Good day, ladies and gentlemen, and welcome to the Enphase Energy's Third 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 call is being recorded. I would now like to turn the call over to Christina Carabino.
Please go ahead.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q3 2018 results. On today's call are Badri Pathandaraman, 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 Q3 ended September 30, 2018. During this conference call, Enphase Management will make forward looking statements, including, but not limited to, statements related to Enphase Energy's financial performance, market demands for its current and future products, advantages of its technology and market 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 annual report on Form 10 ks for the year ended December 31, 2017, which is on file with the SEC and the quarterly report on Form 10 Q for the quarter 9 months ended September 30, 2018, which will be filed with the SEC in the Q4 of 2018. Enphase Energy cautions you not to place any undue reliance on forward looking statements and undertakes no duty or obligation to update any forward looking statements as a result of new information, future events or changes in its expectations. Also, please note that financial measures used on this call are expressed on a non GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. The company has provided a reconciliation of these non GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the Investor Relations section of its website. Now I'd like to introduce Badri Kassandaraman, President and Chief Executive Officer of Enphase Energy.
Badri?
Good afternoon, and thanks for joining us today to discuss our Q3 of 2018 financial results. We reported revenue of $78,000,000 for the 3rd quarter. The customers continue to appreciate our differentiated products, quality and service initiatives. Our strong balance sheet was instrumental in driving increased customer demand. Our biggest challenge in Q3 was meeting this additional demand.
We experienced supply shortages that constrained our revenue by more than $10,000,000 For Q4, we are seeing strong demand and are fully booked already. We expect to be supply constrained in Q4 as well. Our non GAAP gross margin in the 3rd quarter was 32.8% and our non GAAP operating income was $7,000,000 We are pleased to report the 4th consecutive quarter of positive non GAAP operating income. We have also made a lot of progress on transforming our balance sheet and improving the company's operations. We exited the Q3 with a cash balance of $116,200,000 Next, I will talk about 30, 2010.
We introduced the concept of a 30, 2010 target financial model at our Analyst Day in June 2017 with a commitment to meeting it in Q4 of 2018. 30, 2010 stands for 30% gross margin, 20% operating expense and 10% operating income. We have now reported 5 consecutive quarters of improved financial performance and are very close to realizing 30, 2010. Eric will go into greater detail about our financial results later in the call. An important focus item that we have discussed over the past few quarters is ease of doing business, how customers perceive us.
Quality and customer service are the cornerstones of our top line growth and our objective is to deliver exceptional customer experience. Our business processes are maturing and we are prioritizing customer experience as number 1 in all aspects of our business, be it in product development or operations. During Q3, we continued to make several improvements in our customer contact center metrics and online support. Our service on the go has now enabled majority of customer claims to be handled through self-service via mobile devices. A key customer experience metric we introduced last quarter was Net Promoter Score or NPS.
This metric is calculated based on feedback customer surveys on how likely customers are to recommend Enphase to a friend or colleague. Our customer service NPS was over 50% in Q3 versus 40% in Q2. We have made significant improvement with our customer service in the last four quarters making it easier to do business within phase. Our target is to achieve an NPS of 60% or higher in 2019. Let's now talk about tariffs.
We all know about the 201 tariffs on solar cells and modules. Many of our AC module partners are building factories in the U. S. To counter the tariffs. Also, we all know SunPower recently obtained an exemption from the 201 tariff.
In summary, we see the barriers on AC modules seem to be easing up and their production is beginning to ramp. Let's now move on to 301 tariffs, which became effective late September and their impact on Enphase microinverters and accessories. We expect to mitigate the 301 tariffs by sharing the cost increases with our customers and expanding our manufacturing agreement with Flex to include Mexico. Starting in Q2 of 2019, Flex will begin delivering Enphase products produced in Mexico to the U. S.
Market. This additional line in Mexico will help Enphase not only to mitigate the tariffs, but also better serve our North American customers by cutting down cycle times and streamlining inventory at a similar manufacturing cost as China. Now turning to our markets. Our U. S.
And international mix for Q3 was 65% 35% respectively. 3rd quarter revenue in the U. S. Was up 1% sequentially and down 4% year on year. We ramped IQ7 shipments to our U.
S. Customers during the quarter along with IQ7X, our microinverter compatible to 96 cell modules. In Europe, revenue was up 9% sequentially and 31% year on year. We entered the German and Austrian solar markets in Q2 with IQ7 and continued to develop the customer relationships in Q3. We maintained our market share lead in France and were flat in Benelux and Switzerland compared to Q2.
In APAC, the revenue was down 7% sequentially and up 18% year on year. The revenue decrease was due to channel inventory on our legacy microinverters. We expect to bleed out the excess inventory in the Q4 and we also expanded our partnership with Beivar to distribute IQ7 microinverters across Southeast Asia. In Latin America, the 3rd quarter revenue was up 33% sequentially and down 38% year on year. We experienced steady growth in Mexico during the quarter.
Now that we are financially stable, a large portion of my time is spent on profitable top line growth. We plan to achieve this growth through differentiated products. Our four levers for profitable top line growth remain: IQ7 regional expansion, high power and high performance products, AC modules and Ensemble solar and storage technology. Of course, quality and customer experience remain corner stones of this top line growth. The first lever for profitable top line growth is IQ7 regional expansion.
We had a significant IQ7 ramp in Q3 and we expect to complete the transition in Q4. Approximately 78% of our microinverter shipments in Q3 were IQ7, up from 22% in Q2. As I mentioned earlier, we experienced supply shortages on high voltage transistors in Q3. We expect this situation to continue in the Q4 and have made appropriate investments to alleviate majority of the constraints in early 2019. The second lever for profitable top line growth is releasing high power, high performance products.
As you know, IQ7X is the highest power and highest efficiency variant of our 7th generation family of microinverters. The IQ7X product addresses 96 cell PV modules up to 400 watt DC and with its 95% CEC efficiency is ideal for integration into AC modules. We plan to introduce a new product in the Q1 of 2019, IQ7A, which is even higher power than IQ7X to address up to 4 50 watt DC modules. The benefit of our architecture is that it enables higher value to customers at lower incremental cost for us, thus improving our gross margins. The 3rd lever for profitable top line growth is AC modules or ACMs.
Last week, we announced a strategic partnership with Lonji to develop Enphase energized Longy ACMs based on IQ7. We expect these ACMs to be available in the U. S. Starting in the Q4 of 2018. Enphase is now the exclusive module level power electronics supplier for SunPower's residential business in the U.
S. And we anticipate volume shipments of IQ 7Xs microinverters in the Q4 and an acceleration of ramp throughout 2019. We expect to add $60,000,000 to $70,000,000 of annualized revenue from this acquisition in the second half of twenty nineteen at 33% to 35% non GAAP gross margin. Both SunPower and Longy joined leading module manufacturers such as Panasonic, Solaria and LG in developing Enphase Energize AC modules. These integrated systems allow installers to be more competitive through capital management, reduced labor costs and improved SKU management with accelerated design and installation.
Since their release to installers in October of 2017, Enphase Energized ACMs from our module partners have been adopted by 3 30 installers in the U. S. Finally, a big catalyst for our profitable top line growth is Ensemble Solar and Storage Technology. Is based upon our grid agnostic always on technology called Ensemble. This system has 4 components: energy generation, which is the grid agnostic microinverter energy storage, which is the encharge battery with capacities of 3.3 kilowatt hour, 10 kilowatt hour and 13.2 kilowatt hour communication and control, which consists of the automatic transfer switch that provides fine grain load control and the combiner box circuitry and the 4th component is Enlighten, which is the IoT cloud software.
The IQ system with its sophisticated software capabilities can address use cases ranging from grid tied to off grid and any possible hybrid configuration in between. In addition, the grid agnostic feature of the microinverter can be turned on and off through software remotely. This is just one of the many software configurable options in the IQ8 system, enabling a future service business within our installed base. Consequently, the Ensemble technology enables Enphase to transition from a pure play microinvertersolar company to a complete energy management systems company, bringing about a substantial growth opportunity for us. We expect our revenue potential to increase from approximately $2,000 per home selling pure microinverter systems to over $10,000 per home selling complete energy management systems with Ensemble Solar and Storage Technology.
We anticipate introducing the grid agnostic IQ8 systems to customers in the first half of twenty nineteen and realize meaningful revenue by Q4 2019 while still adhering to 30, 2010. We also expect to release the pure off grid microinverter solution in Q4 of 2018 in limited quantities as we previously discussed. We have completed the necessary safety certifications and the off grid product is currently being field tested. In summary, our top priority is to improve profitability quarter on quarter, creating shareholder value. In the near term, our focus is to optimize the supply chain to meet additional demand, unlocking our growth vectors and providing outstanding customer experience.
In the next few years, Ensemble represents a transformative opportunity for Enphase to increase our revenue manyfold by providing a complete home energy management system. 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 Q3 2018 financial results as well as our business outlook for the Q4. 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 financial measures to GAAP financial measures in our earnings release posted today, which also can be found in the Investor Relations section of our website.
Total revenue for the Q3 of 2018 was $78,000,000 an increase of 3% sequentially and an increase of 1% year over year. We shipped approximately 204 Megawatts DC in the Q3 of 2018, an increase in megawatts of 1% sequentially and a decrease of 12% from the year ago quarter. The megawatts shipped represented about 665,000 microinverters, approximately 78% of which were IQ7. Non inverter revenue, which includes our AC battery storage solution, envoy communications gateway and accessories increased as a percentage of revenue compared to our prior quarter. Non GAAP gross margin for the Q3 of 2018 was 32.8% compared to 30.5% for the 2nd quarter.
We are pleased with the continued progress that we have made expanding our gross margins. The increases reflect the targeted initiatives of our pricing management, transition to IQ7 and the $3,300,000 milestone achievement from an IQ8 partner. We continue to be impacted by component shortages, which negatively affected our Q3 gross margin by approximately 2% due to expedite fees. Non GAAP operating expenses were $18,600,000 for the Q3 of 2018 compared to $19,000,000 in Q2 $16,900,000 for the Q3 in 2017. GAAP operating expenses were $25,600,000 for the Q3 of 2018 compared to $23,300,000 in Q2 $22,400,000 for the Q3 of 2017.
GAAP operating expenses for the Q3 included $3,700,000 of stock based compensation expenses, $2,600,000 of restructuring expenses and approximately $700,000 of acquisition related expenses and amortization. On a non GAAP basis, income from operations was $7,000,000 compared to $4,100,000 in Q2 and a loss of $102,000 in the year ago quarter. This improvement in operating income for the year ago quarter is reflected of our hard work and underscores our commitment towards establishing a solid financial foundation. On a non GAAP basis, net income was $4,600,000 resulting in basic earnings per share of $0.05 and diluted earnings per share of $0.04 Now turning to the balance sheet. Inventory levels were $17,900,000 for the Q3 compared to $17,500,000 in the 2nd quarter and $25,300,000 in the year ago quarter.
We ended at 30 days of inventory on hand as of September 30, up from 30 days last quarter and down from 38 days in the year ago quarter. Inventory management remains one of our key cash management initiatives in 2018. We exited the quarter with a total cash balance of $116,200,000 compared to $58,500,000 in Q2. The Q3 balance includes both net proceeds of approximately $62,700,000 from a convertible debt offering and a payment to SunPower of $15,000,000 We generated $6,800,000 in cash flows from operations as well as approximately $11,900,000 in positive adjusted free cash flow. The $6,800,000 in cash from operations in Q3 would have been $12,800,000 as we allocated $6,000,000 out of the $15,000,000 payment to SunPower in operating cash flow for the acquired customer relationship intangible.
Now let's discuss our outlook for the Q4 of 2018. We expect our revenue for the Q4 of 2018 to be within a range of $80,000,000 to $90,000,000 Turning to margins, we expect GAAP and non GAAP gross margin to be within a range of 31% to 34%. Note that our Q4 gross margin guidance includes approximately 2% of higher expedite fees resulting for industry wide component shortages. We expect our GAAP operating expenses to be within a range of $25,000,000 to $28,000,000 including a total of approximately $7,200,000 of estimated stock based compensation expenses, additional restructuring expenses and acquisition related expenses and amortization. We expect non GAAP operating expenses to be a range of $18,500,000 to $20,500,000 With that, I will now open the line for questions.
Our first question comes from the line of Colin Rusch with Oppenheimer and Company. Your line is now open.
Thanks so much guys. Can we break down that $10,000 per home opportunity? How much of that is energy storage and Ensemble? And then can we break it down between what's hardware and what's actually software and service type revenue?
Yes. So Colin, today we ship a microinverter system that is roughly on the average $100 This includes a microinverter, the Envoy, the combiner box, the cable. And usually, there are 20 microinverters per home. So that makes it a microinverter system is about $2,000 per home. When we go to the home energy management system powered by Ensemble, we are now talking about additional storage.
And then we are talking about an automatic transfer switch in addition to our usual combiner box and we are talking about software. So if you think about it, for let's say for anything from 8 kilowatt hour to 10 kilowatt hour system, you're right that the storage will be the $8,000 the storage plus ATS. And even then, we are only scratching the surface because the we are which we are still thinking about it, but we are thinking of having a yearly software fee there, which can be rolled out through our IoT system via the cloud. So you're right, it's at least $10,000 and we expect to get more.
Okay. And then just on the component shortage, obviously, you guys are working through the issues on this. But how can we expect that to start flowing through over the next several quarters in terms of your ability to actually serve the revenue or the opportunity that think you have in front of you with your customers?
I mean, to just stepping back and looking at it, the supply shortage is on the high voltage about the general suppliers who make it are a handful. They are basically STMicroelectronics, Infineon, Alpha Omega Semiconductor, ON Semi, Toshiba. These are the usual suspects. We have done our homework. We have 3 of these 5 suppliers on our ABL today.
Despite that, those guys are facing unprecedented demand due to EV charging. So their demand exceeds the supply that they have. We recognized this problem about 6 to 8 months ago. I invested money creating a dedicated line for us to create capacity and that line is coming on board in January of 2019. So I expect majority of my supply problems to be gone in Q1 of 2019.
Okay. Thanks so much guys. I'll hop in the queue.
Thank you. Our next question comes from the line of Brad Meagle with Williams Trading. Your line is now open.
Hey, guys. Thanks for the question. So just to follow-up on the power the line that you're bringing on, I guess, is the power of Mosshead line exclusively? Or can you talk more about how broad the shortages are and what capacity you're bringing on? Thanks.
Yes. To I mean, to basically give you a color, we walked away from $10,000,000 of demand in Q3. And at this point in time, we are fully booked for Q4 to the guidance that I gave you. And it is only November, early November right now. So, obviously, the demand is outstripping supply from our end.
In terms of the investment with the supplier, I'm not going to provide too much of details, but all I can say is that we are switching to that supplier as our preferred supplier and they basically have given us assured capacity. They are a very reputed, very reliable supplier and we expect to between that source and our existing other two sources, we expect to have more than the available demand that we need. So I expect the problem to be gone in Q1 of 2019.
Okay. Could you elaborate at all in terms of whether it's generally within the industry, just the specialty memory shortage as well or is it really the power MOSFETs, capacitors, passive components primarily?
Yes. I mean, look, the power MOSFET 600 volts is by far the biggest shortage. Yes, there are problems on MLCC. Everybody knows that, but we have been able to resolve that through spot It affects our gross margins by a couple of percent, as Eric said, but we are getting by there with the shortage of MLCCs. But the high voltage transistor FETs is an esoteric device.
It's made only by the 5 suppliers I said. And therefore, that's a little bit more complex. And like what I said, we believe we are putting the right actions 6 to 8 months ago and the capacity is coming on board now. It is at the right time and I think this should be behind us soon.
Okay. Thanks. On a separate topic, could you talk about your being sold out for Q4? What's your visibility into the Q1 at this point? And could you share some thoughts generally on 2019 revenue growth and opportunities that you're looking at?
Thanks.
Well, we are not we don't give guidance normally for more than a quarter out. But in general, I'll give you some color on 2019. Our 4 vectors for profitable growth, they are turning on. IQ7 is catching on. Our balance sheet is very robust now and that is enabling customers to come back to us, especially and you already know about the SunPower transaction.
So that is going to add about $60,000,000 to $70,000,000 annualized in the second half of twenty nineteen. Then we have other relationships on the AC modules. On top of it, we are introducing high power and high performance products that are high gross margin as well. The biggest icing on the cake is Ensemble. Ensemble, solar and storage.
If of course, new product development is always very complicated. You can hardly predict the exact timelines you're going to get. But if we are on track there, which we are right now, our revenue per home is going to increase by many folds and that can be transformational for Enphase.
Thanks. And the second part of that was just around the Q1. Do you think the supply problem gets better in the Q1? Can you grow your amount shift based on that? And are you sold out on the Q1 already?
Or what's your visibility into the quarter?
Yes. I mean, like what I said, I'm not going to provide guidance for Q1 of 2019. But like what I said, our balance sheet is robust. We really feel good. Customers are coming back.
Demand is strong. I'm fully booked already for Q4 and this is only the beginning of November. I still have 2 more months If customers order, they are going to go to Q1 by default. So we feel good about Q1.
Thanks, Badri. And last question is just and thank you for the time. We've heard reports, we do a lot of surveys and checks with installers and a lot of discussions we've had indicate that the SolarEdge failure rates are in the 10% to 15% range as compared with I think you're in the 0.2% range. And this drives warranty reserves. And so it has created a lot of speculation on whether how appropriate warranty reserves are.
So is there ever a point where you can share what your failure rates are with us, so that we can back into those numbers more precisely?
We are not going to be talking about competition, but I'll talk about our strategy. We our quality business process is something which I learned from my previous company over the last 21 years. And that is based upon what is called the root cause corrective action methodology. And that is you review your quality failures every week, you look at the root cause, you ask yourself 5 whys, you put in containment actions in place, you put in interim corrective actions, you then look at permanent corrective actions and then you change the culture of the company so that everybody reacts to quality in the same way and it is number one priority. That's what we are trying to do here at Enphase.
So my target personally is to get to 500 PPM. 500 PPM is 0 point 5%, if I'm doing the math. So that is my target to get to 500 PPM. And we are working day and night to achieve that target. We have a great leader in place on quality.
And like what I told you, we engage in root cause corrective action to fix the problems. Excellent. Thank you. Yes. Thank you, Brett.
Thank you. Our next question comes from the line of Eric Stine with Craig Hallum. Your line is now open.
Hi, everyone.
I was just wondering on the guidance, the revenue range wider than normal. So just curious, I mean, is that in place? Is it all component shortages? Or is there some other factors that are driving that it's a $10,000,000 range?
That's a good question. I deliberately did this because our supply situation is a little bit like what I told you, we are short of supply, we are getting good news every day, sometimes we get some bad news every day. So we thought we should guide to the right range for you and I felt that range was $80,000,000,000 to $19,000,000,000
Okay. And then in terms of the 30, twenty ten, just doing the quick math, it looks like a little bit the midpoint or a little bit above on revenues would get you to that 10% level for op margins. I mean, below the revenue line, can you just talk about some of the puts and takes that get you to the high end of that range?
I mean, you're right. That's exactly how we are thinking about it too. The gross margin around that range, 32.5 is the midpoint of guidance and the OpEx in the midpoint of guidance gets us to 30, 2010. And the way I want you guys to think about 30, 2010 is that our target operating model. And sometimes we may be sometimes we'll overshoot gross margins, sometimes we'll under shoot gross margins and you should really go by the guidance there.
But that's our model, that's what we are sticking to. In terms of our OpEx, for example, we are restructuring the company to achieve 20% OpEx. What does that mean, right? As customers come back to us, we have a strong balance sheet, customers are coming back to us. We are starting to grow top line.
We're starting to invest in Ensemble. We don't want to I mean, we want to still be very careful on OpEx, which is why we have made the decision to have the right people at the right places. And therefore, we are shifting majority of execution teams to India and New Zealand to control costs. While we will add selected strategic talent in the U. S, India and New Zealand will be a massive base for us in terms of controlling the OpEx.
So that way we are confident that 20% OpEx model is the right long term model for us. So that explains to you 30%, 20%, 10%.
Yes. Okay. Thanks for that. And then last one just for Eric, just to clarify, I missed it. The milestone payment in the Q3, the amount that that was, and then is that something that you expect to get as well a 3rd milestone payment in the 4th?
Yes. And it will be $700,000
Okay. And what was the I'm sorry, what was the 3Q number?
3Q, 3.3.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Philip Shen with ROTH Capital Partners. Your line is now open.
Hi, everyone. Thanks for the questions. First one is on pricing. Can you talk about how much you may be passing pricing on, how much higher is pricing in Q4 in the U. S?
And then how much do you expect to raise pricing in Q1?
So, Phil, with regarding the tariffs, you know that we had the 10% tariff, 301 tariffs effective September 24. And basically what we communicated to our customers is, we will absorb a portion of that while we will pass on a portion of that. So roughly that is actually equal. For each about 3% to 4% price increases to customers in Q4. Q1, we don't yet have visibility whether the tariff is going to be a 25% tariff or not.
So in the event it is 25%, our strategy will be very similar. We will share the cost increases with our customers.
Okay, great. And then as it relates to the SunPower volume, you made it very clear what the revenue contribution can be in the back half next year. But to what degree, how much ACM volume could you see in Q4 this year and also in Q1? My sense is your volumes might be ramping up decently. Is it possible to share what kind of mix ACM for SunPower might be in Q4 and or Q1?
Thanks.
Yes. Q4, we are starting to ramp. We expect volume shipments in Q4. Q1 will be a really nice ramp. I expect to get most of it in Q1 and we should complete the ramp by Q2.
Okay, great. And then as it relates to, I know you can't provide guidance, but in the event that we have a 25% tariff on the 301 and in the event that you raise pricing in the way that you talked about, suffice to say, do we expect do you expect margins to be roughly in line with what you are experiencing now? Is there some degree of maybe even upside with the price increases? But if you can talk about what the Q1 margin might look like or even the cadence as we go by quarter through 2019, that would be really helpful. Thanks, Bhajan.
Yes. Okay. Thank you, Phil. So we don't guide to our gross margins in Q1, but I will give you some color. In general, we are making a lot of progress on gross margin.
We are working on costs day and night. We are working on this architectural innovation. We are working on accessories, dropping our overhead. In addition, as we transition And like what I said, Dheeraj, this And like what I said, Dheeraj, this is the solar industry. We have 201, 201, we have 301, I'm not sure what comes next.
So obviously, we are cautious, but we really feel good about gross margins.
Okay, good. That's great color. And then finally, in terms of that partner for IQ8, can you give us a little bit more information on that? I know you introduced it last quarter. When do you expect commercial business to come from this partner?
Can you share more about this partner? In what country this partner might be based in? And then beyond them, are there opportunities similar to them that could be in the near term, call it the next 6 months to 1 year, that could be supportive as well? Thanks.
Right. While we cannot give too many details. The opportunities are outside the U. S. That is 1.
And the partner is currently doing field trials with our off grid version product. And we have completed all the safety certifications. So we do expect a ramp in the first half of twenty nineteen, yes, as I said. And with regarding other opportunities, yes, we are bullish about other opportunities, especially in regions like where I am from. In my hometown, in my city, there is no power for 8 hours a day in summer.
I mean, those are the places where it can actually really help. Off grid solar and storage will be a game changer for India as well. Of course, granted we need to work with a partner there too. I mean, the opportunities are big there.
Great. And one last follow-up on that. In terms of the ramp in the first half next year, can you quantify that in any way? Are we talking about tens of 1,000,000 or single 1,000,000?
I can't quantify it. I cannot quantify it yet, Phil. No. Okay, great. Thanks for all
the color, Badri. I'll pass it on. Yes. Thank you.
Thank you. Our next question comes from the line of Carter Driscoll with B. Riley FBR. Your line is now open.
Good afternoon, gentlemen.
So of the $10,000,000 that you think you couldn't satisfy this quarter, do you think that was a lost opportunity went to competitors? Could it have been pushed out? And then at all, if you could either qualify, if so, maybe the mix of customers that were not able to be satisfied with that, either regionally or by type?
Yes. I mean, the $10,000,000 was evenly spread between both long tail as well as the Tier 1 customers. They are going nowhere. They are going to stick with us and we are going to service them in Q4. Okay.
Okay. Excellent. Can you talk about if you could quantify the kind of tariff mitigation impact from Flex in 2Q relative to your pricing strategy in 4Q and 1Q? I mean, do you anticipate you would be able to lower your prices in response to having Flex up and running or would that be an incremental margin add?
Well, first, I'll answer the question on Flex. Basically, we expect the Flex capacity to come on board in Q2 of 2019. In Q2, we expect to service 50% of the North American demand from Mexico. In Q3, we expect that 50% to go to 90%. We have already put the additional capacity in terms of capital.
We've already invested the capital for that. With regard to your question on pricing, we are going to look at the pricing environment at that point in time and we'll make a decision that is right for our customers. Okay.
I think you guys
have talked about when you were not in a stronger financial position just a couple of years ago that relationships with the Tier 1 installers was more transactional. Would you characterize it as moving towards more of a relationship? Or have you achieved any of those longer term relationships or solidified them? Is that a fair statement now? Or would that be still an unfolding process?
I would say it's work in progress. And the reason I say work in progress is we have started the discussions What the Tier 1s love is the Ensemble product. The Ensemble solar and storage is a game changer for anybody. It provides a clear value proposition, AC marketplace, a complete solar and storage solution, a grid agnostic solution and that is difficult to get from anybody else in such an elegant form. So the discussions with Tier 1s are progressing very well and we'll announce more when we are ready.
Okay. Maybe just two quick ones. You see anyone anywhere close to maybe not with an integrated level, but offering something similar to Ensemble at this point or in next quarter or 2, hearing you may have to try to cobble something together?
This is Raghu. We cannot say for sure, but if you look at architecturally how we are built, we are it's a microinverter based, heavy on semiconductors and leveraging Moore's Law. And all of it is built around, like I said, a custom ASIC, which is a 55 nanometer technology with an ARM core embedded in each one of those ASICs. So it uses it's a very high speed architecture that performs very complex computations and manages this AC bus or this AC marketplace at an extremely high rate. So architecturally,
we don't know, but I
mean, I think it's going
to be challenging for the string inverters. However, as we get the product out into the marketplace, I think we'll know more. I just want to say that our architecture is quite unique and it's built around semis and software, and I think that gives us some very unique capabilities that we are leveraging to release the Ensemble technology. Okay. Thank you, Raghu.
And then just
last one, is any noticeable incremental spend in S and M for the rollout of Ensemble? Just because you're going to different geographies or there's different tape outs to give product early product to some customers or just trying to get a sense of what that might be the OpEx line?
Well, in general, we are adding more sales and marketing heavy hitters across the board. And that is true in general, because as we grow our top line, as we introduce complicated products like Ensemble, it is more of a solution cell. It's more of a technical sell. So we are adding heavy hitters there. I expect we will continue to add incremental talent in the sales and marketing side, but you still need to think about our long term OpEx model at 20%.
Yes. Excellent. Okay. I'll take the rest offline. Thanks, gentlemen.
Our next question comes from the line of Amit Dayal with H. C. Wainwright. Your line is now open. Amit Dale, your line is now open.
If your line is on mute, can you please unmute your line? Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.
Thanks for taking the question guys. You referenced the SunPower exemption for the 201, and my understanding is there are some additional rounds of exemptions that have yet to be granted. Is there any sense of what has been the reason why yours has not been processed to date? Is it just administrative slowness? Or is there something substantive that has been impeding the process?
We don't know this, Pavel. So we don't have an answer.
Okay. Any guidance on when you're anticipating or when you're being told this process will run its course?
Well, we have stopped expecting something. But on the other hand, the way we are sidestepping this problem is by engaging I mean, the partners are actually building factories in the U. S. So we are sidestepping this problem and I think it's not a big deal for us in the long term.
Okay. I hear you. Let me ask a quick one about the battery. You've been selling the kind of 1st generation battery product, I think for about 2 years now. With those sales having moved, I imagine, fairly slowly, What are the learnings or lessons that you've gleaned that will influence how you're going to go about selling this integrated solution going forward?
Yes, it's pretty simple. We have shipped over 25 megawatt hours till date on the ACP 1.0. The main target markets have been Europe as well as Australia. The good so let me tell you the good. It's an in phase system, so you can expect the high quality and easy installation.
It is also very highly modular. It can be scaled very easily. If you want to build a 3 kilowatt hour system, you have to buy 3 of those, string it together, you're done. On the other hand, the negatives are 2. 1 is we've been told that although we do value based pricing, our prices are high.
That's 1. Number 2 is it doesn't support backup. And I'll add a third one, the capacity of that system is quite low. So we are solving all of these problems and we are basically building 10 kilowatt hour system and a 13.2 hour system, while still keeping the modularity of 3.3 kilowatt hour building blocks. That's what we're doing right now.
All
right. Appreciate the color guys.
Thank you.
Thank you. Thank you. This concludes our question and answer session. I would now like to turn the call back to Badri Gautandaraman for closing remarks.
Hi. Thank you for joining us today and for your continued support of Enphase. I look forward to speaking with you again on our call next quarter.
Ladies and gentlemen,