheep Mandloi — Analyst

Julien Dumoulin-Smith — Jefferies — Analyst

Austin Moeller — Analyst

More ENPH analysis

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