Good morning. Good morning. Thank you very much. I know Wednesday morning, Vegas, 8 o'clock, 8:30, it's kind of brutal, but we do appreciate you showing up.
I have something unfortunately
a little bit awkward to announce about the scheduling today. So please forgive us. Last night, I was invited to participate on the CEO panel that's occurring this morning at the plenary session. And Chris and I wrestled with this. This occurred like 3 o'clock last night.
Chris and I wrestled with this because we have been preparing, rehearsing for today. It was very important for us. This is our 1st big analyst, more of an hour, but Analyst Day. But really came to the conclusion that it's probably in the best interest of both the holders of Entei as well as Entei for me to attend that, which means that originally what I was going to do is spend the first 15 minutes with you and then turn it over to the rest of the team and then come back and for the Q and A. I'll still do the 15 minutes.
I'll still have my session,
but I won't be here. But right after that, I will leave and I won't be here for the Q and A. So any questions come up during this presentation, either for myself or for the team, don't hesitate to sort of ask as we go along. We will carve out some time at the end for questions specifically. Obviously, all these discussions are under the Safe Harbor provision.
So I'm going to start off at a higher level talking about our general vision and where we're going. After that, Raghu Balor, our Vice President of Strategic Initiatives and Products, also Co Founder, will be talking about our technology. Jeff Loboca, VP of Sales and Marketing Worldwide is going to talk about both the markets and our go to market strategy. And then Chris Sennesol, our CFO, will be talking about financials both the financial strategy as
well as the specifics.
So let's go ahead and start. And as we start, I think it's very important to recognize the scale and the scope of the opportunity that we're talking about. I think in many in a very real sense, we're looking at an unprecedented opportunity both in terms of growth of a company as well as wealth creation. Today, solar is less than 1% of the energy mix in the United States. It's less than 3% of the energy mix in all of Europe.
If there are at most 450,000, 500,000 solar homes in aggregate to date in the U. S, there are 900,000 new homes being built this year. The scale and scope of what we're talking about and how we are thinking about Enphase as we build Enphase is not about getting from $500,000,000 to $1,000,000 or $1,000,000 to $2,000,000 It's how do we do 20,000,000 rooms in the U. S. How do we duplicate that scale in other countries?
How do we move into commercial? How do we move into utility scale solar? There are going to be many opportunities in front of us. Our job is to be able to navigate these waters and to grow in a profitable way as we take advantage of our technology position and our leadership. So in order for Solar to realize its potential, in order for Solar to do what it needs to do, there are certain key initiatives that have to be met.
Solar has to evolve. The way solar has existed, it cannot scale to the heights that we're talking about. We have to improve the return on investment for both the owner and the installer. We do that for the solar by decreasing the complexity of design and installation. I don't care how what your ROI is, if your solar installation is challenging or if it's faulty, you're not going to buy it.
Operations and maintenance has to be developed to be able to be done in scale. Utilities need to be able to control and manage the grid and do that with a bunch of distributed resources. And then finally, safety. Solar has a great safety record so far scaling to 20,000,000 rooms, we need to make sure that that continues. So how do we achieve that?
At Enphase, we have fundamentally a very deep philosophical conviction that the future of energy is about a distributed network architecture. All of us come from the tech industry and we've seen exactly this occur many times in many markets. If you go into a Google or Facebook data center, you don't see a large server anymore. What you see are many small servers, thousands of small servers that are replicable, that are inexpensive, that are hot pluggable, that are simple. If you want to build a supercomputer today, you build it with 10,000 Intel chips on CPU blades for exactly the same reason.
And for that exact same reason, we're seeing solar do the transition in the same way from a big, large monolithic inverter to lots of small simple devices. So how does that benefit you? Well, clearly for the owner, we produce we harvest more energy and therefore produce a better return on investment. In fact, our energy harvest increase is embedded into most calculators today. We also produce a better return on investment for the installer because we simplify all the design and installation.
With a bunch of microinverters, you don't have string sizing, you don't have high voltage, you don't have special certification and qualifications necessary. We've reduced those barriers and enabled tradespeople now to become qualified solar installers. Our reliability is far and away the best in the industry, but you need to look at reliability in 2 ways. The unit reliability of an Ampeze inverter is the highest reliability of any inverter. But more importantly, the system reliability is yet again higher because even if an inverter does go down, the system is effectively performing, in fact, in many cases, still outperforming the original assumptions because of the extra energy that we produce.
Now that doesn't mean that an inverter will never go down. That doesn't mean that a module will never go down. So what happens when that occurs? Well, with a traditional inverter, you have a sort of a break fixed model that says that when it breaks, I've got to run it fixed and I've got to drop everything I'm doing because now the entire system is down. This is true in a residential system, a commercial system, even utility grade systems.
With an in phase system and inverter goes down, the response is do nothing. Wait, it's 1 inverter. We've had many of our installers tell us that that's exactly what happens. And they'll wait till there is in aggregate once every 6 months, once every year in a particular area, maybe there's a module issue, maybe there's a wiring issue here, there's an inverter issue there, they send 1 guy out, the guy going out is the least expensive person and that person go ahead and manage his entire area. And because of our communications technology, we know in advance if there's going to be an issue and where that issue is.
That is scalable to 20,000,000 rooms. That is uniquely scalable to 20,000,000 rooms. We have a microprocessor built into each and every inverter. The inverter, as Raguel will talk to you about, is very software definable, very programmable. So we can adjust to the evolving needs of utilities.
And there is there are multiple examples of this already where utilities have requested us to make changes to a group of inverters to help stabilize the grid. Back in Petaluma at our headquarters, we were able to push a button and make that happen. And then finally, safety. We are the same voltage as in a building.
We solve the safety problem in
a way that is impossible for anyone else to solve. We don't need big disconnects. We don't need the safety switches and all the stuff that all the issues that are being developed in order to solve the safety problem are solved inherently in a low voltage design. So we've seen as the vectors of the industry, we've seen industries move in this direction. And for the exact same reason and for the reasons I mentioned, we're seeing the solar industry move in this direction.
Now the question is, why aren't other people doing this? What does it take to actually make this happen? Answer is very simple. There are 4 buckets of technology, each one of which is complex, each one of which requires its own unique set of engineers and all of them have to work together seamlessly to make the solution work. It starts with a semiconductor based low power microelectronics solution that is a lot of that takes a lot of the most advanced power electronics designs in the world, coupled with, as I said, semiconductor design, firmware, software, everything to make that device work.
On top of that, now you've got these devices that are distributed, how do you communicate to them? We had to develop our own communication technology that runs on the power line that allows us to communicate to and from each and every inverter to bidirectional communication technology that is proprietary to Enphase and in fact embedded in our ASIC. Now we're collecting data. Today we're collecting 600 gigabytes of data every single day from over 250,000 sites in 70 different countries. And with all of that data, we're analyzing it, we're reporting on it, we're alerting people when there
are issues. Many of our customers are
using that data for billing. This is mission critical data that's being managed on a scale that the solar industry has never seen before. And the rate of growth of that data is stunning. As you can imagine with how Enphase is growing, that data rate is growing. Managing that data is a complexity that very few companies in the world, forget solar, in the world know how to do today.
And then finally, high volume manufacturing. There are very few industries in the world that have the requirements that they have. They have the kind of volume we're talking about, millions of units a year moving to millions of units a quarter under the cost challenges that the solar industry has coupled with our reliability. I can only think of 2 frankly, this is the automotive industry and the disk drive industry. Outside that, nobody knows how to do this.
Nobody has to do this. The manufacturing IP, the intellectual property that defines how we build these units is owned by Inpixon. We have our own manufacturing process engineers. We define the entire manufacturing line. We'll dictate what equipment, where the equipment sits, what is the solid composition, what are the bell speeds, what are the temperatures, all of that is controlled and defined by Enphase.
In fact, much of the manufacturing line is automated. That automation is designed and owned by Enphase. It has to occur. What I'm describing to you, by the way, is, as I mentioned, very unique and there are only a couple of companies in the world that take this kind of responsibility. It works great because again, it fits the general model where we own the IP, but Flashtronix, our contract manufacturer owns the equipment, owns the people.
The next topic is on competition. I'm just going to take a minute here because I think there is a confusion here. There are no reports that show microinverter market share because they would look stupid. You see Enphase at 97%, 98% and you'd see 50 other companies at a fraction of 1%. So you don't see that report.
I think as a result of that, some people feel there may be a confusion that, well, therefore, there is no competition and we're going to wait till there is micro competition. The reality is we've had fierce competition. We've had incredibly aggressive competition. The issue is that we beat the competition. SMA and POWER1, the 2 largest inverter manufacturers in the world have had multiple generations of microorganisms for years to no success.
In fact, SMA is no longer even showing their pie chart in their booth. I can't speak for
them, but it's almost like they're
they punted. They've tried to compete and were completely unsuccessful. We've had multiple when I say multiple, I'd say anywhere between 12 dozen very well funded that starts in this space that are today all of them dead or dying. There's probably 30 or 40 Asian companies that have been around for 4 or 5 years trying to compete with Enphase all to no avail. The competition has been incredibly strange, incredibly harsh.
The difference is that we have overcome that competition. And now we're in bigger and bigger volumes every day. Now with the next generation technology, we've taken yet another leap. Remember that they are competing with us or have been competing with us against our the inverter we're shipping today. What Raju is going to talk to you about our next generation inverter is many times more complex than what we're shipping today.
We've had well over 100 engineers working on this thing for the better part of
3 years
because of that level of complexity, because of what we need to do in order to accomplish what we need to do. So the wrong takeaway is that we don't have competition, we certainly do. And there could be something that comes out that we're not aware of, which is why we're always looking over our shoulder, why we're investing in R and D to increase that lead. But it's important to note that there has been tremendous aggressive competition, but today Enphase is the last person standing. Again, all that is great, but what makes Enphase investable fundamentally is everything I said, coupled with the right business model.
We're really the only company in the tech industry that has the solar industry that has a tech business model, very standard for all of us, very prosaic in Silicon Valley, but wildly unique in solar. And by that I mean, we focus our OpEx on the development of intellectual property, semiconductor design, software, services, so that we can provide more features, functions and products as you see here to our customers to help elevate our ASP while working with Celestronics, working with a contract manufacturer to continuously reduce our price and build products at the highest possible quality. That combination is where you see the gross margin expansion. That combination is the definition of a Silicon Valley hardware company. That's who Entpace is.
Again, this is a business model with decades of proven success, but again, uniquely in the solar space. What is the future for Enphase hold? It's unbelievably rich. We have never at been as excited about what's going to happen in the future as we are now. The residential space is going to turn from just solar into energy management with the advent of storage and load management.
You're going to see storage and solar coupled together in the utility space. Again, Raguel will talk to
you about the products that
we have that are going to support that. Utility scale solar systems, these big 250, 500 Megawatt inverters are dinosaurs. They are dinosaurs. As we enter the utility space and we said many times that we are entering the utility space, people are going to understand that a distributed network architecture is the only real architecture that scales. The micro grid market, we're doing a lot in the micro grid.
We're doing a lot with the U. S. Military. We have several micro grids in Nigeria. The microgrid market is yet again uniquely suited to an MPA solution in part because of its location and the challenges with O and M.
Utility Services, again, you're going to hear more about this, but we know more about the distribution and feeder networks that we're in than the utility does. We are already in discussions with multiple utilities talking to them about how we can supply services to them that not only helps them monitor the grid, but help them control the grid through our inverters. And there's a host of other new markets that we're not even ready to talk about yet. So finally, in conclusion, I think we all probably agree that Solar represents an unprecedented market growth opportunity for those companies who are in the right place to take advantage of it. Enphase is an undisputed technology leader.
And as of today with what we're announcing, we've taken yet another leap forward in technology. We have the right investable business model. And finally, the opportunities in front of us, both through market segment expansion as well as geographic expansion are simply stunning. So if there are any questions, I'll take them right now. If not, I'm going to pass things over to Raghu Balore, our Vice President of Strategic Initiatives.
And again, I apologize, but I'm going to have to run. I will hopefully catch up with you back at the booth.
Thank you very much.
Good morning. Thank you very much.
I want to start
the video, but before I get there, what a first day of SPIs, our booth was just nuts. It was absolutely crazy. I don't know if you guys got a chance to come by
or not, but it was
absolutely wall to wall people, it was just fantastic. But I want to start with a quick video here. In the solar industry, all you need and a lot of money are extremely viable. Your solar system should be up,
it should be running, it should be effortless.
The technical challenges of achieving that at volume are incredible.
We need to build a product that can support 20,000,000. How do you do that? Well, that's a completely different level of reliability that had been seen in the inverter industry
before. Most probably when I
work in the telecom industry, It's degrading to us to actually think about system reliability for some.
Quality is built into the entire project development license.
So it's not just
quality of the product or quality of the system,
but it's quality of the whole solution and quality of the company that stands behind it. All this came out of the high-tech business. So we applied really high-tech principles to solar. Before we go into the planning phase of the product, we outline all of the standards that have to be met since our system has to perform at really wide temperature ranges, we choose components that not only do that, but will operate well outside that. We have certain components like our capacitors that we actually do years worth of testing before we put them into design.
The system is constantly communicating with our Envoy device, so that we can pull real time data from neighbors, know exactly what they're doing and push data out to them to either upgrade them or fix problems that we have. When we do a product development, we go through a series of stages with successive higher stages of validation testing, culminating in 1,000,000 power on hour tasks under stress conditions. The performance data from the field is critical to our process. We have upwards of 5,000,000 units in the field that does 400 gigabytes of data a day. We test the unit under stress conditions simulating lifetime.
We test a very specific temperature conditions. We do thermal cycles and these tests themselves last month. Those chambers are validating the reliability of the under very high stress conditions. We do ongoing reliability testing in production so that we can assure that what we produce in production is equivalent or gutter to what we produce in development. Flextronics is our manufacturing partner and they have a lot of experience with products that have to work for beyond 25 years, which is a different mindset.
We have in phase employees embedded with Wextronics team. They oversee day to day production. We build 15,000 units a day with automation. We minimize variation and improve quality, repeatability of the product. So we developed our own manufacturing monitoring system from the U.
S. We have real time views of all of the different assembly operations and test steps and the process. The quality inside of that phase is in the organization around the product, build the product well, test the product well, that's extremely key. But then with the fact that the company is going to take the steps and make sure that the customer satisfies that, the difference between I have a quality product and I have a quality system.
Quality is not something that we do
in addition to our job. Quality is what we do.
It's embedded into everything that we produce.
Great. As you can see clearly, we take quality and reliability very, very seriously and this is not just at the manufacturing step, but starting all the way from conceiving the product, the design all the way through customer support and service. So as we jump in, I'm going to get into kind of the technical details here, if I may. When we started the company, we never think about we never thought about the inverter as a piece
of hardware.
I met Cisco and my background is in telecom. We always thought about it as a system. And the system includes the power electronics, the communications, the software and all of them working seamlessly together. While we have done a lot of innovation on the power electronics side, we have built this really extensive communication and software infrastructure. So just to give you a sense of scale, as Paul mentioned, 600 gigabytes of data gets managed on 250,000 installations in 70 countries, right?
So in essence, what we have done is we have built this operating system where solar is just one application that's running on this operating system. Now you can think about how that operating system is somewhat is extensible in that now you can think about adding storage, load management, utility services, etcetera. So we'll talk more about that. And as you can imagine, it's very IP rich. We have filed 125 patent families, each family has multiple patents granted, out of which we've been granted already 48 patents.
And these are very rich patents in all areas, power electronics, communication, software, etcetera. So now again, when you think about the system, think about the inverter as kind of a physical layer and where it communicates with the gateway, gateway the software is the platform layer and then the gateway then communicates with the cloud and that's the application layer. And all of these this combination of the physical layer, the platform and the cloud all working seamlessly together as a system. The inverter itself is a digital architecture, the heart of which is our own custom semiconductor, right? And it's an incredibly complex device.
And it's not complexity for the sake of complexity, it's what's needed as we go further and the grid itself becomes more complex. I'll give you an example of what I mean. I worked at a startup and Martin and I both, we worked at a startup many years ago. We were doing cutting edge optical communication technology, absolutely cutting edge. And when the product came out, we blew the doors off the market.
Cisco bought us for $7,000,000,000 at that time, right? This product, this microinverter is an order of magnitude more complex than what we did back then. And it's because you're trying to optimize performance, reliability, cost, all for high volume and in high volume manufacturing as well. And now with the 5th generation of products that we just announced, arguably the most complex technologically complex device we have designed. It took us about 4 years.
Again, it's not complexity for the sake of it, but it's what's needed as we go further. And I'll talk a little bit about it on the next slide, right. Now the inverter itself and Paul alluded to this is software defined, meaning as I said, the digital architecture with ASIC is running a microcontroller in it. We can we can completely alter the behavior of that inverter through software. And then so why is that important?
There are a couple of key advantages to that. PV or solar is a 20 year asset. And if you look, the grid conditions are changing dramatically, load conditions are changing dramatically and the weather conditions are changing dramatically. So you cannot expect that you can have a static PD system and it's going to last 20 years. It's just not going to happen.
You need a system that's fully adaptive. You need a system that you can push remote software upgrades to and alter their behavior. You've seen this play out in places like Hawaii, where the utility called us and said, hey, can you in a hypernutrition solar environment, they said, can you alter the behavior? And we were able to do that. First, they said, hey, we think there are 1,000 sites, and we said, no,
there are 5,000. They didn't know how many sites
they had on their video networks. We knew obviously because we have that information. We were able to go in there, do software upgrade. Of course, we had all the audits in place. We did the upgrade and change the behavior.
I think that's going to continue and that's not new. Anytime SolarEdge high penetration, you'll have to change its behavior and alter its behavior. Another example of this is when you go into new geography, we don't develop a microgrid from the ground up to go to new geography. In most cases, we just do a software change. Just an example of that is the requirements for France, Belgium, UK, Australia, all different regulatory requirements are completely different and we make software changes.
And so there's a lot of leverage that you get from that model. Now talking specifically about our FCDs or 5th generation microinverter. So 97% average efficiency, 2 75 watts. Again, when I look back when we first started, they said 94% could be done. That's where we started.
Here we are at 97 percent. But what's unique about this is the following. Solar anymore cannot be simply attached to the grid. It's just not going to happen. As solar penetration continues to increase, you have to integrate into the grid, which means you have to have the capability of providing advanced grid function, things such as power factor correction or both bar types function.
So and all this Genzyme version that I have here does all of those things. But there's one key feature that it provides that I think is an enabling technology to other solutions as well. And that is, it's a fully bidirectional device, which means it's really not a microinverter, it's an ideal converter. It can go DCN, ACI, ACI, AC out, AC in, DC out. We're joking about it, you can even do DC in, DC out.
So why is that so important and we'll come to that in a second. But before we get there, I want to talk about kind of what our broader vision is. Our broader vision is here's a residential example of that is how do you provide to the system owner the lowest cost, highest reliably and seamlessly deliver that energy to the system owner. So it's in the context of a total energy management solution where you have CD on the roof, Again, it's all distributed network architecture. As Paul mentioned, we don't have any centralized power conversion.
So you have PV on the roof. You have storage in your garage, you have control and you have like a smart appliance or
a smart thermostat, for example. All of
them being managed seamlessly through our energy management solution. It is this is a manifestation or a realization of that operating system model I was talking about, where solar, storage, smart appliance, etcetera, all comes together. And it is what we are leveraging for our solutions. So here is a quick video of how that plays out, how the energy management solution plays out. So again, the speed of the roof, storage in your garage, control and then in this case and some management through you have a smart thermostat again to manage your loads, for example.
So solar in the morning comes up, solar starts producing. It's not producing a whole lot, it's 30 in the morning, so you're drawing some
from the grid. You go
off to work and now what happens is you have too much generation of solar. When you have excess generation of solar, you start charging the batteries. Once the batteries are full, you start feeding power back into the grid. You come back well, 30 is kind of early to come back, but nevertheless, you come back, you come back home. And then now what you do is you start solar there's still a little bit of solar left.
And then as the evening comes along, you start discharging from your batteries and then and start feeding all the loads. This is an example of how that whole control system or that whole energy management solution works and then you rinse and repeat the next thing. So now let's talk specifically about storage. Pardon this kind of engineering line diagram, but again, philosophically, we fundamentally believe a distributed network architecture is better. So that's what we have today.
That's the Enphase solution in that, you have a PV system, you have panels on the roof attached to a micro inverter. And that micro inverter converts from DC to AC on a per panel basis and it's producing, say, in the home, 2 40 volts standard AC voltage, standard home voltage and it's connected through our engagement cable or standard AC wiring into a 20 amp breaker, right? So the reason why we did this, there are four reasons. 1 is you produce more because you don't have a lowest common denominator problem within the panels. They're all connected in parallel, it's an AC module.
The second advantage is no single point of failure. The third advantage is very soft plug and play, very simple to design, install and maintain. And it's a very safe solution because you don't have high voltage DC. And it all gets managed through our gateway because all of them communicate over the power line to our gateway. We applied that exact same principle to storage And we said just like you have an AC module on the roof, you have an AC battery in your garage, right.
Unlike every storage solution that's out there regardless of what they say, every storage solution that's out there, they're all centralized topologies, which means you have a battery bank and a big central inverter that does the conversion. It suffers from the exact same problems if you are as good as the worst performing battery, worst performing cells in that battery bank. So you have a production problem. You have a single point of failure that inverter fails, in some cases both you lose PV and storage and in other cases you may lose your storage. The third problem is it's extremely complex to design and install.
You need 3 people, you need special equipment, these battery banks and inverters weigh 100 kilos, 150 kilos. You can go look at them, the refrigerator size now. And finally, it was bad enough that people were rubbing high voltage DC all over the place, now couple high voltage DC and high energy chemistry, I'm not sure that's very smart, right? So what we said was, look, we're going to do an AC battery, break everything down into very small manageable chunks, you address the production problem because you don't have or you completely minimize the lowest common denominator problem here, very small number of cells in a cell module, right. You don't have any single point of failure, the module fails or the battery fails or inverter fails, only that's isolated.
It's completely plug and play, AC coming in and AC coming out of it. And by the way, AC coming out of it and you just plug into a standard AC bus and goes to a 20 amp breaker. So very simple to design, very simple to install. We can drive that cost down. Finally, no high voltage DC.
So from a safety standpoint, arguably much safer solution. Very modular, very scalable. You can start with 6 or 4 kilowatt hours and go to 5, 6, 7, you can
grow it as you want.
By the way, this exact same architecture, this exact same topology works in commercial as well. And this whole system gets managed. So if you think about the cost of storage system today, it's kind of there are 4 costs that drive storage systems. The chemistry costs, the electronics or the power conversion costs, the installation costs and the integration costs. Let's talk about it for a second.
So chemistry costs, we know that's headed towards commoditization. I think I see numbers by $150 $100 a kilowatt hour. Say, yes, absolutely. No question about it. It's heading towards commoditization.
No question. The second cost is power electronics. We use the same it's the bifurational micro inverter, it's the S275 that's in that AC battery. And this is leveraging the scale of PV, 1,000,000. We can drive the cost of power electronics done substantially.
Installation, like I said, it's not a 1 person install. It's all plug in play. Each battery weighs about 40 pounds. You literally hang it on the wall and run it into a 20 amp breaker. It's a 1 person install.
We talked about and then the 4th element is, unlike PV, unlike solar, put panels on the roof, when the sun shines, it converts energy. It's not good enough to have storage in your garage. It's just not going to work. It's not going to do anything. You need an expert system that's there that's managing your solar and PV and making decisions on when to charge, when to install, when to discharge.
Because it uses the same communications and software infrastructure just on their application, it's seamless, plug it in and it just starts pretty much working at that point. So and to give you some specifications, it's 1.2 kilowatt hours. We use lithium iron phosphate. Safety was a very big driver. Having said that, we are chemistry agnostic.
Just like we are panel agnostic, you can put a Trina next to a Yingly with our micro, you can put any chemistry in there. We picked LFP to begin with because and particularly this particular partner that we chose, Eddy Power, fantastic performance, designed for stationary applications and very ultra safe batteries. And we did we looked at all the testing, was very impressive. Like I said, very modular, plug and play and fully integrated into the Enphase solution. So this is what this kind of slide And that's the AC connector that comes out of it, just plugs into our standard trunk and drop cable that we use for TVS.
Yes, we looked at both 18,650 and 2650 because the packaging thermal I mean, that LE cell will discharge down to minus 20 feet. Yes, and you can charge to minus 10 feet. It was a very big driver for us because we want these to sit in the garage and we don't want to do any we want to do passive cooling on it. And we know that has a big impact on RTE and cycle life. So we took all of those into consideration.
We actually designed our own, what I call, an effective energy model that takes into account cost, RT, cycle life, DoD at different temperatures convolve to our application. And it was quite obvious. That's why when somebody says, gives you a spec, it should be followed up with half a dozen questions, because not everything is set up. I want to be very clear I want to be very clear that when we talk about energy management, it's not just applicable to residential. It applies just as much to commercial.
Just the application, the core elements of it are the same. So PV on the roof, you got storage, you got load management, integration to BMS, your optimization function is different when doing demand charge reduction or you may be optimizing for highest availability. But the underpinnings of it are the same. That's the beauty of that operating system model that we were talking about. Now one I want to make one point here.
When you think about commercial, we don't need to make it this pretty and it doesn't have to be aesthetically so nice. We did this for residential application. For commercial, it's exactly the same concept of a distributed network architecture. It's just repackaged in a different form factor, which we are working on right now. So what's next?
Because as part of my responsibility of strategic initiatives, I'm looking at things like microgrids. I'm looking at things like utility scale, deployment and utility services. I'll talk about utility services in particular, but let me just touch on microgrids. It's absolutely the future of energy, both in developed countries as well as in developing countries. In developed countries, it's about resiliency.
And in developing countries, it's going to be about energy access. And in our opinion, microinverters are a perfect fit for those applications because of the one, because of the software defined nature of it, because of energy management, because of ease of O and M. It will be the biggest driver and I think it's absolutely the future. We have a number of projects that we're involved with right now. You'll see some announcements about them.
Utility scale solar, we have always believed that we that micro motors are a great fit for utility scale solar. We haven't done it now in the interest of focus. But the value proposition, particularly around operations and maintenance, holds very strong in utility scale services, in addition to yield, in addition to CapEx, not just on inverter, I'm saying the system level CapEx plus O and M, all driving towards we know it's an LCOE sale. So again, stay tuned. Let me talk briefly about utility services.
One of the challenges with solar is the technical burden it places on when there's very high penetration of PV and the utility is not ready for all that reverse power flow, because now you have power going into the distribution network. With the infrastructure that we have, with all the deployments that we have, for the first time, the utilities have rich information deep in their own network. In fact, with all due respect, we know sometimes more about what's going on, on their feeder networks than they do. That's because part of the monitoring that we do is not just on how the inverter is doing, we monitor how the panel is doing and we also monitor how the grid is doing. They are directly sitting on the grid.
So I'll show you an example. I can't disclose where the location is, but I'll show you an example of high penetration of solar to sign glass on a day with grid events took place where the grid was out of specification that triggered that caused solar to go offline. Not uncommon, but we have that information. Once you have that information, couple that with the fact that we have vibrational common, we can make adjustments to that inverter, the utilities are saying that it's very valuable. Having said that, we don't have any business model built around it as yet, just stating what the utilities are telling us.
This is a heat map of all the installs that we have. It's actually you can go to our public side and you can actually see them. But as you can see, all this number of systems installed worldwide, residential
and commercial.
But here is that I was talking. You'll see these red flashes. Now that may be a site that has an issue, but at some you see that big event? That was something happening on their network. And you see these big flashes.
We have all that information. We know exactly what happened and what was the cause of it. So in conclusion, in conclusion, yes. Yes. In that particular case, it was what's called an AC voltage out of range, meaning usually it's expected to maintain a certain voltage.
When you go measure the voltage in that socket, there are very specific federally governed rules that say Citi must stay within that range. Because of high penetration of solar, they're having a hard time maintaining the range. Because clouds go by, your frequency may be drifting because it's not fast enough to catch up, but all that TV comes on and off. It's like massive amount of nodes coming on and off in versus solar. It's causing that challenge.
He detects all of those. By law today, by law, by certification, they say, when you have a out of voltage or an out of frequency event, you have to jump offline. It's the law today. What we are saying is, hang on, what we can do is ride through some of these transient events or widen the windows. In some instances, we didn't widen the window.
But there are now we are proposing advanced rate functions where we can write through some of these demands. So what we can do is we can say, hey, this is the transient voltage event. We can say, do not go off light. That way the generation source, the primary generation source doesn't see a massive change in load. You can see it right through that transient event.
Or you can say, we're going to change the operating parameter that says do not trip offline between today's set at 59.7 Hz to 60.3 Hz, we widened that window. So even if that event occurs, you kind of rise through it. That's just one simple example of what can be done And we have done that. Again, I can't disclose where it is, but this happens in last year.
So can you talk a little bit about the bi directionality? And so my understanding is that you guys have a resonant topology that you're working with. And there's only a couple of companies working with this approach. Obviously, the form factor is complicated to build it. How complicated is it for someone else to take that approach into dine and sort of catch up?
Because that seems to be the key to and resource effectively.
Yes. So I think as the evidence has been that it's been very difficult to catch up with our previous quasi resonance apology. I think this is even much more complex. Like I said, arguably, most technologically advanced work that we have done. I think it's just that much more complex.
To provide full bidirectionality, all these master functions and still be at 97% in 275 watts because efficiency also drives reliability. So in terms of magnitude, I can say this is much more complicated than what we have ever done. And that itself was much harder to people are finding it hard to catch up on. As Paul talked about competition, we don't have incredible amount of competition right from the beginning. I mean ABB and SMA, 2 big behemoths in the solar industry have been trying to do micros.
And this is using the oldest policy.
And the advanced CRIS technology, string averse been able to do that for a good period of time. It's mandated in Germany. What do you think it does in terms of your product positioning positioning in Europe? And is that okay? I know this is maybe
So clearly, we can do those, but it's also degree to which you can do it. And that's my point. With so many changes taking place on the grid, I mean, I haven't been in this industry for 8 years, the grid is more different than ever before. It's because there is more PV, solar on there. I keep saying PV for photovoltaics, but more solar on there, EV coming online, etcetera, the grid and the weather conditions and node conditions are changing so dramatically.
You want a completely software defined system, which means it's not sufficient to have, hey, here's a list of 8 advanced functions like both bar, frequency watt, ramp rate control, write through, etcetera. You need something a lot more flexible than that. So when you have a hardware based solution, you're going to be limited by how much you can do. I'm arguing that 4 years from now, you'll need maybe 2 slopes
on your rapid control.
Anything is possible because you need that
There's a couple of
things, right? One is what is I mean, it's kind of doing what Queensland is doing where they're saying go to 0 export and then I'll allow interconnection. I think storage, we have discussions have been going on. There are speeds out there to provide storage. We have had those discussions and we clearly are saying, yes, if there is storage, we can foresee allowing that.
There's going to be policy also has to catch up, who pays for it, etcetera. So I think there are a few things that need to happen. Some rules have to be set up and they're already working on 14H, which is the Route 41 equipment in Hawaii. So policy technology, I think, will be ready. Policy needs to get in place and the PUC needs to approve it.
So all the regulatory stuff needs to occur. But it's absolutely a fertile ground for where this thing is going to happen first. But what's really interesting for us is that it's the Canadian coal mine. It's going to happen everywhere. San Diego, I think, is going to be next.
I mean, San Diego has got very high penetration of solar on a pretty tight net on a pretty tight distribution network.
I would say one thing, though. I'm going to talk about markets to TAM and the model for our success in entering new markets. But to answer your question, it's not just about entering new markets with our existing solutions, which is as Radu showed solar generation, but then having those same go to market engines available for other products and solutions that are sold in addition to solar generation storage, home energy solutions, and that becomes very, very large very quick. So the answer is we can leverage what we're building today with the route to market and relationships and bring more products and more forward solutions, which will help grow the business. And in order not to be confused, storage is not going to drive any meaningful revenue this year or 20 15, okay?
But we need to have the product out there to start introducing it to new alpha and beta size to share with the rest of the solar industry what we are doing and get ready for the ramp probably in 2016, 2017 and 2018.
Quick conclusion and then I'm going to hand it off to Jeff. I think we're pretty tight on time. Again, I want to emphasize what Paul said. We are absolutely a technology company and our goal is to bring innovative products and solutions. I keep saying this is about relentless innovation.
That's what we are about. With that,
Jeff? Thank you, Biraju. Good morning. My name is Jeff Lobel, Economy Global Sales, Marketing and Service SVP. And I want to spend about 15 minutes going over a little bit about the solar market, growth trends, sizing and then more specifically, how does that relate to Enphase and our growth drivers over the next several years?
If you look at the data, it's a large and fast growing market, it's an attractive market, expected to be 60 gigawatts in 20 16, a 20% compounded annual growth rate. But if you go back to some of
the things that Paul mentioned in terms of some
of the data points from International Energy Agency, that this could be very conservative, if you believe some of that data. So it's a large and attractive market. And what's important is today, even as much growth as we've realized over the last several years as we've grown, we're just playing in a small segment, and small segment of this marketplace. So how do we turn that into even bigger growth opportunities? What are the primary growth drivers that we see at Enphase over the next several years?
The first is, we've been very successful, as you know, in our core market, U. S. Residential, we now have over 40% share. The question is, well, that's pretty high. How do you grow from there?
Where do you go? Yes, when you're at 40% share, you're getting incremental share growth. It's tough to make quantum leaps from there. But that market is going to grow from 1 gigawatt or so this year to 3 gigawatts in the next few years. That's going to drive a lot of volume, number 1.
Number 2, major growth driver is U. S. Commercial. We've just scratched the surface in U. S.
Commercial. With primarily a residential product, we've been very focused on small commercial. Small commercial, as you can see, is just a small piece of the U. S. Residential marketplace, and we've been able to be very successful there, getting close to we think at the end of this year about a 40% share in exit run rate.
When you look at our new C250 and what we believe we can do in medium and large getting into those segments, that's a 30x growth in the market availability, from 2 50 megawatts to almost 9 gigawatts in just 2 years. So now we're playing on a much bigger pool. Thirdly, we're going to continue our geographic expansion, new markets, new countries. As we've done today, we've successfully grown in a number of new countries, but we're still only playing at about 2 gigawatts. If you look at our overall combined share, we're at about 5% and we're growing.
But as we look at the next couple of years, we talk a little bit about this new F2175, for example, in Germany, countries like that, opening up that market, get this access to another 20 gigawatts of market opportunity. Now we're going from roughly playing in a very small 3 to 4 gigawatts phase 2, 30 gigawatts of truckers at that point represent over 50% of the market opportunity in 2016, tremendous growth and access to market and opportunity. So how are we going to be successful? How are we going to win? Well, we've got a proven model.
We've learned a lot over the last few years in terms of what it takes to enter, build and grow new markets. We have an incredible brand, a brand that stands for the best quality reliability, the leader in technology innovation and the best in class support. We have incredible the best in class support. We have incredible distribution and reach. Global partnerships with companies on the distribution side like Rexel, players like SunEdison, where we have a very large and growing piece of their business in the residential small commercial business unit today.
We're expanding that into Europe and Australia and APAC. And major PV module manufacturers for global relationships like SolarWorld. We can take that and leverage that and that helps us go big and go fast and get access to those markets. We have very deep and strong partnerships with market leaders. As an example, in the U.
S, 7 of the top 10 residential installers use Enphase for a significant piece of their business. As a matter of fact, more than half of those use Entphase almost exclusively. They've made the conversion, they see the benefits of the proposition and they're doing Entphase all the time. As I mentioned, we've learned a lot in the last couple of years in terms of what are the right strategies, what's the playbook, what go to market strategies we have next year, what investments do we need to make in the market and we're able to take that now and apply it to new countries and new segments that management. So a lot of years of blood, sweat and tears to build that model.
And lastly, the end stage proposition is very compelling for both the business proposition for EPCs and installers and as a value proposition to project owners, whether they're homeowners or commercial owners. What does that mean? So the NPA system totally changes the way that the economics and the overall system performance is done. So while CapEx is important, it's not the only thing. This focus on dollars per watt of CapEx, all important, is really not the most important thing.
It's about the system IRR. It's about the levelized cost of energy. The end phase system drives lower levelized cost of energy, which drives higher IRR. You're an individual homeowner, whether you're credit squeeze with 20,000 homes in a portfolio or whether you're a project commercial owner, you can even best site RR for that asset. As an EPC installer, you can sell a higher priced system and make more gross profit.
That simple. Not only that, but as you adopt Enphase, you get operational efficiency, you're able to reduce costs because of the simplicity in terms of design, labor. You actually wind up saving money, carry 1, use inventory, right? All these things are huge in terms of business process. That's how we win.
And that's what's enabled us to
do this in our first important growth driver, which is the U. S. Residential and get this kind of share growth consistently year over year to the leading share position of below 40%. So if you think about this category leadership in terms of the position, you think about the fact that it's going to be a 3 gigawatt market in 2016 and a market that's growing over 50% in terms of megawatts year on year, that is going to drive a lot of growth. In other words, we're excited we're not expecting huge share growth, but our leading share position in a huge market has grown very fast is a good place to be.
Let's talk about commercial. So as I mentioned, even with primarily more of a residential product, we've had a lot of success in small commercial space. We've got up through the summer over 150 megawatts of commercial installations installed in the United States. This year, as you can see, we expect to continue that growth in installed 50 megawatts. That represents over 7,000 systems of anywhere from smaller systems like 10, 20, 30 kw up to our largest system, which is Windstream Megawatts.
So Inphase is being used, it is successful, but it's not even yet where the car has optimized design for commercial. That gets us roughly to about at the end of the year about 40% share in the space because the medium large commercial space is much bigger, it's only about 6% of the overall commercial. So lots of upside opportunity. And again, what's driving that is the industry leading best business proposition for the EPC and installer and the best value prop, the best IRR for the project owner. But why are we well positioned to ramp in medium large commercial in the U.
S. And drive growth? You've seen our announcement and hopefully we'll show you some of the new products that we've just launched. The C250 is designed and built just for the commercial market, 40 volt 3 phase, we haven't had that before. More importantly, though, we recognize that it's not just about the end phase system and the hardware and that piece of software has to combine with complete end to end solution.
So design and coding tools, providing access to financing partners and most importantly we think as a new and very unique differentiator, O and M. Now I'll talk about our O and M offering that we're going to have as part of our overall commercial offering. We again are going to work our playbook and have dedicated sales, marketing, technical resources focused on the commercial market, commercially seasoned commercial developers. Just like we've done in other countries as we ramped and scaled. And again, we believe that the levelized cost of energy in Enphase Systems and Commercial is going to be consistently about 10% lower than string and central systems, which means a higher IRR.
Let's talk for a second though
just about O and M in general.
We've talked a lot about technology platform, a distributed approach. It dramatically changes O and M. So I don't know how familiar you are, but O and M is an ongoing cost that is pretty substantial in terms of the cost of maintaining and optimizing the performance of an asset in the solar system. We're pretty confident that because of Entrance Systems, it's roughly half the cost on a yearly basis to spend on O and M than you would have to spend on a traditional Springer central. Why is that?
Because we have a distributed architecture. There is no single point of failure. It's not a break fix model. It's never emergency. It's not the system is down, it's out for a week, you've lost energy, it's an emergency, you've got very expensive resources out there trying to fix it.
We've got big data with our cloud based and light system that provides incredible visibility, analytics and information, the project owner know is their assets being optimized and how can they improve it. It allows them proactive and predictive O and M and that in turn drives a much more cost effective model for O and M. It's a totally different paradigm from the way things are done today and a big enabler. And that's why what we're doing as part of our commercial offering is actually offering an end phase service offering. Because not only do we have the technology capabilities, but we actually have built up an incredible infrastructure at competitive advantage.
We've got 50 technical people on the phones. We've built tools that help us analyze what's going on and react. So we can act as the service agent or the project owner, guaranteeing 98.5% uptime, which is huge, which is huge for the Q1. Handling all the monitoring and analytics, providing all the proactive system maintenance and on-site proactive as well as foreign work, make sure that that asset is up and running and do it and offer it to a project owner at a lower cost, which is better economics and gives them peace of mind. We will leverage this infrastructure in a very good way and again, combined with the overall system and economics makes it even more compelling, we believe, in commercial.
The 3rd driver so that was the 2nd driver, but the 3rd and final driver is about geographic expansion. So this is our footprint today. You can see there's still a lot of markets and there's still a lot of countries that we aren't in that we plan to get into that some of these new products we just talked about enable us to. We've got the model, we know how to scale it. Let's just talk about an example about how that works and what is represented.
So in the U. K, we entered about 2 years ago. We started shipping product about 2 years ago. The UK is going to be about 400 Megawatt market next year, one of the largest the largest residential market in Europe. Over, you can see in the chart consistently we've grown share to the point where we believe this quarter we're going to be about 11% to 12%.
In other words, the same chart that I showed you for the U. S. Growth, we're starting to see the UK even though we entered at a much later date when the market was more mature, but it was a much more competitive price competitive marketplace. We've done that because we've got a scalable model. We know how to build it.
We know how to enter markets. We've dedicated the resources. We've hired resources for a dedicated team. We've been able to be very successful. We've taken that into other markets as well.
We have been very clear about that. In some of those international markets, it's a much tougher competitive environment. And so pricing is much tougher than as well. So price points in the European market are a little bit lower than the U. S.
Our relative premium is pretty consistent. So we're able to still get that. And we're still winning over DSUVIA in the U. S. New customers with that.
So in conclusion, we are just at the beginning in terms of Enphase and where we are. We've got significant growth drivers and expansion into markets that will help drive significant growth pressures in the future. And as I mentioned earlier, it's not even today about solar generation, but if you look at it over the next 2, 3 years with this sales and marketing and go to market engine, putting storage in there and other home energy solutions as well as traditional solar generation is what we're doing today, opens up a very large opportunity.
So with that, I'd like to turn it over
to Chris. I'm sorry, I'm sorry, talk to you all about financials. Yes, sorry. One question was there on
the commercial data rate
growth number. It's not driven by the new product. The market is growing well, but we continue to, we think, to fully gain share. So it is reflective of good growth in the market as you've seen overall in some of the markets primarily and some good execution and continuing to grow share. Yes, there's definitely some new customers.
But the interesting thing is in commercial, it's a pretty fragmented market, whether it's small or medium, large. So it's not like it's easy to point to and say there's just one guy that you've successfully wanted and we've got a portfolio of 20 megawatts. It's a very fragmented marketplace. So there are definitely some new partners that we want in new business
as well as existing customers.
Europe in general has been more competitive simply because they've been a little more mature markets. And then you had some dynamics where because of the incentives like FIT, for example, you had a country like the UK where the FIT were very high, it literally was a land rush. Everybody got in and made a lot of money and they changed it to make it more sustainable and viable long term. And in there, there was a great fallout where the market got much smaller and all these guys were competing against each other and driving prices down. And so you had that dynamic in terms of maturity as well as dynamic and the change in the market that made it more competitive.
Just in terms of the overall price points relative to the U. S, they're not spoken to that like a magnitude difference, but they are definitely lower. And you see that in some other markets like Germany and places like that. A lot of that happens sometimes when there's changes, there's major changes in policy and incentives. The whole what happens is the whole ecosystem and models have to change.
And sometimes that change is very challenging and it causes some bad behaviors, right? So in this case, we've got a lot of guys trying to stay in business and just giving away on price. And so you go to that case and saying, well, here's a totally different proposition, it just got to really work Yes. So if you were to ask some of our installers, we get a range of what they tell us they feel they're saving. And by the way, none of this is scientific because a lot of our customers are miscellaneous and are running more full than that kind of system capability.
But if they look at their business and they truly factor in all the different pieces, for example, they have less design people. They can do it a lot faster. If you look at inventory carrying costs, installation labor, those types of things when they really modify their model for Enphase. So a good example of that is build on these days, you have a high cost DC electrician on the site for the whole day. That's really expensive.
A lot of guys in the end phase will just have an electrician who's not a high voltage guy, who's at lower cost and he comes in and he's there for 1 hour and he connects at this time. So things like that. We're anywhere from at least $0.05 a watt to maybe up to $0.08, dollars 10 a watt. That's an installer saying overall, if I look at all my businesses and all the different resources and different functional areas, I'm saving that. That's meaningful for them.
In terms of payback and return, I would just put it more in terms of we tend to look at IRR. And so the net of it is as we look at the IRR, it's better. I can run I don't know, I can't quote necessarily exactly what it is, but we believe it's better to be meaningful. Typically what happens is that's because you're factoring in your IRR and higher energy. If you're looking at a 20 year system and you buy strength, guess what, you're going to buy a new strength in year 11 or 12.
Well, you don't have to do that with anything.
All those things are factored in, IRRs matter. The payback isn't much different at all if it is at all. We tend not to look at payback if I look at IRR, so I can't quote the question. Great. Let me turn it over to Chris.
Thank you. Thanks, Jeff. Good morning, everybody. I'm Chris Hennessale, CFO of Entbase. And after Paul shared with us the vision of Enphase and Raghu talked about the key technology building blocks that is really helping Enphase to transition from a migrant worker systems company to an energy management company.
And Jeff talked about the success in our key markets as well as some of the grow markets that we play in. I'm going to wrap it up by talking about our balanced profitable growth strategy. And if there is one key takeaway, I want you to take away from this is that accelerated growth drives EPN expansion. So, I repeat accelerated growth drives EPN expansion. And so, I'll go back with it at the end of my presentation.
First of all, let's make sure we all understand what it really means, driving a balanced profitable growth strategy. Maybe I'll start with saying what it is not. So driving a balanced profitable growth strategy is not just about focusing on the top line and trying to grow the top line as fast as we can, throwing a ton of more resources and R and D until the marketing at it and never made a dollar of profit. There's too many companies who have done that. That's not what Entries wants to do.
It's also not just about trying to maximize the profit here in the next 12 to 24 months and stop making any investments in new initiatives, developing new products, making that transition towards energy investment and maximizing the profit in the next 12 to 24 months. That's not what we're trying to do, because that will slow down our growth 3 to 5 years down the road. So we really want to try to strike the right balance between focusing on top line growth, other constraint conditions, while at the same time improving the bottom line. And there's basically 4 key elements to that. It's about all about revenue growth, gross margin expansion, driving leverage through operating expense management and that results in EPS expansion and EPS growth.
And 1st of all, let's have a look at how have we executed on those 4 key metrics in the last 6 quarters. And as you can see on this chart here, on all four of them, they are all trending in the right direction. If you look at If you look at revenue, you can see nice sequential growth in 2013 quarter by quarter, of course, followed by a normal seasonal decline. In this case, it was actually better than normal seasonal decline in the Q1 of 2014, followed by an acceleration of the growth in the Q2 of 2014, with revenue being up 41% year over year or up 42% sequentially. That revenue growth is mainly driven by the U.
S. Residential market as well as our execution into our growth markets as explained by Chad. If you look at the gross margin, you can see that the trend of gross margin improvement, which started many years ago, we had 10% gross margin in 2010. We doubled to 20% in 2011, go to 25% in 2012, 30% in 2013. We've continued to further improve the gross margin all the way up to 33% in the Q2 of 2014.
Over a span here of 6 quarters, that's up from 27% to 33%, that's up 600 basis points. So, great In terms of driving leverage in the model and being financially disciplined in our operating expense management, you can see we also made continuous improvement. The operating expense as a percent of revenue in Q1 of 2013 was 45%. We drop it down to 33% as a percent of revenue right now. And of course, the combination of 1 of that has improved our bottom line.
EPS non GAAP EPS in Q1 of 2013 was negative $0.21 and we got
it close to
breakeven in Q2 of 2014 at negative 0.7%. So, on all four key metrics, great execution and trending in the right direction. But let's start a little bit more now on what we expect going forward on each of those metrics. And the first one, of course, is revenue growth and accelerating those growth drivers, accelerating the growth that you saw already happening
in the Q2 of 2014.
And Jeff already talked about that. This is mainly 3 growth drivers. And actually there is a 4th one now, right? So, all this exciting stuff here and the question was already asked. This is not going to drive meaningful revenue in the short or medium term, but this is expected to drive very meaningful revenue in the mid- to long term.
But in the short- to medium term, it's all about those three growth drivers that Jeb already talked about it. The U. S. Residential market, which is 75% of our revenue that market is on fire. We have great market share there and we need to continue to focus on that market, execute on that market, continue to slightly improve our market share and that will fuel a lot of growth.
But the other two growth drivers are very important as well. It's segment expansion not only playing in the commercial in the residential market, but expanding into the commercial market with our new commercial product offering and eventually as well in the utility scale market and the microgrid markets. And thirdly, our continuous geographic expansion by growing share in the countries we already are outside of the U. S. And continue to enter other countries, new countries we have not entered yet.
And just to put that in a different perspective here, I have this slide up here where today actually we have 85% of our revenue is in residential and 50% is outside of residential, mainly commercial, mainly small commercial. And from a geographic point of view, 85% of our revenue is in the U. S. And 50% is outside of I'm willing to share that with the investment community here. And I'm willing to share that with the investment community here.
It's our target to drive that 8,515 to a 50 meaning 50% coming from ready and 50% coming from non ready commercial utility scale and microgrids. And from a geographic point of view, having 50% of our revenue in the U. S. And 50% outside of U. S.
It will probably take us 3 to 5 years to get to that fifty-fifty and all of that will depend on how hot and how strong the U. S. Residential market continue to grow. And so, it will be difficult to outgrow that market, but that will be our target here, making progress towards that fifty-fifty target model. That also will give us a more diversified revenue base and customer base, which is a very important element in our strategy here as well.
So that's in terms of revenue growth and revenue and driving those revenue growth accelerators. Let's have a look at gross margin and gross margin expansion here. As I said before, we've done a great job at expanding the gross margin up to 33%. And by the way, at 33%, I believe we are probably by far the highest gross margin in worker company. Most of our competitors have margins in the teens.
We have margins in the low 30s, making good progress towards our long term target model of 35% to 40%. And despite the fact that we a large part of our ongoing cost reductions, we continuously share with our customers, right? You can see here that in the first half of twenty fourteen versus the first half of twenty thirteen, revenue per watt decreased by approximately 8.5%. And I say revenue per watt, revenue per watt that means revenue not only coming from the microinverters, but includes revenue coming from accessories like our proprietary cabling system or the gateway, some services and lighting and so on. So but we have 8.5% price or revenue per watt decrease in the first half, which is pretty consistent with what we have seen the last couple of years.
But we have been able to outpace those revenue per watt decline with more cost per watt decrease of approximately 15% here in the first half of twenty fourteen versus the first half of twenty thirteen. And again, that 15% is pretty much representative of what we have been able to do the last couple of years. Now, the big question I always get is 50% that's great, that's good, but will you be able to continue to do so? And so the answer there is, yes, not necessarily 50%, I mean, somewhere in the ballpark there. And the reason why we can continue to drive down the cost is summarized here.
We basically there's 3 key elements that we continue to work on in driving down the cost. First one is innovation. Innovation, innovation, innovation. We are really only in the first inning of a 9 inning innovation game. There is so much more that we can do, partially based of course on our architecture, semiconductor based design and architecture where we continue to integrate components into the semiconductor, reduce the pressure circuit board, reduce the size of the microinverter and make it cheaper.
But there's many other things as well in terms of innovation, material science, mechanical engineering and so on. So that's one big bucket and there is still a lot that we can do. 2nd, scale. Volume is our trend. Just to put that in perspective, last year we did 1,600,000 units.
This year we are doing more than 2.5 1,000,000 units. Eventually, we are going to do 5,000,000 or 10,000,000 units per year. And of course, when you have those mix volumes, you can really drive down the cost drastically. And lastly, power. As higher power 75, 2nd generation 190, 3rd generation 215, 4th generation 250, and now our 5th generation 275.
While the unit cost of each generation has continued to come down, that combined with higher power, the cost per watt goes down drastically. Of course, it takes time because those it's not because those high power panels become available that everybody immediately jumps on those high power panels. It will take multiple quarters years till those high power high voltage get adopted in the market. But that is for us a continuous tailwind for a gross margin improvement. By the way, we as a microinverter company uniquely benefit from that.
Central oil string inverters don't benefit from that at all. It doesn't matter what power per panel is for central string inverters. So we have a lot more here that we will continue to drive down the cost in the next couple of quarters years. Talking about leveraging the operating expense here for a second. You can see here, it's again it's very important because as I said in our profitable growth strategy, we can really try to accelerate the growth even more than we do so by throwing in a ton more resources at it.
But we would never make a dollar of profit and that's not the right thing to do. What we are doing here is driving growth, but at the same time being financially disciplined. And in order to do so, we have an internal rule that I'm willing to share with you here guys. And the rule is that we allow our operating expense to grow at half the speed of revenue growth. And just as an example, if I pick a random number, if revenue grows at 40% year over year, we allow operating expense to grow at 20% year over year.
It's not necessarily going to be like that every quarter, but it's more kind of like over year over year trend and guardrail that we use to manage our operating expense. And to illustrate what that does in terms of leverage in the model, I start here with the Q2 results, which was $82,000,000 a quarter with 33% gross margin and 33% operating expense to revenue resulting in a breakeven operating margin. If I just for simplicity here, assume in my what I call the 2x model, 100% revenue growth from $82,000,000 to $164,000,000 And I assume my gross margins at my long term target volume at 35%, 40%, and I allow my operating expense to grow at 15%, which is half of the 100% revenue growth here, I actually come to an operating expense up of 25% to revenue, resulting in an operating margin of 10% to 15%, which is a good start. 10% to 15% operating margin is a really good start. It's obviously not our end goal or target.
We stick to our long term target model that we have introduced by now almost 3 years ago, where we will continue to drive margins to the 35%, 40% and where we want operating margins in the and that's what we aspire to be and that's what we target and we'll continue to drive. So obviously, we need more than 2x revenue increase per quarter to hit those long term target models. And so to wrap it up here, again, accelerated growth is all about driving EPS growth and EPS expansion. And again, to illustrate that here with my model, you can see that there is a tremendous opportunity here to go and drive EPS expansion. Again, starting from my Q2 2014, yes, 2014 $1,000,000 revenue, margins at 33%, operating margin at breakeven with $0.01 of negative EPS.
If I plug that in into my 2x model and assume that my revenue doubles to $154,000,000 per quarter at 35%, 20% gross margins and those 10%, 15% operating margins that drives $0.35 to 0 point 5 dollars of non GAAP pre tax EPS, which when you analyze those EPS numbers, you get to $1.40 to $2 of yearly EPS, which is a tremendous improvement from, of course, where we are today and which clearly illustrates earnings power that this company with this business model has. I said pretax EPS, currently we still have approximately $100,000,000 of NOLs. So 1st couple of years we're not going to pay taxes. At a certain point as we continue to be more profitable, we will have to start paying taxes. But trust me, we will do everything that we can do to reduce the tax burden as much as we can and we'll address that at the across the homes.
But again, the key takeaway accelerated revenue growth here really drives EPN expansion. And with that, I'm going to open up the floor here for questions. Pavel? On the doubling of revenue from 18Q to 1Q before, you mentioned that you want to be more international over time and more commercial versus resi over time. Given that pricing is lower in the international market and probably in commercial as well.
What kind of volume assumptions is that revenue forecast? It's not really I can't really express it in volume. The volume will have to more than double obviously because of this continuous price erosion. But maybe I'll answer your question differently. It is true as Jeff also indicated that expanding in some of those international markets, not all of
them, but
as well as expanding in commercial and eventually utility scale will put some pressure in the headwind from a gross margin point of view. That is why we definitely will continue as hard as we've done in the past. We will continue in the future to drive down the cost of our products. We spend a ton of money on R and D and a lot of that goes through innovation, new product introductions as well. But we continue to spend a lot of money and R and D and technology development as well to go on and continuously drive down the product cost.
We will need that to be successful in those markets and to keep our margins making progress towards our long term target model. I also want to clarify that pricing in other European and international markets, while a little bit lower, it's not substantially lower, substantially lower, okay? I don't want you guys thinking that this is a huge difference in terms of price point. It is very low single digit difference of small, okay? It's not huge.
Can you talk a little bit about the pricing of the battery system? We haven't disclosed any pricing yet of the battery system, but my intelligence tells me that competitive products are currently being priced anywhere from $1500 to $2,500 per kilowatt hour. We feel very comfortable to have a very competitive pricing compared to those price levels and still make some good margin on it. And then as a follow-up, how do you think about what are you doing for warranty there? One of the pushbacks that I've seen from integrating modules on power electronics, and I'm sure you see this too, but that module players want to be responsible for a long lifetime of something they don't control.
You're kind of you are potentially subject to large issues of battery chemistry. So, we have not fully disclosed and communicated what the commercial offering is going to be. And so, 1, we will communicate that later on. What I can say and Raghu, feel free to jump in, is that the battery is a lifetime expectation is expected to be more than 10 years.
Yes. And I think a lot of that so obviously warranty is a kind of a business decision effectively. Some warranty decisions will get driven
by incentive programs that are
in Jif, for example,
in California and programs that require certain warranty level.
But again, it's really going to be at the
time of launch the product is positioned on what warranty will offer. And sorry, just another follow-up. It's battery lifetime, so if there is something equivalent the S275 in there, would you guess Yes, the S275. Okay. So let's just assume that's 25 years.
The battery is 10 years, I assume that the system is easy enough to sort of retrofit batteries after
Yes, it's not feasible whether we do that, whether we retrofit it or not. There are all operational decisions. Yes. Right now, it's literally 2 connectors that are going to connect with the cell module and the antenna encoder.
But I'm trying to separate understand if you separate the battery piece like if that plastic housing comes off.
Chris, just a follow-up. How does the target model change? These are growing in the storage device. How How would people how difficult is it to do with the margin?
Yes. As I said before, we do not expect any meaningful revenue in 2014 or 2015. Revenue from storage will start ramping in 2016 2017. As I also said before, we do expect a decent good margin on that product as well given where we believe the cost point is and where we see pricing going into this market. And from an operating expense point of view, we will have to manage those new initiatives within the guidelines that I have explained before.
So, all incremental revenue that will come from those new initiatives and including decent margins will mostly flow through to the bottom line and be need to price the value. It's not
about pricing that box, right? It's going to be about pricing
we need to price the value.
It's not about pricing that box, right? It's going to be about pricing that solution because there are 4 elements that drive pricing or cost of a storage solution, it's the chemistry, it's part of iconic, the installation, that's a pretty big element of it. It comes to competitive and integration. We don't price to help and we are expecting 3 of
those 4 industries going to be monetizing
for that. But those other things
we affect quite significantly.
We're going to price to have a value of the solution rather than a, how we're
going to maximize our markets. So, sorry, a follow-up question on the box there,
I mean, is that something that Ellie is making or you're
assembling it to control the IP and patents around that?
So there's a lot of patents. The heart of this and the highest patent product in this is the Skyler, right. There's 275, this is kind of where all the core IPs kind of the site. The current planning is that the battery vendors will provide cell module, which has the state of charge, temperature, all of the safety features for monitoring those inventory, then most likely you're going to rely on Flexronics. They are the best partner to kind of assemble the pieces together, which is take the inverter, take the battery module, connect it and put it into a box.
Chris, just wanted to follow-up on NextGen MicroProfitters margin profile there. In the past, you guys have produced a number of components. You So first on the timeline, the 5th generation microcontroller in the U. S. Will be available approximately mid-twenty 15.
Then shortly after that followed by availability for the European or outside of the U. S. Version. From a margin point of view, again, we are managing the whole margin on a company wide level and trying to make good progress towards our 35%, 40%. Obviously, taking the benefit of the higher power microinverter here will help us to drive down the cost per watt.
It will help us to move including the new microcontroller towards that long term target level. Chris, as a follow-up to that question, once you introduced the Gen 4, you guys talked about a year long transition. So as you introduced Gen 5, what kind of transition or what should we expect between Gen 4 and Gen 5? Points. Yes.
My expectation is that this transition from GEN4 to GEN5 will be even longer than the transition from GEN3 to GEN4. Can
I answer one more question on pricing and value? While we continue to drive the cost of the microinverter down itself, we're also paying very close attention to kind of the entire balance of system. Let me give you a few examples of that. This new gateway that you're seeing, the new Envoy S, that will be released at the same time as the S275. It has a few it integrates, for example, the revenue grade meter.
So a lot of our partners have to install today a separate meter. Today, it's integrated into it will be integrated into that itself. Cellular connection is integrated into that. The whole thing fits into a box, an external box. And you'll see that at the when you go to the booth, AC in, AC out.
Again, you're driving the system level labor costs down. Another yet another example, that's on the ground. On the roof, for instance, when we released the M250, it's integrated ground, which means they didn't they no longer needed to run what's called a grounding electrode conductor, they're copper wire through all the inverters. So that had acute savings in not just material costs, but labor costs as well. And finally, we just announced that the inverter when paired with a specific racking vendor, I think it's UniRack, you don't need to ground the modules anymore.
Bounds don't need to be grounded anymore. We ground it through the inverter and through our cabling system. Again, another example of where we are continuing to drive kind of the system level costs down. We influence that
quite a bit. And maybe Phil, let me answer there as well that because we expect a very long in certain areas as well. As a result of that, we will continue to drive down the cost of our 4th generation, again, leveraging those 3 same buckets as well. We are still making some innovative changes to our 4th generation that help drive down the cost of it. Of course, the volume ramp into the multi millions on the 4th generation helps drive down the cost of the 4th generation.
And we could still continue to see a shift from $215,000,000 to $250,000,000 in that 4th generation as well, which also helps to further improve the margins. So in the Gen 4, you guys have 2 versions of the inventory, actually, a 250 and 250. Do you plan to have Tesla? And then similar question on storage, you plan to have a bigger size storage, I guess, obviously, like commercially, you might want more and you plan to have
a big size storage? Yes. Again, again, it's what's the
market drives it, right? There are panels that today, if
you look at it, there are panels that are down. Still people are installing 235, 240, watt panels and 215 is a better pairing for it. And now when I just saw an LG panel 60 cell that 310 watt better pairing it to 50 watts. So yes, we're going to do what the market needs. The nice thing about it is
do it in software.
Again, I want to say that reinforce what that software defines conceptually. Similar to that here as well, from an application standpoint, we are looking at offering this both as a Ctwo, what's called 2 overcharge discharge rate or a Cfour charge discharge rate. So it's 1.2 kilowatt hour of energy, it's either 2 75 watts or 2 of them, which gives you 5 50 watts, gives you 2 or 4, and it's going to be very application dependent. In a commercial application where it's demand charge driven, most likely it will be CO2 than CO4.
And maybe to add that for residential solution, this is a and it's a modular approach. If you want 6 kilowatt hour, you need 5 of those boxes, right? For commercial, we will of course think this through and think through the
whole packaging
will offer more bigger solutions. It's going to
be repackaging on the exact same concept. So most likely, say, 1.2 kilowatt hours. There's no certain advantages.
And then just a quick follow-up question on commercial in terms of the new product you guys have launched, right? A lot of information on the presentation and your colleagues provide how that's coming along and what progress you guys have made and etcetera? Just in terms of well, so the market right now we're in beta, we're doing pilots. We expect to have full availability of volume in late December, early January. Reception that we've received and as we're talking with customers is very positive.
Many customers are waiting just waiting for it. So, so far, we're getting a lot of good momentum. And again, we're just starting that process, right? We're just starting that process.
Again, Balen, just if I may make one point on the C250. People have strings, right? They have certain strings and then they go to a combiner box and a string system or a central system. On an average, they put anywhere from 14 or 1,000 volts, we're putting 20 on a string before they go to the combiner box. You can put 48 units, 48 module or 48 panels on a single 20 amp breaker.
So that's C2. So that's
an example where you have a higher inverter CapEx, but it's offset quite a bit. It could be we think it's much of $0.06 to $0.07 a lot on lower POS CapEx costs, pretty substantial.
I joke about this. I mean, I listened to Tesla that spike was set to 125 years ago. AC prepaid is just always better.
And certainly you guys have seen 30% to 35% cost reduction on successive generation. Can you talk a little bit about your expectation of Gen 4 to Gen 5 in terms of 2 things, 1, where your full policy question is? And then what the compounding cap looks like from Gen 4
to Gen
5? I'm
not sure we're lumping any specific numbers on what the cost reduction is. But again, the focus on that we were talking about in terms of further integration. So we do have our I think it doesn't line up perfectly with the generation of Gen 6 ASIC in here, mixed signal ASIC, multimillion gate ASIC. So further integration has taken place. Part comps have continued to come down.
Even though the complexity and the requirements have gone up, actually parts count has come down. I don't I can't give you an exact number or quantify a specific number. I don't think we are releasing precise numbers on that sharing of the market. You'll see it on a cumulative system level basis for our gross margin. But yes, we continue on that exact same path.
And of course, this is another 10% higher and yes, it's about another 10% higher in Power. So on a dollar per watt basis, we get disproportionate benefit
as well. And then you guys have kind of evolved business model slightly in terms of financing options now with the energy storage. Can you talk about potential monetizing the grid services? Obviously, voltage management along certain distribution lines very valuable for utilities in terms of managing cost generation.
And where do you see in terms
of real possibilities to monetize that? Or is that just something to sustain the can't be able to have deeper penetration with the solar?
It's absolutely something that we are thinking about, and we are talking to utilities about for monetizing those goods monetizing those kind of great services. These have been deceptive, not in their saying, hey, we give you X dollars for it. But in recognizing the value of what we're doing, we're actually in discussions with utilities. And typically, the way they work, they usually have a pretty long cycle. They start with pilots.
And so that's what we're into discussion with about half a dozen utilities on entering and doing some pilots that do what's called Integrated Energy Resource Management Services or DIRMs. So yes, there's real value in it and we just won't give away stuff.
Two questions. I think you probably answered the first one already, but I missed
it. Other than commercial Systems, how
much lower do you anticipate the gross margins being like mid next year
when you're shifting in volume?
Yes. I think it's going to be below average. And so a lot of that commercial business result is really deal by deal. And so for sure for the larger deals, there's going to be some competitive pricing there and it will be below average. You diminish the portfolio, which we continue
to see up headwinds target. Absolutely. And volumes are framed.
And second question, what's the maximum charge and discharge rate of that battery?
The module the cell module itself is capable of doing actually 1C or more. In this particular case and that's just more 1 or 2 inverters. Yes, 1 or 2 inverters, it's 275 or 550 gives you CO2, CO4. That's the limiting variable. But I don't really call it limiting.
I think that's kind of what the application means. This is
the only reason why I have 2 inverters
in there to have that If you want 2 in some applications, I expect that to happen. Like for example, in demand chart in some instances, I expect that to happen. And of course, our ambitions are to be utility scale as well, because I absolutely believe the same architecture applies for a 2 megawatt hour storage solution. I think we may need for like frequency reg, we may need higher we'll need higher power.
Look, those are like the major issues. Some walls to walls to I'll take one more for you, Chris. If you guys achieve anything close to the 2X model, one of the corollaries is you have fair amount of free cash flow that the business will be throwing off. Can you talk about the priorities for how that would be allocated if in fact that you're very likely? Thanks.
Right. I think it's a great question and I'm always pleased when I get this because I think 6 months ago or 12 months ago, I got a lot of questions like, you guys are going to run out of cash, how are you going to survive? And so how quickly it now changes to, wow, you guys making a lot of cash, what are you going to do with the cash, right? So but yes, I mean, this keep in mind, we have a very low CapEx model because most of the manufacturing is all outsourced. We do spend some CapEx dollars there on some proprietary test equipment and some in some cases some factory automation and so on.
But the combination of driving healthy profits with a low CapEx model results in some really strong cash generation. Last quarter, we ended with 38,000,000 dollars of cash on the bank. We still have $6,000,000 of historical debt that will be repaid over the next couple of years. In addition to that, we have access to a $50,000,000 working capital facility that has not been used. So, yes, I feel really good about my balance sheet.
I feel really good about the cash generation capability of this business model. And having said that, I don't really have an answer about what I'm going to do with all the cash. On the storage front, can you guys speak a little bit to the strategic decision to pursue something in residential as opposed to maybe commercial where you might have utility demand charges that drive a little bit better economics on storage?
Actually, we're going to do both pricing and commercial. And I think if you look at it from clearly, there's a business model that exists on commercial and demand chart. I think the more valuable business model there is a combination of solar and storage. So absolutely, we are thinking commercial is absolutely a valuable place, plus outside of the U. S.
As well, places like UK, places like Australia. The really nice thing about this architecture is it's literally swapping out this bag. And since we're already making an M235 for the non U. S. Market, it will be, not to trivialize it, a matter of putting this in and getting it certified.
So no, we are thinking about commercial, we are thinking about outside U. S. As well. Same architecture, though, that's the key. It's going to be distributed network
architecture. More questions? With that, I thank everybody for participating in our 1st meeting Analyst Day. I think it was a great discussion and great questions. We're going to wrap it up here.
And so we're going to now walk over to the Board at SPI. It's number 812. But whatever number is, once you walk in, you will see our nice beautiful booth there. By now I think it's probably already buzzing there with all of other people. Ragu, Jammu, myself will be there.
I hope Paul will catch up with us as well. And there will be plenty of other people out there, so feel free to grab them and ask your questions. So thank you again and have a nice day and big