Ladies and gentlemen, thank you for standing by and welcome to the Enphase Energy's First Quarter 2020 Financial Results Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Hinckley.
Thank you, and please go ahead, sir.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q1 2020 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer Erik Branderez, Chief Financial Officer and Raghu Balor, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q1 ended 31, 2020. During this conference call, Enphase management will make forward looking statements, including, but not limited to, statements related to Enphase Energy's expected future financial performance, the capabilities, launch and availability of our technology and products, our performance in sales and operations and our expectations as to the impact of the COVID-nineteen pandemic. These forward looking statements involve significant risks and uncertainties and Enphase Energy's actual results and the timing of events could differ materially from these expectations.
For a more complete discussion of the risks and uncertainties, please see the company's annual report on Form 10 ks for the year ended December 31, 2019, which is on file with the SEC and quarterly report on Form 10 Q for the quarter ended March 31, 2020, which will be filed during the Q2 of 2020. Enphase Energy cautions you not to place any undue reliance on forward looking statements and undertakes no duty or obligation to update any forward looking statements as a result of new information, future events or changes in its expectations. Also, please note that financial measures used on this call are expressed on a non GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. The company has provided a reconciliation of these non GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the Investor Relations section of its website. Now I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Entphase Energy.
Badri? Good afternoon and thanks for joining us today
to discuss our Q1 2020 financial results. I hope all of you are staying safe and healthy. We had a good quarter considering the COVID-nineteen pandemic. We reported revenue of $205,500,000 and shipped approximately 2,000,000 microinverters. I am very proud of the fact that our global teams did an excellent job navigating the manufacturing and logistics disruptions in China due to COVID-nineteen in order to ensure on time customer deliveries.
We reached an all time record for gross margin driven by both disciplined pricing and cost management. We exited the Q1 at approximately 40, 1426 outperforming our baseline financial model. This means 40% gross margin, 14% operating expenses, 26% operating income, all as a percentage of revenue on a non GAAP basis. As a reminder, our target baseline financial model is 35, 15, 20. When we last spoke in middle of February, the general concern was primarily around supply disruptions in China due to COVID-nineteen.
At that time, our teams were on top of the situation on a daily basis and managed the situation very well. The demand in the U. S. Remained strong through early March as distributors wanted to ensure they had adequate inventory. We were seeing excellent bookings for Q2 at that time and were poised to rebound well from a seasonally soft Q1.
However, since early March, the spread of the pandemic worldwide has resulted in a significant downward pressure on worldwide demand due to current shelter in place restrictions. Even though solar installations have been allowed as essential services in some locations, the ability to generate new sales has been hindered due to social distancing and economic uncertainty. I'll give you more color on the regions later in the call. Let's now talk about how we are servicing customers in these times. I'm very happy to report that our customer service the customer service personnel in all 4 worldwide locations, U.
S, Europe, India and Australia are fully supporting our installers and homeowners while working from home. We have not missed a beat in supporting them as all our systems are cloud based. I'm particularly pleased that our Q1 Net Promoter Score in North America was 72% compared to 56% in Q4. This dramatic quarter over quarter improvement was a result of many initiatives such as retraining our agents, matching orphan sites to active installers for better servicing, and improving our tools, processes, and systems. Our average call wait time increased slightly in Q1 to approximately 90 seconds.
We have taken corrective actions such as optimizing customer notifications from our Enlighten cloud, enhancing self-service and chat capabilities to reduce call volumes and lower our wait times to 60 seconds or less. In addition, we are working regularly on continuous improvement to the Enlighten mobile app for homeowners as well as installers. We are also very pleased with the momentum of the Enphase online store in the U. S, which now has got many of our latest products, including IQ 7 based AC modules available for sale. I want to spend a couple of minutes on quality.
We made excellent progress in 2019, dropping our IQ7 defects by a third and getting closer to our 0.05 percent annual failure rate target. Our always on connectivity strategy combined with our semiconductor and software defined architecture along with 8 d problem solving methodology were instrumental in making this happen. While we plan to continue these actions aggressively in 2020, we have started focusing on storage as well. For example, our quality teams have been intimately involved in the design and reliability of our Encharge storage system from day 1. We believe that designing in quality and reliability upfront will improve our top line due to better customer experience and bolster gross margins due to warranty expense reductions in the long term.
Let's now turn our attention to Mexico contract manufacturing facility that continues to ramp nicely for us. The facility has been deemed essential and has not experienced any significant production disruptions till date. We manufactured more than 700,000 IQ7 microinverters in Mexico during Q1 and exited the quarter at a weekly run rate of more than 70,000 units. We feel very confident in the ability to produce over 1,000,000 units by Q4 2020 if justified by product demand. Let's touch upon overall inventory management.
Given the reduced demand situation in Q2 of 2020, we are working very closely with our contract manufacturing partners to optimize our inventory builds both in China and Mexico. Maintaining a tight lid on inventory is very critical for us, especially in times like this. However, it is important to note we are not compromising one bit on our Encharge storage ramp and are executing on all the necessary builds there. Moving on to the regions, our U. S.
And international mix for Q1 was 84% 16% respectively excluding Safe Harbor revenue. Europe, Asia Pacific and Latin America all demonstrated sequential growth in Q1 compared to the U. S. That had a slight seasonal decline in Q1. We continue to make solid progress in acquiring new installers and growing our U.
S. Business in Q1. As a result, we have seen a strong increase in sell through from our Recent installer wins include Petersen, Dean, Recent installer wins include Petersen Dean, Amicus Solar, RSI Energy and a whole bunch of small and medium sized installers. A number of these new installers also plan to offer storage in addition to solar. We are excited about bringing them on board and look forward to ramping the business with them as COVID-nineteen subsides.
In the U. S, we are hearing industry reports of a 30% to 50% drop in residential installations in April. Some states like New York and California are experiencing even bigger drops. With the near term demand disruptions to the industry, we are taking all necessary actions to keep our channel inventory in check. With the lower sell through, in April, we are working with closely with installers and distributors to optimize their existing inventory.
We believe that this will result in a healthier organic pattern when installer sales activities pick up after restrictions on shelter in place are relaxed. While the short term is painful and uncertain, we see a few long term benefits for Enphase and the solar industry. Let's talk about the first one. For example, San Luis Obispo County in California introduced electronic permitting for microinverter based PV systems in early April 2020. We are pleased that the building department recognizes the safety advantages of our AC architecture.
The second benefit is installers are rapidly adapting to the COVID-nineteen challenge by embracing virtual selling using digital tools. This is going to be a major trend in the future. 3rd, we also believe that the pandemic will bring self sufficiency to the forefront of the homeowners' mind, particularly around energy storage. And we are in a great position to service homeowners, especially as our high quality solar and storage solutions can help them save money during difficult economic times as well as providing energy security. Now let's talk about Europe.
Europe, we made nice progress in Q1 more than doubling the revenue from Q4. As previously discussed, we have tripled our sales force in that region and we are working diligently with installers and distributors while leveraging our high quality and customer service. We are excited by the opportunities in Netherlands, Spain, Germany and Belgium. We also have a couple of AC module solutions that provide us with added differentiation. In fact, we expect Q2 sales to be in line with Q1 despite the pandemic reflecting the nice progress we are making.
We previously indicated that our goal this year was to double sales in Europe from the prior year. It's going to be a little bit difficult given the pandemic, but we have not given up on it yet. Both Asia Pacific and Latin America demonstrated revenue increases compared to Q4. In Australia, we secured our ACV, the equivalent of AAA in the United States with 2,200,000 members as the new landmark customer. We also introduced a partnership with Rexel to expand our Australian solar distribution network.
Again, our strategy here is pretty simple, focus on the basics like increasing installer visits and training and promoting high quality safe AC. We do expect a slowdown in this region in Q2 due to the pandemic, but with our solid growth initiatives and a talented team in place, we believe we are well positioned to grow for the long term. In Latin America, Q1 revenue sharply increased primarily due to sales of our IQ7 microinverters in Puerto Rico. We expect to make a lot more strides in this region with our inCharge storage product, which is coming soon. Let's now turn to new products.
I want to talk a little bit about how our engineers are doing. Despite the restrictions imposed by the lockdowns, our engineers have been working very hard to find ways to accelerate development, automate testing efforts and implement remote debugging. In the U. S, we are in complete lockdown with the exception of very few engineers to support essential business activities or minimum basic operations. In New Zealand, the government imposed a complete lock down and just allowed partial opening of offices in the last week of April.
In India, a handful of engineers were able to get permission from the local authorities to do essential work. We acknowledge the effort from all of our employees for their tremendous dedication to Enphase in these times. I'm really proud of them. Nevertheless, the shelter in place rules implemented in March impacted our overall engineering activities such as testing and compliance of our in charge battery storage system. As a result, we were unable to ship beta units before the end of the quarter, Q1 as we originally planned.
As of now, all testing is complete and we expect to start shipping beta units to installers shortly. Barring any further impact from COVID, we do expect to have meaningful revenue in Q2 from production shipments of our Encharge battery storage systems. Installer training is critical for Encharge's success. We trained 654 people at our Fremont headquarters in Q1 and were limited in being able to train more due to shelter in place routes. We are switching over to online training in the coming weeks and after completing all course work online, installers will receive provisional certification and will have a video inspection of their first install by an Enphase field application engineer.
We believe this process adequately ensures the skill verification that we require of our certified installers. As I mentioned in my recent letter to shareholders, new products are the lifeblood of Enphase. The IQ7 family of products has put us in a very solid position today. We have an incredible product lineup awaiting us. First, we are committed to launching IQ8, the grid agnostic microinverter for residential rooftops, which will add even more differentiation on top of IQ7.
2nd, our small commercial offering IQ8D, the 640 watt AC microinverter for 2 panels is coming along well. We expect this product to provide high quality, rapid shutdown compliance in addition to outstanding CEC efficiency of 97.5%. 3rd, we are adapting the Ensemble in a Box product we announced at our 2019 Analyst Day and expect to introduce it initially for the U. S. Followed by India.
This product will be portable with a battery capacity of 1.7 kilowatt hour providing energy security inside the home as well as energy on the go for outdoor activities such as camping. The battery can be directly charged from the grid or from portable solar panels depending on whether the product is used indoors or outdoors. The product will have our trademark characteristics, high quality, always on connectivity, and exceptional customer experience. We are looking forward to introducing the product later this year. Let me talk about another big initiative we are embarking on, digital transformation.
Today, we are engaged digitally with our installed base of more than 1,100,000 sites through the Enlighten mobile and desktop applications, putting us in a unique position to understand our customers' energy needs well. Similarly, we work very closely with a few 1,000 installers and engage with them through the mobile app, training workshops, customer visitations and installer newsletters. We want to create an incredible experience for both installers and homeowners by developing a comprehensive digital platform. It is our desire that both existing and new homeowners come on to our platform, are seamlessly connected to our great installer network and have an efficient interaction all the way through installation, activation and O and M, which stands for operations and maintenance. It is our vision that when done right, this platform will serve as a powerful catalyst accelerating our solar and storage sales.
In order to build such a powerful platform, we are planning to create several tools for the installers to make the entire installation process a lot more efficient. This involves building software expertise both organically as well as inorganically. We expect to make significant progress on this front in 2020. Although there is short term uncertainty due to COVID-nineteen, we have tremendous confidence in the strength of our business in the long term. Our supply chain is flexible and resilient aided by our strong contract manufacturing partners.
We are laser focused on operational excellence and customer experience. We have a very strong balance sheet with additional cash from the recent convertible debt offering and good cash flow generation capability. Our strategy is to manage current circumstances by investing in innovation and creating new products with unmatched value based on our 3 pillars of differentiation, semiconductors, software and Ensemble. In summary, we are pleased with the results of the Q1 considering COVID-nineteen pandemic. We extend our deepest sympathy to those impacted by this pandemic.
While it is impossible to know how the crisis is going to unfold, our top most priority is to ensure the health and safety of our employees, customers, and partners. We will also do whatever possible to ensure uninterrupted supply and support of our high quality products to our customers and partners. With that, I will hand things over to Eric for his review of our finances. Eric?
Thanks, Babu. I will provide more details related to our Q1 of 2020 financial results as well as our business outlook for the Q2 of 2020. We have provided reconciliation of these non GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the Investor Relations section of our website. Total revenue for the Q1 of 2020 was $205,500,000 including $44,500,000 of Safe Harbor revenue. Total revenue for the Q1 of 2020 decreased 2% sequentially and increased 105% year over year.
Excluding safe harbor revenue, 1st quarter revenue decreased 7% sequentially and increased 61% year over year. We are pleased with these results considering the typical industry seasonality in the Q1 and the supply chain disruption in China from COVID-nineteen pandemic. We shipped approximately 6 43 Megawatts DC in the Q1 of 2020. Non GAAP gross margin for the Q1 of 2020 was 39.5% compared to 37.3% for the Q4 of 2019. The sequential improvement resulted from our continuous focus on price management and cost reduction initiatives.
Non GAAP operating expenses were $28,500,000 for the Q3 of 2020 compared to $26,100,000 for the Q4 of 2019. The sequential increase was primarily driven by the hiring of sales personnel in Europe and higher payroll taxes related to equity vesting. A significant portion of expected operating expenses for 2020 has been allocated to sales and marketing to support our international growth and to research and development for both hardware and software innovation as well as the expansion of our digital platform. GAAP operating expenses were $36,000,000 for the Q1 of 2020 compared to $33,400,000 for the Q4 of 2019. GAAP operating expenses for the first quarter of 2020 including $6,900,000 of stock based compensation expenses and 546 $1,000 for amortization expenses for acquired intangible assets.
On a non GAAP basis income from operations was 50 $2,800,000 for the Q1 of 2020, a record for the company compared to $52,300,000 for the 4th quarter of 2019. On a GAAP basis, income from operation was $44,700,000 for the Q1 of 2020. We are pleased with the increase in non GAAP income from operation on a sequential basis despite the modest seasonal decline in revenue. On a non GAAP basis, net income for the Q1 of 2020 was $51,900,000 basically unchanged from the Q4 of 2019. This resulted in diluted earnings per share of $0.38 for the Q1 of 2020 compared to $0.39 for the Q4 of 2019.
GAAP net income for the 1st quarter of 2020 was $69,000,000 compared to $116,700,000 for the Q4 of 2019. GAAP net income in the Q1 of 2020 included $15,300,000 benefit from changes in fair value of derivatives and $11,900,000 income tax benefit compared to the prior quarter that included $72,200,000 tax benefit for the release of a valuation allowance against the 1st tax assets. GAAP diluted earnings per share was $0.50 for the first quarter of 2020 compared to $0.88 for the Q4 of 2019. GAAP earnings per share for the 1st quarter of 2020 included an $0.11 gain from change in fair value of derivatives and compared to the Q4 of 2019, which included a $0.54 non cash benefit from the release of the valuation allowance. Now turning to the balance sheet.
Inventory was $34,600,000 at the end of Q1 2020 and including approximately $3,000,000 allocated to a charged battery storage product. Inventory at the end of Q4 2019 was $32,100,000 Accounts receivable were $95,500,000 at the end of Q1 twenty twenty compared to $145,400,000 at the end of Q4 twenty nineteen. The reduction was primarily due to safe harbor shipments in Q1 2020 having been prepaid in Q4 2019 and improved shipment linearity in the Q1 of 2020. We exited the Q1 of 2020 with a total cash balance of $593,800,000 compared to $296,100,000 for the Q4 of 2019. The cash balance includes a $320,000,000 aggregate principal convertible notes issuance in March that resulted in net proceeds of 3 $13,000,000 In addition, the purchase of the coal spread to increase the effective compression premium to 100% had an additional net cost of $17,500,000 The tax deductibility of the convertible not hedge effectively offsets the upfront net cost over the 5 year duration of the notes.
The cash balance in the quarter was reduced by $34,300,000 for employees withholding taxes to net settled stock compensation that vested in the Q1 of 2020. This prevented the issuance of 938,000 shares and does not count towards the $200,000,000 share repurchase authorization that I will discuss in a moment. Ending cash balance would have been $628,100,000 instead of $593,800,000 if we did not execute on this anti diluted transaction. We generated $39,200,000 in cash flow from operations and $35,900,000 in adjusted free cash flow for the Q1 of 2020. Capital expenditure was $3,400,000 for Q1 2020 mainly to increase our micro inverter supply capacity in Mexico and then charge battery capacity to support our ramp in Q2.
Now let's discuss our outlook for the Q2 of 2020. We expect our revenue for the Q2 of 2020 to be within a range of $115,000,000 to $130,000,000 Turning to margins, we expect GAAP and non GAAP gross margin to be within a range of 37% to 40%. We expect our GAAP operating expenses to be within a range of $33,000,000 to $35,000,000 including a total of approximately $7,500,000 estimated for stock based compensation expenses and acquisition related amortization. We expect non GAAP operating expenses to be within a range of 25 point $5,000,000 to $27,500,000 The actual operating expense as a percentage of revenue will be above our target baseline financial model in the near term, but we expect to trend towards this model as demand rebounds later in the year. I would like to spend a few minutes discussing the resiliency of our business model considering the current economic backdrop.
Our outsourced manufacturing model results in low fixed cost of goods sold and we have no material minimum volume commitments or take or pay provisions with our contract manufacturers or critical vendors. We pay slightly more per unit when volumes decline and we are working with our contract manufacturers and suppliers to navigate through these unique circumstances. Based on the gross margin guidance for Q2, it should be clear that these higher costs do not materially affect our gross margin. Then it becomes up to us to control operating expenses in the near term by restricting new hires to essential or strategic positions, deferring trouble and discretionary spending actions. We have built a talented global team of employees we seek to retain and are not reducing any headcount at this time.
It is important to note that we are doubling down on our new products and want to introduce them faster. We believe this will enhance our differentiation making us emerge even stronger after the global economy gets back on track. Before turning the call over for questions, I would like to touch on one of our capital allocation strategies. On April 21, our Board of Directors authorized the repurchase of up to $200,000,000 of Enphase Energy common stock to minimize shareholder dilution related to employee equity issuances. The purchases will be completed from time to time in the open market or through a structured repurchase agreement with 3rd parties.
Such purchases are expected to continue through March 2022 unless otherwise extended or shortened by our Board of Directors. This adds another tool to our toolkit to increase shareholder value when management believes the market value of the stock DVAs materially below the conservatively calculated intrinsic value. With that, I will now open the line for questions.
Thank Our first question comes from the line of Brad Meakle with Williams Trading. Your line is now open.
I have 2 main questions. If you could talk about the change in demand patterns that you've seen across different countries in Europe and also the different states in the U. S, that would be great. And then also secondly, have you seen any supply interruptions? And can you talk about your timing of your new products to be the start shift in the second half, namely the IQ8, the rooftop and the Ensemble storage?
Thank you.
Right. So with regarding the demand situation, let me tell you the story. In the last earnings call in February, we all and all of us were looking forward to a nice Q2 and we were quite healthily booked at that time. And then suddenly in early March, we started seeing the pandemic spreading to the U. S.
So in the last 3 weeks of March, we started seeing the residential installations go down. And for Enphase particularly, we were actually 100% linear at that time. And so we were shipping perfectly. And yes, we did experience slowdown in the last 3 weeks, yet we managed to make our numbers. Then April, the pandemic spread was a lot more severe.
And particularly we have seen it very severe in obviously California due to the shelter in place rules and obviously in New York where it is really severe unfortunately at this point in time. The places where so I already said 30% to 50% drop according to industry reports that we see in overall residential installation. In some places like Texas, it's on the side of 30% and some places like what I said, New York, California, it's even more than 50%. In Florida, it's a little bit less on the lower side. And then we also find our obviously in times like this our small and medium size installers are going to be a lot affected.
And so what we are doing Enphase, if you see our midpoint of guidance this time in Q2, that's about 122.5 $5,000,000 the midpoint of guidance for Q2. And we are well booked above that number right now. But we know that we have to work with a lot of customers and make sure that we don't overload the channel. That's important for us that we have we support our customers in this time. And so we are working with each customer to make sure they have the right inventory because we have no interest in stuffing the channel.
And then we are looking forward to a great Q3. So, right now, we are in the beginning of May. California is on lockdown till the end of May, and a shelter in place till the end of May. The other states, they have been a little bit more aggressive. New York is also going to be similar to California.
So, we expect if things are optimistic, we expect to start seeing more activity towards the end of May June, demand may pick up. But right now with the visibility we have, we thought it is important for us to be realistic, give you the right guidance to work with our installers to make sure we don't have excess inventory in the channel so that we are ready for a nice ramp in Q3.
Thanks, Fadri. Is the change in Europe different from the US, more severe or less severe?
Yes, situation in Europe, sorry, I didn't answer that question. The situation in Europe, Italy, we are not in Italy. So, unfortunately, Italy has been a lot affected in Europe, but fortunately, we are not there. In Netherlands, despite the pandemic, Netherlands is modestly affected and our share in Netherlands has been quite low, maybe sub-ten percent. And what we tripled our sales team, We hired some great people in Netherlands.
We are working on distributor partnerships. We are working to win installers. And so, for us in Netherlands, I would say it's more a share gain perspective because of our efforts. And in terms of Germany, Germany is affected by COVID. Of course, we don't do much business in Germany.
That's the nice thing about it. And we were able to make a modest impact in Q1 and we expect to grow that in Q2. Spain is another place where we have started efforts. We have a team of 3, 4 people there, an excellent team of people. We expect them to start making significant progress for us in Q2 and beyond.
That's why you've seen Europe, although Europe is hit by the pandemic for us in phase, we think we will be in line with Q1 and for Q2. So that's the situation in In Australia, Australia is similarly affected. They have actually right now Australia is doing a lot better than the U. S, but they do predict a drop in demand. And our numbers in Australia are also flat compared to Q1.
Q2 numbers are flat compared to Q1. In fact, so if you were to summarize, the rest of the world business is doing better than the U. S. And the U. S.
Is a lot affected by the pandemic basically. Now we want the question on manufacturing. Manufacturing is not an issue. Supply chain is not an issue. We have a lot of options.
We basically are we have China. We have Mexico, they're all doing well. We are working with our contract manufacturer to optimize inventory in both places. This is a time where cash is king and we want to make sure we don't spend money unless we need to. At the same time, we are not compromising on our batteries.
We have as Eric said, we built an inventory of $3,000,000 for battery at the end of March and now it is even more. So we are getting ready for the ramp there. And in terms of manufacturing supply chain, we are also diversifying to another place, meaning another location neither in China nor in Mexico. And we'll announce it when we are ready, but we'll be able to start manufacturing microinverters there in the Q4.
Thank you. And our next question comes from the line of Brian Lee with Goldman Sachs. Your line is now open.
Thanks for taking the questions. Hope everyone is doing well and staying safe. First question I had was on the inventory. Badri, it sounds like you don't think inventory is a problem right now. You're pretty lean.
You want to keep it that way as well. So can you give us some sense on where inventory levels are and also lead times right now in terms of, I guess, number of weeks? And then remind us on kind of where the target or healthy ranges are that you typically try to operate within?
Yes. I mean, our inventory target is usually have 30 days. And like
what Yes.
Like what
rate would be channel?
Yes. Are you asking for channel inventory or in phase inventory, Brian?
Yes. It sounds like you guys are lean, but the channel would be great if you have some visibility on the channel. I think you've said 8 to 10 weeks in the past, but if you could just kind of refresh us on that and where you are today?
Got it. Sorry, I misunderstood the question. Sorry. Yes, so if you're asking about the channel, in the past, we have always said 8 to 10 weeks. Obviously, the break, the downward pressure on demand means that the installations didn't happen, didn't happen much in April.
That means when you look at inventory, forward looking inventory based upon what actually happened in April, you're going to end up with a big number of weeks of inventory. But if you what we are doing at this time is it's pretty clear, right? We are saying, okay, yes, you guys have stopped installing. Therefore, it is no point for us to put more inventory into the channel. And therefore, we will make sure that we work with you and we push out your orders into the next quarter and ensure that the channel inventory is always healthy.
If the channel inventory is always healthy, then when the demand comes back up, then we can when the channel depletes a bit, we can basically refresh the material back. So it's almost like a mass balance. When the channel depletes some inventory, we can ship back some inventory into the channel. And we are doing it mathematically. We have a lot of experience in this.
In good times, obviously, inventory is going to be low. In bad times, the trick is to see how you can prevent inventory from ballooning up. And it's mathematically done, formulaically done, and we work with our installers. So that's what we're doing.
Okay, that's helpful. And I guess maybe just related to that, I wanted to understand one of the comments you made, Badri, you said bookings, you're well above midpoint right now for Q2 guidance. You said the 122.5%, you're well above that from a bookings perspective. Clearly, you don't want to overload your customers with inventory. So is that to suggest you're worried about some of those bookings as you're describing them being canceled?
Or are you seeing a high degree of cancels right now? Because it sounds like if we didn't have the COVID uncertainty, maybe with the level of bookings you'd have, you'd be guiding above the targets you're providing today for Q2? Just trying to parse those comments and understand sort of the level of visibility you have versus the level of maybe
yes, we are booked quite well. We are booked a lot more than the midpoint of the guidance, but visibility is low at this time and the uncertainty is high. If April were a proxy of things, we will expect a little bit more cancellations and push out. On the other hand, if May or June is a lot more positive, we'll have a chance to hit the high point. So, we thought we should give you a number that takes into account all of these puts and takes.
And that's why I'm giving you full visibility. You guys know what I know.
Okay, that's great. And then maybe just last one, I'll pass it on. On gross margins, you guided 36% to 39% for Q1. You beat that range. Now you're guiding 37% to 40% on 40% lower revenue.
So the model is pretty resilient irrespective of volumes, that's pretty clear. But once volumes do pick up later in the year, coupled with some of the new products that are ramping, it seems like you'd have some upside to that margin range. I'd be curious sort of what your views are on that margins in a healthier volume environment kind of if they pick up from here. And then just on the flip side of that, you also mentioned you've got some of the long tail customers, maybe some of those customers are more challenged in this kind of environment right now. Any worries around bad accounts and sort of charges related to that?
Maybe just some context around that if you're seeing that or you have anything to suggest that you have the ability to mitigate that? Thanks guys.
[SPEAKER A EDWARD K.
ALDAG, JR.:] Aldag, Jr.:] Right. Let me ask Let me answer the question on gross margin. Yes, absolutely. We are highly confident of our gross margins. And that's why we gave you guidance of 37% to 40% despite these times.
Why is that? The basic question, gross margin comprises of 2 things, pricing management and cost management. Pricing management is we are very disciplined in pricing. We have a pricing team which I established a couple of years ago and they do a great job optimizing every transaction. That's extremely important for us and we do value based pricing.
We will continue to do that, absolutely. So pricing is one of the big reasons why our gross margin is where it is. The second is cost management. Cost management comprises into a lot of tactical pieces and a few strategic pieces. Tactical pieces are blocking and tackling in order to do supply chain We have systematically We have systematically designed our supply chain such that microinverters produced in Mexico do not require a tariff and we are extending the same to accessories in the future.
That's 2. Number 3, also tactical is you saw us doing a lot of expedites 2 or 3 quarters ago. And expedites are no longer required for us because we have solved the power transistor problem. We have solved the component shortage problem. So therefore, expedites are going to be in the noise.
That's one more thing there. And then number 4 is a little bit more strategic piece in the when it comes to cost reduction, we have an ASIC strategy. In the ASIC, we have basically the digital portion and then we also have the analog integration of the ASIC. We are able to integrate analog chips that we use in the microinverter onto the ASIC. And even if it means $0.20 cost reduction, dollars 0.20 multiplied by let's say 8,000,000 units a year, that's big deal, dollars 1,600,000 So every cent for us that we can take out of the micro by integration into the ASIC is extremely critical.
And then in addition, the last few things are how can we fundamentally change the architecture of our transformer that is used? How can we go from 300 components down to 50 components? How can we reduce the microinverter to the size of an iPhone? And those are some of the long term strategic cost reductions that we are thinking about. So to answer your question, we have a very high degree of confidence, especially when the demand comes back, we do have upside in gross margin.
Now I'll have Eric talk about whether we are worried about bad debt.
Yes. So thank you for the question, Brian. As you know, we on Note 3 of our 10 Q filing that we just published, we disclosed our allowance for doubtful account. And you can see that it's very small. And the reason that it's very small is because most of our business is through distribution.
And with that, most of the distributors that we do business with, they have pretty strong balance sheet. Not only that, they also manage their cash and their days of inventory very well. So they put some things that goes into a conversation with the installer about their point of sale data from the distributor is normally done on a triage with the distributors as well, which they own the credit phase with the installer. So at this point, we don't hear any issues associated with the payment terms or paying. Some of our installers, we actually have a relationship on a direct business relationship in which all of them right now are doing fairly well.
Some of them requested a little bit of an extended payment term, but for the most part, all of them are okay. So at this point, as of the time of this filing, we don't see or we don't foresee any issues from collections associated with my receivables at the end of the quarter.
All right. Thanks guys.
Thank you.
Thank you. And our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Thanks so much guys. As you look at the market for energy storage and your ability to drive costs out, obviously, it's a little bit early days and you just walked through a lot of detail on the microenter market. How much opportunity is there for you guys over the next couple of quarters to support your gross margin trajectories as you scale up a little bit on the margin? And then curious about it on a 12 to 18 month basis as well.
Right. If you look at our Encharge battery, the sub components inside the Encharge battery are the cell battery pack. Then you have the battery management unit, which is the BMS. Then you have a battery controller, which basically communicates to the gateway and then you have the microinverters. As we drop the cost of the microinverters, that's going to go down.
We do have plans to integrate the battery management unit and the battery controller into one board and we do plan to use an ASIC to integrate to achieve even higher levels of integration. Now then we are left with the Cell Pack. The beautiful thing about that is we work with so many Cell Pack vendors. And therefore, if they drop their cost, they're going to pass their cost on to us. So I would say that is nice potential for us, especially as we start ramping volumes, there is really we can probably get a lot of costs out in the 1st couple of years and then it more translates into steady progress after that.
Great. Thanks so much. And then looking out a couple of quarters and considering the long tail of installers that are customers for you guys. How much visibility do you get into their cash flow dynamics the strength of their balance sheet? There's an awful lot of small operations in various localities, But how much information in this building can you really gather at this point to looking at that portion of the customer base?
Yes. So it appears that for the most part, the installers are taking advantage of some of the generous programs issued by the federal government, right. Many of those most of them actually qualify for both programs. So some of them is taking some time to get them administratively completed because of the fact that they don't have a big accounting group to manage and to chase the reimbursements. But I don't hear or I have quite a bit of visibility and I don't hear any big issues on installers not being able to sustain through their balance sheet through this period for now.
Now if this situation continues and deteriorate even more, the first ones to upfront that hit will be distributors in which eventually we will need to triangulate that one into what it means to us, right. But at this point, actually to my surprise, the small installers, they do pretty well. Some of them, they manage their cash very tightly. They don't have a large OpEx or big infrastructure to support and they can hunker down into a smaller operation and then be ready for the comeback when needed. So I'm actually okay with that.
All right.
Great. Thanks so much guys.
Thank you. Thank
you. And our next question comes from the line of Mark Strouse with JPMorgan. Your line is now open.
Yes. Excuse me. Thanks very much for taking our questions. Can you just touch on the competitive dynamics? Any signs that some of your weaker competitors may be looking to exit the market?
Any evidence that your kind of fortress balance sheet that you've built is allowing you to take any market share? And then kind of lastly, as a follow on to that, are there any interesting competitors or technologies that are out there that could potentially be struggling during this downturn that you think could be interesting M and A opportunities?
Hi, this is Raghu. So let's take your first one, which is on the competitive dynamics. Now we are not hearing of any competitors at this time exiting the market. We obviously keep track of it, but we are not hearing anything. So we expect that to continue.
Your second question was on any interesting technologies that are available for us to look at. Absolutely, but you mentioned that the one area that we are looking at is as part of our digital transformation technology to look at building out an end to end software platform that can significantly improve the customer experience, everything from generation from the sales lead all the way through procurement, through installation, commissioning, operations and maintenance. And I think we're going to grow that business both organically and look at growing it inorganically as well. And yes, absolutely, we are looking at a bunch of different software companies out there that can help us in that endeavor. I think in the long run as well, we have talked about given as Ensemble transitions into a more sophisticated energy management system, there's a tremendous opportunity to look at companies that are doing some interesting work in forecasting engines and machine learning and AI type work, managing big data, etcetera.
So, all of those are areas that we are exploring. There's tremendous opportunity as we start bringing all of our new products into the marketplace.
Okay, got it. That's it for us.
Thank you very much.
Thank you. Thank you.
Thank you. And our next question comes from the line of Jeff Osborne with Cowen and Company. Your line is now open.
Yes, great. Just a couple of questions. In response to Collin's question, could you break out roughly speaking the mix of small customers versus larger? I would assume it's 70%, 80% smaller through distribution, but I didn't know if you could
That's close enough. Yes. That's close enough.
Okay. And then in terms of the I know I've asked you this before in past earnings calls, Badri, but the battery piece, a lot of discussion of costs and certainly LFP prices have come down. I assume it's still an LFP based battery. But is that still anticipated to be in line with the corporate average now that you're approaching 40% or should we be modeling something less than that as the storage piece ramps up?
Yes. Yes, LFP, yes, in line with 40%.
Okay, good to hear. And then just given the uncertainty in the market, how should we think about share shifts between you and other competitors? Are we at a point in time where people are transitioning from door to door and sitting down at the kitchen table to digital sales where people would want to learn new technologies and potentially replace a different inverter company with yourselves or are people still hunkering down with the status quo? I just didn't know if you're seeing over the past, call it 6 to 8 weeks, any inbounds as it relates to people wanting to get trained that maybe you hadn't heard of in the past or were aligned with a competitor?
It's still early days, but the nice things we have seen are our traffic. The leads have increased a lot. We don't do too much of business digitally today, but that is increasing. Our traffic to the online store is increasing. So that's why I talked about the digital platform.
And the digital platform is not something that we are taking it lightly yet another effort. This is going to be a really powerful platform if we do it right. What does that mean is you've got a homeowner who is coming to you and you've got a lead that is coming to you and how effectively you transfer that lead to your installer network. Enphase has got an installer network of 500 loyal installers. They are amazing partners for us.
They are why we exist. So imagine if we generate thousands of leads, maybe it will become tens of thousands of leads and maybe it will become 100 of thousands of leads soon, but let's start with thousands of leads. We pass it to our Enphase loyal installer network. We help the homeowner make a decision there. And then we then create a platform for the homeowner and the installer and Enphase to interact on one platform seamlessly.
Then we start to take care of things like all the way from appointment setting, design closure, contract closure, bill of materials procurement, permitting, planning and then activation when it shows up on our Enlighten database and then O and M after that. If we can help our installers to digitize all of these and these are I'm talking about small and medium sized installers because they are the ones who have manual systems. They use ad hoc tools for everything. It would be really advantageous for us to introduce this platform where we have everything in one place that is contained. And if we do that well, and I'm not saying that it's easy to do that well.
If we do that well, it's a multi year effort. If we do that well, then we can sell a lot more solar and storage solutions because as you go as you can see, we are going to go from $2,000 a home to over $10,000 a home. And with things we are going to introduce later on for consumption with AC panels, it's only going to become more and more and more. And so we are going to become a much higher fraction of the bill of materials. And so once again, the concept is if we can make it so easy for the homeowner and in particular for the installer, the sales of our Ensemble based solar and storage solutions are going to shoot up.
That's really what we want to do long term.
That makes sense. Just I was trying to get at with my question, somebody not going through your digital store, but somebody that has an established sales force. Are you finding that the 500 installers that are loyal today, do you anticipate that meaningfully growing over the next 3 to 6 months?
I'm just trying to get a sense of
with the uncertainty in the space, are you finding that people want to actually shift vendors or people just sticking with what they know and as they transition from selling door to door and sitting face to face with people and moving to online or whatever to stimulate
demand? Right. I mean, look, we do have even in this time, we do have installers. We are winning a lot of installers. Why?
It's pretty simple. It's the same thing that I'll meeting on, which is quality and customer experience. If we get to 0.05 percent annual failure rate, which is we are actually very close to that number, that's an outstanding number, unbeatable number. And if we demonstrate that continuously, which we have for the last couple of years with IQ7, that is a big factor for people to move to us. And so that transition will happen regardless because in tough times like this, that transition I believe will happen fast.
People do not have time to screw around with failures. They don't. So if we can keep our NPS Net Promoter Score above 60, this quarter we did 72, that's a phenomenal quarter. If we can do that, if we can answer the phone in less than 60 seconds, 0.05% annual defectivity if we can extend that to batteries. Our all in one solar and storage solution is going to dominate.
No question.
Great to hear. Thank you for the detail.
Thank you.
And our next question comes from the line of Philip Shen with ROTH Capital Partners. Your line is now open.
Hey guys, thanks for the Badri, what you were just talking about there in terms of the lead gen machine, it sounds like it could be very powerful. Can you give us a little bit of the history on that, meaning where what were your leads at maybe in Q1? And where do you think you could end the year at in terms of your lead generation you can pass on to your partners? And what kind of close ratios have you experienced? I can imagine they're quite high, because there are programs like this out there and it seems like again this could be powerful.
So want to see what kind of ramp we could see ahead And then also what kind of capital are you willing to invest here? Some one of your peers spends 1,000,000,000 of dollars on TV ads, for example. I don't expect you guys to do that, but just curious what kind of money you might be putting behind this?
Right. So Phil, you know that we are a disciplined company. We are not going to give you metrics without thinking. So you've got to be a little bit more patient for those metrics. But what I'll tell you is this, we have 1,100,000 sites today and these are in phase sites.
And okay, I have the ability to generate leads by spending a lot of extra money on my right hand and I have all the 1,100,000 homeowners on my left hand, what do I choose, right? The answer is obvious. Those are Enphase customers and so therefore the low hanging fruit is those Enphase customers. And we are already working on such upgrade programs. We do talk about one particular upgrade program that we constantly issue press releases on, which is the upgrade program for the endwritten phases first and second generation microinverters.
We're transitioning from the M190 based products to IQ7 and sometimes IQ7 based AC module. Those are examples of programs that you will start seeing more and more from us. But you're absolutely right. It's a powerful concept. And if we can do it right, we'll be in a different place.
Great. As it relates to Q3, I know visibility is limited, uncertainty is high, but I do believe we've seen an inflection point in terms of sales have troughed out and they're improving week over week. So things are improving a little bit. Just curious to see if you guys have seen an improvement in Q3, like what kind of visibility in Q3 do you have?
Phil, at this point, we don't have visibility for Q3.
Got it. Okay. And one last one here. In terms of your guide for Q2, you talked about meaningful storage revenues in that Q2 guide. I don't think you quantified it.
I was wondering if you might be able to quantify Q2 and then also talk about the cadence of how storage revenues ramp in Q3 and Q4?
We are not going to quantify it. We may separate it out. We may and Eric already told you guys that last quarter. But in order for you guys to think about a lower number we gave you, we gave you the inventory of storage products that we built. We gave you that, but that number was at the end of March and that number was $3,000,000 So you guys can do the calculation and have a base number.
That's the base number. Obviously, that is not all of it. But that will help you to at least have some number instead of shooting in the air.
Okay, great. Thanks, Bhajan. I'll pass it
on. Thank you. And our next question comes from the line of Eric Stine with Craig Hallum. Your line is now open.
Hi, everyone. Most questions asked here, but I guess I'll just go with so Ensemble in a Box, I know that was a big topic at the Analyst Day in India. Just thought process on bringing that to the U. S. Now, how you view it competitively in the market and then if you have any thoughts on the overall market opportunity?
Yes, I think one of the key things and this is as this disruption happened, we got together and we said, what is it that the cost what is it that the people are thinking about? And I think you realize that self sufficiency resiliency is top of mind for a lot of people, especially here in the U. S. And so that's why we decided not long ago that we were going to first prioritize getting the Ensembles in a Box product here. We did our competitive analysis.
We did our survey out there and really felt that we have phenomenal technology in Ensemble that we can leverage to bring a competitive product into the marketplace. Like we mentioned, forefront of it being the reliability part, the always on connectivity and finally just the customer experience part, which can address both the resiliency part when you're inside the home or self sufficient part when you're inside the home. And then you can also it's a mobile device. So it's basically energy on the go both for whether it's for recreational use or for emergency purposes as well in the event of a catastrophic event. We think it's a really complementary product to the complete ensemble solution that we have with TD on the roof and big and charge storage solutions with Npower.
So, I think it's a really complementary solution. It's about 1.7 kilowatt hours and I think it plays really well with our set of products that we have. So the opportunity I think is going to be very big here in the U. S. To begin with.
We also plan to of course do the India version of that product subsequent to the U. S. Version. And then we shared what our served available market is going to be and it's quite large.
And is
that something you think is a contributor can be a meaningful contributor in 2021?
Absolutely, yes. That's when we plan to introduce it in the second half of this year and it will play a big role in 2021.
Okay, thanks. Thank you. And our next question comes from the line of Bahip Mandeloy with Credit Suisse. Your line is now open.
Hi. Thanks for taking the question, everyone. Hope you're all doing safe. Could you just talk more about the software strategy? How should we think about it?
Is it a new product or a service for the installers? Or should we think more of a platform for your core installers? And apart from any M and A opportunities for the nCharge solutions, do you see any M and A opportunities for the software strategy?
Yes. So we as Badri mentioned, it's a very key element of our overall strategy. This is the digital transformation piece. And the key here is to provide fantastic customer experience end to end and which means starting from that lead all the way through matching the installer with the homeowner, managing through the process all the way through digital permitting. You saw that you're seeing some of the AHAs moving to that environment as well.
You see there's a general push towards moving everything into the digital extend beyond into the actual operation of the Ensemble extend beyond into the actual operation of the Ensemble technology, which is the energy management piece. So today, we think about it as disparate elements, meaning the front end, which is about sales and procurement and installation. And then there is this Enlighten piece, which is our Ensemble Energy Management piece, which is a product related piece. But imagine if that whole experience was completely seamless. Of course, that means there's a lot to do and a lot of software to be developed.
And so we are going
to be very thoughtful about what are the things that we can build in house ourselves.
Of course, the core Ensemble technology, there's a significant amount of IP there and we have built that in house. But then there is the piece around the front end, which I think will build some and we'll look for some organic inorganic M and A. On the product side, of course, there is the micro part, the battery. I mean, there is we know what we are going to do. We know where all our IP lies.
And all our IP lies in the power management piece, the communications piece, the software piece. The 2 things that we are not in the business of is manufacturing of solar panels or manufacturing of cell, cell packs. So everything in between is significant IP to be developed, particularly around the software part, which is everything software defined power conversion, all the way through economic optimization, which is what we refer to as tertiary control. That's core IT for us. But I wanted to point you out is that, that whole experience needs to be completely seamless.
So that is what we mean by complete digital transformation.
That's helpful. Thanks. And just like one last for me on batteries. Could you just remind us which countries you'll be buying the batteries from? Just trying to get ahead of any trade escalations in the country.
And also like there's a 5% battery attachment rates by end of the year that does that still hold? I know it's probably been pointing to one small number here, but any clarity on that would be helpful.
Right. So the answer is China and we have one source now. We will have one more source in the second half of the year. And then yes, the 5% holds in Q4 of 2020.
Well done.
Thanks for taking my questions.
Thank you. And our next question comes from the line of Jeffrey Campbell with Tuohy Brothers. Your line is now open.
Good afternoon. I wanted to ask you, have you disclosed how many of $1,100,000,000 installed in phase customers are on legacy micros at this time?
No, we have not.
But is it safe to say that it's still a fairly sizable amount?
Correct.
As I've listened to you describe the digital platform in a number of different ways, it sounds similar to the approach of some large installers. Is it correct, at least optically? Is it correct to say that the main point of the initiative is to increase the sales potential of the smaller installer?
That's right.
And kind of following on that, can the digital platform positively impact Enphase internal operations in some way?
Not really. When you say impact the digits, I mean impact Enphase operations, I'm not sure what you mean, but Well, I'm thinking,
for example, would it make your sales effort more efficient, so maybe you'll get more out of less headcount or would it somehow positively impact your inventory because it would provide you maybe with another source of feedback that you're not getting now? Just wondering if there's any feedback we'll do
for you. It's going to make our installers' lives a lot better, the small and medium sized installers. It's going to make the homeowners' lives a lot better. In order for us to achieve such a seamless experience, it's going to take us time. It's going to we need world class software.
So it's going to take us more people in order for us to do this. And fortunately for us, we have our gross margins are strong and we have a nice balance sheet. So we are in the right time to invest and help both our homeowners as well as our small and medium sized installers.
And I guess the final point on this digital platform thing, I think it's been touched on it just to confirm it. If this works the way that you want it to, is it reasonable to think that it's going to attract additional installers to you that you may not be working with now and could that be significant?
That's right. Yes, that's right.
Okay, great. And just one question on a different subject. I was just wondering is the IQAD still because I know we have all these COVID-nineteen headaches. Is this still moving along fairly smoothly and do you still expect to release it in the Q4?
Right. I did mention it
in the call, actually earlier we
are pleased with the progress that we are making on IQ8D. IQ8D to remind everyone, it's a small commercial product, 6 40 watts AC. It will basically service 2 panels. And our differentiation there is obviously the trademark and says high quality, rapid shutdown implementation and essentially very high efficiency product. So yes, it is on track.
Great. Thank you.
Thank you. And our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.
Thanks for taking the question guys. You have not been asked yet about manufacturing. I mean, you mentioned that there is no issues. Mexico has been under a lockdown, maybe a weak one, but a lockdown since the end of March. And I'm curious if there have been any disruptions in terms of labor availability or the social distancing requirements at the fab in Mexico?
Yes. Our factory has been declared as an essential business. And so there have not been interruptions. And also like what I said in my prepared remarks, obviously, this is a quarter where we are building less inventory, not more. So we are carefully balancing the inventory between China and Mexico.
And due to COVID, the amount of inventory that we have to build is
quite small.
Okay. Let me ask one more regulatory question. From the perspective of your customers that are postponing installations and you referenced the New York area in particular, Is that because of lockdowns and stay at home orders or is it more of a precautionary measure? Because my understanding is most states do not prohibit solar installation because it has been considered an essential business.
I think in I mean, this is from an installation point of view, I think just people are cautious about having other people come and interact with them in their house. And I think that's one slowdown. The second slowdown obviously is also on the permitting side. Not everybody is like some of the counties that you're seeing here in California, like San Luis Obispo, etcetera, where we've gone completely digital. And then the third element is around permission to operate the PTO, which is both inspection and PTO.
So I think you're seeing that there is friction in the system as a result of just of the social distancing element. I think that is the biggest challenge. On the sales side, again, kitchen table sales are now less likely to happen or not happening. And but you are seeing we are seeing and we are a lot of our installer partners adapting to doing this more virtually using digital tools. So, yes, we are going through that, experiencing those processes right now.
Understood. Thank you, guys. Stay safe.
Thank you.
Thank you. And our next question comes from the line of Amit Dayal with H. C. Wainwright. Your line is now open.
Thank you guys for taking my question. You guys indicated that you're being aggressive on product introductions. But at the same time, you're seeing some push outs relative to go to market for existing products in the pipeline. Just wanted to understand what the time frame for these new product introductions will look like. Is it something that may transpire in this calendar year or are we talking a little bit more of further out?
Right. I mean, the delay on in charge is because of social distancing and work from home. The engineers essentially do not have they've not been working together. And because of that, some of the engineering activities and the compliance activities were delayed and that's kind of behind us now because the short term blip which affected us. Last February, I thought or rather 2 months back, I thought we were going to ship and charge by the end of March.
That didn't happen because of this. And with regarding the other products, I do plan to introduce the IQ8 grid agnostic microinverter for residential rooftops. I do plan to introduce it in the second half And I do also plan to introduce IQ 18 in the second half along with Ensemble and A Box. Those are we have a lot of engineering teams in the company. And the teams obviously, they're a little bit hampered right now working from home.
But hopefully that will end and June will be a lot better. And at this point, we still see so we are on track to getting them in the second half.
Understood. Thank you for that. Just last one for me. Have you acted on any buybacks so far?
No. Got it. Thank you.
Thank you. And at this time, I'm not showing any further questions on the phone line. This concludes today's question and answer session. I would now like to turn the call back to CEO, Badri Kotandeel Raman for closing remarks.
All right. Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again during our Q2 'twenty earnings call. Bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.