Good day, ladies and gentlemen, and 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. As a reminder, this conference may be recorded. I would now like to turn the conference over to our host of today's call, Ms.
Christina Carabino. You may begin.
Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's 3rd quarter results for the period ended September 30, 2014. This call is also being broadcast live over the web and can be accessed in the Investors section of Enphase Energy's website at www.enphase.com. On today's call are Paul Nahee, Enphase Energy's Chief Executive Officer and Chris Senesol, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its Q3 ended September 30, 2014.
We are providing an accompanying presentation with our earnings call that you can access in the Investors 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 30, 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 30, 2014, which will be filed with the SEC in the Q4 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. Also, 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 Naughey, Chief Executive Officer of Enphase Energy.
Good afternoon, and thanks for joining us today to discuss our Q3 2014 financial results. As usual, I'll start with my opening remarks and touch on some key highlights and then Chris will take us through the Q3 financials and the outlook for the Q4. After that, we'll open up the call for Q and A. We're extremely pleased with our financial results for the Q3 of 2014. We reported record financial results including revenue of $99,100,000 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.
Chris will review
the fine points regarding our Q3 financials, but I will say that I'm thrilled with our record breaking results. These results reflect the increasing global demand for Enphase microinverter systems and our ability to execute on a 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 Q3 of 2014, we shipped 170 Megawatts AC, an increase of 81% year over year. Since inception, we shipped over 1.3 gigawatts of Enphase microinverter systems. We're the highest volume inverter company in the world with more than 6,400,000 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 4 decades. The total global installed capacity was over 150 gigawatts in early 2014. The IEA envisioned solar to be a dominant source of power generation in the world by 2,050.
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 twenty fourteen. 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 3rd 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 UK, revenue increased 18% sequentially and 92% year over year as we continue to gain share in this attractive market.
During the Q3, we expanded our distribution channel with the addition of 5 new partners and expanded our business with some major residential installers. We entered the U. K. PV market less than 2 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 3rd 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 and solar community.
New Zealand's solar market holds great potential for Enphase. Since inception, our vision is meant 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 and 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 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 scale system from concept through implementation to long term O and 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 Enliven 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. 2 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 STI, 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 5th 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. This 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 5th 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. VAC Battery is a safe, reliable and easy to install storage solution designed for residential and commercial applications. We believe storage will be a multi $1,000,000,000 market and will be essential in helping gain 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 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've also completely 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 building 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 9,000 and 1 and ISO 14,000 and 1 certifications during the Q3, both 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 have 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 thanks to the hard work day in and day out from all our dedicated Enphase employees.
Now I'll turn it over to Chris for his review of our financial results.
Thank you, Paul, and I fully agree. The Q3 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 detail related to our financial results for the Q3 of 2014. And as a reminder, the financial measures that I'm going to provide are on a non GAAP basis unless otherwise noted.
During the Q3, we saw continued strong growth in the overall solar market as well as an increasing demand for Enphase microinverter systems resulting in the acceleration of our revenue growth. Total revenue for the Q3 of 2014 was $99,100,000 an all time revenue record. With $99,100,000 of revenue, we exceeded our revenue outlook of $93,000,000 to $98,000,000 that we provided last quarter. Revenue for the Q3 of 2014 increased 60% compared to the Q3 of 2013 and was up 21% compared to the Q2 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 Megawatts AC or 195 Megawatts DC during the Q3 of 2014, an increase of 81% on a year over year basis.
The 170 Megawatts shipped represent approximately 760,000 microinverters, of which 90% was our 4th 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 Q3 of 2014. Gross margin for the Q3 of 2014 was 33%, an increase of 4 70 basis points compared to the Q3 of 2013, as our product cost reductions continue to outpace price reductions. The Q3 of 2014 gross margin was consistent with the record gross margin achieved in the Q2 of 2014.
Operating expenses during the Q3 of 2014 were $28,000,000 compared to $27,000,000 in the Q2 of 20 14. Operating expenses as a percentage of revenue decreased from 33% in both the Q3 of 2013 as well as the Q2 of 2014 to 28% in the Q3 of 2014, demonstrating the leverage we have in our business model in line with our balanced profitable growth strategy. R and D expenses were $11,300,000 sales and marketing expenses were $9,300,000 and G and A expenses were $7,300,000 These non GAAP operating expenses excluded $2,300,000 in stock based compensation expenses and $365,000 of expenses related to the secondary stock offering that we completed during the Q3. The combination of accelerated top line growth, strong gross margin performance and operating expense leverage resulted in a record operating income of $4,800,000 in the Q3 of 2014, compared to breakeven in the Q2 of 2014 and an operating loss of $2,900,000 in the 3rd quarter of 2013. The $4,800,000 of operating income resulted in an operating margin of 4.8%.
I'm 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% to 25% range. For the Q3 of 2014, net income was $3,800,000 resulting in earnings per diluted share of $0.08 compared to a net loss of $3,600,000 or a loss of $0.09 per share in the Q3 of 2013. During the Q3 of 2014, we achieved positive GAAP net income for the first time. GAAP net income was $800,000 or 0 point $300,000 or a net loss of $0.15 per share in the Q3 of 2013. In summary, while looking at the income statement on a year over year basis, I'm 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 Q3 was $11,200,000 while our net cash flow was $6,900,000 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 days sales outstanding at 46 days during the Q3 as well as excellent inventory management with inventory on hand at 21 days. Capital expenditures during the Q3 of 2014 were $5,500,000 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 1 600,000 units and this year we expect to ship over 2,500,000 units, an increase of more than 55% year over year.
In the Q3 of 2014, depreciation and amortization was $2,100,000 We exited the 3rd quarter with a total cash balance of $44,500,000 $5,900,000 of term debt. We repaid approximately $670,000 of our existing term debt during the Q3. And 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 Q4 of 2014.
In line with normal seasonality, we expect revenue for the Q4 of 2014 to be within a range of $98,000,000 to $103,000,000 At the revenue outlook range, revenue would be up 50% compared to the Q4 of 2013. We expect gross margin to be within a range of 31% to 33% and we expect non GAAP operating expenses to be up 8% to 10% compared to the Q3 of 2014, as we continue to invest in research and development to support new and innovative products and systems. And now I will open the line for questions.
Thank
And our first question comes from Phil Shen. Your line is open.
Questions. Although you don't have guidance for 2015, perhaps you can provide us your view of 2015. What do you see in Q1 so far? And what do you expect as we go through the year?
So Phil, we only provide guidance 1 quarter at a time. So 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 Q3 and then kind of a flattish quarter going into the 4th quarter. So we definitely expect seasonality to be the same in 2015 as 2014.
Great. Thanks, Chris. 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. So 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, Chris. I'll jump back in queue.
Thank you.
Our next question comes from Josh Baraboe 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 bps. Just wondering if you could like I said kind of provide a little bit more of the moving pieces there?
Yes. Joss, 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 2 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% to 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 2 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. And of course, we are going to be smart about that. But we also if pricing pressure is becoming too high, we definitely will continue to take pricing actions. On the other hand, we have product cost, product cost reductions. We will continue to innovate.
And 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. And as a result of that, the road going forward might be a little bit bumpy.
Okay. And then 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 micro inverters and just your overall share expectations?
Sure. So clearly, there are some customers who we have many customers who are 100 percent Enphase, some use Enphase with other products. And 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. So 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. And now with the advent of the commercial product, we're addressing yet an entirely new customer segment. So I think that if we look at concentration, it's actually gone down considerably from Q2 to Q3 and we expect that trend over time to continue.
Okay. And then 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're that you've introduced how that might look relative to corporate average?
Sure. So 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 Hy Tech story. And this is very similar to what Chris 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 a cost reduction as well.
And 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.
And 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 2 things? 1, what percentage of your sales came from the Gen 4 products? And then also just clarification on the price pressure. Are you seeing that from micro inverters?
Are you seeing that from string inverters or a combination of both?
Right. So Gen 4 was approximately 90% of our total In converted now and I do expect in the Q4 to have close to 100% of our revenue coming from the 4th generation. Within the 4th generation, we have 2 products a 2.15 and a 2.50. The 2.50 was approximately 25% of that 4th generation mix.
And 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 products, string inverters that are competing and several of them are competing by lowering their price that will provide that will pose some competition in the future. But it's primarily from standard string inverters.
Okay. And then just the follow-up. In terms of the percentage of your sales that you're monetizing with the cabling products as well as Envoy, I mean, can you just walk us through any changes there? And then kind of an absolute percentage in terms of the Catalina solution? Was there some sort of anomaly this quarter in terms of the kaolinite solution given the 6% price decline?
I think there's a lot of folks that kind of understand the nitty gritty on where those price declines came and all of what contributed to that?
No. I think this the Q3 was pretty much in line with 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.
And our next question comes from Edwin Monk of Needham and Company. Your line is open.
Hi. Thanks for taking my question. First question I have is in terms of channel or distributors inventory, have you seen any change, no strong demand? Are you seeing inventory tighten up in the channel? Or do you think that channel can't build inventory?
So as you know Edwin, we monitor the channel very, 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. So no much change there. And then I guess question on strong growth in U.
K. And Australia. You're right. So it
looks like those are really 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, Trey? I think this level of growth is sustainable and specifically on Australia, are you talking about Australia driving 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. Thanks.
Sure. So 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. But our penetration and our market share growth in Australia has been very, very impressive.
In response to the question about do I expect that to continue into 20 15, 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 is has been completed. So I expect to see some very significant growth in Australia in 2015. And 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.
And we do now have much stronger brand recognition, great relationships with installers and distributors and we'll be able to leverage a lot of this in 2015.
Great. Thank you.
And our next question comes from Krish Sankar of Bank of America Merrill Lynch.
A couple of them. Paul or Chris, what do you expect the mix of resi versus commercial to be in Q4?
Currently that is still 85, 15 and I don't expect that to be drastically changing in Q4. We're really excited about the new commercial product that we have available. And we will more aggressively target the commercial 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.
And so you have to make sure you get designed in, in some of those larger projects. And 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 commercial market have been waiting for this product for a long time and we will start shipping it beginning 2015.
Got it. And then I mean 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 like 70% resi and 30% commercial? Will the gross margin be how many like a rough estimate, how many basis points higher or lower?
Yes. So we can't give specific guidance like that. However, what I can say is this. We have, as a company, we're 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.
So over time, I expect, as Chris had said, we are more confident than ever that our target gross margins and that aggregate corporate gross margins of 35 to 40 points will be met. In the short term, will you see some bumps in the road? Absolutely, that's to be expected. But I think the when you look at our cost reduction road map and you look at where we're estimating prices to be, we remain very confident that the long term potential of 35 to 40 points has never been as clear as it is today.
Got it. Fair enough. And then last question from my end is I understand that you did say that from a microinverter standpoint, there's really no one who's as good as you guys. I'm just kind of curious, if I look at your ASP on a dollar per watt basis, I mean, both year over year and sequentially, it has done quite a bit. So I'm kind of curious like 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's a difficult question to answer. What the nature of this market is that prices will come down year on year. That's not just that's not Enphase specific. I think that is true for every part of the channel, whether it's customer acquisition costs, whether racking, whether it's modules, whether it's inverters. We certainly will do our part to continue that.
Is there will we use pricing strategically in some accounts? Sometimes. Will we always respond to pricing pressure from competitors? Not always. But what we're 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 2 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, Chris.
Sure.
And our next question comes from Vishal Shah of Deutsche Bank. Your line is open. I'm not receiving any response from the Shaw 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. But I think we're seeing pricing pressure and we'll 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. But I think we can assume that going forward as we have over the past 7, 8 years is that we will continue to see prices in all segments continue to come down.
Great. That's it for me. Thanks.
And our next question comes from Pierre Maccagno of Dougherty. Your line is open.
Congratulations on the quarter, Paul and Chris.
Thank you.
So 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. But 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 and the commercial space. Our rate of increase in new customers continues to impress us and continues to grow. And 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. So 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 the 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.
Impressive. Also your regarding your SG and A, it was down as a percentage of revenue quite significantly. And so any explanation for that? Or going forward, are you just seeing lower SG and A as a percentage 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 and A, but also to a certain extent in sales and marketing.
Okay. And my last question here is regarding the transition to the M250. When do you expect that to be fully transitioned? And in terms of ASPs or gross margins, is there much a difference between the $215,000,000 and the $250,000,000
Yes. 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. So 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.
And so we would benefit from the adoption of the higher power microinverter.
Okay, great. Thanks.
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 Q3 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.