Q3 2023 Enphase Energy Inc Earnings Call

Good afternoon.

Welcome to Enphase Energy's third quarter 2023 financial results Conference call.

All participants will be in a listen only mode and should you need any assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

Move yourself from the queue. Please press Star then two.

In addition, we ask that you please limit yourself to one question and one follow up on today's call.

If you have additional questions you may rejoin the queue.

Please also note that this event is being recorded today.

I would now like to turn the conference over to Zack Friedman. Please go ahead Sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third quarter 2023 results on today's call are Badri <unk> <unk>, our president and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Rob <unk>, Our Chief products officer after the market closed today.

Enphase issued a press release announcing the results for its third quarter ended September 32023.

During this conference call Enphase management will make forward looking statements, including but not limited to statements related to our expected future financial performance market trends the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing customer service and supply and demand and.

Dissipated growth in existing and new markets, the timing of new product introductions and regulatory and tax matters.

These forward looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations.

For a more complete discussion of the risks and uncertainties. Please see our most recent Form 10-K, and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward looking statements and undertakes no duty or obligation to update any forward looking statements as a result of new information future events or changes in expectations.

Also please note that financial measures used on this call are expressed on a non-GAAP basis, unless otherwise noted and have been adjusted to exclude certain charges.

We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on form 8-K, which can also be found in the Investor Relations section of our website.

Now I'd like to introduce Badri put under Robyn, our president and Chief Executive Officer Audrey.

Good afternoon, and thanks for joining us today to discuss our third quarter of 2023 financial results.

Reported quarterly revenue of $551 1 million shipped approximately $3 9 million micro Inverters and 86 megawatt hours of batteries and generated free cash flow of $122 million approximately 86% of Q3 micro inverter shipments, but IQ week.

We exited the third quarter at 48% gross margin, 18% operating expense and 30% operating income as a percentage of revenue on a non-GAAP basis, and including the Iot benefit.

Andy will go into our financials later in the call, let's now discuss how we are servicing customers on worldview.

Worldwide NPS was 77% in Q3 compared to 74% in Q2, our NPS in North America was 78% compared to 77% in Q2, our average call wait time was one three minutes compared to $1 one minutes in Q2.

We've made significant progress on the root cause fix is up some customer issues and expanded our field service teams globally.

Zachary Freedman: Good afternoon, and welcome to Enphase Energy's third quarter 2023 Financial Results Conference call. All participants will be in a listen only mode. And should you need any assistance, please signalling conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To remove yourself from the queue, please press star then two.

Zachary Freedman: In addition, we ask that you please limit yourself to one question and one follow up on today's call. If you have additional questions, you may rejoin the queue. Please also note that this event is being recorded today.

Let's talk about operations in general the overall supply environment for micro Inverters and batteries is quite stable right now.

Let's call it a micro inverters, specifically U S manufacturing.

We began manufacturing net cellcom facility in Arlington, Texas during third quarter, we shipped approximately 531000 micro inverters to customers in Q3 from three contract manufacturers in the U S Flex in South Carolina, Fox Con and risks.

And Sal comp in Texas, we expect to ship approximately $1 million micro inverters to customers from our U S manufacturing facilities in Q4.

Zachary Freedman: I would now like to turn the conference over to Zach Freedman. Please go ahead, sir. Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third quarter 2023 Results. On today's call, our Badrinarayan Kothandaraman, our president and chief executive officer, Mandy Yang, our chief financial officer, and our Google or our chief products officer. After the market closed today, Enphase issued a press release announcing the results towards third quarter ended September 30, 2023.

Zachary Freedman: During this conference call, Enphase Management will make forward-looking statements, including but not limited to statements related to our respective future financial performance, market trends, the capabilities of our technology and products, and the benefits to homeowners and installers, our operations, including manufacturing, customer service, and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions, and regulatory and tax matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations.

Let's talk about batteries for IQ batteries, we have two cell pack suppliers, both of which are in China.

We have a manufacturing capacity of 300 megawatt hours.

Water positioning us well to ramp up in 2024.

We are looking at bringing manufacturing of IQ batteries into the U S by the middle of 2020.

Let's now cover the regions, our U S and international revenue mix for Q3 was 60 foot and 36% respectively.

In the U S. Our revenue decreased 16% sequentially.

And 22% year on year.

Overall sell through of our micro Inverters was down 12% in Q3 compared to Q2.

On the other hand, the sell through of our IQ batteries in the U S was up by 34% in Q3 compared to Q2.

Zachary Freedman: For a more complete discussion of the risks and uncertainties, please see our most recent form 10K and 10Qs filed with the SEC. We caution you not to place any under-reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes and expectations. Also, please note that financial measures used on this call are expressed on a non-GAF basis unless otherwise noted and have been adjusted to exclude certain charges.

In Europe, our revenue decreased 34% sequentially and increased 26% year on year at healthy gross margin.

The sell through of our micro Inverters in Europe was also down 35% in Q3 compared to Q2.

The sell through of our IQ batteries in Europe was down by 14% in Q3 compared to Q2.

We are now shipping IQ micro inverters and batteries into many countries in Europe.

Zachary Freedman: We have provided a reconciliation of these non-GAF financial measures to GAF financial measures in our earnings release furnished with the SEC on Form 8K, which can also be found in the Investor Relations section of our website.

We recently entered the U K, Sweden, Denmark and Grease markets.

With both IQ eight micro Inverters and IQ batteries.

Badrinarayanan Kothandaraman: Now I'd like to introduce Padri Kuthan DeRaman, our President and Chief Executive Officer, Padri. Good afternoon and thanks for joining us today to discuss our third quarter 2023 financial results. We reported quarterly revenue of $551.1 million, shipped approximately $3.9 million microinverters and 86 megawatt hours of batteries and generated free cash flow of $122 million. Approximately 86% of our Q3 microinverter shipments were IQ 8. We exited the third quarter at 48% gross margin, 18% operating expense and 30% operating income all as a percentage of revenue on a non-GAF basis and including the IRA benefit.

Combined these new markets represent more than one five gigawatts of residential solar opportunity with countries like the UK, having a healthy battery attach rate of 30%.

I'll provide some brief commentary on Australia, our revenue in Australia more than doubled year on year. We are quite pleased with the launch of our Enphase energy system. It is state of the art powered by IQ eight micro Inverters plus third generation battery.

Let me comment on the rest of the world.

In Brazil, we launched our <unk> micro Inverters 480 Watt Zec the highest power micro inverters that we have.

We also launched the solar glass software platform and have good feedback from installers there.

Badrinarayanan Kothandaraman: Mandy will go into her financials later in the call. Let's now discuss how we are servicing customers. Our worldwide MPS was 77% in Q3 compared to 74% in Q2. Our MPS in North America was 78% compared to 77% in Q2. Our average call weight time was 1.3 minutes compared to 1.1 minutes in Q2. YouTube. We made significant progress on root cause fixes of some customer issues and expanded our field service teams globally. Let's talk about operations. In general, the overall supply environment for microinverters and batteries is quite stable right now.

In addition, we started shipping both the 384 awards IQ eight HC and 480, Worksite QEP micro inverters into India to support high powered solar panels.

Let's now talk about Q4 guidance.

We are guiding revenue for Q4 in the range of $300 million to $350 million.

This reflects approximately $150 million of channel inventory correction in the U S and Europe.

Other words, we are under shipping through the end market demand for our products by approximately $150 million. We anticipate under shipment will continue in Q1 and expect channel inventory to normalize in Q2 of course, we are concerned.

Badrinarayanan Kothandaraman: Let's cover microinverters, specifically US manufacturing. We began manufacturing at Selcom's facility in Arlington, Texas during third quarter. We shipped approximately 531,000 microinverters to customers in Q3 from our three contract manufacturers in the US. Flex in South Carolina, Foxconn in Wisconsin, and Selcomp in Texas. We expect to ship approximately 1 million microinverters to customers from our US manufacturing facilities in Q4.

Assuming the demand picture is unchanged from the current limit.

So what has changed since 90 days ago. When we told you that the inventory levels will normalize by the end of Q3.

We have seen a substantial demand and a reduction in Europe.

<unk> also seen the U S market continued to fall.

Driven by California.

When the demand fall, we think mode decisive inventory correction becomes necessary.

Badrinarayanan Kothandaraman: Let's talk about batteries. For IQ batteries, we have two cell packs employers, both of which are in China. We have a manufacturing capacity of 300 megawatt hours per quarter, positioning us well to ramp up in 2024. We are looking at bringing manufacturing of IQ batteries into the US by the middle of 2024.

We are being conservative in our assumptions of nor demand recovery until Q2 in this framework.

So that explains the guidance.

Despite the large reduction in Q4 guidance, we are maintaining our non-GAAP gross margin above 40% in our guidance.

Without the <unk> benefit.

We aren't making any broad based pricing changes at this time on micro inverter, then we have already made the necessary changes on batteries before.

Badrinarayanan Kothandaraman: Let's now cover the regions. Our US and international revenue mix for Q3 was 64 and 36 percent respectively. In the US, our revenue decreased 16 percent sequentially and 22 percent year-on-year. The overall cell through of our microinverters was down 12 percent in Q3 compared to Q2. On the other hand, the cell through of our IQ batteries in the US was up by 34 percent in Q3 compared to Q2. In Europe, our revenue decreased 34 percent sequentially and increased 26 percent year-on-year at healthy gross margin.

Our pricing and operations team are doing an excellent job of managing pricing and reducing costs.

Let's discuss some market trends I'll give you a little more than usual color on markets.

Let's split the U S market by non California on States and California.

For non California state the sell through of our micro Inverters.

40% less set in Q3 compared to Q2.

We see this business starting to stabilize given the weekly sell through trends.

Badrinarayanan Kothandaraman: The cell through of our microinverters in Europe was also down 35 percent in Q3 compared to Q2. The cell through of our IQ batteries in Europe was down by 14 percent in Q3 compared to Q2. We are now shipping IQ microinverters and batteries into many countries in Europe. We recently entered UK, Sweden, Denmark and Greece markets with both IQ 8 microinverters and IQ batteries. Combined, these new markets represent more than 1.5 gigawatts of residential solar opportunity with countries like the UK having a healthy battery attachment rate of 30 percent.

California, the sell through of our micro Inverters was 25% less.

In Q3 compared to Q2 due to the NIM three node transition.

It will take a few more quarters for installers to fully transition to <unk> and normalized sales to nematode at all levels.

Utility rates are currently.

I'm going to move higher in California, with one, California utility recently requesting that 22% rate type.

Assuming that even half of that rate hike is approved by the CPUC.

The payback period for <unk> solar plus battery system will become close.

Badrinarayanan Kothandaraman: I will provide some brief commentary on Australia. Our revenue in Australia more than doubled year-on-year. We are quite pleased with the launch of our Enphase Energy System. It is state of the art powered by IQ 8 microinverters plus a third-generation battery.

And then $2 towards solar only system. So that's good.

Let me say a few words about the U S market share before I give more color on Europe.

We see stable share today for our micro Inverters based on both internal as well as third party data.

Badrinarayanan Kothandaraman: Let me comment on rest of the world. In Brazil, we launched our IQ 8 p microinverters 480 watts. We see the highest power microinverters that we have. We also launched the solar graphs software platform and have good feedback from installers there. In addition, we started shipping both the 384 watts IQ 8HC and the 480 watts IQ 8P microinverters into India to support high powered solar panels.

Competition is not new for US we have always relied on our differentiated technology with our distributed AC architecture.

<unk> quality and customer service to win share and we expect this to continue we have many tools at our disposal such as the installers services.

We have not we've made several acquisitions over time in the last couple of years such as.

The software tool for design and proposal the permitting tools lead management et cetera, we have a lot of tools at our disposal to help our installers and our partnerships go a lot deeper.

Badrinarayanan Kothandaraman: Let's now talk about Q4 guidance. We are guiding revenue for Q4 in the range of 300 to 350 million dollars. This reflects approximately 150 million dollars of channel inventory correction in the US and Europe. In other words, we are undershipping to the end-market demand for our products by approximately 150 million dollars. We anticipate undershipment will continue in Q1 and expect our channel inventory to normalize into Q2. Of course, we are conservative and are assuming the demand picture is unchanged from the current level.

In the downturn.

Let's talk about Europe demand a little bit we are facing two challenges in Europe and the situation has dramatically changed from the last quarter from 90 days ago.

We saw a much weaker demand recovery from summer.

We also see a lot of distributors facing oversupply of solar solar equipment, particularly panels, leading to much more aggressive stock.

Despite this temporary weakness.

The full back in Europe will be temporary as the.

Fundamentals remain strong and we are relatively underpenetrated in the U S. We are entering a lot lots of new geographies without IQ a micro insurers in batteries. So we remain very bullish about Europe.

Badrinarayanan Kothandaraman: So what has changed since 90 days ago when we told you that the inventory levels would normalize by the end of Q3? We have seen a substantial demand reduction in Europe. We have also seen the US market continue to fall driven by California. When the demand falls, we think more decisive inventory correction becomes necessary. We are being conservative in our assumptions of no demand recovery until Q2 in this framework.

Let me spend a few minutes discussing our three largest markets in Europe, the Netherlands, France, and Germany in detail.

And Netherlands, our largest European market, our Q3 sell through was down 40% compared to Q2.

This was our first sequentially down quarter in the last two years.

In solar cell as the customers fear of an export penalty and confusion around ending of the net metering has caused the market pullback.

Badrinarayanan Kothandaraman: So that explains the guidance. Despite the large reduction in Q4 guidance, we are maintaining our non-gap growth margin above 40% in our guidance without the IRA benefit. We aren't making any broad-based pricing changes at this time on microinverters and we have already made the necessary changes on batteries before. Our pricing and operations team are doing an excellent job of managing pricing and reducing costs.

And Netherlands, two weeks ago, I visited with our leading installers.

I came away confident that this pulled back will be shortly.

We think that the plan for net metering will be clarified after the country's elections in November that payback period are continuing to be attractive and.

In Netherlands. In addition, total system solutions, which includes batteries solar and EV Chargers are going to become the norm.

Badrinarayanan Kothandaraman: Let's discuss some market trends that give you a little more than usual color on markets. Let's split the US market by non-California states and California. For non-California states, the fell through of our microinverters was 4% less than Q3 compared to Q2. We see this business starting to stabilize given the weekly sell-through trends. In California, the sell-through of our microinverters was 25% less than in Q3 compared to Q2 due to the NM3.0 transition.

As dynamic tariffs.

Some more prevalent in the Netherlands.

We are well positioned to take advantage of these changes.

In France, our Q3 sell through was down 34% compared to Q2, driven by seasonality, we see potential for this market to rebound very quickly we are already seeing that as utility rates recently moved higher and are expected to increase even more in early 2024.

Sure.

In Germany, our Q3 sell through was down 32% compared to Q2, we saw strong sequential growth in the installed on account and Activations.

Badrinarayanan Kothandaraman: It will take a few more quarters for our installers to fully transition to NM3.0 and normalize sales to NM2.0 levels. Utility rates are continuing to move higher in California with one California utility, recently requesting a 22% rate hike. Assuming that even half of that rate hike is approved by the CPUC, the payback period for to an M2.0 solar-only system. So that's good.

And we are continuing to gain traction there.

Let's talk about our new products IQ batteries.

Sell through for the batteries has been steadily increasing over the last couple of quarters.

We are at an inflection point for our battery business with at ICU battery five B, we can deliver the best power specs and the best commissioning times of any Enphase battery till date, and an industry, leading to a 10 year warranty and at the right price point.

Battery adoption rates are on the rise globally, we are well positioned to grow battery sales throughout 2024.

Badrinarayanan Kothandaraman: Let me say a few words about US market share before I give more color on Europe. We see stable share today for our microinverters based on both internal as well as third-party data. Competition is not new for us. We have always relied on our differentiated technology with our distributed AC architecture, product quality and customer service to win share and we expect this to continue. We have many tools that are disposal such as the installer services that we have bought.

And we are working on entering even more countries in Europe and Asia in the next few months with our AC battery.

In addition, we expect to introduce our first generation battery in the middle of 2024 that will have a much reduced form factor and the reduced cost structure.

As previously discussed we have entered many new markets with the IQ eight family of micro and murders, we plan to enter many more new markets in Europe and Asia in the next several months.

Badrinarayanan Kothandaraman: We made several acquisitions over time in the last couple of years, such as the software tool for design and proposal, the permitting tools, lead management, etc. We have a lot of tools that are disposal to help our installers and our partnerships go a lot deeper in the downtown.

Let's talk about our latest micro inverter for the residential segment in emerging markets I didn't mentioned this before this is ICU AP micro inverter at highest powered micro inverter till date 480 watts of AC powered that can support solar panels up to 650 watts.

Badrinarayanan Kothandaraman: Let's talk about Europe demand a little bit. We are facing two challenges in Europe and the situation has dramatically changed from the last quarter from 90 days ago. We saw a much weaker demand recovery from summer. We also see a lot of distributors facing oversupply of solar equipment, particularly panels leading to much more aggressive de-stop. Despite this temporary weakness, we think that the full back in Europe will be temporary as the fundamentals remain strong and we are relatively under penetrated in the US.

But Brazil, India, South Africa, Mexico, Spain, and other emerging markets, we have started shipping the product.

Into Brazil, South Africa, and India in Q3 and are on track to start shipping in Mexico in Spain in Q4.

The other <unk> of the IQ eight micro and murder activate T micro inverter with a new three phase cabling system is well suited for small commercial solar installation ranging from 20 to 200 kilowatts.

We are doing beta installations, as we speak there and we expect to release the product.

Badrinarayanan Kothandaraman: We are entering a lot of new geographies with our IQ8 microinverters and batteries so we remain very bullish about Europe. Let me spend a few minutes discussing our three largest markets in Europe, the Netherlands, France and Germany in detail. In Netherlands, our largest European market our Q3 sell through was down 40% compared to Q2. This was our first sequentially down-quarter in the last two years. Installers tell us that the customers fear of an export penalty and confusion around ending of the net metering has caused the market pullback.

This quarter into the U S market, we are very bullish about the small commercial business, where we believe we can add value to our business owners and installers with our quality and good customer experience.

Let's cover EV charging we shipped over 3500 Chargers in Q3 compared to over 6600 Chargers in Q2, we launched our IQ Smart EV Chargers in the U S.

Just a few days ago, both U S and that Canada actually the IQ EV Charger and Wi Fi enabled it includes smart control and smart monitoring capabilities. It seamlessly integrates into our solar and battery systems to help homeowners maximize savings.

Badrinarayanan Kothandaraman: I was in Netherlands two weeks ago. I visited with our leading installers. I came away confident that this pullback will be short-lived. We think that the plans for net metering will be clarified after the country's elections in November.

For example by directly charging from solar energy only that's card green charging.

Badrinarayanan Kothandaraman: The payback period are continuing to be attractive in Netherlands. In addition, total system solutions which includes batteries, solar and EV chargers are going to become the norm as dynamic tariffs become more prevalent in Netherlands. We are well positioned to take advantage of these changes. In France, our Q3 sell through was down 34% compared to Q2 driven by seasonality.

We are also working on developing IQ EV Chargers for many countries.

In Europe, and we expect to introduce them in the middle of 2024.

Let's now discuss our installer platform briefly solar graph, our cloud based design proposal software platform now provides <unk> functionality for solar and battery systems in California. We are now offering <unk> features and continue to make progress on our new feature.

Badrinarayanan Kothandaraman: We see potential for this market to rebound very quickly. We are already seeing that as utility rates recently moved higher and are expected to increase even more in early 2024. In Germany, our Q3 sell through was down 32% compared to Q2. We saw strong sequential growth in the installer account and activation, and we are continuing to gain traction there.

And functions with software platform is now available installers in U S, Germany, Australia, and Brazil, we expect to make this software release as part of our standard <unk>.

Offering to any country that we enter.

Let me conclude we are managing through a slowdown in overall demand.

In the U S. It is due to higher interest rates the mandatory auto in Europe. It is due to broad macroeconomic conditions. Despite this we are very bullish about that business long term, we see several positive drivers that will accelerate adoption such as the 30% ITC tax credit in the U S.

Badrinarayanan Kothandaraman: Let's talk about our new products, IQ batteries. Our cell-proofer batteries has been steadily increasing over the last couple of quarters. We are at an inflection point for our battery business. With our IQ battery 5P, we can deliver the best power specs and the best commissioning times of any Enphase battery till date at an industrial leading 15-year warranty and at the right price point.

Rising utility rates globally, and pleased to grid instability also globally climate change and of course, increasing EV adoption worldwide.

Badrinarayanan Kothandaraman: The battery adoption rates are on the right globally. We are well positioned to grow battery sales throughout 2024 and we are working on entering even more countries in Europe and Asia in the next few months with our IQ battery 5P. In addition, we expect to introduce our food generation battery in the middle of 2024. That will have a much reduced bond factor and the reduced cost structure.

We have no doubt that this will drive meaningful solar plus battery growth.

Our strategy is very clear.

Manage for the long term, we are doubling down on our relationships with our customers. During these times, we are driving down installation times and investing in our customer service teams.

We are also strongly investing in innovation, we are working on ICD nine and ICD 10, our next two generations of micro Inverters as well as the next two generations of batteries.

Badrinarayanan Kothandaraman: As previously discussed, we have entered many new markets with the IQ 8 family of microinverters. We plan to enter many more new markets in Europe and Asia in the next several months. Let's talk about our latest microinverter for the residential segment and emerging markets. I did mention this before. This is the IQ 8P microinverter, our highest power microinverter till date, 480 watts of AC power. That can support solar panels up to 650 watts DC for Brazil, India, South Africa, Mexico, Spain and other emerging markets.

Also rapidly expanding worldwide with systems comprising of IQ eight micro Inverters IQ batteries, IQ EV Chargers and home energy management software, we are introducing products for the small commercial and emerging residential solar markets and we are making continuous enhancement.

Jordan Tyler platform. In addition to driving towards World class cost sonar products, we remain very positive about our future growth and profitability and we will continue to make best in class one <unk> systems with a laser focus on innovation quality and customer experience with that.

Badrinarayanan Kothandaraman: We have started shipping the product into Brazil, South Africa and India in Q3 and our track to start shipping in Mexico and Spain in Q4. The other variant of the IQ 8 microinverter, IQ 8P microinverter with a new three phase cabling system is well suited for small commercial solar installations ranging from 20 to 200 kilowatts. We are doing beta installations as we speak there and we expect to release the product this quarter into the US market. We are very bullish about the small commercial solar business where we believe we can add value to our business owners and installers with our quality and good customer experience.

I will turn the call over to Mandy for a review of our financial results.

Thanks, Patrick and good afternoon, everyone.

I will provide more details related to our third quarter of 2000 <unk> financial results.

Well with our business outlook for the fourth quarter of 2023.

We have provided reconciliations of these non-GAAP financial measures in our earnings release posted today, which can.

Can also be found in the IR section I'll forward.

Total revenue for Q3 was $551 $1 million with sugar Parsimony 1585, six megawatt DC of Michael Your partners and 86.2 megawatt hours of ICU beds in the quarter.

Badrinarayanan Kothandaraman: Let's cover EV charging. We shipped over 3500 chargers in Q3 compared to over 6600 chargers in Q2. We launched our IQ smart EV chargers in the US just a few days ago, both US and Canada actually. The IQ EV charger is Wi-Fi enabled. It includes smart control and smart monitoring capabilities. It seamlessly integrate into our solar and battery systems to help homeowners maximize saving. For example, by directly charging from solar energy only, that's called green charging. We are also working on developing IQ EV chargers for many countries in Europe and we expect to introduce them in the middle of 2024.

non-GAAP gross margin for Q3 was 48, 4%.

<unk> 246, 2% in Q2.

The increase was driven by increased net.

Right.

Gross margin was 47, 5% for Q3.

Our non-GAAP gross margin for Q3 included $14 5 million ton of solvency II NSA.

Michael you murder may in the U S.

And ship to customers in the quarter.

non-GAAP operating expenses were $99 million for QTL.

<unk> to $98 $2 million for Q2.

We are diligently managing operating.

And we will continue to do so in coming quarters.

Operating expenses were $144 million.

Badrinarayanan Kothandaraman: Let's now discuss our installed platform briefly. Solar graph or cloud-based design proposals of our platform now provides memory auto functionality for solar and battery systems in California. We are now offering 3D and shading features and continue to make progress on our new features and function. The software platform is now available to installers in US, Germany or Austria and Brazil. We expect to make this software release as part of our standard offering to any countries that we end.

Compared to $153 million for Q2.

GAAP operating expenses for Q3 included $41 $1 million of stock based compensation.

$3 $9 million.

For acquired intangible assets.

I will now thank you.

Income from operations for Q3 was $167 $6 million compared to $235 million.

Okay.

From operations with $118 million compared to $173 million for Q2.

Badrinarayanan Kothandaraman: Let me conclude, we are managing through a slowdown in our overall demand. In the US, it is due to high interest rates and M3.0, in Europe, it is due to broad macroeconomic conditions. Despite this, we are very bullish about our business long term. We see several positive drivers that will accelerate adoption such as the 30% ITC tax credit in the US, rising utility rates globally, increased grid instability, also globally, climate change, and of course, increasing EV adoption worldwide. We have no doubt that these will drive meaningful solar plus battery growth.

I will now.

Income for Q3 was $141 million compared with $205 6 million for Q2.

The resulting non-GAAP diluted earnings per share of $1 two thank you for participating.

Compared to $1 47 for Q2.

Net income for Q3 was $114 million compared with GAAP net income of $157 million.

This resulted in GAAP diluted earnings per share of <unk> <unk>.

Badrinarayanan Kothandaraman: Our strategy is very clear. We manage for the long term. We are doubling down on our relationships with our customers during these times. We are driving down installation times and investing in our customer service teams. We are also strongly investing in innovation. We are working on IQ 9 and IQ 10, our next two generations of microinverters, as well as the next two generations of batteries. We are also rapidly expanding worldwide with systems comprising of IQ 8 microinverters, IQ batteries, IQ EV chargers, and home energy management software.

Compared to $1 nine.

We exited Q3 with total cash cash.

Equivalence and marketable securities balance of $1 $78 billion compared to $1 $8 billion at the end of Q3.

Part of our $1 billion share repurchase program authorized Bob our board of directors in July.

We repurchased approximately 847000 shares.

In Scotland, and an average share price of $129 92.

Badrinarayanan Kothandaraman: We are introducing products for the small commercial and emerging residential solar markets, and we are making continuous enhancements to our installer platform in addition to driving towards world-class costs on our products. We remain very positive about our future growth and profitability and will continue to make best-in-class home energy systems with the laser focus on innovation, quality, and customer experience.

For $110 million.

Sure.

Approximately $8 5 million Thomas holdings, yet to come.

They are withholding taxes for employees.

That reduced the diluted share approximately $59 eight daven chips.

To continue this anti dilution point.

And truthfully, we generated $145 $9 million in cash flow from operations and $122 million in free cash flow.

Mandy Yang: With that, I will turn the call over to Mandy for her review of our financial results. Mandy? Thanks, Patrick, and good afternoon, everyone. I will provide more details related to our third quarter of 2023 financial results, as well as our business outlook for the fourth quarter of 2023. We have provided recommendations of this non-cap to get financial measures in our earnings release posted today, which can also be found in the IR section of our website.

Macroeconomic challenges.

To generate healthy free cash flow as a result of our strong financial discipline.

Capital expenditure was $23 8 million for Q3 compared.

Compared to $44 million for Q2.

Capital expenditure requirements decreased as we largely completed building out our U S manufacturing line.

Now, let's discuss our outlook for the fourth quarter of 2020.

Mandy Yang: Total revenue for 23 was 551.1 million dollars. We should approximately 1585.6 megawatt DC of microinverters, and 86.2 megawatt hours of IQ batteries in a quarter. Non-cap growth margin for Q3 was 48.4 percent, compared to 46.2 percent in Q2. The increase was driven by increased net IRA benefits. Deep growth margin was 47.5 percent for Q3. Deep and non-cap growth margin for Q3 included 14.5 million dollars of net IRA benefits for microinverters made in the US and shipped to customers in the quarter.

Our revenue for Q4 to be within a range of $300 million to $350 million.

Including shipments of 80 to 100 megawatt hours of actual batteries.

GAAP gross margin to be within a range of 46% to 49%.

Yes.

38% to 41% before.

Okay.

They need yet.

We expect non-GAAP gross margin to be within a range of 48% to 41%.

And 40% to 43% before.

Yes.

non-GAAP gross margin excludes stock based compensation expenses.

Mandy Yang: Non-cap operating expenses were 99 million dollars for Q3, compared to 98.2 million dollars for Q2. We are diligently managing operating expenses, and we will continue to do so in the coming quarter. Get operating expenses were 144 million dollars for Q3. 23, compared to 153 million dollars for Q2, ship operating expenses for Q3 included $41.1 million of star-based compensation expenses, and $3.9 million of immunization for acquired intangible assets. On a non-gay basis, income from operations for Q3 was $167.6 million, compared to $230.5 million for Q2.

Acquisition related amortization.

With respect to AI benefits to be between 26 and $28 million.

Shipments of 1 million units of U S manufactured Michael Advisors.

Please stay on GAAP operating expenses to be within a range of $142 million to $146 million.

<unk> approximately $57 million estimated for stock based compensation.

And acquisition related expenses.

Jason.

Our non-GAAP operating expenses to be within a range of $85 million to $89 million.

Our reducing our non-GAAP operating expenses by 12% in Q4 as compared to Q2, we will not compromise on investing in customer service and innovation.

Mandy Yang: On a gay basis, income from operations was $118 million for Q3, compared to $170.3 million for Q2. On a non-gay basis, income for Q3 was $141.8 million, compared to $205.6 million for Q2. This resulted in non-gay diluted earnings per share of $1.02 for Q3, compared to $1.47 for Q2. Good net income for Q3 was $114 million, compared to good net income of $157.2 million for Q2. This resulted in debt diluted earnings per share of $0.80 for Q3, compared to $1.9 for Q2.

Moving to tax since we have utilized muscle von <unk> operating Martin research tax credit carry forward.

We are now a significant U S cash taxpayer, we expect GAAP and non-GAAP annualized effective tax rate for 2023, it will be at 22% plus or minus 1%.

Okay.

These statements with Sachin.

Net of any incremental costs for domestic manufacturing will be in the range of 26 to $28 per microwave router salt to customers in Q4.

We expect to ship 1 million micro inverters to customers. This quarter. We now have all three of our U S manufacturing facility operational.

With that I will open the line for questions.

Mandy Yang: We access the Q3 with a total patch, patch equivalence, and marketable security balance from $1.78 billion, compared to $1.8 billion at the end of Q2. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased approximately $847,000 shares of M-fade coming stock in Q3, at an average share price of $129.92 for $1010 million. In addition, we spent approximately $8.5 million by withholding shares to cover withholding taxes for each stock investing in Q3, that reduced the diluted shares by approximately $59.8 million shares.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Again, we ask that you please limit yourself to one question and one follow up on today's call. If you have additional questions you may rejoin the queue.

At this time, we will take our first question, which will come from Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon, thanks for taking the questions.

I know the environment is pretty uncertain. So appreciate the additional sort of.

Our quarter visibility in some of the market by market color budgets. So can I just ask as you think about the framework you said you'd under ship in Q1, the way that you're under shipping in Q3, and Q4 can you give us one a sense of how much you expect under shipped in Q1, and then you made the comment that this.

Mandy Yang: We expect to continue this anti-dilution plan. In Q3, we generated $145.9 million in cash flow from operation, and $122 million in free cash flow. We spent the make-up economic challenges to continue to generate healthy free cash flow as a result of our strong financial disappoint. Capital expenditure was $23.8 million for Q3, compared to $44 million for Q2. Capital expenditure requirements decreased as we largely completed building out our U.S, manufacturing lines.

This is all contingent upon sort of demand trends.

Trends staying about where they are at or can you give us a sense of what your internal expectations for demand trends are it sounds like you don't expect them to get worse, but sort of can you quantify that a bit.

And then I have a follow up.

Yes.

I think that at a few puts and takes first to answer your question is.

Mandy Yang: Now let's discuss our outlook for the first quarter of 2023. We expected our revenue for Q4 to be within a range of $300 to $350 million, which includes shipments of 80 to 100 megawatt hours of actual batteries. We expect get gross margin to be within a range of 46 to 49% with net IRA benefits, and 38 to 41% before net IRA benefits. We spent net get gross margin to be within a range of 48 to 41% with net IRA benefits, and 42% to 43% before NEIRA benefits.

<unk>.

Is under shipment going to be close to $150 million in Q1, we.

We expect it to be a little bit less than $150 million, but not too much less.

So our expectation and second is I will talk about them.

Markets and then it will become clear to you first of all we see the.

On California state stabilizing we see that so therefore, we arent that much worried there of course things could go a lot salt.

During the winter, but we are already at pretty low levels. So we don't think so.

California is definitely a wildcard.

Mandy Yang: Nunge, Bruce Margin, is crew star-based compensation expenses and acquisition related monetization. We expect the NEIRA benefits to be between 26 and 28 million dollars on estimated shipments of 1 million units of U.S, manufacturers, microinverters. We expect our gap operating expenses to be within a range of 142 million dollars, including approximately 57 million dollars estimated for star-based compensation expenses and acquisition related expenses and monetization. We expect our non-gab operating expenses to be within a range of 85 to 89 million dollars. We are reducing our non-gab operating expenses by 12% in Q4 as compared to Q3, but we will not compromise our investing in customer service, innovation and sales.

But.

<unk>.

Even if that goes down 10% to moment I think we'll be fine because.

We expect Europe to recover.

Little more.

Europe right now.

For all the reasons I said.

We basically.

Our under shipping quite a bit.

Order to normalize inventory and that will be the fastest to normalize so we expect.

Europe revenue to come back a little bit up in Q1.

Therefore, what we expect at least.

What we expect internally is that our revenue sell in revenues we think.

It will be close.

To what we are looking at in Q4 of course, they don't have a crystal ball and not giving your Q1 guidance. This is our expectation right now.

Mandy Yang: Moving to tax, since we have utilized most of our non-operating laws and research test credit carried forward, we are now a significant U.S, cash tax payer. We expect gap and non-gab annualized effective tax rate for 2023 to be at 22% plus or minus 1% with IRA benefits. We expect the production credit, net of any incremental cost for domestic manufacturing to be in the range of 26 to 28 dollars per microinverter sold to customers in Q4. We expect to ship 1 million microinverters to customers this quarter. We now have all three of our U.S, manufacturing facilities operational.

And Q2 onwards.

The channel inventory is going to approach.

Normalized level.

And therefore with that normalized level, assuming the demand picture is unchanged that normal level is what we said roughly around $450 million to $500 million is the normal normal levels.

That assumes no change in demand from the current current situations. So.

We expect our revenue to approach that number.

The second quarter, but of course that doesn't tell you too much because I'm assuming that the demand is the same as the current depressed levels.

Operator: With that, I will open the line for questions. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. Again, we ask that you please limit yourself to one question and one follow up on today's call. If you have additional questions, you may rejoin the queue.

One thing, which I forgot to say is in France, which is another very big market for us.

We already see the sell through rates for example in the first three weeks of this quarter and already backup height.

Which is good.

Incidentally the utility there wasn't a utility rate hike in August.

There's one more expected in February so we think.

Brian Lee: At this time, we will take our first question, which will come from Brian Lee with Goldman Sachs. Please go ahead. Hey, you guys, good afternoon. Thanks for taking the questions. I know the environment's pretty uncertain, so appreciate the additional sort of out quarter visibility in some of the market by market color advisory. Can I just ask, as you think about the framework, you said you'd undership in Q1 the way that you're undershiping Q3 and Q4.

Brands will record fast Netherlands, we have some education to do like what I told you.

B.

There is some political uncertainty that we think that will get to you. After Q4. So I think Q1 will be definitely better and thats a great market with that market is now.

Brian Lee: Can you give us one a sense of how much you expect to undership in Q1? And then you may need to comment that this is all contingent upon sort of demand trends staying about where they're at. Can you give us a sense of what your internal expectations for demand trends are? It sounds like you don't expect them to get worse, but sort of can you quantify that a bit? And then I have a follow up.

In addition to solar I think with the dynamic Ted are starting to become prevalent in.

In Netherlands, there is opportunity for battery storage.

<unk> 7 million homes today, just so that everybody understands Netherlands, there is seven to 8 million homes.

Solar is there in 2.2 million homes today.

And now with this opportunity with net metering is going to evolve into into something similar to California, not exactly the same but very similar.

What's going to happen is it opens up opportunity for solar plus storage and all 7 million homes.

Brian Lee: Yeah, I think there are a few puts and takes first answer your question is, is the undership meant going to be close to $150 million in Q1? We expect it to be a little bit less than 150 million but not too much less. That's our expectation and second is I will talk about them you know markets and then it will become clear to you. First of all we see the non-California state stabilizing.

So I think long term, it's going to be great for us but.

Yes, I told you what's going to happen in the short term.

Yes, that's great context I appreciate it just a second one here and I'll pass it on on the margins.

Gross margins non-GAAP, it seems like Youre guiding to low forty's ex <unk> benefit.

How much of that it's down a couple of hundred bps from from what you've been tracking at recently how much of that is due to pricing how much due to mix may be can you give us a sense of the margin.

Brian Lee: We see that so therefore we aren't that much worried there. Of course things could go a lot south during the winter but you know we are already at pretty low level. So we don't think so. California is definitely a wild card but you know even if that goes down 10% more I think we'll be fine because we expect Europe to recover a little more. Europe right now for all the reasons I said we basically you know our undershipping quite a bit in order to normalize inventory and that will be the fastest to normalize.

Puts and takes into year end and then do you see anything that would put incremental pressure on the margins into next year.

Yes.

<unk>.

It's pretty simple, Brian you will understand it correctly.

You can see our storage business is actually going a little bit up.

But micro inverter business is the one that is.

Going.

A lot down now because of around that shipment.

And therefore if.

If you see some product mix.

Issue and micro Inverters have a little bit more gross margin.

Brian Lee: So we expect Europe revenue to come back a little bit up in Q1. Therefore what we expect at least you know what we expect internally is that our revenues sell in revenues we think will be close to what we are looking at in Q4 of course I don't have a crystal ball I'm not giving you if you want guidance this is our expectation right now. And Q2 onwards you know we think the channel inventory is going to approach normalize levels and therefore that normalize level assuming the demand picture is unchanged that normal level is what we said roughly around $450 to $500 million is the normal level.

Then storage and therefore.

With this product mix.

It's why we have we have the guidance of non-GAAP gross margin.

42, 43% for the company without Iot with Iot.

non-GAAP gross margin of 48 to 51 so.

In terms of pricing.

I mean, we are not planning to make any broad based pricing changes.

Of course the pricing.

There is a lot of competition, but we have seen competition for the last few years.

Since I've been here, we have a very disciplined.

Business process, it's surprising business processes.

Spa, Phil Shen Lakes to talk about it.

Special pricing adjustment, we have been doing that forever.

And it is not new.

Brian Lee: That assumes no change in demand from the current current situation so we expect our revenue to approach that number the second quarter but of course that doesn't tell you too much because I'm assuming that the demand is the same at the current depressed level.

That's one and also in these times and of course under loading.

We have to work with us.

Contract manufacturers to take care of under loading, but in these times, especially when you have.

Multiple suppliers for a particular component.

Brian Lee: One thing which I forgot to say is in France which is another very big market for us we already see the sell through rates for example in the first three weeks this quarter are already back up high which is good basically the utility there was the utility rate hike and August that is one more expected in February. So we think France will recover fast Netherlands we have some education to do like what I told you you know there is some political uncertainty there we think that will get cleared after Q4 so I think Q1 will be definitely better and that's a great market where that market is now you know in addition to solar I think with the dynamic kind of starting to become prevalent in Netherlands.

Multi is hoping for a component this is the opportunity where we can draw cost a lot.

So.

Our target I mean, any good company in these times, we should be able to drop our cost by 10% for the year.

And we will be targeting that.

And so we have to talk both equations pricing and costs.

And so we are quite confident in our gross margins. This is what we do is not new.

This is what we established when.

When I joined the company because we have a pricing team that prices based on value, we have a world class cost team that.

Or at some cost.

And it's business as usual for us in these environments.

Alright, Thank you I'll pass it on.

Brian Lee: There is opportunity for battery storage in 7 million homes you know today just so that everybody understands Netherlands there is 7 to 8 million homes. Solar is there in 2.2 million homes today, and now with this opportunity where net metering is going to evolve into something similar to California, not exactly the same but very similar, what's going to happen is it opens up opportunity for solar plus storage in all 7 million homes. So I think long term is going to be great for us, but I told you what's going to happen in the short.

Our next question will come from James West with Evercore ISI.

Hey, good afternoon buttery.

Hi.

But as we're going through this period of <unk>.

Stocking and some weakness in certain markets.

Understanding that you you've always face competition and you have a very value based pricing strategy or are you seeing any.

Behavior.

By your competitors somewhat irrational or is the market overall behavior rationally understanding that this will get out of the zoom a few quarters.

Well.

Brian Lee: Yeah, that's great context, appreciate it. Just a second one here, and I'll pass it on the margins, you know, gross margins, non-gab, it seems like you're guys in the low 40s X IRA benefit. How much is that, you know, it's down a couple of under bits from what you've been tracking out recently, how much of that is due to pricing, how much due to mix, maybe can you give us a sense of the margin puts and takes into your end, and then do you see anything that we put incremental pressure on the margins into next year?

I would be lying if I, if I tell you I am not seeing something aggression of core installers are very stressed right. They do want to take advantage of the lowest cost available.

At a given point in time, so therefore, sometimes without understanding they may want to switch to somebody who is offering low cost.

But we usually.

Most of our installers.

They have a lot of experience they are very well trained now.

And they understand the importance of distributed architecture. They understand the importance of single point no single point of failure they understand quality.

Brian Lee: Thank you. Yeah, it's pretty simple and Brian, you will understand it quickly. We are, but you can see our storage business is actually going a little bit up. Our microinverter business is the one that is going a lot down now because of our under shipment. And therefore, you know, if you see it's a product mix, you know issue and microinverters have a little bit more gross margin than storage. And therefore, with this product mix, that's why we have we have the guidance of non-gab gross margin.

They understand customer service and.

And therefore.

You might save a few few dollars upfront but.

If you have a quality problem.

Our service call by the installer is a truck roll you spend a lot of money in one truckload.

And if you just do one mode. I mean that said you have no more room there despite the low cost.

No.

It is a penny wise pound foolish strategy.

Brian Lee: 40 to 43% for the company without IRA, with IRA, non-gab gross margin of 48 to 51. So in terms of pricing, I mean, we are not planning to make any broad base pricing changes. Of course, the pricing, you know, there is a lot of competition, but you know, we have seen competition for the last few years, since I've been here. We have a very disciplined business process, it's a pricing business process, it's called SPA, Phil Shen likes to talk about it, it's a special pricing adjustment.

To do that and Dave.

Realized it and.

<unk> actually put things in context net.

Let us say the pricing is $3 or $3 50 per watt you look at the inverter bill of materials, probably of the order of 10%.

Should you play around there.

Should you take a lot of risks there and it's their call at the end of the day and many of them.

Our way is to say, we are not going to make that call.

No.

I mean, we have a lot of robust discussions. This is the time, where we are talking to customers more than ever.

Brian Lee: We have been doing that forever. And this is not new. That's one. And also in these times, you know, of course, under loading, we have to work with our, you know, contract manufacturers take care of under loading, but in these times, especially when you have multiple suppliers for a particular component. You know, multi-sourcing for a component, this is the opportunity where we can drop costs a lot. So our target, I mean, any good company in these times, we should be able to drop our cost by 10% for a year.

We have a lot of other tools at our disposal for example solar graph.

We do design and proposal <unk>.

We can generate leads for installers at very economic and rates.

We can help them on permitting services for example.

Sometimes even free of charge.

We have a lot of tools at our disposal to reduce their soft costs.

And that's critical because we have to look at everything.

<unk>.

It cannot look at component level, we have to look at the full system level in these times.

And once you start looking at that and have these discussions usually comes comes back too.

Brian Lee: We'll be targeting that. And so we have to talk both the equations, pricing and cost. And so we are quite confident in our gross margins. This is what we do. It is not new. This is what we established. When I joined the company, we have a pricing team, that price is based on value, we have a world-class cost team that works on costs, and its business is usual for us in these environments. All right, thank you, I'll pass it on.

We get more market share not less.

And model more installers wanted to move to us not less.

You can see some evidence of that in the third party reports.

Okay. Okay got it that's very helpful. Badri. Thank you Linda.

Quick follow up for me you mentioned, producing IQ batteries in the U S by middle of 2024.

Did you give a capacity number along with it.

We have not given we will provide more details as we come close to that date.

James West: Our next question will come from James West with Evercore ISI. Hey, good afternoon, Badrinarayan. Hi. Badrinarayan, as we're going through this period of destocking and some weakness in certain markets, understanding that you've always faced competition and you have a very value-based pricing strategy. Are you seeing any behavior that's, you know, by your competitors that is somewhat irrational, or is the market overall behaving rationally, understanding that this will get out of this in a few quarters?

Okay got it.

Thanks.

Thank you.

Our next question will come from Eric Stine with Craig Hallum. Please go ahead.

Hi, everyone.

So just talking about California, I can appreciate talking or thinking about that as a wildcard.

Given what's going on in the market, but if I think about the expectation that that market stays flat, but then the hangover from them.

You said has a few quarters here left to work out.

Want to put words in your mouth, but I mean is it fair to say that there is some cautious optimism about California as we get into the back half of next year.

James West: Well, I'll be lying if I tell you, I'm not seeing something in rational. Of course, you know, installers are very stressed, right? They do want to take advantage of the lowest cost available at a given point in time, so therefore, you know, sometimes without understanding, they may want to switch to somebody who's offering low cost, but we usually, you know, most of our installers are, you know, they have a lot of experience.

<unk>.

As we get into the back of absolutely, meaning one as the utility rates are continuing to go up the <unk>.

<unk> is.

Let's assume the utility rates go up even by half the amount of the advertise.

The payback like what I've said is going to become.

I mean for a solar plus storage system is going to become the same almost the same as the solar only mental system.

James West: They are very well trained now, and they understand the importance of distributed architecture. They understand the importance of single point, no single point of failure. They understand quality. They understand customer service, and therefore, you know, you might save a few, a few dollars upfront, but if you have a quality problem, a service call by the installer is a truck roll, you spend a lot of money in one truck roll, and if you just do one more, I mean, that's it.

And.

The economics are actually today.

The battery can not only provide resilience.

It can help the grid during times of stress in August and September when the grid needs. The most so it's a combination.

You got resilience for yourself, you make money by providing <unk> services, which is incorporated into the utility rates right now.

And we are well positioned to <unk>.

Doing that why because we got we got great micro Inverters number one we got batteries now that can discharge.

James West: You have no more room there, despite the low cost. So, it's a Pennywise Crown Foolish strategy to do that, and they've all realized it, and you know, if you actually put things in context, let us say the pricing is $3 or $350 for what? You look at the inverter bill of materials, probably of the order of 10 percent. Right. Should you play around there? Should you take a lot of risks there?

At very high powered double the power of earlier batteries why is that important because during certain hours.

You have the utility paying you a lot for exporting power to the grid and what we can do because of variety of this charter rate during those times, we can maximize the power.

So we can do that so we have solar plus storage.

James West: And it's their call at the end of the day, and many of them are wise to say we're not going to make that call. So, I mean, we have a lot of robust discussions. This is the time where we are talking to customers more than ever. We have a lot of other tools that are disposal, for example, solar graphs, we do design and proposal. We can generate leads for installers at very economical rates.

And of course, we have.

Complete energy management software.

And we couple that with our solar graph design and proposal tool we have.

Everything.

All of the optimization at the fingertips of the homeowner and many times they need to do nothing he just needs to turn our optimization engine. It will do the right thing for us.

Him.

So we are absolutely very bullish about California towards the second half of 2024.

James West: We can help them on permitting services, for example, sometimes even free of charge. We have a lot of tools at our disposal to reduce their soft costs. And that's critical because we have to look at everything, you know, we cannot look at component level, we have to look at a full system level in these times. And once you start looking at that and have these discussions usually comes back to, you know, we get more market share, not less. And more, more installers want to move towards not less, you can see some evidence of that in the third party reports.

Got it.

And maybe just sticking with California for my follow up.

With NIM.

That whole that transition takes place being the biggest factor.

What are some of the other factors that could cause California to be a wildcard what are the things that.

There may be top of mind for you that could cause that market take another leg down.

Yes. This is Roger I think mentioned all of the potential tailwind start of their.

Remember in an environment, where the demand.

Per home is continuing to go up people are continuing to electrify people are buying more and more evs heat pumps et cetera, and couple that with utility rates, where they are in and going further up. This is youre right. The right solution solar plus battery is the right solution at the energy management software.

James West: Okay, okay, got it, that's very helpful, but thank you. And just want to quick follow up for me, you mentioned producing IQ batteries in the US by middle of 2024. Did you give a capacity number along with that? No, we have not given, we will provide more details as we come close to that day. Okay, got it. Thanks. Yeah, thank you.

Is absolutely the right solution in order to drive.

Roy in and as well as reduce your payback.

And to that end, what we have done as well as a lot of education into the marketplace.

In terms of explaining to people what the <unk>.

Eric Stein: Our next question will come from Eric Stein with Craig Howell, please go ahead. Hi, everyone. So just talking about California, I can appreciate talking or thinking about that as a wild card. Given what's going on in the market, but if I think about the expectation that that market stays flat, but then the hangover from them, you know, which you said has a few quarters here left to work out. I don't want to put words in your mouth, but I mean, is it fair to say that there is some cautious optimism about California as we get into the back half of next year?

<unk>.

Solar plus battery system, with energy management, and et cetera, and going out there and educating the market as well as providing them with a lot of tools. So in this environment, where demand is going up you have the education you have there to financials out there the payback is very good.

That's the reason why we are extremely bullish about it.

About California coming back strongly so to answer the question in another way the headwinds are.

Headwinds that we see already a installers.

I don't think adjudicated by by Us.

Eric Stein: Absolutely, yes. As we get into the back of absolutely, meaning one is the utility rates are continuing to go up. The second is, let us assume the utility rates go up even by half the amount they are advertised. The payback, like what I said, is going to become, I mean, for a solar plus storage system is going to become the same as almost the same as the solar only meant to system.

Properly if we don't do a good job of educating the installers things can stall out a little bit. So it is important for us and other companies do in this in this space too.

To make sure the installers.

We provide installers.

The tools are very easy to use so that they can sit at the kitchen table.

And look at the homeowner and day and say your payback of six years and here is why youre payback of six years and explained to them very confidently.

Eric Stein: And, you know, the economics are there actually today. The battery can not only provide resilience, it can help the grid during times of stress in August and September when the grid needs it the most. So, it's a combination of, you know, you get resilience for yourself, you make money by providing grid services, which is incorporated into the utility rates right now. And we are well positioned to, to doing that, why?

And it's not just end phase it is enphase plus our competition plus all of the energy companies.

All of us have to do our job in training the.

And I think that is of course.

That's a piece that is not.

Not very easy to do and.

You cannot have enough of it.

So.

Raghuveer Belur: Because we got, we got great microinverters number one. We got batteries now that can discharge at very high power double the power of our earlier batteries. Why is that important? Because during certain hours, you have the utility paying you a lot for exporting power to the grid. And what we can do, because of our high discharge rates, during those times, we can maximize the power. So, we can do that. So, we have solar plus storage.

That's the biggest headwind that AC.

Okay. Thank you.

Our next question will come from Colin Rusch with Oppenheimer. Please go ahead.

Thanks, So much guidance can you talk a little bit about how much modulation you can.

You can do with the Opex as you look at investing in.

Incremental programs and from these products to market.

Is there some incremental color that you can do is there are there is going to be.

Our regular spend increase of R&D side.

Raghuveer Belur: And of course, we have complete energy management software. And we couple that with our solar graph design and proposal tool. We have... Everything, you know, all the optimization acts, the fingertips of the homeowner, and many times he needs to do nothing. He just needs to turn on our optimization engine. It'll do the right thing for him. So we're absolutely very bullish about California towards the second half of 2024.

No I mean, we're cutting opex by 12, 4% from <unk>.

Q3 to Q4, how are we doing that.

We're on a we're on a hiring freeze except for.

Critical positions for example in.

In sales.

And customer service and to a little bit.

On the innovation site there so basically that has got a big effect on.

Bringing down costs the other one the other ones are there.

Raghuveer Belur: Got it. And maybe the sticking with California for my follow up, you know, with them, you know, is that whole. That transition takes place being the biggest factor. I mean, what are some of the other factors that could that caused California to be a wild card? What are the things that are maybe top of mind for you that could cause that market to take another like down.

Few professional expenses like for example, this is the time, where we look at a lot of effect.

In fact cutting out a lot of fat in the company for example.

When the companies are doing well we do.

Hired a lot of contractors.

And.

Raghuveer Belur: Yeah, this Raghu, and as we mentioned, all of the potential tailwinds that are there, remember in an environment where the demand per home is continuing to go up, people are continuing to electrify people are buying more and more EVs, heat pumps, etc. And couple that with utility rates where they are and going further up, this is your right, the right solution solar plus battery is the right solution. The energy management software is absolutely the right solution in order to drive your ROI and as well as reduce your payback.

We are looking at all of those and we've taken all the necessary actions.

<unk>.

Cut that level as well.

And of course.

As we as we continue to grow I cannot I cannot deny that there is that as some fact that before we can easily cut another area.

We were able to cut about 12% we are always looking forward.

Further.

<unk> to cut because we'd like to get back towards baseline of Opex pretty quickly, which is 15% of sales.

So.

We'll give the guidance accordingly.

And of course, this is a dislocation and revenue and that is temporary but we're very cognizant of that.

Raghuveer Belur: And to that end, what we have done as well is a lot of education into the marketplace in terms of explaining to people, you know, what the benefits of, you know, solar plus battery system with energy management and etc and going out there and educating the market as well as providing them with a lot of tools. So in this environment where demand is going up, you have the education, you have the tools, financials are there, the paybacks are very good.

We're always going to be trying to operate close to our modeled to 15% of sales.

Excellent and then on the component side given the change in volumes that you guys are working through on the <unk> side.

Obviously, youre guiding to reasonably stable gross margins here, but I'm, assuming that there's going to be.

Raghuveer Belur: That's the reason why we are extremely bullish about California coming back strongly. So it is important for us and other companies to in this space to make sure the installers, you know, whatever we provide installers, the tools are very easy to use so that they can sit at the kitchen table and look at the homeowner and die and say your payback is six years and here is why your payback is six years and explained to them very confidently.

Some breakpoints on the components that you may run into with a negative impact can you just talk a little bit about how your suppliers are scaling balancing them here over the next quarter or two or three.

What that might do to your your Cogs line.

Yes, I mean, it is a tough situation, but our contract manufacturers no question.

But we have great partners here.

Flex.

Yes, Amazing partners, who help does when we were.

Especially 2017 2018.

When we when we had some tough times they were dead right with us.

<unk> also a great partner.

So we work well together we do have this is the time, where both of US can recognize saying. Okay is this a short term problem is this a long term problem can we do think structurally we recognize that both of us need to be profitable not just one versus the other.

Raghuveer Belur: And it's not just in phase, it is in phase plus our competition plus all of the energy companies, all of us have to do our job in training the, you know, installers and I think that is, of course, that's a piece that is not very easy to do and you cannot have enough of it. So that's the biggest headwind that I think.

And we do take some necessary actions and.

All of those are confidential in terms of our relationships I mean, we cannot disclose the actions we are taking.

But our P&L always incorporates all of these.

And so the message is over the next few quarters, we will continue to work with them. We will give you the P&L transparently.

And the guidance for gross margin.

But we are very confident that at all.

Colin Rusch: Okay, thank you. Our next question will come from Colin Rush with Oppenheimer. Please go ahead. Thanks so much, guys.

We are finding the right solutions working together.

Okay. Thanks, so much guys.

Colin Rusch: Can you talk a little about how much modulation you can do with the op-ax? As you look at investing in these incremental programs and bringing this product to market, is there some incremental cut-in that you can do, or there's going to be a regular spend increase in R&D side? No, I mean we are cutting up X by 12% from Q3 to Q4. How are we doing that? We are on a hiring freeze, except for critical positions, for example in sales and customer service, and to a little bit on the innovation site there.

Thank you.

And our next question will come from Philip Shen with Roth Capital. Please go ahead.

Hey, guys. Thanks for taking my questions.

You brought up spas, so I figured I'd.

Jumping with a question on that.

As you know our.

<unk> come up with a lower micro pricing under a bunch of spa agreements on the order of 10%.

Does that resonate with you at all or is that off base.

You often will get something in return for some kind of price.

When you negotiate the spas maybe.

Exclusivity or higher volume.

Can you just talk through that a little bit.

And then Mandy can you talk through how spa counting you might work on.

Colin Rusch: So basically that has got a big effect on bringing down costs. The other ones, the other ones, there are a few professional expenses like for example, this is the time where we look at a lot of fat fat, cutting out a lot of fat in the company. For example, when the companies are doing well, we do hire a lot of contractors, and we are looking at all of those, and we have taken all the necessary actions to cut that level as well.

Your income your financial statements for example, do you.

The spa the refunds.

Against your sales you have net sales or do you accrue a liability on your balance sheet.

So.

<unk> first of all for the other than the cause Boston for special pricing adjustment.

It is it is a business process that has been forever at Enphase.

And it is.

Always happening it's business as usual.

A large fraction of our business you really happens at what we call us.

Colin Rusch: And of course, as we continue to grow, I cannot deny that there is there is some fat that we found we can easily cut in other areas. We were able to cut about 12 percent. We are always looking for further room to cut because we'd like to get back to our baseline of X pretty quickly, which is 15% of sales. So we'll give the guidance accordingly. And of course, this is a dislocation in revenue and that is temporary, but we have a very cognizant of that and we are always going to be trying to operate close to our model to 15% of sales.

LP, which is the distributors list price.

And.

If business happens at <unk> that has no spot.

For a small fraction of our customers depending upon.

How the volumes May go up.

Within the quarter next quarter.

Depending on their forecast we.

We knew spot spas.

You have a volume price curve.

And when the volume goes up the price comes down.

And that's how it is and that process is very active it's always been inactive.

Is the one I instituted six years ago, when I came in the accounting for that is unchanged.

Badrinarayanan Kothandaraman: Excellent. And then on the component side, given the change in volumes that you guys are working through on the microverse side, obviously you're guiding to reasonably stable gross margins here, but I'm assuming that there's going to be some breakpoints on the components that you may run into with a negative impact. You just talk a little bit about how your suppliers are scaling down with you here over that quarter or two or three and what that might do to your cogs line. Yeah, I mean, it is a tough situation for our contract manufacturers. No question.

It is exactly what we have done in the last six years.

So.

Can you talk about the $10 reduction all of those are anecdotal they don't matter.

One customer doesn't matter, it's not a trend.

It is a large fraction of our customers by Atlas price.

So.

I'd like you to if there is a broad based pricing adjustments, we will tell you.

And we are telling you right now that there is no broad based pricing adjustment for US yes, we will continue to those but that's the way of life for us.

Badrinarayanan Kothandaraman: But we have great partners here. We have Flex, an amazing partner who helped us when we were, you know, especially 2017, 2018, when we when we had some tough times, they were there right with us. Sal Combe also a great partner. So we work well together. We do have this is the time where both of us can recognize saying, okay, is this a short term problem? Is this a long term problem?

And sometimes it is a way for us to lock.

Market share for the mix.

Yes.

X amount of quarters, and we will do that it's business as usual nothing new.

To answer your accounting question.

We accrued for Spa rebates.

Badrinarayanan Kothandaraman: Can we do things structurally? We recognize that both of us need to be profitable, not just one versus the other. And we do take some necessary actions and all of those are confidential in terms of our relationship. I mean, we cannot disclose the actions we are taking, but our P and L always incorporate all of these, and so the message is over the next few quarters, we will continue to work with them, we will give you the piano transparently in the guidance for Gross-Morgent but we are very confident that, you know, we are finding the right solutions working together.

Liability side, when we recognize revenue that assertion.

Future potential rebates for the current quarter shipping core.

The reduction in revenue and is the liability.

Balance sheet.

Same accounting process no change right.

Alright, great. Thanks, guys Okay.

Shifting gears.

I appreciate that color. Thank you.

No you don't have any official guidance for 'twenty four but was wondering if you could talk through how you expect margin to trend by quarter. In 2004. So you gave some perspective on Q1.

There was under shipment there.

Close to Q4 due to product mix.

Badrinarayanan Kothandaraman: Okay, thanks so much, guys. Thank you.

So should we expect Q1 margins to be similar to Q4, because that product mixes maybe more heavily skewed to.

Philip Shen: And our next question will come from Philip Shen with Roth Capital, please go ahead. Thanks for taking my question. Badrinaray, you brought up Spaz, so I figured I'd jump in with a question on that. As you know, our checks have come up with lower micro pricing under a bunch of spa agreements on the order of 10%. Does that resonate with you at all or is that off base? I know you often will get something in return for some kind of price when you negotiate the spa as maybe exclusivity or higher volume.

Batteries again, and then due to product mix returning back in this base case to micros more micros potentially in Q2 after the under shipment in Q4, and one would you expect margins to return back to the pre under shipment levels.

In Q2 of 'twenty, four and back half next year.

Yeah, I mean, that's logical.

It is logical.

Q1, what you said is right. We expect similar levels of course, I'm, not giving guidance, but I mean, just given trends and then Q2, we expect it to because the mix is going to change the micro inverter mix is going to be a little bit higher than the prior quarter. So we expect that logical.

Philip Shen: Can you just talk through that a little bit? And then Mandy, can you talk through how spa accounting might work on your financial statements? For example, do you net the spa, like the refunds against your sales? You have net sales or do you accrue a liability on your balance sheet? Thanks.

That's correct.

Great. Okay. Thanks, guys I'll pass it on.

Philip Shen: So spa, first of all, for the others in the call, spa stands for Special Pricing Adjustment. It is a business process that has been forever at end phase. And it is always happening. Its business is usual. A large fraction of our business usually happens at what we call as EDLP, which is the Distributor List Price. And if business happens at EDLP, there is no spa. But for a small fraction of our customers depending upon how their volumes may go up within the quarter, next quarter, depending on their forecast, we do spa.

Our next question will come from Mark Strouse with Jpmorgan. Please go ahead.

Yes, thanks for taking our questions I believe I asked this on the on the <unk> call as well, but just kind of given the.

The precipitous decline in valuations across the space.

Worth revisiting.

Obviously sitting on a pile of cash here you continue to generate cash.

Just curious your latest thoughts on M&A.

Something that Youre planning on leaning into until the macro improves here.

Yeah.

We do take a look at a number of companies.

All the time every week I have an M&A meeting at a lot of companies that come.

We are very careful, especially in these times to not buy something in a hurry.

Philip Shen: Spa's are, you have a volume price curve. And when the volume goes up, the price comes down. And that's how it is. And that process is very active. It's always been active. It's the one I instituted six years ago when I came. And the accounting for that is unchanged. It is exactly what we have done in the last six years. So, you know, you talk about a $10 reduction. All of those are anecdotes.

They're also capable of.

Making sure that that company is aligned.

Of course in terms of strategic fit and cultural fit.

The farmer is extremely important the latter.

Is practically even more important.

So.

The areas that we usually look forward.

Mode in the energy management software.

Philip Shen: They don't matter. One customer doesn't matter. It's not a trend. It is a large fraction of our customers by at the list price. So, you know, I'd like you to, you know, if there is a broad-based pricing adjustment, we will tell you. And we are telling you right now that there is no broad-based pricing adjustment from us. Yes, we will continue to do spa. That's the way of life for us. And sometimes it is a way for us to lock market share for the next, you know, X amount of quarters.

Sometimes in.

Home automation for example.

Small commercial solar.

Any innovation in batteries, we look for these.

We like.

We like smaller companies bolt on acquisitions, that's what we have done now.

But I mean, we're looking at all all kinds of companies. Please stay tune if we are going to move on something.

It won't be without <unk>.

Okay. Thanks, Badri and then just a real quick follow up.

Philip Shen: And we'll do that. It's business is usual. Nothing new. So, Phil, to answer your accounting question, yes, we accrue for spa rebates as our liability, right? When we recognize revenue, the associated future potential rebates for the current quality of shipping, we accrue more as a reduction in revenue and as a liability on our balance sheet. Same accounting process, no change. Great, thanks guys.

I apologize if I missed this but was there an update on the small commercial products.

Timing or any color there.

Yes, yes. There was we are right now doing beta installations as we speak the product is working great. We.

We expect to introduce this product in this quarter current quarter, and we expect to make some.

Some reasonable revenue out of this product in Q4.

Okay. Thanks, Patrick.

Yes.

Our next question will come from Steve Fleishman with Wolfe Research. Please go ahead.

Philip Shen: Okay, and then shifting gears, appreciate that color, thank you. I know you don't have any official guidance for 24. But was wondering if you could talk through how you expect margin to trend by quarter and 24. So, you gave some perspective on Q1, there's under shipment there, close to Q4. So, due to product mix, so should we expect Q1 margin to be similar to Q4, because that product mixes maybe more heavily skewed to batteries again.

Yes, hi, thank you.

The.

$150 million of under ship.

Youre talking about could you break that out between the U S and Europe.

I would say approximately equal between the two.

Okay.

Thank you and then in Europe.

The impact of you mentioned two things the weaker demand and then also the.

Issues with the distributors.

Philip Shen: And then due to product mix returning back in this base case to microes, more microes, potentially in Q2, after the under shipment in Q4 and 1, would you expect margins to return back to the pre-under shipment levels in Q2 of 24 and back out next year? Thanks. Yeah, I mean, that's logical. It is logical. If at, you know, Q1, what you said is right, we expect similar levels. Of course, I'm not giving guidance, but I'm just giving trends. And then Q2, we, we expect it to, you know, because the mix is going to change. The microinverter mix is going to be a little bit higher than the prior quarter. So, we expect that logical.

Destocking like could you just.

Give some flavor of what.

When you look at the weakness you started to see whats what are they about equal drivers is one.

Kind of dominating the other.

Yes.

Actually to tell you the truth every country is a little bit different.

Philip Shen: That's correct. Great. Okay. Thanks, guys.

Clubbing them together.

Under macroeconomics will not do justice, but there are some a few factors let me tell you.

Overall, the thing that can be generalized it's basically.

If you rewind to last year.

All distributors.

<unk> consumers, where literally we got a lot more aggressive due to the Ukraine crisis.

Mark Strouse: Our next question will come from Mark Strauss with JP Morgan. Please go ahead. Yes, thanks for taking our questions. I believe I asked this on the, on the QQ call as well, but just kind of given the precipitous decline and valuations across the space, I thought it's worth revisiting.

The Ukraine crisis, the shortage of natural gas caused many countries to be very aggressive pull in their plans for renewables.

And we saw a huge spike in virtually every country in Europe.

Solar plus storage.

Mark Strouse: You know, so you're obviously sitting on a pilot cache or you can continue to generate cash. Just curious your, your latest thoughts on, on MNA, if that's something that you're planning on leaning into until the macro improves here. Yeah, we do take a look at a number of companies all the time every week. I have an MNA meeting. There are a lot of companies that come. We are very careful, especially in these times to not buy something in a hurry.

Everybody started talking up a lot.

We also profited from that our revenue also peaked.

But then that enthusiasm.

Is.

A little bit tempered right now.

And because of that Whatsapp.

What's happening is the distributors suddenly realizing.

That they got more on their hands.

And also in our <unk>.

Earlier.

Maybe a year and half back with product availability wasn't that tight because of that increase in demand, but now all of the suppliers have geared up especially panels.

Mark Strouse: We're also careful of, you know, making sure that that company is aligned. Of course, in terms of strategic fit and cultural fit. The former is extremely important. The latter is practically even more important. So the areas that we usually look for are, you know, more in the energy management software. You know, sometimes in, you know, home automation for example. Sample, small commercial solar, any innovation in batteries, we look for these, usually we like smaller companies, bolt-on acquisitions, that's what we have done, have now. But, I mean, we are looking at all kinds of companies, please stay tuned, if we hear, we're going to move on something, it won't be without you knowing.

Product availability of panels is very high so.

A lot of over inventory, particularly on the patents is happening and district that is putting.

Pressure on the distributors because they are purchased inventory at.

As high prices before and now the prices have collapsed on panels.

So.

That has some financial weakness there.

But again they are.

So therefore, they are conservative now and they want to hold.

Less inventory as possible. So thats the kind of a macroeconomic now let's come to Netherlands, our biggest market Netherlands has got.

The interesting dynamic that when I went there two weeks ago, because I went there.

When I heard that our.

Our demand was dropping I got concerned I went there.

Steve Fleischman: Okay, thanks, Father, and then just a real quick follow-up, I apologize if I missed this, but was there an update on the small commercial product, the timing or any color there? Yes, yes there was, we are right now doing beta installations as we speak, the product is working great, we expect to introduce this product in this quarter, current quarter, and we expect to make some reasonable revenue out of this product in Q4. Okay, thanks, Father. Yes, our next question will come from Steve Fleischman with World Research, please go ahead.

And when I looked at it.

Netherlands situation is actually not so bad.

If you see.

The air payback is about six years.

But.

They had.

They are less cat recently, a couple of maybe two or three months ago, We're an energy company called when Randy Brown.

Basically.

Send that to.

To the consumer saying, we are going to charge you a penalty to export solar back into the grid.

And in <unk>.

It's a very small fraction that are about 30 35 energy companies I think in Netherlands at the deregulated market Randall Crown is one of them. They serve about 3% of customers. They basically said that Oh, we're going to charge you an export penalty. All they were trying to do is to put some pressure on the government.

Steve Fleischman: Yeah, hi, thank you. The 150 million of ownership that you're talking about, could you break that out between the US and Europe? Or say approximately equal between the two. Okay, thank you, and then in Europe, the impact of, you mentioned two things, the weaker demand, and then also the issues with the distributors, like could you just give some flavor of what, when you look at the weakness you started to see, what are they about?

You need to help us with net metering because.

The simple fact that the mattress, Netherlands has got wind it's got solar.

That is $2 2 million homes with solar out of 7 million homes.

These if they.

<unk> two.

Export solar energy in a random manner. The energy companies are finding they cannot handle that isn't.

Steve Fleischman: Equal drivers is one kind of dominating the other, yeah. Yeah, actually to tell you the truth, every country is a little bit different, clubbing them together, under macroeconomics will not do justice, but there are some, a few factors, let me tell you, overall thing that can be generalized is basically if you rewind that to last year, all distributors, installers, consumers, were a lot more aggressive due to the Ukraine crisis. Ukraine crisis, the shortage of natural gas caused many countries to be very aggressive, to pull in their plans for renewables, and we saw a huge spike in virtually every country in Europe.

So they are putting pressure on the government too.

Okay metering needs to evolve into something where the.

The customers have.

Self consumption, which is solar plus storage.

And so its actually extremely good for us.

But the way they are doing it.

Is of course, a little bit disrupted so that is the.

Government is going to respond once it is in place now that is.

Election happening.

Metering clarity is going to come probably probably after that.

And.

But the way it's going to evolve is this market.

And our net metering will still last until 2025. So we are covered for the next two years.

Steve Fleischman: Solar plus storage, everybody started talking up a lot, and we also profited from that, our revenue also peaked, but then that enthusiasm is a little bit tempered right now, and because of that, what's happening is the distributors suddenly realizing that they got more on their hands, and also earlier maybe a year and a half back, the product availability wasn't that high because of that increase in demand, but now all of the suppliers have geared up, especially panels. Product availability of panels is very high.

With good payback and then the payback will be.

We will be maintained after that with the combination of solar.

Our storage.

Plus dynamic tariffs, which is getting popular thing.

So.

That's the big picture in Netherlands, many of the European countries.

<unk>.

In a similar way many of them.

Have garnered dynamic Dennis Germany is a little bit little bit ahead, they don't have dynamic tariffs, but they introduced feed in tariffs.

Rich very similar to net metering export is not paid.

As much as important in fact is only a fraction that is way, Germany, you find 80% attach rate on batteries.

Steve Fleischman: So, a lot of over-inventory, particularly on the panels has happened. That is putting a pressure on the distributors because they have purchased inventory at high prices before and now the prices have collapsed on panels. So, there is some financial weakness there, but again there. So, therefore, they are conservative now and they want to hold as less inventory as possible. So, that's kind of a macroeconomic.

So.

Long answer to your question, but that's the color on Europe.

I guess just to wrap the topic up overall, just let's say, we continue to move away from the kind of Ukraine energy crisis conditions.

But we do have these markets each put in these changes just does your kind of expectation of Europe kind of improving.

Can it be driven just by these market by market changes or do you need.

Do you need to see some kind of move up in energy prices again.

Badrinarayanan Kothandaraman: Now, let's come to Netherlands or biggest market. Netherlands has got very interesting dynamic that when I went there two weeks ago, because I went there, when I heard that our demand was dropping, I got concerned, I went there. And when I looked at it, Netherlands situation is actually not so bad. If you see, their payback is about six years, but they had as care recently a couple of maybe two or three months ago, where an energy company called Vandabron basically said that to the consumers saying, we are going to charge you a penalty to export solar back into the grid.

Well I didn't talk about energy prices energy prices are also increase.

In places like France, the energy prices are also going up so I.

Energy prices are going to help us the utility rates are increasing and so that is that is definitely going to be a tailwind, but make no mistake. Despite all of this in a place like Netherlands, two gigawatts of solar in a place like France. The feedback is extremely good.

Five to six years, where can you get that even just for solar is going to evolve into into solar plus storage with a payback of.

Maybe seven to eight years, but still very good.

For our 25 year product so.

That is a small small dislocation right now due to inventory issues due to these but that's why we expect.

Badrinarayanan Kothandaraman: And, you know, Vandabron is a very small fraction. There are about 35 energy companies, I think, in Netherlands. It's a deregulated market. Vandabron is one of them. They serve about 3% of customers. They basically said that, oh, we are going to charge you an export penalty. All they were trying to do is to put some pressure on the government saying, you need to help us with net metering because, you know, the simple fact of the matter is, Netherlands has got wind, it's got solar.

The ramp up.

Normally I won't say transmission revenue recovery.

<unk> revenue recovery at least some level in Europe.

Great. Thank you.

Our next question will come from Jeff Osborne with Cowen. Please go ahead.

Yeah. Thank you Badri I was just curious on your expectation for <unk> recovery. What is your working assumption on normalized inventory in the channel I think in the past you had talked about eight to 10 weeks and assuming it's still the case I guess is there an argument.

Badrinarayanan Kothandaraman: There are 2.2 million homes with solar out of 7 million homes. These, if they start to export solar energy in a random manner, the energy companies are finding they cannot handle that easily. So, they are putting pressure on the government to say, okay, net metering needs to evolve into something where the customers have, you know, self-consumption, which is solar plus storage. And so, it's actually extremely good for us there, but the way they are doing it is, of course, a little bit disruptive.

That.

Now that manufacturing is localized content by both yourselves as well as competitors that.

Wouldn't that number be five or six weeks and maybe pressure will continue into Q2.

Yes, I mean.

What youre, saying is possible, but we don't think so so I'll give you a quick quick primer on the weeks on hand, so you.

And I think generally.

Badrinarayanan Kothandaraman: So, there is, you know, the government is going to respond once it is in place, true. Now, there is, you know, election happening. Net metering clarity is going to come probably after that. And, you know, but the way it's going to evolve is this market. You know, net metering will still last until 2025. So, we are covered for the next 2 years with good paybacks. And then the payback will be maintained after that with the combination of solar plus storage.

Yes, I have to say that for the debris everybody followed it for example, if you have.

Let's say you start off with 100 units.

At the beginning of a quarter.

In the channel.

And let us say you drained inventory.

At.

10 weeks 10 units a week.

And they also.

Sure.

You also ship into the channel.

10 units a week.

Okay.

You ship into the channel at 10 units a week you drained from the channel that 10 units a week.

Badrinarayanan Kothandaraman: Bush, plus dynamic tariffs, which is getting popular there. So, that's the big picture in Netherlands. Many of the European countries are evolving in a similar way. Many of them have gotten dynamic tariffs. You know, Germany is a little bit ahead. They don't have dynamic tariffs, but they introduce feed-in tariffs, which very similar to net metering. Export is not paid. As much as important. In fact, it's only a fraction. That is why Germany, you find 80% of the tax rate on metering. So, long answer to your question, but tax the color on Europe.

Therefore at the end of the quarter Youll find yourself at the same hundreds because 100, plus 130, which is 13 weeks.

Minus 130, <unk> you have 100 units at the end of the quarter you ask yourself what is the weeks on hand.

You say that as hundred divided by 10.

At 10 weeks.

So remember that number 10 weeks.

Now I would say Oh, my demand is suddenly dropped by let's say 40%.

That means.

I have.

For the units.

Badrinarayanan Kothandaraman: I guess just to wrap the topic up overall. Let's say we continue to move away from the kind of Ukraine energy crisis conditions, but we do have these markets each put in these changes. Does your kind of expectation of Europe kind of improving? Can it be driven just by these market by market changes? Do you need? Do you need to see some kind of move up in energy prices again? Well, I didn't talk about energy prices.

Weak.

That is accumulating.

So that that means and zoom is shift the same number of units into the channel because I am slow in recognizing.

The situation has changed.

So let it says total ship the same hundred 30 as before.

But now my Dream.

Is only 78 instead of 130.

So therefore to end up with 40 units excess per week, which is <unk>.

Badrinarayanan Kothandaraman: Energy prices are also increasing. In places like France, the energy prices are also going up. So, I mean, energy prices are going to help us. The ability rates are increasing. So, you know, there is a small dislocation right now due to inventory issues, due to these, but that's why we expect the ramp up, you know, normalize it. I won't say normalization, revenue recovery, a quick revenue recovery, at least to some level in Europe.

<unk> units more than the last kit. So now I have at the end of the quarter of 152.

Badrinarayanan Kothandaraman: Great. Thank you.

The 152, but Mike.

My end customer demand is only six units a week.

So I would tell you that my weeks on hand, now is 150 to over six.

With just 25 weeks.

So I suddenly go my weeks on hand increases by 150%.

Due to a 40% drop in demand.

If I am.

I continue to be oblivious.

Off and are continuing to be oblivious and ship the same material into the channel.

So.

It can blow up disproportionate.

Right and of course, the further the demand drop the further youre weeks on hand will go up and the Congress in stroke.

If the demand improves a little bit the weeks on hand is going to come down fast.

No.

We think that the distributors I mean, we'll look at we'll look at logical things here because even at 10 to 12 week inventory.

Jeff Osborne: Our next question will come from Jeff Osborne with a comment. Please go ahead. Thank you. Audrey, I was just curious on your expectation for a two-q recovery. What is your working assumption on normalized inventory in the channel? I think in the past, you talked about eight to 10 weeks and assuming that it's still the case. I guess, is there an argument that, you know, now that manufacturing is localized and continent by both yourself as well as competitors that, you know, why wouldn't that number be five or six weeks and maybe pressure would continue into Q2?

Will it be the similar dollar number that they have had it in the past and yes. In fact, the lesser dollar number that they have held in the past so.

We think logic will prevail and.

Of course and market demand could change all of that pretty pretty quickly.

<unk>.

Weeks on hand.

This is not something that you that is obvious it can really change drastically.

Jeff Osborne: Yeah, I mean, what you're saying is possible, but we don't think so. So I'll give you a quick primer on the weeks on hand. So you follow it. I think generally, I'd like, you know, to say that so that everybody follows it. For example, if you have, let's say you start off with 100 units, at the beginning of a quarter in the channel, and let us say you drain inventory at ten weeks, I mean ten units a week, and you also ship into the channel at ten units a week.

By small changes in demand.

And I gave you. The example, there.

I appreciate that Michael and correct me, if I'm wrong, but I think youre allowed to under the IRA export U S manufactured goods.

International jurisdictions is that something that you're already doing or B, you intend to do in 2024.

Jeff Osborne: So you ship into the channel at ten units a week, you drain from the channel at ten units a week, therefore at the end of the quarter you find yourself at the same hundred, because hundred and thirty, which is 13 weeks, minus 130, you have a hundred units at the end of the quarter, you ask yourself what is the weeks on hand. You say that is hundred divided by ten, that's ten weeks, remember that number ten weeks.

Yes, not doing today, but of course, it's really considered.

Got it thank you.

And our next question will come from Julien Dumoulin Smith with Bank of America. Please go ahead.

Hey, good afternoon. Thank you guys very much for the time appreciate it hey, I just wanted to pivot to a slightly different direction here right. So you have a few of these exclusive deal.

Across a number of different customers, but some some larger ones. If you will I am curious how do you think about how quote unquote locked in those are going into the next year and how you're thinking about working together realistically as partners.

Itemizing your value proposition, while dealing in addressing with their respective needs, which are clearly and likely dynamic, especially given the backdrop in California. If you can speak to that those dynamics I know I'm not trying to get into the contract specifics here, but really working with them. If you will and how you think about how locked in that portion of the volumes are.

Yes.

I presume you are talking about one large customer here that's the only one we have.

Jeff Osborne: Now I say, oh my demand is suddenly dropped by let us say 40%, that means I have four units a week, that is accumulated. So that means, and assume I ship the same number of units into the channel, because I am slow in recognizing that the situation has changed. So now I have at the end of the quarter, 152, but my end customer demand is only six units a week, so I tell you that my weeks on hand now is 152 over six, which is 25 weeks.

Which is official.

The we love our partners.

We worked very closely with them the value that relationship a lot.

And we are there I mean, we are at their service.

All of the time.

Whether it's quality whether its customer experience.

We value the relationship with <unk> so.

Yes of course, we will be looking to renew all of those.

Right, Yeah fair enough, it's difficult to opine too much and then just coming back to all these different contract manufacturing relationships I know they might not be identical here, but how do you think about underutilization costs here I mean, what are the commitments like how flexible are the terms as you look at both flexing down.

And up the volumes through the course of the year here under these new arrangements.

Right I did talk about it.

Answering a prior question.

Say the same thing here we have.

Great contract manufacturing partners.

Next as beam.

No.

Jeff Osborne: So I suddenly go, my weeks on hand increases by 150%, due to a 40% drop in demand, if I continue to be oblivious of, you know, continue to be oblivious and ship the same material into the channel. So it can blow up disproportionately, right, and of course the further the demand drops, the further your weeks on hand will go up and the conversation is true. So if the demand improves a little bit, the weeks on hand is going to condone fast, so we think that the distributors, I mean, will look at logical things here, because even a 10 to 12 week inventory will be the similar dollar number that they have held in the past.

Great Yeah, great photos, they particularly helped us when we were in trouble in 2017.

Thankfully there our relationship has been very healthy even during <unk>.

During these times and we are working.

We are working together sometimes.

If we look at a problem and say is this a short term problem or a long term problem. If it is.

Going to cause them pain.

We are willing to restructure.

And all of those.

All of those accounting.

In our opinion, we reported as part of our non-GAAP.

And GAAP gross margin.

So.

You should read the P&L.

No that everything is there and we.

We view this particular situation.

Yes.

Temporarily, but we are very cognizant of the fact that.

Jeff Osborne: So we think logic will prevail, and of course end market demand could change all of that pretty quickly. So, Vikram Hand is not something that is obvious. It can really change drastically by small changes in demand, which I gave you the example there. I appreciate that. My follow-up is encouragement from Ron, but I think you're allowed to, under the IRA, export US manufactured goods to international jurisdiction. Is that something you're already doing or be you intend to do in 2024? Yeah, not doing today, but of course, we'll consider. Got it. Thank you.

Under loading is the pain for a contract manufacturer so.

And we think the right approach is to make sure both of us are profitable.

Sure at the bank and.

And we will be doing them.

Got it alright, well best of luck guys will speak to you soon.

Thank you.

And our next question will come from Andrew per Coca with Morgan Stanley. Please go ahead.

Great. Thanks, so much for squeezing me in so.

So I just wanted to come back to a prior question.

So.

It is clear that the demand backdrop is can be tough demand backdrop potentially for the next few quarters.

Can you maybe just discuss the health of the average installer that as a recurring user of your equipment and their ability to manage through this period and transition to the Tpa model I think there's been some challenges around working capital and tax equity. So I'm, just curious what youre seeing and what Youre hearing from some of those maybe repeat buyers on a smaller scale side of the install.

Jeff Osborne: And our next question will come from Julien Dumoulin Smith with Bank of America. Please go ahead. Hey, good afternoon. Thank you guys very much for the time. Appreciate it. Hey, it just wanted to pivot to a slightly different direction here, right? So you have a few of these exclusive deals across the number of different customers, but some larger ones, if you will. I'm curious. How do you think about, you know, how, quote, unquote, locked in those are going into the next year?

Our community. Thank you.

Yes, I mean, we.

We only here.

Colored from.

Jeff Osborne: And how do you think about working together realistically as partners, I'm an app optimizing your value proposition while dealing and addressing with their respective needs, which are clearly and likely dynamic, especially given the backdrop in California. If you can speak to that, those dynamics, I know I'm not trying to get into the contract specifics here, but really working with them, if you will, and how you think about how locked in that portion of volumes are.

Other <unk>.

Industry news, but.

We.

We do see.

We do see some transition too.

The leasing model, we do see that.

Clearly.

For us how does it affect us.

We have some great partners.

The <unk>.

Jeff Osborne: Yeah, I mean, I presume you're talking about one large customer here, that's the only one we have, which is official. We love our partners, right? We work very closely with them. We value their relationship a lot, and we are there. I mean, we are at their service of the time, whether it's quality, whether it's customer experience, you know, we value their relationship a lot. So, yeah, of course, we would be looking to renew all of those.

Great Partners, John John Berger is a close friend of mine.

Sunpower.

Ron.

The other leasing partners, we do business with all of them, they're all great partners.

So for us it is.

If loan moves to lease.

Our business I would say there could be some product mix issues, but businesses nominally not affected.

We have heard of it.

I don't from.

A few industry sources that installers in California that many long tail installers, who are.

Jeff Osborne: Right, yeah, fair enough. It's difficult to be able to find too much. And then just coming back to, you know, all these different contract manufacturing relationships, I know they may not, might not be identical here, but how do you think about underutilization costs here? I mean, what are the commitments like how flexible are the terms as you look at both flexing down and up the volumes through the course of the year here, under these new arrangements?

Werent in business any longer, but we don't have any direct data.

Sir.

So I can only tell you what I know.

The <unk>.

Of course, I mean, it is a stressful time for them and we are trying to help them with whatever we can weather it leads leads or weather.

Jeff Osborne: Right, I did talk about it, answering a prior question and I will say the same thing here. We have great contract manufacturing partners. Flex as we, you know, great, you're great for us. They particularly helped us when we were in trouble in 2017. We're grateful there. Our relationship has been very healthy even during, during these times. And we are working, we are working together, you know, sometimes we look at a problem and say, is this a short term problem or a long term problem?

We can provide them some other services like our solar graphics sector, whether we can help them with NIM three there.

<unk> business.

We are doing that.

That's the color that we have.

In general we do break through this.

New business majority of the business, we do is through distribution.

And the distribution one of the ways, we would see it is in a payment that if we were to do direct business with all of the installers, which we don't we do business with distribution partners. So therefore, we have one level.

Jeff Osborne: If it is going to cause them pain, we are willing to restructure. And all of those, all of those accounting are in our PNF. We reported as part of our non-GAF, and Gap Gross Molchan. So, you should read the piano and you know know that everything is there and we view this particular situation is you know temporary, but we are very cognizant of the fact that under loading is a train for our contract manufacturing. So, and we think the right approach is to make sure both of us are profitable and share the pain and we will be doing that. Got it.

A little bit.

Away from.

Direct relationship with the long tail installers.

But yes.

Yes that makes sense. Thank you and the other question my other questions have been answered all sorts of things there.

Yeah could you repeat the question.

Okay. Our next question will come from Tristan Richardson with Scotiabank. Please go ahead.

Hey, good evening guys. Thank you so much asked and answered I appreciate all the commentary on 24 and really just thinking about the.

Commentary you made around stabilization.

Here should we think that could there be a swing factor with some of the new markets, you've entered whether Thats UK, Greece, Denmark, even India.

Could that be a meaningful factor that could affect sort of the timing of that stabilization or present, a growth wedge above kind of that <unk> timeframe youre talking about.

Joseph Osha: All right, well best of luck guys, we'll see you soon. Thank you. And our next question will come from Andrew Percoco with mortgage family. Please go ahead. Thanks so much for squeezing me in. So, I just wanted to come back to a prior question. So, you know, it's clear that the demand backdrop is going to be tough demand backdrop potentially for the next few quarters. Can you maybe just discuss the health of the average installer that is a recurring user of your equipment and their ability to manage through this period and you know transition to the to the TPO model.

Absolutely we have a lot of vectors of growth.

That's a great place for us to start with.

In the color I gave you we didn't consume all of that but we have absolutely. So many countries and we are not we were not present, even couple of quarters ago.

We are introducing.

Batteries and micro Inverters actually batteries for example in Austria.

In Spain.

Joseph Osha: I think there's been some challenges around working capital and tax equity. So, just curious, you know, what you're seeing and what you're hearing from some of those new repeat buyers on the smaller scale side of the installer community. Thank you. Yeah, I mean, we only hear the color from other industry news, but you know, we do see we do see some transition to the leasing model. We do see that clearly for us, how does it affect us is we have some great partners.

U K as you correctly pointed out Sweden.

Denmark.

Please.

We have plans to introduce to about 15 countries.

In the fourth quarter.

Micro Inverters alone they are all new countries.

So that's that's one vector new new geography is very important for us.

But on the flip side there.

It does take some time to establish infrastructure that you do need it.

You do need to build up your installer base, you do need to train them very well because our bread and butter is our installers.

Joseph Osha: We have Sonova great partners John, John burger is a close friend of mine. Son power, you know, son run and other other leasing, you know, partners, we do business with all of them. They're all great partners. So, for us, it is, you know, if loan moves to lease our business or face, you know, there could be some product mixed issues, but business is normally not affected. We have heard, you know, anecdotes from a few industry sources that, you know, installers in California, there are many long table installers who aren't in business any longer, but we don't have any direct data there.

So therefore, we need to train them excellently.

And we need to win them one by one and that is a process in itself.

It can be as early as three to six months, but it can be.

Over a longer time timeframe as well.

<unk> got several new markets in Asia that are also interesting for US like for example, Taiwan Korea.

Indonesia, we're there today, but we are rapidly moving.

Into IQ eight there are a few other small.

Mahler countries in eastern Europe that we are going after <unk>.

Small commercial.

That's a big one.

Small commercial in the U S is about a gigawatt, we are going to have that product this quarter.

The small commercial opportunity in Europe is much bigger it's about 10 plus gigawatts.

And we are we are figuring out that go in and systematically because we can service that market less than 100 kilowatts with the products we have.

Joseph Osha: So, I can only tell you what I know the, of course, I mean, it is a stressful time for them and we are trying to help them with whatever we can, whether it leads or whether, you know, we can provide them some other services like our solar graph, etc. Whether we can help them with name three, their business, we are doing that, and, you know, that's the color that we have. In general, we do business, we do business, you know, majority of the business we do is through distribution, and the distribution, you know, one of the ways we would see it is in our payment, right, if we were to do direct business with all the installers, which we don't, we do business with distribution partners.

So there are of course pricing as is.

It's something that we're looking on how to be competitive in that segment.

But we do have a lot of leverage there.

On small commercial so that is one more the other one is <unk>.

<unk> charging.

EV charging we just introduced a connected <unk> chart.

That is a big deal now with everybody wanting to electrify.

Meaning that home, which is buying.

Electric vehicles electrified vehicles for example.

Our product will work with solar.

Plus batteries.

Joseph Osha: So therefore, we have one level, a little bit, you know, away from, you know, direct relationship with the long tail installs. But, you know, yeah, let me say thank you. And the other questions, my other questions have been answered. So I'll just leave it there. Do you have a minute to read the question?

And.

It will help the homeowner optimized is built.

He can do green charging now it doesn't need to spend.

Money charging the vehicles from the grid Ali needs to look to add about one time investment of course. He has got to do that six to eight six to 10 tenants he needs to add it if he buys in EBIT.

Joseph Osha: Oh, okay, our next question will come from Tristan Richardson with Scotia Bank, please go ahead. Hey, good evening, guys. Thank you so much, ask me and I appreciate all the commentary on 24. And really just thinking about the commentary you made around stabilization next year, should we think that could there be a swing factor with some of the new markets you've entered, whether that's you. Okay, Greece, Denmark, even India, could that be a meaningful factor that could affect sort of the timing of that stabilization or present a growth wedge above kind of that 2, 2 timeframe you're talking about.

And that that.

Is the huge opportunity we are now following up and introducing these EV Chargers in Europe, which is what I talked about so early next year, we will have.

<unk> EV Chargers.

In Europe.

<unk>.

Then the other and the other one is.

Home Energy management software.

Right now.

Beginning.

Beginning with Germany, we now have the ability.

To also connect.

Two third party EV Chargers and heat pumps.

Joseph Osha: Absolutely, we have a lot of vectors of growth and that's a great place for us to start, but we are, you know, in the color I gave you, we didn't assume all of that, but we have absolutely so many countries that we are not. We were not present even a couple of quarters ago, like we have introduced in, you know, batteries and microinverters, actually batteries, for example, in Austria, in Spain, you know, UK as you correctly pointed out Sweden, Denmark, Greece, we have plans to introduce to about 15 countries in the fourth quarter.

So now we can optimize the entire system, our solar our storage.

Hopefully our EV Chargers soon but in the meantime, third party EV Chargers third party third party heat pumps.

And giving the homeowner one app all in one app.

Optimizing.

His energy.

From.

His fingertips, so that's energy management software.

Plus we have some some hardware there, which we will eventually integrate into our gateway.

We'll roll that out too.

All the countries, including the U S.

So we got a lot of vectors.

Joseph Osha: Microinverters alone, they're all new countries. So that's that's one vector. New new geographies, very important, you know, for us, but on the flip side, there it does take some time to establish infrastructure there, you do need it. You do need to build up your installer base, you do need to train them very well because our bread and butter is our installers. Therefore, we need to train them excellently and we need to win them one by one and that is a process in itself.

They're which is introduced solar plus batteries into.

Many many new countries worldwide.

Introduce products for the small commercial markets largely.

Introduce IQ smart EV Chargers, both in the U S, which we have done and Moores leg.

Energy management software.

That's what I've been hardware is required to manage heat pumps.

Third party <unk>.

Broadly so we have a lot of vectors of course I did not include that in the.

Joseph Osha: It can be as early as three to six months, but it can be over a longer time timeframe as well. We got several new markets in Asia that are also interesting for us, like for example Taiwan, Korea, Indonesia, we are there today, but we are rapidly moving into IQ 8. There are a few other smaller countries in Eastern Europe that we are going after. Small commercial, that's a very big one. Small commercial in the US is about a gigawatt, we are going to have that product this quarter.

Color, which I gave which is conservative.

From our perspective.

That's great I appreciate all the extra comments Tonight.

Thank you.

Our next question will come from Moses Sutton with BNP Paribas. Please go ahead.

Hi, Brad.

Me in I, just wanted to tag on to Andrew's comment about the fact that with the solar are you seeing outside of the California market. What are you seeing any.

Joseph Osha: The small commercial opportunity in Europe is much bigger, it's about 10 plus gigawatts and we are figuring out that one systematically because we can service that market less than 100 kilowatts with the products we have. So there, of course, pricing is something that we're looking fair on how to be competitive in that segment. But we do have a lot of leverage there on small commercial. So that is one more. The other one is EV Charging, EV Charging.

We're talking to distributors.

Price concessions, maybe distributors asking for concessions on terms and receivables.

So if you could give there has been a little more color on the health care for.

Yes.

Yes.

Yeah I'm just clarifying the question you want you want to know the health of the business outside California is that correct.

Specifically for the Fab Tech really small.

Specifically for the long tail.

Yes, the color that I can give you is.

Joseph Osha: We just introduced our connected EV Charging. That is a big deal. Now with everybody wanting to electrify their home, which is buying electric vehicles, electrify their vehicles for example, our product will work with solar plus batteries. And it will help the homeowner optimize his bill. He can do green charging now. He doesn't need to spend money charging the vehicle from the grid. All he needs to do is to add about one time investment, of course, he's got to do that six to eight panels or six to ten panels.

The non California business is a fully.

Is.

Stabilizing right now that's what we see.

We see.

Q3 was 4% down.

From Q2, and the first three weeks.

Of.

Q4, which is the last last three weeks of this quarter.

We're also not too bad.

In fact, it's a little bit up so.

We think the non California business is.

It's pretty decent but of course it is still down from the high levels that we had by by nearly 35%.

Joseph Osha: He needs to add it if he buys an EV. And that is a huge opportunity. We are now following up and introducing these EV Chargers in Europe, which is what I talked about. So early next year, we will have IQ EV Chargers in Europe. So then the other in the other one is home energy management software. Right? We are now beginning with Germany. We now have the ability to also connect to third party EV Chargers and heat pumps.

Q4 of last year Q4, 'twenty, two it's still down by nearly 30% to 35%.

And your question is how is the health of the long tail, it's a similar answer for us.

We work with.

Our business if you see 80 plus.

80 plus percent probably.

Maybe 75% is the long tail sales.

So.

We see all of them down whether they're our installers going out of business.

We don't get that information, but.

Joseph Osha: So now we can optimize the entire system, our solar, our storage. Hopefully our EV Chargers soon. But in the meantime, third party EV Chargers, third party EV means third party heat pumps. And giving the homeowner one app, all in one app optimizing his energy from his fingertips. So that's energy management software. Plus we have some hardware there, which we will eventually integrate into our gateway. So we'll roll that out to all the countries, including the US.

I think we.

We don't have the data we don't see the same trend which is <unk>.

Loans.

Moving to leases.

And all of our partners are pretty pretty.

Great.

Sunflower syndrome, so yes.

For us it is moving from one hand to another hand, like what I said.

That's that's the color I can give you.

That's very helpful. And then just any sense on Texas, and Florida in particular, I know outside California.

Bridging a little better, but maybe specifically those markets.

Yes, I mean, they were disproportionately down because of.

Joseph Osha: So we got a lot of vectors there, which is, you know, introduce solar plus batteries into many, many new countries worldwide. You know, introduce products for the small commercial markets worldwide, introduce IQ smart EV Chargers, both in the US, which we have done and worldwide energy management software plus whatever hardware is required to manage heat pumps in third party EV worldwide. So we have a lot of vectors, of course, I did not include that in the color, which I gave, which is, you know, conservative. You know, from our perspective. That's great, but we appreciate all the extra comments tonight.

Because the utility rates aren't as high.

Compared to the compared to the increase in interest rates. So.

They were worst affected but we see many of them in Texas and California.

Texas, and Florida, particularly moving into the lease model.

We do see that.

Like what you said and we do see that business starting to recover.

Thank you.

And our next question will come from Joseph Osha with Guggenheim Partners. Please go ahead.

Hey, Thanks for fitting me in Badri I appreciated two questions first following on from the previous one.

Look we all see.

<unk>.

Sunpower accessing.

Tristan Richardson: Thank you. Our next question will come from Moses Sutton with BNP Paraba. Please go ahead. Hi, Bob, we think it's just squeezing me in. I just wanted to tag on to Andrew's comment about the fat cow's stroller. Are you seeing the rest outside of the California market? Are you seeing any stroller, something that distributors are asking for advice in sessions? Maybe distributors asking for concessions on terms, and the theory of sorts you could give a little more color on the health of the cure for.

Our ABS or whatever markets for third party ownership I'm curious do you know.

If you're long tail has found any other.

Our solutions for third party ownership or when you talk about that Avenue as it basically those those three companies that you are seeing in I'd.

We have one other question.

The majority of those those companies.

And there are a few.

Smaller leasing companies that are coming up.

Tristan Richardson: Yeah, the, you know, I'm just clarifying the question. And you want, you want to know the health of the business outside California? Is that correct? Specifically for the fat cow, for the really small stores. Specifically for the long tail. I mean, yeah, the color that I can give you is the non-California business as a fully is, you know, stabilizing right now. That's what we see. We see. You know, Q3 was 4% down from Q2, and the first three weeks of Q4, which is the last last three weeks of this quarter, are also not too bad.

But 90% of those.

<unk> III company.

Okay great.

And then this is really more of a philosophical question I know all of US on Wall Street, just love to hear you talk about defending your gross margin but.

Given how the market is evolving have you done some analysis and are you sure a bit your business.

Perhaps generate higher bottom line earnings if you simply more quickly.

While I would say.

35% gross margin I'm, just curious as to your philosophy as.

So why the gross margin has to stay where it is.

But it is the terminal question.

<unk> grow faster refi.

Crop prices right I mean for us it is it is pricing.

It's based on value the moment with top generating value it is over.

Tristan Richardson: In fact, it's a little bit up. So we think the non-California business is pretty decent. But of course, it is still down from the high levels that we had by nearly 35%. Meaning from Q4 of last year, Q422, it is still down by nearly 38 to 35%. And your question is, how is the health of the long tail? It's a similar answer for us. We, we work with our business. If you see 80 plus 80 plus percent probably.

So.

That's why I never look at those in conjunction pricing I don't base. It on cost the moment you base it on cost it's a problem.

Then you forget about the value drivers.

And therefore.

The.

What that means is if.

We need to add values value in both micro inverters and batteries.

And software.

And that's that's hard to do but that's what we do poorly.

Innovation.

Yes.

Tristan Richardson: Maybe 75% is the long tail. So, you know, we see all of them down whether there are installers going out of business. We don't get that information, but I think we, you know, we don't have that data. We do see the same trend, which is loans moving to leases. You know, all our partners are pretty, pretty great. You know, Sonoma, Sonoma, Sonoma, Sonoma, Sonoma. So, for us, it is moving from one hand to another hand, like what I said.

Aviation is.

Someone said it right in Silicon Valley innovate or die.

We are that company.

That's our philosophy.

We believe.

We believe high quality high is high volume and high price at the right price.

Well.

Sure.

Okay. Thank you I appreciate that.

Okay.

And our next question will come from Vikram <unk> with Citigroup. Please go ahead.

Good evening everyone.

Tristan Richardson: That's, that's the, you know, color I can give you. And that's very helpful. And then just any sense on Texas in Florida in particular, I know outside California, averaging a little better, but maybe specifically those markets. Yeah, I mean, they were disproportionately down because of, because the utility rates aren't as high compared to the, compared to the increase in the interest rates. So, they were worst affected, but we see many of them in Texas and California. I mean, Texas and Florida are particularly moving to the least model. We do see that. Like what you said. And we do see that business starting to recover. Thank you.

Very helpful color on demand and supply dynamics in countries. The countries in Europe. What's the you mentioned you expect to recover a bit in your calculation of $300 million of inventory reductions over the next two quarters.

Is that rebound got a function of.

Enphase entering a number of new countries in EU. This year as you mentioned and gaining market share in existing markets, such as Germany or the outlook for inventory reductions assumes that the base demand rebounds in first quarter and on top of that you gained market share.

In new as well as sort of like existing markets and then if you can talk about the U S. Market also it seems like you are looking to defend market share you haven't seen any declines in market share so far.

There were some you will you would look to defend that.

Yes, I mean, we already told you that we arent assuming the demand picture changing from the current levels in our assumptions.

Tristan Richardson: And our next question will come from Joseph Osha, would you have been hand partners? Please go ahead. Hey, thanks for fitting me in, Badraya, I appreciate it. Two questions, first following on from the previous one. You know, look, we all see Dunrun Sonova, you know, Sun Power Accessing, you know, ABS or whatever markets for third-party ownership. I'm curious. Do you know if you're long-tailed sale has found any other solutions for third-party ownership or, you know, when you talk about that avenue, is it basically those three companies that you're seeing? And I do have one other question. Majority is those companies. And there are a few smaller leasing companies that are coming up to, but in 90% is those three companies. That's right. Okay, great.

And basically.

I'm not here to give guidance for Q1.

I'm, just giving you a general color for Q1, so all of our assumptions.

Based on demand picture not changing that.

Next.

No.

Demand picture not changing from what it is today. So that's that's what we said.

<unk> then.

Question is on the U S U S.

U S for us.

Is.

We work with a lot of customers.

We this is the time, where our partnerships like what I set out a lot deeper.

Every one of our executives is always on the road visiting customers.

Badrinarayanan Kothandaraman: And then this is really more of a philosophical question. I know all of us on Wall Street just love to hear you talk about defending your gross margin. But, you know, given how the market is evolving, have you done some analysis? And are you sure that your business couldn't perhaps generate higher bottom line earnings if you simply grew up more quickly and allowed say at 35% gross margin? I'm just curious as to your philosophy as to why the gross margin has to stay where it is.

Every opportunity to gain market share.

We are all over it.

And.

Like what I said that we have a number of tools.

Yes of course.

Defending against competition all competition is very important for us.

We take everybody seriously.

We work on our problems.

We fix our problems.

Customer service you see many people simply stick to us.

Badrinarayanan Kothandaraman: Well, it is the eternal question. Can I grow faster if I drop prices, right? I mean, for us, it is pricing is based on value. The moment we stop generating value, it is over. So, that's why I never look at those in conjunction pricing. I don't base it on cost. The moment you base it on cost, it's a problem. Then you forget about the value drivers. And therefore, you know, the, what that means is, if we need to add values, value in both microinverters and batches and software.

Quality.

And customer experience, our net promoter scores.

78 in the U S.

We have opened 24 by seven a call center.

We have field service technicians, who will show up in your home to model. If you have a problem today.

So we have a.

Yeah.

If you put the total picture together.

It's.

Innovation.

Quality and.

In customer experience no. We have one more fact that we have.

We can give people mainly in the Medicare product.

No we do have.

That in many of our installers love it because they for example, we just had.

Badrinarayanan Kothandaraman: And that's, that's hard to do. But that's what we do for a living. You know, innovation. Innovation is, you know, someone said it right in Silicon Valley, innovate or die. We are, we are that company. That's our philosophy. So, we believe, we believe high quality, high is high volume and high price. Or the right price for value. Well, okay. Thank you. I appreciate that.

In flex.

We.

In South Carolina.

Yes, President vitamin Cayman Cayman inaugurated.

That plant and we have a lot of installers.

Including not just installer partners distribution partners. So.

It's very important for them.

Made in America product right, they add in South Carolina.

They're in Arlington right there in Wisconsin.

It is that.

So we think that.

<unk> will help.

Tooth and.

We are going to in a similar vein, we are going to bring in our batteries as well.

Badrinarayanan Kothandaraman: And our next question will come from Dick Graham Bakery with city group. Please go ahead. Good evening, everyone. Very helpful color and demand and supply dynamics in country, countries in Europe. What do you mention? You expect EU to recover a bit in your calculation of $300 million of inventory reductions over the next two quarters. Is that rebound? That a function of an end phase entering a number of new countries in EU this year, as you mentioned, and gaining market share and existing market.

In the U S and we will take advantage of the domestic content.

There and so that will provide.

Extra help to some of our leasing partners.

So.

Yes, we are always.

Always working on market share, we always take competition seriously not just right now.

So we do business.

Badrinarayanan Kothandaraman: So just Germany. Or the outlook for inventory reductions assumes that the based demand rebounds in first quarter. And on top of that, you gain market share in new as well as sort of like existing market, and then if you can talk about US market also, it seems like you are looking to defend market share, you haven't seen any declines in market share so far, but if there were some you will look to defend that.

Thanks, Bob.

As a follow up I wanted to quickly follow up on the capital allocation question earlier in the call I was wondering if your priorities have changed given where the stock price is today I see you repurchased about $110 million in shares.

$42 million of free cash flow this quarter.

Should we expect similar trend going forward share buybacks closely following free cash flow generation.

Badrinarayanan Kothandaraman: Yeah, I mean we already told you that we aren't assuming the demand picture changing from the current levels in our assumptions. And basically, you know, I'm not here to give guidance for Q1, but I'm just giving you a general color. So all our assumptions are based on demand picture not changing in the next, you know, demand picture not changing from what it is today. So that's what we said in our assumptions.

Quarters.

Yes.

We have a lot of cash like what you pointed out $1 8 billion.

We have shown that we are willing to.

Buy back stock in a disciplined fashion.

We have bought back stock in the last couple of quarters, I think we bought back $310 million and totaled 110 in Q.

Three and $200 million in the prior quarter.

I think this is an opportunistic time for us where we can take advantage of the stock price. So we will be opportunistic about it.

Badrinarayanan Kothandaraman: Then your question is on US, US, US for us is, we work with a lot of customers. This is the time where our partnerships like what I said are a lot deeper. Every one of our executives is always on the road visiting customers. Every opportunity to gain market share, we are all over it. And you know, like what I said, we have a number of tools. Yes, of course. It's defending against competition.

Okay.

Thank you very much.

Thank you.

And our next question will come from <unk> <unk> with Wells Fargo. Please go ahead.

Thanks, Thanks for squeezing me in here, a long call I guess I wanted to ask about Tesla's new.

<unk> three offering and maybe what are kind of the puts and takes there comparing that against your IQ eight and five P battery and I guess do you anticipate any market share changes when this product is launched next year.

Badrinarayanan Kothandaraman: All competition is very important for us. We take everybody seriously. We work on our problems. We fix our problems. Our customers service, you see, many people, employees take to us for our quality and customer experience. Our net promoter score is 78 in the US. We are open 24 by seven or call center. We have field service technicians who will show up in your home tomorrow if you have a problem today. So we have a, you know, if you put the total picture together, it's innovation, quality and customer experience.

Yes, Hi, this is <unk>.

But as we mentioned earlier on our competition is not new to us and.

Any company out there that's doing string inverters.

We've been competing against those since the inception of the company and we are very very strong value proposition against.

Against that technology technology that we've been fighting against since 2008. So if you think about it if you break it down.

We just produce more energy, we do maximum powerpoint tracking on a per module basis right, because we haven't even broken into power conversion right at the module itself.

We are much more reliable we don't have a single point of failure that the true value of the distributed architecture.

So even if one of.

Badrinarayanan Kothandaraman: Now we have one more factor. We have, we can give people the made in America products. Now, we do have that many of our installers love it because they, for example, we just had a, you know, inflex. Next, we in South Carolina, you know, we have President Biden and came in, came in inaugurated that, that land and we have a lot of installers there, including not just installers partners, distribution partners. So it's very important for them, you know, made in America product right there in South Carolina, right there in Orlando, right there in Wisconsin.

Our micros or the module are too.

Bill or get in based on energy the rest of the system continues to operate.

String inverters on the other hand auto very significant single point of failure that trigger in order were to fail.

The entire systems system instead.

Again, if you look at also design installation.

And maintenance.

We don't have string designs anymore like string designs are a thing of the past those things went away in 2012.

And with US you don't have to do any stringing no string design no limitation stead can put as much new modules are just like installations, all plug and play and maintenance. We provide you with our module information right and with the traditional string inverters.

Badrinarayanan Kothandaraman: It is there. So we think that will help to, and you know, we are going to, in a similar vein, we are going to bring in our batteries as well in the US and we will take advantage of the domestic content there. And so that will provide extra help to some of our leasing partners. So. Yeah, we are always, you know, always working on market share. We always take competition seriously, not just right now. This is how we do business. Thanks, Pavel.

Completely blind to how your modules are performing so I think thats going backwards, and finally and arguably one of the most important element of it is safety.

To do you don't want any of our high voltage DC anywhere in the system and so with Enphase. We are all low voltage DC, we are traditional AC and the combination of high voltage DC at a high energy chemistry.

It is.

It's probably not very not very optimal.

And on the reliability front.

We mentioned one is system level reliability, which is not having a single point of failure.

Badrinarayanan Kothandaraman: And as a follow-up, I wanted to quickly follow-up on the gap between $122 million and shares versus $122 million of free cash flow for this quarter. Should we expect similar trend going forward, share buybacks, closely following free cash flow generation in quarters? Yeah, well, I mean, we have a lot of cash like what you pointed out, $1.8 billion. We have shown that we are willing to buy back stock in a discipline fashion.

Unit itself extremely reliable, we offered 25 year warranty compared to other other types of technologies that offer.

10, 12 year warranties and on the battery if you break the battery down as well.

Modularity is extremely important and you don't need to have very large batteries in Europe.

No.

But we are building block is five kilowatt hours you can right size the system to exactly what the homeowner homeowner needs, but you mentioned the higher power.

Third generation battery, our IQ <unk> <unk>.

The high sea rate of the battery.

Really is an economic benefit to the homeowner because it can you can you can export significant amount of power during those times of the day.

Badrinarayanan Kothandaraman: We have bought back stock in the last couple of quarters. I think we have bought back $310 million in total, $110 million in Q3 and $200 million in the prior quarter. I think this is an opportunistic time for us where we can take advantage of the stock price. So, we will be opportunistic about it. Thank you very much. Thank you.

Are those types of the hour, where do you get compensated by the utility for exporting exporting exporting energy.

And finally on safety, we use lithium iron phosphate LSP chemistry, right LSP chemistry is arguably much safer.

And then any other chemistry, that's out there put all that together look at it in the totality of the system alright.

Praneeth Satish: And our next question will come from Pranee Satish with Wells Fargo. Please go ahead. Thanks for squeezing me in here, long call. I guess I wanted to ask about Tesla's new Powerwall 3 offering and maybe what are kind of the puts and takes there comparing that against your IQ 8 and 5P battery. And I guess do you anticipate any market share changes when this product is launched next year? Yeah, hi. This is Sarago.

All the software that we provide the design tools that we provide those are the competitive moats against any other technology.

That is out there in a couple back with.

Customer service right.

We have opened 24 survey and our customer service Department opened 24 seven.

The installer can call us at anytime to homeowners and callers beautiful app, where they see there.

<unk> that batteries now, even though with the connected EV charter they are seeing how the reviews doing Seattle DPP program right from the App itself you can sign up for the PPP program to really bring a comprehensive solution that is.

Praneeth Satish: And as you know, Buddy mentioned earlier on, a lot of competition is not new to us. And any company out there that's doing string and butter, we've been competing against those since the inception of the company. And we have a very, very strong value proposition against that technology. And technology that, you know, we've been fighting against since 2008. If you think about it, if you break it down, we just produce more energy.

Completely differentiated distributed architecture on Inverters battery arguably one of the safest batteries connected EV Chargers and a complete system solution for the homeowner and of course, a great customer experience. So.

Take any so we have a very competitive solution and like I said competition is not new for us at all so.

Praneeth Satish: We do maximum powerpoint tracking on a per module basis, right? Because we haven't, we do power conversion right at the module itself. We are much more reliable. We don't have a single point of failure. That's a true value of the distributed architecture. So, you know, even if one of our micros or the module were to fail or get impinged on energy, the rest of the system continues to operate. You know, string and butter on the other hand are a very significant single point of failure.

That's very helpful. I guess, just quickly switching gears to California, I just wanted to.

You mentioned that you're you're educating installers about NIM 3.0.

The payback is six years, maybe maybe down to five years with some of these rate increases.

You've got the Stoller graph software, where you're kind of automating a lot of the calculations for installers, but despite all of this and then it all sounds good on paper, but despite all of this that the permits are just they're moving down week on week right.

Praneeth Satish: That string and butter were to fail. Your entire system system is dead. Again, if you look at also design installation and maintenance, you know, we don't have string designs anymore. Like, you know, those string designs are the thing of the past. Those things went away in 2012. And with us, you don't have to do any stringing, no string design, no limitations there. You can put as much, the modules are just like installations all plug and play and maintenance.

In the wrong direction. So I'm just trying to understand if there's anything else you can do to simplify the process and help convert some of the leads to signed contracts or is it just is it rates or is it just waiting for time waiting for macro to improve a bit.

It start waiting right.

It's all we have to go out, adding we and the rest of our industry needs to get out there and continue educating our installer partners, helping uninstall partners educate the homeowner that's what it's going to take and I think all of the tools out there everything is ready.

Praneeth Satish: We provide you with per module information, right? And with traditional string inverters, you know, you're completely blind to how your modules are performing. So, I think that's going backwards. And finally, and arguably one of the most important elements of it is safety, right? You want to do, you don't want any of the high voltage DC anywhere in the system. And so within phase, we are all low voltage DC. We are traditional AC.

But most importantly, the economics out there.

It's simply getting in front of the homeowner getting and convincing them that showing them the numbers showing them using a tool like solid graph and showing them what a solar installer their house would look like.

Praneeth Satish: And the combination of high voltage DC and high energy chemistry is probably not very optimal. And on the reliability front, you know, we mentioned one is system level reliability, which is not having a single point of failure. But look, our unit itself is extremely reliable. You know, we offer 25 year warranty compared to other types of technologies that offer, you know, 10, 12 year warranties. And on the battery, if you break the battery down as well, you know, modularity is extremely important.

Size of the battery.

Would require.

And then showing them the payback period that it's anywhere from five to seven years and getting better at utility grid continues to improve so I think we are all doing the doing the right things we are getting out there and a key entry as we are getting out there and I.

I am sure that competition is also getting out there and educating both installers and customers and so we expect yes, we expect that simply a matter of time I think youll see youll see the California market turnaround as well.

Praneeth Satish: You don't need to have very large batteries and you have the... We are building blocks, it's fast kilowatt hours, you can write size, the system to exactly what the homeowner needs, but they mentioned the higher power of our third generation battery, the high c rate of the battery is really an economic benefit to the homeowner because you can export significant amounts of power during those times of the day, or those times of the hour. Where you get compensated by the utility for exporting, exporting, exporting energy.

Thank you.

So this concludes our question and answer session I would now like to turn the conference back over to Badri <unk> for any closing remarks.

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

Okay.

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

Praneeth Satish: And finally, on safety, we use lithium ion phosphate, LFP chemistry, LFP chemistry is arguably much safer than any other chemistry that's out there, put all that together, look at it in the totality of the system, right. All the software that we provide, the design tools that we provide, those are the competitive modes against any other technology that is out there. Now, couple that with our customer service, right. We are open 24-7, our customer service department's open 24-7, the installers can call us at any time, the homeowner can call us, they have a beautiful app where they see their solar, their batteries, now even they're with the connected EV charger, they're seeing how the EV is doing.

Okay.

Praneeth Satish: If you have a VPP program, right from the app itself, you can sign up for the VPP program, we really bring a comprehensive solution that is completely differentiated distributed architecture on inverters, the battery, arguably on safe as batteries, connected EV chargers, and a complete system solution for the homeowner, and of course a great customer experience. So we have a very competitive solution, and like I said, competition is not new for us at all, so.

Okay.

Raghuveer Belur: That's very helpful, I guess just quickly switching gears to California. I just wanted to, you mentioned that you're educating installers about NEM 3.0, the payback is six years, maybe down to five years with some of these rate increases. You've got the solar graph software where you're kind of automating a lot of the calculations for installers, but despite all this, and it all sounds good on paper, but despite all this, the permits are just, you know, they're moving down week on week right in the wrong direction.

Raghuveer Belur: So I'm just trying to understand if there's anything else you can do to simplify the process and help convert some of the leads to sign contracts, or is it just rate, or is it just waiting for time, waiting for just macro to improve a bit. It's start waiting, right? It's our, we have to go out there and we and the rest of our industry needs to get out there and continue educating our install partners, helping on install partners educate the homeowner.

[music].

Yeah.

[music].

Raghuveer Belur: That's what it's going to take, and I think all the tools out there, everything is ready. But most importantly, the economics are there, right? It's simply getting in front of the homeowner, and convincing them that showing them the numbers, showing them using a tool like solar graph, and showing them what a solar installer, the house would look like, you know, the size of the battery that they would require, and then showing them the payback period that it's anywhere from, you know, five to seven years and getting better as you to literally rate continues to improve.

Raghuveer Belur: So I think we are all doing the right things, we are getting out there, and at least end phase, we are getting out there, and I'm sure our competition is also getting out there and educating both installers and customers. And so we expect, yeah, we expected simply a matter of time. I think you'll see, you'll see the California market coming around as well.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Yes.

[music].

Yes.

[music].

Hum.

Yes.

[music].

Yes.

[music].

Yes.

Yes.

[music].

Yes.

[music].

Okay.

[music].

Yes.

[music].

Yes.

Yes.

[music].

Yes.

[music].

Yes.

Yes.

[music].

Yes.

[music].

Okay.

Sure.

[music].

Yes.

[music].

Okay.

Yes.

[music].

Yes.

[music].

Yes.

[music].

Yes.

Okay.

Yes.

Yes.

Yes.

[music].

Yes.

Okay.

Okay.

Okay.

Okay.

Yes.

Okay.

Yes.

Yes.

Okay.

Okay.

Yes.

Yes.

[music].

Good afternoon.

Afternoon and.

And welcome to Enphase Energy's third quarter 2023 financial results Conference call.

All participants will be in a listen only mode and should you need any assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

To remove yourself from the queue. Please press Star then two.

In addition, we ask that you please limit yourself to one question and one follow up on today's call.

You have additional questions you may rejoin the queue.

Please also note that this event is being recorded today.

I would now like to turn the conference over to Zack Friedman. Please go ahead Sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third quarter 2023 results on today's call are Badri <unk> <unk>, our president and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Rob <unk>, Our Chief products Officer.

After the market closed today Enphase issued a press release announcing the results for its third quarter ended September 32023.

During this conference call and <unk> management will make forward looking statements, including but not limited to statements related to our expected future financial performance market trends and capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing customer service and supply and demand.

<unk> growth in existing and new markets, the timing of new product introductions and regulatory and tax matters.

These forward looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations.

For a more complete discussion of the risks and uncertainties. Please see our most recent Form 10-K, and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward looking statements and undertakes no duty or obligation to update any forward looking statements as a result of new information future events or changes in expectations.

Also please note that financial measures used on this call are expressed on a non-GAAP basis, unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on form 8-K, which can also be found in the Investor Relations section of our web.

Right now.

Now I'd like to introduce Badri co founder Robin, our President and Chief Executive Officer Audrey.

Good afternoon, and thanks for joining us today to discuss our third quarter 2023 financial results.

Reported quarterly revenue of $551 1 million shipped approximately $3 9 million micro Inverters and 86 megawatt hours of batteries and generated free cash flow of $122 million in.

Approximately 86% of our Q3 micro inverter shipments with IQ week, we exited the third quarter at 48% gross margin, 18% operating expense and 30% operating income all as a percentage of revenue on a non-GAAP basis, and including the Iot benefit.

Manley will go into our financials later in the call. Let's now discuss how we are servicing customers and worldwide NPS was 77% in Q3 compared to 74% in Q2, our NPS in North America was 78% compared to 77% in Q.

Our average call wait time was one three minutes compared to $1 one minutes in Q2.

Made significant progress on the root cause fixes of some customer issues and expanded our field service teams globally.

Operator: Thanks. This concludes our question and answer session.

Let's talk about operations in general the overall supply environment for micro Inverters and batteries is quite stable right now.

Let's cover micro Inverters, specifically U S manufacturing.

We began manufacturing and Cellcom facility in Arlington, Texas during third quarter, we shipped approximately 531000 micro inverters to customers in Q3 from three contract manufacturers in the U S Flex in South Carolina, Fox Con and risks.

<unk> and sell comp in Texas, we expect to ship approximately 1 million micro inverters to customers from our U S manufacturing facilities in Q4.

Badrinarayanan Kothandaraman: I would now like to turn the conference back over to Vaudry Kothandaraman for any closing remarks. Hi, you know, thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines. You You You You You You You . . Good afternoon, and welcome to Enphase Energy's third quarter, 2023 Financial Results Conference call.

Let's talk about batteries for IQ batteries, we have two cell pack suppliers, both of which are in China.

Badrinarayanan Kothandaraman: All participants will be in a listen-only mode. And should you need any assistance, please signify conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To remove yourself from the queue, please press star then two. In addition, we ask Matthew, please limit yourself to one question and one follow-up on today's call.

We have a manufacturing capacity of 300 megawatt hours per quarter positioning us well to ramp up in 2024.

Badrinarayanan Kothandaraman: If you have additional questions, you may rejoin the queue. Please also note that this event is being recorded today. I would now like to turn the conference over to Zach Freedman. Please go ahead, sir. Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third quarter, 2023 Results. On today's call, our Badri Kothan Dharaman, our president and chief executive officer, Mandy Yang, our chief financial officer, and Ragu Belor, our chief products officer.

We are looking at bringing manufacturing of ICU batteries into the U S by the middle of 2024.

Badrinarayanan Kothandaraman: After the market closed today, Enphase issued a press release announcing the results for its third quarter ended September 30, 2023. During this conference call, Enphase management will make forward-looking statements, including but not limited to statements related to our expected future financial performance, market trends, the capabilities of our technology and products, and the benefits to homeowners and installers, our operations, including manufacturing, customer service, and supply and demand, anticipated growth in existing and new markets, the timing of new product introductions, and regulatory and tax matters.

Let's now cover the regions, our U S and international revenue mix for Q3 was 64 and 36% respectively.

In the U S. Our revenue decreased 16% sequentially.

And 22% year on year.

The overall sell through of our micro Inverters was down 12% in Q3 compared to Q2.

Badrinarayanan Kothandaraman: These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent form 10K and 10Qs filed with the SEC. We caution you not to place any under-reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations.

On the other hand, the sell through of our IQ batteries in the U S was up by 34% in Q3 compared to Q2 in.

In Europe, our revenue decreased 34% sequentially and increased 26% year on year at healthy gross margin.

The sell through of our micro Inverters in Europe was also down 35% in Q3 compared to Q2.

Badrinarayanan Kothandaraman: Also, please note that financial measures used on this call are expressed on a non-gap basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-gap financial measures to gap financial measures in our earnings release furnished with the SEC on form 8K, which can also be found in the Investor Relations section of our website. Now, I'd like to introduce Bajri Kuthan-Dharaman, our president and chief executive officer, Bajri.

The sell through of our IQ batteries in Europe was down by 14% in Q3 compared to Q2.

We are now shipping IQ micro inverters and batteries into many countries in Europe.

We recently entered the UK, Sweden, Denmark and Grease markets.

With both IQ eight micro Inverters and IQ batteries.

Combined these new markets represent more than one five gigawatts of residential solar opportunity with countries like the UK, having a healthy battery attach rate of 30%.

Badrinarayanan Kothandaraman: Good afternoon, known and thanks for joining us today to discuss our third quarter 2023 financial results. We reported quarterly revenue of $551.1 million, shipped approximately $3.9 million microinvotors and 86 megawatt hours of batteries and generated free cash flow of $122 million. Approximately 86% of our Q3 microinvotors shipments were IQV. We exited the third quarter at 48% gross margin, 18% operating expense, and 30% operating income, all as a percentage of revenue on a non-gap basis and including the IRA benefit.

I'll provide some brief commentary on Australia, our revenue in Australia more than doubled year on year. We are quite pleased with the launch of our Enphase energy system. It is state of the art powered by IQ eight micro Inverters plus third generation battery.

Let me comment on the rest of the world.

In Brazil, we launched our IQ eight P micro inverters food hundred 80 Watt Zec the highest power microwave mergers that we have.

We also launched the solar glass software platform and have good feedback from installers there.

Badrinarayanan Kothandaraman: Mandy will go into her financials later in the call. Let's now discuss how we are servicing customers. Our worldwide NPS was 77% in Q3 compared to 74% in Q2. Our NPS in North America was 78% compared to 77% in Q2. A average call weight time was 1.3 minutes compared to 1.1 minutes in Q2. YouTube. We made significant progress on root cause fixes of some customer issues and expanded our field service teams globally.

In addition, we started shipping both the 384, what's IQ ADC and the 480 watts Ecu AP micro inverters into India to support high powered solar panels.

Let's now talk about Q4 guidance, we are guiding revenue for Q4 in the range of $300 million to $350 million.

This reflects the approximately $150 million of channel inventory correction in the U S and Europe in other words, we are under shipping through the end market demand for our products by approximately $150 million, we anticipate under shipped.

Badrinarayanan Kothandaraman: Let's talk about operations. In general, the overall supply environment for microinverters and batteries is quite stable right now. Let's cover microinverters, specifically US manufacturing. We began manufacturing at Selcom's facility in Arlington, Texas during third quarter. We shipped approximately 531,000 microinverters to customers in Q3 from our three contract manufacturers in the US. Flex in South Carolina, Foxconn in Wisconsin, and Selcomp in Texas. We expect to ship approximately 1 million microinverters to customers from our US manufacturing facilities in Q4.

<unk> will continue in Q1 and expect to have channel inventory to normalize in Q2.

Of course, we are concerned of atrium and assuming the demand picture is unchanged from the current level.

So what has changed since 90 days ago. When we told you that the inventory levels were normalized by the end of Q3.

We have seen a substantial demand and a reduction in Europe.

You've also seen the U S market continued to fall.

Driven by California.

When the demand falls, we think more decisive inventory correction becomes necessary.

Badrinarayanan Kothandaraman: Let's talk about batteries. For IQ batteries, we have two cell packs employers, both of which are in China. We have a manufacturing capacity of 300 megawatt hours per quarter, positioning us well to ramp up in 2024. We are looking at bringing manufacturing of IQ batteries into the US by the middle of 2024. Let's now cover the regions. Our US and international revenue mix for Q3 was 64 and 36 percent respectively. In the US, our revenue decreased 16 percent sequentially and 22 percent year-on-year.

We are being conservative in our assumptions of nor demand recovery until Q2 in this framework.

So that explains the guidance.

Despite the large reduction in Q4 guidance, we are maintaining our non-GAAP gross margin above 40% in our guidance.

Without the IRT benefit.

We aren't making any broad based pricing changes at this time on micro inverter, then we have already made the necessary changes on batteries before.

Our pricing and operations team are doing an excellent job of managing pricing and reducing costs.

Badrinarayanan Kothandaraman: The overall shell-through of our microinverters was down 12 percent in Q3 compared to Q2. On the other hand, the cell-through of our IQ batteries in the US was up by 34 percent in Q3 compared to Q2. In Europe, our revenue decreased 34 percent sequentially and increased 26 percent year-on-year at healthy gross margin. The cell-through of our microinverters in Europe was also down 35 percent in Q3 compared to Q2. The cell-through of our IQ batteries in Europe was down by 14 percent in Q3 compared to Q2.

Let's discuss some market trends I'll give you a little more than usual color on markets.

Let's split the U S market by non California, and states and California.

For non California state the sell through of our micro Inverters was 4% less than in Q3 compared to Q2.

We see this business starting to stabilize given the weekly sell through trends and.

California, the sell through of our micro Inverters was 25% less.

In Q3 compared to Q2 due to the <unk> III transition.

It will take a few more quarters for installers can fully transitioned to <unk> and normalized sales to nematode at all levels.

Badrinarayanan Kothandaraman: We are now shipping IQ microinverters and batteries into many countries in Europe. We recently entered UK, Sweden, Denmark and Greece markets with both IQ-8 microinverters and IQ batteries. Combined, these new markets represent more than 1.5 gigawatts of residential solar opportunity. With countries like the UK having a healthy battery-attach rate of 30 percent. I'll provide some brief commentary on Australia. Our revenue in Australia more than double-deer-on-year. We are quite pleased with the launch of our N-phase energy system.

Utility rates are continuing to move higher in California, with one, California utility recently requesting a 22% rate.

Assuming that even half of that rate hike is approved by the CPUC.

The payback period for <unk> solar plus battery system will become close.

So our NIM $2 towards solar only system. So that's good.

Let me say a few words about U S market share before I give more color on Europe.

Badrinarayanan Kothandaraman: It is state-of-the-art powered by IQ-8 microinverters plus a third-generation battery. Let me comment on rest of the world. In Brazil, we launched our IQ-8 p-microinverters 480 watts. We see the highest power microinverters that we have. We also launched the solar graph software platform and have good feedback from installers there. In addition, we started shipping both the 384 watts IQ-8HC and the 480 watts IQ-8P microinborders into India to support high-powered solar panels.

We see stable share today for micro Inverters based on both internal as well as third party data.

Competition is not new for US we have always relied on our differentiated technology with our distributed AC architecture.

<unk> quality and customer service to win share and we expect this to continue we have many tools at our disposal such as the installers services.

We have not we've made several acquisitions over time in the last couple of years such as.

The software tool for design and proposal permitting tools lead management et cetera, we have a lot of tools at our disposal to help our installers and our partnerships go a lot deeper.

Badrinarayanan Kothandaraman: Let's now talk about Q4 guidance. We are guiding revenue for Q4 in the range of 300 to 350 million dollars. This reflects approximately 150 million dollars of channel inventory correction in the US and Europe. In other words, we are undershipping to the end-market demand for our products by approximately 150 million dollars. We anticipate undershipment will continue in Q1 and expect our channel inventory to normalize in Q2. Of course, we are conservative and are assuming the demand picture is unchanged from the current level.

In the downturn.

Let's talk about Europe demand a little bit we are facing two challenges in Europe and the situation has dramatically changed from the last quarter.

From 90 days ago.

We saw a much weaker demand recovery from summer.

We also see a lot of distributors facing oversupply of solar solar equipment, particularly panels, leading to much more aggressive rooftop.

Despite this temporary weakness.

Think that the fullback in Europe will be temporary as the.

Fundamentals remain strong and we are relatively underpenetrated in the U S. We are entering a lot lots of new geographies without IQ eight micro insurers in batteries. So we remain very bullish about Europe.

Badrinarayanan Kothandaraman: So what has changed since 90 days ago when we told you that the inventory levels would normalize by the end of Q3? We have seen a substantial demand reduction in Europe. We have also seen the US market continue to fall driven by California. When the demand falls, we think more decisive inventory correction becomes necessary. We are being conservative in our assumptions of no demand recovery until Q2 in this framework. So that explains the guidance.

Let me spend a few minutes discussing our three largest markets in Europe, the Netherlands, France, and Germany in detail.

In Netherlands, our largest European market, our Q3 sell through was down 40% compared to Q2.

This was our first sequentially down quarter in the last two years.

In solar cell as the customers fear of an export penalty and confusion around ending of the net metering has caused the market pullback.

Badrinarayanan Kothandaraman: Despite the large reduction in Q4 guidance, we are maintaining our non-gap growth margin above 40% in our guidance without the IRA benefit. We aren't making any broad-based pricing changes at this time on microinverters and we have already made the necessary changes on batteries before. Our pricing and operations team are doing an excellent job of managing pricing and reducing costs. Let's discuss some market trends. I'll give you a little more than usual color on markets.

And Netherlands, two weeks ago, I visited with our leading installers.

I came away confident that this pull back will be shortly.

We think that the plans for net metering will be clarified after the country's elections in November the payback period are continuing to be attractive Amanda.

And Netherlands in <unk>.

Total system solutions, which includes batteries solar and EV Chargers are going to become the norm.

As dynamic tariffs.

Some more prevalent in Netherlands.

Badrinarayanan Kothandaraman: Let's split the US market by non-California states and California. For non-California states, the cell through of our microinverters was 4% lesser in Q3 compared to Q2. We see this business starting to stabilize given the weekly cell through trends. In California, the cell through of our microinverters was 25% lesser in Q3 compared to Q2 due to the NM3.2 transition. It will take a few more quarters for our installers to fully transition to NM3.2 and normalize sales to NM2.2 levels.

We are well positioned to take advantage of these changes.

In France, our Q3 sell through was down 34% compared to Q2, driven by seasonality, we see potential for this market to rebound very quickly we are already seeing that as utility rates recently moved higher and are expected to increase even more in early 2024.

Sure.

In Germany, Q3 sell through was down 32% compared to Q2, we saw strong sequential growth in the installed on account and Activations.

And we are continuing to gain traction there.

Let's talk about our new products IQ batteries.

Badrinarayanan Kothandaraman: Utility rates are continuing to move higher in California with one California utility recently requesting a 22% rate hike. Assuming that even half of that rate hike is approved by the CPUC, the payback period for an NM3 solar plus a battery system will become closed, to an M2.0 solar-only system, so that's good. Let me say a few words about US market share before I give more color on Europe. We see stable share today for our microinverters based on both internal as well as third-party data.

Our sell through for the batteries has been steadily increasing over the last couple of quarters.

We are at an inflection point for our battery business with at ICU battery five B, we can deliver the best power specs and the best commissioning times of any Enphase battery till date at an industry, leading 15 year warranty and at the right price point.

Battery adoption rates are on the rise globally, we are well positioned to grow battery sales throughout 2024.

And we are working on entering given more countries in Europe and Asia in the next few months with our ICU battery.

In addition, we expect to introduce our first generation battery in the middle of 2024 that will have a much reduced form factor and the reduced cost structure.

Badrinarayanan Kothandaraman: Competition is not new for us. We have always relied on our differentiated technology with our distributed AC architecture, product quality and customer service to win share, and we expect this to continue. We have many tools that are disposal such as the installer services that we have bought. We made several acquisitions over time in the last couple of years, such as the software tool for design and proposal, the permitting tools, lead management, etc.

As previously discussed we have entered many new markets with the IQ eight family of micro Inverters, we plan to enter many more new markets in Europe and Asia in the next several months.

Let's.

Talk about our latest micro inverter for the residential segment in emerging markets I didn't mentioned this before this is ICU AP micro inverter at highest powered micro inverter till date 480 watts of AC powered that can support solar panels up to 650 Watts DC.

Badrinarayanan Kothandaraman: We have a lot of tools that are disposal to help our installers, and our partnerships go a lot deeper in the downturn. Let's talk about Europe demand a little bit. We are facing two challenges in Europe, and the situation has dramatically changed from the last quarter from 90 days ago. We saw a much weaker demand recovery from summer. We also see a lot of distributors facing over supply of solar equipment, particularly panels, leading to much more aggressive de-stop.

<unk>, India, South Africa, Mexico, Spain, and other emerging markets. We have started shipping their product into Brazil, South Africa, and India in Q3 and are on track to start shipping in Mexico in Spain in Q4.

The other <unk>.

The IQ eight micro inverter IQ eight <unk> micro inverter with a new three phase cabling system is well suited for small commercial solar installation ranging from 20 to 200 kilowatts.

Badrinarayanan Kothandaraman: Despite this temporary weakness, we think that the full back in Europe will be temporary as the fundamentals remain strong, and we are relatively under penetrated in the US. We are entering a lot of new geographies with our IQ8 microinverters and batteries, so we remain very bullish about Europe. Let me spend a few minutes discussing our three largest markets in Europe, the Netherlands, France, and Germany in detail. In Netherlands, our largest European market, our Q3 sell-through, was down 40% compared to Q2.

We're doing beta installations as we speak then we expect to release the product.

This quarter into the U S market, we are very bullish about the small commercial solar business, where we believe we can add value to our business owners and installers with our quality and good customer experience.

Let's cover EV charging we shipped over 3500 Chargers in Q3 compared to over 6600 Chargers in Q2, we launched our IQ Smart EV Chargers in the U S.

Badrinarayanan Kothandaraman: This was our first sequentially down-quarter in the last two years. Installers tell us that the customers fear of an export penalty and confusion around ending of the net metering has caused the market pullback. I was in Netherlands two weeks ago. I visited with our leading installers. I came away confident that this pullback will be short-lived. We think that the plans for net metering will be clarified after the country's elections in November.

Just a few days ago, both USA that Canada actually the IQ EV Charger is Wi Fi enabled it includes smart control and smart monitoring capabilities. It seamlessly integrates into our solar and battery systems to help homeowners maximize savings.

Badrinarayanan Kothandaraman: The payback period are continuing to be attractive in Netherlands. In addition, total system solutions which includes batteries, solar, and EV chargers are going to become the norm as dynamic tariffs become more prevalent in Netherlands. We are well positioned to take advantage of these changes. In France, our Q3 sell-through was down 34% compared to Q2 driven by seasonality. We see potential for this market to rebound very quickly. We are already seeing that as utility rates recently moved higher and are expected to increase even more in early 2024.

For example by directly charging from solar energy only that's called Green charging.

We are also working on developing IQ EV Chargers for many countries.

In Europe, and we expect to introduce them in the middle of 2024.

Let's now discuss our installed platform briefly solar graph, our cloud based design proposal software platform now provides men treat auto functionality from solar and battery systems in California.

We are now offering <unk> features and continue to make progress on our new features and functions with software platform is now available installers in U S, Germany, Australia, and Brazil, we expect to make this software release as part of our standard offering to any country that we enter.

Badrinarayanan Kothandaraman: In Germany, our Q3 sell-through was down 32% compared to Q2. We saw strong sequential growth in the installer account and activation, and we are continuing to gain traction there. Let's talk about our new products, IQ batteries. Our cell-proofer batteries has been steadily increasing over the last couple of quarters. We are at an inflection point for our battery business. With our IQ battery 5p, we can deliver the best power specs and the best commissioning times of any Enphase battery till date at an industrial leading 15-year warranty and at the right price point.

Let me conclude we are managing through a slowdown in overall demand in.

In the U S. It is due to high interest rates and then three the alto in Europe. It is due to broad macroeconomic conditions. Despite this we are very bullish about our business long term.

See several positive drivers that will accelerate adoption such as the 30% ITC tax credit in the U S.

Rising utility rates globally, and pleased to grid instability also globally climate change and of course, increasing EV adoption worldwide.

Badrinarayanan Kothandaraman: The battery adoption rates are on the right globally. We are well positioned to grow battery sales throughout 2024 and we are working on entering even more countries in Europe and Asia in the next few months with our IQ battery 5p. In addition, we expect to introduce our food generation battery in the middle of 2024. That will have a much reduced bond factor and reduced cost structure. As previously discussed, we have entered many new markets with the IQ 8 family of microinverters.

We have no doubt that this will drive meaningful solar plus battery growth.

Our strategy is very clear.

Manage for the long term, we are doubling down on our relationships with our customers. During these times, we are driving down installation times and investing in our customer service teams.

We are also strongly investing in innovation, we are working on ICD nine and <unk> 10, our next two generations of micro Inverters as well as the next two generations of batteries.

Also rapidly expanding worldwide with systems comprising of IQ eight micro Inverters IQ batteries, IQ EV Chargers and home energy management software, we are introducing products for the small commercial and emerging residential solar markets and we are making continuous enhancement.

Badrinarayanan Kothandaraman: We plan to enter many more new markets in Europe and Asia in the next several months. Let's talk about our latest microinverter for the residential segment and emerging markets. I did mention this before. This is the IQ 8p microinverter or highest power microinverter till date, 480 watts of AC power. That can support solar panels up to 650 watts DC for Brazil, India, South Africa, Mexico, Spain and other emerging markets. We have started shipping the product into Brazil, South Africa and India in Q3 and are on track to start shipping in Mexico and Spain in Q4.

Jordan Tyler platform. In addition to driving towards World class cost sonar products, we remain very positive about our future growth and profitability and we'll continue to make best in class one <unk> systems with a laser focus on innovation quality and customer experience with that.

I will turn the call over to Mandy for her review of our financial results.

Badrinarayanan Kothandaraman: The other variant of the IQ 8 microinverter, IQ 8p microinverter, with a new three-phase cabling system is well suited for small commercial solar installations ranging from 20 to 200 kW. We are doing beta installations as we speak there and we expect to release the product this quarter into the US market. We are very bullish about the small commercial solar business where we believe we can add value to our business owners and installers with our quality and good customer experience.

Thanks, Patrick and good afternoon, everyone.

I will provide more details related to our third quarter of 2023 financial results.

Well as our business outlook for the fourth quarter of 2023.

We've provided reconciliations of these non-GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website.

Although revenue for Q3 was $451 $1 million with sugar Parsimony 1585, six megawatt DC of micro Inverters and 86.2 megawatt hours of ICU beds in the quarter.

Badrinarayanan Kothandaraman: Let's cover EV charging. We shipped over 3500 chargeers in Q3 compared to over 6600 chargeers in Q2. We launched our IQ smart EV chargers in the US just a few days ago, both US and Canada actually. The IQ EV charger is Wi-Fi enabled, it includes smart control and smart monitoring capabilities. It seamlessly integrate into our solar and battery systems to help homeowners maximize saving. For example, by directly charging from solar energy only, that's called green charging.

non-GAAP gross margin for Q3 was 48, 4%.

<unk> to 46, 2% in Q2, the increase was driven by increased net II.

Yes.

Gross margin was 47, 5% for Q3.

Our non-GAAP gross margin for Q3 included $14 5 million ton of solvency II MSA.

Michael you matters may in the U S and shipped to customers in the quarter.

non-GAAP operating expenses were $99 million for QTL.

Compared to $98 2 million for Q2, we are diligently managing operating.

Badrinarayanan Kothandaraman: We are also working on developing IQ EV chargers for many countries in Europe and we expect to introduce them in the middle of 2024. Let's now discuss our installed platform briefly. SolarGraph, our cloud-based design proposal software platform, now provides nem3.off functionality for solar and battery systems in California. We are now offering 3D and shading features and continue to make progress in our new features and functions. The software platform is now available to installers in US, Germany, Austria and Brazil.

And we will continue to do so in the coming quarters.

Yes.

Thanks, guys for $144 million.

Compared to $153 million for Q2.

GAAP operating expenses for Q3 included $41 $1 million of stock based compensation.

And $3 9 million.

Amortization for acquired intangible assets.

I will now thank you.

Cash from operations for Q3 was $167 $6 million.

Badrinarayanan Kothandaraman: We expect to make this software release as part of our standard offering to any countries that we end. Let me conclude, we are managing through a slowdown in our overall demand. In the US, it is due to high interest rates and M3.0, in Europe, it is due to broad macroeconomic conditions. Despite this, we are very bullish about our business long term. We see several positive drivers that will accelerate adoption, such as the 30% ITC tax credit in the US, rising utility rates globally, increased grid instability, also globally, climate change, and of course increasing EV adoption worldwide.

<unk> $235 million for Q2.

Okay. Thank you.

Operations with $118 million for QTL and <unk>.

<unk> to $173 million for Q2.

I will now.

Net income for Q3 was $141 million compared with $205 $6 million for Q2. This resulted in non-GAAP diluted earnings per share of $1 <unk> to participate.

<unk> to $1 47 for Q2.

Net income for Q3 was $114 million compared with GAAP net income of $157 $2 million.

Badrinarayanan Kothandaraman: We have no doubt that these will drive meaningful solar plus battery growth. Our strategy is very clear. We manage for the long term. We are doubling down on our relationships with our customers during these times. We are driving down installation times and investing in our customer service teams. We are also strongly investing in innovation. We are working on IQ 9 and IQ 10, our next two generations of microinverters, as well as the next two generations of batteries.

This resulted in GAAP.

Earnings per share of <unk> 80.

Compared to $1 19 for Q2.

We exited Q3 with total cash cash equivalents and marketable securities balance of $1.78 billion.

<unk> to $1 $8 billion at the end of Q2.

As part of our $1 billion share repurchase program authorized Bob Our board of directors in July Thank you Sandy.

Badrinarayanan Kothandaraman: We are also rapidly expanding worldwide with systems comprising of IQ 8 microinverters, IQ batteries, IQ EV chargers, and home energy management software. We are introducing products for the small commercial and emerging residential solar markets and we are making continuous enhancements to our installer platform in addition to driving towards world-class costs on our products. We remain very positive about our future growth and profitability and will continue to make best-in-class home energy systems with the laser focus on innovation, quality, and customer experience.

We repurchased approximately 847000 shares.

It's come in Scotland, Tuesday, and an average share price of $129 92.

For $110 million.

In addition, with <unk>.

Approximately $8 5 million tonne is packed with holding shares to cover withholding taxes on employee stock vesting.

That reduced the diluted shares.

$59 eight daven shifts we expect to continue these anti dilution point.

In Q3, we generated $145 $9 million in cash flow from operation.

Badrinarayanan Kothandaraman: With that, I will turn the call over to Mandy for her review of our financial results. Mandy. Thanks, Patrick and good afternoon, everyone. I will provide more details related to our third quarter of 2023 financial results, as well as our business outlook for the fourth quarter of 2023. Non-get growth margin for Q3 was 48.4 percent compared to 46.2 percent in Q2. The increase was driven by increased net IRA benefits. Gave growth margin was 47.5 percent for Q3.

$122 million in free cash flow.

Despite the macroeconomic challenges, we continue to generate healthy free cash flow as a result of our strong financial discipline.

Capital expenditure was $23 8 million compared.

Compared to $44 million for Q2.

Capital expenditure requirements decreased as we largely completed building up our U S manufacturing line.

Now, let's discuss our outlook for the fourth quarter of 2020.

We expected our revenue for Q4 to be within a range of $300 million to $250 million.

Including shipments of 80 to 100 megawatt hours of actual battery.

GAAP gross margin to be within a range of 46% to 49%.

38% to 41% before.

We have a new kit.

We expect non-GAAP gross margin to be within a range of 48% to 41%.

Badrinarayanan Kothandaraman: Given non-get growth margin for Q3 included 14.5 million dollars of net IRA benefits for microinverters made in the US and shipped to customers in the quarter. Non-get operating expenses were 99 million dollars for Q3 compared to 98.2 million dollars for Q2. We are diligently managing operating expenses and will continue to do so in the coming quarter. 23, compared to 153 million dollars for Q2. Ship operating expenses for Q3 included $41.1 million of surface compensation expenses, and $3.9 million of immunization for acquired intangible assets.

And 40% to 43% before.

Yes.

non-GAAP gross margin excludes stock based compensation.

Acquisition related amortization.

With respect.

To be between 26 and $28 million.

Shipments of 1 million units.

Thank you Michael.

Please stay on GAAP operating expenses to be within a range of $140 million to $146 million.

Approximately $57 million and net inflow.

Stock based compensation.

And acquisition related expenses and amortization.

Our non-GAAP operating expenses to be within a range of $85 million to $89 million.

Badrinarayanan Kothandaraman: On a non-gay basis, income from operations for Q3 was $167.6 million, compared to $230.5 million for Q2. On a gay basis, income from operations was $118 million for Q3, compared to $170.3 million for Q2. On a non-gay basis, income from Q3 was $141.8 million, compared to $205.6 million for Q2. This resulted in non-gay diluted earnings per share of $1.02 for Q3, compared to $1.47 for Q2. Good main income for Q3 was $114 million, compared to good main income of $157.2 million for Q2.

We are reducing our non-GAAP operating expenses by 12% in Q4 as compared to Q2, we will not compromise investing in customer service.

On SaaS.

Moving to <unk> since we have utilized muscle von <unk> operating Martin research tax credit carryforward.

Now a significant cash tax payer, we expect GAAP and non-GAAP annualized effective tax rate for 2023 to be at 22% plus or minus 1% with AI.

These statements with Sachin.

Net of any incremental cost bottleneck manufacturing will be in the range of 26 to $28 per micro inverter salt to customers in Q4.

Thanks to ship 1 million, Michael and where there's two customers each quarter.

Badrinarayanan Kothandaraman: This resulted in debt diluted earnings per share of $0.80 for Q3, compared to $1.9 for Q2. We access the Q3 with a total patch, cash equivalent, and marketable securities balance from $1.78 billion, compared to $1.8 billion at the end of Q2. As part of our $1 billion share repurchase program authorized by our Board of Directors in July 2023, we repurchased approximately $847,000 shares of end-fade common stock in Q3, at an average share price of $129.92 for $110 million.

Now have all three of our U S manufacturing facility operational.

With that I will open the line for questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Again, we ask that you please limit yourself to one question and one follow up on today's call. If you have additional questions you may rejoin the queue.

At this time, we will take our first question, which will come from Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Good afternoon, thanks for taking the questions.

Badrinarayanan Kothandaraman: In addition, we spent approximately $8.5 million by withholding shares to cover withholding taxes for each stock investing in Q3, that reduced the diluted shares by approximately $59.8 billion shares, with respect to continue this anti-dilution point. In Q3, we generated $145.9 million in cash flow from operation, and $122 million in free cash flow. Despite the macro economic challenges, we continued to generate healthy free cash flow as a result of our strong financial disappoint.

I know the environment is pretty uncertain. So appreciate the additional sort of.

Our quarter visibility in some of the market by market color Badri. So can I just ask as you think about the framework you said you'd under ship in Q1, the way that you're under shipping in Q3, and Q4 can you give us one a sense of how much you expect under shipped in Q1, and then you made the comment that this.

This is all contingent upon sort of demand trends.

Trends staying about where they are at or can you give us a sense of what your internal expectations for demand trends are it sounds like you don't expect them to get worse, but sort of can you quantify that a bit.

Badrinarayanan Kothandaraman: Capital expenditure was $23.8 million for Q3, compared to $44 million for Q2. Capital expenditure requirements decreased as we largely completed building out our U.S, manufacturing lines. Now let's discuss our outlook for the first quarter of 2023. We expected our revenue for Q4 to be within a range of $300 to $250 million, which includes shipments of 80 to 100 megawatt hours of actual batteries. We expected GERS margin to be within a range of 46 to 49% with net IRA benefits, and 38 to 41% before net IRA benefits.

And then I have a follow up.

Yes.

I think that at a few puts and takes first to answer your question is.

On.

Is under shipment is going to be close to $150 million in Q1, we.

We expect it to be a little bit less than $150 million, but not too much less.

So our expectation and second is I will talk about them.

Markets and then it will become clear to you first of all we see the.

On California on stage stabilizing we see that so therefore, we arent that much worried there of course things could go a lot south.

Badrinarayanan Kothandaraman: We spent net GERS margin to be within a range of 48 to 41% with net IRA benefits, and 42% to 43% before NEIRA benefits. Nunge, Bruce Margin, is crew star-based compensation expenses and acquisition related monetization. We expect the NEIRA benefits to be between 26 and 28 million dollars on estimated shipments of 1 million units of U.S, manufacturers, microinverters. We expect our gap operating expenses to be within a range of 142 million dollars.

During the winter, but we are already at pretty low levels. So we don't think so.

California is definitely a wildcard.

But.

<unk>.

Even if that goes down 10% to moment I think we'll be fine because.

We expect Europe to recover a little more.

Europe right now.

For all the reasons I said.

We basically.

Our under shipping quite a bit.

Order to normalize inventory and that will be the fastest to normalize so we expect.

Badrinarayanan Kothandaraman: In approximately 57 million dollars estimated for star-based compensation expenses and acquisition related expenses and monetization. We expect our non-gave operating expenses to be within a range of 85 to 89 million dollars. We are reducing our non-gave operating expenses by 12% in Q4 as compared to Q3. We will now compromise our investing in customer service, innovation, and sales. Moving to tax, since we have utilized most of our non-operating laws and research test credit carried forward, we are now a significant U.S, cash tax payer.

Europe revenue to come back a little bit up in Q1, and therefore, what we expect at least.

What we expect internally is that our revenue sell in revenues we think.

It will be close.

To what we are looking at in Q4 of course, I don't have a crystal ball and not giving your Q1 guidance. This is our expectation right now.

And Q2 onwards, we think the channel inventory is going to approach.

Badrinarayanan Kothandaraman: We expect gap and non-gave annualized effective tax rate for 2023 to be at 22%, plus or minus 1% with IRA benefits. We expect the production credit, net of any incremental cost for domestic manufacturing to be in the range of 26 to 28 dollars per microinverter sold to customers in Q4. We expect to ship 1 million microinverters to customers this quarter. We now have all three of our U.S, manufacturing facilities operational. With that, I will open the line for questions.

Normalized level.

And therefore that normalized level, assuming the demand picture is unchanged that normal level is what we said roughly around $450 million to $500 million is the normal normal levels.

That assumes no change in demand from the current current situations. So.

We expect our revenue to approach that number.

In the second quarter, but of course that doesn't tell you too much because I'm assuming that the demand is the same as the current depressed levels.

Badrinarayanan Kothandaraman: We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw your questions, please press star, then two. Again, we ask that you please limit yourself to one question and one follow up on today's call. If you have additional questions, you may rejoin the queue.

One thing, which I forgot to say is in France, which is another very big market for us.

We already see the sell through rates for example in the first three weeks of this quarter in Alderney backup hi.

Which is good.

Typically the utility there wasn't a utility rate hike in August.

One more expected in February so we think.

Badrinarayanan Kothandaraman: At this time, we will take our first question, which will come from Brian Lee with Goldman Sachs. Please go ahead. Hey, you guys. Good afternoon. Thanks for taking the questions. You know, I know the environment's pretty uncertain, so appreciate the additional sort of out-quarter visibility in some of the market by market color boundaries. Can I just ask, as you think about the framework, you said you'd undership in Q1 the way that you're undershiping Q3 and Q4.

Frans will record fast Netherlands, we have some education to do like what I told you.

B.

There is some political uncertainty that we think that it'd get to your <unk>.

After Q4, so I think Q1 will be definitely better and Thats, a great market where that market is now.

Badrinarayanan Kothandaraman: Can you give us one a sense of how much you expect to undership in Q1, and then you may need to comment that this is all contingent upon sort of demand trends staying about where they're at. Well, can you give us a sense of what your internal expectations for demand trends are? It sounds like you don't expect them to get worse, but sort of can you quantify that a bit? And then I have a follow up.

In addition to solar I think with the dynamic Ted are starting to become prevalent in Netherlands, there is opportunity for battery storage.

In 7 million homes and are today, just so that everybody understands Netherlands, there is seven to 8 million homes.

Solar is there in 2.2 million homes today.

And now with this opportunity with net metering is going to evolve into into something similar to California, not exactly the same but very similar.

What's going to happen is it opens up opportunity for solar plus storage in all 7 million homes.

Badrinarayanan Kothandaraman: Yeah, I think there are a few percent takes first to answer your question is, is the undership men going to be close to $150 million in Q1? We expect it to be a little bit less than 150 million but not too much less That's our expectation In second is I will talk about them in our markets and then it will become clear to you First of all we see the non-California state stabilizing We see that so therefore we aren't that much worried there of course things could go a lot south during the winter but you know we are already at pretty low level so we don't think so California is definitely a wild card but you know even if that goes down 10% more I think we'll be fine because we expect Europe to recover a little more Europe right now for all the reasons I said we basically you know our undershipping quite a bit in order to normalize inventory and that will be the fastest to normalize so we expect euro revenue to come back a little bit up in Q1 therefore what we expect at least you know what we expect internally is that our revenues sell in revenues we think will be close to what we are looking at in Q4 of course I don't have a crystal ball I'm not giving you Q1 guidance but this is our expectation right now and Q2 onwards you know we think the channel inventory is going to approach normalize level and therefore that normalize level is using the demand picture is unchanged that normal level is what we said roughly around 450 to 500 million dollars is the normal level that assumes no change in demand from the current current situation so we expect our revenue to approach that number in the second quarter but of course that doesn't tell you too much because I'm assuming that the demand is the same at the current depressed level one thing which I forgot to say is in France which is another very big market for us we already see the sell-through rates for example in the first three weeks this quarter are already back up high which is good basically the utility there was a utility rate hike in August there's one more expected in February so we think France will recover fast Netherlands we have some education to do like what I told you you know the you know there is some political uncertainty there we think that it gets cleared after Q4 so I think Q1 will be definitely better and that's a great market where that market is now you know in addition to solar I think with the dynamic kind of starting to become prevalent in Netherlands there is opportunity for battery storage in 7 million homes you know today just so that everybody understands Netherlands there is 7 to 8 million homes Solar is there in 2.2 million homes today and now with this opportunity where net metering is going to evolve into something similar to California, not exactly the same but very similar, what's going to happen is it opens up opportunity for solar plus storage in all 7 million homes.

So I think long term, it's going to be great for us but.

Yes, I told you what's going to happen in the short term.

Yes, that's great context I appreciate it just a second one here and I'll pass it on on the margins.

Gross margins non-GAAP, it seems like Youre guiding to low forty's ex IRR benefit.

How much of that it's down a couple of hundred bps from from what you've been tracking at recently how much of that is due to pricing how much due to mix may be can you give us a sense of the margin.

Puts and takes into year end and then do you see anything that would put incremental pressure on the margins into next year. Thank you.

Yep.

It's pretty simple Brian.

Brian you will understand it correctly.

You can see our storage business is actually going a little bit up.

But micro Inverters business is the one that is.

Going.

Our locked down now because of our under shipment.

And therefore if.

If you see it's a product mix.

Issue and micro Inverters have a little bit more gross margin.

And then storage and therefore.

With this product mix.

Why we have we have the guidance of non-GAAP gross margin.

42, 43% for the company without Iot with Iot.

non-GAAP gross margin of 48 to 51 so.

In terms of pricing.

I mean, we are not planning to make any broad based pricing changes.

Of course the pricing.

There is a lot of competition, but we have seen competition for the last few years.

Since I've been here, we have a very disciplined.

Business process, it's surprising business processes.

Spa, Phil Shen likes to talk about it.

Special pricing adjustment, we have been doing that forever.

And it is not new.

That's one and also in these times and of course under loading.

We have to work with us.

Contract manufacturers to take care of under loading, but in these times, especially when when do you have.

Multiple suppliers for a particular component.

<unk> is hosting for our components. This is the opportunity where we can drive cost a lot.

So.

Our target I mean, any good company in these times, we should be able to drop our cost by 10% for the year.

And we will be targeting that.

And so we have to talk both equations pricing and costs.

And so we are quite confident in our gross margins. This is what we do it is not new this is what we established when I joined the company because we have a pricing team that prices based on value, we have a world class cost team that.

Some costs.

And it's business as usual for us in these environments.

Alright, Thank you I'll pass it on.

Our next question will come from James West with Evercore ISI.

Hey, good afternoon buttery.

Hi.

Budd.

As we're going through this period of <unk>.

Stocking and some weakness in certain markets.

Understanding that you you've always faced competition and you have a very value based pricing strategy are you seeing any.

Behavior.

By your competitors is somewhat irrational or is the market overall behaving rationally understanding that this will get out of the zoom a few quarters.

Well.

Badrinarayanan Kothandaraman: Yeah, that's a great context, I appreciate it. Just the second one here and I'll pass it on the margins, you know, gross margins, non-gab, it seems like, you know, you're guiding the low 40s X IRA benefit. How much is that, you know, it's down a couple of under bits from what you've been tracking out recently. How much of that is due to pricing, how much due to mix, maybe, can you give us a sense of the margin puts and takes into your end and then do you see anything that works?

I'd be lying if I, if I tell you I am not seeing something aggression of core installers are very stressed right. They do want to take advantage of the lowest cost available.

At a given point in time, so therefore, sometimes without understanding they may want to switch to somebody who is offering low cost.

But we usually.

Most of what installers Adam.

They have a lot of experience they are very well trained now.

Badrinarayanan Kothandaraman: We're putting criminal pressure on the margins into into next year. Thank you. It's pretty simple. Brian, you will understand it quickly. We are, you can see our storage business is actually going a little bit up. Our microinverter business is the one that is going a lot down now because of our under shipment. And therefore, you know, if you see, it's a product mix, you know, issue. And microinverters have a little bit more gross margin than storage.

And they understand the importance of distributed architecture. They understand the importance of single point no single point of failure they understand quality.

They understand customer service and therefore.

You might save a few few dollars upfront but.

If you have a quality problem a service call.

Badrinarayanan Kothandaraman: And therefore, with this product mix, that's why we have, we have the guidance of non-gab, gross margin, 40 to 43 percent for the company without IRA, with IRA, non-gab, gross margin of 48 to 51. So in terms of pricing, I mean, we are not planning to make any broad base pricing changes. Of course, the pricing, you know, there is a lot of competition. But, you know, we have seen competition for the last few years since I've been here.

Badrinarayanan Kothandaraman: We have a very disciplined business process. It's a pricing business process. It's called SPAR, Phil Shen likes to talk about it. It's a special pricing adjustment. We have been doing that forever. And it is not new. That's one. And also in these times, you know, of course, under loading, we have to work with our, you know, contract manufacturers, take care of under loading. But in these times, especially when you have multiple suppliers for a particular component, multi-sourcing for a component, this is the opportunity where we can drop costs a lot.

The installer is a truck roll you spend a lot of money in one truckload.

And if you just do one mode.

That said you have no more room there despite the low cost.

So.

It's a penny wise pound foolish strategy.

To do that and Dave.

Realize that and.

If you actually put things in context.

Let us say the pricing is $3 or $3 50 per watt you look at the inverter bill of materials.

Probably of the order of 10%.

Should you play around there.

Should you take a lot of risks there and it's their call at the end of the day and many of them.

Our way is to say, we are not going to make that call.

So.

I mean, we have a lot of robust discussions. This is the time, where we are talking to customers more than ever.

We have a lot of other tools at our disposal for example solar graph.

We do design and proposal we.

We can generate leads for installers at very economic rates.

We can help them on permitting services for example.

Sometimes even free of charge.

We have a lot of tools at our disposal to reduce their soft costs.

And that's critical because we have to look at everything.

And are we cannot look at component level, we have to look at the full system level in these times.

Badrinarayanan Kothandaraman: So our target, I mean, any good company in these times, we should be able to drop our cost by 10 percent for a year. We'll be targeting them. And so we have to talk both the equations, pricing and cost. And so we are quite confident in our gross margins. This is what we do. It is not new. This is what we established. When I joined the company, we have a pricing team, that price is based on value, we have a world class cost team that works on costs, and its business is usual for us in these environments.

And once you start looking at that and have these discussions usually comes comes back too.

We get more market share not less.

And model more installers want to move to us not less.

You can see some evidence of that in the third party reports.

Okay. Okay got it that's very helpful. Badri. Thank you and then just one quick follow up for me you mentioned producing IQ batteries in the U S by Middle 2024.

Did you give a capacity number along with it.

We have not given we will provide more details as we come close to that date.

Badrinarayanan Kothandaraman: All right, thank you. I'll pass it on. Our next question will come from James West with Evercore ISI. Hey, good afternoon, bothering. As we're going through this period of stalking and some weakness in certain markets, understanding that you've always faced competition and you have a very value based pricing strategy, are you seeing any behavior that's, you know, by your competitors that is somewhat irrational, or is the market overall behaving rationally, understanding this.

Okay got it.

Thanks.

Yes. Thank you.

Our next question will come from Eric Stine with Craig Hallum. Please go ahead.

Hi, everyone.

So.

Just talking about California, I can appreciate talking or thinking about that as a wildcard.

Given what's going on in the market, but if I think about the expectation that that market stays flat, but then the hangover from NIM, which you said has a few quarters here left to work out.

Badrinarayanan Kothandaraman: We'll get out of this. A few quarters. Well, I'll be lying if I, if I tell you I'm not seeing something in rational. Of course, you know, installers are very stressed, right? They do want to take advantage of the lowest cost available at a given point in time. So, therefore, you know, sometimes without understanding, they may want to switch to somebody who's offering low cost, but we usually, you know, most of our installers are.

I don't want to put words in your mouth, but I mean is it fair to say that there is some cautious optimism about California as we get into the back half of next year.

Badrinarayanan Kothandaraman: You know, they have a lot of experience. They are very well trained now and they understand the importance of distributed architecture. They understand the importance of single point, no single point of failure. They understand quality. They understand customer service. Yeah, you look at the inverter bill of materials, probably of the order of 10%. Should you play around there? Should you take a lot of risks there? And it's their call at the end of the day and many of them are wise to say we're not going to make that call.

Absolutely yes.

As we get into the back of absolutely, meaning one as the utility rates are continuing to go up the second is.

Let's assume the utility rates go up even by half the amount of the advertise.

The payback like what I've said is going to become.

For our solar plus storage system is going to become the same almost the same as the solar only Mendoza.

And.

The economics are there actually today.

The battery can not only provide resilience.

It can help the grid during times of stress in August and September when the grid needs. The most so it's a combination.

You'll get resilience for yourself, you make money by providing <unk> services, which is incorporated into the utility rates right now.

And we are well positioned to fill.

They are doing that why because we got we got great micro Inverters number one we got batteries now that can discharge.

Very high powered double the power of earlier batteries why is that important because during certain hours.

You have the utility paying you a lot for exporting power to the grid and what we can do because of our high discharge rate during those times, we can maximize the power.

So we can do that so we have solar plus storage.

And of course, we have.

Complete energy management software.

And we couple that with our solar graph design and proposal tool we have.

Badrinarayanan Kothandaraman: So, I mean, we have a lot of robust discussions. This is the time where we are talking to customers more than ever. We have a lot of other tools that are disposal. For example, solar graphs, we do design and proposal. We can generate leads for installers at very economical rates. We can help them on permitting services, for example, sometimes even free of charge. We have a lot of tools at our disposal to reduce their soft cost.

Everything.

All the optimization at the fingertips of the homeowner.

Many times they need to do nothing he just needs to turn our optimization engine.

The right thing for him.

So we are absolutely very bullish about California towards the second half of 2024.

Got it.

And maybe just sticking with California for my follow up.

With NIM.

That whole that transition takes place being the biggest factor.

Badrinarayanan Kothandaraman: And that's critical because we have to look at everything, you know, we cannot look at component level, we have to look at the full system level in these times. Okay, got it, that's very helpful, but we thank you. Just want to quick follow up for me. You mentioned producing IQ batteries in the US by middle of 2024. Did you give a capacity number along with that? No, we have not given, we will provide more details as we come close to that day.

What are some of the other factors that could cause California to be a wildcard what are the things that are may be top of mind for you that could cause that market take another leg down.

Yes.

And then I think you mentioned all of the potential tailwind.

And remember in an environment, where the demand.

Per home is continuing to go up people are continuing to electrify people are buying more and more evs heat pumps et cetera, and couple that with utility rates, where they are in and going further up. This is youre right. The right solution solar plus battery is the right solution at the energy management software.

Badrinarayanan Kothandaraman: Okay, got it. Thanks. No, thank you. Our next question will come from Eric Stein with Craig Howell. Please go ahead. Hi, everyone. So just talking about California, I can appreciate talking or thinking about that as a wild card. Given what's going on in the market, but if I think about the expectation that that market stays flat, but then the hangover from them, you know, which you said has a few quarters here left to work.

He is absolutely the right solution in order to drive.

Roy in.

And as well as reduce your payback.

And to that end, what we have done as well as a lot of education into the marketplace.

In terms of explaining to people.

The benefit.

Our solar plus battery system, with energy management, and et cetera, and going out there and educating the market as well as providing them with a lot of tools.

Badrinarayanan Kothandaraman: I don't want to put words in your mouth, but I mean, is it fair to say that there is some cautious optimism about California? Is we get into the back half of next year? Absolutely yes. As we get into the back of absolute meaning one is the utility rates are continuing to go up. The second is, let us assume the utility rates go up even by half the amount they advertise. The payback, like what I said, is going to become, I mean, for a solar plus storage system is going to become the same as almost the same as the solar only meant to system.

In this environment, where demand is going up you have the education you have there to our financials out there the payback is very good.

That's the reason why we are extremely bullish about.

California coming back strongly so to answer the question in another way the headwinds are.

Headwinds that we see already a installers.

I don't think adjudicated by by Us.

Properly if we don't do a good job of educating the installers things can stall out a little bit. So it is important for us and other companies do in this in this space too.

To make sure the installers and whatever.

We provide installers the tools are very easy to use so that they can sit at the kitchen table and look at the homeowner and day and say.

Badrinarayanan Kothandaraman: And, you know, the economics are there actually today. The battery can not only provide resilience, it can help the grid during times of stress in August and September when the grid needs it the most. So, it is a combination of, you know, you get resilience for yourself, you make money by providing grid services which is incorporated into the utility rates right now. And we are well positioned to doing that, why? Because we got great microinverter number one.

Your payback is six years and here is why your payback of six years and explained to them very confidently and it's not just enphase. It is enphase plus our competition plus all of the energy companies.

All of us have to do our job in training the.

Our installers and I think that is of course.

That's a piece that is.

Not very easy to do and.

You cannot have enough of it.

So.

That's the biggest headwind that I see.

Badrinarayanan Kothandaraman: We got batteries now that can discharge at very high power, double the power of our earlier batteries. Why is that important? Because during certain hours you have the utility paying you a lot for exporting power to the grid. And what we can do, because of our high discharge rates, during those times, we can maximize the power. So, we can do that. So, we have solar plus storage. And of course, we have complete energy management software.

Okay. Thank you.

Our next question will come from Colin Rusch with Oppenheimer. Please go ahead.

Thanks, So much guidance can you talk a little bit about how much modulation you can.

You can do with the Opex as you look at investing in.

Incremental programs in bringing this product to market.

Is there some incremental color that you can do is there are there is going to be a.

Our regular spend increase of R&D side.

No I mean, we are cutting opex by 12% from Q.

Badrinarayanan Kothandaraman: And we couple that with our solar graph design and proposal tools. We have... Everything, you know, all optimization acts, the fingertips of the homeowner, and many times he needs to do nothing. He just needs to turn our optimization engine. It'll do the right thing for him. So we're absolutely very bullish about California towards the second half of 2024. Got it. And maybe the sticking with California for my follow up, you know, with them, you know, is that whole.

Q3 to Q4, how are we doing that.

<unk>.

We are on a we're on a hiring freeze except for crude.

Critical positions for example in <unk>.

In sales.

And customer service and to a little bit.

On the innovation site there so basically that has got a big effect on.

Bringing down costs the other one the other ones are there.

Few professional expenses like for example, this is the time, where we look at a lot of effect.

Badrinarayanan Kothandaraman: That transition takes place being the biggest factor. I mean, what are some of the other factors that could cause California to be a wild card? What are the things that are maybe top of mind for you that could cause that market to take another leg down? Yes, this is Ragu. And as you mentioned, all of the potential tailwinds that are there, remember in an environment where the demand per home is continuing to go up, people are continuing to electrify, people are buying more and more EVs, heat pumps, etc.

<unk> and are cutting out a lot of fat in the company for example.

When the companies are doing well we do.

Hired a lot of contractors.

And.

Badrinarayanan Kothandaraman: And to that end, what we have done as well is a lot of education into the marketplace in terms of explaining to people, you know, what the benefits of, you know, solar plus battery system with energy management and etc and going out there and educating the market as well as providing them with a lot of tools. So in this environment where demand is going up, you have the education, you have the tools, financials are there, the paybacks are very good.

We are looking at all of those and we have taken all the necessary actions to.

<unk>.

Cut that level as well.

And of course.

As we as we continue to grow I cannot I cannot deny that there is that as some fact that before we can easily cut another area.

We were able to cut about 12% we are always looking forward.

Further room to cut because we'd like to get back towards baseline of Opex pretty quickly, which is 15% of sales.

So.

We'll give the guidance accordingly and of course this is a dislocation and revenue and that is temporary but we're very cognizant of that.

We're always going to be trying to operate close to a <unk> model to 15% of sales.

Excellent and then on the components side given the change in volumes that you guys are working through on the <unk> side.

Obviously, youre guiding to reasonably stable gross margins here, but I'm, assuming that there's going to be some.

Badrinarayanan Kothandaraman: That's the reason why we are extremely bullish about California coming back strongly. So in order to answer the question in another way, the headwinds are, you know, headwinds that we see are if installers, you know, aren't educated by us properly. If we don't do a good job of educating the installers, things can stall out a little bit. So it is important for us and other companies to in this space to make sure the installers, you know, whatever we provide installers, the tools are very easy to use so that they can sit at the kitchen table and look at the homeowner and die and say your payback is six years.

Breakpoints on the components that you may run into with a negative impact could you just talk a little bit about how your suppliers are scaling balancing out here over the next quarter or two or three.

What that might do to your your Cogs line.

Yes, I mean, it is a tough situation, but our contract manufacturers no question.

And but we have great partners here.

We have flex.

Amazing partners, who help does.

When we were.

Especially 2017 2018.

When we had some tough times they were dead right with US Cellcom also a great partner.

So we work well together we do have this is the time, where both of US can recognize saying. Okay is this a short term problem is this a long term problem can we do things structurally.

Badrinarayanan Kothandaraman: And here is why your payback is six years and explained to them very confidently. And it's not just in faith, it is in faith plus our competition, plus all of the energy companies, all of us have to do our job in training the, you know, installers. And I think that is of course that's a piece that is not very easy to do and you cannot have enough of it. So that's the biggest headwind that I think.

Recognize that both of us need to be profitable not just one versus the other.

And we do take some necessary actions and.

All of those are confidential in terms of our relationships.

We cannot disclose the actions we are taking.

But our P&L always incorporates all of these.

And so.

The message is over the next few quarters, we will continue to work with them. We will give you the P&L transparently.

The guidance for gross margin.

But we are very confident that.

Badrinarayanan Kothandaraman: Okay, thank you. Our next question will come from Colin Rush with Oppenheimer, please go ahead. Thanks so much, guys. Can you talk a little bit about how much modulation you can do with the op-ax? As you look at investing in its incremental programs and bringing this product to market, is there some incremental cut-in that you can do, or there's going to be a regular spend increase on R&D side? No, I mean, we are cutting up X by 12% from Q3 to Q4.

We are finding the right solutions working together.

Okay. Thanks, so much guys.

Thank you.

And our next question will come from Philip Shen with Roth Capital. Please go ahead.

Hey, guys. Thanks for taking my question.

You brought up spas, so I figured I'd.

Jumping with a question on that.

As you know our checks have come up with lower micro pricing under a bunch of spa agreements on the order of 10%.

Badrinarayanan Kothandaraman: How are we doing that? We are on a hiring freeze except for critical positions, for example, in sales and customer service and to a little bit on the innovation side there. So basically, that has got a big effect on bringing down costs. The other ones, there are a few professional expenses, like for example, this is the time where we look at a lot of fat fat, cutting out a lot of fat in the company.

Does that resonate with you at all or is that off base.

You often will get something in return for some kind of price.

When you negotiate the spas maybe.

Exclusivity or higher volume.

Can you just talk through that a little bit.

Then Mandy can you talk through how spa counting you might work on your income your your financial statements for example, do you.

Net the spa.

The refunds.

Against your sales you have net sales or do you accrue a liability on your balance sheet.

So.

Badrinarayanan Kothandaraman: For example, when the companies are doing well, we do hire a lot of contractors. And we are looking at all of those and we have taken all the necessary actions to cut that level as well. And of course, as we continue to grow, I cannot deny that there is some fat that we found we can easily cut in other areas. We are able to cut about 12%. We are always looking for further room to cut because we'd like to get back to our baseline of X pretty quickly, which is 15% of sales.

Spot first of all for the others in the calls Boston.

<unk> pricing adjustment.

It is it is a business process that has been forever at Enphase.

And it is.

Always happening it's business as usual.

A large fraction of our business you really happens at what we call as any LP, which is the distributor list price.

And.

If business happens at <unk>, there is no spot.

For a small fraction of our customers depending upon.

How the volumes May go up.

Within the quarter next quarter.

Badrinarayanan Kothandaraman: So, you know, we'll give the guidance accordingly. And of course, this is a dislocation in revenue and that is temporary, but we're very cognizant of that and we're always going to be trying to operate close to our model to 15% of sales. Excellent. And then on the component side, given the change in volumes that you guys are working through on the microverse side, you know, obviously you're guiding to reasonably stable growth margins here.

Depending on their forecast we.

We lose parts.

<unk>.

You have a volume price curve.

And when the volume goes up the price comes down.

And that's how it is and that process is very active it's always been inactive.

Is the one I instituted six years ago, when I came and the accounting for that is unchanged whatever it is exactly what we have done in the last six years.

So.

Can.

Badrinarayanan Kothandaraman: But I'm assuming that there's going to be some breakpoints on the components that you may run into with a negative impact. You just talk a little bit about how your suppliers are scaling down with you here or in that quarter or two or three, and what that might do to your cobs line. Yeah, I mean, it is a tough situation for our contract manufacturers. No question. But we have great partners here.

You talk about a $10 reduction all of those are anecdotal they don't matter.

One customer doesn't matter, it's not a trend.

It is a large fraction of our customers by Atlas price.

So.

I'd like you to if that is a broad based pricing adjustments we will.

And we are telling you right now that there is no broad based pricing adjustment for US yes, we will continue to those but that's the way of life for us.

Badrinarayanan Kothandaraman: We have Flex, an amazing partner who helped us when we were, you know, especially 2017, 2018, when we when we had some tough times, they were there right with us. Sal Combe, also a great partner. So we work well together. We do have, this is the time where both of us can recognize saying, okay, is this a short term problem? Is this a long term problem? Can we do things structurally? We recognize that both of us need to be profitable, not just one versus the other.

And sometimes it is available to us to lock.

Market share for the mix.

X amount of quarters, and we will do that it's business as usual nothing new.

Okay.

And Sir your accounting question.

Yes, we are accruing for spa rebate, our liability by when we recognize revenue that assertion.

Badrinarayanan Kothandaraman: And we do take some necessary actions. And all of those are confidential in terms of our relationship. I mean, we cannot disclose the actions we are taking. But our P and L always incorporates all of these and so the message is over the next few quarters, we will continue to work with them, we will give you the piano transparently in the guidance for Gross-Morgent, but we are very confident that, you know, we are finding the right solutions working together.

Future potential rebates for the current quarter shipping we are core.

A reduction in revenue and is the liability.

Balance sheet.

Same accounting process will change right.

Alright, great. Thanks, guys Okay.

Shifting gears.

I appreciate that color. Thank you.

I know you don't have any official guidance for 'twenty four but was wondering if you could talk through how you expect margin to trend by quarter and 24. So you gave some perspective on Q1.

There was under shipment there.

Badrinarayanan Kothandaraman: Okay, thanks so much, guys. Thank you. And our next question will come from Philip Shen with Roth Capital, please go ahead. Hey guys, thanks for taking my question. Budger, you brought up Spaz, so I figured I'd jump in with a question on that. As you know, our checks have come up with lower micro pricing under a bunch of spa agreements on the order of 10%. Does that resonate with you at all, or is that off base?

Close to Q4 due to product mix.

So should we expect Q1 margins to be similar to Q4, because that product mix is maybe more heavily skewed to.

Batteries again, and then due to product mix returning back in this base case to micros more micros potentially in Q2 after the under shipment in Q4, and one would you expect margins to return back to the pre under shipment levels.

Badrinarayanan Kothandaraman: I know you often will get something in return for some kind of price when you negotiate the Spaz, maybe an exclusivity or higher volume. Can you just talk through that a little bit? And then Mandy, can you talk through how spa accounting might work on your financial statements? For example, do you net the spa, like the refunds against your sales, you have net sales, or do you accrue a liability on your balance sheet?

In Q2 of 24 in the back half next year.

Yeah, I mean, that's logical.

It is logical.

<unk>.

Q1, what you said is right.

Correct similar levels of course, we are not giving guidance, but I'm, just giving trends and then Q2, we we expect it to because the mix is going to change the micro inverter mix is going to be a little bit higher than the prior quarter. So we expect that logically.

Correct.

Great. Okay. Thanks, guys I'll pass it on.

Badrinarayanan Kothandaraman: Thanks. So spa, first of all, for the others in the call, spa stands for special pricing adjustment. It is a business process that has been forever at NFS. And it is always happening. Its business is usual. But a large fraction of our business usually happens at what we call it, any LP, which is the distributor list price. And if business happens at any LP, there is no spa. But for a small fraction of our customers depending upon how their volumes may go up within the quarter, next quarter, depending on their forecast, we do spa.

Our next question will come from Mark Strouse with Jpmorgan. Please go ahead.

Yes, thanks for taking our questions I believe I asked this on the on the <unk> call as well, but just kind of given the <unk>.

Precipitous decline in valuations across the space.

Worth revisiting.

You are obviously sitting on a pile of cash here you continue to generate cash.

Just curious your latest thoughts on M&A.

Something that you are planning on leaning into until the macro improves here.

Yes.

We do take a look at a number of companies.

All the time every week I have an M&A meeting at a lot of companies that come.

We are very careful, especially in these times to not buy something.

Badrinarayanan Kothandaraman: Spa's are, you have a volume price curve. And when the volume goes up, the price comes down. And that's how it is. And that process is very active. It's always been active. It's the one I instituted six years ago when I came. And the accounting for that is unchanged. Whatever it is exactly what we have done in the last six years. So, you know, you talk about a $10 reduction. All of those are anecdotes.

In a hurry.

They're also capable of.

Making sure that that company is aligned.

Of course in terms of strategic fit and cultural fit.

The farmer is extremely important.

Important the latter is.

Is practically even more important.

So.

The areas that we usually look forward.

And Ah mode in the energy management software.

Badrinarayanan Kothandaraman: They don't matter. One customer doesn't matter. It's not a trend. It is a large fraction of our customers by at the list price. So, you know, I'd like you to, you know, if there is a broad-based pricing adjustment, we will tell you. And we are telling you right now that there is no broad-based pricing adjustment from us. Yes, we will continue to do spa. That's the way of life for us. And sometimes it is the way for us to lock market share for the next.

Sometimes in.

Home automation for example.

Small commercial solar.

Any innovation in batteries, we look for these usually we like.

We like smaller companies bolt on acquisitions, that's what we have done have now.

But I mean, we're looking at all all kinds of companies. Please stay tune if we're going to move on something.

It won't be without <unk>.

Badrinarayanan Kothandaraman: You know, X amount of quarters. And we'll do that. It's business is usual. Nothing new. So, Phil, to answer your accounting question, yes, we accrue for spa rebates as our liability, right? When we recognize revenue, the associate at future potential rebates for the current quarter-shipping, we accrue a reduction in revenue and its liability on our balance sheet. Same accounting process, no change. Great, thanks guys. Okay, and then shifting gears, appreciate that color, thank you.

Okay. Thanks, Badri and then just a real quick follow up.

Apologize if I missed this but was there an update on the small commercial product.

Timing or any color there.

Yes, yes. There was we are right now doing beta installations as we speak the product is working great. We.

We expect to introduce this product in this quarter current quarter, and we expect to make some.

Some reasonable revenue out of this product in Q4.

Okay. Thanks, Patrick.

Yes.

Our next question will come from Steve Fleishman with Wolfe Research. Please go ahead.

Badrinarayanan Kothandaraman: I know you don't have any official guidance for 24, but was wondering if you could talk through how you expect margin to trend by quarter in 24. So, you gave some perspective on Q1, there's under shipment there, close the Q4. So, due to product mix, so should we expect Q1 margin to be similar to Q4? Because that product mix is maybe more heavily skewed to batteries again, and then due to product mix returning back in this base case to micros, more micros, potentially in Q2, after the under shipment in Q4 and 1, would you expect margins to return back to the pre-under shipment levels in Q2 of 24 and back out next year?

Yes, hi, thank you.

The.

$150 million of under ship that Youre talking about could you break that out between the U S and Europe.

Badrinarayanan Kothandaraman: Thanks. Yeah, I mean, that's logical. It is logical. You know, Q1, what you said is right. We expect similar levels. Of course, I'm not giving guidance, but I'm just giving trends. And then Q2, we expect it to, you know, because the mix is going to change. The microinverter mix is going to be a little bit higher than the prior quarter. So, we expect that logical. That's correct. Great. Okay. Thanks, guys. Our next question will come from Mark Strumps with JP Morgan.

I would say approximately equal between the two.

Okay.

Thank you and then in Europe. The impact of you mentioned two things the weaker demand and then also the.

Issues with the distributors.

Destocking like could you just.

Give some flavor of what.

When you look at the weakness you started to see whats what are they about equal drivers is one.

Kind of dominating the other yes.

Yes.

Actually to tell you the truth every country is little bit different.

Clubbing them together.

Under macroeconomics will not do justice, but there are some a few factors let me tell you.

Overall, the thing that can be generalized it's basically if.

If you if you rewind to last year.

All distributors installers consumers, where literally we had a lot more aggressive due to the Ukraine crisis.

Badrinarayanan Kothandaraman: Please go ahead. Yes, thanks for taking our questions. I believe I asked this on the QQ call as well, but just kind of given the precipitous decline and valuations across the space, I thought it's worth revisiting. You know, so you're obviously sitting on a pile of cash or you can continue to generate cash. Just curious your latest thoughts on, on M&A, if that's something that you're planning on leaning into until the macro improvements here.

The Ukraine crisis, the shortage of natural gas caused many countries to be very aggressive pulling their plans for renewables and we saw a huge spike in virtually every country in Europe.

Solar plus storage everybody started talking up a lot.

We also profited from that our revenue also peaked.

But then that enthusiasm.

Yes.

A little bit tempered right now.

And because of that.

Badrinarayanan Kothandaraman: Yeah. We do take a look at the number of companies all the time every week. I have an M&A meeting and a lot of companies that come. We are very careful, especially in these times, to not buy something in a hurry. We're also careful of, you know, making sure that that company is aligned, of course, in terms of strategic fit and cultural fit. The former is extremely important. The latter is practically even more important.

What's happening is the distributors suddenly realizing.

That they got more on their hands.

And also in.

In our earlier.

Maybe a year and a half back with product availability wasn't that tight because of that increase in demand, but now all of the suppliers are geared up especially panels.

Product availability of pilots is very high so.

A lot of over inventory, particularly on the patents has happened and district that is hurting.

Badrinarayanan Kothandaraman: So the areas that we usually look for are, you know, more in the energy management software, you know, sometimes in, you know, home automation, for example. Sample, Small Commercial Solar, Any Innovation in Batteries, we look for these, usually we like smaller companies, bolt-on acquisitions, that's what we have done, have now, but I mean we are looking at all kinds of companies, please stay tuned, if we hear, we're going to move on something, it won't be without you knowing.

Pressure on the distributors because they are purchased inventory at higher prices before and now the prices have collapsed on panels.

So.

That has some financial weakness there.

But again they are.

So therefore, they are conservative now and they want to hold.

Less inventory as possible. So thats the kind of a macroeconomic now let's come to Netherlands, our biggest market Netherlands has got very.

A very interesting dynamic that when I went there two weeks ago, because I went there.

When I heard that our demand was dropping I got concerned I went there.

Badrinarayanan Kothandaraman: Okay, thanks, Patrick, and then just a real quick follow-up, I apologize about this, but was there an update on the small commercial product, the timing or any color there? Yes, yes, there was, we are right now doing beta installations, as we speak, the product is working great, we expect to introduce this product in this quarter, current quarter, and we expect to make some reasonable revenue out of this product in Q4. Okay, thanks, Patrick, yes, our next question will come from Steve Fleischman, with World Research, please go ahead.

And when I looked at it.

Netherlands situation is actually not so bad.

You see.

Their payback is about six years, but they had.

<unk> recently, a couple of maybe two or three months ago, We're an energy company called when Randy Brown.

Basically.

Said that too.

Who the consumers are saying, we're going to charge you a penalty to export solar back into the grid.

And in <unk>.

It's a very small fraction that at about 30 35 energy companies I think in Netherlands at the deregulated market Randall Crown is one of them. They serve about 3% of customers. They basically said that Oh, we're going to charge you an export penalty. All they were trying to do is to put some pressure on the government.

Badrinarayanan Kothandaraman: Yeah, hi, thank you, the 150 million of undership that you're talking about, could you break that out between the US and Europe? Or say approximately equal between the two. Okay, thank you, and then in Europe, the impact of, you mentioned two things, the weaker demand, and then also the issues with the distributors destocking, like, could you just give some flavor of what, when you look at the weakness you started to see, what are they about equal drivers, is one, you know, kind of dominating the other, yeah.

You need to help us with net metering because.

The simple fact of the mattress, Netherlands has got wind it's got solar.

It is $2 2 million homes with solar out of 7 million homes.

These if they.

Chart two.

Export solar energy in a random manner. The energy companies are finding they cannot handle that isn't.

So they are putting pressure on the government too.

Badrinarayanan Kothandaraman: Yeah, actually to tell you the truth, every country is a little bit different, you know, clubbing them together, under macroeconomics will not do justice, but there are some, a few factors, let me tell you, overall thing that can be generalized, is basically, if you rewind that to last year, all distributors, installers, consumers were a little, were a lot more aggressive due to the Ukraine crisis, the Ukraine crisis, the shortage of natural gas caused many countries to be very aggressive, to pull in their plans for renewables, and we saw a huge spike in virtually every country in Europe. Solar plus storage, everybody started talking up a lot, and we also profited from that, our revenue also peaked, but then that enthusiasm is, you know, a little bit tempered right now, and because of that, what's happening is the distributors suddenly realizing that they got more on their hands, and also, you know, earlier, maybe a year and a half back, the product of availability wasn't that high, because of that increase in demand, but now all of the suppliers are geared up, especially panels.

Okay, net metering needs to evolve into something where the.

The customers have.

Self consumption, which is solar plus storage.

And so its actually extremely good for us.

But the way they are doing it.

Is of course, a little bit disrupted so that is another.

<unk> is going to respond once it is in place now that is.

Our election happening net metering clarity is going to come probably probably after that.

And.

But the way, it's going to evolve in this market.

And our net metering will still last until 2025. So we are covered for the next two years.

With good payback and then the payback will be.

We will be maintained after that with the combination of solar.

Our storage.

Plus dynamic tariffs, which is getting popular thing.

So.

That's the big picture in Netherlands, many of the European countries.

<unk>.

In a similar way many of them.

Have garnered dynamic Dennis Germany is a little bit little bit ahead, they don't have dynamic tariffs, but they introduced feed in tariffs.

Rich very similar to net metering export is not paid.

As much as important in fact, there is only a fraction that is way, Germany, you find 80% attach rate on batteries.

Badrinarayanan Kothandaraman: Product availability of panels is very high. So a lot of over-inventory particularly on the panels has happened. And that is putting a pressure on the distributors because they have purchased inventory at high prices before and now the prices have collapsed on panels. So there is some financial weakness there, but again they are, so therefore they are conservative. Now and they want to hold as less inventory as possible. So that's kind of a macroeconomic.

So.

Long answer to your question, but that's the color on Europe.

I guess just to wrap the topic up overall, just let's say, we continue to move away from the kind of Ukraine energy crisis conditions.

But we do have these markets each put in these changes just does your kind of expectation of Europe kind of improving.

Can it be driven just by these market by market changes or do you need.

Do you need to see some kind of move up in energy prices again.

Badrinarayanan Kothandaraman: Now let's come to Netherlands or biggest market. Netherlands has got very interesting dynamic that when I went there two weeks ago, because I went there, when I heard that our demand was dropping, I got concerned, I went there and when I looked at it. Netherlands situation is actually not so bad. If you see, their payback is about six years. But they had, you know, they had a scare recently, a couple of maybe two or three months ago where an energy company called Wanda Braun basically said that to the consumer saying we are going to charge you a penalty to export solar back into the world.

Well I didn't talk about energy prices energy prices are also increasing.

In places like France, the energy prices are also going up so I.

Energy prices are going to help us the utility rates are increasing and so that is that is definitely going to be a tailwind, but make no mistake. Despite all of this in a place like Netherlands, two gigawatts of solar in a place like France. The payback is extremely good.

Five to six years, where can you get that even just for solar is going to evolve into into solar plus storage with the pay back up maybe seven to eight years, but still very good.

For our 25 year product so.

That is a smart small dislocation right now due to inventory issues due to these but that's why we expect.

Badrinarayanan Kothandaraman: Wanda Braun is a very small fraction. There are about 35 energy companies, I think in Netherlands. It's a deregulated market. Wanda Braun is one of them. They serve about three percent of customers. They basically said that, oh, we are going to charge you an export penalty. All they were trying to do is to put some pressure on the government saying you need to help us with neck metering because you know, the simple fact of the matter is Netherlands has got wind.

The ramp up.

Normalized I won't say transmission revenue recovery.

<unk> revenue recovery it leads to some level in Europe.

Great. Thank you.

Our next question will come from Jeff Osborne with Cowen. Please go ahead.

Yeah. Thank you Badri I was just curious on your expectation for <unk> recovery. What is your working assumption on normalized inventory in the channel I think in the past you had talked about eight to 10 weeks and assuming that it's still the case I guess is there an argument.

Badrinarayanan Kothandaraman: It's got solar. There is 2.2 million homes with solar out of 7 million homes. These, if they start to export solar energy in a random manner, the energy companies are finding they cannot handle that easily. So they are putting pressure on the government to say, okay, neck metering needs to evolve into something where the customers have, you know, self-consumption, which is solar plus shortage. And so it's actually extremely good for us there, but the way they are doing it is of course a little bit disruptive.

That.

Now that manufacturing is localized in continent by both yourselves as well as competitors that.

Wouldn't that number be five or six weeks and maybe pressure will continue into Q2.

Yes, I mean.

So what youre, saying is possible, but we don't think so so I'll give you a quick quick primer on the weeks on hand, so you.

You follow it.

And I think generally yes.

Mike.

Badrinarayanan Kothandaraman: So there is, you know, the government is going to respond once it is in place. Now there is a, you know, election happening. Net metering clarity is going to come probably, probably after that. And, you know, but the way it's going to evolve is this market. Net metering will still last until 2025. So we are covered for the next two years with good payback. And then the payback will be maintained after that with the combination of solar plus storage.

Yes in order to say that for the debris everybody followed the for example, if you have.

Let's say you start off with 100 units.

At the beginning of a quarter.

In the channel.

And let us say you drained inventory.

At.

10 weeks, I mean 10 units a week.

And they also.

Sure.

You also ship into the channel.

10 units a week.

Okay.

Do you ship into the channel at 10 units a week you drained from the channel that 10 units a week.

Badrinarayanan Kothandaraman: Bush, plus dynamic tariffs, which is getting popular there. So, that's the big picture in Netherlands. Many of the European countries are evolving in a similar way. Many of them have gotten dynamic tariffs. You know, Germany is a little bit ahead. They don't have dynamic tariffs, but they introduce feed-in tariffs, which very similar to net metering. Export is not paid. As much as important. In fact, it's only a fraction. That is why Germany, you find 80% of that rate on metering.

Okay.

Therefore at the end of the quarter, you'll find yourself at the same hundred because 100, plus 130, which is 13 weeks.

Minus 130, <unk> you have 100 units at the end of the quarter you ask yourself what is the weeks on hand.

You say that as hundred divided by 10.

That's 10 weeks.

So remember that number 10 weeks.

Now I would say Oh, my demand is suddenly dropped by let's say 40%.

Badrinarayanan Kothandaraman: So, long answer to your question, but that's the color on Europe. I guess just to wrap the topic up overall, just let's say we continue to move away from the kind of Ukraine energy crisis conditions. But we do have these markets, each put in these changes. Just because you're kind of expectation of Europe and kind of improving, can it be driven just by these market-by-market changes? Do you need to see some kind of move up in energy prices again?

That means.

I have.

Full units.

Weak.

That is accumulated.

So that that means and as you might shift the same number of units into the channel because I am slow in recognizing.

The situation has changed.

So let it says total ship the same hundred 30 as before.

But now my Dream.

It's only 78 instead of 130 <unk>.

Therefore to end up with 40 units excess per week, which is.

Badrinarayanan Kothandaraman: Well, I didn't talk about energy prices. Energy prices are also increasing. In places like France, the energy prices are also going up. Energy prices are going to help us. The utility rates are increasing. That is definitely going to be a tailwind, but make no mistake. Despite all of this, in a place like Netherlands, two gigawatts of solar, in a place like France, the payback is extremely good still. Five to six years.

52 units more than the last kit. So now I have at the end of the quarter of 152.

The 152, but.

My end customer demand is only six units a week.

So I would tell you that my weeks on hand, now is 150 to over six.

With just 25 weeks.

So I suddenly go my weeks on hand increases by 150%.

Badrinarayanan Kothandaraman: Where can you get that? Even just for solar. It's going to evolve into solar plus storage with the payback of maybe seven to eight years, but still very good for a 25-year product. There is a small dislocation right now due to inventory issues, due to these, but that's why we expect the ramp up. I won't say normalization. Revenue recovery. A quick revenue recovery, at least to some level in Europe. Thank you.

Due to a 40% drop in demand.

If I am I continue to be oblivious.

Off and are continuing to be oblivious and ship the same material into the channel.

So.

It can blow up disproportionately.

Right and of course, the further the demand dropped the further year weeks on hand will go up and the converse is true.

If the demand improves a little bit the weeks on hand is going to come down fast.

No.

We think that the distributors I mean, we'll look at we'll look at logical things there because even at 10 to 12 week inventory.

Badrinarayanan Kothandaraman: Our next question will come from Jeff Osborne with a power. Please go ahead. Thank you. Audrey, I was just curious on your expectation for a 2Q recovery. What is your working assumption on normalized inventory in the channel? I think in the past you talked about eight to ten weeks and assuming that it's still the case. I guess is there an argument that now that manufacturing is localized and continent by both yourself as well as competitors that why wouldn't that number be five or six weeks and maybe pressure would continue into Q2?

Will it be the similar dollar number that they have had it in the past yeah. In fact, a lesser dollar number that they've held in the past so.

Badrinarayanan Kothandaraman: Yeah, I mean, what you're saying is possible, but we don't think so. I'll give you a quick primer on the weeks on hand, so you follow it. I think generally I'd like to say that so that everybody follows it. For example, if you have, let's say you start off with a hundred units, at the beginning of a quarter in the channel and let us say you drain inventory at ten weeks, I mean ten units a week and you also ship into the channel at ten units a week, okay, so you ship into the channel at ten units a week.

We think logic will prevail and.

Of course and market demand could change all of that pretty pretty quickly.

<unk> <unk>.

Weeks on hand as is.

This is not something that you that is obvious it can really change drastically.

By small changes in demand.

And I gave you. The example, there.

I appreciate that my follow up is and correct me, if I'm wrong, but I think youre allowed to under the IRA export U S manufactured goods.

International jurisdictions is that something that you're already doing or B, you intend to do in 2024.

Badrinarayanan Kothandaraman: And then from the channel at ten units a week, therefore at the end of the quarter you find yourself at the same hundred, because hundred and thirty, which is thirteen weeks, minus a hundred and thirty, you have a hundred units at the end of the quarter, you ask yourself what is the weeks on hand, you say that is hundred divided by ten, that's ten weeks. So remember that number ten weeks, now I say oh my demand is suddenly dropped by let us say forty percent, that means I have four units a week, that is accumulated, so that means and assume I ship the same number of units into the channel.

Yes, not doing today, but of course, we'll consider.

Badrinarayanan Kothandaraman: Because I am slow in recognizing that the situation has changed, so let us say I still ship the same hundred and thirty as before, but now my dream is only seventy eight instead of hundred and thirty. So I suddenly go my weeks on hand increases by a hundred and fifty percent due to a forty percent drop in demand is I am I continue to be oblivious of you know continue to be oblivious and ship the same material into the channel.

Got it thank you.

And our next question will come from Julien Dumoulin Smith with Bank of America. Please go ahead.

Hey, good afternoon. Thank you guys very much for the time appreciate it.

Wanted to pivot to a slightly different direction here right. So do you have a few of these exclusive deals.

Across a number of different customers, but some some larger ones. If you will I am curious how do you think about how quote unquote locked in those are going into the next year and how you think about working together realistically as partners.

Badrinarayanan Kothandaraman: So it can blow up disproportionately right and of course the further the demand drops the further your weeks on hand will go up and the conversation is true, so if the demand improves a little bit the weeks on hand is going to condone. So we think that the distributors I mean will look at will look at logical things here because even a ten to twelve week inventory will be the similar dollar number that they have held in the past.

Optimizing your value proposition, while dealing in addressing with their respective needs, which are clearly and likely dynamic, especially given the backdrop in California. If you can speak to that those dynamics I know I'm not trying to get into the contract specifics here, but really working with them. If you will and how you think about how locked in that portion of volumes are.

Yes, I mean.

I presume you are talking about one large customer here that's the only one we have.

Which is official.

We love our partners.

We worked very closely with them we value the relationship a lot.

And we are there I mean, we are at their service.

All the time, whether it's quality whether its customer experience.

We value the relationship the loss so.

Yes of course, we will be looking to renew all of those.

Right fair enough, it's difficult to opine too much and then just coming back to all these different contract manufacturing relationships.

It might not be identical here, but how do you think about underutilization costs here I mean, what are the commitments like how flexible are the terms as you look at both flexing down and up the volumes through the course of the year here under these new arrangements.

I did talk about it.

Answering a prior question.

Let's say the same thing here we have.

Great contract manufacturing partners.

Next as beam.

No.

Great Yeah, great photos, they particularly helped us when we were in trouble in 2017.

Thankfully there our relationship has been very healthy even during <unk>.

During these times and we are working.

We are working together sometimes.

If we look at a problem and say is this a short term problem or a long term problem. If it is going.

Going to cause them pain.

We are willing to restructure.

And all of those.

All of those accounting.

In our P&L, we reported as part of our non-GAAP.

GAAP gross margin.

So.

You should read the P&L.

No that everything is there and we.

We view this particular situation.

Yes.

Temporarily, but we are very cognizant of the fact that.

Badrinarayanan Kothandaraman: So we think logic will prevail and of course end market demand could change all of that pretty quickly. So, Vikram Hand is not something that is obvious. It can really change drastically by small changes in demand. I gave you the example there. I appreciate that. My follow-up is encouragement from Ron, but I think you're allowed to, under the IRA, export, US manufactured goods to international jurisdictions. Is that something you're already doing or be you intend to do in 2024?

Under loading is the pain for a contract manufacturer so.

And we think the right approach is to make sure both of us are profitable.

Sure at the bank and.

And we will be doing that.

Okay.

Got it alright, well best of luck as well.

Thank you.

And our next question will come from Andrew <unk> with Morgan Stanley. Please go ahead.

Great. Thanks, so much for squeezing me in.

So I just wanted to come back to a prior question.

So.

It is clear that the demand backdrop is can be tough demand backdrop potentially for the next few quarters.

Can you maybe just discuss the health of the average installer that as a recurring easier of your equipment and their ability to manage through this period and transition to the Tpa model I think there's been some challenges around working capital and tax equity. So I'm, just curious what youre seeing and what youre hearing from some of those many repeat buyers on a smaller scale side of the <unk>.

Badrinarayanan Kothandaraman: Not doing today, but of course, really consider. Got it. Thank you. And our next question will come from Julien Dumoulin Smith with Bank of America. Please go ahead. Hey, good afternoon, team. Thank you guys very much for the time. Appreciate it. Hey, it just wanted to pivot to a slight different direction here, right? So, you have a few of these exclusive deals across the number of different customers, but some larger ones, if you will.

All of our community. Thank you.

Yes, I mean, we.

Badrinarayanan Kothandaraman: I'm curious, how do you think about how, quote, unquote, locked-in those are going into the next year? And how do you think about working together, realistically, as partners, I'm in optimizing your value proposition while dealing and addressing what their respective needs, which are clearly and likely dynamic, especially given the backdrop in California. If you can speak to that, those dynamics, I know I'm not trying to get into that contract specifics here, but really working with them, if you will, and how you think about how locked in that portion of volumes are.

<unk>.

We only here.

The color from.

Other <unk>.

Industry news, but.

We.

We do see.

We do see some transition too.

The leasing model, we do see that.

Clearly.

For us how does it affect us.

We have some great partners.

<unk>.

Badrinarayanan Kothandaraman: Yeah, I mean, I presume you're talking about one large customer here. That's the only one we have, which is official. We love our partners, right? We work very closely with them, we value their relationship a lot, and we are there, I mean, we are at their service all the time, whether it's quality, whether it's customer experience, you know, we value their relationship a lot. So, yeah, of course, we will be looking to renew all of those.

Great Partners, John John Berger is a close friend of mine.

Sunpower.

Ron.

Other other leasing partners, we do business with all of them, they're all great partners.

So for us it is.

Okay.

Loan moves to lease.

Our business I would say there could be some product mix issues, but businesses nominally not affected.

We have heard of it.

Don't from.

A few industry sources that installers in California.

Badrinarayanan Kothandaraman: Right, yeah, fair enough, it's difficult to do a fine too much, and then just coming back to all these different contract manufacturing relationships, I know they might not be identical here, but how do you think about underutilization costs here? I mean, what are the commitments like how flexible are the terms as you look at both flexing down and up the volumes through the course of the year here, under these new arrangements?

The long tail installers, who are.

We werent in business any longer, but we don't have any direct data.

There so.

So I can only tell you what I know.

The of.

Of course, I mean, it is a stressful time for them and we are trying to help them with whatever we can weather it leads leads or weather.

Badrinarayanan Kothandaraman: Right, I did talk about it, answering a prior question, and I will say the same thing here. We have great contract manufacturing partners. Flex has been great for us, they particularly helped us when we were in trouble in 2017. We are grateful there, our relationship has been very healthy even during these times, and we are working together, you know, sometimes we look at a problem and say, is this a short term problem or a long term problem?

We can provide them some other services like our solar graphics sector, whether we can help them with NIM three there.

<unk> business.

<unk>.

We're doing that.

Sure.

That's the color that we have.

Agenda relocate thinking through this.

We do business majority of the business, we do is through distribution.

And the distribution one of the ways, we would see it is in a payment that if we were to do direct business with all of the installers, which we don't we do business with distribution partners. So therefore, we have one level.

Badrinarayanan Kothandaraman: If it is going to cause them pain, we are willing to restructure, and all of those, all of those accounting are in our piano, and Gap Gross Molchan. So, you should read the piano and, you know, know that everything is there. And we view this particular situation, you know, temporary. But we are very cognizant of the fact that underloading is a pain for our contract manufacture. So, and we think the right approach is to make sure both of us are profitable and share the pain.

A little bit.

Away from.

Direct relationship with the long tail installers.

But yes.

Yes that makes sense. Thank you and the other question my other questions have been answered so I'll pause there.

Yeah could you repeat the question.

Okay. Our next question will come from Tristan Richardson with Scotiabank. Please go ahead.

Badrinarayanan Kothandaraman: And we will be doing that. Got it. All right. Well, best of luck guys. We'll see you soon. Thank you. And our next question will come from Andrew Percoco with mortgage family. Please go ahead. Thanks so much for squeezing me in. So, I just wanted to come back to a prior question. So, you know, it's clear that the demand backdrop is going to be a tough demand backdrop potentially for the next few quarters.

Badrinarayanan Kothandaraman: Can you maybe just discuss the health of the average installer that is a recurring user of your equipment and their ability to manage through this period and, you know, transition to the TPO model? I think there's been some challenges around working capital and tax equity. So, this curious, you know, what you're seeing and what you're hearing from some of those new repeat buyers on the smaller scale side of the installer community.

Badrinarayanan Kothandaraman: Thank you. Yeah, I mean, we only hear the color from other industry news, but, you know, we do see we do see some transitions to the leasing model. We do see that clearly. For us, how does it affect us is we have some great partners. We have Sonova, great partners. John Berger is a close friend of mine. Son Power, you know, Son Run and other leasing, you know, partners. We do business with all of them.

Badrinarayanan Kothandaraman: They're all great partners. For us, it is, you know, if loan moves to lease our business or phase, you know, there could be some product mix issues, but business is normally not affected. We have heard, you know, anecdotes from a few industry sources that, you know, installers in California, there are many long-tail installers who are in business any longer, but we don't have any direct data there. So I can only tell you what I know.

Badrinarayanan Kothandaraman: Of course, I mean, it is a stressful time for them, and we are trying to help them with whatever we can, whether it leads or whether, you know, we can provide them some other services like our solar, graphic, etc, whether we can help them with name three, their business. We're doing that, and, you know, that's the color that we have. In general, we do business, we do business, you know, majority of the business we do is through distribution, and the distribution, you know, one of the ways we would see it is in our payment, that if we were to do direct business with all the installers, which we don't, we do business with distribution partners.

Badrinarayanan Kothandaraman: So, therefore, we have one level, a little bit, you know, away from, you know, direct relationship with the long tail installs. But, you know, yeah, that makes sense. Thank you. And the other questions, my other questions have been answered up. So obviously, it's there. Okay, do you repeat the question? Oh, okay. Our next question will come from Tristan Richardson with Scotia Bank. Please go ahead.