Good day, ladies and gentlemen, welcome to the Enphase Energy first quarter 2019 financial results conference call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session, instructions will follow at that time. If you require operator assistance during the program, please press star then zero on your touchtone telephone. As a reminder, today's conference is being recorded. I would now like to introduce the host of today's conference call, Ms. Christina Carrabino. You may begin, ma'am.
Good afternoon, thank you for joining us on today's conference call to discuss Enphase Energy's first quarter of 2019 results. 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 first quarter ended March 31st, 2019. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy's technology, products, and financial performance, operations, including supply and lead times, and current and future market and customer demands and trends. 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 quarterly report on Form 10-Q for the quarter ended March 31st, 2019, which will be filed with the SEC in the second quarter 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. 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. Thanks for joining us today to discuss our first quarter of 2019 financial results. We had another solid quarter. We reported revenue of $100.2 million. The demand from all of our customers was strong across the board. The biggest challenge in meeting this demand was component shortages. We are fully booked for Q2 2019, just as we were for Q1 2019. I will provide an update later in this call on our plans to mitigate component shortages. Our non-GAAP gross margin in the first quarter was 33.5%, and our non-GAAP operating income was $11.3 million. Our non-GAAP gross margin was negatively impacted by 280 basis points due to expedite fees related to component shortages. The expedite fees were in the form of airships that we chose to make in order to service our customers better.
We exited the first quarter with a cash balance of $78.1 million after repaying our high interest-bearing senior secured term loan of approximately $39.5 million, plus accrued interest and fees. In addition, we reported $16.4 million of adjusted free cash flow in Q1. An important area of focus for us that we have discussed since the second half of 2018 is the ease of doing business, how customers perceive us. The quality and customer service together constitute customer experience and are the cornerstones of our strategy. During Q1, we made several improvements in our customer call center metrics and online support. For example, our first call resolution metric has improved approximately by 15% over the past year, while our Service-on-the-Go support tool has enabled over 50% of customer claims to be handled through self-service via their mobile devices.
We recently announced that over 2,500 homeowners have now joined our Enphase Upgrade Program, a program for early adopters of our legacy microinverters. This program represents our commitment to quality and service, and we appreciate the solar installers who do so much to support the program. The key metric we use to measure customer experience is the Net Promoter Score, or NPS. This metric is calculated based on feedback from customer surveys on how likely customers or partners will recommend Enphase to a friend or colleague. Our NPS in North America was approximately 50% in Q1, compared to approximately 51% in the fourth quarter of 2018. Our target is to achieve a worldwide NPS of 60% or higher in the fourth quarter of 2019. Turning to tariffs. The 10% 301 tariffs became effective in September of 2018, impacting Enphase microinverters and accessories.
As we have said before, we shared the cost increases with our customers. We are continuing to execute on our plans to mitigate the 301 tariffs by expanding our manufacturing agreement with Flex in Mexico starting in Q2 of 2019. We are on track with our plan and expect to start shipping volume production from the Flex Mexico factory this quarter. Turning to our regions. Our U.S. and international mix for Q1 was 78% and 22% respectively. The customer demand was strong in all regions in the first quarter. However, all regions were also impacted by component supply shortages. As a result, we continue to allocate supply carefully to each region during the first quarter. Our first quarter revenue in the U.S. was up 9% sequentially and up 80% year-on-year.
The IQ 7 product family has been well-received in the region, and we are pleased to see our customer base expand during the first quarter. U.S. revenue also included shipments of our IQ 7X S microinverters to SunPower. In Europe, our revenue was down 11% sequentially, but up 2% year-on-year. Europe's growth in Q1 was impacted by component shortages, but we were able to meet customer demand with channel inventory. We expect the supply increases in Q2 2019 will help replenish the channel inventory in that region and service the increasing demand. Europe continues to be a target region for expansion, as IQ 7 has been very well-received and is particularly optimal for small systems. In APAC, our first quarter revenue was up 84% sequentially and down 54% year-on-year.
We corrected the previously discussed inventory challenges in the channel, as reflected by the sequential growth, and we continue to be optimistic about our growth opportunities in the region. In Latin America, our first quarter revenue was up 78% sequentially and 16% up year-on-year. We experienced steady growth in Mexico during the quarter. Both Mexico and Puerto Rico are important markets for Enphase. We are also working with a few of our customers in North America on their ITC safe harbor opportunities. While it's still early and we do not have accurate volume forecast yet, we expect to have more information on the next earnings call. Nevertheless, our strategy is to ensure we are prepared with the right capacity in place to support these opportunities. Now is a good time to talk about supply.
As previously mentioned, in order to address the component shortages, we signed long-term contracts for high-voltage power transistors and expect additional supply, some of it starting as early as this quarter and most of it in the second half of this year. As a result, we expect to have a capacity of 2 million microinverters per quarter in the fourth quarter of 2019. This should also help us reduce our microinverter lead times and make them closer to our internal target of approximately six to eight weeks. Now, let's talk about our top-line growth initiatives. We have four levers for profitable top-line growth, which I've talked about in the previous calls. The first one is IQ 7 regional expansion, the second one is high-power, high-performance products, the third one is AC modules, and the fourth one is Ensemble Solar and Storage technology.
The first lever for profitable top-line growth is IQ 7 regional expansion. Approximately 94% of our microinverter shipments in Q1 were IQ 7, up from 84% in Q4. Our goal is to complete the transition of nearly all of our microinverters shipments to IQ 7 by the end of Q3. The second lever for profitable top-line growth is to release high-power and high-performance new products. As previously announced, we released our new product, the IQ 7A family of high-power microinverters targeted for modules up to 450 W DC. The IQ 7A is our highest power microinverter till date and is capable of producing as much as 366 W AC of peak power at an average CEC efficiency of 97%. We shipped significant volumes of IQ 7A's to SunPower during the first quarter. They are expected to integrate the IQ 7A's into their 66-cell NGTA series AC modules.
General availability of IQ 7A microinverters for generic 72-cell modules in North America will follow in the second half of 2019. The pairing of high-efficiency solar modules with IQ 7A microinverters is a powerful combination that creates tremendous value for homeowners, particularly those whose roofs are space-constrained. The third lever for profitable top-line growth is AC modules. We had fewer shipments of our IQ 7X microinverters to SunPower in the first quarter compared to the fourth quarter. We worked with SunPower to ensure smooth product transition from their prior generation microinverters to IQ 7X as they began ramping. As previously announced, we expect an acceleration of the ramp in the second quarter and throughout 2019. In addition, the N330E Panasonic AC module integrated with our IQ 7X microinverters became available in March of 2019. These modules combine the efficiency of Panasonic's HIT solar panels with Enphase's highly reliable IQ 7X microinverters.
We are also making steady progress with our other module partners, such as Solaria, in ramping AC modules. Since their release in October of 2017, Enphase AC modules from our module partners have been adopted by about 439 installers in the U.S. as of this date. The most critical driver for our profitable top-line growth is the Ensemble Always-On Solar and Storage technology. The Ensemble solution has four components: energy generation, which is accompanied with the grid-agnostic microinverter IQ8; energy storage, which is achieved by the Encharge battery with capacities of 3.3, 10 kilowatt-hour, and 13.2 kilowatt-hour; communication and control, which consists of the automatic transfer switch and the combiner box with the Envoy gateway. The fourth and final component is Enlighten, which is the IoT cloud software. As discussed last quarter, we plan to introduce Ensemble in a phased manner.
We expect to release the Ensemble 1.0 solution in the fourth quarter of 2019, exclusively focused on the residential energy storage in North America. Residential energy storage is enabled by the Encharge battery, which is designed to be a modular 3.3 kilowatt-hour solution. Encharge consists of LFP, which is lithium iron phosphate cells, Enphase battery management system, communications, software, and most importantly, our IQ8 grid-agnostic microinverter, all packaged together in a single enclosure. The 3.3 kilowatt-hour modularity is a differentiating feature that allows for ease of installation, flexibility, and scalability, while helping to streamline our supply chain as well. The Ensemble 1.0 solution is designed to be compatible with IQ 6 and IQ 7 PV systems, both for existing and new installs.
Another key part of the Ensemble 1.0 solution is the automatic transfer switch, called Enpower, which allows the home to be isolated from the grid in the event of a grid failure, enabling the grid-agnostic function. We expect to release new generations of Enpower over time with enhanced software and hardware capability. Ensemble 2.0 is expected to follow 1.0 shortly after and will enable new IQ8 PV installations. The next generation of Enpower, which will be part of Ensemble 2.0, will have the software and hardware capability of managing consumption in a fine-grained manner. Our goal is to continue providing additional value to our partners and customers with every new Ensemble release. We will continue to update you on a quarterly basis. We are very close to delivering our final requirements on the pure off-grid IQ8 microinverter solution to our partner and expect to ramp production in the second quarter.
There has been a quarter delay here, mainly involving software changes to get the customer experience right. We now expect to receive the final milestone payment of approximately $675,000 from our partner in the second quarter. In summary, our top priority is to increase profitability quarter-on-quarter, creating further shareholder value. In the near term, our focus is to expand and optimize the supply chain to meet the additional demand while providing a superior customer experience. In the longer term, we are focused on product innovation to increase our revenue potential from approximately $2,000 per home to over $10,000 per home by leveraging Ensemble-based home energy management systems. 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 relating to our first quarter of 2019 financial results, as well as our business outlook for the second quarter. 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 our investor relations sections of our website. Total revenue for the first quarter of 2019 was $100.2 million, an increase of 9% sequentially and an increase of 43% year-over-year. We shipped approximately 306 megawatts DC in the first quarter of 2019, an increase of megawatts of 19% sequentially and an increase of 71% from the year ago quarter. The megawatts shipped represented approximately 976,000 microinverters, approximately 94% of which was IQ7.
Both IQ6 and IQ7 represented 99% of Q1 microinverter shipments. I am pleased to report that since inception, we have now shipped more than 20 million microinverters globally. Non-GAAP gross margin for the first quarter of 2019 was 33.5% compared to 30.7% for the fourth quarter. Even though we share some of the expedite fees with our partners, component shortages continued to negatively impact our Q1 non-GAAP gross margin by approximately 280 basis points. Non-GAAP operating expenses were $22.3 million for the first quarter of 2019, compared to $19.7 million in Q4, and $17.7 million in the first quarter of 2018. As a result, we incurred higher than expected expenses in internal audit, plus additional consulting and advisory fees. These higher than normal expenses continued into Q1 2019.
GAAP operating expenses were $26.2 million for the first quarter of 2019, compared to $23.2 million in Q4, and $20.8 million in the first quarter of 2018. GAAP operating expenses for the first quarter included $3 million of stock-based compensation, $546,000 of amortization for acquiring tangible assets, and $368,000 of restructuring expenses. On a non-GAAP basis, income from operations was $11.3 million in the first quarter of 2019, compared to $8.6 million in Q4, and $861,000 in the year ago quarter. This improvement in operating income is reflective of our continued improved operational excellence and continued product leadership. On a GAAP basis, income from operations was $7.1 million in the first quarter of 2019. On a non-GAAP basis, the net income for the first quarter of 2019 was $9.5 million, compared to $5.1 million in Q4, and a loss of $1.3 million in the year ago quarter.
This resulted in basic earnings per share of $0.09 and diluted earnings per share of $0.08 in the first quarter of 2019, compared to basic earnings per share of $0.05 and diluted earnings per share of $0.04 in the fourth quarter of 2018. In GAAP, net income for the first quarter of 2019 was $2.8 million compared to $709,000 in Q4, and a loss of $5.2 million in the first quarter of 2018. This resulted in basic earnings per share of $0.03 and diluted earnings per share of $0.02 in the first quarter of 2019 compared to basic and diluted earnings per share of $0.01 in the fourth quarter of 2018. We are happy to report that this was the second quarter in the company's history that we have achieved GAAP net profitability. Now turning to the balance sheet.
Inventory was $13 million in the first quarter of 2019, compared to $16.3 million in Q4, and $18.5 million in the year ago quarter. We ended at 18 days of inventories on hand as of March 31st, 2019, significantly below our target of 30 days, and down from 23 days in the fourth quarter, and also down 32 days in the year ago quarter. Although most of the inventory reduction was due to high demand constrained by component shortages, inventory management continues to remain one of our key cash management initiatives. We exited the first quarter of 2019 with a total cash balance of $78.1 million, compared with $106.2 million in Q4. As previously discussed, we repaid in full our high interest bearing senior secured term loan with Tennenbaum Capital Partners. The repayment included a principal amount of approximately $39.5 million, plus accrued interest and fees.
We generated $17.1 million in cash flow from operations and $16.4 million in adjusted free cash flow for the first quarter of 2019. Now let's discuss our outlook for the second quarter of 2019. We expect our revenue for the second quarter of 2019 to be within a range of $115 million-$125 million. Turning to margins, we expect GAAP and non-GAAP gross margin to be within a range of 32%-35%. Note that our Q2 gross margin guidance include a negative impact of approximately 250-350 basis points due to expedite fees resulting for component shortages. We expect our GAAP operating expenses to be within a range of $25 million-$27 million, including a total of approximately $4 million estimated for stock-based compensation, additional restructuring, and acquisition related expenses and amortization. We expect non-GAAP operating expenses to be within a range of $21 million-$23 million.
With that, I will now open the line for questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. Our first question comes from Philip Shen with ROTH Capital Partners.
Hey, guys.
All right. We'll move on to the next question. Our next question comes from Colin Rusch with Oppenheimer.
Thanks so much, guys. Can you talk a little bit about the operating leverage that you're seeing here? Are you expecting to hold your operating expenses flat here and see some additional leverage as you grow sales, and revisit that 30/20/10 model, or what can we expect going forward?
Yeah. That's Chad, right? Colin. Hi, Colin. How are you?
Yes. Yeah. Okay.
The framework that we are using, which is the 30/20/10 framework that we launched a year and a half ago, almost two years ago, remains in place as a baseline for operating our business, right? The operating leverage will be manifested over time. You can see that in the Q2 guidance on the midpoint, we basically are already achieving some of that by looking at the midpoint is about 18% of the OpEx as a percentage of revenue, right? I would say that we continue making investment on critical areas such as sales and marketing and the investments associated with R&D for future development of products, which is part of what we do, which is innovation.
Okay. Just on the battery product, can you talk a little bit about your expectations around pricing, how much that's moving around, how much visibility you have into that at this point? As well as the movement on LFP supply, we're certainly seeing some interesting movements in terms of cost structure there, what are you expecting in terms of costs for acquiring those cells as you go forward and move into a little bit higher volume?
Colin, it's a little bit early, but I'll share some of our preliminary thoughts.
In general, if I take a look at the market pricing, not our pricing. The market pricing for a battery system is usually ranging from $600 per kilowatt hour for the big guys, the tier 1 guys, to anywhere more than $1,000 per kilowatt hours for the long tail guys. We will obviously price it appropriately, taking the market dynamics into account. With regarding the cost structure of the cells, you asked. Again, we are not going to break out the cost of our battery cells, but we have partnered already with one supplier, who we are buying the ACB, meaning the 1.5, the 1.2 kilowatt hour battery from. They have given us extremely competitive pricing, along with very high quality. We are in the process of signing an MSA with another very high-quality supplier with a great supply chain.
Those two will put us in a good position as far as both capacity and costs are concerned. We expect to be very competitive.
Okay. Thanks so much, guys.
Our next question comes from Philip Shen with ROTH Capital Partners. Your line is open. Our next question comes from Eric Stine with Craig-Hallum.
Hi, everyone. I don't know if you're willing to break this out specifically, just curious maybe how that is trending versus your expectations. I guess what I'm getting at, obviously, a very strong top-line quarter and wondering if that was a major component of the strength or, if this is your underlying business, then as we get into the back half of the year, we're going to layer the impact of the volumes of SunPower on top of that.
The SunPower transition is going extremely well for us. They are a very important customer. We will do whatever it takes to serve them well. Of course, when SunPower is ramping with the Enphase product, we had to basically work with them to ensure that the inventory position is right, therefore the numbers were a little bit lower in this quarter. We had extraordinary strength from all other customers as well, therefore, even if their demand or if we ship less material to SunPower because of inventory reasons, we made it up with the other customers. Going forward, we should start seeing that business ramping in Q2 of 2019, as we said before, there's no change to what we are thinking there.
Okay. Got it. Obviously you're making quite a bit of progress with other AC module customers. Just curious, what that's driving from the rest of because you've got a number of AC module partners, whether it's current partners or new partners in response to the trends you're seeing today.
Right. We started with AC modules in late 2017. LG was our first AC module partner. We are thankful to them for that. Since then, we have learned a lot on AC modules. We have now started shipping AC modules only, or the microinverters for AC modules to SunPower. We are shipping microinverters for AC modules to Panasonic. We are shipping to Solaria. AC modules is another cornerstone of our innovation, where we basically absorb a certain activity in the field in the factory. Because of that, we are able to reduce the installation time, we are able to improve on logistics, we improve on quality, we improve on training. It offers extraordinary value. The installers, whoever have converted AC modules, find it obviously difficult to go back to discrete. AC module is very important.
We are continuing to work on it. It's not that it is going to ramp heavily in one quarter, it is slow and steady growth. For example, in Europe, we are working with a couple of very key module vendors in order to introduce AC modules. We will announce when we are ready. We are also working with a few partners in APAC as well.
Got it. Maybe last one from me. I don't know if I missed this. Did you mention, did you give the number what 1Q was constrained by on the components and what that number looks like in Q2?
No, we are not breaking out the number we were constrained by. No.
Okay. Got it. Thank you.
Thank you.
Our next question comes from Amit Dayal with H.C. Wainwright.
Thank you. Congratulations, guys, on the strong quarter and the guidance. Just the year-over-year strength you're seeing, is this tied to any one partner or customer? I know you're doing well in the U.S. and Latin America, from a geography perspective. What's driving some of the strength? Are you taking market share from other players? Could you just maybe give some color on the.
Yeah, actually, 18 months back, Enphase was in a very different place. Our balance sheet was not in a great shape. Our P&L was hurting. I think in the last 18 months, with the hard work of a lot of people, we basically have turned the corner. Our balance sheet is very strong now. We're starting to make money. A lot of the customers who were kind of nervous at that time to do business with us are now coming back. Most importantly, our product innovation hasn't stopped. Even during the most difficult of times, we introduced IQ6 and IQ7. IQ7 is a fantastic product. IQ7 is best in class in terms of the number of components it has, the kind of power, the weight. In addition, the cable is a lot simpler cable.
Product innovation has really been the root cause on why we are here. That, combined with a great quality, great customer service, coupled with a strong balance sheet, is the root cause, probably, of a lot of customers coming back. Having said that, where is this demand coming from? The demand is broad-based. It's coming from a lot of long-tail customers. In addition, we are seeing a bunch of tier 2s as well cropping up. Of course, AC modules are ramping. You know about that. SunPower relationship, yeah, is also important for us. Those are some of the vectors for our revenue growth.
Understood. Are you potentially seeing this trend going to play out in the following, in the second half of the year as well? I'm just trying to look further down the line a little bit. I don't know if you can share that or you have that level of visibility, but sequentially, it looks like you probably are in a position with Ensemble, et cetera, coming down in maybe the fourth quarter to continue sequential.
Yeah. It's too early, Amit, to talk about the guidance for the second half. We feel good. We have a lot of positive things happening. Ensemble is going to get released in the fourth quarter with the focus on the residential storage market. We are very excited about that. We are going to take it one quarter at a time now.
Just maybe one last one. On the expedite fees now with the Infineon coming online, is this now going away for us, or should we expect this to continue playing out a little bit more?
In the long term, you should always expect a little bit of expedite, which is 1%-2%. Anything in the 3%-4% et cetera, is egregious. That needs to go away, and it's probably going to go away only early next year or maybe the latter part of this year, which we will see. Again, Infineon is instrumental for us because we signed the contract with Infineon that enables a steady stream of supply in the second half with, in fact, some of it starting in Q2. Yeah. We expect some levels of expedite always. Okay.
That's all I have. Okay. Thank you so much. I'll follow up offline. Thank you.
Yeah. Thank you.
Our next question comes from Philip Shen with ROTH Capital.
It's Travis again. Can you guys hear me okay?
Yes.
Sincere apologies for the technical difficulties with my cell phone. First question is on pricing. Apologies if you've already talked about some of this, but we've heard that you may have raised prices by 5% on April 1st. Just want to confirm that that's just for the U.S. business. What percentage of the business does that apply to? Looking forward, what's the outlook for pricing in general? With the lack of entrants from a competitor and the strength that you have now, how do you expect pricing to trend independent of tariffs as we go through the year? Thanks, [Mayur].
Yeah. Yes, it is true. We did raise the pricing by 5% on April 1st, correct, in North America. With regarding the pricing trends, we see pricing to be stable right now. Like what I said, we're going to take it one quarter at a time, right now we see pricing flat.
Okay, great. I know you're not providing guidance for the back half, was wondering if you could provide some broad brush strokes. Specifically, you talked about being fully booked for Q2. Can you provide some indication about how much Q3 might be booked? Perhaps talk about what the cadence of Q3 and four might be.
Phil, yeah, unfortunately, I cannot break out numbers for Q3 and Q4, I'll say the same thing as I told Amit. We are in a very good spot in terms of the business. A lot of the business strength is due to the long tail, tier 2s, AC modules, and the relationship with SunPower. Historically, you know that for the solar business, Q3 and Q4 are usually good. Having said that, you know the kind of business, the kind of government conditions we are at, anything can change. We are going to take it one quarter at a time, but we feel good.
Great. As for Q3 supply, how much of your U.S. demand do you think could be addressed by your Mexico facility? Are we looking at maybe 50%? I know you started in the quarter of Q2 ramping up there, are we looking at a vast majority?
Well, it's a little bit early to quantify, let me tell you my line of thinking. We take all the product qualification seriously. The Mexico product will be treated like a new product. We will not release it until we are absolutely confident that it is as reliable and as high quality as the China version. Basically, we are not going to get ahead of ourselves. We are confident of getting the qualification done in this quarter. We will do what we call as a soft ramp. We'll do a focus group. We'll start with a few customers, we will introduce on a broad scale. That's the color I can provide right now.
Okay, thank you. One last housekeeping set of questions. Eric, this might be more for you. As it relates to one-timers, it seemed like a very clean quarter, but wanted to just confirm, besides the air shipments, were there any one-timers in COGS? Were there any one-timers in revenue or even in G&A?
OpEx is the only one I come to mind for the little of the legacy of the SOX attestation work that we started last year and finished with the Q1 10-K, right? Other than that, on the OpEx front, it's pretty clean, right? It's pretty straightforward.
Okay, great. Thank you both. Congrats on the great quarter and the guide and just development progress in general. I'll pass it on.
Thank you.
Thank you.
Ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touchtone telephone. Our next question comes from Maheep Mandloi with Credit Suisse.
Hey, thanks for taking the question. Just on the gross margins, can you talk about how much of the guidance includes the impact of component shortages in the Q2?
Yeah. As we said in the script, the 32%-35% gross margin guidance includes 250-350 basis points spending for component shortages.
Got that. Sorry if I missed that earlier. Just on safe harbor, you said we can probably expect more details in Q3, but just high level based on the talk so far, what are customers looking for in the safe harbor? Is it generally this microinverter or are they looking for AC modules? Have they talked about using your warehousing capacity, anything else which we can learn on the next call on this or this right now?
Yeah. Maheep, it's too early for us to be talking about the specific nature of demand. Right now, we know that our customers have a need, right now it looks like it's going to be more of the microinverters. We really don't have the right details to share with you, that will be available in the next three months, we'll share it with you then.
Got that. Thanks a lot for taking the questions, congratulations on the quarter.
Yeah. Thank you.
Thank you.
Our next question comes from Brad Meikle with Williams Trading.
Hi. Thanks for taking the question. It's the end of April, essentially saying by Q4 you'll have 2 million units of capacity. You shipped about 970,000, I guess. You'll have more than twice as much capacity five months from now, based on the way you're laying it out. Can you fill that in with a little bit of color on where that incremental demand is coming from? Like, how you got to that number and how much of that may be, even if it's not bookings, there may be some visibility on demand for, even though you're not guiding on that period. Thank you.
Got it. Yeah. Brad, you're right. We are planning for a 2 million-unit capacity in Q4 of 2019. We are putting in place our measures. That's how you saw the Infineon press release, et cetera. That's going to help us in terms of component shortages. Yeah, having said that, I'll go back to our profitable top-line growth vectors. The root cause of our profitable top-line growth vectors is the clean balance sheet. It's a great P&L, most importantly, our IQ product, IQ7 product. That product with its highest quality in terms of great PPM. Our long-term target is 500 PPM. That is the one that is driving a lot of strength. The strength is obviously across the board.
As you know, it's no secret, Enphase is primarily focused on long-tail customers because we think long-tail customers. We have a great value proposition for long-tail customers. Very often they have crews of 4 to 8 people in total, and they do limited number of jobs, and all they want is to make sure their product is very high quality. And that customer service, when they call with a problem, it is solved immediately. So first call resolution is super important for the long tail. Our job is really, where we excel is to make that easy, so smooth for the long tail. It's so easy to use our product that they just, when they buy an Enphase product, they hopefully will not switch to anyone else. That is our fundamental value proposition, the long tail. We are seeing a lot of strength across long tail.
In addition, we are seeing some of the tier 2 customers, they are also growing in strength. As we talked about AC modules, we talked about Panasonic, which we did a press release. We talked about our great partner, SunPower. We talked about Solaria. We have a few more in the works. That is yet another, AC modules makes long tail a lot more easier because it's just, again, so easy to use. It absorbs a lot of field activity into the factory. And it comes with very high quality because it's already pre-assembled. These all are actually together driving a lot of strength for us. It's too early for us to be talking about the second half. But like what I told you, I mean, told in the call, historically, Q3 and Q4 are strong for the solar industry, and I hope it is true now, too.
The safe harbor is another piece as well, which we need to get visibility on. What we are doing is to prepare the company for the long term. Irrespective of whatever happens in the short term, we want to make sure we have the right capacity for the long term. For now, we have decided it is that number, 2 million units, getting to a 2 million-unit capacity number in Q4 2019. We'll keep you informed as we know better.
Thank you. Do you have a sense for what your market share would be? Let's say you were to use, ship all of that 2 million capacity. There's some variation in the market share numbers that you see out there. But if you got to that point, at some point in time, do you have a sense for what that market share would be?
Brad, I mean, look, I'm not going to speculate about market share because that involves, That means I know the total available market, and I don't really know what will the total available market be for the latter half. What I can tell you is this. I consider, yes, market share is important, but for me, the way I think about market share, it is an output of a lot of things. What is an input is, can I solve customers' problems? Can my solution be so easy for the customer to use? How can I innovate to solve customer problems better than the competition? How can I differentiate better? Therefore, how can I maintain the value on my product? That is the most important thing, and that's why you see a product like Ensemble.
Ensemble addresses a problem that Solar still works when the grid is off. That is a problem that we took, and we addressed that problem. AC modules is we wanted to absorb the field activities into the factory so that installers reduce their installation time, making it easier for the installation partner. While the Ensemble makes it easier for the homeowner. We believe, in order to generate a lot of value, we need to focus on both our homeowner as well as our installer partner. That's really how we drive the company to focus on innovation and differentiation and creating value.
Yeah. Thank you very much. The root of the question was really thinking about if you got back to the dominant market share that Enphase had 3, 4 years ago. Is that more than 2 million units or is that 3 million units? Kind of trying to frame the market. Any help you could give on that offline, that would be much appreciated. That's it. Thank you very much.
Thank you, Brad.
Our next question comes from Pavel Molchanov with Raymond James.
Thanks for taking the question. I want to go back to the gross margin guidance for Q2. If the supply chain loosening is indeed getting better in Q2, as you've said, and you're also going to benefit from the final partnership payment, which I suppose carries 100% margin, why wouldn't the overall margin actually improve in Q2 versus Q1? Because you're guiding to basically flat at the midpoint.
Pavel, we have guided a range, 32%-35%, number one. The second one is we are talking about an increased revenue number. Like what I said, some of the extra supply from our supply agreement is going to trickle down in Q2 of 2019, but most of it in the second half of 2019. Having said that, it is a delicate balance between exactly the dates the customers need product, because they're going to go lines down, and the date we can supply. Therefore, Q2 will still have expedite fees to the tune of 250-350 basis points. That's already in our gross margin guidance.
Okay. Let me also ask about warranty obligations. Given that revenue obviously is increasing, you referenced it was up counter seasonally in Q1. Warranty obligations actually edged down in the quarter. Can you explain how that was?
Well, look, we are running the company with enormous focus on quality. This started not only, right from when we started the company, after the first year or two, we learned that the cornerstones of the company are quality, customer service and product innovation. That's what we learned. Basically, if you look at our microinverter, if you look at our competition, the way other people do is a traditional microinverter has got 2 stages. We do it in 1 stage. We do it in 1 stage because we have an ASIC. That ASIC provides, the ASIC has got a calculator in it that basically is predictive, and it is able to reduce the number of stages from 2 stages to 1 stage. Because of that, there is a reduced number of components.
Because there's a reduced number of components, the quality is inherently better, and that gets better and better and better with every microinverter generation. The second aspect is, because we use lesser number of components and lesser number of stages, we generate lesser heat, which means our efficiency is higher. Because we generate lesser heat, we do not need metal casing. A plastic casing would do. It is, architecturally, we have designed a product that is correct by construction for quality. Our quality principles, the way we beat on quality in the last two years is, it is a business process that is ingrained in us. Which is, we go into a room, we understand the failures that came in during that week. We are relentless until we dig deep and understand the reasons on why exactly the failure happened.
Many of the failures, like for example, 70% of the failures are usually related to our suppliers, then we are dogmatic about going back to them and saying, "You need to change your design, or we are going to remove you from the bill of materials." That's the process that we are getting better at. We are not perfect today, but our long-term target is 500 DPPM. 500 DPPM is 0.05%. We are not there today, but our quality principles are something that we very strongly believe in, and that's how we run the company.
Okay. Just one quick one. As the battery becomes a more needle-moving revenue driver, do you plan to eventually break that out away from the microinverter megawatts?
I think it's a good question. I need to debate it with my CFO, but I think it looks like that may not be a bad idea.
Okay. Appreciate it. Thanks.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star then the one key on your touch-tone telephone. Our next question comes from Amit Dayal with H.C. Wainwright.
Thank you. Badri, just on the long tail/tier 2 customers, is this sort of a reliable channel for growth sustainable, or is this something that has emerged now, could go away for you guys?
Tier 2 customers are actually by definition emerging customers because they actually emerge from tier 3 or tier 4 to tier 2 and then on their way to tier 1. Yes, they are sustainable. Yes, they've had a long-term relationship with us. Yes, they helped us when we were down in the dumps. They actually helped us. The answer is yes.
Thank you.