Enphase Energy, Inc. (NASDAQ:ENPH) Q1 2023 Earnings Call Transcript

Enphase Energy, Inc. (NASDAQ:ENPH) Q1 2023 Earnings Call Transcript April 25, 2023

Enphase Energy, Inc. beats earnings expectations. Reported EPS is $1.37, expectations were $1.21.

Operator: Good day, everyone, and welcome to the Enphase Energy’s First Quarter 2023 Financial Results Conference Call. Please also note that, today’s event is being recorded. At this time, I’d like to turn the floor over to Karen Sagot. Ma’am, please go ahead.

Karen Sagot: Good afternoon, and thank you for joining us on today’s conference call to discuss Enphase Energy’s First Quarter 2023 Results. On today’s call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 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, 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 matters.

These forward-looking statements involve significant risks and uncertainties, and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K and which can also be found in the Investor Relations section of our website.

Now, I’d like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Badri Kothandaraman: Good afternoon, and thank you for joining us today to discuss our Q1 2023 financial results. We had a decent quarter. We reported revenue of $726 million, shipped approximately 4.8 million microinverters and 102-megawatts hours of batteries, and generated free cash flow of $223.8 million. Approximately 65% of our Q1 microinverter shipments were IQ8. We exited Q1 at 46% gross margin, 14% operating expense and 32% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Let’s now discuss how we are servicing customers. Our Net Promoter Score worldwide was 75% in Q1 compared to 71% in Q4. Our North American NPS was 77% compared to 74% in Q4. Our average call wait time was 1.2 minutes compared to 1.6 minutes in Q4.

We are focusing on route cost fixes of customer issues and improving our business processes rapidly to enhance customer experience. Let’s talk about microinverter manufacturing. Our overall supply environment is quite stable. There are no major shortages right now. We began manufacturing at Flex Romania in the first quarter, bringing our quarterly capacity to approximately 6 million microinverters. Our European business is growing rapidly and many customers have asked us for local manufacturing, and we will be able to do that going forward. Let’s come to US manufacturing. As we discussed last quarter, the IRA, Inflation Reduction Act, will help bring back high-tech manufacturing to the US and stimulate economy through creation of new jobs. We are opening manufacturing lines with three different manufacturing partners, adding a capacity of 4.5 million microinverters per quarter, bringing our overall global capacity to 10 million microinverters per quarter as we exit 2023.

We expect to begin US manufacturing with one partner in Q2 and with the remaining two in Q3. Let’s now cover the regions. Our US and international revenue mix for Q1 was 65% and 35%, respectively. In the US, our revenue decreased 9% sequentially due to seasonality and macroeconomic conditions and increased 28% year-on-year. The sell-through of our microinverters in Q1 decreased 21% sequentially compared to Q4, worse than the typical seasonality of 15%. Our microinverter channel inventory at the end of Q1 was relatively normal, while the storage channel inventory was a little elevated. I’ll go into details later in the call. In Europe, our revenue increased 25% sequentially and more than tripled year-on-year. Our Europe non-GAAP gross margin is quite healthy, over 45%.

Another point to note is that the sell-through of our microinverters in Europe reached an all-time high in Q1. We are now shipping IQ microinverters into France, Netherlands, Spain and Portugal. In addition to Germany and Belgium, we just recently started shipping IQ batteries to Netherlands, France, Austria and Switzerland. Let me provide some brief comments on Latin America, Australia and Brazil. In Latin America, revenue decreased 2% quarter-on-quarter and increased more than 70% year-on-year. Our revenue in Australia increased 6% quarter-on-quarter, while our revenue in Brazil more than doubled. We are growing very rapidly in Brazil. And given the big market size, we are expanding the team and prioritizing new products. Let me provide some additional color on the US followed by Europe.

We usually recognize revenue when we ship product to distributors and large installers. Most of our installers buy our products from distributors. It is therefore relevant for us to talk about the sell-through of our products from distributors to installers. Since we have a healthy market share in the US, our statistics are a meaningful representation of the business trends. As I said earlier on this call, our sell-through of microinverters in the US was 21% lesser in Q1 compared to Q4. Our sell-through in California was only 9% lesser than Q4. There was some impact due to the weather in early Q1, but the NEM 2.0 rush in Q1 more than compensated for it. California installers took advantage of the NEM 2.0 rush and have built up a solar backlog for the next three to four months.

We believe when the stockholders aren’t expanding their crews to accelerate installation, they’re laser focused on their cash flow due to the high interest rate environment and are looking clarity — for clarity on the NEM 3.0 demand. Sell-through of our batteries in California was 23% lesser in Q1 compared to Q4, as installers focused mainly on solar. We expect this trend to continue for the next three to four months. After that, we see NEM 3.0 as a net positive for California and expect strong demand to resume for solar plus storage. Let’s cover the rest of the US. The sell-through of microinverters in non-California states was 25% lesser in Q1 compared to Q4. We observed that the sell-through was even lower in states with low utility rates such as Texas, Florida and Arizona.

In these states, the economics of loan financing has worsened due to rising interest rates. The sell-through performance in the Northeast US was a little better. Coming to IQ Batteries, the sell-through in non-California states was 28% lesser in Q1 compared to Q4. Let’s briefly discuss the health of our US customer base and some trends in financing. Our Q1 data shows higher sell-through rates for long tail installers compared to Tier 1 and 2 installers. Our installers, in general, are navigating three key challenges: first, the rapid increase in interest rates over last year; second is switch from selling low APR with high dealer fees, the selling market rate loans with low dealer fees; and third, the delayed payment from the loan originators or as the industry calls it, reduction of M1 payments.

Let’s discuss about the second and third challenges. We see the move to high APR and low dealer fee loans as a positive for the industry. The demand for market rate loans remained strong. New capital providers who were not able to buy below market rate loans are now offering solar financing. Installers are adjusting their sales practices for a higher interest rate environment. We are also seeing new lease providers entering the market with focus on servicing the long tail. We think capital will be available for both long-tail — for long-tail installers regardless of the mix of loan and lease. On the reduced M1 payments, loan originators are providing less cash to installers at the time of contract signing and a greater percentage after installation.

This creates a working capital challenge for the installers and is forcing them to become more efficient. As the installers adjust to this new reality, we expect the sell-through of microinverters and batteries to incrementally improve in Q2 compared to Q1. Q2 is seasonally stronger and should help the situation even more. Let’s come to Europe. Our European business is doing very well. We expect healthy revenue growth in Q2 compared to Q1. Our business is growing much faster than the market. We plan to introduce IQ8 microinverters and IQ batteries into many more countries in Europe throughout the year. Our value proposition is our differentiated home energy management systems combined with high quality and great customer experience. We are integrating the products from our latest acquisition, GreenCom Networks into our Enphase Home Energy System, starting in Germany this quarter.

This will help network third-party EV chargers and heat pumps with Enphase solar plus storage systems. The benefit to homeowners is reduced electricity bills due to increased self-consumption in addition to having control via the Enphase app. Let’s talk about new products. I say internally in the company that 2023 is the year of new products, and it’s coming in good time. We are getting ready to launch our third-generation IQ battery in North America and Australia this quarter. In Australia, we will also launch the IQ8 microinverters. As I previously discussed, the IQ battery has a modularity of five-kilowatt hours and delivers double the continuous and triple the peak power compared to our prior generation of batteries. The higher charging and discharging rate of a third-generation battery will be uniquely beneficial for NEM 3.0 systems in California through its ability to generate revenue by exporting into the grid at the appropriate time.

In addition, our third-generation battery is very easy to install and commission. We are currently piloting these third-generation batteries in Australia and in the US with select installers and are very excited about the experience we are about to deliver to our customers. Next, let’s talk about our latest new product for the residential segment in emerging markets. This product, the IQ8P microinverter will deliver 480 watts of AC power, supporting panels up to 650 watts DC for Brazil, Mexico, Spain, India and emerging markets. We are on track to release IQ8P into production in the second half of the year. The other variant of IQ8P microinverter with the new three-phase cabling system is well-suited for small commercial solar installation, ranging from 20 to 200 kilowatts, such as gas stations, schools, hospitals, churches and small business.

These microinverter systems offer the same grid compatibility, high quality and rapid shutdown capability as our standard residential products. We expect to release this product into the US small commercial solar market in the second half of 2023. Let’s discuss EV chargers. We shipped over 8,600 chargers in Q1, compared to 7,600 charges in Q4. We are now shipping Enphase-branded EV chargers from Flex Mexico, helping us increase capacity and reduce costs. We are on track to introduce IQ smart EV chargers in Q2. These charges will have WiFi connectivity, enabling use cases like green charging and allowing the homeowners visibility into operation of their Enphase solar plus storage, plus EV charger system through their app. Let’s now discuss the installer platform.

We released several updates to our solar graph design and proposal software, including basic NEM 3.0 functionality, battery design, document management and other improvements are requested by installers. We have more than 1,000 installers using the software. NEM 3.0 incentivizes homeowners to use solar and battery systems for avoiding energy imports, while compensating homeowners for exporting energy when the grid needs it. The updated solar graph platform offers a simplified experience for designing an NEM 3.0 system by optimizing panel placements, configuring battery sizing, leveraging its modularity and enhancing system operations for self-consumption and energy export to deliver the best possible payback. We see that solar plus storage under NEM 3.0 can achieve a payback period between six and eight years depending on the utility.

As we said before, the higher power of our third-generation battery helps us to export more energy to the grid and maximize savings. Let me conclude. With the residential solar and storage market growing rapidly in Europe, we are in a great position to significantly accelerate our business. The situation in the US is a little different with NEM 3.0 in California and the macroeconomic challenges in rest of the US. Our strategy doesn’t change. We are focused on working closely with our installers to address their issues, making new products and entering new markets and countries. The fundamentals are intact for our industry. 30% ITC for the next decade, the rising utility rates, the focus on climate change and the desire for resilience are all going to push the need for solar plus storage more than ever before.

With our differentiated products, high quality and exceptional customer experience, we are in a strong position to capitalize on this trend. With that, I will turn the call over to Mandy for her review of our finances. Mandy?

Mandy Yang : Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2023 financial results as well as our business outlook for the second quarter of 2023. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $726 million, slightly up from the fourth quarter of 2022. We shipped approximately 1,957 megawatts DC of microinverters and 102-megawatt hours of IQ batteries in the quarter. Non-GAAP gross margin for Q1 was 45.7% compared to 43.8% in Q4. The increase was driven by increased IQ8 product mix and improved logistics. The gross margin was 45% for Q1.

Non-GAAP operating expenses were $98.4 million for Q1 compared to $87.7 million for Q4. The increase was driven by international growth and R&D. GAAP operating expenses were $158.7 million for Q1 compared to $153.7 million for Q4. GAAP operating expenses for Q1 included $56 million of stock-based compensation expenses and $3.7 million of acquisition-related expenses and amortization for acquired intangible assets and $700,000 of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1 was $233.6 million compared to $229.4 million for Q4. On EBIT basis, income from operations was $167.7 million for Q1 compared to $157 million for Q4. On a non-GAAP basis, net income for Q1 was $192.3 million compared to $212.4 million for Q4.

This resulted in non-GAAP diluted earnings per share of $1.37 for Q1 compared to $1.51 for Q4. GAAP net income for Q1 was $146.9 million compared to GAAP net income of $153.8 million for Q4. This resulted in GAAP diluted earnings per share of $1.02 for Q1 compared to $1.06 for Q4. The decline for both non-GAAP and GAAP net income and earnings per share was driven by our higher effective tax rate as we are now a significant US cash taxpayer. We exited Q1 with a total cash, cash equivalents, and marketable securities balance of $1.78 billion compared to $1.61 billion at the end of Q4. We did not make any open market share repurchases against our $200 million share repurchase authorization. Instead, we spent approximately $72 million to cover withholding taxes for the employees divesting in Q1 that received the dilutive shares by 338,000 shares.

We expect to continue this anti-dilution program throughout the year. In Q1, we generated $246.2 million in cash flow from operations and $223.8 million in free cash flow. Capital expenditure was $22.5 million for Q1 compared to $16.4 million for Q4. The increase was primarily due to investment in R&D equipment and US manufacturing. Now, let’s discuss our of 2023. We expect our revenue for the second quarter of 2023 to be within a range of $700 million to $750 million, which includes shipments of 80 to 100-megawatt hours of IQ Batteries. We expect GAAP gross margin to be within the range of 41% to 44% and non-GAAP gross margin to be within the range of 42% to 45%, which includes — which excludes stock-based compensation expenses and acquisition-related amortization.

Our guidance numbers do not include any IRA benefit. We expect our net operating expenses to be within the range of $155 million to $159 million, including approximately $57 million estimated for stock-based compensation expenses, acquisition-related expenses and amortization and restructuring charges for site consolidation. We expect our non-GAAP operating expenses to be within the range of $98 million to $102 million. We intend to keep the non-GAAP operating expenses flat in Q2. We will continue investing in product innovation and international growth while making other areas of the company more efficient. Moving to tax. Since we have utilized most of our net operating loss and research tax credit carryforward, we are now a significant US cash taxpayer.

We expect GAAP and non-GAAP annualized effective tax rate for 2023 to be at 22% plus or minus 1% before any IRA impact. Now I’d like to discuss how the advanced manufacturing production credits from the IRA will be reported in our earnings while waiting on the implementation guidelines from the US Treasury. Based on the current guidelines, the production credit can be claimed as direct pay or in the form of tax credit. Under direct pay, the production credit will be accounted for as a reduction in cost of goods sold. And in tax credit, you will be reported in the tax expense line. Incrementally we will provide us the same dollar impact to our earnings per share as the production credit is nontaxable. We expect the production credit net of any incremental costs for domestic manufacturing to be in the range of $20 to $30 per microinverter sold to customers.

We expect to ship 50,000 net in USA microinverters to customers this quarter. We plan to have our US contract manufacturing facilities to be fully operational by the end of 2023. We estimate shipments to reach our US capacity of 4.5 million microinverters per quarter by the end of 2024, assuming robust demand. With that, I will open the line for questions.

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Q&A Session

Operator: Ladies and gentlemen, at this time we will begin the question-and-answer session Our first question today comes from Colin Rusch from Oppenheimer. Please go ahead with your question.

Colin Rusch: Thanks so much, guys. Can you talk a little bit about channel levels outside the US? And how much of the 2Q guidance is really about just selling into the channels? I get the channel is full to serve the markets in both Latin America and Europe?

Badri Kothandaraman: Yes. Actually, in Europe, our channel is rather light. We’ve been tight on product in the last few quarters. And so the channel is light. By light, I mean, we consider channel to be normal between eight and 10 weeks of inventory and light means less than eight weeks. So basically, that’s the situation there.

Colin Rusch: Okay. And then with the battery volumes decline sequentially and continuing in 2Q, can you talk a little bit about how much of that’s related to the product cycle you guys are going through? And how much of that is just related to overall underlying demand?

Badri Kothandaraman: Yes. On batteries, as an executive team, we are hyper focused on batteries as much as on our microinverters. Our learning curve on batteries has been tremendous. As we speak, our second-generation batteries are getting better and better every day in both their installation and performance. Our third-generation battery, like what I said is coming soon into the US and Australia in Q2, that will be even better with a wired communication can and with double the continuous power and triple the peak power and with enhanced modularity, as well as serviceability that helps us in dropping costs compared to the prior generation. And of course, it’s LFP, so it’s the safest battery. The demand in the US, that demand being down is temporarily.

I described the dynamics due to the NEM 2.0 pulling in California, as well as the increased interest rates outside of California. We believe that’s a temporary problem. Installers will figure out what to do outside. And California, we’re incredibly bullish on NEM 3.0. We think our battery is going to be perfect for NEM 3.0, because the increased power of the battery will give the ability to export more energy during the time when the grid needs it in August and September, and people can get paid handsomely for it. And because of that, you see the payback for a solar plus storage system under NEM 3.0 is approximately six to eight years, depending on which utility you are in. So, we think NEM 3.0 will accelerate the attach rate of batteries, and it might take a little bit of time for the industry and for the consumers to realize it, but I have no hesitation that NEM 3.0 will be better for California.

Now, let me come outside the US. So far, we’ve been shipping to Germany and Belgium in Europe. This quarter, I would say, in end of March as well as in the beginning of April, we introduced batteries to four more countries, basically, France, Netherlands and Switzerland — actually, Austria, to correct myself, that was a month or two ago. So, we just introduced batteries in four countries. We are going to introduce our third-generation battery in Australia in Q2 in addition to the US. In both Q3 and Q4, we are going to target several more countries in Europe. We’ll be in Italy and UK by Q4. So, on the batteries, we’re just getting started in Europe. And I think the volumes will start ramping there. And in the US, it’s a matter of time, the rest of the US recovers, the installers start selling batteries again.

And in California, it will be a no-brainer with NEM 3.0. So the numbers are only going to get better from here on. The long answer, I just wanted to give you a full picture.

Colin Rusch: Thanks so much for real help. I’ll get back in the queue. Thanks guys.

Operator: Our next question comes from Maheep Mandloi from Credit Suisse. Please go ahead with your question.

Maheep Mandloi: Hey, good evening. Thanks for taking my questions. Maybe just on the battery question, just to elaborate on that. Do you see any opportunity for lower peak kilowatt battery, which is mostly used to — as a rate arbitrage device versus a full home pack of solutions? Just any thoughts on that kind of a device, which — where you could use your Gen 2 solutions as well?

Raghu Belur: Yes. I think both Gen 2 and Gen 3, if you look at Gen 3, as Badri mentioned — this is Raghu, by the way. The power is double the max continuous power of the Gen 2 and three times the peak power. The peak power, as a reminder, is what gets used to manage heavy loads during start-up time. But to you — answer your question, the power is — can be modified. We can set the limits to what the power needs to be in software. So what that does is just makes the whole process very efficient for the installer. They have got one SKU to purchase. They can install that one SKU, which would be the five-kilowatt hour SKU. And then they can vary the power depending on what the homeowners’ needs are, whether that is going to be an NEM 3.0 system, which could be just one battery with a PV system, and it happens to be grid tied, for example, or a 10-kilowatt hours of battery that could be providing partial loan backup or you could be doing 20-kilowatt hours and doing whole home backup.

So all of that — the beauty of the system is that it all can be configured in software and gives you a tremendous amount of flexibility and simplicity for the installer.

Maheep Mandloi: Got it, got it. And just a second question from me on ASPs. If you could just talk about how to think about ASP trends here. You talked about inventory being slightly light in Europe, but as we come out through the rest of this year and some of these component shortages and logistic issues slowed down, do you expect any reduction in ASPs in Europe or the US markets? Thanks.

Badri Kothandaraman: We don’t see any drop in pricing. In fact, we see our gross margin sequentially up a couple of percent from Q4 to Q1. And also, I broke out the gross margins in Europe because some of you had been asking me. The gross margins in Europe are incredibly healthy. They’re over 45%. The gross margin in the US is incredibly healthy. Pricing is stable for us. Gross margin means both price as well as cost. And so we do value-based pricing, which is basically price products based upon the value they bring compared to the next best alternative like alkaline batteries, it may be increased power, increased safety. In microinverters, it may be increased quality, increased service. So that’s on the pricing side. On the cost side, we have a world — a task force that runs all the time called world-class costs.

So we are constantly discovering ways to save a cent in the microinverter. For example, based on last year’s shipments, last year, we shipped 15 million microinverters in 2022. So $0.01 reduction for us means $154,000. So it’s very important for us, even $0.01 reduction, even $0.005 reduction is important for us. So we take it extremely seriously. On batteries, with a third-generation battery, which has got higher modularity as increased serviceability. Now I think we can reduce the overhead contribution and costs to a minimum. And on batteries, the gross margin for every generation will get better than the prior generation. So a long answer again, but ASPs, we do not see much change and our cost programs are going well.

Maheep Mandloi: Got it. Appreciate it. And thanks for taking my questions here. Thanks.

Operator: Our next question comes from Corinne Blanchard from Deutsche Bank. Please go ahead with your question.