Ladies and gentlemen, and welcome to the Enphase Energy's 4th Quarter 2018 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 conference call is being recorded. I would now like to introduce your host for today's conference, Ms.
Christina Carabino. Ma'am, you may begin.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q4 year end 2018 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer Eric Branderiz, Chief Financial Officer and Raghu Baloor, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its Q4 and year ended December 31, 2018. 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, 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 quarterly report on Form 10 Q for the quarter ended September 30, 2018, which is on file with the SEC and the annual report on Form 10 ks for the year ended December 31, 2018, which will be filed with the SEC in the Q1 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 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 Safandaraman, President and Chief Executive Officer of Enphase Energy.
Badri?
Good afternoon and thanks for joining us today to discuss our Q4 and full year 2018 financial results. We had a solid quarter. We reported revenue of $92,300,000 We had strong customer demand as our financial strength and robust balance sheet reaffirmed customer confidence. Our biggest challenge in Q4 was meeting this additional demand due to component shortages that constrained our revenue. We are fully booked for Q1 2019 just as we saw in Q4 2018.
I will provide an update later in the call on our plans to mitigate component shortages. Our non GAAP gross margin in the 4th quarter was 30.7% and our non GAAP operating income was $8,600,000 Our gross margin was negatively impacted by 4.3% due to expedite fees related to component shortages. The expedite fees were in the form of air shipments that we chose to make in order to service our customers. We exited the Q4 with a cash balance of $106,200,000 net of a $10,000,000 final payment to SunPower. The strong cash balance also enabled us to completely repay on January 28, 2019, our high interest bearing senior secured term loan of approximately $39,500,000 plus accrued interest and fees.
Now let's talk about 30, 2010, our target financial model. We introduced 30, 2010 at our Analyst Day in June of 2017 and committed to meeting the model in Q4 of 2018. And 30, 2010 stands for 30% gross margin, 20% operating expense and 10% operating income. We made significant progress towards making that model a reality as we exited 2018. Eric will go into greater detail about our financial results later on the call.
An important focus item that we discussed in the past few quarters is ease of doing business, how customers perceive us. Quality and customer service are the cornerstones of our strategy and our objective is to deliver exceptional customer experience. Our business processes are maturing and we are prioritizing customer experience to be number 1 in all aspects of our business. During Q4, we made several improvements in our call center and online support, particularly in Europe and Asia Pacific. We also rolled out an in phase upgrade program, a service program for early adopters of our legacy microinverters and announced that over 1,000 homeowners have joined 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 51% in Q4 and our target is to achieve a worldwide NPS of 60% or higher in 2019. Now let's talk about the 301 tariffs that became effective in September of 2018 impacting Enphase microinverters and accessories. As we discussed last quarter, we are mitigating the existing 10% three zero one tariffs by sharing the cost increases with our customers and expanding our manufacturing agreement with Flex in Mexico starting Q2 of 2019.
This additional line in Mexico is expected to help Enphase better service our North American customers by cutting down cycle times and streamlining inventory at a similar manufacturing cost as Flex China. Now turning to our regions, our U. S. And international mix for Q4 was 77% and 23% respectively. All of our regions were impacted by component shortages.
Our 4th quarter revenue in the U. S. Was up 38% sequentially and up 29% year on year due to strong customer demand across the board. Note that the U. S.
Revenue includes volume shipments of our IQ 7XS microinverters to SunPower as we previously planned. In Europe, revenue was down 2% sequentially, but up 27% year on year. The megawatts shipments were up 26% sequentially and up 31% year on year setting a new record for Note that the Q3 2018 revenue for Europe included a $3,300,000 of milestone achievement from a partner on IQA. We are encouraged by the growth outlook in the new build and social housing sectors in Europe. In APAC, our revenue was down 61% sequentially and down 74% year on year.
As we previously mentioned, the region had built up significant channel inventory over time and we took this opportunity to bring the inventory down. We recently appointed Wilt Johnston as our new General Manager for the region and we believe his years of international executive management experience will help strengthen our APAC business. In Latin America, 4th quarter revenue was down 41% sequentially and down 14% year on year. Unfortunately, component shortages significantly impacted our Q4 sales to this region as well. Now that we are financially stable, a large portion of our time is spent on profitable top line growth.
We plan to achieve this growth through differentiated products and services. Our 4 levers for profitable top line growth remain IQ7 regional expansion, high power and high performance products, AC modules and Ensemble Solar and Storage Technology. The first lever for profitable top line growth is IQ7 regional expansion. Approximately 84% of our microinverter shipments in Q4 were IQ7, up from 78% in Q3. As I mentioned earlier, component shortages constrained our revenue in Q4.
We have been working with our customers and partners to manage these shortages and we are thankful for their efforts and patience. The additional capacity based on an investment we made with 1 of our suppliers earlier in 2018 is now online. This has allowed to increase our microinverter supply for Q1 2019,
but with
the growth we are seeing, our lead times are still around 13 to 15 weeks. We have recently signed 2 new long term contracts for additional high voltage transistors. This additional supply is expected to become available in the second half of this year, which we believe will help improve our microinverter lead times to 6 to 8 weeks. The second lever for profitable top line growth is releasing high power and high performance new products. The IQ7X product addresses 96 cell PV modules up to 400 watt DC and with its 97.5% CEC efficiencies ideal for integration into high power modules like SunPower and Panasonic.
In addition, we shipped limited quantities of our new product IQ7A, which addresses up to 4 50 watt DC modules. The 3rd lever for profitable top line growth is AC modules. We had volume shipments of our IQ 7XS microinverters to SunPower in the 4th quarter. And as previously announced, we expect the continuation of the ramp in 2019. In addition, we are making steady progress with module partners such as Solaria and Panasonic in ramping Enphase energized AC modules.
These integrated systems allow installers to be more competitive through improved logistics, reduced installation time, faster inspection and training. Since their release in October of 2017, Enphase Energized ACM from our module partners have been adopted by about 4 20 installers in the U. S. As of today. Finally, a major catalyst for our profitable top line growth in the long term is our Ensemble Solar and Storage Technology.
The IQ8 system is based on our grid agnostic always on technology called Ensemble. This system has 4 components, energy generation, which is accompanied with the grid agnostic microinverter IQ8, energy storage, which is achieved by Encharge battery with capacities of 3.3, 10 kilowatt hour, 13.2 kilowatt hour, communication and control called on power, which consists of the automatic transfer switch and the combiner box with the Envoy gateway. And the 4th and final component is Enlighten, which is the IoT cloud software. We are working hard on each of these 4 components of the IQ8 system. There are over 100 engineers working on the project across multiple time zones.
However, given the high complexity of the technology in terms of hardware and software, we are running a little bit late. We believe in making the right decisions for the long term and getting the customer experience right. Therefore, we now anticipate introducing Ensemble in a phased manner starting in the Q4 of 2019. Let me remind you that there are 2 major market segments Ensemble Technology addresses. 1 is the pure off grid segment and the other is the grid agnostic segment.
We just talked about the grid agnostic solution being delayed to the Q4 of 2019. However, the pure off grid microinverter solution is on track. We shipped limited quantities to our partner on IQ8 during the Q4 of 2018 and we expect to ramp production in the first half of twenty nineteen. We also expect the final milestone revenue from this partner in the Q1 of 2019. In summary, we are encouraged by our progress in 2018.
Our top priorities remain providing superior customer experience and focusing on our 4 profitable top line growth vectors. I would like to thank our employees for their hard work and our customers, partners and shareholders for their strong support. 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 Q4 and full year 2018 financial results as well as our business outlook for the Q1. As a reminder, the financial measures that I'm going to provide are on a non GAAP basis unless otherwise noted. We have provided reconciliations 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 Q4 of 2018 was $92,300,000 an increase of 18% sequentially and an increase of 16% year over year. We shipped approximately 257 Megawatts DC in the Q4 of 2018, an increase of Megawatts of 25% sequentially and an increase of 16% from the year ago quarter. The megawatts shipped represent about 820,000 microinverters, approximately 84% of which was IQ7. Both IQ6 and IQ7 represented 91% of Q4 microinverter shipments. Non inverter revenue, which includes our AC battery storage solution, Envoy communications gateway, combiner box and accessories increased as a percentage of revenue compared with the prior quarter.
Total revenue for 2018 was $316,200,000 up 10% from 2017. In 2018, we shipped approximately 2,800,000 microinverters representing 972 Megawatts DC, a 13% year over year increase in megawatts shipped. Non GAAP gross margin for the Q4 of 2018 was 30.7% compared to 32.8% for the 3rd quarter. Note that Q3 2018 non GAAP gross margin including a $3,300,000 milestone achievement from a partner on IQ8. Even though we share some of the expedite feeds with our partners, component shortages negatively impacted our Q4 gross margin by approximately 4.3%.
Non GAAP operating expenses were 19 point $7,000,000 for the Q4 of 2018 compared to $18,600,000 in Q3 $18,000,000 in the Q4 of 2017. 2018 was our 1st year of SOX compliant efforts and as a result, we incurred higher than expected expenses in internal audit plus additional consulting and advisory fees. These higher than normal expenses will also continue into Q1 2019. Non GAAP operating expenses for 2018 were $75,000,000 compared to $72,800,000 in 2017. GAAP operating expenses were $23,200,000 for the Q4 of 2018 compared to $25,600,000 in Q3 $21,100,000 in the Q4 of 2017.
GAAP operating expenses for the Q4 included $1,500,000 of the stock based compensation expenses, $1,500,000 of restructuring expenses and approximately $400,000 of acquisition related expenses and amortization. GAAP operating expenses for 2018 were $92,800,000 compared to $95,400,000 in 2017. On a non GAAP basis, income from operations was $8,600,000 in the Q4 of 2018 compared to $7,000,000 in Q3 and $1,300,000 in the year ago quarter. This improvement in operating net income for the Q4 of 2018 was $5,100,000 compared to $4,600,000 in Q3 $683,000 in the year ago quarter. This resulted in basic earnings per share of $0.05 and diluted earnings per share of $0.04 in the Q4 of 2018 compared to basic and diluted earnings per share of $0.01 in the year ago quarter.
GAAP net income for the Q4 of 2018 was $709,000 We are happy to report that this was the Q1 in the company's history that we reported GAAP net profitability. Now turning to the balance sheet. Inventory was $16,300,000 in the Q4 of 2018 compared to $17,900,000 in Q3 $26,000,000 in the year ago quarter. We ended at 23 days of inventory on hand as of December 31, 2018, significantly below our target of 30 days and down from 31 days in the 3rd quarter and also down from 39 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 Q4 of 2018 with a total cash balance of $106,200,000 compared to $116,200,000 in Q3. The Q4 balance includes the final payment to SunPower of $10,000,000 for the acquisition of its microinverter business. We also generated $1,900,000 in cash flow from operations and $4,100,000 in adjusted free cash flow. The 1,900,000 dollars in cash flow from operations in Q4 would have been $5,900,000 as we allocated $4,000,000 out of the $10,000,000 payment to SunPower in operating cash flow for the acquired customer relationship acquisition related intangibles. As Badri mentioned, on January 28, 2019, we repaid in full our high interest bearing senior secured term loan with Tenenbaum Capital Partners and indirect wholly owned subsidiary of BlackRock Inc.
The repayment included a principal amount of approximately $39,500,000 plus accrued interest and fees. The repayment also terminated the liens of all in phases assets, providing graded operating flexibility going forward. Now let's discuss our outlook for the Q1 of 2019. We expect our revenue for the Q1 of 2019 to be within a range of $90,000,000 to $95,000,000 Turning to margins. We expect GAAP and non GAAP gross margin to be within a range of 31% to 34%.
Note that our Q1 gross margin guidance include a negative impact of approximately 2% to 3% due to expedite fees resulting from component shortages. We expect our GAAP operating expenses to be within a range of 25 $25,000,000 to $26,000,000 including a total of approximately $4,500,000 estimated for stock based compensation expenses, additional restructuring expenses and acquisition related expenses and amortization. We expect non GAAP operating expenses to be within a range of 20.5 $1,000,000 to $21,500,000 With that, I will now open the line for questions.
And our first question comes from Brad Meakle with Williams Trading. Your line is now open.
Hi, thanks for the question. Could you add a little more color in terms of your visibility into second quarter and the second half of the year from a demand standpoint? And also as you're ramping, it sounds like you prioritize the ramp of the IQ7 and to alleviate the shortages and catch up with customer demand. Can you comment on how much more capacity you'll have as you go into the second and third quarter? Thanks.
Yes, Brad, thanks for the question. As you know, we're not going to provide guidance beyond the quarter and we guided $90,000,000 to $95,000,000 of revenue for Q1 of 2019. Having said that, we are unlocking 3 of the 4 top line growth vectors that I said. The first one was the IQ7 regional expansion. The second is the AC modules and the third is the high performance, high power products.
So I'll take each of them. In the first one, obviously, our balance sheet has significantly improved. We are very financially stable. We have a great cash balance. So customers are coming back to us.
In addition, we pride ourselves on offering the highest quality and customer experience. So with all of this, our demand has started to increase. And what we did was we recognized this sometime last year and we basically we worked with one of our suppliers to increase our 600 volt transistor supply, which is a key component in our microinverters. And we did that early in 2018. We locked some capacity down and that capacity is coming on in Q1 2019.
In fact, it is online right now. But having said that, as we unlock more of our top line growth vectors, we found that that is not enough. We found that in the Q4 that we had to scramble for more capacity. And I personally went down and talked to the CEOs of these companies and we were able to get 2 additional long term contracts done. The result is that from middle of 2019, meaning from the second half of twenty nineteen, the incremental supply will turn on and we will start to service customers a lot better.
The answer to your question is Q1 2019 will be better than Q4 of 2018, Q2 2019 will be better than Q1 of 2019 and Q3 and Q4 will be a lot more comfortable for us.
Thanks, Badri. I guess just to ask it another way, I think you'd said in the past that the new power MOSFET line could be 60% of your output when ramped and I'm not sure exactly how long that takes to ramp, but that really implies close to doubling of capacity depending on how your existing contracts sort of look. But
is that the right way to think about it?
Well, I mean, yes, that is the right way to think about it. Let me say this, in the second half of the year, we will be in a very comfortable spot in terms of our supply. Supply, I hope supply will not be a major problem in the second half.
And are you sold out through the Q2 at this point as well?
We're not going to talk about the Q2, Brad. We are sold out for the Q1 though.
Okay, thanks. And just last question, could you speak to the battery ramp and we've heard of some high attach rates in California of 25% plus. And obviously, you make probably 8 times as much on a storage installation with your customers. So could you comment on what you're seeing from customers that you're talking about in terms of storage attachment and what that can mean for the business? Thanks very much.
Yes, we are extremely excited about storage. As I said in the prior quarter, storage represents a significant opportunity for us to increase the revenue potential for home from $2,000 to $10,000 And a key part of Ensemble is Encharge. Encharge is going to have capacities of 3.3 kilowatt hour, 10 kilowatt hour, 13.2 kilowatt hour. It is going to have a CO2 charging rate. It is going to have LSP chemistry, which is going to be very safe for residential applications.
It is, I mean, most importantly, it's going to use use IQ8 and the same IQ8 microinverter. So, we are furiously working on in charge. Having said that, like what I said, it is a little bit delayed. It is a little bit delayed to the Q4 of 2019, but we are extremely optimistic about our prospects in storage. And, yes, I'll leave it at that.
Thanks. I'll get back in the queue.
Thank you. And our next question comes from Carter Driscoll with B. Riley FBR. Your line is now open.
Good afternoon, gentlemen. Can you just talk about your assessment of the opportunity for Ensemble and the grid tied versus not necessarily having been grid tied and the delay of when you're going to ramp the second portion of that market? Just trying to get a sense of relative market opportunity.
Right. So Ensemble is designed to service 2 markets. 1 is grid agnostic market in a segment and the other is the off grid market segment. I'll come to the off grid market segment where we are on track. We started sampling the product to our lead customer in the Q4 of 2018 and we are expecting to ship a significant quantity to them in the Q1 of 2019.
So what I'll say is this, I mean, if you look at the countries where the off grid technology is going to play a major part, it's going to be places like India and Africa. India and Africa are places where you will see, of course, the PV and the storage systems are not going to be that big. They're going to be small, But imagine a hut having 1 or 2 AC modules or 1 or 2 modules with microinverters. And so that will be just perfect for the architecture of a microinverter. It's still too early for us to assess to talk about volumes and talk about ramps, but we're excited that our product is there, our product is sampling.
We have a strong partner and we'll talk about in the coming quarters on progress. So that's on the off grid, pure off grid microinverter. On the grid agnostic one, it gets more exciting. The grid agnostic one, obviously, there is a lot of cases. We service somebody who wants to be completely grid independent.
We service somebody who wants to be totally dependent on the grid, but just wants backup as a peace of mind. So Ensemble is a technology that can do whatever the customer wants. That's why we call it as grid agnostic. And Ensemble is complex. It has got 4 components, which is the micro, the battery, the automatic transfer switch and the combiner and the cloud.
Having working all of these together seamlessly in terms of hardware and software is something that we have been challenged with. And I think that's why we are experiencing the delay. But the way I think about it is 2 big one is the storage, which is in charge, which takes our revenue per home from $2,000 to $10,000 And the other is, even if there is not much storage attachment, what would people want, grid agnostic solar or a grid tied solar? I mean, we think that most people would want a grid agnostic solar, they are given a choice. So once again, we are extremely excited about that technology.
We're extremely excited about Ensemble, but we do not want to get ahead of ourselves. Right now, we are basically having our heads to the table. We are focused on execution and we are focused on getting this product out in the Q4 of 2019.
Okay. Just another one.
Can you maybe talk about the percentage shipped to AC modules in the form factor or range where you have been in 4Q and where you think it could go by say year end 2019?
Well, we're not going to break out the percentage shipments, but AC modules have been increasing slowly and steadily. And it starts with customers like SunPower, which is all AC modules for the microinverters like you 7Xs that we ship to SunPower is in their Equinox AC modules. In addition, partners like Solaria are all gaining a lot of traction in their market. Solaria has got a 355 watt AC module. They use their IQ 7 plus microinverter, which is a 295 watt AC output.
So basically a DCAC ratio 1.2 there. And Solaria value proposition is it's a sexy module, it is aesthetic and that's why everybody likes it. That's that. And earlier in the year, we announced our partnership with Panasonic. That's slowly getting to be a reality.
And we'll announce when we are ready there. So basically these are very strong partners. And in addition, we have a few more that we are working on in the international regions, which we'll announce when we are ready.
Maybe just last one for me. To get to the high and low end of your margin guidance for 1Q, can you just talk about the factors? Is it some combination of mix? Obviously, what you've done and potentially in terms of sharing the tariff impact, Maybe just talk about those factors, the more important ones to get to that 300 bps delta?
Yes. I mean, look, we are already sharing the tariff costs with our customers. We did that effective in Q4 of 2018, which is what we said we would. So we are doing that. Really the puts and takes on gross margin, the 4.3% really comes from air shipping our microinverters so that we provide customer service.
And so I didn't to tell you the truth, I prioritize customer service in Q4 and therefore we spent a lot of money air shipping product. Yes, now a few of our customers were also willing to pay. We're also willing to pay for airships. So that basically offset us a little bit, but even after that, we still had a gross margin hit of 4.3% as we said. And now in Q1 of 2019 with our supply situation a little bit better.
We are not going to be spending so much of money, but still it is significant 2% to 3% in terms of air shipments is still significant and that's really accounted in the guidance of 31% to 34%. I'm sorry, if I may just sneak in the
last one. Just talk about the competitive environment whether from existing and then maybe new entrants, what you're seeing both last quarter and what you expect in 2019?
I mean the competitive environment remains pretty, I mean pretty much the same that is not much change. Of course, we are all talking about Huawei. We did not see them that much in the residential space right now. But of course, they are a formidable competitor. We are watching the space.
But let me remind you that our product is unique. Our product is differentiated. It's a microinverter. And we focus on the differentiation through innovation. So we'll be prepared to meet competition.
Appreciate taking all my questions. I'll go back in queue guys. Thank you.
Thank you. And our next question comes from Eric Stine with Craig Hallum. Your line is now open.
Hi, everyone. Maybe just wanted to start with SunPower and I might have missed this, but could you break out the percentage of your revenues in Q4 there? And then just curious if you could talk about the ramp. I know it's still early, but the ramp and maybe how it's progressing versus your expectations when you made the acquisition a couple of months ago?
Yes. We are not going to break out the percentage of SunPower revenue. But I'll tell you what, I mean, it is the ramp is very much in line with our expectation. I expected volume shipments beginning Q4 of 2018 and we are exactly at that point where we had volume shipments to SunPower on our IQ7Xs microinverters in Q4 of 2018. I expect Q1 2019 to be a ramp, a nice ramp and I expect us to be done by Q2 of 2019 as I previously communicated.
Okay. And I guess you touched on this on your answer to the previous questions. But I'm just curious with SunPower, with some of the traction you're getting with some of your other AC module partners, just curious what you're seeing from the rest of the market. I mean, what that's doing in terms of interest, people coming to you looking for their own solution, anything along those lines would be helpful?
Yes. I mean, if you really see it, an AC module is actually perfect when you see that the modules are going to higher and higher power because we can easily scale our microinverters. So it's actually advantageous for us in terms of gross margin as well. And having said that, SunPower is the biggest and then people like Solaria for example, like I will reemphasize that again. It's a 355 watt AC module and it is really neat module, 72 cell module and very high aesthetics, black on black and it really looks nice.
So those are the kind of partnerships we are actually getting and we are getting many such partnerships across the world. So like for example in Europe, in Europe there are a couple of partnerships which we are working on. We cannot announce them yet, but they are making rapid progress.
Got it. Let's see, maybe last one for Eric, just on the OpEx, you mentioned that in Q4, you had some professional fees and some other stocks related items that ran a little hotter than you thought. In the guide for Q1, I mean, it sounds like it's going to persist, but maybe beyond Q1, maybe a way to think about OpEx is at a more normalized level.
Yes, I think that we when we think about OpEx for 2018, except for the qualifications on Q4 and Q1, Eric, we should think it in terms of the model, the financial operating model that we set up, right, which is cash generating. So the 20% number is still relevant. It may go up a little bit, it may go down. It's the whole model of the 30, twenty, ten that we basically live by and that will be the guiding principle outside this unique specific circumstances, right?
Okay. Thanks for that.
Thank you. And our next question comes from Jeff Osborne with Cowen and Company. Your line is now open.
Excellent. Maybe just following up on Eric's question. Eric, is there a way you can quantify what the OpEx increase was in Q4 for SOX and professional fees or will it be broken out in the 10 ks?
Yes, it will be broken on the 10 ks. You actually can see that as well, I believe in the tables of the press release, right. And for the most part, you can see there is stock component 1.5, another portion associated with the restructure fees. So everything is neatly easy to follow there compared with the prior quarter and then you can take it into the following, right.
Got it. And then I think Badri had in his prepared remarks a comment about the last if I heard you right, Badri, the last milestone payment would be showing up in Q1 from your partner for IQ8. Can you, A, confirm that? And then, B, is there a way to think about what the magnitude of that payment is?
Yes, confirmed, yes, it will be Q1 of 2019 and it will be under $1,000,000
Okay. I just noticed you hadn't caught you didn't break that out when you were talking about the puts and takes on the gross margin side, but if it's under $1,000,000 Is that the last of the if that's the last of the payments or is there any additional payments in the future?
That's the last of the payments.
Got it. And then another question on SunPower. I know you can't break out specifics, but is there a way you can talk about what your level of engagement is with their channel, their dealer network? Is that something that you have more than half of their channel has been exposed to the product? Or is that still an uphill battle over the next 6 months for you to penetrate that channel?
No, I mean it's not an uphill battle, but it is not for us to penetrate the channel. SunPower has is going to exclusively use Enphase microinverters. And therefore, it is in SunPower's best interest to promote these microinverters and the future microinverters to their dealer network. So our job is a little bit easier there because SunPower is taking all I mean is making all the effort to make sure that everybody is trained, the dealer network is trained and of course we are helping them every step of the way. Got it.
That makes sense. The last question I had was
on the component side, 2 part question. One is on IQ8, does that use more or less of the 600 volt transistors? I know it's a slightly different form factor and more cost optimized, but I wasn't sure if it's more intensive on the transistor side in particular.
The IQ8 uses the same for high voltage transistors.
Got it. And then as part of these now I guess three contracts you have on supply, is there any notable cash payments upfront that would be disclosed in the 10 ks as that's published? Or how does the mechanics of these work? And the second part of that question would be, what are the general duration of these types of contracts just in the event, say, the auto industry or some other industry comes back and these components continue to have a problem later in the year and in 2020?
Yes. We have 2 arrangements that we have on top of the one that we have existing before. One of the 2 that are new, the value set up is actually a continuation of the existing one with some prepaid arrangements similar to the one we have before. The other one is with another one with it has a take or pay that is very short time frame, right. So probably I wouldn't think beyond 18 months to 2 years, right, which gives us enough runway to get the problem resolved, but at the same time, doesn't commit the company on a structured pricing arrangement on a take or pay for a long term.
Got it. That's very helpful, Eric. I appreciate it.
Thank you. And our next question comes from Amit Dayal with H. C. Wainwright. Your line is now open.
Thank you. Good evening, guys. Most of my questions have been asked. Maybe just on the leverage of the business, now that we're seeing some revenue ramp coming through, what is the opportunity over here? Should we expect operating cost to sort of normalize at these levels?
Or should these expected to increase with the ramp in revenues?
Right now, you should think about the OpEx as our long term model is 20% of revenue. We are not going to deviate from that. We incurred restructuring expenses to make sure we have the right people in the right places. So we are very confident that we can meet that. Yes, that's not an issue.
So we are while we ramp revenue, we will control OpEx at 20% of sales. Okay?
Got it. So the 30, 2010, no update to that, maybe in the next few quarters?
Look, I mean, the 30, 2010 is more and more looking like 32, 22, 10. So, I mean, what you should be looking at is, the 30, 2010 spirit is what is the 10% operating income. So as long as that is met, the numbers will fluctuate a little bit. Yes, but having said that, we feel good about our profitable top line growth vectors. We feel good that even if Ensemble is late, we feel that the other three vectors that are actually kicking in and more than compensating for that.
And so we feel really good about that. But and still we're not going to guide more than 1 quarter out and we know this is a solar industry, anything can happen overnight. We know if the government sneezes on this a little bit, yes, things can go south. So we're not going to update the model right now.
Right.
And in the context of a pretty strong sort of guide for the Q1 relative to the Q4, Ensemble, should we expect Ensemble to really contribute anything meaningful this year? Or should that be pushed out in terms of expectations from 2020?
Well, look, I mean, when we introduced the product in the Q4, obviously that will be only the ramp, right? There won't be much significant revenue from Ensemble in 2019.
Got
it. That's right.
Yes, that's all I have guys. I'll follow-up offline. Thank you.
Thank you. And our next question comes from Colin Rusch with Oppenheimer. Your line is now
open. Thanks so much guys. It looks like you increased the working capital a little bit here with AR getting up to almost 78 days for the quarter. Can you talk a little bit about what happened there and what your expectation is for working capital needs as you go into the 1st part of 2019?
Yes. I'll take the first part and Buddy can probably cover the business aspect of it, Colin. But if you think about it, the 5th supply component, the sub shortages, right, it has created challenges on our linearity, right. So what you see is significant amount of shipments taking place sometimes on even on an expedite costing basis on air shipping toward the end of the quarter, right. And that has been aggravated since Q3.
And so now I believe we are turning a corner, right, in which you can see receivables with days sales outstanding of 70 days, right. And at the same time, that compensates with the payable side of it, right, which we have a lot of purchases of inventory taking place towards the end of the quarter. So with that being said, you end up with super low levels of inventories on the working capital front, maybe a little bit below our comfort level for operational flexibility. And now at 23 days, we had a total cash conversion cycle of 24 days of working capital in the quarter, right. So we believe with the linearity challenges being started to get resolved in Q1 and pretty much come by the end of Q2, we are in good shape to normalize the business back again and start seeing receivables, payables getting into our own internal target, right.
And as you go into 2019, so you're checking that 10 wines, it should be a source of cash in your expectations for March June?
I didn't quite follow your question. Say that again.
You should be generating a bit of cash from the working capital as you go into March June or you feel like you're going to consume that as you ramp up?
It's just cash, let me tell you about cash at Uber, right. We feel confident about our cash generating capability based on our financial operating model that we have, right? 30, 20, 10 or like Valerie put it, 32, 10, right? That model is a cash generating model, right? And with all all the things that we took into account, I believe we're going to continue going forward into the year by resolving the linearity challenges and increasing our cash costs, right.
Okay, that's helpful. And then you broke out international and domestic sales. As you look into 2019, how is that shifting at all? And is there a price component that you're going to see a benefit or any sort of headwinds on from next on a geographic basis?
Look, I mean, it's still going to heavily be skewed towards North America because of SunPower. Having said that, we are really excited about Europe. We had the highest megawatt shipments like what we noted, really excited about the social housing boom in Netherlands and we have very strong distribution partnerships in France. And once the component shortages are resolved, we to break into other regions like start ramping in Germany, start ramping in Austria. Those are the places we would like to start ramping.
Yes. And then if you look at Australia and the Asia Pacific, Australia, New Zealand, etcetera, there we really took this opportunity with the component shortages in order to correct our inventory, correct the inventory in the channel. And we did that in Q4. We bought on a general manager and his expertise is he's a solar guy. He understands the And then the last one is India.
We And then the last one is India. We're not talking about India much, but with the off grid product starting to come, the pure off grid product, I'm really excited about the prospects in India as well. There are some niche applications that I'm not going to talk about right now. But as our pure off grid product rolls out in the first half of the year and as Ensemble turns on, there are exciting prospects there as well.
Okay. Thanks so much guys.
Thank you. And our next question comes from Philip Shen of Roth Capital Partners. Your line is now
I'll follow-up on the last question there by Colin. I think we're seeing some really nice growth internationally. Is there a situation where you can see the international growth rate actually being faster than the U. S? Or do you kind of look at it in that way at all?
And if so, do you see potential for getting to an international versus U. S. Mix of, call it, sixty-forty, even fifty-fifty someday in the near call medium term 2 to 3 years
out? Yes, that's our goal, Phil, to obviously get to parity in terms of U. S. Versus Europe versus Asia to get to something like 33, 33, 33. But having said that, business is the strongest at this point in time, especially with SunPower, especially with our financial stability, with the long tail of customers coming back because of our product quality, because of our customer experience.
U. S. Firing on all cylinders right now. And I think 2019 is going to be about the U. S.
And but I'm optimistic that 2021 timeframe we can start being more balanced in terms of all the deals.
Great. That makes a lot of sense. And we're even starting to hear about some really aggressive growth rates for the overall U. S. Market.
I think people have been thinking about 15% year over year growth. But I'm hearing now 20%, maybe even 25% or 30 percent growth in the U. S. As a market overall. Are you guys seeing any of that?
And then let's put your internal supply constraints or component shortages aside. When you look at the U. S. Market, is there any validation or potential you think that the overall U. S.
Market can actually grow 25% year over year in 'nineteen versus 'eighteen? When I say overall, let me specify that for residential. And if you want to speak to commercial, feel free.
Yes. I mean, I'm going to talk only about the residential space. And yes, I mean, look, what I said in the last conference call is that we could not ship more than $10,000,000 of demand. And in the yes, I said that in the Q3 conference call and that number is a little bit higher for Q4. So basically, yes, there is a lot of demand out there and we are seeing a lot of demand because of our financial stability, because of our strong balance sheet, because IQ7 is the latest and greatest product that we have, our customer experience, our high quality.
And so demand is strong. And it is all supply limited at this point in time. And I expect the next 2 quarters like that. But I'm optimistic about Q3 and Q4.
Great. Following up on that thought there, Badri, can you talk about Q1? I mean, your official guide is $90,000,000 to $95,000,000 I know you're sold out. I know you had internal constraints. But how much revenue do you think you're leaving on the table as it relates Q1 specifically?
So Phil, we are not going to break that out. I broke that out in Q3 because just to show that our top line is starting to break out. Now we are not going to get into the habit of breaking that out. But I'll just tell you this, I mean, we feel really good. The demand is strong.
And what we feel bad is we are not I mean, are still not servicing customers well in terms of deliveries and we need to fix that. That's what I'm working on day and night. That's what our top priority is to not be internally focused, but to be focused on what customers want. And we need to do a lot more work there.
Great. One last one for me on the competitive dynamics in Europe. I know we were just talking about Huawei and more skewed to the U. S. But in Europe, they have been selling their product for some time.
Can you talk about whether or not you're running into them at all as it relates to installers and customers? Is their storage product getting like are you competing with them you think? Or do you feel like the demand overall market demand is so strong, it's really not an issue? Would love to hear your thoughts on that in Europe. Thanks.
Hey, Phil, this is Raghu. Yes, we definitely see them in the market in Europe. We are competing with them very effectively. Of course, in the markets that we are more active in Holland, Netherlands, and in France and a couple of other countries in that region. So we do run into them, but we clearly are being very effective there and doing well, given that in Q4, we had the highest megawatt shift ever in Europe, both in terms of megawatts actually as well in terms of units.
So I think it is but we mentioned this earlier on, it's because we have a really well differentiated product. We do micro inverters. They do string with or without optimizers, right? So I think the fact that it's a microinverter that is the highest performance and very high quality and reliability as well as the customer experience itself, including customer support and the work that we have done is what's, I think, separating us from all the other string players that are out there, which you obviously there's more than just more than just Huawei. The other thing also is and we touched upon this earlier on that ACM, AC modules can be very interesting in Europe.
We are now actively engaged with a few partners that we've announced when we
are ready.
And there's clear value to the value generation when installers install AC modules, both in terms of the savings both on the logistics side as well as the installation time and quality of installation, training, inspection, etcetera. So all in all, we feel pretty we feel very good about Europe and it's shown in the numbers, right? Like I said, we hit record numbers in Q4.
Great. Thanks, Raghu and Badri. I'll pass it on. Thank
you. Thank you. Our next question comes from Pavel Molchanov with Raymond James. Your line is now open.
Thanks for taking the question guys. Given the deleveraging that you've recently accomplished with a debt paydown and the cash flow that you'll likely generate in 2019, I'm curious if you're becoming more open to acquisition opportunities above and beyond what you've purchased from SunPower. I know that hasn't historically been the Enphase business model to do M and A, but any changes on that front?
Yes. So the conversation about the strategic targeted accretive short payback acquisitions similar to something like SunPower on different parts of the spaces, right, more in line with the complementary to Ensemble, competition in the commercial sector are always part of the discussions here, right? The success on how we integrated PayFac and we are starting the harvesting, the benefit associated with the SunPower transaction put a high bar in terms of what we are trying to achieve, right? And we have cash. We feel very comfortable, but we want to be very careful on how we're going to go about spending it and targeting.
Trust me, Pavel, I mean, there will not be kind of big diversions to what we are trying to do for training in a strategy or potentially decisions that we eventually will need to have a payback that extends beyond 18 months or maybe 2 years, right. So that's kind of how
we are seeing it. Okay.
And can we get a quick update on the tariff exemption process with relation to the AC modules? I know that's been kind of a work in progress for a while.
Yes. Yes, you can get an update and the update is that we have not heard back.
I can understand how that can be. All right. Thanks guys.
Thank you. And our next question comes from Brad Meakle with Williams Trading. Your line is now open.
Hi, thanks. Just a follow-up. So you've spoken about 1, paramosfet line that's running, another one that's coming up and as well as a couple of contracts, I think, from a supply standpoint. So it obviously implies a lot more demand out there and a lot more supply. Can you speak to your level of confidence that the demand is there and what I know you're not guiding on the second half, but just kind of what your demand visibility is for the second half?
And just as part of the capacity ramp up, I also want to know what portion you expect of U. S. Demand to be from Guadalajara in the second and third quarter? Thank you.
Brad, so like what I mean, you already know, we are not going to be talking about specific demand in the beyond Q1. But having said that, our objective is to basically make sure we take all supply related problems off the table. That's what we would like to do. That is why I went and did in the last couple of months, I went and did these additional 2 long term contracts. And Guadalajara coming on is an interesting dynamic.
It doesn't change anything on the supply scenario, but it does one thing, which is streamline inventory and cycle time to all our customers, which we think is important, especially as we service the U. S. So if we do a good job in ramping the Flex Mexico, there's no reason why we cannot ship almost all of the North American demand from Mexico. Time will tell in terms of the quality of their plant, etcetera, which we will have to see. But we are working towards that.
Thank you. And just last question is, I guess, solarquotes.com.au in Australia reported of SolarEdge threatening to sue some of the customers around the failure rates being higher, I guess, than expected in that region. We've heard about it in the U. S. As well.
Can you speak to whether you think that Enphase will benefit from market share shift away as a result? And just broadly speaking, what your feeling is in terms of your potential for market share gain? Thanks.
So Brad, we are not going to comment on the competition, what their strategy is, etcetera. But like I sound like a broken record. Where we really our core strengths are the product quality, superior customer experience. That is what we do. Ease of use, high quality, high customer service.
And so we will continue to offer that to customers and if they pick us, we are more than happy. We need to solve these component shortages. We can start servicing them right.
Thank you.
Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Badri Kothandaraman for any further remarks.
Yes. Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you once again on our call next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.