Good day, ladies and gentlemen, welcome to the Enphase Energy's third quarter 2014 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If you require any assistance during the call, please press the star then the zero key on your touchtone telephone. As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today's call, Mrs. Christina Carrabino. You may begin.
Thank you. Good afternoon, thank you for joining us on today's conference call to discuss Enphase Energy's third quarter results for the period ended September 30th, 2014. This call is also being broadcast live over the web and can be accessed in the investor section of Enphase Energy's website at www.enphase.com. On today's call are Paul Nahi, Enphase Energy's Chief Executive Officer, and Kris Sennesael, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its third quarter ended September 30th, 2014. We are providing an accompanying presentation with our earnings call that you can access in the investor section of our company's website.
During the course of this conference call, Enphase management will make forward-looking statements including, but not limited to, statements related to Enphase Energy's financial performance, market demands for its microinverters, advantages of its technology, market trends, future products, and future financial performance. These forward-looking statements are based on the company's current expectations and inherently involve significant risks and uncertainties. Enphase Energy's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties. Factors that could cause results to be different from these statements include factors the company describes in its press release of today, especially under the section entitled Forward-Looking Statements, as well as those detailed in the section entitled Risk Factors of the company's report on Form 10-Q for the quarter ended June 30th, 2014.
Additional information will also be set forth in those sections in Enphase Energy's quarterly report on Form 10-Q for the quarter ended September 30th, 2014, which will be filed with the SEC in the fourth quarter of 2014. Copies of these documents may be obtained from the SEC or by visiting the investors section of the company's website. Enphase Energy cautions you not to place undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in its expectations. Please note that certain financial measures used on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges.
The company has provided reconciliations of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the investor relations section of its website. Now I'd like to introduce Paul Nahi, Chief Executive Officer of Enphase Energy.
Good afternoon. Thanks for joining us today to discuss our third quarter 2014 financial results. As usual, I'll start with my opening remarks and touch on some key highlights. Chris will take us through the third quarter financials and the outlook for the fourth quarter. After that, we'll open up the call for Q&A. We're extremely pleased with our financial results for the third quarter of 2014. We reported record financial results, including revenue of $99.1 million, an increase of 60% year-over-year and up 21% sequentially. We also reported gross margin of 33% and impressive bottom-line results, including positive operating income and net income and non-GAAP diluted earnings of $0.08 per share. I will say that I'm thrilled with our record-breaking results.
These results reflect the increase in global demand for Enphase microinverter systems and our ability to execute on our balanced, profitable growth strategy. Our overall strong business momentum included the continued surging demand in our core U.S. residential market, as well as market share gains in the residential and commercial solar markets in the U.K. and Australia. During the third quarter of 2014, we shipped 170 megawatts AC, an increase of 81% year-over-year. Since inception, we've shipped over 1.3 gigawatts of Enphase microinverter systems. We're the highest volume inverter company in the world, with more than 6.4 million units shipped. Enphase systems have produced over 2.4 terawatt-hours of clean energy. The global demand for solar continues to grow rapidly. According to the International Energy Agency, or IEA, the world added more solar PV capacity during 2013 than in the previous four decades.
The total global installed capacity was over 150 gigawatts in early 2014. The IEA envisions solar to be a dominant source of power generation in the world by 2050. The U.S. solar market is especially robust. According to GTM Research, the U.S. installed approximately 2.5 gigawatts of solar in the first half of 2014. The U.S. solar market remains a huge opportunity for Enphase, as currently, solar is less than 1% of the energy mix. We believe the future will soon see a world in which solar is as standard as any other major home appliance. In our core U.S. residential market, we saw significant demand for our microinverter system from our current and new customers. As a result, our third quarter U.S. revenue was up 63% year-over-year.
On the international front, we continue to be pleased with the top-line contributions as international revenue was up 41% year-over-year, primarily due to strong performance in the U.K. and Australia. In the U.K., revenue increased 18% sequentially and 92% year-over-year as we continue to gain share in this attractive market. During the third quarter, we expanded our distribution channel with the addition of five new partners and expanded our business with some major residential installers. We entered the U.K. PV market less than two years ago, and our rapid growth and market share gain are examples of our commitment to international presence and expansion. Our U.K. market share is now estimated to be about 10%. In Australia and New Zealand, we made great progress and posted strong third-quarter results as well.
Revenue was up 73% sequentially as we continue to extend our reach and penetration in the residential and commercial solar markets throughout this region. We also expanded our distribution channel by partnering with some well-regarded industry players, including YHI New Zealand, to distribute our microinverter systems to the New Zealand solar installer community. New Zealand's solar market holds great potential for Enphase. Since inception, our vision has been to realize the global potential of solar energy through our technology innovation. With 125 active patent families, Enphase is committed to developing the most innovative solar energy systems in the world and protecting the intellectual property embodied in those systems. We take tremendous pride in how we've revolutionized solar power generation through technology innovation and focus our R&D efforts on a smart, distributed, networked architecture that helps solar energy scale.
Our residential business, which accounts for approximately 85% of revenue, is very solid, and our commercial business, accounting for the remaining 15% of revenue, is getting a strong boost. According to GTM Research, the U.S. commercial PV market is poised to grow by 21% annually to over 1.3 gigawatts in 2014 and is expected to grow from approximately 30% of the U.S. solar market in 2015 to approximately 40% in 2018. In September, we announced a new solar energy solution for the commercial market that offers both the technology and operations and maintenance services solution capable of taking a commercial-scale system from concept through implementation to long-term O&M. The system offers clear economic benefits and reduces the overall balance of system costs while delivering optimal performance and driving a better return on investment and lower LCOE than competing inverters.
This new commercial-grade system, to be available in early 2015, includes the C250 microinverter, the Envoy communications gateway, the cloud-based Enlighten monitoring system, and our Enphase Energy Services solution. Enphase is already powering around 7,000 commercial systems across a wide variety of market segments, from schools and corporate offices to baseball and football stadiums, as well as agricultural sites. Our new commercial system provides developers, installers, and owners a robust solution for maximizing the performance of their solar assets. We believe this will help us to further drive the adoption of the microinverter system technology in small, medium, and large commercial projects. Two weeks ago, we were in Las Vegas at the Solar Power International trade show, or SPI. It was a great show this year, very well attended, and a clear indication that solar is a very attractive and fast-growing business.
Our Enphase booth was overflowing with customers, partners, suppliers, and investors. While at SPI, we announced some groundbreaking and exciting new products and services that represent our vision for the future of solar: connected, intelligent, simple, and designed to support mass solar penetration on the grid. With our announcement of the connected, intelligent Enphase Energy Management System to be available in 2015, we're taking a big step towards our ultimate goal, enabling mainstream solar adoption. Our energy management system is built upon our fifth-generation microinverter and intelligently integrates the critical technologies to solve solar energy challenges at scale: smart grid intelligence, communications, big data analytics, and storage. It's an innovative system for energy management that delivers on the vision of enabling large-scale implementation of solar power integrated with the grid.
The system offers powerful energy generation, plug-and-play storage, advanced control capabilities, and load management to provide a better return on investment for system owners, expand the range of profitable business models for installers, and provide broad insight into and control for the utilities. The foundation of the Enphase Energy Management System is our fifth-generation microinverter, the Enphase S275, which combines a leading-edge performance and reliability with groundbreaking new features, including smart grid functionality, reactive power control, and, for the first time ever, bidirectional power flow. It is this bidirectional power flow that enabled the development of our revolutionary AC battery, an advanced energy storage solution with a modular plug-and-play storage device fully integrated with the Enphase Energy Management System. The AC batteries are safe, reliable, and easy-to-install storage solution designed for residential and commercial applications.
We believe storage will be a multibillion-dollar market and will be essential in helping solar gain broader acceptance and higher penetration. Enphase is bringing the same technological innovation to storage that we brought to solar by pairing our innovative distributed architecture with what we believe is the best-in-class battery chemistry in the industry. The AC battery and Enphase Energy Management System will provide new opportunities for our sales channels. As part of the AC battery rollout, we've engaged with several partners for pilot projects, including Lennar Homes, Hawaii Energy Connection, and Vivint Solar in the U.S., Pretty Green Energy, CJ Solar, and Domunio in Europe, and Metro Solar in Australia. We also have a completely redesigned networking hub as part of the new system. The Envoy-S gateway expands from energy monitoring into full revenue-grade metering of solar production, metering of home consumption, and storage management.
Ruggedly constructed and suitable for installation outdoors, the Envoy-S offers a full range of networking connectivity options, including built-in cellular capabilities. We believe the S275, combined with the Envoy-S, is the most advanced and highest quality microinverter system ever made. Enlighten, our cloud-based energy management platform, displays and manages generation, storage, and built-in consumption data in an intuitive interface, enabling customers to monitor system performance from any PC, tablet, or smartphone. It's a one-stop interface for all energy production, storage, and consumption management that optimizes the use of solar, grid, and stored energy. As with all Enphase products, we remain committed to quality and reliability, quality of innovation, quality of design and production, quality of support, and quality in everything we do. We're pleased to have achieved the ISO 9001 and ISO 14001 certifications during the third quarter.
Both are internationally recognized quality management and environmental management system standards. These certifications underscore Enphase's unwavering commitment not only to quality, but also to continuous improvement and environmental stewardship. We've long believed that our high technology business model, world-class products, and superior customer support will help sustain our long-term growth and allow us to continually develop new and innovative products and systems. With our new announcements, we're taking a big step forward in our vision of realizing the global potential of solar energy through connected, intelligent technology innovation. I'll close my Q3 comments by acknowledging our outstanding financial results and our excitement about Enphase and the future of solar.
Our quarterly top-line growth of 60% year-over-year, record profitability, and a solid positive cash flow from operations all point to our continued strong execution track record that can only be achieved thanks to the hard work day in and day out from all our dedicated Enphase employees. Now, I'll turn it over to Kris for his review of our financial results.
Thank you, Paul, and I fully agree. The third quarter financial results are a remarkable achievement and prove that our business model works very well. I'm proud, happy, and excited to be part of the Enphase family that is able to deliver those strong financial results, and we are all committed to continue to drive further improvements. Let's first get into some of the details related to our financial results for the third quarter of 2014. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis, unless otherwise noted. During the third quarter, we saw continued strong growth in the overall solar market, as well as an increase in demand for Enphase microinverter systems, resulting in the acceleration of our revenue growth. Total revenue for the third quarter of 2014 was $99.1 million, an all-time revenue record.
With $99.1 million of revenue, we exceeded our revenue outlook of $93 million-$98 million that we provided last quarter. Revenue for the third quarter of 2014 increased 60% compared to the third quarter of 2013 and was up 21% compared to the second quarter of 2014. As Paul mentioned, the large year-over-year and sequential revenue growth was driven by strong overall demand for solar in our core U.S. residential markets, as well as the growing demand for Enphase microinverter systems and increased contributions from the U.K. and Australian markets. We shipped 170 MW AC or 195 MW DC during the third quarter of 2014, an increase of 81% on a year-over-year basis. The 170 MW shipped represent approximately 760,000 microinverters, of which 90% was our fourth-generation microinverter system.
We also continue to see a stronger adoption of higher power panels that are being paired with our higher power microinverters. As a result, the Enphase M250 represents approximately 25% of all units shipped during the third quarter of 2014. Gross margin for the third quarter of 2014 was 33%, an increase of 470 basis points compared to the third quarter of 2013, as our product cost reductions continue to outpace price reductions. The third quarter of 2014 gross margin was consistent with the record gross margin achieved in the second quarter of 2014. Operating expenses during the third quarter of 2014 were $28 million, compared to $27 million in the second quarter of 2014.
Operating expenses as a percentage of revenue decreased from 33% in both the third quarter of 2013, as well as the second quarter of 2014, to 28% in the third quarter of 2014, demonstrating the leverage we have in our business model in line with our balanced, profitable growth strategy. R&D expenses were $11.3 million, sales and marketing expenses were $9.3 million, and G&A expenses were $7.3 million. These non-GAAP operating expenses excluded $2.3 million in stock-based compensation expenses and $365,000 of expenses related to the secondary stock offering that we completed during the third quarter. The combination of accelerated top-line growth, strong gross margin performance, and operating expense leverage resulted in a record operating income of $4.8 million in the third quarter of 2014, compared to breakeven in the second quarter of 2014, and an operating loss of $2.9 million in the third quarter of 2013.
The $4.8 million of operating income resulted in an operating margin of 4.8%. I am very pleased with this level of profitability, but of course, we will continue to drive our business towards our long-term target model that calls for operating margins to be in the 15%-25% range. For the third quarter of 2014, net income was $3.8 million, resulting in earnings per diluted share of $0.08, compared to a net loss of $3.6 million or a loss of $0.09 per share in the third quarter of 2013. During the third quarter of 2014, we achieved positive GAAP net income for the first time. GAAP net income was $800,000, or $0.02 per diluted share, compared to a GAAP net loss of $6.3 million, or a net loss of $0.15 per share in the third quarter of 2013.
In summary, while looking at the income statement on a year-over-year basis, I am very pleased with our top-line growth, gross margin improvements, and operating expense leverage, resulting in a significant improvement to our bottom line and EPS expansion. Turning to the balance sheet, cash flow from operations during the third quarter was $11.2 million, while our net cash flow was $6.9 million. This illustrates that our business model not only drives profitability, but also generates cash as we combine profitability with continued focus on working capital management and relatively low capital expenditures. In terms of working capital management, we have our day sales outstanding at 46 days during the third quarter, as well as excellent inventory management with inventory on hand at 21 days.
Capital expenditures during the third quarter of 2014 were $5.5 million, up from the last couple of quarters as we added additional proprietary test equipment and factory automation equipment to support the large volume ramp in the Flextronics factory. Keep in mind that last year, we shipped approximately 1.6 million units, and this year we expect to ship over 2.5 million units, an increase of more than 55% year-over-year. In the third quarter of 2014, depreciation and amortization was $2.1 million. We exited the third quarter with a total cash balance of $44.5 million and $5.9 million of term debt. We repaid approximately $670,000 of our existing term debt during the third quarter. As a reminder, our working capital facility remains undrawn.
We remain confident that our cash position and credit facility, combined with our focus on working capital management and profitability, provide adequate liquidity to support the growth of our business. Now, let's discuss our outlook for the fourth quarter of 2014. In line with normal seasonality, we expect revenue for the fourth quarter of 2014 to be within a range of $98 million-$103 million. At the midpoint of the revenue outlook range, revenue would be up 50% compared to the fourth quarter of 2013. We expect gross margin to be within a range of 31%-33%, and we expect non-GAAP operating expenses to be up 8%-10% compared to the third quarter of 2014 as we continue to invest in research and development to support new and innovative products and systems. Now I will open the line for questions.
Thank you. Ladies and gentlemen, if you do have a question at this time, please press the star then the 1 key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Our first question comes from Philip Shen. Your line is open.
Questions. Hey, although you don't have guidance for 2015, perhaps you can provide us your view of 2015. What are you seeing in Q1 so far, and what do you expect as we go through the year?
Phil, we only provide guidance 1 quarter at a time, I'm not going to provide any specific guidance for 2015. In general, of course, we do expect that the normal seasonality that we have seen in the last couple of years will continue during 2015, meaning that Q1 is typically a seasonally down quarter, followed by a strong sequential growth in the second quarter, more growth in the third quarter, and then kind of a flattish quarter going into the fourth quarter. We definitely expect seasonality to be the same in 2015 as 2014.
Great. Thanks, Kris. As for my follow-up, can you give us a sense for what your expectations are for the ramp of the commercial product in 2015? Perhaps you can speak in terms of megawatts or unit volumes or mix.
I can't really speak in terms of megawatts or unit volumes. What I can say is this, that in the small commercial market, we already have close to a 38% market share. I think our commercial customers have been waiting for this product. We finally have, for the first time, a purpose-built commercial inverter. I'm very optimistic about its reception and its uptake, but I'm going to refrain from giving any specific megawatt data.
Okay. Thanks, Paul. Thank you, Kris. I'll jump back in queue.
Thank you.
Our next question comes from Josh Baribeau of Canaccord. Your line is open.
Hi, thanks. I was wondering if you could just help us out with some of the moving pieces in the gross margin guidance with revenues basically flat, you're at the midpoint down about 100 basis points. Just wondering if you could, like I said, kind of provide a little bit more of the moving pieces there.
Yeah. Josh, let me start with just reiterating that I'm very happy with the progress we have been making on gross margins over the last couple of years, moving the margin from 10% to 20% to 30%, now two quarters in a row being at 33%. I'm really happy with the progress that we have been able to make there. You know that our long-term target model is 35%-40%, and we are committed and confident that we will make and continue to make progress towards that long-term target model. Having said that, the progression between today and hitting our long-term target model might not be linear. The road might be bumpy, and so there might be quarter-to-quarter certain fluctuations there. The main reason for that is when you look at gross margin, of course, there's two sides to the equation.
One of them is pricing, the other one is product cost. On pricing, we definitely see some increased pricing pressure in the market there. Of course, we are going to be smart about that. If pricing pressure is becoming too high, we definitely will continue to take pricing actions. On the other hand, we have product cost reductions. We will continue to innovate. Through innovation, we will continue to add features and functions to our product, while at the same time continue to drive down the product cost. The key here is that the timing of the pricing actions and the timing of the product cost reductions, of course, does not necessarily fall in the same quarter. As a result of that, the road going forward might be a little bit bumpy.
Okay. Can you just also address some of the issues of potential customer concentration, as well as the effect of them potentially using other technologies as well as microinverters and just your overall share expectations?
Sure. Clearly, we have many customers who are 100% Enphase, some use Enphase with other products. It would not be surprising to us, and we have, I think, signaled for quite some time that one of our biggest customers has indicated that they wanted to bring on a second source. There's nothing here that's either new or surprising. I think what's very important for Enphase is that when we look at the universe of customers that we're addressing, we're increasing the number of customers that we have every day, both U.S. domestically as well as internationally. Now with the advent of the commercial product, we're addressing yet an entirely new customer segment. I think that if we look at customer concentration, it's actually gone down considerably from Q2 to Q3, and we expect that trend over time to continue.
Okay. Lastly for me, can you help us out with maybe sort of at least directionality of how you think the Gen 5 residential inverter, or rather the margin profile of Gen 5, as well as some of the commercial products that you've introduced, how that might look relative to corporate average?
Sure. What we have said in the past, and what continues to be true, is that with every subsequent generation of microinverter, we see a cost reduction, and that's during the course of the development and course of the life of that microinverter. We don't see that trend changing anytime soon. That's really part of the high-tech story, and this is very similar to what Kris was saying, that we fully expect with every generation of product, we are going to introduce new features and new functions, such as bidirectional power flow, such as reactive power, and we'll see a cost reduction as well. Again, over time, we expect that to be accretive to gross margin.
Okay, great. That's it for me. I'll pass it on.
Thanks.
Our next question comes from Colin Rusch of Northland. Colin, your line is open.
Thanks so much. Guys, can you just give us an update on two things? One, what percentage of your sales came from the Gen 4 products? Then also, just clarification on the price pressure. Are you seeing that from microinverters, or are you seeing that from string inverters, or a combination of both?
Right. Gen 4 was approximately 90% of our total being converted now, and I do expect in the fourth quarter to have close to 100% of our revenue coming from the fourth generation. Within the fourth generation, we have two products, an M215 and an M250. The M250 was approximately 25% of that fourth-generation mix.
In reference to the second part of your question about sort of where the competitive pricing pressure is coming from, we still haven't seen a viable microinverter competitor. We all know that there have been several variants of microinverters from both large and small companies, but none have yet posed a very significant competitive challenge. However, there are a lot of other product string inverters that are competing, and several of them are competing by lowering their price, that will pose some competition in the future. It's primarily from standard string inverters.
Just the follow-up, in terms of the percentage of your sales that you're monetizing with the cabling product as well as Envoy, can you just walk us through any changes there, and then kind of an absolute percentage in terms of the cabling solution? Was there some sort of anomaly this quarter in terms of the cabling solution, given the 6% price decline? I think there's a lot of folks that kind of want to understand the nitty-gritty on where those price declines came and all of what it contributed to that.
I think the third quarter was pretty much in line with the previous quarter in terms of inverters and cables and Envoys, in terms of the mix there.
Okay. Perfect. I'll take the rest of them offline. Thanks a lot, guys.
Our next question comes from Edwin Mok of Needham & Company. Your line is open.
Hi, thanks for taking my question. First question I have is, in terms of channel or distributor inventory, have you seen any change, strong demand? Are you seeing inventory tighten up in the channel, or do you think that channel are top-building inventory?
As you know, Edwin, we monitor the channel very tightly, by SKU, and we do this all over the world. I would say in general, we've kept the channel fairly stable. I don't think you'd see a significant change from this quarter to last.
Okay, great. Not much change there. I guess a question on strong growth in U.K. and Australia. Looks like those are three great numbers, and maybe you can give us some idea in terms of how we kind of think about those markets as we go into 2015 trend. Do you think this level of growth is sustainable? Specifically in Australia, are you talking about Australia driving the growth, or is it because your expansion to New Zealand that was driving that growth? If you can give some color on that, it would be great. Thank you.
Sure. Let me take that last question first. In the APAC region, Australia was primarily driving the growth. We are still relatively new to New Zealand, and New Zealand is going to be a bit of a smaller market. Our penetration and our market share growth in Australia has been very impressive. In response to the question about do I expect that to continue into 2015, without giving any direct guidance, we really have spent a good part of 2014 building up the infrastructure in Australia, making sure the right people were in place, making sure we had the distribution channels established, making sure that the installers were being trained. We'll continue doing a lot of that in 2015, but I'd say a lot of the groundwork has been completed. I expect to see some very significant growth in Australia in 2015.
I would say something very similar about the U.K. as well. The U.K. growth, as you mentioned, is very impressive. We have a great team out there that's doing extremely well, we do now have much stronger brand recognition, great relationships with installers and distributors, we'll be able to leverage a lot of this in 2015.
Great. Thank you.
Our next question comes from Krish Sankar of Bank of America Merrill Lynch. Your line is open.
Yeah. Hi. Thanks for taking my question, a couple of them. Paul or Kris, what do you expect the mix of resi versus commercial to be in Q4?
Currently, that is still 85/15. I don't expect that to be drastically changing in Q4. We're really excited about the new commercial product that we have available. We will more aggressively target the commercial market, not only small commercial, but also medium and large commercial. Having said that, it will take some time until we will be able to drive meaningful revenue there. The sales cycles are pretty long. You have to make sure you get designed in in some of those larger projects, so that will take some time. So far, we are in beta testing, and the product is being installed. It's very well received by the market. The installers and players in the commercial market have been waiting for this product for a long time. We will start shipping it beginning 2015.
Got it. Then, I understand that you guys are definitely doing a lot of good work in cost reduction. If I look at your Q3 or your Q4 revenue, 85% resi, 15% commercial, how will the gross margin look if, at that revenue run rate, the split was more 70% resi and 30% commercial? Will the gross margin be, like a rough estimate, how many basis points higher or lower?
We can't give specific guidance like that. However, what I can say is this: as a company, we are still in the very early days, in terms of technology development for microinverters. There is a tremendous amount of innovation that we are currently working on and will be working on that, as I mentioned, will not only increase features and functions, but will also reduce cost. Over time, I expect, as Kris had said, we are more confident than ever that our target gross margins, and that is aggregate, corporate gross margins of 35-40 points will be met. In the short term, will you see some bumps in the road? Absolutely. That is to be expected.
I think when you look at our cost reduction roadmap, and you look at where we are estimating prices to be, we remain very confident that the long-term potential of 35-40 points has never been as clear as it is today.
Got it. Fair enough. The last question from my end is, I understand that you did say that from a microinverter standpoint, there is really no one who is as good as you guys. I am just curious. If I look at your ASP on a dollar-per-watt basis, both year-over-year and sequentially, it has done quite a bit. I am curious, are you actively cutting prices to gain more share, or is there something else going on, or pressure from your customers to cut the pricing?
That is a difficult question to answer. The nature of this market is that prices will come down year-on-year. That is not Enphase-specific. I think that is true for every part of the channel, whether it is customer acquisition costs, whether it is racking, whether it is modules, whether it is inverters. We certainly will do our part to continue that. Will we use pricing strategically in some accounts? Sometimes. Will we always respond to pricing pressure from competitors? Not always. What we are trying to do is keep a balanced portfolio that allows us to, over time, continue to increase gross margins, while growing our share as much as possible. This really underscores the balanced, profitable growth strategy that we have. A decision to go big on growth at the expense of gross margins would be a very easy one to make.
A decision to get to our target gross margins at the expense of growth is equally easy. What we are faced with every day is the balance between the two and making decisions on growing our top line as much as possible while seeing growth in the bottom line as well.
Got it. That's very helpful. Thanks, Paul. Thanks, Kris.
Sure.
Our next question comes from Vishal Shah of Deutsche Bank. Your line is open. If your phone is on mute, please unmute your line. If you're using speakerphone, please lift your handset. I'm not receiving any response from the Shah line. I'm going to go to the next question. Our next question comes from Carlos Newell of Raymond James. Your line is open, Carlos.
Hi, thank you. I'm speaking in for Pavel. Clearly, your pricing seems to be holding up quite well despite the pressure in the U.S. inverter market related to the U.S. trade war with China. What do you see enabling the residential inverter market to sustain such high pricing when utility-grade pricing is under such pressure?
Well, I think the residential pricing has been under a lot of pressure. It's a different price point, obviously, than the utility scale inverters. I think we're seeing pricing pressure and will continue to see pricing pressure, again, not just in the inverters, but along the entire value chain for resi, commercial, and utility scale. The fact is, the dynamics of the utility scale market are different than the residential market. The type of products and technologies are different, which lends itself to a different cost point and a different price point. I think we can assume that going forward, as we have over the past seven, eight years, is that we will continue to see prices in all segments continue to come down.
Great. That's it for me. Thanks.
Our next question comes from Patrick Maccagno of Dougherty. Your line is open.
Congratulations on the quarter, Paul and Kris.
Thank you.
Regarding most of your growth, could you characterize it as mostly from your established customers or from new customers? Or how would you divide that?
That's actually a great question. It's actually very exciting for us that our existing customers, particularly the ones in the U.S. residential market, because the U.S. residential market is doing so well, really are experiencing some tremendous organic growth. It's very exciting to watch their success, and that certainly has been great for Enphase. In addition to that, in the U.S. residential market, in the U.S. commercial market, and overseas, we continue to add new customers every single day. Big customers and small customers, really in the residential space, in the commercial space. Our rate of increase in new customers continues to impress us and continues to grow. As we move into new geographies, as we continue to go deeper into the geographies we're in, I expect that rate to actually increase.
It's a bit of a mixed bag, but the good news for us is that both existing customers are doing extremely well, and we're adding to that customer list every day.
At this point, how many customers do you have, more or less?
I actually don't have a count, but it's in the many thousands.
Oh, impressive. Regarding your SG&A, it was down as a % of revenue quite significantly. Any explanation for that or going forward, are you just seeing lower SG&A as a % of revenue?
Well, it's clearly the leverage in our operating expenses that we are seeing here at work. We had nice sequential revenue growth or year-over-year revenue growth, and we were able to leverage the infrastructure that we have, especially in G&A, but also to a certain extent in sales and marketing.
Okay. My last question here is regarding the transition to the M250. When do you expect that to be fully transitioned? In terms of ASPs or gross margins, is there much of a difference between the 215 and the 250?
Yeah, it will take multiple quarters till that transition is fully completed. Basically, the main driver there is the adoption of higher power modules, which is progressing, but at a slow speed. We expect that adoption to continue over the next couple of quarters. For us, that is a gross margin tailwind, because the gross margin profile of the M250 is slightly higher than with the M215. We would benefit from the adoption of the higher power microinverter.
Okay, great. Thanks.
Ladies and gentlemen, if you do have a question at this time, please press the star then the one key on your touch-tone telephone. Again, ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the one key on your touch-tone telephone. I'm showing no further questions from the phone line. I'd now like to turn the call back over to Paul Nahi, CEO of Enphase Energy.
Thank you all for joining our call. The solar market represents an enormous growth opportunity. Our proven high-technology business model, combined with a balanced, profitable growth strategy, allows us to take advantage of this explosive market. Enphase has the technologies required for the next generation of solar. I'm very proud of our third quarter financial results, and I'm looking forward to speaking with you again next quarter.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a nice day.