Good morning. Welcome to the Enphase Energy Analyst Day. Our theme of the presentation today is Profitable Top Line Growth. Let's get started. Can I have a clicker? Where is that? Here. Standard safe harbor disclosure. The agenda for today, I'll get started with an overview and how we are going to grow profitably. We have a special topic. I'd like to introduce the CEO of Sunnova. He's at the back of the room. His name is John Berger. He's going to talk about the partnership with Enphase. Raghu, our Chief Products Officer, is going to cover Ensemble Solar and Storage. We'll have a small break. Jeff McNeil is our VP of Customer Experience. He's going to talk about the initiatives in quality and customer service.
Eric Branderiz, our CFO, is going to talk about how we are building a solid financial foundation. We expect Q&A to last for 45 minutes, if things go on schedule, we will end at 12:00 P.M. You guys will get lunch here outside from 12:00 P.M. to 12:30 P.M. We have two lab tours for you. One is you're going to see Ensemble, both solar and storage, the real products in action. That's the first lab. The second one is a tour of our reliability and quality laboratories. Okay. Those will take roughly 30 to 45 minutes each. If those go on plan, which they should, we should all get on the bus to go to the winery. Sounds good? All right, let's get started.
Enphase, you guys know we are the number one microinverter company in the world. Our mission is to deliver technology solutions, making clean energy affordable, reliable, and accessible to all. Who are we? We are a power electronics company, we are a semiconductor company, we are a software company, and we bring everything together with connectivity. In short, we are an Internet of Things systems company. The reason I came to Enphase about 18 months ago, I was fascinated how such a complex system comprising of more than 300 components, had the ability to be software-controlled and connected to the internet. When there were buzzwords called IoT being used at that point in time, Enphase was actually doing it. I was running the IoT division at Cypress Semiconductor. It was a chip company, but this is much more complicated. Right.
That's why I came here. If you see here, we have shipped about 17 million units till date. Every one of those units can be accessed. Me sitting at my desk, I can roll out updates to the performance of those microinverters just sitting in my office. That's the power of Enphase. The software platform that we have, the connectivity that we have going from the home through Wi-Fi, to our solar communication system. In fact, communication happens through the power line, through the AC power line, going to the microinverter. Yep. Our market share is number two today. We ended 2017 roughly at about 25%-28% market share, that was prior to the SunPower Microinverter business acquisition. With that one, if I were to do a pro forma market share, that would be 35%-38% in the U.S. Okay.
The way you should think about it is, these 17 million units are on 790,000 homes. Each home, about roughly 21 microinverters on the average. Okay? That's the way we think about it. Of course, 838 megawatts shipped and $286 million in 2017. The total number of employees is 385, and our employee demographics are changing. I'll explain to you more in the next few sections. Now that I told you we are a software company, we are a semiconductor company, we are a connectivity company, we are a solar company. Management has deep semiconductor and solar expertise. I've been in the semiconductor industry for 21 years. I came from Cypress. Eric Branderiz. Eric, stand up. He joined us from Tesla. Prior to that, he was at SunPower. Prior to that, he was at Spansion.
Energy company, solar company, semiconductor company. He's just been here a couple of months, and it feels like a long time already. Raghu is our Chief Products Officer. You guys all know him well. He's the face of the company. Both Raghu and Martin are the pillars of the company. Dave Ranhoff. Dave, stand up. Dave is our Chief Commercial Officer. He joined us in December of last year. Again, he has got a rich experience of solar, plus semiconductors. The last one is Jeff McNeil. I got him in February of 2018. Jeff, stand up. He comes with 35 years of experience in the disk drive industry, semiconductor industry, and now solar. We were in trouble on customer service, and I got him on board, and he'll talk to you on the transformation that he's making there. Okay.
Let's jump right in. What is Enphase's strategy? Four components of our strategy: 30/20/10, which you guys all know because I keep beating it a lot. Right? Everybody should be familiar with 30/20/10. 30 stands for 30% gross margin, 20 is 20% operating expenses, and 10 is 10% operating income. That's the company's operating model, 30/20/10. When I came to the company, I came in April, we went to the Analyst Day last year, June of 2017. I met many of you there. At that time, we introduced the concept of 30/20/10. I said we will get to 30/20/10 in Q4 of 2018. I think we are well on our way there. We have made a lot of progress as a company. I'll show you that. We are well on our way there.
This is something that we will always follow, no matter what business we enter. We are going to enter the storage business, as you can see. That business will follow this model. Okay? This is ingrained in our DNA. This is how we manage the company, operationally. The next one is profitable top-line growth. Yes, we have spent a lot of time in 2017 managing things operationally, fixing the ship, and we had to do that at that time. Beginning of 2018 onwards, we are starting to shift our balance towards growth. What are the business processes for growth? I'm spending a lot more time there with the sales force, with customers, with partners like Sunnova. I'll talk a lot more there. That's number two. Number three is build world-class customer experience.
In a blog to all my employees at the beginning of the year, I said we have three priorities as a company. We have to improve customer service. We got to get better at it. That's ease of doing business, is what I call. The second one is get the IQ 7 transition done. The third one is get Ensemble out. Those are the three simple priorities I outlined to the company. Customer service is directly on my goals. In fact, I take at least 20 points out of 100 points on customer service, to improve the way customers perceive us. That's why I brought Jeff McNeil in. Solid financial foundation. We all have lots of ideas for growth. As a management team, both Eric and me are a little bit conservative. We, therefore, want to take cash off the table.
We want plenty of cash to run the company. We don't want to worry about cash. Whatever we do, our job is to create a real solid financial foundation, so we have a lot of options on whatever we want to do. That's how we want to run the company. Let's talk about 30/20/10. Again, these numbers, A, B, C, D, corresponds to each of the components. Let's talk about component A. Okay, component A is basically financial turnaround. Is a financial turnaround. As you can see, we have done a decent job in the last 18 months. Our gross margin has gone up from 13%-30%. From Q1 of 2017 is the blue bar, Q2 of 2018 is the orange bar. Gross margin has improved. Operating expenses have come down. Operating income has improved.
Cash has improved due to the $20 million equity investment. Plus, we have started generating free cash flow in the last two quarters. Okay? We are starting to do better, and we are well-positioned to make our numbers. Marching towards operational excellence. If I talk about gross margin, how did our gross margins get better? Three things: supply chain optimization, new product transition, and pricing management. For supply chain optimization, for example, when I came to the company, we didn't have a business process for managing costs. All I did was to create powerful cross-functional teams, which has involved the engineering team, the architects, the procurement guys, and strong program management. We started hammering on costs. In a lot of areas, we did not have multiple sourcing, so we went to multi-sourcing in those areas.
We didn't understand our suppliers really well, so we had a strategic supplier selection process. We did not understand the grounds of stack-up cost of each component, so we went to what is called a physics-based costing. We were focused a lot on the microinverters and had neglected accessories, which is a significant part of our revenue, so we started focusing on that. The last one is overhead. A lot of the companies don't pay enough attention to overhead. The overhead can be as high as 10% of your revenue. It comes from not managing inventory properly, having too much scrap, having a lot of warranty expenses, having your returns that actually come back. They are very expensive. Freight, logistics. Many companies neglect these. We started bringing all of these into one place in the P&L and started managing those.
It's really a transformation on how we started managing costs. That's what I call a supply chain optimization. On the new product transition, all of you know it, IQ6. Last year was about IQ6, this year is about IQ7. As of today, or as of Q2, we were about 22%. 22% of our shipments in Q2 were IQ7. I expect at least 65% in Q3, if not more. We expect to complete the transition in Q4. Okay. I talked about supply chain optimization to improve gross margin. I talked about new product transition to improve gross margin. The next, obviously, is pricing management. Pricing has evolved from transactional-based pricing to value-based pricing. What does it mean? This graph shows our system ASP, system pricing. Here you have the number of quarters.
When I talk about system pricing, I mean microinverter system pricing. Microinverter system pricing means the microinverter, plus the cable, plus the communication system, plus a bunch of miscellaneous accessories there. That all amortized with respect to the number of microinverters that we ship. That is the system pricing there. What are we doing on the pricing side? We started with transactional control. What does that mean? Pricing is complicated. Some customers are large, tier 1 customers. Some are long-tail customers. The number of long-tail customers is a lot, therefore each transaction needs to be optimized there. Very often, we were not able to service some valued customers because our costs on IQ6 were not good enough. We had to walk away from some businesses, that required a lot of discipline for us. We managed to do that.
The segmentation is another one, which is, a product like AC module, product like a high-power product, like the ones that we created for SunPower and Panasonic. Those intrinsically have a good cost structure. The nice thing about the microinverter is, the value that I create in increasing the power from 300 to 330 watts of AC, is much more than the incremental cost I spend to creating that. For us, our architecture is amenable and is advantageous as we go to higher and higher power products. I'll show you what our future looks like there. Of course, AC module. When somebody goes to AC module, the advantages are obvious for the installer. Segmentation in terms of higher power and AC module products, these have intrinsically higher gross margin for us. Services and software.
This is an area where we are just scratching the surface. Things like, we have started licensing some APIs. We have started introducing enhanced version of Enlighten Manager for homeowners to have more control on their per-panel views. We have started introducing the legacy upgrade program that I talked about. That's for the future. We are starting to see promising results. Although our service and software revenue is not significant to break out right now, I'm confident it will be soon. That revenue has tripled to date compared to last year, and will triple again in 2019. We like that because that's nice gross margin. The last one is, of course, products like Ensemble. As we get sophisticated in doing transactional pricing, then doing segmentation, then going to services and software, Ensemble is the right platform for that.
Ensemble, the amount of software in that platform, the amount of control in that platform, is amazing. That's the right business model with Ensemble. We'll start to see more and more of that, these two overlap with each other. Investing and reducing our expenses. We have dropped our OpEx from, in the 2016 timeframe, we were about $27 million-$28 million a quarter. Now we are at about $18 million-$19 million a quarter. We had to make some difficult decisions about 18 months ago, where we had to do a lot of restructuring. That's long behind us. The way we'll run the company is we will not sacrifice or we'll not compromise on innovation.
Our differentiation, or our products that we do, our value drivers of our software and semiconductors, we will not compromise on anything we have to invest in order to make that happen. In order for us to, at the same time, meet what I promised, which is 30/20/10, operating expenses need to be at 20% of revenue. What we are doing is to have the right people at the right places. For example, India, I have all my execution teams in India. Last year, this time, India had zero people. Now I have 100 people there. I'm starting there, yet my OpEx is under control, and I can get high quality talent. At the same time, it's cost-effective. Okay? I can do everything I need while I can go and add people in the U.S., in targeted skills, which is what I'd like to do.
2016, bottom line, was about fixing operations. The company was not in a healthy state at that time, and we focused on gross margins, we focused on operational excellence, and we steadied the boat. That has changed now. We have started to focus on top line. The problems in general, if I were to categorize these problems, we didn't service valued customers because of high costs. We didn't do that well in the last couple of years. We missed out on storage because we didn't have the right product. The product, too small a capacity, high cost structure, did not have backup. We didn't do that well in the storage market. That's not a secret. I've told this publicly. The regional gaps. With IQ 6, we could only stay in the U.S.
IQ 6 was, in hindsight, we should have done a better job there, and we didn't. IQ 6 enabled us to only be in the U.S. It was difficult for us to expand outside, and we didn't have the platform to expand outside. Every product, we had to create a lot of SKUs if we had to expand, which is not the wise thing to do. We never had a product comparable to Panasonic or SunPower. These were the mistakes the company made. Not having a good strategy for regional expansion, not having the right storage product, not having product for 96-cell panels, and having high costs. Those were the problems. We have addressed a lot of these problems, and I'm going to show you how we are going to address a few more. Again, what we believe is product innovation, differentiation, creating value.
That's Enphase. With that, let's jump into profitable top-line growth. Before we go right in, let us understand the market. The residential solar market is an attractive market. As you can see, it is stable. It is growing at a 10% CAGR from 2016 to 2022. The growth is expected in all regions. North America growing, Europe growing, India growing, everything is growing. Our addressable market today is roughly about 40%. 12 GW, roughly 40%, is about 5 GW. That's our addressable market. With IQ 7, we have improved. We have more addressable market now in Europe, with Germany and Austria. Then we have a little bit more in Latin America, with Brazil. We have a product that is cost competitive for India with IQ 7. Going forward, 2019 will be about, of course, growing in the regions where we are present.
In addition, enter into more regions in Southeast Asia. 2020 onwards, we are looking at Japan. Okay. Again, the way to do this is, regional expansion, I talked about it. If we were to design a SKU for each region, we are going to go out of business. We just can't do that. The way to doing it is to have one hardware platform and a completely software configurable platform that will enable me to crank out solutions for every region to be compliant. That's how we are going there. That's what I call the regional expansion. Then with AC modules, we are partnering with more module partners across various regions. That'll actually help us. With Ensemble, we are going to be addressing a huge untapped market in India for weak grids, and in Africa for no grids.
In addition, with the help of partners like Sunnova, we are going to target the island countries here, which will be an obvious choice, too. Bottom line is we have the right products to address this market, and we'll talk more about those products. Storage, here it's pretty simple. We made some mistakes in storage. We didn't have the right product. Too small, too high cost, didn't have the right features. That has changed. You will see today in your lab demos that we have a high-capacity storage product. I don't want to steal Raghu's thunder, but you're going to see that, and that can be controlled by home automation. Okay. Just to briefly talk a little bit about the market. The market is growing really nicely, 34% CAGR. Most of the systems today are based on lithium-ion chemistry.
The key requirements are cost, safety, reliability, and self-consumption. People want to all basically control their energy consumption, and solar plus storage is an ideal combination for that. Especially with Ensemble, which can produce solar in the absence of a grid. You have solar during the day and storage at night, and you can be grid-independent. That's the vision. Again, we are well-positioned to capitalize on the storage market growth with Ensemble. Now let me talk about software. Software is a big value driver for Enphase. We talked about the market, we talked about solar and storage market. Now, what is unique about Enphase that we are well-positioned to capture this? It is our software skill, our semiconductor skill. Sitting in my office, like what I said, I can improve the performance of the microinverter. How can I do that?
I can roll out software that goes to the cloud, that goes to the solar communication system through the homeowner's Wi-Fi. From the communication system, goes through the power line, AC power line, into the microinverter, update the flash memory inside the microinverter, set the flash memory to a new configuration. That configuration is taken by our ASIC. The ASIC is application-specific integrated circuit. That is the brain of the microinverter. The ASIC takes that setting, the new setting, and it can transform power control. It can be a totally different beast than what it was before. All I did was, with a simple click of a button from the cloud, I can make a change that can transform the behavior of my microinverter. That's the power of the software platform. That's why it's a huge differentiator for Enphase.
For example, if we learn something on a better way to update the firmware or to fix the firmware to account for a quality issue, we can immediately roll that out to all of the microinverters in the world. In a sense that the state, the learning from the factory is instantly transferred to the field. That's not easy. It's easy because all our systems are IoT systems, Internet of Things-connected systems. Software is a huge deal for us. It is this software-defined architecture that enables us to enter into new regions with a single hardware platform for IQ 7, for example. All of the advanced grid functions, for example, are all configured in software. The next is the ASIC. ASIC again stands for application-specific integrated circuit.
I come from the chip industry, this is obvious to me, but it may not be to others, is Gordon Moore, he founded Intel, along with Robert Noyce and Andy Grove. Moore, he invented Moore's law. What does Moore's law say? The number of transistors in a chip doubles every 18 months. What does that mean? Is the chips are going to get smaller and smaller, more functionality is going to get packed into it, and everything is going to get small. Right now, our ASIC right now for IQ 7 or IQ 8 is in 55 nanometer technology. We are not going to stop there. It's going to go to 40 nanometer, it's going to go to 28 nanometers.
Five years down the line, this will look smaller, it'll have a lot more functionality, and it'll help us to reduce the microinverter from having 300 components today to 50 components. It's going to happen over time. Over the next five to 10 years, that's our vision. We want to make the microinverter smaller, lighter, more power, that's possible because of advances in semiconductors. There are lots of new technologies coming, like gallium nitride, for example. That'll enable the current carrying capacity to be a lot higher with the area a lot lower. That's why our technology is completely different from others. That's why it's difficult for others to copy us. Ours is a chip-based architecture. Every generation, we try to reduce the number of components by 6%-10%. The way we do that is to integrate those components into the chip.
Eventually, like what I said, when I said my vision of 50 components, it might have three or four ASICs in there. One for digital, like here, one for analog, one for power. That's our architecture. It is semiconductor-based. Once it is semiconductor-based, miniaturization is the name of the game. That's what we do. If you can see here, we already told you this. In Q1 of 2018, we told you that this chip was working. Typically, we start working on the ASIC 12 to 18 months. I mean, the ASIC is actually, yeah, 12 to 18 months before the microinverter. For example, here, IQ 9, we aren't talking about IQ 9 yet, but the chip team is already working on IQ, meaning the ASIC for IQ 9. That's the power of our platform. It's software plus semiconductors.
Today, the power electronics, which is the rest of the component, that's what I call power electronics in the microinverter. The ASIC is a digital chip that controls the power electronics. Power electronics is controlled by digital architecture. The digital architecture is implemented by semiconductor integration in the ASIC. That's the brain of the microinverter. That's the control. Because it is a digital architecture, nanosecond control enables fast reaction to grid faults or grid problems. That's key. Component integration into the ASIC improves quality and cost. After five years, if I have less number of components, that is good for quality as well. Not only it is low cost, not only it is low weight, not only it is higher power, but it's got higher quality because less number of components, better quality. Everything gets better with miniaturization.
Today, our microinverter is a little bit bigger than the iPhone 8 Plus or the iPhone X Plus. We'd like to shrink it a lot in the next five years. It's not simple to do. It requires architectural changes. It requires new technology innovation in semiconductors, which is happening. It requires us to invent new methods of thermal conductivity. Like for example, today, we have a different case. It's a polymer case. We may have to go to something else, but the semiconductor is the driver of miniaturization, and it'll help us to basically continuously reduce the form factor down. That's the name of the game. Tomorrow, like what I said, fewer number of components, more ASIC integration, new materials that can withstand higher current, provide grid independence.
We can start to think about machine learning, which is again, the software platform, the power of our software platform there. All right. Let's jump into the four vectors for profitable top-line growth. One is blocking and tackling. Now that IQ 7 platform, IQ 7 is out, enter new regions with IQ 7. That's the first one. The second one is along the lines of what we did for high-power products, which is the 320-watt AC product for SunPower and Panasonic, which basically, gives us an outstanding cost structure and creates more value. Along the lines of that, create higher and higher performance microinverters. AC modules, you guys all know this. The SunPower transaction basically puts us a lot forward in this area.
Now a lot of our business will be in AC modules, and more and more partners, especially in Asia and Europe, are coming to us, asking us to do these modules for them. Again, the name of the game here is not, you can't think about this as reducing the cost of the component, but it reduces the installers' costs. We'll talk about that as well. The biggest of this all is Ensemble Solar and Storage. Like what I said, high-capacity storage with grid independence, solar, is going to be a huge vector for us to grow. Ensemble is going to be available. The entire energy management system is going to be available in the first half of 2019 with the off-grid version available in Q4 of 2018, like what I said before. Let's get into regional expansion with IQ 7.
We have penetrated Europe a little bit and then Brazil. Now we are well-positioned to attack the India market, we have added basically a gigawatt of addressable market with IQ 7. With IQ 7 starting to ramp, 22% going to 65%, going to 100% in Q4, we should start seeing the benefits from Q4 of this. Again, I can't overemphasize this enough. The software-defined architecture allows us to enter new regions rapidly. Like what I said, the same hardware and just a different software profile, and it adds, whatever we have done this year, we have added roughly a gigawatt of addressable market. Of course, now we need to make sure that we have the right sales guys there, the right partners to start growing revenue. The next one is high power, high performance. You know this.
We had IQ7 and IQ7 Plus, then we introduced IQ7X, which was the 320-watt AC product for SunPower and Panasonic for both the U.S. We've introduced already for the U.S. We are going to introduce for the rest of the world shortly. Now we are planning for, by the end of 2019, we will have a 425-watt AC product. A little bit beyond that, 2020 and beyond, we are going to have a 500-watt product there. Again, here again, I wanted to make sure you guys get the point is, our distributed architecture means that if I increase the wattage a little bit, if I increase the wattage here by 10%, I provide a lot more value to the installer than the cost I spent, than the incremental cost I spent. My gross margin is, I would prefer more mix of higher power products any day.
That's why the transaction with SunPower is very interesting. AC modules are the future of residential solar. Nothing new here. This is the result of our installer survey. The installers have, some have 20%, some have 40%, so 20%-40% reduction in installation time versus an Enphase discrete solution. The logistics and supply chain getting better by 10%-12%. High quality of installation. See, very often these, fixing the micro to the module needs to be done. Today it is done in the field. It is error-prone, it takes time. Now that's completely taken out of the equation. We are absorbing activities in the field into the factory. Which is why we are saving time and money for the installer. Then, easy training. The lesser things installers have to do, the better it is for them.
If something is plug-and-play for them, that's the easiest. That's how we are going here with AC modules. We have some great module partners, which I'll talk about on the next page. The acquisition of SunPower's microinverter business. That advances AC module as future of residential solar. We closed the acquisition last week. We expect volume shipments in Q4 of 2018, and we expect an acceleration of ramp through 2019. The full potential of business is still $60 million-$70 million per year in the short term, with a non-GAAP gross margin of 33%-35%. Okay. That is the SunPower product with our Enphase microinverter. Okay. Together, the name of the game is high quality, high performance, high quality, easy-to-use Enphase Equinox home solar system. Now let's talk about all of our AC module relationships. We talked about SunPower. Panasonic is still in progress.
The AC module will only be released in early Q1 of 2019. What we have done today is, since we have released the IQ7X product as a discrete microinverter, that's getting paired up in the channel along with Panasonic modules in the channel. We have an excellent relationship with Panasonic, and both of us are working furiously to make sure that gets done fast. This product, Solaria, is already out, and along with Soligent, who's our distribution partner, this product is actually selling today. It's a 355-watt black-on-black aesthetic module. It'll serve the long tail well. Of course, LG and JinkoSolar, we engaged earlier with them, and we do have a few stumbling blocks there primarily because of the tariff. The tariff is being imposed on the entire AC module, and we are trying to solve it.
Many of our module partners have invented their own way out of it. Some of them are actually doing the assembly in the U.S. This is proving to be less of an issue, but it's still, nevertheless, we are waiting for a ruling on the waiver that we asked. The bottom line is this, we will have so many AC modules that we can serve tier 1, we can serve long tail. We are working in India as we speak with two or three guys, which we'll announce shortly. We are working in Europe as well with a few guys there. We'll announce when we are ready there. This is how I see our solution evolving in the future, and SunPower is going to provide a much needed boost here. Because all of SunPower's shipments will be for AC modules. Okay.
Let me come to the last topic in profitable top-line growth, is Ensemble. B4 is B is the profitable top-line growth, and fourth is the fourth initiative there. That is the path to energy independence. Raghu is going to spend a whole section on Ensemble. He's going to talk about the solar and storage. The key driver for Ensemble, Martin and Raghu came up with their original idea for Ensemble is, how can we enable solar energy when the grid is not present, when the grid goes down? That is a major problem. For example, John Berger will tell you stories in Puerto Rico, where because of the floods, there were several hundred thousand homes which didn't have a grid connection. Even though they had solar, that was not very useful. They had no power.
With IQ 8, with Enphase Ensemble, we can change that. Okay? That provides something that has never been there before in the industry, a completely differentiated solution. Ensemble, this gets accentuated with high capacity and flexible storage with backup, which is ideal for the residential market. The concept of Ensemble is the following, that it is a platform which treats everything as a resource and creates an AC marketplace. For example, in a solar, your solar is a resource, load is a resource, storage is a resource, grid, as well as generator. All transactions happen in the AC marketplace, which is why we think the AC coupled architecture for storage is the right architecture because it enables flexibility, scalability, whether it's one house or 100 houses. Community solar plus storage is easy. That is possible because everything is transacting in the AC marketplace.
All right. Let me introduce Sunnova right now. Sunnova has been a strategic partner to Enphase. Their mission is power energy independence. John will talk a lot more about it. They are privately held, leading residential solar and storage service provider in the U.S. They've raised over $2.5 billion in private funding. They've been a really strong Enphase partner and customer over five years. During the times when we had a lot of difficulty, a couple of years back, they supported us during our toughest times. They are more than just a partner or customer. They're more than that to us. We have a great strategic relationship across all levels, highest to lowest levels. The nice thing is we have very strong collaboration on the new products. Because of their extensive experience, they are able to advise the dos and don'ts for us.
With that, I'm going to introduce John Berger, the CEO of Sunnova. John.
Thank you.
Yeah.
All right. Is this on? Okay. Good morning. I know some of you are disappointed in the rumor there was a special guest from Texas, and you thought it was going to be Secretary Perry. Anyways, I appreciate the invitation that Badri and the rest of the Enphase family gave me to come up and talk to you a little bit about what our relationship is with Enphase and what we see in the industry. First, I think, we need to talk about exactly who we are. Sunnova is a service provider. We're a residential-only solar and storage service provider. Way to think about it is, and where we're moving to and what you're going to see is very interesting. Off the charts, I would say interesting, because I'm going to build Raghu up. He's a fellow Aggie. I love that.
He's the smart guy in the room, right, Badri? What you're going to see is basically wireless power. What we are doing here, we're one of the largest out there. We're actually the largest. If you had the top four of the service providers in the U.S., we're the only one that's private. I guess I can say a lot of different things to you guys and ladies that others can't. We operate in other areas that others have not, and it's not just the fad of the moment. Puerto Rico, we've been in Puerto Rico for five years. Got the scars to prove it and can tell you all the stories. We also operate in the Pacific Islands, Guam, Saipan. We just opened over in Tinian. I'll let you all find on a map where all those are.
We intend on going into many other islands. We intend on going into many other markets. Not just the islands. There's the coast. California has a great program with storage. Houston, our headquarters, that's another thing is we're headquartered out of Houston, Texas, of all places. Not California, not the East Coast. The energy capital of the world, and we're trying to keep it that way, is Houston. Houston was hit by a very big hurricane or really a big storm that dumped a lot of water there, and that was another thing we had to deal with. Florida got hit by Irma, the Northeast is constantly was getting pounded, especially Massachusetts and Upstate New York with winter storms that collapsed power lines and so forth.
The idea that the system currently, as Edison put it together, really he wanted to go more distributed, as I think most of you know, that started to be formed and really took off in the early part of last century, a lot of folks like to say is good enough. It's not good enough. Having lived through it several different times, including for those of you, anybody flew through Reagan National last night, you know that's not good enough. What we can do is we can provide different services to the customers that are not available currently. That's what I want to talk about here as we move forward, is power energy independence. This is what Sunnova does across its territories and moving in a global fashion.
What we are doing is we are turning, not just putting some equipment on a rooftop saying to the customer, whether it's a lease, a power purchase agreement, or a loan, you've got a cheaper price of power. Those are the old days. Those are fragmented. That's a product-driven approach. That is, I got to pound the cost out of Enphase and everybody else because I'm just selling a commodity. I founded the company to deliver a better service at a better price. Truth be told, as an industry, the only thing we've been doing is delivering a cheaper commodity. There's nothing wrong with that, but it's not as exciting from an investor standpoint for the industry, and it doesn't bring about the real transformation of the energy business on a global basis as delivering a better service.
All those different services, think about it this way, the current system is everybody gets the same service. You pay the same price, you get the same level of reliability, you get the same features, and you're going to like it, whether you do or not. Oh, by the way, you don't get a choice of what you pay either. What we can do together and change the industry, and I want you to understand that the industry is changing, not going to change the future and all that, although I do want that IQ8 out as fast as possible. I think, Raghu, I've told you that a couple of times, right? It has changed where we can come in and provide different services for our customers.
Two of my colleagues back there, Kelsey Smith, Director of Communications, Public Relations, Michael Grasso, my Chief Marketing Officer, he actually does a lot more than that. They're very busy right now, especially Michael, launching out new products as we take these technologies like Enphase, like what you're going to see and hear about just in a minute from Raghu and see later today about how we can craft new service contracts, how we can sell different services to different customers because there is customer segmentation out there. Most importantly, the days when the monopolies can come in and say, "Aha, if you don't have net metering. Net metering, if I take it away from you, Enphase, Sunnova, Sunrun, all of you're dead." Those days are over. We're already having customers run off grid in Puerto Rico. It's already there.
You're going to see a lot more transform, including my house in Houston. You'll see it where we will not need the grid whatsoever. It's not just batteries. They're a big catalyst here. They're a huge catalyst. It's all the technology that's being developed like Enphase on the leading end of it, that comes together, that enables the technology of the solar and the batteries, the inverters, and everything to work together, not just on the supply side, but on the demand side. What we call at Sunnova is a nanogrid for each customer's home. I come out of the conventional power business. I've run a utility from the control room, and basically what we're doing is we're creating a mini utility for each and every home, and it'll be for millions of homes.
We can aggregate those together and then move in and out of the grid as the market demands, as soon as there's a lot more regulatory openness, which will happen. The market will be driven more by consumers and technology than it has been in decades, and indeed over a century. You want to live as our customer, a life of choice and a life of freedom to have the quality of power, the reliability of power, the cleanness of power, the lowest cost of power that you want. You can live your life free and uninterrupted with this new technology. All this is coming together where we're being able to provide service contracts, like I said, working with our technology partners.
I'm going to point out something here that I know is going to be music to your ears, and I don't want Badri to read this wrongly in any way, before it's all been about cost, pounding it down. What I'm looking for, as he mentioned, I'll pay a little bit more, just a little bit. A little bit more for those features. Why? Because our customers will pay more for those features. If we craft the service contracts together in a go-to-market strategy with our dealers, we're a dealer-only model, by the way. Always been, always will be. I believe in the power of the entrepreneur. I believe that if everybody who's in a local area knows more about what's going on there than I will trying to run things out of Houston. We believe in the power of partnerships.
Enphase is one of those very strategic and core and long-term partners for us. We're taking these service contracts, like I said, we're able to go up and upsell customers. Not only the new customers coming in the door, the old customers. We're upselling batteries now, there's all sorts of different levels of services on the demand side and the supply side that we can upsell our customers. You know what we need? We need technology. Now we're getting the price points down and have gotten them down. Wish there were no tariffs, which I know Badri spoke about that earlier, no tariffs. Practically, solar is as cheap as we need it to be.
We can come in and look to see how we can add more value to the customer, some of that value will be transferred back into the technology providers. Way to think about it is, I'm the army, I'm the service provider. We own the customer, the contract, and the system. They're the arms dealer, they're a very good one, we're going to pay the most for the best technology. This is no longer focused exclusively on just pounding the cost out. It is focused on technology and what does that technology open to us as far as services that we can sell to our customers. That is value. That's a real business. That's a game-changer. On the partnership, I'll finish with this and maybe answer a couple of questions just for me, just because I have to leave later.
I think that we've had a long partnership with Enphase, as I mentioned earlier, and as Badri mentioned earlier. We talked a lot about where we see the market going. I want to emphasize that without the technology partners, we couldn't make these new services happen. We have gone, including me personally, over the last few months, globally. I've literally hopped from country to country to country. There's a lot going on. I told my board in a board meeting last month, I said, "If it feels like a lot's happened since we last met 90 days ago, you're not imagining things. A lot has happened." I think what's not fully appreciated yet is the speed of technological change. Again, what you're about to hear and what you'll see later on, with Enphase leading a charge, is accelerating.
The change in technology and the capabilities are accelerating. They're accelerating at a fast rate. When I started the year, full disclosure, I missed that. I missed the fact that I thought storage was something that people in California, yeah, Puerto Rico, we got that. Yeah, some Pacific Island markets, Hawaii, Guam, Saipan got that. That would be it. I was dead wrong. Every area of the country wants storage. What's happening is, the way to think about it, we've gone from a dumb solar market where we're just swinging off the utility system, using the utility as a battery. The utility's still providing the service to moving in probably we'll have 2 years of this with 1 year already under our belts of dumb solar and storage.
Can't really have 2-way operability, not a lot of features, nothing on the demand side, to moving to smart solar and storage, to complete grid independence. Now, I hope it doesn't come to that in terms of us cutting the cord. If the utilities don't figure out how to cut costs like the rest of us and figure out how to make sure that consumers can choose who they want to provide them power and at what level of service, we will have that technological capability. What you'll hear is we have it now. Huge. Huge value. Take a big question mark of the industry, throw it off the table. It's over. That's what this technology does. That's why I'm here.
What I will tell you is, we believe that there is so much pent-up demand for what you're about to see, again, hear and then see, is that we're lining up to give orders and trying to pull it in. I'm not going to talk numbers and everything else. At the end of the day, what I'll tell you is we're at the verge of really huge growth in the industry, driven by technology like what Enphase has. We're going to experience a significant shift in the business from being a commodity business, all driven by cost and price and so forth, to one that's being driven by service and providing value, i.e. higher margins, i.e. better business. We're going to take out the existing infrastructure in much more rapid fashion than anybody understands today, possibly even including me.
It's an exciting future, but that future is here now, and change is here. Thank you, Badri. I really appreciate. Is there any questions I can answer real fast before I turn it back over? Yes, sir.
What's your revenue or what other inverter companies do you use, and what kind of growth rate do you see for your company going forward?
I don't think I can tell you my numbers, but I will tell you that. What can I say that we've said publicly? We are the only ones that have been EBITDA positive. We've been EBITDA positive for over two years. We do have, I would say, over $100 million of revenue. We have long-term contracts. We do loans, leases, PPAs on balance sheet. We have near 60,000 customers in the footprint. We've been a very good steward of capital. We have a different view of the world in terms of. We love cash, let's put it that way. We love cash. In terms of the other partners, I can't remember their names, but yes, we do have other partners, in terms of providing technology to us.
I will say this, that I think that what you'll see is that the service provider model, so this idea, again, it's a product-driven, I just come up to the customer, and I sell the customer a bunch of panels and inverter, and then I go away, and I don't even have a service contract associated with that, in terms of operation, maintenance, monitoring, things go wrong. That is over. Those days are numbered, if not over. What we'll see is that there's going to be a small number of service providers like you see in cellular, like you see in satellite cable television, and even home security has a fairly big concentration of large number of service providers, because there's inherent high operating leverage in that.
The flip side of that is, what I will see is that once the whole storage and control electronics and so forth kind of passes through here, I do feel like you'll have a handful of winners. Obviously, I think you know which one that I think will be one of the winners here because I'm here today.
You need to add your other suppliers in?
Yes, sir. We do.
Hi, Bradford Meikle, Williams Trading. I guess there's dozens of other storage solutions out there in the market already today. Why would you be particularly excited about the Enphase IQ8 and storage as opposed to what's out there currently?
Well, it's a fast-moving field. I'm not going to talk anymore or I can't really comment on what others may have. I don't think that would be fair to them. What I would say is that the approach that Enphase has taken is much more of thinking. What we're doing is we're putting the smarts and intelligence and controls, and we're pushing them to the endpoints of the power system. What that enables you to do is think about the world in a distributed fashion. Instead of thinking about how you can make the grid somehow better, you can't. It's a wire in the air. No matter what you do, no matter how much money you throw at it's a wire in the air, and that is your biggest failure point.
This whole talk about resiliency and swapping gas for coal and all that nonsense, it's a wire in the air. Those plants in Puerto Rico, they went down, but the U.S. Army Corps of Engineers had those things up and running in a few days. Guess what took months? The wires. That's your problem. When Enphase came at this and looked at that from the edge point of the system, as Badri mentioned earlier, that is a different way of viewing the world. That's the way we view the world, is how can we look at that home as an independent system and be able to automatically balance both demand and supply. We can run on and off the grid as economics dictate or as physical availability dictates.
That kind of flexibility, that vision, what's already built into the technology, and then you have a future product roadmap, is unique. I will tell you, it will drive more value in terms of thinking of that way and having that vision, more value than anybody else over time. Yes, sir.
On the management, are you looking in addition to the storage, are you looking at home automation and load shedding roadmaps?
Yes.
Okay.
Yes. I think what you'll see later today is what you want to be able to provide the customer. I've been in the power business for 22 years, and this idea that you can come in and change behavior doesn't really fly. People want to do whatever they want to do. They don't want people to tell them what they can and cannot do. What you need is technology like this that basically does things without the customer even knowing. You'll see some cool stuff. It's really neat. That is something where I think that it's a game changer, and it's completely different than the way the monopolies have thought about demand-side management. Yes.
the amount of sunshine, where do you think the price of the solar power has to be for customers to adopt right?
That's a great question. Again, what I've said, I want to deliver a better service at a better price, and not just been delivering a better price. You look at obviously at different sunshine amounts, fuel, if you will, from different regions, but you would typically need to see something in the low teens for a per kilowatt hour. Yeah.
All of California.
If you live in California, you don't have solar by now, and you're here, I don't know. Sorry, call me. We'll take care of that.
I mean, I don't think with net metering, they can stomach them. Without net metering, you're saying all of California solar power more.
Yes. You should have storage. Here's the other thing is, in Houston, for instance, and in the islands, we see people paying a premium above grid. Why? Because they already pay a premium. It's not new. Mr. Kohler, all these other engine manufacturers, they've been selling. If you go look, that's been one of the best businesses to be in for the last 15, 20 years. If you look at the price per kilowatt hour, it ranges anywhere from $0.025 add or on top to as much as $0.10. You can't use that very often, right? Then you have to worry about whether it really comes on and everything else. So there's a lot of issues, and you got more maintenance and so forth. Think about this, in terms of this is a solid-state disruption of the global energy business.
That's what's happening. So now I can come in and say, "I can provide you with the Enphase technology. I can provide you a better service than what this monopoly can ever hope to provide. Will you pay me for that? Just a little bit more." You see it's a mindset change. It's talking about selling service. Michael and I talk on the phone, I'm like, "Always, we need to sell value. Not cheaper commodity. Sell value." People see it. They not only see it in terms of getting value for the higher reliability and better services that we can provide. The other thing is, what's interesting, as soon as you add a battery, people are like, "Whoa, wait a minute. This is not do-it-yourself anymore.
I need a service provider to come in and do all these different things, and I'm willing to listen to what other services I can be provided for and that I should pay for." It's a game changer. Yes, sir.
On the regulatory front, we're talking about kind of a fundamental shift in how the power market works. The analogy is obviously the wireless industry. What you're seeing, and it may even be common now, is if you have energy storage at a low cost, what is the next regulatory fight that you guys are seeing in terms of the basic democratization of power, which has been a core value in a lot of countries. That's going to come up as an issue as you kind of sell better service and get those up there in all other industries. What are you seeing right now? I mean, are there kind of early rumblings on this at all?
We power energy independence. We are going to see, and I started to tell members of Congress on both sides of the aisle in January of 2017, January of last year, you need to address the regulatory structure. Remember, I don't know in my background, I spent some time at the Federal Energy Regulatory Commission under Chairman Wood. What we saw and what I've lived through in the 1990s and the deregulation movement, we now have a technology-driven deregulation movement. It's all going to be around consumer choice and the idea that a government agency, either literally or practically with the IOUs, has a monopoly right to sell power is over. We have to change that. That's where the fight's going to be. We need to allow consumers to be able to choose. If they don't choose Sunnova, they can choose somebody else.
They should have that right to choose whatever power provider they want.
Just going to push back on that a little bit, because you're going to be competing with customer credit quality, right? Because you're going to be paying that against customer credit quality, right? That's where the sticking point is going to come in on regulatory.
You're right. We can address that. Give me the credit wrap that you gave the monopoly. It's not hard. They're using old technology, centralized technology. I will go put solar on any neighborhood you want me to if you credit wrap me just as you do PG&E, SoCalEd. There's some PUCs that are like in Hawaii playing around with this and so forth. That's what needs to happen. You give me a credit wrap, we'll get that done. That's a legitimate point.
Why wouldn't utilities want to cut out the middleman? We're talking about the past, the current technology that's out there.
They should be allowed to, but they need to have a market-based cost to capital, and there should not be a monopoly right to sell power. The old line history, the reason why we got into this monopoly system, is that it was deemed a social good to have one wire to go to one home. You don't need a monopoly. In fact, it is not in the best interest of any consumer in any part of the world to have a monopoly provide solar and batteries to their home. They should be able to have a competitive choice. The last one. Yes.
Do you see the downstream margin expanding or contracting?
Who's married? Who's married here? Anybody? Okay. All right. What I would say the best marriage is balanced, right? It's balanced. Some days I'll win, some days Badri will win. At the end of the day, the consumer wins. The consumer gets a different service that they're willing to pay more for, that increase in margin will inure to the equipment providers, the arms dealers, but also it will inure to us, the service providers. I think there's going to be more than enough money to go around. That sounds a little like, yeah. No, I do see that happening. For instance, when we can pay just a little bit more for equipment, what Badri showed you on the gross margin, it'll pop nicely. At the same time, I'm doing it for a reason on my side, because my margins are going up.
I think it's like everything, there'll be a balance here.
Does that lead to the conclusion that ultimately you see a boost in gross margin as you add more and more services?
Yes. I'll speak for Sunnova. I'll let Badri speak for Enphase, but yes, that's what I'm saying. That's why I don't feel it's fully appreciated at all by the investment community, is that we are moving from a cost-focused, and you just had to go up against and sling a cheaper commodity to the services and how we can provide a better quality of service to the customer, and those should lead to, and we already see it, enhanced margins. All right. Thank you. Thanks for having me.
Thank you, John.
Thank you.
All right. Thank you very much. Ready? Ready, the top. Yeah. Thank you very much, John. Really appreciate it. Thanks for the partnership and thanks for pushing us to be better. I think that's what great partners do, and John's been pushing me, saying he wants the Ensemble system sooner than later, of course. I heard that even yesterday when he came and toured the lab with us. Thank you for being really great partners of ours. My name is Raghu Belur. I'm the Chief Product Officer for Enphase. We are here today, and I think at the cusp of some major technology and market transformations. I think what you're going to see is that we have invented, and Martin, our CTO, is in the room.
It's his brainchild. We have invented a technology that really can transform in terms of taking us from what's predominantly a grid-tied solar system to being completely grid independent. What is Ensemble? It's actually an energy management technology that does economic optimization of a multitude of resources. Resources such as solar, storage, load, the grid, generators, et cetera, all of them on an AC marketplace or on an AC bus, which effectively is an AC marketplace. Right? If you look at what the challenge, what does grid independence mean? If you look at the challenges of solar today, both Badri and John also spoke about that, was that the solar systems today are predominantly dependent. They're grid-tied. They depend on the presence of the grid. If the grid were to fail, the solar system shuts down, even though the sun is perfectly shining.
With Ensemble, you change that. If the grid is present, great. The grid's not present, great. As long as there is enough sunshine, we're going to convert as much of that energy as possible and start driving the loads. You add storage to this, now you have an always-on system, solar during the day and storage at night. With that, let's jump into the details. This is an Ensemble system. You've got IQ8-based microinverters on the roof, preferably with an AC module. You've got a storage solution, you've got communications and control, and you've got the Enlighten cloud. The core elements of it are generation, storage, communications and gateway, and the cloud. It is a complete solution, solar, storage, communications and control, and the cloud. The key here for us is to make sure that these systems are becoming more complex. Right?
Our key, what we're doubling down is to making sure that everything is very plug and play. From an installation point of view, it should not be complex. Our job with technology, particularly with software, is to abstract away the complexity from both our installer partners as well as the homeowner. The installer partners just plugs things in. You install solar on the roof, you bring it into a power combiner, you install your storage, it's AC coupled, bring it into a power combiner, install the automatic transfer switch. Let the software take over from there. The experience for our installation partners is very efficient, and then let the software manage the system over time as well, so the experience for the homeowner is also very seamless.
When that person goes over, when the homeowner goes over and flips that light switch on, the light always turns on, right? It's the most reliable form of energy. It's the most economical form of energy. It's the safest form of energy, and of course, it has to be the cleanest form of energy. That's our goal, and that's what Ensemble tries to do. It's an energy management solution that does economic optimization of all the available resources. This is your bus. Those are those resources. Badri showed that picture with all of those resources plugged into that bus. It's a truly distributed architecture in that sense.
Can you, Raghu, sorry. Can you just explain where everything fits.
Sure
In terms of the.
Sure. This is on the roof. That can be in the garage or outside. This is a combiner that's aggregating the power from these two, and that's a little device that we have one outside that sits next to your main panel. This is a automatic transfer switch, but we have a specific take on it. We have invented a micro ATS that allows you to isolate yourself from the load, from the grid, sorry, in the event of a grid failure, or you make an economic decision to isolate yourself from the grid. It allows you to transfer loads that you deem important and critical over to the microgrid in the event of the grid disappearing. All of that is managed by software, both locally as well as in the cloud. You can send new objectives, new economic optimization goals from the cloud into the system that's here.
This is per house?
Correct. Per house.
Per house. How sophisticated is the transfer switch? In other words, Just the washer is one load and the fridge is another load. It recognizes all of that?
Correct. The transfer switch is sophisticated enough that you have to identify it at the time of installation, an installer identifies it. They identify, and they also associate a priority to what they want to transfer. Then the system determines how much available capacity there is, and then determines which one of those loads it is going to service. Because by priority, it'll reject the lower priority loads and service the highest priority loads. If you hold on for a moment, I'll come to a slide on that, okay?
Coming back here, one of the things that when Martin first came up with the idea, he said, "Look, we have to maintain the sanctity of a distributed architecture." If we did this and We had to do a masterless system, because when you create a masterless system, you get all the benefits of what a microinverter does today, which means you get all the efficiency benefits, the reliability benefits, the scalability benefits, the modularity, and safety, and ease of design, installation, and management. With Ensemble, this is exactly that as well. It's completely masterless, right? There is no central authority. There is no central controller that's deeming that the system needs to operate in this way. Every resource is independently making decisions on how it should participate in that marketplace. There's incredible amount of intelligence in each one of those devices, and I'll talk about that.
Because of that, it's very scalable. I can have a system where I install this, I come in and add more AC modules. I keep growing my solar system. I have no limits. I can keep adding more resources, meaning I can add more solar. Same thing, I can keep adding more storage to this system as well. It's also extremely flexible, which means I can have any configuration of systems. I can have a solar-only configuration. I can have a configuration with solar and storage. I can have a storage-only configuration. Solar-only configuration is a great place for retrofit markets, as an example, right. There's already an existing solar system, I can come in and add storage. Or I can have a system with a generator as well. Generator can participate in that marketplace. Right. We also do very robust load management.
We have some technology, like what we call intelligent brownout and black start. One of the key things with technology is you want to make sure that the homeowner doesn't have to drastically, dramatically change their behavior. We want the technology to adapt to their lifestyle. We've done a lot in order to achieve that goal, which is make sure that they are not thinking -- there's no app running that's constantly telling them what their system is doing or anything. Of course, we give them the information, but it should not drive their behavior. Can the system adapt to their behavior? I think we can do that to a great extent. We'll show both of those when you come to the lab. We also do some advanced features, right. We've got some new things like fine-grained load control, like you were asking.
Instead of just doing a whole transfer switch where you transfer everything onto the microgrid, we actually can do it in a much more intelligent manner. We can do it with greater degree of granularity, and you can also inform the homeowner how their systems are doing. We also do things like electronic current limiting. I'll talk about that. That's one way where you can avoid things like panel upgrades. National Electrical Code has a number of limitations, and especially as storage starts coming into the picture, it puts pressure on how the National Electrical Code has been written, but we can do things in software to manage and avoid panel upgrades, which can be cost as much as $1,500-$2,000, especially when you come in and add storage to the system. Of course, the core of this is the IQ8 microinverter.
It inherits the reliability and all the work that we have done to make that microinverter incredibly reliable. Incredibly reliable for it to operate for 25 years, even in a very corrosive environment. With that, let's jump into, before we get there, just as a summary, it's a complete solution, right. We want to be the one-stop shop for your energy needs. We provide you the solar solution, we provide you the storage solution, we provide you load control, fine grain load control, and the whole energy management system wrapped around it. There's real value in being that one-stop shop provider is because all the systems now are fully optimized to work with each other. However, I do want to say the platform is still extensible. We've never been in the generator business.
If we want to bring another resource onto the network, we can do that as well. Energy management, we talked about economic optimization. It's a fully distributed architecture, this was probably one of the hardest problems to solve, is now the whole solar system and the storage system has to form its own grid. It's a grid-forming technology. How do you coordinate every single microinverter to form a single grid? You could still maintain the sanctity of the distributed architecture, that was extremely vital. I think that's the code we have cracked, arguably one of the hardest but the most important things to solve. That allows you to be very scalable and flexible, as well as being very robust and resilient as well. Resiliency, add new techniques and technologies in order to ensure that the homeowner's experience is unchanged.
They don't have to change their behavior. Right? We talk about some advanced features, of course, the system will inherit the reliability of the microinverter. Let's talk about each one of those components. Let's start with the IQ 8 microinverter. The heart of this is where it's all about the silicon that's in there, the heart of this is what we call the Swift ASIC. The Swift ASIC is a 55 nanometer, 5 million gates mixed signal device. It's got an ARM processor embedded inside the ASIC itself. Imagine a roof with 20 of these. That is one intelligent roof with 20 ARM cores embedded in it. Somebody was joking that we should be mining Bitcoin because we got so much computational capability on the roof. Very high speed digital control. We calculate control vectors every 20 nanoseconds.
What that translates to really from a homeowner's point of view is when a fast-changing load comes on, let's say you turn on, the compressor on your refrigerator comes on, or you're now running in microgrid, or your air conditioning system comes on, the grid doesn't collapse. The system is very fast in reacting to it. The experience of that, you all experience this, right? When sometimes your air conditioner, it happens at my house, your air conditioner comes on, you can see the lights dim. It's because it's still the grid. While the grid has the capacity, it doesn't have necessarily the speed to react to it. We have to do it even faster because we are in a much smaller environment.
When I say control vector is updated every 20 nanoseconds, it really translates to microsecond response time, very, very fast and very, very seamless. Badri talked a lot about this. Even more software defined, which means the functionality of being grid-tied or grid-independent is also software defined. One thing I want to point out, this is not just an inverter. This is actually a fully bidirectional device. In software, which means that I can draw power from DC to AC or AC to DC as well. In software, it acts like an inverter and a charge controller. When you talk about SKU management, you're not just talking about SKUs by region, where we can go to a common platform. We're also talking about the hardware that's in our storage system, that's on the exact same platform, exact same hardware.
If you peeked inside our battery, you'd find a bunch of these. That's how we are optimizing or getting efficient on our supply chain and development as well, because you only have to develop one thing for both our solar solution as well as our storage solution as well. Let's talk about our storage solution. This is our AC-coupled storage solution. We have been shipping our storage solution now for the last seven quarters, and we have shipped about 25 megawatt hours till date. It's this device, which is the ACB 1.0. We have a sample of that outside. It's about a 1.2 kilowatt hour building block. Okay.
We are going to release in Q4 a cost-reduced version of the ACB 1.0, and what we have done, and this should improve, the goal of improving margins, is what we have done is we have gone to a new battery supplier. One of the advantages for us architecturally is the inverter charge controller that sits on the front end of it doesn't change. For us, going to a new battery vendor, yes, there is work, certification, et cetera, but most of it, from an engineering point of view, is a software change for us. It's efficient from that point of view. This is not just a battery, right? It's a complete solution. It's a complete system. What that means is it's got the cells, it's got the cell modules in it's got the BMS in it's got the charge controller, inverter, software, everything built in.
It's AC in, AC out. As Badri pointed out, we did a lot of things right, but we also did a lot of things wrong. Let me explain the things that we did right and the things that we need to change. Right? We made it into a complete solution. I think that we got right. Okay? Made it AC coupled. I think we absolutely did the right thing there. Right? We used LFP, lithium iron phosphate. I think that was the right choice. Right? The things that we didn't do right in this, the capacity is only 1.2 kilowatt hours. It's okay when you are in EMEA, APAC, where you're doing things like rate arbitrage and TOU optimization. It's not right for the U.S. market where you're expecting the sweet spot is going to be 10-plus kilowatt hours. Right? The capacity is too low.
The power that it has is C over four, which is it's a four-hour charge discharge. That's too low. It's indoor-only product. I think the market really needs both the optionality of indoor and outdoor. Probably the biggest weakness of this is that it doesn't provide backup. I'd like to introduce today what we're working on, which is coming in the first half of 2019, is this product called Encharge. Okay? It's a third generation of a product based on Ensemble. It's a 3.3 kilowatt hour building block. C over 2.5 with surges or C over two, which means two and a half hour charge discharge with surges of two hours to address any load changes as they come on. It's indoor/outdoor. Right?
It does backup because it's got Ensemble. We do the 10 kWh version because we use the 3.3 kWh building block to build the 10 kWh as well. We took all of the learnings, the good things about what we had done with 1.0 and 1.5, and we have now come up with what we call Encharge 3 and Encharge 10. Specifically, what it is, this Encharge 3 has got LFP here, the cells at the bottom, and it's got four IQ8Xs embedded in there. You get 3.3 kWh and 1.28 kW of power. It's a two-and-a-half-hour charge discharge. It weighs 40 kg. The dimensions are, it's about 700 mm tall, 265 mm deep, and about 300 mm wide. Okay? It can be wall and floor mount. It's a two-person install.
At 40 kg, OSHA requirements are that it needs to be a two-person install. You hang it on the wall. It's got a mounting bracket, and you can hang it on the wall. For me, for sure it's a two-person install, but I've seen Martin lift it and hang it himself. It's fully flexible and scalable. Like I said, we retain all the benefits of what we had done, learnings from the previous architecture. It's single-phase, and of course, it's fully distributed. For example, if that one micro were to fail, the other three keep running. We can go in and hot swap that other micro as well. It uses LFP. LFP has some great advantages. LFP is arguably the safest chemistry. It's got great performance, everything from thermal performance to DoD to cycle life, et cetera.
That's why, because it's LFP, it's passively cooled, outdoor rated, and the communication in it is Zigbee. From an installation point of view, again, as I was mentioning about making everything plug and play, you hang this on the wall, and you plug this straight into that combiner box that I was talking about. The way we do the 10 kWh version of this is you have stacked three of them right next to each other, and that's our 10 kWh version. 10 kWh version, while it weighs 120 kg because there are three of them in there, it's still a two-person install, and you install them in three chunks, and in software, you configure them as a single unit. It's 1,000 mm wide, 700 mm tall, and about 265 mm deep. Again, it's wall and floor mount.
It's very flexible and scalable, and it also does three-phase. Three-phase is required because we've got three systems, we can make it three-phase. Three-phase is required in a number of residential applications in Europe and Australia both. Again, we are going to make this as a single piece of hardware with software changes to support the worldwide market. It's 10 kWh and 3.8 kW. There's actually something unique about 3.8 kW in that it meets the National Electrical Code of a 20 amp circuit. Of course, you can keep adding as many as you want. There's no limitation for a system to have 10 kWh. You can have 20 kWh, you can have 30. In fact, we think that the sweet spot in places like Hawaii will be closer to 20 kWh as opposed to 10.
As you can imagine, we spend time with our partners like Sunnova to discuss how this should be, what are the things that we need to do to make this the optimal product. The thing I want to point out, these are not just nice engineering renderings. You will actually see this device in the lab today.
Based on a usage profile that you guys would think would be standard in a residential system and the degradation, how long do you expect that to last on a 25-year life solar system? Are you going to be replacing this two or three times during its life, or is that sufficient?
I think our expectation is that it's about a 10 year. There are calendar life and cycle life, right? I think it's going to be of the order of 10 years, and not limited by the micro power electronics, not limited by the microinverter, because that's a 25-year microinverter that's inside the device. It's going to be limited by the cell and cell chemistry itself.
Have you figured out the new chemistry supplier? Does that mean a new Japanese higher price supplier or not?
We have. We are going to a new supplier with both the 1.5 as well as Encharge, battery is such there's so much work, so much technology development taking place in batteries that now we actually have a dedicated supply chain person only looking at cell chemistry and vendors worldwide. That's how important we think that whole, it's a big element of the storage system, and that's why there's so much amount of focus and importance on that.
Can you say how much cheaper that is than your-
No, we can't get into the details of that. Suffice it to say, every product that we do, as Badri mentioned, we have the 30/20/10 target. We don't want things to be off of that. Go ahead.
Each module in the power discharge, if you take just the 3.3 kWh one, that can discharge at 20 amps?
1.28 kilowatts.
1.28 kilowatts.
1.28 kilowatts, which it'll take about two and a half hours for the battery to completely discharge and charge. Really important to note is that we get bursts of much higher than that in order to start to deal with motor starts, et cetera. That's the beauty of storage, right?
I'm at about 10 amps?
It's going to be a third of the order of about six amps or so. About four and a half, five amps or so.
That's not enough to run a hot water heater or would have to run, you'd need three of them to run an electric hot water heater or an air conditioner.
Especially air conditioner, you're not running with 1.28 kW. Even though we can do some smart things like intelligent brownout, very unlikely. You'll need a bigger system for that. That is what was one of the challenges with the older system as well. It just didn't have enough power. Now we have gone out there and put a lot more power on it. Very likely, you'll need a 10 kWh box with the 3.28 kW. If you're running a full air conditioner for, expect that you're going to run an air conditioner for a long time, you're very likely not going to be able to do 10 kWh. You probably need 20 kWh, and then that doubles. You get now 7.6 kW of power. They'll both go into independent 20 amp circuits.
You've got a lot of power, and you got a lot of capacity as well. That's the beauty of the AC coupled architecture is you can add. I mean, in Hawaii, there are homes that today are doing 30 kWh. The cost of these, just cell chemistry is getting better and better, costs are coming down. I think everything becomes economically viable, over time as well. The last but not least is what we call as the communications and control. Communications and control consists of two elements. What's the AC combiner and the automatic transfer switch, right? Let's talk about AC combiner to begin with. It's a power aggregation device. You can bring in your solar. It's got four circuits of power. We sell this product today for grid-tied application.
You bring in your power, you bring in your solar, one or two circuits of solar, you land it on this device. You bring in two more circuits of storage, one or two circuits of storage, again, land it on this device. It does. It's got the protection built in. It's got a gateway. The gateway communicates over Wi-Fi, over the homeowner's broadband, as well as over solar. You get high availability. In the event the homeowner's broadband goes down, which happens often, they change their password, what have you, it falls back onto Wi-Fi. You get a high availability connection, and this is key as we think about Ensemble, is we want all our systems to be connected all the time. We are adding more connectivity to these devices into the cloud.
We do full metering in it, including revenue grade, ANSI C12 revenue grade for some of our partners who require metering of their generation systems. We are introducing this thing called the electronic current limiting. As I mentioned earlier on, when systems are coming on with more and more storage, you're hitting the limits of what your main panel can handle in a house. More often than not, what you're finding is installer partners have to go out there and replace that main load center, the main panel. They have to upgrade it. That upgrade can cost as much as $1,500-$2,000. This electronic current limiting is all done in software. We can manage the system in a manner that we don't trigger the requirement for a main panel upgrade.
This is, again, thinking about it from the standpoint of savings and making it easy for our installers. This is what we do. Again, you're looking at another plug-and-play device. Literally, I'm not trying to overuse that word, but that's literally what it is. You land four circuits, it's any combination of solar and storage on here, and let the software take over from there. Let's talk about the ATS. A lot of people do ATS. The problem we were trying to solve, again, we were thinking about what problem you're trying to solve, is we wanted to make sure that we provided whole house backup. That was one. The second thing we wanted to make sure was we didn't need to add a critical loads panel, because that would be cost and a lot of work as well.
The third thing we needed to do was we needed to make sure that you didn't have to call the utility. Because when you do a whole house backup and you go on the utility side of the meter, which is where you'd have to go, that's a phone call to the utility, which is going to be very expensive. It's going to take a lot of time. We came up with this idea of the micro ATS, right? The theme of micros. Yes, that's the micro ATS, where you do eight individual circuits. Okay? By doing eight individual circuits, you're monitoring in real time all eight individual circuits, and you can transfer over to the microgrid all of those eight circuits. It's expandable, so you're just not limited to eight. You can go 16 or even 24, depending on what your choice is.
At some point, you reach a point of diminishing returns. What that allows you to do is a whole house backup with no utility disruption because you are on the load side of your main load center. You don't have to add a critical loads panel. Protection circuitry is all built in. The really cool thing is you can do load prioritization. In real time, all 8 circuits are monitored. Now I get exactly what my consumption is by circuit, and the system is monitoring that in real time and making a decision, "Hey, I have enough resources right now available to service all 8, or I have to reject the bottom 2." Very likely, your kitchen's going to be the highest priority number 1, and your hot tub, hopefully, is your lowest priority, which is number 8, right?
That prioritization is going to get set in the beginning, but the software will allow you to reprioritize if needed. You can do load rejection as well as load enablement. Of course, that's completely expandable. Now let's address the quick use cases. This is important. The first use case is a very traditional grid-tied system. There may be people who may choose, "Hey, great, thank you, but I just want to be a grid-tied solar system." That's their choice. What IQ8 will allow us to do is Ensemble can be turned on and off in software. If somebody wants a very traditional IQ7 replacement as an example, there they go. They install a very traditional grid-tied product. Okay? The second, and I think this is my favorite, is the whole grid independent solar system.
Grid energy, our independent energy system is obvious, this is going to be really interesting as well, where you have an IQ8 system on the roof, you have the combiner as well as the transfer switch. The combiner allows you to future-proof because you can come in and add more solar or add more storage if needed and turn it into an energy system. You can start with solar only as a grid independent system. If the grid goes away, the automatic transfer switch will isolate you, will manage all 8 loads for you, reject loads as needed, and allow you to convert all the available fuel, which is all the available sunshine, into production to service your loads. You may make an economic decision. Here's an interesting thing, right? I think there's a cost now to be connected to the grid.
There's real cost, especially as new and new advanced grid functions and IEEE 1547 requirements are coming online, where inverters have to provide a number of advanced features. Those features are not free. They come at the expense of, in some cases, real power production. For example, you have to inject VARs into the network. VARs are not free for us or the homeowner for that matter, right? Because you steal power from real power, which is what drives their appliances. The system may choose, this is what the economic optimization Ensemble does. The system may choose that every day in the middle of the afternoon, for economic reasons, the system may choose to isolate itself from the grid. If you're isolated from the grid, now we are not forced by standard to comply with VAR injection into the grid for voltage support as an example.
Of course, if the grid were to fail, if there was a grid failure, same thing. The system isolate itself, and Ensemble manages it. Of course, this is the whole enchilada, which is the full grid independent system with solar storage, load management, and tertiary control or economic optimization. A full -- this bouncing thing always catches me off. Of course, the smart home interconnection as well and interface as well, which you will see. Finally, you can unplug from the grid as well. In unplugging from the grid, the use case here, while I show multiple AC modules, solar and micros and storage, et cetera, this could be one solar panel, one IQ8 microinverter pointed to the sun, and you get about 300 watts of production. You can do a lot with it. A village in India, right?
I can fans and small refrigerator, everything I can run just with one, maybe two, and I can keep adding as I go. I can add one of this and one storage element. Maybe the 1.2 kilowatt hour is sufficient for one small system, but it's all moving in the direction of AC, and there is no grid. Someday, if the grid shows up, great. It can now be grid connected with a software upgrade. It has the capability of servicing so many different use cases and opening up a market segment that we have not had access to. It's because it's a microinverter-based system, it's AC, it's scalable, and it's completely masterless. Imagine if this was a big system. You had to have minimum five kilowatts. You had to have a central controller that tries to arbitrate and manage everything. That doesn't work.
It's got to be like this.
What is the sense for when that might be offered in the U.S.? How far away are we from that being economically attractive?
The question is, how soon can this be offered in the U.S. for it to be economically viable, right? It's a great question. I think you have to think about it in terms of the corner cases, really, right? If you had, for example, the use case that we showed where you had a what happens if you have three weeks of really bad weather? There is no solar. The battery doesn't charge. There's a solution for that. Think about putting a generator on there, whether that's fossil fuel-based or any other technology, fuel cell based, whatever. It plugs into the Ensemble platform. That's the power of that platform. The system gets managed because, as I said, it's about managing resources, right? The flexibility of that is you can have any combination of resources. Ensemble is capable of that.
In that particular situation, you'll have a solar resource, a storage resource, and a third generation resource. You just don't have the grid as a resource available. The system has to adapt to that, and that's what it does. It'll manage it based on whatever are the available resources. If there's any takeaway, think about that as that AC bus, AC marketplace architecture. You have the ability to add many things to that bus to that architecture, to that marketplace. The economic optimization engine then says, "Hey, what's the most economical way to do it?" Obviously, the marginal cost of electricity from solar is arguably zero, while the goal is to reduce the marginal cost across the board. You'll start with solar, you'll always lead with solar.
You can program in what are called droop curves, et cetera, to decide which one charges and discharges, which one comes into the picture next. That happens at the next level of intelligence. Okay. All right. We have a lot of advantages. We do a lot of things right here. I'm going to talk more about what are the advantages of ours. If you break it down into solar, storage, and the system, from the solar point of view, again, as we had said, we maintain the sanctity of the distributed architecture. This is really, really key because all the benefits that we have had as a micro, the efficiency, the reliability, the ease of design installation and management, the safety, the complete plug-and-play appliance as an IoT appliance, we inherit that with IQ8 as well. You're very reliable. Design is really simple.
We are NEMA 6. You'll see when you go on the reliability tool, we actually test these things underwater. We run these things for 21 days underwater as part of our testing. It's designed for 25 years life. There is no high voltage DC anywhere in our solar system. With storage, it's very scalable. It's an AC coupled system. As I said, I think, can you get to 20 kilowatt hours? Someday you want to be 30 kilowatt hours. I don't need to do a forklift upgrade of my system. I just simply go in and add. It's very likely to happen because chemistry will keep getting better. Over time, you come in and add new storage solutions. The system just gets more efficient and much better. We use LFP. Again, there is no high voltage DC. The cell pack talks to four microinverters.
DC voltage is very low compared to other solutions. From an installation point of view, of course, LFP has less energy density than others. You can see we are worse on our energy density. If you look at that, the total solution, we are about 12 kilograms per kilowatt hour compared to 8.9 and 9.3 when you have NCA or NMC. We try to mitigate that by building out a very modular solution, so even though the energy density of LFP itself is worse, we have architected it with micros so it can be modular, so it can still be a two-person install without the need for a big lift or anything else. Of course, LFP also has other benefits, as I had mentioned, about safety as well as performance.
Clearly, from a weight per kilowatt hour point of view, it's definitely more than all the others. From a system, it's a one-stop shop. It's an absolutely plug-and-play, one-stop shop system. That's the goal. The system is fully optimized to interact with each of the components. We think we are very competitive on cost, although our goal is always to sell value. From a cost point of view, our solution is very cost competitive. I think, we do over-the-air firmware upgrade. I'm assuming that others do it as well. It's just a matter of degree. I think we have been doing it for a very long time, and we think it's important. I think as an industry, we should be thinking about you can't be putting dumb boxes out there.
We should be thinking about, hey, how do you make sure that systems are intelligent that's out there? Of course, expandability, because nothing is static. Lifestyles change, people buy and sell their homes. New people come in. Their lifestyles are different. You want a system that's very flexible, that can adapt to the homeowner's lifestyle. Which means you want to have flexibility and expandability in the system. We will have Ensemble Solar plus Storage available in the first half of 2019, the whole system. In conclusion, we are transforming access to energy. This is about moving the world. I think John said it very nicely. This transformation is not going to happen. It's happening. I think we have the capability, the technology and the product set, to do that, to move the world from being completely grid-tied to grid independence.
I think, there's a lot of options, a lot of capabilities. Thank you. We'll stop now for a break for about 15 minutes.
You can go ahead.
All right. Good morning. As I was introduced earlier, I'm Jeff McNeil, and I'm responsible for the customer experience, which covers both the quality and the service aspects of what we do. I'm relatively new to the company. I joined in January. I'll first talk about quality, and then I'm going to talk about what we're doing on other aspects of the customer experience. Our objective here is to have a world-class customer experience. As I came into the company, we weren't there. I was hired because Badri, as well as members of our board, viewed that this was a way that we could differentiate ourselves from our competitors and add more value to our customers.
When you look at the cost of ownership of having a system, and especially with our installers, being able to have a system that is extraordinarily reliable, quality, and that if there is an issue, issues could be they just have a question, or they actually have a service need, that those get handled quickly, first time, makes it so we are their preferred supplier. We worked hard on doing that. We're not done, but we're well on the path for that. I'm first going to talk about how reliability and quality is the bedrock of Enphase and what we do. One thing I'm going to talk about first is when you look at our systems have no single point of failure.
If you look at, and if any of you are solar owners, and unfortunately, if you have a string inverter, if that fails, your power production is zero. It's gone. You are no longer going to be able to produce power. With a microinverter, if you have a typical system, let's say that has 20 microinverters on your roof, that if unfortunately, and we hope it doesn't happen to you, but if it did, and you had one microinverter went out, you're still producing 95% of the power that you bought your system for. Most consumers don't even notice the difference at that. It's one where by how our systems are set up, and it's the inherent advantage of being in a microinverter versus string, is there's no single point of failure.
One thing that Badri highlighted, was the value of an ASIC. I'm going to repeat that. This ASIC is the brain of our microinverter that you have a integrated circuit that operates very fast. When you look at the challenge of having a reliable microinverter, we're part of a grid that has a lot of excursions on it, a lot of changes in it, that if you're not reacting to that quickly, you have a risk of damaging your microinverter. Because we have this very fast operating ASIC, we can react to that and take care of any of those conditions before it damages our system, and it keeps operating correctly. There's another very important part about this ASIC. Badri also talked about this. We used to have inverters that had 300-plus components in those.
We worked very hard, and you'll see our reliability lab, to make sure every one of those components that goes into our system is very reliable. If you add up all the failure rates of 300 components versus what Badri talked about, where we're heading, which is 50 components, you have an inherently, by design, much more reliable product. We are well along that path. We're halfway on that path of what Badri talked about, of eliminating components, integrating them into the ASIC, which is also, by design, a very inherently reliable product, to, by design, have a very reliable system. Badri also talked about the power of having over-the-air software. He took you through what can happen. We have a system that failed. We bring it back here. We do failure analysis. We look at why that failure occurred.
We learn that perhaps a grid condition occurred that stressed our system. We can then, without ever interfering with the homeowner, update our software to protect the system from that type of a grid condition, roll it out to our customers, and their system, from the time it was installed till after we have, has now improved reliability and resilience to different types of defects. As someone who is responsible for quality, I tell you, this is my friend, that a lot of people when you Like for example, when you buy a car, the reliability of your car is set when you drive off that lot. They can't really change it. For us, as we learn, and since we're software-controlled, we are able to continually improve the reliability of our product after the sale. Very key differentiator. We design for reliability.
With Martin and his team, starting with the initial concept, we know that we want our product never to fail in the field. From the way it's architected to the way it is then designed, and I'll talk a little bit later, and you'll see it in the tour this afternoon on how we done tests, we make sure that these products exceed not only our competition, but standards for our industry. When you put these four components together, we then have an inverter that is extraordinarily reliable by design out of the gate. We then test the system heavily. There are industry standards, if you go out and read them, on how a microinverter or an inverter is to be tested. We exceed those standards in several ways. One, in the sample size that we monitor.
When we go compare how many units we are testing in our qualifications and others, they typically exceed what would be minimum in the standards by four to eight times more. Why do we make more measurements? You collect more data. You're able to find lower failure rates of problems when you sample higher amounts. We also stress the units for longer. There's certain types of tests that we put in that for at an elevated temperature and elevated humidity, industry standard is 1,000 hours. We go to 1,500. Why do we do that? We want to make sure that our product is known to survive for a warranty or longer of 25 years. The other thing that we do is somewhat unique is if you read these standards, they're passive tests. For example, you take your inverter, it's not plugged in, you put it in your stress condition.
After the duration, you take it out, you measure it, and is it still working? If it's still working, it passes. For us, we run them fully powered and exercise them while they're in the test. That's a more stringent condition because temperature matters, and that when these are powered up, they generate their own heat. It more accurately simulates what goes on in that use condition. Our objective is to reduce the failure rate that our customers see by a factor of 10. DPPM stands defects parts per million. A DPPM of one means one out of a million failed. We're not at one yet, but that's where we're heading. All that sounds good. What does that translate into what we've actually accomplished? We have an objective, and we're being successful at every subsequent generation is better than the previous for reliability.
The M215 is a product that came out about six years ago. This is a reliable product. Customers are very happy with how this product performs. Most customers view that better than what our competitors are at. M250, which was the follow-on generation, dramatic improvement from those corrections that we talked about and those improvements that we made. IQ6, IQ7, those have continued the trend of improvement. Percentage-wise, they don't look as large because of this, but each of those, excuse me, is an improvement. We view these as a key differentiator from us from our competitors. You look at this, and I talked about an improvement of 10x. You look at that and go, "You're not quite there." That's right.
That we are seeing over the next few years by a factor of three, this coming down further, both by future generations that we put out, as well as what I talked about as improvements we're able to make through our software over the air as we learn how to make our products more reliable. I'm going to talk about customer experience as a priority. One of the primary reasons I was brought into Enphase is we had a challenge in our customer experience and how customers were being serviced. When you look at as our volumes increase of units in the field, call volumes go up with installers. We had not reacted to that right. We hadn't put the right people in place to be able to quickly and accurately react to customers' needs.
My background is manufacturing, where I was an engineer when I started, and I worked my way up and through the semiconductor industry and was running fabs for that. I approach most problems as a manufacturing mentality. This was pretty simple. We didn't have the right tools. I didn't have the right equipment, the right people, the right tools for them, and I was out of capacity. I had more demand than I had capacity, and that meant things like wait time and other things expanded. The people we had were talented and trying hard, but they didn't have the right tools. We've worked on very hard in the last six months, and you'll see how that's paid off. We've added a few people to make sure we have the capacity. We made sure they're trained right.
When somebody calls and you want to make sure that their problem is addressed the first time. As somebody that ran factories, and if any of you have been in them and watched them, those people like myself that are an ex-factory manager are very metric-driven. You look at numbers. You make sure you measure what is important that reflects what will, as it improves, get better results. You drive that in a very systematic and process-oriented way. That's what we've done. A number of customers we've shared our suite of metrics that we have. We have roughly 15 that represent how we're servicing customers. We've made aggressive goals for ourselves. We share them with customers. They look at those metrics, and they go, "You do those things, and we're going to be very, very happy." We approach it in a very systematic way.
We go into the root cause of why something has happened and eliminate that. That's where we're at and how we're going to continue to improve. Again, what I'm going to show you is we've made good improvements. We're not satisfied with where we're at. We have a lot of runway to go. Service is going to start with best-in-class quality. When we all buy something, we want it just to work. Now, just to work from our customer standpoint, you can think about it in two ways. One is you certainly don't want it ever to fail, and you have to replace it. That's one that when we talked about DPPM defects is that, and we're working to make that go away. There's another aspect of just work, which is the documentation we give, how easy it is for our systems to be installed.
When they're doing what they think is the right work and they power it up, it just works. They don't have to call us and go, "Wait, I'm not having communication," or, "This one measurement doesn't quite look right." We've worked very hard on improving that, also giving our installers and our homeowners tools so they themselves can quickly recognize it and take care of themselves and recognize that, "Oh, yes, I now understand. I didn't set that up right. I set it up this way and it works," and don't have to contact us. We value our homeowners and our installers that partner with us and trusted us with their business.
We treat them with respect, and part of that respect is when they call, we quickly answer a call, and we have people that are trained that the first time they call after a 10-minute conversation or however long it takes, when they hang up the phone, they have got their problem resolved. That is a way to have somebody feel treated with respect, is their problem was recognized, they were helped, and it went away. Putting the right people and processes. We have a fairly sophisticated product, so we need to have technical support that are well-educated and well-trained to be able to help these primary electricians who call us and be able to understand their problems and resolve those quickly. We have those people in place now, and we make sure that's the case that going forward.
For them, we give them processes, data that they're able to quickly identify a customer problem and resolve it. One thing that I was extremely impressed when I started is our online data and analysis tool that we call Enlighten. Our technicians, myself, can look at the data we're able to extract from that and know what's going on with the home basically instantaneously is phenomenal. We can tell by looking at the data, yes, you're having a production problem. We can tell whether it's the module, whether it's our inverter, whether it's just a communication problem, literally within seconds of pulling up their system, and therefore, quickly get them on to a solution. As part of that, we have expanded self-service.
When you look at what I just articulated on the power of the data we have, and somebody calls now or used to and say, "I think I have a failed inverter." Having a person then go look at our data and say, "Yes, you're right," and then do an RMA and ship it to them doesn't have to happen. It was very routine. We've automated that. Our customers have on their phones what we call the Installer Toolkit, whether it's an Android phone or a excuse me, a iOS phone, that they are able to take that on their toolkit, and if they suspect that they have a failed inverter, they're able to select that inverter on their phone. It automatically checks our data and says, "You're right. It's bad. RMA it," form. Literally in less than 60 seconds. They don't even have to call us.
The other thing we've done to make life easy for them is we do what's called a Seedstock program, that for our installers that have a reasonable amount of business with us, we pre-ship RMAs to them. Inverters. When they drive out to this home that they suspect might have had a problem, they take an inverter with them. They have their Installer Toolkit on their phone. They get there. Yes, it's bad. They replace it. One thing that they used to have to call us for is after it's replaced, they had to have that new device registered on our system, so it's communicating. They're already in there. It's also registered for them automatically. One truck roll, which we hope doesn't happen very often, and it doesn't happen all that often.
They're able to take care of this without having to call us and saving two phone calls, where even if we answer right away and with the chitchat on a phone call and taking care of it, saves them about 10 minutes a phone call. Every installer is saving 20 minutes on one of these. In addition to that, the fact they're able to do it in a single truck roll, is a huge savings for them. When you look at, as I have both quality and a customer experience responsibility, as I go out and visit with installers, they really appreciate that. That with that being low cost of ownership by working with us, we're then who they're then preferred inverter for their customers. What does all this translate into?
These four turn into an extraordinarily good service experience for our customers, homeowners and installers. We work and we're successful. I'll show you on the metrics I'll show you, getting the issue resolved first time in minutes. Then what we look for is making sure our customers are promoters. I'm going to take a moment because I'm going to talk about this metric a little bit more later and explain Net Promoter Scores. I already warned you that I'm a metric guy and I like data. A way of measuring customer satisfaction is a well-known metric called NPS or Net Promoter Score. This is something that was published about 20 years ago in a Harvard Business Review, where what you do, and we've all taken these surveys.
If you've ever gotten a survey that had a score from zero to 10 that you selected, and we all do those multiple a year, that data is going into that company for what's called a Net Promoter Score. There's a little bit of math to it. If you score a nine or a 10 on that, you're deemed a promoter. If you score seven or eight, and some of you may think, "Well, they're pretty good, I gave them an eight," that's actually called passive. Because you think they're pretty good, you're passive. If you're six or lower, you're a detractor. The question that you're asked in one of these, again, the phraseology of it, is that, given your recent experience, would you recommend Enphase to a friend or colleague? If you read a question like that is a Net Promoter Score.
What has been found is this correlates very well, a very good way of quantifying, really, your customer satisfaction. We're working this year to get greater than 60% on that metric. You may go, "Well, that's not all that great of a number." That means on average, you're getting a score of 0.6 or 6. That's not how the math is done. For a Net Promoter Score, your promoters, you get a one for that. If they score as you add to your number. Your detractors, so those six or less, subtract from your promoters, and you divide by the total number. You get no credit in your numerator for a passive. For example, let's say we did three surveys, and I got a nine, a seven, and a six. I got one promoter, I got one detractor.
One minus one is zero, divided by three is zero. If you got on a survey of a nine, a seven, and a six, your NPS is zero. How do you get to 60? You've got to have a lot of promoters, and you have to have very few detractors. What have we done to drive more promoters? Next couple pages are some data. We've really worked on the operation of how we service customers to make the experience much, much better. First graph on the left is wait time. As our business was growing and it had some other challenges, our wait time was over 10 minutes. You had an installer that was out trying to resolve a problem, and they were put on hold for over 10 minutes. They weren't very happy about that.
With what I described as far as processes and people upgrade, that we drove that down to right around two minutes. We've gotten a lot of very positive feedback on that one. As you can expect, an installer used that as, "Thank you. You're treating my time with respect." In addition to that, when you look at the number of cases that we had open, these have been driven down by over a factor of 10. This is, at any given time, how many cases that people still have where we haven't resolved their problem. What we've done here is we've made sure that when they call, the first time they call, that when they're on the phone, we resolve their problem. We hover right around 90% on that metric, where sometimes problems we have to get back to them, but again, that's one they appreciated.
They didn't have to wait very long on the phone. When they called, it was taken care of. How does that relate to what I just talked about as far as this metric, Net Promoter Score? I'm first going to talk about the graph on the right. This is the Enphase NPS, and we've been measuring it for a while, in that this is something we send out as surveys after we've helped somebody. If you look back here, we were bouncing around zero, and we had some pretty bad quarters where it was negative. Now, if you look at our market and our other competitors, in general, the solar industry isn't exceptional at service, and this actually was around average for our industry. We have stepped up. We're at 40 last quarter, and quarter to date, we're at 47%. We're not at 60.
We're not where we want to be, and I'm not necessarily proud of where that number is, but I'm proud of the rate of improvement, and we're going to keep doing that. Now, we're here, and we care about, okay, so what? Customers are happy. How does this equate to something that will move the company forward? If you go and you read the "Harvard Business Review," it talks about companies that move up Net Promoter Score are more successful. I collected a few companies, airline and computer, consumer electronics, and automotive, and how they have done as far as their Net Promoter Score. First, United. I think a lot of us fly United because- We have to. But if you had a better choice, if somebody went to the same direct flights as you'd pick somebody else, right?
I'm guilty of the same thing. I think if you look at, kind of rate that on how would you rate United, saying that they have an NPS score of around 10%, probably maybe you think that's generous, but that's about where they are. A lot of us have also flown Southwest, and even though, you know what? They don't have assigned seatings and sometimes they're viewed as low cost, but you come up and they're helpful and the customer service people are there. They try to make an effort to make you have a positive experience. If you've flown them, you're probably not surprised that you see that, and I have a lot of people that I know that exclusively travel them for that. You look at how their stock has grown over the last five years, it correlates. Dell and Apple.
A lot of us have Dells, a lot of Apple here. Typically, if you were to poll people, they're a lot more passionate about an Apple product than a Dell product. A lot of that has also, as we've had customer service experiences, you go, you call them, even the purchase, the ease of use of firing up a computer. Typically, if you take an Apple out of your box, you're up and running in a few minutes. Other products, not so much. Again, you see the growth there. I'll pause for a second. I recognize that there are other factors in how companies perform other than NPS, but it's a factor that I think tells about how a customer experiences the loyalty they'll give and how a company focuses on solving problems that get in the way of their business growing. GM and Tesla.
Again, when you look at U.S. automakers, they're in the 20s. Some of the German automakers for NPS are in the 40s. Tesla is really off the chart. You have an early adopter that has people that are passionate about it. With that makes it so their value is much, much higher than others, and that is what we see in our future as well. As we focus on the problems that get in the way of a customer experience, they will drive customer loyalty. They also will take cost out of what it takes our customers to use our product. Therefore, we have an inherent advantage of how they work with us. Then on many of these, they also help our cost structure. I talked about something that our customers are ecstatic about as far as a automated way of interacting with us, self-service.
I don't have to have somebody answer a phone. It helps our cost structure. It's much better for them and helps them. As we talk more and as we go on, as I said, this is only up, 60 is not where it ends. It's where we plan on getting this year. It'll have a very positive impact for us as well as our customers. Thank you.
Thank you.
Eric?
All right. Well, right before lunch. Great time. Which one is the clicker? This one. Okay. Well, thank you for coming. The other day, I was talking to my wife and she was telling me, "I just learned something new." She says, "There was this guy that we went into a conference, and this person kind of described to the group the difference between being curious and being interested." Right? I don't know if you've heard that before, right? It's interesting how that person presented the concept of curiosity versus interest, right? Basically, his conclusion on that presentation was people that are curious are just curious, right? They browse. They don't have any type of involvement whatsoever, right? Someone that is actually interested is someone that actually has somewhat of a personal connection or involvement, right, in some form. Right?
When we look at the list of people coming here to attend, we have a lot of interest and a few curious people. Right? It was very hard for us to narrow down to the list of people that we felt their interest matches their commitment, right? They were more interested than curious in reality. I just want to tell you thank you for being with us. Thank you for your interest. Going forward, I will hold you into that commitment and involvement. Okay? Thank you. I think after listening to the rest of the presentations from the various folks, I think it's going to be a hard beat to at least beat Raghu's part of the presentation, right? He has that great showing there that looks like the path to heaven, right, in some way. I would read it the other way.
I will say that distribute it down from heaven to us, right? That's the way I would look at it. I couldn't get him to remove that cross from there, right? We'll save it for the next time. What is solid financial foundation, and why do we want to approach it that way? I'm getting a lot of questions about the convert. Why? Why now? Why are you doing this? What is the motivation? Why didn't you wait? Why did the company make that decision, right? When we made the decision with Badri, it was kind of very conflicting, right? We look ahead and we look at the company and we are really motivated. You saw it's just a little bit of the tip of all the stuff that we have lined up, right?
Unfortunately, we don't have the capability or perhaps the desire to commit to show you everything that we are working on to make this company an incredible, fantastic company that you will be proud to be part of, to be interested on and be involved with. It was very hard also to hold back, right, and use the finance presentation as a way of pumping everybody up and getting them all excited and go out there and start revising your models and getting better reports and so on. The energy level, the commitment of the management team, which as you can see, all of them are pretty much new, right? Except for Badri, who's been here for 18 months. Jeff just joined, I will say. Dave recently joined in January. I joined two and a half months ago.
Most of the management team is kind of coming in and we see the opportunity. We are coming from big companies or companies that were somewhat successful Or larger. We are here to make a difference on a scale and make this one an incredible place to work and an incredible place to invest. The reason I'm saying all of that is most of the folks that you're going to meet today that are part of the new management team are fairly conservative people. We don't like to over-commit. We come from working for companies. Some of us come from working for companies that are margin-challenged, and we've seen pretty much all the cycles, especially in the solar industry. In my case, I have a lot of experience in semiconductor, and memory, flash memory, NOR, and then moving into solar. It's not for the faint of heart.
Working for Tesla, which is also not for the faint of heart. You learn a lot. I've been doing this for many years. I'm not the deal type of CFO. I'm all of the data, accounting, get it right, build the right foundation. The first thing that I did when I joined the company is I grabbed the balance sheet and I did a diagnostic. What do I have? How is my balance sheet compare with the promise of the business? Even to the performance of the company over the last 18 months since Badri joined. The first thing that came to my mind is we have a balance sheet that doesn't match the war chest that we need in order to address the challenges and the opportunities of the future.
I'm going to emphasize the challenges because I'm by nature very conservative. The challenges are you never know what the behavior of the market will be. You never know when the competitor can come in and create distortions in the marketplace temporarily enough to cover a company like ours. We are small, but very creative, very powerful, and we survived probably the worst already. Be prepared with a war chest that we feel we have the adequate level of capital structure to address that competitive challenge. Competitive challenge, tariffs, trade wars, potentially softening or a correction of the stock, the stock market. All of these things are always in play when we talk about it. We always think about the plan to be exempt to those things, including act of God, believe it or not.
Those things may or may not materialize, and when they materialize, you look back and you say you make a decision, and you people will be happy with the decisions that they made. That's the way we approach this transaction in particular. I'm going to address questions after the presentation. The other thing I'm going to tell you is that joining Enphase was a very interesting experience. Actually, Patrick was pretty good at opening the books, and I actually got to perform an almost forensic due diligence on a company that mysteriously moved from almost being bankrupt to the position that the company is right now. I was very happy. I'm an accountant by trade, and I've been doing this for many years. I have a record of cleaner opinions and clean SOX compliance.
I've done that with no amendments of any of my public filings on these complicated companies that I've been the chief accounting officer for. I have a massive amount of experience in operations as well. By joining a smaller company, I use the highest possible bar that you can use to address the financial foundation of the company. The one thing that caught my attention is the existing debt structure and cap structure, and I wanted to deal with it, and I wanted to deal with it quickly. That was a decision that we made.
The other thing is I acid test the capability of the management team to enable to follow leadership on keeping this solid financial foundation alive at all times without taking away the capability for them to be creative, be on the playground, exploring ideas like Silicon Valley deserves, but within the boundaries of making sure that we don't go bankrupt, that we almost run out of cash. My number one role is never run out of cash. My number two role is make the company extremely profitable and shareholder value. If you don't have cash, you don't have the right cap structure, there is no way you can fund all the great ideas that we have in plan. With that being said, as a foundation, I'm going to move into the core of the presentation. Patrick told me you need to do graphics.
I'm a finance guy. He's a data guy, and pretty much all of us, we are data guys. This was a challenge. He came up with this little kind of Venn diagram. Trying to make sense out of it. Let me give you an example. You got finance organization in Silicon Valley that they are scorekeepers. What they do is they close the books, they get the data, and they react. Technically address the issues with the business, and then they come back again. Scorekeep the next month, react, and so on. In this company, one example is the way we manage our cash conversion cycle and the process of cash. Every Friday we meet for one entire hour, Dave, basically Patrick, myself, and the head of operations, who is not here, Mike.
We literally micromanage to a strategy, to a cash conversion cycle, which we desire internally to be zero. That means that the days of inventory is not an after-the-fact issue. It's a planned supply-demand, architected outcome that we manage from the bottom up that gets monitored and redirected every single Friday. That's an example. If you look at my days of inventory being 30, it's not just we got lucky, or we run out of parts, or we have shortages or this or that. There is probably a very small element of chance that plays on that one, but it's architected from the bottom up. Same way with receivables. The way we manage our receivables with our customers and our vendors is all architected from the bottom up.
For me, coming in as a new guy and working with Mike and with Jeff and with all the rest of the team on managing my vendor terms and relationships in the vendor qualification process. The ability to establish the longest possible payment terms without compromising pricing. All of these things are done at the vendor by vendor level. We are a small company, we can do that. I can spend time doing that. I don't particularly find this the most enjoyable part of my job, but it's part of the keeping the company on a solid financial foundation. It's part of the architecture in which everything sits on top, we do that every week. With customers, Dave. David was a CEO before, he understands.
I don't need to go to Dave and convince him to try to see if we can get our customers to sign up for better shipping terms, better payment terms, so on. He architects that from the bottom up on the customer master, we have conversations every day. Sunnova is not here, I can say we need to continue working with Sunnova to get the best payment terms that we can, right? The idea, folks, is that when we are talking about this Venn diagram on the people process technology, this is a business process that becomes a finance process. It's not just a whole bunch of finance guys getting together on Friday reacting on how we are on cash. We get every week an email from Treasury saying, "This is how much cash we have." We are on metrics on time.
On Friday we meet, we revise the plan, we adjust accordingly. Those things will continue. Now that we have the convert, we'll continue even stronger because cash management, cash conversion cycle, internal target to zero. We are at 46 right now. Our target is zero. Zero means you basically fund all your cash flow from operations. You fund it with basically your vendors and your customers, managing the lowest possible inventory level. We also have a very simple company. We are fabless. We use contract manufacturers from which we are looking for multi-sourcing, that actually is a simpler, easier way to manage cash.
If we do the right level of alignments with our contract manufacturers and we establish the best terms that we can, including the shipping terms and warehousing terms, we can actually produce a lot of volume and manage our cash and cash conservation much better, right? You don't need to consider large CapEx on a work in progress or whatever, right? All of these things, the tie out of the capital is associated with purely inventory that we own, which is very minimal. We manage again to the detail, right? That gives you the comfort that we have the ability to retract and contract and expand very quickly, right? That capability is embedded into the business model that we have. We use a lot of system and automation to create the right reports and real-time reporting as well.
The 30/20/10 plan is a P&L look of the world, right? Most of the operational people, they look at the P&L. I'm obsessed with the balance sheet. Actually Dave, Mike, and I, we are obsessed with the balance sheet. We want to make sure the P&L fuels the cash flow from operations that we need in order to continue generating cash to use that money to invest. That's our model, right? This 30/20/10 is working and you can see. You will see the numbers because I couldn't afford not to have numbers with a finance presentation, right? We just generated free cash flow two quarters in a row. Going forward, you will see a pattern of prediction associated with cash flow generation that ties into the commitment exiting 2018 on the 30/20/10 model.
Now I'd like to invite you to extend that model into 2019. That's one thing that I'd like to tell you. This framework is something that we are committed also into the next year. That's one thing that we can commit, because this is part of what we do. It's embedded into our business processes. This, based on the four vectors of growth that you saw from Badri, will not get compromised because those vectors of growth are already tied into the 2019 strategy. That's how we're gonna grow, but we're gonna grow fast and profitable. That's the idea. We talk about free cash flow, we talk about the two quarters in a row, the business process embedded into that decision.
The balance sheet transformation is the one thing that I wanted to make sure that we set up and we get it up and running as soon as possible, right? Finishing Q3 with a war chest where we have options. Think about it. We did a convert. On the convert, we got a lower coupon. Is it a perfect convert? Could it have been a better convert? Could it have been a worse convert? Only time will tell. You can always look back and pass judgment when the stock goes up, or you can pass judgment if the stock goes down, right?
The reality is that at this time, doing an overnight deal the way we did it, with the terms that we did it, with the demand that we solicited, and the behavior of the bond the day after and the stock price reaction the day after is way beyond our expectation. In my opinion, based on these transactions and considering that converts normally require one day of at least public marketing, this transaction we did probably about eight or nine out of 10 in the way the stock behaved after the fact and in the way the stock traded. There was only one trade, folks, and most of the people are holding it. The bond was trading at a premium. That's a good sign to the transaction in terms of the stability. Now we have access to potential investors to stay longer.
It's a good decision, and we locked the dilution. We wanted to minimize the amount of risk associated with the day-after impact on the stock. With that decision, we locked a dilution that we felt it was appropriate considering what we wanted to achieve and the conservative values that we have as a company, right? That's on the convert. Why the convert? Well, they give you the financial flexibility. We don't need to pay with cash. We settle physically, meaning we issue the shares. The conversion premium was adequate. The coupon was good, considering there was a pre-marketed arrangement. The demand that we got is actually fantastic from what I can tell. I actually read in detail the script of the trading desk to figure it out, even the strategy of these investors, on how they are approaching this.
I feel very confident that was a good decision. The 30/20/10 operating model that basically Badri put in place 18 months ago, it started to now show signs of being credible in a way that is actually showing the numbers. We are getting closer to year-end. In two quarters earlier, if you exclude the one transaction, the $2 million transaction that we actually reported as a unique transaction, the $2 million in Q2, we still are getting 28.8% of the gross margin target. We are very close to get to that particular exit in 2018 on this 30/20/10 model. I think the challenge will remain on OpEx, but we do have a strategy. The strategy is actually very clear.
It's not particularly unique, but let me tell you one thing that why the OpEx strategy, the way we are approaching this is going to be a little bit unique. It's not unique because everybody offshores, or at least they used to offshore. It used to be more like, well, okay, we're going to look for the labor arbitrage on the long term. You continue hiring and hiring people on lower cost locations, and then that arbitrage eventually gets diluted over time because the salaries increase or the cost of doing business outside and the time zone differences create complexity and so on. The way we are approaching this is a little bit of a mix. We are offshoring quite a bit of our capabilities to be able to scale pretty quickly and take advantage of the labor arbitrage.
However, we also have a technology roadmap associated to potentially accelerating some of the people process technology requirements, specifically the technology piece, to address automation and ultimately scale with this offshoring methodology by not growing the headcount as much as we originally would have planned if that technology was not in place. That means taking advantage of better features, better algorithms on our existing ERP system or even the rollout of new applications over the time or the future as we may be able to afford cloud-based solutions. We are looking at this, not just hiring a whole bunch of guys or gals somewhere else and then take advantage of the labor arbitrage, but actually looking at technology as a way of differentiating factors.
Many of the functions require to have a strong presence here in the U.S., and we remain a strong R&D presence here, as well in New Zealand. Those are two critical areas that we want to make sure that we don't compromise at any cost. India itself, Bangalore area is known for having incredible capabilities on technology for software development and other capabilities as well. You can have the greatest talents at the lowest possible cost with the idea of some automation for scalability of transactional activities and still having adequate brain power as well in the U.S. and in New Zealand. That's our model for the 20% OpEx.
Finally, the operating income will be the result of all the efforts associated with the detail price management process that we are using, that Badri explained a little bit how we are approaching the way we manage our tiering customer, the long tail and everything, and the value proposition associated with the go-to-market strategies that we're going to be developing over time as the new technology IQ8 Ensemble will provide. The potential of Ensemble in terms of new ways of approaching pricing and selling value is what exactly you heard from Sunnova. What I like to keep your attention is that the only thing I would change that I heard from Sunnova is that we continue working really hard on cost reduction roadmaps. This is part of our DNA. We just can't help it. We are a semiconductor company basically participating in the solar industry.
We know that removing the moving parts out of our micro and eventually moving those capabilities into the chip is the solution for us to be able to remain cost competitive as we continue value pricing up. That strategy is actually embedded in the company. We had a VP of cost reduction, the same way that we have a VP of pricing. I feel very confident that this framework has the management team in place, the business process in place, and the experience and commitment to deliver on a going-forward basis. These are the numbers. I just need to show you the numbers. You saw it from Badri as well. I just wanted to point out on the free cash flow generation two quarters in a row. Q3, we have a big investment.
When you look at free cash flow, probably you will see an adjusted free cash flow number because of the one-time investment. Again, we are not going to do, I don't envision doing some power transaction every quarter. One thing I know for sure is me, I've been here for two and a half months, and we did that transaction, which started a week before I joined the company. I wasn't even on the payroll, and I was working on this one on an NDA, and then we did a convert. In two and a half months. Think about what we can do in the future. If we can do so much in. I'm not going to dwell too much on this other than pointing out that we finished with $58.5 million of cash.
You can add the $65 million minus the fees, then you take out the $25, if we generate cash flow through the end of the year, you can do the math on a pro forma basis. We are well-suited. We also have two choices. We can actually rework our relationship with existing lender and on a better deal if we decide to continue borrowing, or we can actually move on and repay that loan and potentially have a nice and secure balance sheet available when we need it. Those are things that now are available as of now, as of Friday, actually, when the transaction settles. That's something that I'm proud to report.
This is something that I think Badri presented some of these elements, this tells you a little bit about the history of the company and where we are, and this dramatic increase. There are a few people out there that when they look at this, they see troubles. They see accounting problems. Or alternatively, you can see a competent organization finding its way with a great technology to deliver value and ultimately organizing themselves to win. That's what you can see. I see the latter, obviously, otherwise, I wouldn't join the company. On the balance sheet transformation, we talked about it, about the base business, the 30/20/10 generating cash flows. We talk about the acquisition of SunPower.
I think there is plenty of information out there, including some guidelines that we provided in terms of the size of the business for you to do your own analysis and conclude it was this an accretive transaction or not. Time will tell. Badri mentioned about the ramp closing 45 days earlier or 40, 45, about 45 days earlier. Now, thinking about shipping, you mentioned that, right?
Yes.
I think that's a success, and the reaction and the reports and everything on this decision was pretty good. We talk about the reduction on the, meaning targeting a very low or internal target of zero cash conversion cycle with rigorous management. Then we talk about the convert a little bit, giving you a little bit of a highlight how we feel about the transaction. This is the process that we follow. I just described to you, having a optimize the receivables, optimize your payables with longer. This is super simple model. The lowest possible number here, the longest possible numbers here, and the minimum number, the lowest number that you can, unless you strategically build ahead, like for example, you build ahead components because of shortages, that number should be very low. We had a target internal of 30.
I think Badri is more aggressive. He wants 25. With the model that we have right now, the company is a simple asset-light business model. Fabulous, scalable. I don't see a problem getting better. That number will change. Right now it's 46. It will change. You can do your own math, but eventually will hopefully move towards a neutral number over time. That's my goal. This is the convert we just done. It's gonna sell on Friday, tomorrow. I think that the terms are very good. I said we got a 4% coupon, which is pretty good. The conversion price was okay. It was adequate, I guess. There was physical settlement, so we don't need to pay cash for the on maturity on convert, so that's good. It's trading well so far, the bond.
This is one slide that I want to take a little bit more time because this slide, I think, is important. You heard the presentation of one of our key customers. You saw the passion and commitment on our relationship. You also saw Raghu doing a somewhat passionate presentation. I say somewhat because there's a lot of pressure on Raghu right now, and the team, about our new storage solution, complete solution, which includes our microinverters, that complete solution. It's as a portion of Ensemble. If you remember the buildup of the Ensemble, what he called the Ensemble marketplace, supply-demand of energy marketplace on the AC bus, one of them was the storage solution. He mentioned about the sweet spot between 10%-15%, 10-15 kilowatt-hour, sorry. I would say that's probably pretty common in America.
Probably in Europe and Asia Pacific, a smaller size. We are keep getting good success with the existing solution, which just doesn't have a backpack capability. I look at the opportunity, and I'm a finance guy. I couldn't help. I say, "Well, how about how many micros we ship per year?" You look at 2017, you can look at first half of 2018, and roughly you can do a simple math of 21 panels per home, on the average home, just for a simple math, and you can probably average about between 130,000-180,000 homes can be served in a given year as a range, as a kind of ballpark.
If you assume an attach rate of 3%-5% for that, and if you think about the pricing that is out there right now for solutions that there are perhaps inferior in some cases because they don't have the Ensemble solution, or in some cases they can be probably a little bit better on the degradation front, and time will tell. One thing for sure is that there is a market out there is a customer willing to take orders, actually issue orders, and we take the orders. With the right pricing negotiated, and if we stay on the model that most of the investment associated with the R&D for the development of our 10-kilowatt hour solution, the modular approach that we have for storage as part of Ensemble is going to be spent, or for the most part, already spent in 2018.
If you believe, like I said before, that our 30/20/10 model will be rolled forward into a 2019 way of life, you can arrive to your own conclusions. We feel this is a good opportunity for us, and we're going to focus on that area on a go-to-market strategy with lining up customers, and I think the demand will be there. That's how we see the world. Just to give you a sense of dimension on what you just heard about the storage solution. Now, Ensemble is more than that. Ensemble has value. It created value, and its value to be monetized and shared with the partners that we do business with, and ultimately, on the total cost of ownership for the residential homeowner.
All of those things will be explored, and it will be continued to be studied as a go-to-market strategy as part of our Ensemble go-to-market for the second half of this year. You probably will hear more about it. Just one piece, just the storage solution piece, and there are framework like this one, and think about the opportunities.
Do you think the margin of the corporate average?
I think that
Storage.
I think I'm not going to comment on the margins for storage.
Yeah.
I'm saying the framework that we're going to keep at a corporate level, it will be following the framework. Meaning all our business will deliver that, at least that. That's our commitment. Yes.
When you think about what a battery might cost and what the inverter costs for a house system, the battery, roughly, you can be two to three times what regularly would be from inverters for a house?
Well, I'm not going to comment on pricing. You could probably research that out. Yes.
With IQ 7-
I need to repeat the questions I've been told, so I apologize.
With IQ 7 ops, you went full cost, and you said it was going to be 65% of the third quarter whereas it's 22% of the second quarter, and essentially 100% of the fourth quarter, or by the fourth quarter. Why wouldn't you be taking up the gross margin guidance that you already got for the one and a half available for the fourth quarter?
You're talking about for this quarter, Q3?
The third.
IQ7 or IQ8?
It was a 30-point guidance.
Just to see if I understand your question, Brad. Your question is about second half of 2018 and IQ8 or next year?
Well, the 30/20/10 framework.
Right.
The 30 would be going up given the where you're at now as far as-
For 2019, you mean?
Well, yeah.
Why I'm not guiding up?
Right.
Well, I think the guidance reflect what we understand to be an adequate belief on how the business will perform. Remember that these numbers were given 18 months ago, and we are at 28.5% if you exclude the one-time transaction that we disclosed for the analyst to do their own margin analysis. We committed on a 30/20/10 model exiting 2018, and now we are rolling forward in that another year into 2019. There are all sorts of elements that goes into how we do pricing, the market risk, and so on, and those are already incorporated, including tariffs and so on, that are incorporated into the framework. That's how we felt comfortable that that model was adequate for us right now.
Can I just clarify?
Sure.
It may imply that your gross margin, it's not hard math to do Q4 margins going up with the IQ7 ramp. Does that imply that you expect margins to come back down from that level or that you're just not resetting it at all?
I think we are committed to the existing model, and we are not resetting the model right now. I'm not going to comment. The reality is IQ7 has the benefit that it open new markets. We also committed to profitable top-line growth. There are trade-offs there that we are evaluating. At the end of the day, we talked about extensively whether we want to go ahead and commit to a bigger gross margin and all of those. When we look at the dynamics of the market, we look at the risks. The risks associated with ramping a new product, the incorporation of IQ8, additional expenses that we may incur, tariffs, trade wars, and all these things. Guys, we are in solar. This is a solar industry. Those things are in tune.
For me, this commitment at this point is the right commitment for the company, and I think it's a cash-generating commitment, which I'm very satisfied with that at this point. We are a very cautious management group. Yes.
If you had a few words, am I on? Okay. The question from Brad was, you are already at 28.7 or 30.5% gross margin in Q2 of 2018. Given your low IQ7 conversion rate
therefore, if your conversion rate increases in Q3 and Q4, would you be at a higher gross margin? That's the question, Brad? Right. We are obviously doing very well. It's clear. Yes, the IQ 7 will be at 65% of shipments in Q3. For example, Australia and Europe for the first time will be having a seventh-generation product versus right now they're on the fifth generation product. That will obviously help. The conversion is going to be higher in Q4. Like what he said, we are not in a normal industry. We are in solar. I hear 10% of tariffs one day, I hear 25% of tariffs one day. Right? therefore, for us, although we are actually conservative management, right?
Although we are doing extremely well, we need to take all of these headwinds into the picture, we need to prepare the company for this. At this point, we are really comfortable with our model 30/20/10. Storage, he asked the same question. We think the storage growth margins will also be very close to that corporate model, we're not going to change the model right now.
Can I ask you to confirm this, right off the hot one? I'll ask the question a different way, right?
If you're moving to the IQ 7, you've got more margin to work with, right? How do you deploy that, or how do you think about the opportunities to deploy some of that margin for market share growth?
Yeah.
How quickly does that happen?
Okay.
You've been guiding on a quarterly basis and investing the company as a 12-month company. Your cycles are about a quarter second ahead of time, right? How quickly can this start to change or accelerate in your mind, and how do you make those decisions?
You got to repeat the question.
Yep.
Oh, my Lord. Okay. I think, let me paraphrase a little bit here, right? I think your question is, you look, you get IQ 7 coming up, which definitely improves your margins or will improve your margins or can bear better pricing. Intuitively, you are seeing basically a variation of the same comment that Brad made, right? By you also saying, there is a trade-off in your mind between market share growth and the use of that potential growth margin to subsidize that growth, right?
Correct.
That was the question, right? Okay.
How quickly can you make those decisions?
Yeah. We can make those decisions almost real time in terms of the way we do pricing here and the way we approach our decisioning. It's actually pretty dynamic, right? In short, you're saying that we are using dynamic pricing, maybe Dave can answer some of these questions, right? I think those decisions can be done really well. The critical thing for me is this: Is that the only way, right? Because we also have value pricing, right? We probably can get a situation in which we have growth where the growth margin could be bigger, right? We are not denying the possibility that the model can be beat. We are not saying it will be exactly that. We are saying we are committing to this operating model.
That's what company says based on the visibility that we have in considering that we are a fairly conservative group of people, that we don't like to over-commit. With that being said, the trade-off or the real-time trade-off between market share, pricing, and all of those things eventually could lead to a favorable situation, right?
I guess my question is a little bit more around profit margin. How are you going to make those decisions and what-
Colin, am I on?
Yes.
Okay. See, with IQ6, we had to turn down a number of valued customers because the costs were too high. That's right now changing. The costs are coming under control. IQ7 is ramping. There is more important phenomenon here. Because of the value associated with IQ8 and Ensemble, customers are now coming back to us. It is a much more strategic discussion now involving solar plus storage versus previously, which was only solar and completely commodity-based. With Ensemble and with the differentiation of software and semiconductors, we are really approaching that as a value sell. That is like two of the top tier ones across the world have come back to us and want to reengage on the next platform. Right? We will not lose our discipline on pricing for sure. No question. At the same time, we value these strategic relationships.
If that relationship is going to be purely a commodity play, I'm not interested in playing. If it's going to be something that has long-term value, then I don't mind being a little bit off in pricing. For me, what is important is that there is a really healthy relationship, the one that you saw, for example, with Sunnova. We talk about a platform sell versus pure microinverter sell. That's where we're going.
If I can paraphrase, the nature of your customer relationships are changing right now, you're doing this in real time.
Yeah.
We should be able to see the results over the next couple of quarters.
Yeah. Yes. We are not going to guide you. We are back. Not yet. We are back, but we are cautious, right? We are back and cautious. Brad?
A lot of back and forth between you and your main competitor, again, mainly probably from your main competitor talking about reliability and failure rates. Can you give us any anecdotal or quantitative data on what your failure rates are versus strings or string inverters you've got on installations out there?
Sure. On? All right. The question is, what is our view of our reliability versus string? I'm not going to talk about anybody individually, but you can go look at that, and some of that's public. That versus the numbers I showed you for our current generation technologies, they're public information. Their failure rates are five to 10x higher than ours.
They tend to counter and say that ECAP don't last 25 years in the field. Can you talk about what your ECAP failure rates are on that real quick?
Yeah.
Okay. Am I on? What is the failure rates of ECAPs, and we have been told that ECAPs is the failure point, et cetera. We showed that in the last analyst meeting. We even showed a graph that till date, the total number of ECAP failures is nine DPPM, which means out of every million units that we ship, nine parts come back to us for capacitor failures, and those are not even confirmed as ECAP failures. The failure rate is at an all-time low, and we are extremely confident that ECAPs are reliable.
Hi. Can we take a step back and just kind of look at the market and just the impact of tariffs on.
Yes
overall customer behavior. How does it affect visibility? How does it affect in terms of requirements on customers on price, et cetera? How does this affect overall business outside of your business model? How does that affect you?
What is the impact of tariffs, how does it affect the customer relationships? How does it affect pricing, et cetera? That's the question. Long answer, because there are a lot of tariffs, right? We had the 201 first. The 201 tariffs was imposed on modules. The AC module got inadvertently affected because of the 201, and the microinverter portion of the AC module was also erroneously tariffed. We have basically filed an exclusion with the USTR, and we are still waiting to hear from them. That is on the 201 case, right? So far, everybody with me? That's the first one. The second one is 301A, is what I call. 301A is the $50 billion tariff that Trump imposed. On that one, the microinverters were not affected. There was a $200 billion of tariff that is called 301B. Okay.
In that one, microinverters are affected by 10%. Okay. That 10% is fluid. It can go from 10, it can go 15, 25, and it's still not decided. No decision has been made. Of course, we are fighting for exclusion, et cetera. Our strategy is pretty simple. We recognize the need to have contract manufacturing outside China. We are already proceeding towards qualifying Mexico. I've already invested the capital for that. I'm going to have a manufacturing in Mexico in six to nine months, like what I said on the earnings call. Those are actually happening as we speak. Okay. For us, we view this as an opportunity to both reduce cost, because when we have multiple contract manufacturers, multiple availability, multi-sourcing, it helps overall. Not only is it the tariff mitigation, it's going to help us eventually in costs.
Did I answer your question a little bit?
I was just curious, just how is it affecting customer buying behavior at the module level, just the introduction of overall tariffs for the industry outside of the microinverter. How's the market? Are you seeing volatility in customer behaviors towards the quarter? Are you able to forecast 2019 properly as a result of it? Are customers asking for price cuts because they're under pressure as a result of tariffs elsewhere in the supply chain?
Yeah. We haven't seen any big customer impact because of the Section 201. I haven't seen, at least in the residential market. The pricing situation is very stable. I haven't seen much there. Of course, the module prices, they swing all the time, and I think eventually it'll be good for the end consumer. As far as the pricing pressure on us, we haven't seen that much. Okay.
How much volume are you anticipating manufacturing in China versus Mexico or other places that you may be considering? Would Mexico only serve the U.S. market, or would it serve all of your markets?
How much volume are you planning to manufacture in Mexico versus in China? The way we were thinking to a first order, this is still going through change, the way I was thinking first order is all the international locations will be served from China, and most of the U.S. locations will be served from Mexico. That's to a first order. We might refine that thinking as time goes, but that's what we're thinking now. We haven't finished the presentation yet. All right. We were going to finish the last slide.
I'm happy that we got all excited with my finance.
Oh, yeah. Okay. Conclusions. Everybody hates
Pitchfork
this pitchfork here, but still. We talked about creating a solid financial foundation for profitable top line growth. Right? That's the focus of the company now. Cost is in our DNA. We know how to do cost. 30/20/10 comes naturally to us now. I still go to meetings, I still sit three hours a week on cost. This is coming naturally to us. Supply chain, pricing management, IQ 7 transition, this all will happen. We know how to do this. The solidification of market share leadership in microinverters or in inverters is going to be enabled by IQ 7. We got a beautiful platform. We got a lot of regions to go penetrate. We are doing that now. That was not possible before. IQ 7X, that supports 96 cell modules now. That was not possible before with IQ 6.
The acquisition of the SunPower's microinverter business advances ACM. That'll add on top of it. Okay? That's more in the short term. Then Ensemble, we expect it to be a game changer, especially the storage side. Somebody pointed out, it's going to increase. The higher the storage attaches, the better it is for us, because it's going to increase the revenue per home. Right? We are extremely excited on Ensemble Solar and Storage. That's where the name of the game, again, is that we are an innovation-focused company. We have differentiated products to solve customer problems, and that is why I think that will be a big winner. Okay. With that, I will stop, and now we can have questions, really.
Sir, can I ask a little more on, if you look at Australia as a leading indicator of storage or maybe the SunPower dealer network, what storage attach rates are you seeing in someone like a (Empire Early Adopters)?
Raghu, did you get the question?
Yeah.
Do you want to repeat the question?
Yeah. You're asking storage attach rates in places like Australia and EMEA. Australia is the biggest market for us. Of 25 megawatt hours, I'd say close to 60% of that, 65% of that is in Australia and the rest is in EMEA. It's very interesting. I don't know the specific number on attach rates exactly, but there's an interesting caveat to that, is that 40% of all our systems that were installed were on non-Enphase systems. People aren't just buying storage to attach it to the Enphase system, but they're taking that and attaching it to non-Enphase. There are a couple of other dynamics there as well. The sale is still complex, right? Trying to sell storage is still complicated, trying to explain to homeowners, "Hey, this is what your ROI is going to look like based on rate arbitrage." Backup is a pretty straightforward and easy sell.
What people are doing, the reason why they like the 1.2 kilowatt hours is it's a very low price to entry. People are saying, "Yes, I know. Let me just go and commit, get a 1.2 kilowatt hour block right now," knowing that as the market matures and people start to better understand what the use of storage is and what the economics there are, they can come in and add more to those existing systems. Those are how we are seeing the dynamics there. That's why, actually, even though we announced the Encharge 3, we're going to still offer the 1.2. People want that. Customers are saying, "We like the low one. The 1.2 is good as well.
Do you know what the attachment rates are within the SunPower's dealer network today?
They publicly did give a number.
35%
35. Yeah, I think they said 35.
It's publicly available information, 35%. I think the Sunrun also disclosed, I think Vivint went quiet on that.
Yeah.
They just did it.
Yeah.
As part of the 30/20/10 model, you want to get OPEX to be 20% of revenue.
From where you're sitting right now, do you see it easier or more likely to get there by growing revenue and keeping OpEx about where it is right now? Or do you see more limited revenue growth and more opportunity to cut OpEx?
You want me to take that?
Please.
We see a mixture of both.
Okay.
We see a mixture of both.
Repeat the question.
Okay. The question is, how are you going to get your OpEx to 20% of sales? Is it by cutting cost, right? Like what I said, one of our cornerstones is we are not going to be cutting innovation. In order for us to do that, we need to have the right people at the right places. Okay. What I say is right people at the right places is to not have India as a location just for low cost in some areas. The way we are approaching India is all functions will be in India. For example, today, our entire operations is running from India. Today. Our actually revenue tactical, meaning the sales operations. The sales operations, not sales. The sales operations role is being run from India. We also have hardware and software teams ramping up.
We have our pricing teams ramping up. We have our customer service ramping up. Once you have an ecosystem that is there, which is at a cost which is much better compared to regions like here, we should be able to take OpEx down. Right? At the same time, I want to add targeted places. I want to add here. Like for example, Martin, he is the Chief Technology Officer in the company, and we need five more people like him in his team. Right? That talent, I will not be able to get in India. That kind of talent. Dave Ranhoff wants to expand the North American sales team, to go after more accounts, as well as the Europe sales team. Those, I can't have in India.
I will create the room for all of those, and drop expenses because I'm moving the execution teams very fast there. I hope I was a little bit clear there. That's why we're very confident of meeting the 20%.
Your comment about the two tier 1s that have recently come back and reengaged, can you give us some more color about what level of engagement or what stage of cycle you're in with them, and were these previously customers and did they step away because of bankability reasons and now that's available, or is it more IQ8 driven?
Yeah. I'm not going to provide that much color.
Okay.
We walked away from some of them, because we just didn't have the right cost to serve them. Now we are in a well-placed position. The relationships are resuming, and it is mostly on. Of course, they want to buy IQ7, but mostly on Ensemble solar and storage.
Bankability play a big role on coming back.
Yeah. The bankability is off the table, like what he said, I'm not even going there.
It's pretty impressive that you put the convert in place in roughly eight hours. Given that, can you tell us the profile of the investor? Who was the banker? Are these debt funds? Exactly who invested in this?
Okay. The book runner was Credit Suisse. The profile of the portfolio is very large hedge funds, of which they actually participate on the loan. They have loan participation. We were very selective in how we approach filling the book, we were very deep into understanding the strategies. Obviously, nobody's going to commit to anything, right, in terms of a particular strategy. Strategy can change or whatever, right? I think that the biggest concern that we have is we wanted to open the opportunity for long investors to come in. I think, we are not exactly where we wanted to be, but the behavior of the bond, the selection of the large hedge funds, all of them actually makes you believe that we are in a good position right now.
One other point to add is, T.J. Rodgers, he got in originally at $0.92, if I remember right, in January of 2017. He invested $5 million. Now he invested again $5 million at $5.56. Right? Yep, that's a data point for you there. Okay, go ahead.
Eric Stine, Craig-Hallum. I guess a question for Raghu. Just thinking about distributed energy and playing it forward a little bit, much more talk about peer-to-peer trading. Just curious, is that something that Ensemble can handle or can enable, or does it require more product development?
Let's look at it.
Can you please repeat the question?
Yeah. The peer-to-peer trading, is that something that Ensemble can handle or is it something that you have to do a lot more work on to make it happen? We start with always. Martin and I were talking in the very early days. The right thing to do is to put the right architecture in place. If you have the right architecture in place, all of these can be enabled over time. The very intrinsic nature of what we do is fully distributed. We never went away from that. It could have been very easy to say we're going to make a central authority that manages resources, and that would have been the wrong architecture.
It took us which would have been easy to do, would've been done faster, but it would have failed at its very core in that it wouldn't be capable of enabling things like what you're talking about, where you're looking at peer-to-peer transacting and everything. We didn't talk a lot about that at this analyst call. We're going to save something for the next one. We are being very cautious about what we are talking about in terms of what the capabilities of Ensemble are today. The architecture exists in order to do more and broader things in the future, without a doubt. What that'll do is trigger things like new business models, et cetera. That's what talking to John was very interesting about. That's why we work closely with the partners like John at Sunnova.
Can I follow up on Chad's prior question around customers re-engaging with you? Do you have a sense for how much of your revenue decline being customers that last year raised (various concerns) perhaps a year ago or so?
I don't keep track of that. I'm not going to talk about it. No.
Just in terms of understanding the sense of the market share
It's hard for me to put a number to it. I think what is the most important thing here is, they are not only coming to us for IQ 7. The engagement is not just on solar. The engagement is on the entire system. The engagement is on solar, storage, load control, ECL, the entire thing. The entire system. The discussions have moved from a tactical level to another level. We would like all relationships to become like what they are with Sunnova, and I think they're getting there. Ensemble is playing a big role in actually enabling that for us.
It's moving from the widget to the solution, the complete solution, right?
Yep.
Those are the right conversations. Yeah.
If you look into 2019 and you include the additional business that you will get from SunPower, can you give us a sense for what your expectations are for growth in either megawatts or revenue, just generally? For example, is 25% growth including SunPower reasonable number?
No way. I'm going to have Eric answer all the difficult questions.
I can answer all the questions that I cannot answer, I guess by not answering them.
Yeah, you got to repeat the question.
No, I think.
You got to repeat the question.
Yeah.
Can you give us guidance for 2019? That is the question.
Yeah. That was the question.
The answer is no.
I think that, the way I'm approaching this SunPower transaction is we went a long way providing ranges of the opportunity. The reason we did that, and although I pushed back on Badri a lot, because I was new and suddenly I find myself providing these kind of guidelines. Badri was very smart on one point. He says, "If we make a transaction like this one, we make an investment of this nature, how do we get the market or the investors to understand how important it is, and it meets the minimum economic asset test?" If you do the valuation analysis on company valuation, all the metrics associated with that, you basically get that at a minimum.
You also get that on a minimum, the opportunity, even though we are committing to a 30/20/10 in 2019, you see the margin kind of accretion of that transaction, and then it's the conversation about, what do we do with that, and how do we approach it. That's the second piece. In terms of what I think that on this transaction, what is the biggest piece that is missing is what is not part of the transaction, what comes with the partnership. That Badri mentioned multiple times, and for some reason, we are getting questions about the transaction and not getting questions about the opportunity. I think we are already operating internationally. I believe SunPower has a desire to continue to play internationally. They have a presence there. We have a presence there. We know how to do business there.
I believe they don't have a complete solution there. Now we have IQ8 was not part of this transaction. We have this trusted long-term partnership with SunPower, Europe, Asia-Pacific and so on. The way I'm answering your question by not answering the question is, think on both terms. Think about now suddenly we have IQ8. Even if we don't do IQ8, we have IQ7, and now IQ7XS, and it's a push on the firmware. Same supply chain. That's why the OpEx that we provide as a guideline meets the asset test criteria, at least for me to get comfortable that we disclose that. I think these partnerships that you see playing out, the Sunnova, the SunPower, those ACMs, ones that Badri mentioned, all of those are real and the opportunities will come out of that.
Can I follow up on that? Just, I guess another way of posing that question would be, the market expectation for growth for the company is about 23% on the top line next year. You didn't guide that, but that's what the street estimates are looking at. In that context, is the market, is the TAM going to grow about that much for the company with the new products? And that's kind of the pathway towards reaching to that. Is the TAM going to grow some, and then we're going to gain some market share back?
Raghu.
What are the-
Let me answer that question. You talked about some numbers, right? 20, 23%. The question is, your model assumes-
The consensus estimate.
2019 consensus assumes a 23% growth from 2018.
380 to from 310.
From 2018, it assumes a 23% growth. What do you think about that? How is that going to come? Of course, we already told you, one, he answered that question. One is it is going to come from SunPower. That you already know. The second one, we already told you how excited we are on the storage front. Eric, he actually went and gave you some kind of attach rates there. That's two. And then third is all of the things we are doing right now on the regional expansion, on developing high-power products, on our AC module partnership. There, we haven't even scratched the surface. We are actually engaged in the AC module partnerships with India folks, with Europe folks, and we haven't announced those, and we'll announce when we are ready. Like what I said, there is no secret there.
It is regional expansion, it is SunPower, it is high-power modules, it is AC modules, and of course, Ensemble Storage. Those are the vectors.
Senior. Go ahead.
Just three very quick ones, hopefully. How many people from SolarBridge are you keeping in Texas from when you acquired them?
How many people from SolarBridge am I keeping in Texas? Roughly 15.
Okay. Curious on, for Raghu, the 25 megawatt hours of storage cumulatively being sold. Can you give a sense of what the average size per home is, if we do the 3%-5% attach rate that Eric was talking about? What's the attach rate there approximately?
About two per home.
Yeah, apples and oranges.
Right. First thing, apples and oranges, we are talking about a 1.2 kWh system.
Right.
Eric, whatever he told you was for Encharge, which is the 10 kWh system.
It has backup.
Just wanted you to note that.
It has backup.
Yes. That solution, the new solution, has got backup, while the old solution does not. Having said that, each system that we have sold previously, which we call AC Battery, which we have shipped over 25 megawatt hours, each system or each home has roughly
Two
roughly two AC batteries per home.
That's without the ATS. Now you're going to have it. Your accessory content's going to go up dramatically with the new product, right?
Yeah. Again, it's use case dependent, right? When you look at EMEA, APAC, their backup has not been such a big use case for them. It's about rate arbitrage. We expect that a lot of the Encharge, the 10 kilowatt hour sweet spot that we are referring to is more of a North America play. Backup is a very big, it's still going to be a pretty big play, which means by definition, you have to do a micro ATS, et cetera. You're right. It's a different thing for North America.
Yeah, I think a good follow-up on that question, Raghu, for clarification. I know where you're going. When we are looking about the 10 kilowatt hour battery backup solution, Encharge. With that, you need a component element to it. If there is a component element, what would that be? I think that's your question, right?
Sounds good.
Okay. I'm only assuming.
Yes, that's correct. If you want to enable Encharge to have backup capability, then you need to have a micro ATS to go with it. If you want to use Encharge, again, for pure demand charge or as a grid-tied system, you don't have to.
The last one I had was, it doesn't sound like it's the case with your tier 1s coming back to you, but with the pending introduction of the Huawei products, is that stalling the market? Are people waiting for price discovery as that comes out likely next month at SPI? This period as people look out, ordering into the future for Q4, are they waiting to see what mass availability of that product is relative to the premium they would pay you?
I can tell you what we are seeing in the market. We take all competition seriously, we are all the time looking for signs, and so far, we haven't seen much yet. We hear it is sometime late Q3, Q4, but we can't confirm. So far, we haven't seen much impact.
Can I ask one about the retrofit opportunity? You mentioned on the call the M190 and M215 replacement. If you think about the IQ8, you've shipped 700,000-plus systems historically. Wouldn't there be an opportunity for customers that had a non-grid agnostic system to swap out, say, half of their inverters for an IQ8? Is there a retrofit opportunity for systems that might be, say, SMA or another string inverter to add a IQ8 to their system and become a grid agnostic then?
Yes. Those all opportunities exist. IQ8 will be ideal. To be pragmatic, like what Eric said, we are conservative. We have to first walk before we can run. Our focus right now is to get the Ensemble product out, right?
Is to make sure we basically start selling the entire system. When I say the entire system, solar plus storage, plus ATS, right? Plus cloud. Get that going, make that bulletproof, I come back to the retrofit market, which is huge, and do targeted marketing, see what they want. Absolutely.
You mentioned software and services are going to triple again in 2019. Can you just give us some examples of what types of products you can charge for in a software model that you could not in the past?
Right. Basically, I'll give you a couple of examples. One is, we develop a lot of APIs that a bunch of developers want to use. That is a licensing model that we're already getting revenue from. Of course, the revenues are nothing close to material, but they are increasing. The second one is, again, a flavor of what we do, because there are a few others that we're not going to talk about today. The second one is something like an Enlighten Manager, an advanced Enlighten Manager plus, which basically gives the homeowner a lot more customization, a lot more color of what's going on at the per-panel level.
In a much more intuitive way. If we provide that value and the customer is ready to pay for it, those are two options that would be scratching the surface.
Yeah.
The model, I think, will be distributed model. Meaning for the homeowner to have full control over their experience, right?
Right.
We are not thinking about controlling and Right?
Yep.
That's not the way we are thinking.
I think we are out of time. It's time to go for lunch. All right. Thank you.