Good day, ladies and gentlemen, and welcome to the Enphase Energy's Second Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms.
Christina Carabino. You may begin.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q2 2019 results. On today's call are Badri Safandaraman, Enphase's President and Chief Executive Officer Eric Branderez, Chief Financial Officer and Raghu Baloor, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q2 ended June 30, 2019. During this conference call, Enphase Management will make forward looking statements, including, but not limited to, statements related to Enphase Energy's financial performance and the capabilities and performance of its technology and products operations, including service, capacity and supply and current and future market and customer demands and trends for its services and products. 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, 2018, which is on file with the SEC and the quarterly report on Form 10 Q for the quarter ended June 30, 2019, which will be filed with the SEC in the Q3 of 2019. 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 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 Q2 2019 financial results. We had a pretty strong quarter. We reported revenue of $134,100,000 reflecting the strong demand from our customers across the board. While the demand continued to outstrip available supply in Q2, we were able to increase capacity to better support our customers. I will provide a supply update later in the call.
Our non GAAP gross margin in the Q2 was 34.1% and our non GAAP operating income was $23,200,000 Our gross margin was negatively impacted by 3 30 basis points due to expedite fees related to component shortages. The expedite fees were in the form of air shipments made to service our customers. We continue to make a lot of progress in strengthening our balance sheet. We exited the 2nd quarter with a cash balance of $206,000,000 which included net proceeds of approximately $115,500,000 associated with the issuance of convertible senior notes due 2024 and the repurchase and exchange of certain convertible notes due 2023. We exited Q2 with approximately 30 fourseventeentwenty 17.
This means 34% gross margin, 17% operating expense and 17% operating income, all approximate non GAAP numbers percentages. The most obvious question is whether are we going to reset our target financial base model given that we are doing a lot better than 30, 2010. It is certainly a possibility that we will consider a new model in the future, but we would like a few more quarters of solid execution under our belt. Eric will go into greater detail about our financial results later in the call. Let's now talk about ease of doing business, how customers perceive us.
Our net promoter score in Q2 was 53% in North America. However, our call wait times were a little bit higher than what we wanted. We are working towards getting our call wait times back to 2 minutes or less through additional staffing and enhanced self-service options. We are also pleased to announce that as of today, more than 5,000 homeowners have joined our Enphase upgrade program, a program for our early adopters of our legacy microinverters. This program is yet another example of our commitment to quality and customer service.
We are happy to report our NPS for this upgrade program as given by the homeowners was 65% in Q2 of 2019. We are paying more attention to our mobile apps as part of improving our overall customer experience. For example, homeowners can download the Enlighten mobile app that provides them with a comprehensive view of energy generation from each panel, also called for panel monitoring, the energy consumed and the operation of their end phase AC battery system if they have one. In January, we launched a version of a new version of this app, which resulted in an iOS app rating that was not very good. It was less than desirable.
We immediately created an internal task force in early January to address these issues. And we are now pleased to report our rating is approximately 4.4 out of 5 for iOS, reflecting a better customer experience. Now let's talk about tariffs. As previously stated, we shared the cost increases due to tariffs with our customers. We are working to mitigate the Section 301 tariffs by expanding our manufacturing with Flex in Mexico in addition to increasing global capacity as well as improving delivery.
We started shipping our IQ 7 microinverters from the Flex Mexico factory in late Q2. The shipments were a couple of months later than what we anticipated primarily due to qualification delays. The best way to get the Mexico factory ramping was to copy exactly what worked in Flex China. It's called a copy exact process. This Copy Exact Process was executed well for all but 2 process steps out of 2 30 process steps.
We quickly recognize this through our outgoing reliability monitors and comprehensive audits. We have rapidly corrected the issues. We are now well on our way. You saw the press release on July 1 that stated we have started shipping from Flextronics Mexico. We expect this production ramp to take another 2 to 3 quarters as we continue to streamline our operations in terms of headcount as well as yields in the Mexico factory.
Now let's go to the regions. Our U. S. And international mix for Q2 was 74% and 26% respectively compared to 78% 22% in Q1. Our 2nd quarter revenue in the U.
S. Was up 29% sequentially and up 107% year on year due to strong demand across the board. Our U. S. Revenue also included volume shipments of our IQ 7XS and our IQ 7AS microinverters to SunPower as planned.
In Europe, our Q2 revenue was up 71% sequentially and up 46% year on year. Europe ramped up in Q2 as our supply increases to the region helped to service increasing customer demand as well as replenish the channel inventory to normal levels. IQ7 offers unique advantages to European solar markets, particularly in new build and small residential system due to its scalable architecture. The Netherlands and France remain very strong markets for us in Europe. In APAC, our 2nd quarter revenue was up 29% sequentially and down 23% year on year.
We are rebuilding our solar and storage teams in the region under our newly hired sales leaders for Australia. In Latin America, our 2nd quarter revenue was down 7% sequentially, but up 27% year on year. We continue to be bullish about our growth opportunities in Latin America with Ensemble. We're also working with some of our customers in North America on their ITC safe harbor demand. We do have a good view of the Q3 demand and are working to understand how Q4 'nineteen and Q1 'twenty will It appears Q4 2019 will be the peak quarter with some demand, safe harbor demand expected to spill over into Q1.
Our strategy is to first address the intrinsic demand from all of our customers followed by the safe harbor demand. Eric will provide our Safe Harbor revenue outlook for Q3 later in the call. Now let's discuss supply. Our supply has been limited by component shortages in the past quarters, primarily the high voltage effects. We have qualified multiple suppliers, signed key contracts and have been rapidly increasing our micro inverter output quarter on quarter.
We are now focused on ensuring we have manufacturing capacity to meet our customer demand. We are on track to ramp to a capacity of approximately 2,000,000 microinverters and beyond in the Q4 of 2019. Next, I would like to say a few words about our long term strategy. As you know, we are working on transforming Enphase from a solar microinverter systems company to a home energy management systems company. We are thinking about this transformation in terms of 4 years or 4 components.
They are energy generation, energy storage, energy consumption and services. The first gear which is energy generation is the core part of our business today. The latest product in this gear consists of our IQ 7 family of microinverters and AC modules. Approximately 98% of our microinverter shipments in Q2 were from the IQ7 family, up from 94% in Q1. As previously announced, we released our latest product in the IQ7 family called IQ7A, a high power microinverter targeted for modules up to 4 50 watt DC.
We are on track for the general availability of IQ7A microinverters for 72 cell modules in North America later this year. We continue to create value with AC modules that reduce logistics costs while speeding up installation time. The AC module ramp for SunPower is now largely completed as planned and it will be business as usual going forward. We are also making steady progress with Panasonic, Solaria and a few partners in Europe. Enphase Energized ACMs from our module partners have been adopted by more than off grid product.
We are nearing completion of delivering the final requirements to our partner for our pure off grid IQ8 microinverter solution and expect increased shipments in Q3. We shipped approximately 1,000 microinverters to our partner in Q2 and have a few more requirements under the joint development agreement to meet before we receive the final $675,000 milestone payment. Let's now discuss our 2nd year, which is energy storage. We expect storage to play a major role in our near term revenue growth. We plan to release the Ensemble 1.0 solution in the Q4 of 2019, primarily focused on residential storage in North America.
Storage is enabled by the Encharge battery, which is a modular 3.3 kilowatt hour solution. The 3.3 kilowatt hour modularity allows for ease of installation, flexibility and scalability while helping to streamline our supply chain. The Encharge battery will offer capacities of 3.3 10 kilowatt Our 3rd gear energy consumption will provide customers the ability to measure, report and manage their consumption. We currently ship products that provide both measurement and reporting through our combiner box and Enlighten products at an aggregate level. We expect to release new products over time with advanced hardware and software capabilities to manage consumption in a fine grain manner both at a breaker level as well as an appliance level.
We will provide details of these products in the coming quarters. The 4th and final gear is services. The existing installed base of more than approximately 940,000 systems worldwide represents many potential opportunities including product upgrades for solar and storage in addition to software services. We have learned a lot from our legacy product upgrade program. We plan to build on this learning and introduce On Sample 1.2 storage upgrades to our homeowner installed base through our network of installers.
There are also several services such as APIs, warranty extension, system monitoring and fast enlightened features which have the potential to generate new revenue strength. We will start talking about more of these in the upcoming quarters. In summary, we are pleased with our overall progress in the 2nd quarter. In the short term, we are laser focused on 3 objectives, ramping our supply chain to meet the increased customer demand, providing a superior customer experience through quality and ease of doing business and delivering Ensemble 1.0 later this year. 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 Q2 of 2019 financial results as well as our business outlook for the Q3. As a reminder, the financial measures that I'm going to provide are on a non GAAP basis unless otherwise noted. 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 Q2 of 2019 was $134,100,000 an increase of 34% sequentially and an increase of 77% year over year.
We shipped approximately 4 16 megawatts DC in the Q2 of 2019, an increase in megawatts of 36% sequentially and an increase of 105% from the year ago quarter. The megawatts shipped represent 1,283,000 microinverters, approximately 98% of which was IQ7. Both IQ6 and IQ7 represented almost 100% of the Q4 to Q2 microinverter shipments. Non GAAP gross margin for the 2nd quarter of 2019 was 34.1% compared to 33.5% for the Q1. Component shortages continued to negatively impact our Q2 non GAAP gross margin by approximately 3.30 basis points.
Non GAAP operating expenses were $22,500,000 for the Q2 of 2019 compared to $22,300,000 in Q1 and $19,000,000 in the Q2 of 2018. GAAP operating expenses were $27,900,000 for the Q2 of 2019 compared to $26,200,000 in Q1 and $23,300,000 in the Q2 of 2018. GAAP operating expenses for the 2nd quarter included $4,200,000 of stock based compensation expenses, dollars 546,000 of amortization expenses for acquired intangible assets and $631,000 of restructuring expense. On a non GAAP basis, income from operation was $23,200,000 in the Q2 of 2019 compared to $11,300,000 in Q1 and $4,100,000 in the year ago quarter. This increase in operating income is reflective of our continued improvement in operational excellence and product leadership.
On a GAAP basis, income from operations was $17,400,000 in the Q2 of 2019. On a non GAAP basis, net income for the Q2 of 2019 was $23,200,000 compared to $9,500,000 in Q1 $1,600,000 in the year ago quarter. This resulted in basic earnings per share of $0.20 and diluted earnings per share of $0.18 in the Q2 of 2019 compared to basic earnings per share of $0.09 and diluted earnings per share of $0.08 in the Q1 of 2019. GAAP net income for the Q2 of 2019 was $10,600,000 compared to $2,800,000 in Q1 and a loss of $3,700,000 in the Q2 of 2018. This resulted in basic earnings per share of $0.09 and diluted earnings per share of $0.08 in the Q2 of 2019 compared to basic earnings per share of $0.03 and diluted earnings per share of $0.02 in the Q1 of 2019.
We are happy to report that this was the 3rd quarter in the company's history that we achieved GAAP net profitability. Now turning to the balance sheet. Inventory was $20,100,000 in the Q2 of 2019 compared to $13,000,000 in Q1 and $17,500,000 in the year ago quarter. We ended at 21 days of inventory on hand as of June 30, 2019, significantly below our internal target of 30 days, up from 18 days in the Q1 and down from 30 days in the year ago quarter. The increase in days of inventory on hand as of June 30, 2019 was intended to improve shipment linearity to our customers and better serve increasing global demand.
Inventory management continues to remain one of our key cash management initiatives. We exited the Q2 of 2019 with a total cash balance of $206,000,000 compared to $78,100,000 in Q1. As Badri mentioned, the 2nd quarter cash balance included net proceeds of approximately $115,500,000 on June 5, 2019, associated with the issuance of $132,000,000 aggregate principal amount of convertible senior notes due 2024 and the repurchase of $60,000,000 aggregate principal amount of convertible notes due 2023 in exchange for shares of Enphase common stock and separate cash payment. This convertible note transaction enhanced our balance sheet and will help enable our growth. We generated $14,800,000 in cash flow from operations and $12,300,000 in adjusted free cash flow in the Q2 2019.
Now let's discuss our outlook for the Q3 of 2019. We expect our revenue for the Q3 of 2019 to be within a range of $170,000,000 to $180,000,000 including a range of $6,000,000 to $10,000,000 for ITC Safe Harbor. Turning to margins, we expect GAAP and non GAAP gross margin to be within a range of 33% to 36%. Note that our Q3 gross margin guidance include a negative impact of approximately 200 basis points to 300 basis points due to expedite fees to meet customer demand. We expect our GAAP operating expenses to be within a range of $28,500,000 to $30,500,000 including $5,000,000 estimated for stock based compensation expenses and acquisition related expenses and amortization.
We expect non GAAP operating expenses to be within a range of $23,500,000 to $25,500,000 You should note that the midpoint of this guidance represents 34.5%, 14%, 20.5%, which is 34.5% gross margin, 14% operating expense and 20.5 percent operating income, all non GAAP numbers. With that, I will now open the line for questions.
Thank
And our first question comes from Colin Rusch with Oppenheimer. Your line is open.
Thanks so much guys. Can you talk a little bit about the preparedness of the supply chain to support the elevated levels of revenue that you're seeing? Certainly, I think a lot of us are trying to figure out what the real ceiling is here.
Yes. So, we've been talking about component shortages in the last few quarters. And what we have done is we have qualified multiple suppliers, especially for the high voltage pads. We have signed a bunch of contracts and we have been increasing our microinverter output quarter on quarter. If you notice, Q1 was approximately 980,000 microinverters.
Q2 is about 1,280,000 microinverters. And we expect roughly, if you look at the midpoint of guidance, we expect around 1.7 to 1,800,000 microinverters in Q3. And we are really comfortable with that and also we are on track to do a couple of 1,000,000 microinverters in terms of supply. We'll be ready
for a
couple of 1,000,000 microinverters in Q4. So, basically in terms of high voltage transistors, I think we expect to be largely in good shape as we exit 2019.
Okay. Thanks so much. And then just in terms of pricing power with your customers,
how much do you have
right now? Is it a situation where you guys could actually raise prices here over the next couple of quarters and sustain that into 2020? Or are you just trying to move as much volume as you can right now?
Well, I mean, we have already increased pricing on customers because of the tariffs. So customers are actually absorbing their pricing today. And in general, other than that, the pricing environment is largely stable.
Okay. I'll take the rest of it offline. Thanks so much guys.
Thank you.
Thank you. And our next question comes from Eric Stine with Craig Hallum. Your line is
open. Hi, everyone.
Hi. Hey, maybe just like
to talk about SunPower a little bit. You said that you'll fully transitioned there and ramped there. Maybe just maybe if you could quantify what your expectation is for the 3Q contribution? And just looking at your Q2 number, I mean, it does seem like that's trending well ahead of what your initial expectation was. So maybe just talk about how that's playing into the guidance and certainly as a big part of the rest of your overall business?
We did the SunPower transaction last year. We announced the transaction in June. We closed the acquisition in August of 2018. We said we would by and large be done by the Q2 of 2019 and that is the case. We are done with the SunPower acquisition, meaning we are done with the ramp.
Basically, we also said we would do roughly about $60,000,000 to $70,000,000 of annualized run rate when the business ramps. So everything, the revenue we did in Q2 is completely consistent with that. So SunPower business is largely on track. Things are going well. If SunPower does well, we do well and that's all we can say right now.
Yes. No, I got it. Okay. And maybe I don't know if this is a number you've ever disclosed, but I'm just curious what percentage of your mix would be AC modules? And just obviously that's a big component of the traction that you're getting and wondering if that is something that's attracting other people, other potential partners for that in the market?
Yes. I mean to tell you on the AC modules, it is not a hockey stick growth. It is steady, slower and steady growth. And of course, the biggest customers there are SunPower and then we have Panasonic started ramping couple of quarters ago since Solaria is also ramping right now. And then we are working with a couple of people, a couple of module customers in Europe to provide some differentiated AC modules for you.
So I would say, the pickup is kind of steady and till date about over 500 installers have tried out AC modules. It's not that they are going to switch to AC modules forever, but they've at least tried out AC modules. And in our experience, once you try AC modules, usually you stick to that. But right now it's slow and steady.
Okay. But fair to say we should see or it's very possible we see more partners for you in that area?
Yes. I mean, we are always in the process of adding partners if and when it makes sense and that will be the case going forward.
Okay. Last one for me just on the component shortages and you mentioned that you expect that to be pretty much taken care of by the end of the year, but I also know expedited shipping can be just a part of the business. I mean what would you expect a more normal number to be rather than the 300 basis points it was this quarter?
Yes. Normal, when it's business as usual, I would say, it's the age should be between 1% and 2%, basically between 102 100 basis points. And component shortages like what I said, we are largely out of the woods on high voltage fats. But think about it like this, the microinverter uses 300 components. So, we are always constantly monitoring the supply chain on we are looking a few quarters ahead and making sure that we are completely out of the woods in general.
Okay. Thank you.
Thank you. And our next question comes from Philip Shen with ROTH Capital Partners. Your line is open.
Hey, Philip. Hey, guys. Congrats on the results. Nice quarter. Wanted to ask about your units here.
You talked about the $1,700,000 to $1,800,000 in Q3 and also $2,000,000 in Q4 units. Is it possible to that Mexico could come in better than expected as we get into 2020? Is there a potential for that facility to build a ship closer to 2,500,000 or maybe even 3,000,000 units?
Yes. Look, I mean, we are only going to talk about right now our numbers for Q4 2019. But as a management team, what we do, we look at the next 6 quarters and we look at it on a monthly basis and then we are going to constantly look at our capacity. So the capacity is now a monthly process versus a one time event. So of course, we gave you specific numbers for Q4 2019, but that doesn't mean we are not going to increase that number.
So that number will continuously increase as far as demand also accumulates at the same level. And we are in a great position to do so because we have the Quad factory, Flextronics has done an amazing job there. And also we have a capital light approach. All we need to do is to add the testers. So the capital investment is quite light.
Of course, there is a lead time for it that's usually a quarter. So as long as we have reasonable notification, which we have with the 6 quarter forecasting methodology, there is no reason why we won't have why we cannot ramp more.
Great. And then to what degree are you guys considering alternative geographies for capacity as well? So beyond China and Mexico, is there anything there that you guys might be able to share?
Yes. We're not going to share in detail, but I'll tell you one thing that we've always talked about multi sourcing in all aspects of our business and that is true everywhere. So you can count on us to deploy the strategy wherever it makes sense and I'll leave it at that.
Fantastic. As it relates to safe harbor, Eric, I know you guys talked about $6,000,000 to $10,000,000 in Q3. We've heard in our checks that there are some meaningful safe harbor deals brewing. So $6,000,000 to $10,000,000 seems a little bit modest, but it is earlier in the year. As you ramp up to Q4, what percentage of your shipments in Q4 could actually be safe harbor?
Phil, as you know, we're not going to be talking about Q4 at this point. Right now, we have a great visibility or a good visibility of Q3. We don't yet know about Q4. We'll talk about it when we are ready in the next earnings call.
Great. Thanks, Badri. And this is a very quick set of housekeeping questions. Can you share what the impact of the tariff was on the margin in terms of basis points or maybe even dollars? And then in terms of megawatts, any chance you guys can share how many megawatts was actually shipped in the U.
S. Or delivered in the U. S. In Q2? And if you think you guys are taking share from your peer at this point?
Well, I'll have any comment on the basis points if he's ready. But in terms of the megawatts, we said the rough split up in geographies. We said 70 remember, we said 74% in the U. S. And 26% outside the U.
S. So you should think about the overall megawatts in that ratio.
Great. Thanks, Roger. Eric, any thoughts on the tariff impact on the margin?
Well, no,
we are not going to break it out, but you know the tariff percentage. And you know we actually increased prices to cover 100% or a portion of it, I guess, of the cost, right? So we are sharing that cost with our customers, right? And so with that being said, we shouldn't be concerned about the breakout, right? It's all covered about through the price increase.
Makes sense. Thank you very much to you both and I'll pass it on.
Thank you.
Thank you. Our next question comes from Brad Michael with Williams Trading. Your line is open.
Hi, guys. Thanks for taking my question. Wow, great revenue growth. You're growing a lot faster than the market. And then also last call, you said you were sold out on Q2 at the time of the call.
Are you sold out on Q3? Thanks.
Yes, we are fully booked for Q3, yes, at this point in time.
And on the how do you make sense of the amount of obviously, there was a discount to the amount of business you're doing because of the bankability issue and there's a lot of catch up. How do you interpret the amount of obvious market share that you're taking now?
Yes, I mean, it basically comes back to the 4 things that I always talk about. 1 is the bankability that you said, our balance sheet is pretty strong. And you guys know a lot about it. Our cash balance today is 206,000,000 The second is our product quality. Our target is to be at an annual DPM of $500,000,000 We are not there today, but we are well on our way there.
That's 2. Number 3 is customer experience. Although we did go a little bit high on wait times, we are really committed as a management team. In fact, in every executive staff meeting Tuesday, the first thing I review is the customer service calls, the sample of them to understand what kind of problems customers are having. So we are laser focused as a management team on customer service.
And the last one is innovation. I believe customers want to stick with us because of products like Ensemble. Of course, we haven't executed well on Ensemble. It's been delayed a little bit. So that's why if you notice, we didn't talk about it much, but we laser focused on getting Ensemble 1.0, which is the residential with the focus on residential storage.
We are laser focused on getting the product out in the Q4 of 2019. So, we're heads down there. So, these are the 4 things. And I would like to think these are the ones that contrary, cost the customers to come back and the demand overall comes from long tail customers. Those are the broad base of customers.
They in particular, the long tail of customers really is suited, is the right, are the right customers base for us because of the focus on quality and customer experience. They just don't have the time to deal with quality issues or they just don't have the time to keep calling us again. So it's really that's the place where we service well. So Brad, these are the factors. I'm not sure that I answered you enough.
Thank you, Badri. Just one other question would be, can you talk about the Mexico ramp? I think on July 1, you have a press release saying that the volumes were finally ramping out of Mexico. And you'd said in the past that Q1 of next year would be 100% Mexico. So should we just assume it's a linear ramp to that January level?
Yes, let me tell you a few things on the Mexico ramp. Basically, we are a couple of months behind what I expected and it's really for us transferring the process steps using copy exact methodology. Basically, it didn't go straight. 2 of the 230 process tests had issues. We quickly got on it.
And the nice thing is we were able to get all of the signals in line in terms of reliability monitors as well as we were able to do audits. So, of course, that put us a little bit behind. That's why we started shipping only on July 1st. 1. Having said that, in this quarter, we will probably, my team is looking at me, but we'll probably do somewhere around a couple of 100,000 units in Q3 of 2019.
And in 2 or 3 quarters from now, we expect the yields to stabilize. We expect to have enough manpower to be running all shifts, but we are really laser focused on quality. And we would like to ramp at the right levels, have a controlled ramp. And so, I'm looking for the next 90 days. Can we execute and do 200,000 units in Q3?
That's what I'm looking at.
Thank you. Just last small one was, could you tell us the total megawatts shipped in the U. S. In Q2?
Well, we already disclosed the megawatts for the quarter being 4.16, right? So we talked about 74% in domestic, so you can probably do the math.
Yes, 74% of 416, there is roughly 312 around that. Okay?
Thank you.
Thank you. Our next question comes from Jeff Osborne with Cowen and Company. Your line is open.
Yes, good afternoon and congratulations from me on the strong results. A couple of questions on my end. I was wondering if you could just flush out the share gains. Are you seeing any noticeable trends, Badri, on sort of the larger top 5 installers in North America? Or is it more of a longer tail of folks buying through distribution?
Any noticeable commentary you have there would be helpful.
Yes, we are not going to give out any market share numbers because we don't look at the business like that. Basically, we are laser focused on customer experience. We are laser focused on on our quality. And at the end of the day, profitable top line growth is what we are looking at. Having said that, you know that we have 100% of the SunPower business.
The North American demand is ramping quite nicely across the board. In our long tail of customers, it's probably the place where we basically are gaining some share. And Europe results, if you see the Europe numbers are also not too shabby either. The places that we are doing well are actually Netherlands and France. And I was just in Europe to do a bunch of review meetings there.
And yes, it does turn out that Netherlands is the fastest growing country in Europe. So I think we are at the right places there. And these basically contribute to our overall share.
That's helpful. And while you're meandering around the world, any commentary you have on the new leadership in Australia or Asia Pacific more broadly?
We put the new leadership in place a couple of quarters ago. I'm going to be in Australia pretty soon. We are going to do the similar kind of exercise that what we did in Europe. But I think in Australia, we need to rebuild our organization first. I think Australian market is a very interesting market, both in terms of solar plus storage and it is not a small market.
And so, we are going to work on it.
Makes sense. I had 2 other quick ones here. One, could you just give any sense of indication, you mentioned fully booked for Q3 and demand constrained or supply constrained sorry for Q2. Any sense of what that excess demand was in 2Q that you couldn't meet or did that just slip into Q3? I'm just trying to get a sense of are people walking away from you because the lead times are too long
We are not going to break out the specific numbers, but we have had the situation for the last three quarters. People have not walked away. And as I mentioned, we are fully booked for Q3. So and we still have lot more days left in Q3. That's all I can say.
And then the last one I had is just around the 4th pillar of your strategy around services and I'm an Enphase customer myself and just received an email today asking me to enroll in your program. But can you just talk about your attempt at services and getting the consumer engaged and how do you bridge the border of stepping on the toes of the installer versus going straight to the customer and bringing them awareness of Ensemble and getting them on the 5,000 person waiting list to upgrade. If I click on that link in my own email that I received today, does my installer receive an indication that I'm interested in doing that? Or can you just walk us through how that works?
And how you monetize that?
Right. First of all, I'm going to say this is pretty nascent and we are basically starting to scratch the surface. And I think you should if you're thinking that we are going around installers, you should scratch that. We can never ever go around installers. The installers are a conduit for us.
And basically it is like what can we do in order to better service the customers. Here we are talking about the legacy product upgrade program. These customers bought the first two generations of Enphase product from us. Now it's obviously been time. They we would like to give them the option of purchasing an IQ7 system and maybe also purchasing an AMCHOP system when it is available.
So therefore, in a sense that we basically generate the demand and we essentially pass on that demand to our installers, our network of installers who basically service it for us. So it is a win win situation for both of us and not excluding the installers. So that's just scratching the surface. Of course, there's a lot more things that we can start doing, understanding the consumption, providing homeowners a bunch of tools to enable that and we'll start talking a lot more about those down the line.
Makes sense. I appreciate it. Thank you.
Our next question comes from Maheep Mandloi with Credit Suisse. Your line is open.
Hi. Thanks for taking the question and congratulations on the quarter. Just trying to dig more on the market share and thanks for the comments earlier, but can you just talk about like how much of the growth in Q2 or even Q3 is driven by gaining market share versus overall growth. Just trying to understand like your thoughts on the North American market business?
So, May, it's the same answer that I gave, Jeff. We are not going to give out any numbers on market share. But the reasons why we are gaining market share, I believe, is basically along the lines of our core competence. This is essentially the focus on providing the highest quality, the highest customer experience and basically products like Ensemble showed the innovation, our innovation capabilities. And we think customers would like to stick to somebody who has an innovation roadmap like Ensemble.
So those are the broad strokes and of course the healthy balance sheet always helps.
Got it. And second just on you said you're fully booked through in Q3, but how does the bookings look beyond Q3 or how should we think about that? And as part of that question, like how do you think of the international mix in 2020 or kind of like a long term target, if you could kind of give an update on that?
Yes, we're not going to be breaking your numbers on Q4 bookings. It's just too early right now. It's not we are not going to give guidance. In terms of the international mix, obviously, with the SunPower acquisition, the international mix is skewed a little bit towards North America. Right now, we are approximately 75, 25.
And in the past, I've given numbers of if possible, 50, 50 would be nice. 50 North America and 50 rest of the world would be nice in a couple of years. And ultimately, something that is balanced between APAC, Europe and North America would be actually perfect. But that's a little bit beyond that.
Got it. And just last question on Ensemble. Could you just talk about like the delay of what we now expect in Q4? And we did see some initial presentations to dealers. So could you just talk about like the initial feedback from dealers and U.
S. And other markets? Thanks,
Trey. Ensemble 1.0 is expected to basically release in Q4 of 2019 and particularly oriented towards residential storage. And we haven't started any alpha or beta demonstrations yet. In the next 3 months, we expect to obviously start doing those to with a few installers. But right now, we are laser focused on the development.
We are heads down. It's all about execution.
Thank you.
Thank you. Our next question comes from Amit Dayal with H. C. Wainwright. Your line is open.
Thank you. Hi, guys. Most of my questions have been asked. Just looking at IQ8, is this more of a 2020 driver now largely?
No, it's not. If you see our Ensemble 1.0, I'm talking about high capacity residential storage for North America. If you see the Encharge battery system, it has got battery cells, it has got battery management system, software, a controller, battery controller plus every 3.3 kilowatt hour system has got 4 IQ8s. That IQ8 is nothing but our grid forming microinverter. That's how you make that's how you put together the battery system.
So the IQ8 will be inside our battery and that will be the first product that we'll be releasing. That's what we call Ensemble 1.0. That will work with IQ6 or IQ7 installed base on the PV site. So that's what we are going to release in the Q4 of 2019. And of course, the example 2.0 is what we are talking about IQ8 PV, which is IQ8 on the roof, the IQ8 solar system that could be available in 2020.
Understood.
Thank you for that.
So as we move into more of a home energy management solutions company, how should we think about and this is more longer term obviously, but the shift in margins, how much of these services could be SaaS type offerings or are these still going to be a one time sale? Can you provide any color on the think about these?
Yes. It's a good question. These are more I think we will have a detailed discussion on these in the Analyst Day. The way we are thinking about it is storage alone like what I've said multiple times, the revenue potential for storage will take us from $2,000 per home, which is a pure microinverter players to over $10,000 per home. And then consumption and services obviously add on a little bit more there.
So basically it'll help us on the revenue side. On the gross margin side, no matter what business we take, we already established a floor. We are never going to take a business that is not 30% to gross margin. And so our gross margin targets are pretty set. This quarter in terms of guidance, the midpoint of gross margin will be 34.5%.
So gross margin will be around that number.
Understood. And on the OpEx side, from just you're ramping on the revenues on the OpEx. Are we at a stable level at these current levels or do we expect some ramp? Obviously, from a marketing point of view, maybe some increases, but generally, should we expect leverage to now really start kicking in?
Yes. So you remember that we this is Eric. I mean, I don't know if you remember, we had the big realignment of resources around the world where we did the restructure activity, right, moving functions out of Petaluma, creating a new headquarter in Fremont, establishing a center of excellence in India, plus adding additional R and D resources in New Zealand, right? All of those are part of the biggest strategy on how we're going to be able to scale and be able to have operating leverage, right? So from an expense point of view, operating leverage at the corporate level on G and A is probably already somewhat reflective of the guidance, right?
So if you look at the guidance, we are at 14% OpEx as a percentage of revenue, right? Now in terms of sales and marketing and R and D, remember, we are an innovation company, right? So our focus on investing on new products and product development, digital, digitization, platform work and all that kind of stuff that Pat already mentioned as part of our strategy will happen, right? And that will be part of that kind of bucket OpEx as well the same with sales and marketing growing regionally. As we develop Europe, like Valerie mentioned, Asia Pacific, we may need boots on the ground, sales force there.
We're going to roll out automation as well, right? And those depreciation associated with those technologies or licenses will also hit OpEx, right, in many cases. So I think that we have a healthy operating leverage already reflected on the guidance. You should also think about how those R and D investments will materialize over time, right?
Understood. Yes. Thank you. That's all I have guys. I'll take my other questions offline.
Thank you.
Thank you.
Thank you. Our next question comes from Pavel Molchanov with Raymond James. Your line is open.
Thanks for taking the question. On power storage, so it sounds like Q4 is when you expect that to become kind of financially needle moving in the sales mix for the first time. Is that fair to say?
No, Q4 2019 will not be needle moving. Q4 2019 will be the introduction and then obviously there will be a ramp. And I would say needle moving will be in 2020.
Okay. And is the when you talk about margin structure 30% or long term targets, they're obviously a little above that now. Before the introduction of the storage product. Is storage, all else being equal, likely to move that up or down given the different competitive dynamics in the battery market as compared to microinverters?
Storage will always be at our corporate gross margin. And the reason I say that is, of course, if this is not a commodity product, right? This where we are going to differentiate Ensemble from the rest of the pack is the unique features that we are going to be offering. The flexibility, the scalability, the modularity and then eventually the Ensemble will work with our IQ, the IQ8 on the roof. In addition, there is a bunch of software that we can introduce in order to enhance the customer experience.
So you should not think about it as like what you're thinking just on the battery cell side, it will fall in line with our corporate gross margin.
All right. Appreciate it.
Thank you.
Thank you. And our next question comes from a follow-up from Brad Michael with William Trading. Your line is open.
Thanks. I had a quick follow-up. How much do you think the market share gains are driven by the lower failure rates? In our surveys of installers, we've increasingly been hearing of high 5%, 10% failure rates at SolarEdge. And I'm not sure what yours are exactly, but I think they're probably 90% less than that.
How much do you think that's a driver of the unit growth?
Brad, we are not going to comment on that.
Okay. Well, in storage, just to get a sense for how quickly it could grow, I know you're in touch with a lot of your existing installed base. Have you asked that installed base what their interest is in storage or do you know what percentage roughly might have said that they would be interested?
I mean, yeah, of course, these are surveys that are not comprehensive, but usually people get excited when you ask them such questions and then they change their mind when it comes to time to cut the check. So we'll see. We are very close to launching this product. So we are heads down launching this product right now. We will look at both new installers as well as our existing take rate, but we are obviously excited.
Okay?
Thanks, Badri. Congrats to you and the team on the great execution. Appreciate it.
Thank you.
Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Badri Kholvande Zalaman for any closing remarks.
Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again on our call next quarter. Bye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.