Ladies and gentlemen, thank you for standing by, and welcome to the Enphase Energy fourth quarter 2019 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and- answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Adam Hinckley. Please go ahead, sir.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter 2019 results. I am the Head of Investor Relations for Enphase Energy and am pleased to be hosting my first earnings call for the company. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer, Eric Branderiz, Chief Financial Officer, and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter ended December 31st, 2019. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy's expected financial performance, technology, new products, operations, and sales and marketing. These forward-looking statements involve significant risks and uncertainties. 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-K for the year ended December 31st, 2018, which is on file with the SEC, and the annual report on Form 10-K for the year ended December 31st, 2019, which will be filed with the SEC in the first quarter 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 Enphase Energy. Badri.
Good afternoon, and thanks for joining us today to discuss our fourth quarter 2019 financial results. We had a good quarter. We reported revenue of $210 million and shipped approximately 2.1 million microinverters. Demand was strong for our microinverter products in Q4. We are pleased with the pre-orders for our Encharge battery, utilizing our Ensemble energy management technology and have started training installers to support the upcoming product launch. We exited the fourth quarter at approximately 37-12-25. This means 37% gross margin, 12% operating expenses, and 25% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, we introduced our new baseline financial model of 35-15-20 at our Analyst Day in December. The baseline model represents the minimum financial performance we expect to achieve over the next 18 to 24 months while demonstrating meaningful top-line growth.
Eric will go into greater detail about our finances later in the call. Let's now talk about ease of doing business, how customers perceive us. Our Q4 Net Promoter Score was 56% in North America, compared to 54% in Q3. Our average call wait time is slightly over a minute, and we are working on several self-service initiatives to reduce call volumes. We recently opened our online Enphase store with the objective of providing even better customer experience. Our target is to exit 2020 with an NPS score greater than 65, a number that's considered very good in our industry. Let's talk about the impact of the coronavirus. Our thoughts and prayers are with the people of China as they fight the virus. Our priority is to ensure the well-being of our teams as well as our partners in China.
Our contract manufacturing partner facility in China is steadily ramping back up following the Chinese New Year. The component supply chain is also ramping. We are seeing some indications that the outbound logistics from China is constrained. Now coming to the first quarter. We are fully booked for the first quarter to the midpoint of guidance. In addition, with nearly seven weeks into the quarter, our shipments have been 100% linear to our revenue guidance. While we remain cautious and are watching the impact of the virus carefully, we do not see a big impact to the first quarter revenue guidance at this point. Depending on the situation with the outbound logistics, we may have to expedite some product through airships from China, and we are getting prepared for that. We have already factored that in our revenue as well as gross margin guidance to the extent we know.
Now is a good time to talk about how Mexico is doing. We are very happy that Mexico is running well and provides us a good backup to service global demand in the event of supply disruptions elsewhere. We manufactured more than half a million IQ7 microinverters in Mexico during Q4. Our current run rate in Mexico is a little over 50,000 units a week. We previously stated our target is to double the capacity to a million microinverters per quarter by Q4 of 2020, and we are making very good progress towards that goal. I would like to acknowledge the hard work of numerous people, both on our team, plus the Flex team, in order to make this happen. Next, let's talk about Safe Harbor. The revenue related to Safe Harbor shipments was $36.4 million in Q4, an increase from $8 million in Q3.
For Q1, we plan to recognize the revenue of $44.5 million for ITC Safe Harbor shipments. I would like to highlight that only a very small number of our customers engage in Safe Harbor activity, and that each of these customers has an ongoing relationship with Enphase beyond Safe Harbor sales. These shipments are not merely one-time purchases, and growing share in their portfolio beyond Safe Harbor is an area of opportunity for Enphase. Let's talk a little bit more about Q1. We all know Q1 is a seasonally soft quarter for the solar industry with double-digit percentage declines in revenue, it is worthwhile for us to look at how we are doing, our base business is doing with respect to the industry.
For example, if we include Safe Harbor revenue from our midpoint of Q1 2020 guidance of $205 million, our base revenue only drops by 8%, which is a pretty good result considering the typical seasonality. We will provide formal guidance for the second quarter of 2020 in our April earnings call, I would like to provide some color today. There will obviously be no Safe Harbor sales in Q2. Our bookings for Q2 look pretty healthy right now, considering where we are. We expect a nice uptick in our base business for Q2 commensurate with the industry seasonality. We also expect Q2 to benefit from a full quarter of Encharge battery sales. As I said before, the pre-orders for Encharge remain very healthy, and our installer training is already underway. Obviously, whatever we are saying with respect to Q2 is based on our current understanding of the coronavirus situation.
Let's move on to the regions. The U.S. and international mix for Q4 was 92% and 8% respectively, excluding Safe Harbor revenue. The result is an obvious indication of strength of our North American business. Our U.S. mix as a percentage is probably going to remain high for a few more quarters with the introduction of Ensemble in North America. Nevertheless, we are putting in a lot of effort to grow our international business. You heard some updates on the Analyst Day, and I'm going to expand a little bit more on that now. On Europe, we are making excellent progress. We are doing a few things that are different from before. We're pulling out all stops in order to bolster our sales force through both internal transfers and new hires. Some of those are already in place right now.
We have made several offers and expect to have the increased headcount in place in Netherlands, Belgium, France, Germany, and Spain by early March. While the relationships with the distributors are very important to us, we are placing extraordinary emphasis on winning the long-tail installers by focusing on quality and customer experience. We are doing this by increasing our installer training significantly in Europe and tracking installer visit metrics diligently. Our 2020 goal is to double the 2019 European sales, which was approximately $68 million. Aside from our focus on the long-tail installers, our key initiatives in the region are social housing, ACM partnerships, and providing differentiated solutions such as integrated in-roof solar with Creaton, which we announced last week. Let's now talk about Asia Pacific and Latin America. Both Asia Pacific and Latin America are similar-sized businesses and quite small. Our business in APAC is mainly in Australia.
Just to remind you, we hired a general manager for that region in early 2019. We have the right team in place, along with the focus and the right metrics there. We are seeing very encouraging sell-through to the installers. You recently saw a press release where we partnered with the installers to support the Australian PV industry to introduce rapid shutdown as a requirement. On top of this, Enphase's AC architecture means there is no high voltage DC on the roof, thereby providing increased fire safety. With these initiatives, we expect this region to grow nicely in 2020. We'll discuss products next. We had volume shipments of IQ7A, our highest power product, a 349-W AC, for SunPower, as well as other customers in the fourth quarter.
IQ 7A, like what I said, is our highest power microinverter for the residential space and pairs very well with the high-efficiency modules up to 450-W DC in both 60 and 72 cell configurations. We're going to talk about AC module partners next. We continue to make steady progress with our AC module partners, including SunPower, Panasonic, Solaria, to mention a few. We are working to bring in a few more module partners, both in the U.S. as well as in Europe. Enphase Energy's ACMs from our module partners have now been adopted by more than 740 installers in the U.S. as of this date. By the way, some of these ACMs are also available for both installers and homeowners to purchase directly from the Enphase online store. Next topic is our Encharge battery that uses Ensemble energy management technology.
The shipments for the Encharge battery are expected to begin in March of 2020. We have already started training installers. We are expecting to ramp trainings a lot over the next few months. The feedback has been really positive with very high NPS scores. The installers clearly see Encharge as a safe, reliable, and powerful option for the homeowners. They feel the biggest value for the homeowners is that, for the first time ever, they can easily generate energy, store energy, and control energy in a single system, all completely designed by Enphase. That is the power of Ensemble. In the coming months, we will be expanding the training program beyond our Fremont headquarters to include many of our partner sites in order to increase our training throughput significantly. In summary, we are very happy with the performance in 2019 across all fronts.
We talked about our three pillars of differentiation at the Analyst Day: semiconductors, software, and Ensemble. This, combined with operational excellence and our scalable business model, is helping us win new customers. As we highlighted in the Analyst Day, our immediate growth driver is the Encharge battery, followed by the IQ8 solar microinverters on the roof, then by IQ8D for the small commercial space, and finally, Ensemble in a box for the India off-grid markets. With that, I will turn the call over to Eric for his review of our financial results. Eric?
Thanks, Badri. I will provide more details related to our fourth quarter of 2019 financial result, as well as our business outlook for the first quarter of 2020. We have provided reconciliation of non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the investor relations sections of our website. Total revenue for the fourth quarter of 2019 was $210 million, including approximately $36.4 million of Safe Harbor revenue. Total revenue for the fourth quarter of 2019 increased 17% sequentially and increased 128% year-over-year. We shipped approximately 677 megawatts DC in the fourth quarter of 2019, an increase in megawatts DC of 16% sequentially. The megawatts shipped represented approximately 2.1 million microinverters. Non-GAAP gross margin for the fourth quarter of 2019 was 37.3%, compared to 36.2% for the third quarter of 2019.
Expedite fees are now normalized within our expected range and therefore did not have an abnormal impact in gross margin. As a result, we will no longer quantify this expense if it is within the normal course of business. non-GAAP operating expenses were $26.1 million for the fourth quarter of 2019, compared to $25 million for the third quarter of 2019. GAAP operating expenses were $33.4 million for the fourth quarter of 2019, compared to $31 million for the third quarter of 2019. GAAP operating expenses for the fourth quarter of 2019 included $5.6 million of stock-based compensation expenses, $545,000 of amortization expenses for acquiring tangible assets, and $1.1 million of restructuring expenses. Our restructuring program was completed at the end of 2019. At this time, we do not anticipate any further or future expenses related to restructuring.
On a non-GAAP basis, income from operations was $52.3 million for the fourth quarter of 2019, compared to $40.2 million for the third quarter of 2019. On a GAAP basis, income from operations was $44.4 million for the fourth quarter of 2019. This increase in operating income is reflective of the strong demand of our products and our focus on cost reduction and expense management. On a non-GAAP basis, net income for the fourth quarter of 2019 was $52 million, compared to $39.5 million for the third quarter of 2019. This resulted in diluted earnings per share of $0.39 for the fourth quarter of 2019, compared to $0.30 for the third quarter of 2019. GAAP net income for the fourth quarter of 2019 was $116.7 million compared to $31.1 million for the third quarter of 2019.
This resulted in diluted earnings per share of $0.88 for the fourth quarter of 2019, compared to $0.23 for the third quarter of 2019. GAAP earnings per share for the fourth quarter of 2019 includes a $0.54 non-cash benefit from the release of our valuation allowance against deferred tax assets that we highlighted on the Q3 2019 earnings call. I will address taxes shortly. The strong financial results for the fourth quarter of 2019 represent the fifth consecutive quarter of cash generation and GAAP profitability. I would also like to highlight the significant milestone of achieving the first full year of GAAP profitability in the company history. Turning to the balance sheet. Inventory was $32.1 million at the end of Q4 2019, compared to $30.2 million at the end of Q3 2019.
We exited the fourth quarter of 2019 with a total cash balance of $296.1 million, including restricted cash, compared to $203 million for third quarter of 2019, and $106.2 million for the fourth quarter of 2018. The restricted cash balance relate to first quarter 2020 Safe Harbor deliveries. We expect the restriction to be lifted at the end of April 2020 and for all cash to be unrestricted by then. The cash balance benefited from prepayments of $49.9 million for Safe Harbor deliveries in Q1 2020, of which $5.4 million relate to products with deferred revenue component, such as Envoy and Enlighten. Revenue from these products is deferred and recognized as revenue over the respective useful life. As a result, our Safe Harbor revenue guidance of $44.5 million for the first quarter of 2020 differs from the prepayments we have received.
We generated $102.3 million in cash flow from operations and $94.9 million in adjusted free cash flow for the fourth quarter of 2019. For calendar year 2019, we generated $124.3 million of adjusted free cash flow. Capital expenditures was $7.4 million for Q4 2019, mainly to wrap up our microinverter supply capacity in Mexico and Encharge battery capacity in China. Now let's discuss our outlook for the first quarter of 2020. We expect our revenue for the first quarter of 2020 to be within a range of $200 million-$210 million, including $44.5 million of revenue for ITC Safe Harbor shipments. Turning to margins, we expect GAAP and non-GAAP gross margin to be within a range of 36%-39%.
We expect our GAAP operating expenses to be within a range of $35 million-$37 million, including a total of approximately $7 million estimated for stock-based compensation expenses and acquisition-related amortization. We expect non-GAAP operating expenses to be within a range of $28 million-$30 million. The sequential increase is primarily related to greater spending on R&D to support new products, as well as increasing sales headcount in Europe. In general, our operating expenses are expected to be in line or lower than our baseline financial model of 15% of revenue. Before wrapping up, let me address taxes. During the fourth quarter, we released our valuation allowance against deferred tax assets based on our recent history of profitability that is forecast to persist. This will result in a GAAP tax benefit.
We will now be subject to a 26%-28% GAAP tax rate in 2020, inclusive of federal, state, and international taxes. Cash taxes are expected to deviate materially from GAAP taxes, as we have federal net operating loss carry-forwards of $147.4 million, federal research credits of $12.4 million, state net operating loss carry-forwards of $97.6 million, and state research credits of $11.3 million. Until we fully utilize these NOLs and research credit, most of the cash taxes will only relate to income from international operations, which represents the minority of our business. With that, I will now open the line for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Brian Lee with Goldman Sachs. You may proceed with your question.
Hey, guys. Thanks for the questions and congrats on the strong quarter. I guess maybe first question on the Q1 guidance, the safe harbor revenue. Appreciate all the granularity you're providing around the dollar figures. Can you also give us a sense of what the customer mix looks like? I know in Q4, you had specifically called out the one customer, Sunrun. Is it the same customer in Q1? Is it a totally different customer in Q1? If it's a different customer, are there multiple customers? That'd be the first question I have.
It is a different customer. In fact, there are multiple customers. Yeah, for the Safe Harbor amount of $44.5 million.
Okay. Badri, safe to assume they're all Tier 1 installers, as you mentioned during your prepared remarks.
That's right.
there's only a handful of companies that can do the Safe Harbor. Okay.
Yeah.
Fair enough. That's helpful. I don't want to corner you into giving more guidance than you're willing to provide, you did try to provide us a little bit of sense around Q2. When I look back at the Q2 revenue trends historically, there's been about an average of 30%, give or take, sequential revenue growth and also a similar range for volumes, if I look back through the model, dating all the way back to the 2010s. I know a lot has changed over the period, is that the type of seasonality we should expect in Q2 this year as well based on your comments around healthy bookings and seasonality on core revenues. Again, assuming no Safe Harbor, no incremental coronavirus impact being the base cases. Just wondering if that's sort of the read we should be taking away from your comments.
Thanks.
Yeah. That's a good question. As you correctly said, Q2 is quite seasonally strong. Whether the number is 20% or 30%, it's hard for us to say at this point in time. In general, we expect to outperform the industry seasonality.
All right. Maybe last one, if I could squeeze it in, just around the Encharge. It's encouraging to hear you guys are on schedule for the shipments in Q1. One of your peers, who also has a new product in the market, just last week, Generac, announced that they're raising their target for shipments by 50% versus their original view. Any thoughts around the market makeup as you're seeing early traction on pre-orders and also ship to March and just in the context of your 5% attach rate, there's potentially some upside as you move through the year, given how the market's developing. Thanks, guys.
Yeah. Look, we are extremely excited by our product. In fact, Encharge is running well at all three of our houses. My house, Eric's house, Raghu's house, we are all running. In fact, I went off grid this morning for about eight hours. We are really happy with the performance of Encharge so far. Of course, it's time for us to bring to the market. If you really step back and think about it, why installers like our solution a lot, and this is what the installers told us, is really it's the all-in-one solar and storage system. Seamless experience for the homeowner. One number to call. Very high quality. Very high customer experience. Safe AC architecture. All controlled by Ensemble energy management technology. That's our value proposition. We're sticking to our value proposition.
There is obviously a lot of competition, a lot of noise in the market, I think, our value proposition is quite difficult to compete against. Many people are coming. We will see them in the marketplace. That's all I can say right now.
Okay, thanks, guys.
Thank you. Our next question comes from Mark Strouse with JPMorgan. You may proceed with your question.
Thank you very much for taking our questions. Badri, I just wanted to go back to the comment that you made about the impact from coronavirus and what's included and what's not. I believe you said that it's possible there could be some expedited shipping fees. Is that included or excluded from the 36%-39% guidance that you've given?
We have already included that in the guidance we gave you.
Okay. Thank you. You've been talking about expedited shipping fees for several quarters now, excluding the wild card from coronavirus. Can you just give an update there? Are you tracking expectations, having your capacity be above expected demand?
Look, we used to have expedite charges of more than 200 basis points before. That situation has changed. We are now normalized with respect to expedite. It's really in the noise. Of course, due to coronavirus, we have planned a little bit more than usual, but that's already factored in the guidance. Going forward, if the situation normalizes with respect to coronavirus, expedite is going to become noise. It's not going to be significant for us.
Okay. Thank you. Just one quick follow-up for Eric. Starting next quarter, with the Encharge starting to ship in March, how should we think about any metrics that you're going to give around those shipments or those revenue beginning in 1Q?
Yeah. We are considering the possibility that starting in Q3, we may start providing breakouts on revenue. We haven't made the final decision yet. There are external reporting considerations. We understand that when this becomes meaningful as part of our ramp, it will create a little bit of a problem for you folks to be able to model it. We are very sensitive to that, and we will address it when we have more visibility into how that will work out for external reporting.
Okay. Very helpful. Thank you.
Thank you.
Thank you.
Thank you. Our next question comes from Maheep Mandloi from Credit Suisse. You may proceed with your question.
Hi. Good evening. Thanks for taking the questions, and congratulations on the strong quarter. Maybe just on the other product launches you just mentioned on the Analyst Day, the IQ8 and IQ8D, could you probably just talk about how you're thinking about the rollout of those products, specifically given the supply chain disturbances in China, if any?
For those, we are thinking about the second half of the year. The rough order would be the IQ8 microinverters on the roof would be the first, followed by the commercial microinverters, followed by the Ensemble in a box.
Got it. Thanks. Just probably going back to the Encharge, could you just talk about how much should we expect from Encharge in Q1 specifically, or is it mostly a Q2 number?
We'll have small shipments of Encharge in Q2, I mean, in Q1, but nothing significant in terms of revenue. Q2, we'll have one full quarter of Encharge. Yep. We expect that to be nice.
Got it. Just lastly on taxes, I just wanted to make sure we understood that correctly. From a tax perspective, it's minimal cash taxes and like a standard GAAP tax rate in line with the U.S. corporate tax rates. Is that a fair statement?
Yep. You got it.
Right.
Think about $59 million of cash savings for the monetization of the NOL and tax credits. That's from a cash. From P&L, we gave you all the data to be able to model on a non-GAAP basis. When those are exhausted, we flip GAAP and non-GAAP will be the same.
Got it. All right. Thanks for taking the questions.
Thank you.
Thank you. Our next question comes from Colin Rusch with Oppenheimer. You may proceed with your question.
Thanks so much. Can you guys talk a little bit about the growth in Europe, how effective you've been in being able to build out the sales team, and how much of the 1Q guide is expected to come out of non-North American sales?
We don't really break out the exact numbers for Europe. I did give you some color this time on the total revenue for 2019 was $68 million. Our plan is to double it in 2020 to go to $136 million. Like what I told you, we've not been happy with our progress in Europe, but that has changed. Now we are actually doing very well. We have hired already a bunch of sales guys in place. We have internal transfers from the U.S. already in place. They've already started. I would say in terms of headcount, approximately five salespeople was the number we had in 2019, and that number will triple as we get towards March and April. We are tripling our sales headcount in Europe. We are focusing on the right regions. Our sales guy in Germany already started.
He's driving the collaboration with Creaton. We've already hired the guys for Spain, and we are doubling down on Netherlands, our most important area. We're also going to double down on France, where we have a very high market share already. Yeah, it's a good story right now. We're very confident that we're going to make progress. We are very confident of start seeing an uptick in revenue as early as Q1.
Great. Then as you think about the battery supply chain and your cost structure there, how should we think about the cadence of cost reduction? I'm assuming that you're going to go through a series of cost cuts as you get to higher volumes. Just trying to get a sense of what the order of magnitude is on that and how quickly we might get to some of those cost breaks.
Like what I told you guys in the Analyst Day, cost reduction is embedded in our DNA. That's what I call as operational excellence. We look at all kinds of costs. If I look at microinverter costs, I look at the transformer cost, the FET cost, the connector cost. For example, the connector, I can talk about that for hours. We have a DC connector in our microinverter. Today we have an adapter cable that converts the connection from the panel into a proprietary connector on the microinverter. We are going to eliminate that adapter cable by building what is called as a MC4-like connector on the microinverter. That alone will save us roughly $2-$3. That's going to take some time. It's going to take some time. It's going to be done over multiple quarters. That's just an example of one.
We're focusing on transformers, we're focusing always on sourcing the right AC sets. We're always working on combinations where we can integrate more components into our ASIC. That's on the microinverter. On the accessories, Gateway is an entire exercise. Our Envoy, we are spending a lot of hours trying to take costs out of the Envoy, the same effort on the cable. We'll apply the same diligence to Encharge going forward. That's why you see our gross margins kind of are sequentially going up. If you see the Q3 number was 36%, Q4 2019, we did around 37%. We are guiding 36%-39% for Q1. We are getting more and more, executing well on the cost reduction.
All right. I'll take the rest of it offline. Thanks, guys.
Yep. Thank you.
Thank you.
Thank you. Our next question comes from Jeff Osborne with Cowen and Company. You may proceed with your question.
Thank you. Good afternoon. Just a couple questions on my end. I was wondering if, I know I've asked you this in the past, Badri, but if you just could confirm that with the Encharge, the launch of that the margin profile would be consistent with the corporate average? I think Colin was trying to ask about that as well. Is the initial phases of the launch pressuring margins in Q2 and Q3, and then as you take costs out, will come back to the targeted range?
No, it's not going to compress our margins. It's going to be right in line with our model.
Great. That's great to hear. Can you just talk about IQ8 's introduction for solar-only deployments? Is that still targeted for Q2, Q3? I know it's in the Encharge solution, but how do we think about if somebody doesn't want storage, when will that be available?
Right. As I said, it's in the second half of 2020. Yes, it's almost ready. Basically, you rightly pointed out, it's already available inside the Encharge, of course, we have to do a lot more work with a lot of flavors on IQ8, which is IQ8+, the IQ8X, the IQ8A. The real effort is to make sure that the gateway talks the same language as IQ8 and ensuring that we do all the due diligence on quality on the various flavors. We might do it earlier if things go better. For now, I'm not giving a quarter, but I'm saying generically second half of 2020.
Got it. The last one I had, either for yourself, Badri or Eric, just how do we think about the second half as your Mexico capacity ramps up to the 1 million a quarter target, and what the implications are for pricing, as you sort of reverse the higher prices that you had experienced in 2019 because of the tariff? Fully recognizing it doesn't impact the gross margins, but just it would be important for modeling, as we think about ASPs per watt.
Like what I said, if you think about gross margin, gross margin is a combination of pricing and cost. We are continuously improving our cost. In terms of pricing, right now the pricing environment is very stable. Of course, we always model 1%-2% price reductions every quarter. That's what we do.
Got it. Thank you.
Yeah. Thank you.
Thank you.
Thank you. Our next question comes from Philip Shen with Roth Capital Partners. You may proceed with your question.
Hey, guys. Thanks for the questions. First one is on the coronavirus situation. Was just wondering if you could give us a little more color on what's happening on the ground there in your facility. Specifically, what kind of capacity utilization have you been running through this tough time? How do you expect that to trend in the coming weeks? What kind of potential impact do you think you could see in Q2? Finally, do you source any critical components from Hubei province specifically?
Right. Just to give you a quick thing, we make all our microinverters at Flex Fuyang. That's about, I think, 12 hours drive from Wuhan. We have done our homework in terms of the raw materials, the supplier of the raw materials, et cetera. Most of our raw material suppliers are in Suzhou and Hangzhou, which are also a little bit away from Wuhan. From our diligence checks, our raw materials, they aren't affected. If I were to think about the entire situation in terms of priority, I would think the following. Number one is labor. Is labor back in full force or not? The labor in our Flex factory is roughly about, I would say, because of the reduced labor, our throughput is roughly 50% of the full capacity, which is still pretty good for us.
The second priority or the second constraint that we think about is logistics. We hear that the outbound logistics from China is getting difficult, so we are always watching. We are paying attention to that. The third is the raw materials that you pointed out, which we've done the homework. We think we are good there. The fourth is obviously, we are doing this conference call so late, seven weeks into the quarter. If the revenue guidance for the quarter is X, we have already shipped seven over 13 times X right now. That's what I mean by I'm at 100% linear. We've already shipped that revenue. Seven over 13 multiplied by X is what we have shipped. The last one is Guad. Guad is doing over 50,000 units a week. Of course, Guad depends on the raw materials from China.
There is always risk there. We feel pretty good about that guidance right now. We have factored all of this situation in both revenue as well as gross margin guidance. Considering that one of the data point is we are fully booked to the guidance that we gave you. We are fully booked. We are 100% linear. We've done the homework in terms of raw materials. We are paying extraordinary attention to logistics. At this time, we feel pretty good. If that situation materially changes because of something that we don't know, then we'll come back to you. That's what we know now.
Thanks, Badri. As it relates to Q2, I know you haven't provided official guidance. You talked to Brian about seasonality kind of being in line to slightly better than historical or something like that. What is the risk to Q2? Obviously, you've already shipped for Q1, the question is, what's your view on let's say the current situation remains at this level, 50% of full capacity. How does that impact what you can deliver on Q2?
If the situation remains the same, I don't think we'll have a problem for Q2, if it remains the same. The reason is, of course, we're making good progress in Mexico. That's starting to take the burden more and more. We are keeping a close eye on the raw materials. All things being equal, if it were exactly the same in a few days from now when Q2 is beginning, I'm still pretty optimistic about Q2, but realize that things can change by the day. That's all I can tell you right now, Philip.
Okay, great. No, that's very helpful. Thanks. Shifting gears to pricing, I know you talked about that briefly. Historically, you guys have talked about as you ship away from China and from Mexico, that you would pass along that pricing to customers. Earlier, call it a few months ago, you were talking about maybe a price cut starting April 1st to pass that on to customers. It seems like in our recent checks with customers that you haven't been actively talking about that. What's your view on a potential for a price reduction? At what point in time would you expect that to possibly happen?
Right. Just so we are clear, when the supply chain right now is in turbulence due to the coronavirus, other suppliers are thinking about raising the prices, we have not. We basically value our customers this time. We think that they've already taken a lot of burden on the tariffs, we're not planning to raise prices. It is not prudent for us to also drop prices without understanding the situation on the supply chain due to the virus. If things stabilize, we will do exactly what I said, which is basically depending upon the percentage of manufacturing in Guad versus China for North American shipments, we will basically reduce prices to that level. Okay? That will happen in sometime in Q3 if the situation gets stable, in terms of the coronavirus. If not, we got to wait and watch.
Thank you. Our next question comes from Brad Meikle with Williams Trading. You may proceed with your question.
Hi, guys. Thanks for the question. Your U.S. business grew 137% year-over-year in 2019. Can you give us some detail in terms of the level of inventories in the channel today versus a year ago, so we understand how much market share change that is? Other checks are indicating that SolarEdge inventories are a lot higher in the channel than they were a year ago. I know you get POS data on your inventory in the channel. Can you add any color on that, please? Thanks.
Yeah. We think a reasonable level of inventory to have is usually eight to 10 weeks, we try to maintain our channel inventory between eight to 10 weeks, like what I pointed out the last earnings call. What you said is right. We have grown a lot in the last year. Mainly the growth is because of our IQ 7 product. Fantastic product. It's due to quality. It's due to customer experience. We have made a lot of announcements with Tier 1s. We've made a lot of announcements with the long-tail installers. We recently signed up Petersen-Dean and Sunrun as well. Things look good there. As long as we don't take our eye off the ball in terms of customer experience, I believe we will continue to take share.
Can you quantify at all what that market share is today in U.S. residential versus a year ago?
Brad, we don't really think market share. We control the inputs, but we don't really track the output. I don't know the number, and I'm not going to quote a number.
Right. Yeah.
that I'm not standing by. Okay?
Thanks. Yeah, it's obviously a big number given that the market is growing at 25%, and you grew at 137% with that much inventory growth. What about storage? Can you add any more color on the beta installs, however many, 500, 800 that have been done, what your feedback has been from the customers? Have you gotten follow-on orders? It sounds like April is when production volumes really start up. Can you give us a sense? I know that there's a day and a half training required for an installer. Can you give us some level of understanding what the ramp-up might be? Just kind of how, I know it's a new business, but what does it seem like at this point?
Yeah, just to get our terminologies straight. Right now, we are doing what are called as alphas. Alphas are basically near and dear people, is what we are doing. Like what I said, Eric's house, my house, Raghu's house are all running full Ensemble. That's what we have done. We are giving feedback to the team. There aren't any major issues. There are always minor teething issues that are there in this. Now, coming to the second thing is the training of installers. We have trained all our beta installers. They are our, what we call it, the ambassadors that we trained in the first round. We trained about 70 installer personnel and 22 installation companies. These form our beta network.
Essentially, in the first week of March, they will start installing, or in the second week of March, they will start installing beta systems, and we are going to get further feedback from that. By that time, our compliance will also be done, and so we'll be in a very good position in order to ship product. In terms of the performance of the product. We are actually exercising it. Like in my house, like what I said, this morning, I was off-grid for about six hours, and everything was fine. Someone had flipped my app to go from on-grid to off-grid, so we can enter it through the app. They were doing a test on my house, and I didn't even know that I was off-grid. That's a big deal. If I can make that customer experience seamless, it's all going to be that.
If we can make that customer experience seamless, I think, there's a lot of upside here.
Thank you. Our next question comes from Jeffrey Campbell with Tuohy Brothers. You may proceed with your question.
Good afternoon, congratulations on the strong quarter. Badri, at the Analyst Day, it was said that other than possibly the price, that DC can't compete with Enphase, that's what had me thinking about the IQ8D and the small commercial solar. I was thinking, even with a higher unit ASP, the IQ8D reduction in components should see system costs come down relative to the IQ7. Is it fair to think of it that way? Could the IQ8D be the first Enphase micro that will benefit from quality, service, and cost competitiveness?
Well, yes, but it's not because of the reason you said. Our architecture is a scalable architecture, fully resonant architecture. We are able to-- what we told you in the Analyst Day is that the power density for our product is 50% higher for IQ8D than IQ8, which means we are able to pack a lot more power in the same form factor, and of course, that translates into cost. Of course, we are going to be competitive, but we do not price on cost. We price on value. What is the differentiation with respect to our next best alternative? We'll have to look at what is in the competition and what value are we specifically providing. Is it higher quality? Is it better customer experience? Is it better installation, less labor? All of those factors need to be looked at, and then we will price our products.
Okay. Well, that's very helpful. I also wanted to ask about the Creaton partnership that you sent a press release out on recently. It looks like it's a large operation. There's eight factories. I have no sense of how large the clay tile rooftop market is or Creaton's place in that market, so some color there would be helpful. I also wondered if the installer relationships that Enphase will build through Creaton can go beyond clay tile installation.
Yeah. The idea is very neat, right? If you basically have in-roof solar and you do it for new homes, you would think that it basically can catch on like wildfire, right? This is an entirely brand-new market. We have not seen it take off. I expect it'll be a slow and steady growth. Because we are introducing it in a mature country like Germany, and Germany is very strict on quality, is very strict on customer experience. They wouldn't ramp something as fast. It's got to be in a measured way. The advantages are very clear. It's an AC roof. It basically standardizes everything, and it will reduce the cost of an installation. By definition, the modules are built in the factory, including the microinverters, so quality is going to be very high. It's all in all a good experience for the installer.
The installers, obviously, they want it. At this point, it's too early for us to talk about the ramp.
Thank you. Our next question comes from Eric Stine with Craig-Hallum. You may proceed with your question.
Hi, everyone. A few quick questions here at the end. Maybe just on Ti er 1 customers, I know a couple of years back, you took the action to kind of step away there, and late last year, picked up Sunrun. These new Safe Harbor customers that you referenced, just curious what kind of contribution you expect from those customers as they come back in 2020. Is it meaningful in 2020 and more of a 2021 event, or do you expect that it could impact 2020 nicely?
Yes, we did the Safe Harbor with Sunrun in Q4. We are doing Safe Harbor in Q1 with a couple of customers who are not new, who are our existing customers. The answer to your question is, we expect them to use a lot of the Safe Harbor material. That doesn't mean that they wouldn't place additional orders in the quarters. Of course, the orders will be in a reduced magnitude. I think they'll still be sizable. That's what I think.
Okay. Got it. Maybe last one for me, I know it's early here in the new year, but the new home mandate in California, whether you're starting to see an impact or how maybe your view has changed or starting to become more clear. Then just curious, do you have in mind kind of a share of that market since you're partnered with SunPower and the Petersen and Dean relationship?
It's one where here I have to rely on our partners like SunPower, like Petersen-Dean, like Lennar Homes. These are our partners. They are our front end to the home builders. We expect to do really well because of our partnership with SunPower here, and our partnership with Petersen-Dean. like our solution, like for example, in the case of Petersen-Dean case, imagine a house being fitted with an all-in-one solar and storage system with the beautiful Encharge and the Enphase Solar System. That's going to be an amazing customer experience for them.
Got it. It hasn't changed either way. You still think it's a big opportunity and maybe still too early to tell the magnitude?
Absolutely. It's a nice opportunity for us. We are ideally placed because many of these will be small systems. In these small systems, the whole point of microinverters is I can do small systems very easily. Whole point of Encharge is I can do modularity, flexibility very easily. I can do 3.3 KW/ hr, 6.6, 9.9, or 10 KW/h r. Yeah. I can add chunks later depending upon the customer need. For example, Raghu has got a 10 kilowatt hour system. He wants to add two more 3.3s. I have a 16.8 KW/hr system. Eric has got a 20 KW/hr system. Each of us are different, and the modularity really helps us to fine-tune exactly what we want.
Got it. Thanks.
Thank you.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. Our next question comes from Sameer Joshi with HC Wainwright. You may proceed with your question.
Yeah, good afternoon. Thanks for taking my questions. What are the products that are being pushed in Europe? Are they IQ7 and IQ7+ based, or are you pushing for IQ8 as well there?
Most of Europe right now today is 72 cell. Yeah, 72 cell modules, I believe. That's basically IQ7+ and IQ7 are the predominant sales in Europe.
Okay. Coming to the Safe Harbor sales, are the gross margin profile similar for Safe Harbor versus non-Safe Harbor sales?
Well, since we are actually shipping to Tier 1, the gross margins themselves are a little bit lower. As you can see, we have made extraordinary improvements in gross margin. You can see, despite our huge shipments of Safe Harbor in Q4, our gross margin increased from Q3 to Q4.
Right.
Same with the midpoint of the guidance for Q1, right? You got a referencing point there, either the low end or high end of the range, or in all cases.
Yep. In all cases, it's pretty healthy.
Understood. Moving down the operating expenses, the G&A costs, or rather overall OpEx costs, that have been guided for 1Q, are they representative of the rest of the year, or does the first quarter have some extra stock-based comp?
Most of the infrastructure investment that we need to make for the headquarters, many of the IT improvements that we need to do actually will hit OpEx. What I will say is that we provided the guidelines of 15% of revenue, our view is that the way you guys should model it is by taking that one as your kind of baseline, then it could be a little bit better than that. For the most part, you should consider that to be an investment line through R&D increases, a little bit of the sales in Europe, some of the IT infrastructure security things that we need to do as a company. That in the old days, those used to be OpEx. Most of the subscription-based or license-based IT investment that we need to make are now P&L, hitting the P&L.
That's the way we're going to be subsidizing through the P&L in the form of investment in our infrastructure growth and supporting the growth.
Understood. Just maybe one last one, clarification on the ASP per units, per inverter. If I do a back-of-envelope calculation based on your revenues and total number of units sold, it seems that the ASP has actually reduced over the last several quarters. I know it is not an accurate way of looking at it, but is this trend expected to continue?
No. It's not an accurate way of looking at it. It basically depends. The way you look at it, your calculation, take overall revenue, divide by the number of microinverters, is not the real story. For example, if we do ship our AC batteries, which are a first-generation battery, each of them has got an ASP of $1,000. We're not breaking those, but your calculation includes those. If we ship a lot of cables, for example, if we ship a disproportionate amount of cables, the overall revenue will actually come down. If you ship, the overall ASP will actually come down. It's heavily dependent on mix. What I can tell you is this, we pay very close attention on what we call a customer variant. Did we reduce price at a customer, at a specific customer and calculate that?
We rolled that up and those numbers are actually very less. Pricing is very healthy. Pricing is flat, except for what I talked about in terms of the Guad transition.
Yeah
We don't see many changes to pricing.
It still is good for them to model some price erosion on their models, right? We always recommend that, right?
We always model 1%-2% for our modeling. That's the right way to think about it.
It will get a little bit more complicated with Ensemble coming on board. We will provide some help, hopefully, for you guys to model when the meaningful revenue of Ensemble starts to become more clear, right?
Yeah.
Thank you. Our next question comes from Pavel Molchanov with Raymond James. You may proceed with your question.
Thanks for taking the question. In its midterm review, the International Trade Commission talked about potentially adjusting or even setting aside the Section 201 tariff. As it relates to the AC module relationships you have, is there any read-through, depending on what the decision will be?
I think there was a lot of discussion about it. We have not heard any more discussion on the ad valorem tariffs going away. We also know that there's exclusions there. I don't believe that's in play right now.
Most of our volume business with SunPower already is excluded.
Understood. You were already asked about one of the new entrants, Generac. If I may, let me ask about another one, LG. Can you confirm whether LG is currently a customer for your microinverter as a component to LG's integrated module product?
No, they're not a customer.
Okay. Thank you very much.
Thank you. That concludes our Q&A session. I would now like to turn the call back over to Badri Kothandaraman for any further remarks.
Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again during our Q1 2020 earnings call in April. Okay, thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.