Q3 2019 Earnings Call
But I hope I guess, when my sentiments and only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session. You want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero.
I'd now like to him the conference over to your Speaker today Christina Carrabino. Thank you. Please go ahead ma'am.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energys third quarter 2019 result.
On today's call advisory to find a woman and paces, President and Chief Executive Officer, Eric rendering Chief Financial Officer, and Raghu below our chief product officer. After the market close today in place issued a press release announcing the results for third quarter ended September Thirtyth 2019 drew.
During this conference call it stays management will make forward looking statements.
Putting but not limited to statements related to Enphase Energys financial performance.
The capabilities and performance of its technology products.
Operations, including service and capacity and current and future market and customer demand trends, but services and products.
These forward looking statements involve significant risks and uncertainties and Enphase energys actual results to the timing of events could differ materially from these expectations.
For a more complete discussion of the risks and uncertainties. Please see the companies tend to report on Form 10-K for the year ended December 31st 2018.
Which is on file with the FCC and the quarterly report on Form 10-Q for the quarter ended September Thirtyth, 2019, which will be filed with the FCC in the fourth quarter 2019.
Enphase energy cautions you not to place any undue reliance on forward looking statements and undertakes no duty or obligation to update any forward looking statements as a result of new information.
Future events or changes in its expectations.
Also please note the financial measures used on this call expressed on a non-GAAP basis, unless otherwise noted and have been adjusted to exclude certain charges.
The company has provided a reconciliation of these non-GAAP financial measures to GAAP financial measures and its earnings release posted today, which can also be found in the Investor Relations section of its website.
Now I'd like to introduce bothers us on the Raman President and Chief Executive Officer of Enphase Energy Bobby.
Good afternoon, and thanks for joining us today.
Because the Quad 2019 financial comes on.
We had another very good quadrant.
Reported revenue of $180.1 million.
34% from the second quarter and up 131% year on year on year.
Demand was strong as our customers can be neutral if you're doing a differentiated products services and quality.
We generally don't component supply in the third quarter, then shipped approximately 1.8 million microinverters.
I will talk in detail about no someplace eaten at home.
non-GAAP gross margin in the third quarter was 36.2% Endo non-GAAP operating income was $40.2 million.
Oh, no smoking was negatively impacted by approximately 220 basis points, you expedite fees related to component shortages.
That does expedite seat or decrease due within and I'm wondering jumps do you know 200 basis points in 2020, and I hope to stop talking about them going forward.
Let me provide some additional I'm not on our gross margin.
I often get the question on.
Gross margin can go and how sustainable that could be.
The answer is that we're always working on improving that gross margin I think it's embedded in it would be any.
We see opportunities to increase gross margin through multiple efforts.
You might think pricing.
Introducing differentiated products like on Sunday.
Eliminating expedite fee addressing that its thoughts.
Optimizing supply chain and implementing engineering cost reductions, we think integration.
Let's now talk about cash.
The third one and with the cash balance of $203 million and generated $5 million a cash from operation.
Things inventory on hand in Q3, two bedroom set of his own customers.
We expect two in Q4 19 with a significantly higher cash balance you prepayments for the ITC safe Harbor product shipments to be with me in Q1 of 20 point.
We also exited Q3 at approximately 36 full game and 22, what this means is 36% gross margin for 8% operating expenses, 22% dominating in.
On as a percentage of revenue on a non-GAAP basis, and I was going to bring to be do a bolt on financial doesn't need to them the called.
Let's now talk about ease of doing business on how customers would see but I.
Our Q3 net promoter score, but since people person in North America.
And do 53% in Q2.
I would call wait times that approximately two minutes on average and we had working to get them to less than a minute by the end of Q4.
We are pleased to announce that adds up today more than 6300 homeowners in North America I've joined nobody sees a big now.
Okay and east bought approximately 30000 early adopters of old legacy Microinverters.
Like some commitment to quality and customer service.
I would homeowner and yes, this legacy product up they probably less 64% in Q3 2019.
No that's covered pets.
As previously stated we share the cost increases your debt its without customers.
Expanded our manufacturing, but flex in Mexico and helped mitigate the sections of the older Dennis.
In the local capacity as well as improved done.
We started shipping I would like you seven feminine microinverters and the Flex Mexico factory and maybe you do.
And Im pleased to shipments in Q3, we manufacture at approximately 837000 Microinverters in Q3 I live in short the blend do so again that I mentioned on the last earnings call.
I'll limit our keeping problems that will work and the team is making great progress towards shipping.
Maybe half a million microinverters and useful in fact on a weekly run rate right. Now is 35000 units are weak.
I don't blame it sort of its.
<unk> portion of the North American business from Mexico by Q1 of 21.
Let's now discuss on capacity in D.J.
In the past few partners, we talked about component shortages, we couldn't mainly under 600 more transistors.
The results up on agreements with Infineon and a few other suppliers, we have no stimulates the components like.
In addition, with Mexico coming online, we have capacity needs for 2.5 million Microinverters and useful.
Consistent with our revenue guidance, we expect to ship between 2.1, and 2.2 million Microinverters two of customers into cool.
This represents roughly a 15% buffer between demand and something like.
We have instituted a six for the forecasting process. It NV that'd be review I would unconstrained demand on a monthly basis and ensure that has enough such capacity available in order to sort of its customers.
Moving onto the region's.
Nobody U.S., an international mix for Q3 was 84%.
And 16%, respectively, compared to 70 fold and 26% in Q2.
Our third quarter revenue in the U.S. was up 51% sequentially and up 175% year on year due to strong demand for new and existing customers.
As we have stated over the last year old channel inventory has been.
For the first names this yet I would like it was enough to accommodate customer demand.
In Europe , our third quarter revenue was down 21% sequentially and up 47% to get on yet.
After a strong you do it reach out to channel inventory that don't normally level.
Our Q3 revenue in Europe was in line with that seems one night.
Netherlands, and plans remain strong markets for us.
We'll go to be I'm, not satisfied with the bump and that's we had a making in rest of Europe I.
I would executive team Watson, but it sounds during the third Walker and they didn't cite many strategic and as you just don't than the rest of Europe , including both study now with Salesforce immediately.
Both in Europe will be a major focus area for me personally in 2020.
Opportunities I blame the market is a growing market and we have a very strong Florida markets.
We simply need to execute better.
He back our third quarter revenue was down 16% sequentially and down 22% to get on here during the quarter and our executive team also wouldn't view into strategic plan phone Australian business.
We are beginning to executing well on that line by hiring top not sales managers funding on the long thinking of installers and sending out a value proposition of safe easy on through high quality and.
Superior customer experience I'm confident that this region, it's going to bounce back as we transition into 2020.
In Latin America, <unk> third quarter revenue was up 50% sequentially and up 47% you don't you excited about the growth opportunities in Latin America and are targeting Modi us within Mexico, another let them.
We continue to work with some of our customers in North America on that I'd see safe Harbor demand.
We plan to ship approximately $35 million Oh BARDA funding.
Alright, D.C. safe harbor to a new customer in Q4.
In addition, we expect Q1 to be an equally significant quarter safe Harbor.
Let's now cover new products.
I'm pleased to announce the general availability of at least that's all I've got it. Thank you Stephanie Highpower Microinverter taught to get it for market was up to 450 wasn't easy.
Hundreds, we'll be able to pad in the Yankees 70, microinverter modal fishing awed by fishing.
That's companies see margins, because you need to make steady progress without easy Morgan partners. During Q3, enjoying some both Panasonic and palladium dimension a few.
In phase I know J.D.C.M. automobile partners have now been adopted by more than 600 installers in the U.S. as uncertainty.
I'd now like to talk about on some first the up in Florida, and then the storage product for North America.
Lets come to the object.
We expect to ship seven of those then you wanted somebody up great product, we called it a de weight to our partner useful.
We plan to deleverage in the final requirements Chucky two apartment in order to enable definitely.
Let's now talk about ensemble, one doctor always just focused on enabling high capacity storage for North America.
<unk> buyout in charge back, which is a multi unit 3.3 kilowatt hour.
The modularity allows for ease of installation flexibility and skin ability, while helping to streamline our supply chain.
The unchartered battery will be available in 2 billion 3.3 kilowatt hour and 10 kilowatt hour.
The 2.3 kilowatt hour battery campaign food I do we ended up not speak microinverters enjoying them.
And you at all of it then I'd been failures in Sonoma County in the last few be many of the employees instead newmont's villas that families that affected and have been evacuated our dark flooded with those who lives have been impacted.
As a side effect on these fires many of US, including me I've lost power for an extended period of time.
Unfortunate reality that homeowners are not compared for the black ops and charge for workday ensembles technology, maybe an ideal product went bust blackouts and keep our homes on based on.
What do I mean by all means long.
Ensemble isn't technology that brings together so look.
Total each good and even a generation onto a single energy management platform to keep the home on based on.
This technology Optimizes the usage of these resources under the old conditions.
For example, <unk> dumb ensemble can better balance the usage of so lots to what age and gender age and to keep the lights on and went to get it is up you can make an economic decision regarding the source of energy.
Today, we released some installments, that's a big conveying to put on somebody on our website.
And the recent just be a confidence in Utah.
Hello, seven uninstalled that don't table.
With a total of approximately 15 stores the feedback from the daughters wants to provide enough information on our website and little bit dirtier to make it easier for them to be selling jobs and we didn't exactly that.
We own and the process of installing ensemble wouldn't about Aldfour system at a few enphase sites as well as a few employees homes.
When we complete comprehensive something better testing on these on Pos system.
We plan to take preorders in December through our distribution partners.
We expect production shipments in the first quarter to many trendy after completing the real born to be done installations with nearly 20 installers.
After the release of the storage product, we expect for the divisions of I'm supposed to be the leaves in 2020 with a focus on I, Kuwait PV Alright, you eight solar installations.
The advantage of eight to eight on the who will be that these good forming microinverters they produce power from Panama, even during black ops as long as the feminist dumb shiny.
This is a major pain point without the need for storage.
And it's completely differentiated indefinite effect in somebody.
We are pleased with auto would all progress being made this year I.
I would be microinverter, they tend to be it's Mike Linenberg in a business continues to grow and it's pretty healthy component suppliers stabilized. We are excited about upcoming storage product into the main focus on deleveraging and jobs to the market.
I would like to make one more important announcement.
We will be hosting an analyst day during the second week of December .
It might be put up based on you know strategic initiatives on financial model as well as new products.
More details on old analysts day will follow over the next few weeks that I haven't done the polymer or any photos that in view of a financial incentives and it.
Thanks, Bobby I will provide more details maybe towards or border between a financial results as well if I were business all four before.
As a reminder, supernatural missions that I'm going to provide our non-GAAP basis, unless otherwise noted.
We have provided reconciliations for these non-GAAP financial measures do not work earnings was useful to today, which can also be following the investor relations section of our website.
Total revenue for the third quarter over 2019 was one comes out of $80.1 billion, including approximately 8 million bonus will see <unk> revenue.
Revenue from the third quarter of 29 being increased 34 four cents equation.
Increased 131% year over year.
We shipped approximately 580, forming or what you see the sort of war of 29.
The increase you May go why do you see all 44 cents sequentially.
Please one having on maybe six four cents formed a year ago War.
That make I want to ship since it approximately 1.8 million like remember approximately 99%, which was what I use.
non-GAAP gross margin for the third quarter of 2018 was 36.24 cents compared to 34.1 person for the second quarter of 29.
Components forfeitures negatively impacted our Q3 29 seem on GAAP gross margin by approximately 220 basis points.
non-GAAP operating expenses were 25 million bonus for the third quarter of 29 see compared to 22.5 million bonus for the second quarter of 29, D and 18.6 million bonus for the third quarter, which when you see.
GAAP operating expenses were 31 million water for the third World 2019 comfort from $27.9 billion for the second quarter between 18, and 25.6 million as long as part of the water with 28.
GAAP operating expenses for the third World training. They deem included $4.9 million fulfill <unk> makes compensation expenses.
And it I'm $46000 <unk> expenses for acquiring time to Watson and $469000 for all first term training expense.
Well that non-GAAP basis income from operations was 40.2 million bookings for the third quarter of 29, the compared to 23.2 million Bono for the second quarter of 29 team and $7 million poor than usual.
This increase in operating income is reflective of our continued improvement you know, we're you know operational excellence I'm probably users.
Well that GAAP basis income from operations was $33.7 million for the third quarter of 29.
On a non-GAAP basis net income for the third World 2019 was 39.5 million Boulder compared to 23.2 million bonus for the second quarter of 20 nicely and $4.6 million for the year ago War.
These results in basic earnings per share of 32 cents.
<unk> earnings per share of 30 cents for the third quarter of 29.
Compared to basic earnings per share of 20 cents.
You did earnings per share <unk> do you sense for the second quarter of Trinity.
GAAP net income for the third quarter of 29 theme was 31.1 million dollar compared to 10.6 million dollar for the second quarter of 20, they deem under law School City point 5 million longer for <unk>.
These resources in basic earnings per share of 25 soon.
And the who didn't earnings per share of 23 cents for the sort of world 2019.
For two basic earnings per share of nine cents.
Diluted earnings per share of eight cents for the second quarter was pretty nicely.
We are happy to report that we achieved the important financial milestone for consistency water, so gas generation and appropriate up really.
As we continue to maintain profitability cities have we shouldn't have all possibilities that we may we lease our valuation allowance against <unk> successes in the near future up. These flows you know what thank you.
Now turning to the balance sheet inventory was 30.2 million bonus at the end of Q3 between 18 compared to $20.1 billion at the end of Q2, 2018 and $17.9 million at the end of Q3 2080.
We ended up 24 of the smoking been Tony on hand muscle September 30, 29 see significantly below our internal target of 30 days.
Up from 21 days people or down from 31 days a year ago poor.
The increase in diesel fuel inventory on hand, So September thirtyth.
2019 was intended to improve shipping you noted.
Well were booked them or something better Serbs, increasing their mind.
Inventory management continues to remain one of our key cash management indeed.
We exited the third quarter of 2019, both cash minus 203 million border compared to around 6 million dollar for the second quarter of Trinity.
We generated 5 million bonus National Corporation, seven kind of $69000 seen adjusted free cash flow through water between 80.
Capital expenditure was 4.2 million bonus for Q3 2019, mainly to ramp up almost like a proxy de Mexico China.
As Bobby mentioned, we stick to N Q4, 29 team, we have significantly higher cash bonuses due to pre payments for the ITC Supercar more pro shipment in Q1 20 choice.
Now, let's discuss our outlook for the fourth quarter of 29.
We just picked on what revenue for the fourth quarter of 2018 to be within a range to 200 $210 million.
Including approximately 35 million to go there so shipments for ITC Sim card loan to a new cost.
Turning to margins, we expect GAAP non-GAAP gross margin to be within a range of 34 to 37 four cents, we expect our GAAP operating expenses.
31.5 to 33.5 million Luna, including that for approximately $7 million, it's amazing for stock based compensation expenses restructuring and acquisition related amortization.
We expect non-GAAP operating expenses to be within a range was 24.5 million to $26.5 million. We've done I will now open the line.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound cake.
Please standby well, we compile the culinary roster.
Our first question is from Philip Shen from Roth Capital Partners. Your line is now fan.
Hi, everyone. Thanks for the question in terms of her guidance for Q4.
In the $35 million Safe Harbor first single customer.
Hi.
To what degree did you prioritize the need of a single customer.
And.
How did you not serve that customer how much volume do you think you could sold into the broader U.S. market.
Well.
He gave you a clear view on order capacity so.
Basically you followed up 19, which is this quarter, we have a capacity of 2.5 million microinverters.
And our guidance reflects basically shipments up to 2.1 to 2.2 million Microinverters, so capacity problems auto work.
And we are basically you know back to a demand limited.
Environment.
Great and Roger I think you mentioned for Q1, you expect a similar level of Safe Harbor is that correct. That's exactly the same okay is it for the same customer or do you expect it to be for other customers as well.
We are you not at this time I am unable to provide you that all I know that it'll be the same it'd be.
Deep prevent them up.
Got great and then.
As it relates to storage I know you gave us a ramp there.
When do you can you comment on when you expect to.
She is the storage product really hitting a meaningful volumes.
Look I mean like what I said the.
We released our website this afternoon.
That is going to give installers and Florida.
Install a specific information to help them really selling the product.
We plan to take preorders in December once we have the basically installed did that few off all of whom we just myself, Eric you know raghu and our systems are functioning well and we personally into that you just like Waterview, then we wouldn't begin thinking reorders.
We will need you know we will start shipping production in the first more of them.
Off 20, trendy and we're going to be prepared for a program.
But you know you know that ramps that often difficult brands, but often uncertain very difficult to predict.
Let's say you know but.
By the second half, we should ramp but I'm fully.
You know, but Q2 I would expect to be reasonably significant as well.
Okay, Great and a one one last one from me can you talk about the visibility you have into Q1 I know, we don't have guidance officially but can you comment on the.
Seasonality that you might expect to see in Q1 and and what the overall direction. If you Wanna could be relative to Q4, it's too early to give you specific numbers on guidance, but we expect to see the typical seasonality associated with industry you want.
Okay, great. Thanks, Roger I'll pass it on.
Thank you. Our next question is from Brad It May come from William trading Your line is now fan.
Hi, Thanks to the question as you're well aware, we've we've been without power in the northern California over the last five days to NAV million households.
You know and I think if you guys did 100000 homes, though to be a billion in revenues could you speak to how much you will or will not be capacity constrained in terms of Ah.
Yeah, well the ramp your battery shipments and I think you had a couple sources on the out on the self supply routes like you're right.
Well.
Right.
The question is on the capacity of batteries and we'll be able to handle.
The ramp considering that it's going to be a huge demand he had enough in California. So the answer is yes, we have.
You know, we have announced partnerships with they wouldn't do three I'm the batteries supply that is public.
We basically have a you know good capacity with them. We also signed agreements with one other battery supplier a Chinese based battery suppliers that we have not announced however, we are well into the qualification stages with them and we expect them.
Also with the come on in early 2020 both of them I have promised does nice capacity number. So I think it would be well aligned without ramp and if we need to bringing a third supplier, we will not hesitate to bring one.
[noise], Okay that makes up the follow up I had was there's been a lot of speculation around inventory and channel.
And whether you've been stuffing the channel can you tell us how many weeks.
Your distributors have how many weeks, if you're a direct customers house and whether the inventory levels.
Throwing in way, whether you feel like yourself himself you know just add some color to that like you.
Right. So let me let me give some background there you know.
The last four quarters, we're being unable to meet.
Oh, the customer's demand.
You mean supply and limited.
And every quarter or prior to entering every quarter, we got fully booked.
So there was no question that we would bring in mens even to be one hand to mouth, we didn't have enough supply.
Three is the first quarter where supply.
Was able to keep up with demand.
Now, let me come to general management.
I have a what is going to the ship review every week, where we made we look at the revenue for the Corporation.
Basically we have a channel management business process, which means that we look at every distributor.
We basically you look at what is their sell through every week sell through is how well that distribute and it's doing.
In order to sell into the.
And customers would you think daughters.
Do you have three d. afford installers, particularly.
And essentially we do both the top down as well as bottoms up which is we do have distribution managers.
Whose job is to watch the inventory.
We also have sales.
Regarding the tier three tier four sales folks all day to day generate a lot of demand bottoms up so that the distributions can sell through the product those installers.
So.
We do a combination of both.
And then we have strict limits, which is if we find that.
And then distribute them.
Not have enough sell through for a previous me.
We have formula in place Middleby conscientiously limit shipment into the channel.
So it is no longer an art you Didnt fine.
And it has not yet run by a computer it was some being run by a computer.
But you know me our channels management is well under control.
Yes, Tom do we see an add ons can be so.
Hum.
Did you say, how many weeks on hours. Thank you.
Historically, we have not not talked about two weeks of inventory.
We do not talk about two weeks of inventory Oliver I'll tell you, but best practices that we've talked about in the past used to have eight to 10 weeks off inventory the channel.
That's the guideline I can give you but.
Thank you very much great job or quarter.
Thank you.
Thank you.
Our next question is from Mark Strouse from JP Morgan Your line is now fan.
Oh, yeah. Good afternoon. Thank you very much for taking my questions. I'm. Just curious if you can comment on any changes you've observed in the competitive environment. If any either from anything that you saw at FBR higher any conversations that you've had with Oh, what your distributors are for installers over the last quarter.
Yes, the there that have been a lot of Ah I mean, several companies that emerged.
With that.
This means we are closely watching every one.
A you know, but our strategy is the same why do we continue to watch competition.
You know what we do is focus on the value beacon for white.
And I've always told you and.
And I'm like a broken record here. So basically we have three things product innovation.
Quality and customer experience.
It comes to product innovation.
Let's start with like you seven we introduced thank you seven in Q1 not maybe.
You know I Q seven wasn't software defined architecture.
Even though it but it wasn't surprising to brand architecture, we still have come with generations of like you seven.
You know I do seven plus.
Thank you Sevenx you know like you 70 progressively increasing power with the same based platform and so when we will introduce.
And even more higher followed working very soon in the coming month. So.
With the same platform, we've been able to leverage the hardware.
To basically.
Increase the AC power and increasing easy, but what is important the more they see power the product at the more gross margin I mean.
No it's extremely important.
So having talked about I, just seven the because dealers on some.
What is the fundamental wind up on some eat is.
That you know ensemble has a unique kind of product.
On somebody can function.
Any microinverters bids on on somebody technology called like you wait can function on the room when the grid is down when the Sun shining.
I've not seen such an elegant product available yet in a in the research that I have done so we are unique and differentiated.
Exactly.
The second is ensemble.
And then the micro inverter is the technology.
He is an energy management technology energy management technology that managers like what what I said it managers solar.
Let me just storage.
You can't even managed a generator.
And can manage the grid.
So you know if you start if you start.
But I'm guessing if I don't have anything except the grid, it's very easy the consumption equals the good.
If I have told US then I have solar endoglin document consumption.
I guess starting to get them they didn't complex.
That storage I have no soda storage and the good.
Then if I haven't generator that have.
So a lot of storage generate a lot of fuel cells and the good.
Dr might consumption so.
On somebody technology can exactly do that.
You can keep you always on regardless of.
You know what is happening right now what it did you know I, just wish our product, but little bit earlier, but regardless of the grid.
If the energy sources are managed REIT.
People can have their homes all the way on during these black ops.
And that's what we are all about.
So I.
Bottom line, you know focus on product innovation and of course, you know product innovation, that's not enough we need the quality.
We need.
You know 500, BBB M., these or target, which is which is up a million microinverters ship.
[noise] annually 500 come back to us.
That's got a 500 DPP m., we just 500 defect, but you know defective parts, but really.
And that is not easy to do this is with me.
Made the very tight business processes looked cost corrective action methodology is sick integration over the phone winter grade. Although these are required in order to achieve this kind of quality level.
Got it got somebody expedient next it's got somebody who come to my experiences.
Oh.
You know, we probably don't know that was being able to answer the phone in two minutes of let and I'm not satisfied with that.
How about we entered the phone when they bring that's what I tell my team.
Bridges are you don't get down even further.
Right too you know Yep Yep go together with a few food with.
Sub one minute a week time.
And then eventually.
Yet do you know pick up the golf monitoring so.
Product innovation quality customer experience the thought on a differentiating aspect, we we focus on that all the time.
And a you know I hope to answer I Hope I answered your question, though there yeah. That's very helpful boundaries. Thank you very much a in a just lastly, you if I look at the guidance for Fourq you in strip out the a the 35 million or so for safe harboring a in say then strip out the 8 million from this quarter.
It kinda suggests relatively flattish revenue quarter over quarter. It can you just.
Go back to your commentary you for trucks provided earlier kinda by geography, and if you had to boil down but.
That flattish revenue quarter over quarter, you have to any particular geography. Your product is there a way to do that or is that not a really fair way of looking at the revenue.
Our observations are right on the base business that ought to Florida puts and takes in the base business, but you know realise one thing that that we have basically been.
You know supply limited for the last two quarters. So we have never been able to catch up.
On the demand and this is the first quarter, we actually caught up on the demand.
So, but you know having said that ran through your question I already Georgia, you know Europe I'm not happy with.
The performance of Europe is.
Not that great.
Although we have improved a lot compared to last year.
We said, 47% different right you know 47% year on year on year, but are you know I'm not happy with the progress we're making the rest of Europe , Netherlands is a very nice market for us nederlander the biggest growing market.
Europe , we're doing well there from the we have over I mean, we a majority of share in France, France is also growing but we're still yet to make progress in Germany, we have yet to make brokers in Belgium.
You know.
Mccutcheon billion was quite low.
Oh, we look forward to making progress in other eastern European countries, Poland Hungary.
Those places so yes, we have worked.
Very helpful. Thank you very much.
Thank you. Our next question from Eric Stine from Craig Hallum. Your line is now fan.
So on just want to come back to storage a little bit sounds like you won't be capacity constrained and I know it's still early you know you're just how would the the early units in running those but you know based on conversations with the channel any thoughts on where you think attach rates could be.
You know, whether it's early or whether it's when when things are really rolling as you get into 2020.
I mean, our.
Although the.
Suppliers as well as a company does that kind of provided and attach rate already.
Basically you know sunrun talks about 25% that badgley.
In California, and we expect that to be true.
So I expect the black hopes to be accelerating that.
And also for US it's not only that.
In addition, we haven't installed base.
If you're looking out and stop Hey, So you know as of today are installed bases over a million homes.
Mhm off over a million homes, maybe 70% isn't none of them use in North America.
And these are already loyal and fit customers. They mean waiting for some time for ensemble storage.
So that is gonna be lot of demand from this true. In addition to the demand generated from Blancos, Yeah of course, California is a.
Yeah, I've got a nice a badge Hawaii has got a nice attach other countries are coming Puerto Rico has got a nice attach you know, Texas is going to come soon Massachusetts is going to come soon.
So we're going to start being adoption.
Okay, and then you know just when talking about that installed base.
I mean, the majority of that installed base just because the Ike you platform is that right and that that is what.
Would be required you know for those homeowners to use or do you storage.
Yes, yes is the ends that a significant portion is the accuplex I'm not the majority we do have over them to 15 and into 50, Florida.
But you know the customers up quite a few years there that that you know.
They basically actually want to upgrade.
To the latest and greatest technology technology that gives them superior part production technology compared to one. So you know it is the compatible to ensemble.
As a one stop shop for you know in phases will be a one stop shop, but solo storage you know communication.
Yep.
Okay.
Maybe last one for me just a the recent announcement I Q seven a launch I mean, it seems to me like that's kind of an entry into the the see an eye market. You know just curious you should we view it that way is that something that's just based on your installers and you know what parts of the market. They go after a any thoughts on that would be helpful.
Yeah, we're going to just yet so.
So to begin with the seven it was really had been targeted for the.
Essentially market as a high power continues to be however, I'm sure some up what markets them over installers wouldn't be option deeply looking at using this M&A on does he and I business as well, having said that we really expect these are you targeting what's an essential that's what you see the demand.
Okay. Thanks.
Thank you.
Thank you. Our next question is from Jeff Osborne from Cowen and company. Your line is now fan.
Hey, good afternoon, I, just wanted to circle back to out to Mark's question about the a the flattish revenue and asking it a different way as you look at your six quarter a pipeline that you highlighted for your forecasting methodology can you just give us a sense of up to two and a half million units of capacity you know where are you.
I think that'll be a exiting next year.
Yeah. This is clearly you had the surge of four quarters, where you're capacity constrained now you've been able to catch up which is great customers will be more satisfied with that but I'm just trying to get a sense of as you have the safe Harbor surge in Q1.
Do you become a safe.
Capacity constrained and then how do we think about the timeline or process for you to add more capacity, whether it's in Mexico in China right.
Right and I mean, as an executive team, we decided that we will never be constrained by capacity. So that that's basically youre thinking and we look at our demand unconstrained demand on a six quarter basis, and then we have enough mini Blake you have so to capacity almost 30.
By 40% of surge capacity that is available so that we can meet or.
Not only our you know us demands bikes that happen.
Having said that Ah yes. The you know you can you can say that in Q4 the base business. If you feel safe up a few potent usually a flat but know that the safe Harbor business came from a brand new customer that was not not there before and so that's a big deal.
Also going forward, we expect ensemble once it kicks in in Q1 off 20 that right.
Major customer adoption, that's what we're all about Oh, yes, we are getting prepared for ensemble.
Your question on can be add more capacity for example, if I find that I need to go too.
I need to go to 4 million units in Q4 of 2020.
A you know and and it makes exporting forecast shows they need that.
You will not be a problem for us to do that it will take us anywhere from three to six month.
In order to bring that kind of capacity.
But in the meantime, if I'm hearing your right boundary that you could do easily 3 million paying overtime at flex. It's what's if there was a surge next summer.
And they pointed two and a half as a threat what do think about right. They you know as of today like what I said capacities to point to.
2.9 million unit I told you 2 million units a couple of quarters back now we have increased digital borne by the increase it because you know we are hovering around Oh, that's for demand that they talked about a buffer. So it's obviously.
No, we're not going into capacity changes in a vacuum <unk>.
It will always be predicated by demand, which is why we are forecasting process. The forecasting process tells me that may demand is going to be 3 million units. It's got to be no problem for me to get to that.
Got it good to hear I'd said two financial questions for Eric. One is you you made reference to the valuation allowance, possibly being reversed.
Given you called it out it I would assume that that happens at some point can you just remind us how we should be thinking about tax rate modeling in the financial impact of that reversal.
Yeah, we will provide more clarity on that one you as part of your analyst day.
Do you you know the reversal can be as early as Q4 price and that will be likely we went up for a GAAP only treatment because he is a big large release, the allowance, which will be coming from the volumes that you know so and then in terms of starts rate well used for now the corporate tax rate I remember we have anymore.
I also want to go.
You can probably back into numbers and feel we provide more kind of I've seen.
Got it and then the last question I had was just as you look at the guidance of 34% to 37% can you just talk about you know given the visibility you have what would get you to the low into that range versus the high end of the range.
I mean, historically, we have talked about we have given at 3.3.
The person midpoint range and in general we give ourselves a lot of room bought any execution issues that happened in the quarter et cetera.
It's basically yeah, you know a shocked you know short term fluctuations, but what's more exciting the.
Long term view of gross margin. So everybody keeps asking me you started 5% date and the answer is no the 35% does not it yeah.
Lot of opportunities photos to improve gross margin that's what we do.
Every week, we run a world class cost you know meeting where.
The focus is on improving cost of our system system costs, not microinverter only microinverters cable batteries accessories combiners.
Everything we also put on a pricing meeting.
They are getting the focus is on pricing optimization. So you know multiple initiatives optimizing pricing like what is the introducing products like on some like you said, many eliminating it's been a seasonal component.
Ah supply situation simulators and lifting periscope.
Doing cost reductions through Insync integration.
The that all something that continues to be anyway, that's why you're seeing the gross margin execution over the last year, we tend to be climbing on gross margins.
It certainly has been impressive thanks for all the Ditto I appreciate it yeah.
Thank you. Our next question Colin Rusch from Oppenheimer. Your line is now fan.
Thanks, so much with the the sample technology development and kind of the preparedness to to ramp that here.
You know we knew that you the from where it was one of the last remaining pieces are you guys are working on can you talk about where you're at and that development and then as you think about the updates as you go through testing next year can you talk about your expected a cadence for.
Improvements.
As you go throughout the year.
Right. So yeah, you know I'm talking about something I've not talked about before so that at multiple levels of testing that we do.
One is called the unit testing on all the boards that we use insight products like and charge and power.
By now but.
That's going to unit.
The other is Carla product testing, which is product testing means like that the back to be using.
Certain calculus, and that's part of the product testing, which is a you know if I need to test the battery properly I need to make sure the battery management unit.
These cells themselves the Microinverters the battery control all of them on working together and responding liked to stimulus.
External stimulus.
So so he covered unit testing recovered products.
Third.
The most most important is actually system.
What do I mean by system the system, it's how you mean use it.
In the house.
Which means I need to have a solid simulator for solar.
I need to have the battery I need to have my and both switch I need to happen great.
And I need to have my communication equipment and the CLO.
All of them, we'll have to be real life.
They have to be like how.
You are living in your home with your normal nodes.
Now being can do so we have to simulate with all kinds of notes we have to do it on grid off simulation. So so we have graduated from component testing, which is the which is what I said, that's the first basic testing product testing now we are doing system testing system testing means.
Total units like what I said.
That you know I couldnt be my house. It for me Raghu So's NK cells in fact, they already have the system installed right now.
And we need to be done then make sure all the use cases that cover.
And you know in all of the what is unique about ensemble is that.
The hardware, it's done which is which is the hardware that makes you got nothing that is done.
But the software that helps you manage all of these resources, which I told you about solar.
Storage.
Great even a generator.
And the lows.
That need to be working well in real life.
And which is why once we finish Odell FA.
Installations, which will be primarily focused on the system software testing.
Once we do that properly we will then start taking preorders, because our confidence moves from 85%, 95% at that point.
And then B, we basically you know starting to ship that brought up after we finish real life installations.
We already have about 20 fold ins dollars who are.
Banners for.
They already have signed up to receive beat installations from us.
We will be installing.
We'll be doing these beat up these are real products.
And we'll be doing so many installs for any for installed.
We'll be getting feedback from all of them.
We will get the mine and we have to of course correct.
Ah or not.
And maybe that out of mine of course corrections.
And then we will release the product to productions so.
It's a it's all coming together right now I'm, just giving you the full picture. So you guys know exactly the same thing as me.
And of course.
You know me, we will never really is something which does not have the quality and customer experience, which mean.
If I have.
If you haven't ensemble system at home.
You should be able to do or we should be able to blame you do them.
To the latest software in the event, we have to make changes that's called over the air firmware upgrade.
And you know those are all those all need to be working seamlessly.
So.
So it's basically you know that that is going on right now, but we are confident that you know.
By early December that could be done and we were starting to yours.
Perfect and then just in terms of the geography as you mentioned, where your sales efforts aren't as productive as you would hope you can you talk about what the the sticking points are I mean, certainly you know getting designed into a base level design.
For systems. It ends up being very important for folks you know what what are the challenges is it familiarity with the product is the design cycle does that just availability of product to those geographies help us understand what's going on there.
Colin So it's pretty simple, it's a focus issue.
We have not paid attention and basically the way we've stated engine to North America Bye Bye staffing with best in class seems to be.
In North America, we need to do the same thing.
Article worthless.
Our products have a great fit for the market.
Market is growing market.
We just need to execute.
Okay. Thanks, guys.
Thank you.
Our next question comes from Jeffrey Campbell from Tuohy Brothers. Your line is now fan.
[noise] congratulations on a quarter and thanks for taking my call.
My first question is with regard to the Safe Harbor sales that you've identified in first quarter 20 are they somehow receiving the 30% ITC just auction or is this activity that's actually pegged to the lower 2020 ITC.
They are going to receive the 30 person.
Okay.
Great.
And my second question is.
Back to the I Q seven day.
Do you envision this is primarily in HCM solution.
Not really no.
It can cater to both discrete as well as they see modules.
Okay excellent. Thank you that's it for me.
Thank you.
Thank you. Our next question is from Amit They all from H.C. Wainwright. Your line is now fans.
Thank you for taking my questions, but they're just with respect to this million installed base.
Already reaching out to you know these folks are what are the cloud over talk over here.
Does that effort already started are you waiting until you complete so this dusting et cetera.
We'll probably story I really do a storage uptick sorry, right. We will provide some more color during the analyst day, but you don't get in the short story.
The million homes up 997000 homes, they all communicate with us through the enlighten.
That is a mobile app that basically that we have that is that gateway.
To.
There are providing a view of the power of the already.
In fact, enphase all the time.
Both homeowners as well as installers, having said that.
Our strategy for ensemble is is a you know making sure that de Vito installations are right.
We have the right customer experience and then we can introduce our homeowners to do upgrades you know.
You know grades online Oh, a introduce them to programs like the legacy product upgrade which is a very successful program where.
About nearly 30000 homeowners, who bought product and he is you know eight years ago.
Lindsay you know they want to wall.
Okay Bye bye.
So it can be a similar programs, but when you do it only when we are ready when we finished.
The beaten installations and you know then we will start on those.
Understood.
And then you know with the ensemble and I curated et cetera, now coming into play.
How should we think about you know the addressable market for UNFI is and you know your.
Opportunity to take you know.
Good share of that market.
Like what I'd tell you know what I told you read the.
You know today.
<unk> micro Inverters, we do roughly about $2000.
With batteries, meaning storage.
We will do more than $10000.
And that that means you know even if the attach rate is 20%.
It is still significant dollars for us.
Right, that's the way to think about it.
Total storage is nascent you know there are only couple of states like California, Hawaii Web.
Really ramp on storage.
The value proposition.
The other states is not ask straightforward as as you know in California for example that a blackout simply a peace of mind.
And that value proposition needs to come through.
And then basically storage is going to start.
Becoming mainstream that's going to happen very soon.
And then you know with $10000 at home.
It should be getting our fair share of what we get microinverters today.
Got it [noise].
Just one last one for me you know your comments on the expedite see you know given that you your capacity in shipments sort of experience expectations. You laid out I mean is this expedite feed gone by one Q3 results. That's what I said that I said from 2020, I really hope, it's gonna be gone I really hope I'm gonna be.
Not talking about it.
And it needs to fall within zero 200 basis points.
So let me stop talking about it.
Yes. Thank you that's all I have appreciate it.
Thank you.
Thank you.
Our next question is from my Heath Mundanely from Credit Suisse. Your line is now fan.
Hi, My money away from credit Suisse. Thanks for squeezing me in Oh.
Most of my questions I've been on so Doug, but just maybe a African touch upon operating expense. So it seems more or less flattish in Q4, but how should we think about that going forward and 2020, I'm, especially I was hearing trees are focus and European markets and.
Expand the ensemble attachment rates.
Yeah, I mean Opex if you look at today, what we reported in Q3 is about 14% of sales overall opex.
And know what opex at the midpoint of gate and a few food I think it's around.
Et cetera, and Ah you know 12.
12.4% or something like that so topic definitely under control and we plan to keep it in this range and of course, if we need to give it in that range.
We are you know our expectation is that we will continue to grow.
With the vectors of unsung balloon.
Like what I said so.
Yes.
Yeah, that's the topics like.
Got it and probably one last question for me or you are just spoke about ensemble being able to connect with.
And when Genereight does is that something which you can look forward to kind of quick.
Good collaborating with or any.
Generators out there.
Or have the reached out to you for that.
So yeah I just got we really think about it in a much broader context and any specific type of a a generation resources like if you think about the look at so although you could storage.
We do you think about a generation resources like fuel so fossil fuel de et cetera.
And even load for that matter right because modes also controllable. So it's a very comprehensive or what I call. It the master platform that can bring all of these resources together and manage them. A you know goody seamless seamless manner, so you're not picks Indonesia.
What do you want to be clean and green and so our focus on on unsold and storage is extremely vital.
Ah you ultimately as agreed as you know so Oh, we have a complete solution bottom line and so if there's any particular resource that wants to come come onto the platform. The ensemble, obviously, we'd do that and we manage it everybody effective manner in order to ensure that we have back home is all these on because.
At the end of money that is the most important function that we are providing for the homeowner.
[noise] Mohit I want to make our clarification remote strike fighter bother you mentioned that the midpoint is about 12.4%. We are guiding for Q4. It doesn't mean that will be a new baseline opex for 22 way right, that's a guiding element or a particular you're saying.
That makes in Q4 think about the investments or these are we need to continue making think up all the growth.
Just curious in Europe , and Asia Pacific Saum, we still have all were 30 20 of them, obviously that he's here much better outcomes that we always you know you target sitting on the financial model I'm going to revisit dot one as part of the and I was the right, but I just want to make sure we don't mobile thinking.
The studies the benchmark that you paid more for Opex right.
Got it thanks sort of color I can I look forward to more do you tend to be honest say yep. Thanks for taking my question.
Thank you. Our next question is from Taobao more channels.
Right I mean, our next question is from five Michael from Williams trading airline that's now fan.
Hi, Thanks, a quick follow up so I think the three publicly traded installers are the only ones really safe or bring a this year and two of them or or clients and then the largest one historically hasnt done.
So are you telling us that the the third one it has become a fine of answers.
Brad I'm not going to talk about it.
Okay.
Well I guess it.
The some may read through to the way you're reporting the safe Harbor the.
The non safe Harbor was flat Q4 is you're feeling that the business is still growing or.
It was this a peak revenue quarter, if you go.
I mean [noise].
I've been clear from the answer is we are very excited about on some.
They're very excited about storage.
Got it just got a massive potential for us.
Except from $2000 a phone $10000 Oh.
The attach rate of storage is only going to increase.
California blackouts is going to accelerate the adoption of storage, so and we are going to be coming out with the product in Q1 Wendy.
So we're very excited there.
We are very excited about growth, there's going to follow up starting immediately with the thank you APV Yankee HPV is gonna be you're going to have I can wait on the rule.
Which will produce power when the grid is down and the spend the sun is still shiny. So that's a massively differentiated product.
So yes, you know storage in the next leg.
Baby is another like so we really have a lot of flexible.
[noise] job because no one last thing.
Thank you for.
You know we morning for the point of sale data.
Reviews, the channel very well rice and.
Oh the numbers that we've seen so we are growing price and the viewers. These activities is higher right. So that's our key points I mean, one quarter or about to make upfront.
And same carbo created a lot of interesting dynamic see into the quarter. It as well right. So I just want to point out that these observation about thinking I mean flowing carving out a number I'm trying to look at the trends with the prior quarter you may not be us Logix cost you may prove you ultimately you think.
Right.
Oh, Thanks, Eric Hum, what how do you think about gross margins are a good so if you're if most of your non Sunpower U.S. business. In Q1 is out of my so you basically have a 35% reduction in your.
Cost of goods sold on that on that product and you know how is that.
No I guess, who pass some of that through to customers some point.
But you know it sounds like margins going higher.
Already above.
We previously.
So why did you mention how we think about margin very well in the script right. So you can read the the early part of your prepared remarks, we don't see these.
Check Point's told me point numbers or anything more than a new potential target that Kevin Bacon better as we execute on all deal that eliminates a bother you made some quite on cost reduction. There. We are managing pricing, we are introducing new value differentiated products right in terms of sorry.
You know 34%.
Remember, it's pretty far right. So.
In definitely studies facing closely tied to our ability to how I think with supply to feel domestic known some power tomorrow right. So we always cautious on how we see that are we don't see that I saw a ceiling anyway right. We look at margins he suite of accretion to the fuel.
Sure.
Yes, we can execute on non smoking the dynamics of the margin competitive pricing or ability to execute all of those things materialize.
Thank you.
Thank you. Our next question is from Paas out more channels from Raymond James Your line is now fan.
Thanks for taking my question on Q2 quick ones, if I may about the competitive landscape you touched teleradiology some of the product launch that after <unk> comments.
Comment specifically on the algae isn't announcement of.
Hi, chilled products, incorporating its own microinverters and whether you guys are still selling your micros two algae directly.
Well you know we won almost about any specific any specific competitor like that and I just want to be very clear about how we think about very broad differentiation.
It comes to on when you come to our technology called ensemble. That's what we are focused on what does it is the entire solution you have to be a one stop shop, one warranty you don't.
Perhaps the most resilient solution that's out in the marketplace.
Got it.
Scalable solution and Im very simple.
Full solution.
Plug and play solution as well, so we really think about it.
I'm not as a single little we did not a single little device, but the entire solution. So.
So I think you know.
Just not.
Yeah, just going in a different direction bottom line, that's the way to think about it.
Understood and ill touch on bi facial tariffs are being revised as of last month, a team that has any impact positive or negative on.
Your business, particularly these I'd be odd the 18 module products.
Yeah, that's actually a in general when power goes up it's beneficial for us because we get to leverage the same platform and and and and develop products using the same leveraging the exact same vulgar develop higher power products and the power a it's a more differentiate.
You did a product as well or did you get a family of products that when we can optimize pricing better. So in general I powder is good and of course by Fisher is one way to get to get the high power no. That's part of that that upon by patients are concerned, but it's been and it's been out to spend noise.
Around that we pay attention to it on a pro places, but we're pretty excited about the like you said M&A product, which really targets those higher power modules and most importantly, leverages the base I Q seven platform, which is completely or software defined.
Got it thank you very much guys.
Thank you.
Thank you. Our next question from Jeffrey Campbell from Tuohy Brothers. Your line is now fan.
Hi, Thanks for taking my follow up I I, just wanted to get a little clarity there, 25% ensemble attach rate that you referenced for California is this referencing a go forward new home solar installations under the California, all solar mandate or something else and I'm asking because when other sunpower has a high pending.
Tracing right.
Home solar prior to the mandate right. If you know, but so far let me actually corrected not an on some of the battery, we leveraged refereeing to what the customers competitors.
Basically reps are doing there already gone.
Like information and so companies I've said that they are seeing an attach rate of 25% to that existing installed base.
And that that the.
It is in 29, Dean so it's got nothing to do with the new own banded et cetera, and that is going to influence it but I do not no the answer there.
You know however.
The attach rate like no is what they have seen.
Okay. So we could at least say that are based on the third party, they're seeing at 25% attach rate.
The new solar is not as to that so it could be upside.
Sure.
Right. Thank you appreciate it.
Thank you at this time I'm showing no further questions I want to turn the call back over to buy dray costs on the Rahman for closing remarks.
Alright, Thank you for joining us today and for their continued support of Enphase. We look forward to speaking with you again during our analyst day in December .
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.