Good day, ladies and gentlemen, and welcome to Enphase Energy's first quarter 2018 financial results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ms. Christina Carrabino. Ma'am, you may begin.
Good afternoon, thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2018 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer, Bert Garcia, Chief Financial Officer, and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31st, 2018. During the course of this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy's financial performance, market demands for its current and future products, advantages of its technology, and market trends. These forward-looking statements involve significant risks and uncertainties. Enphase Energy's actual results and the timing of events could differ materially from these expectations.
For a more complete discussion of the risks and uncertainties, please see the company's annual report on Form 10-K for the year ended December 31st, 2017, which is on file with the SEC. The quarterly report on Form 10-Q for the quarter ended March 31st, 2018, which will be filed with the SEC in the second quarter of 2018. Enphase Energy cautions you not to place any undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. Please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges.
The company has provided reconciliations of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the investor relations section of its website. I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?
Good afternoon, and thanks for joining us today to discuss our first quarter of 2018 financial results. We had a decent quarter. We reported revenue of $70 million for the first quarter of 2018 at the higher end of guidance. Our non-GAAP gross margin in the first quarter was 26.5%, surpassing the higher end of guidance. Our non-GAAP operating income was $861,000. We have come a long way in the past year and are pleased to report the second consecutive quarter of positive non-GAAP operating income. As I have stated several times before, my top priority at Enphase is to build a solid financial foundation by improving operations and fortifying the balance sheet. During the first quarter, we continued to make progress on these fronts with further gross margin improvement through pricing management, supply chain optimization, and IQ transition.
We are making good progress on reaching our 30/20/10 target operating model by the fourth quarter of 2018. Turning to the balance sheet. We exited the first quarter with a cash balance of $53.3 million, which included a previously announced $20 million private equity investment. Our sharpened focus on improving AR, AP, and inventory management helped improve the cash conversion cycle in Q1, resulting in approximately $2.3 million of positive free cash flow. Bert will go into greater detail about our financial results later in the call. Over the past year, Enphase has transformed its culture to one of discipline and rigor, supported by metrics. This focus continues to be applied broadly across all aspects of our business. One such example is ease of doing business, the way we are perceived by customers. This is measured by a popular metric called as Net Promoter Score, also called NPS.
An NPS is calculated based on feedback from customer surveys on how likely they are to recommend Enphase to a friend or colleague. Our executive team is very involved with ensuring we provide a best-in-class customer experience that is a benchmark for the solar industry. In January, we hired a seasoned executive to lead our customer support team. We have optimized our call center, resulting in a significant improvement in wait times over the past two months. We measure wait times based upon 95th percentile, not the average. We are not satisfied with the average wait times coming down. Rather, we want the worst-case wait times to come down significantly. We began rolling out self-help tools this quarter that provide our customers the option to resolve majority of their problems quickly and without human intervention.
In short, we are focused on providing superior customer experience measured by continuously improving NPS metrics. I will provide updates on this effort every quarter. Turning to our markets. The first quarter in the U.S. was down 22% sequentially and up 11% year-on-year. We started shipping IQ 7 to our customers during the quarter. In Europe, revenue was up 11% sequentially and 92% year-on-year. We recently announced IQ 7 for the U.K. and look forward to introducing the product in Germany and Austria, along with other European countries during 2018. We maintained our market share lead in France during the first quarter and grew market share in the U.K., the Benelux, and Switzerland. In APAC, revenue increased 5% sequentially and 88% year-on-year. This first quarter was the largest quarter ever for shipments to the region.
Our business in India continues to ramp. We recently announced the availability of IQ family of microinverters across India. This is a rapidly growing solar market, and our IQ family of microinverters is designed to operate in the harsh and dusty conditions in India. In Latin America, the first quarter revenue increased approximately 32% compared to Q4, as Puerto Rico began its slow recovery after the devastating hurricanes last year. The IQ8 product, based on Ensemble technology, will be the perfect fit for such island nations, where the grid is susceptible to natural disasters. As a company, we have been laser-focused on pricing management, supply chain optimization, and new product transition. These efforts are obviously paying off with continuously improving gross margins. With these becoming ingrained into the company's DNA, we are now starting to work on profitable top-line growth.
In order to achieve this, we need to continue offering differentiated products that add value to the installers and homeowners. The first such lever for top-line growth is the IQ7 transition. We started the IQ7 rollout in Q1 and did limited volumes, which were in line with our plan for a well-controlled ramp. In Q2, we expect to continue the ramp and introduce IQ7 in rest of the world. Note that the rest of the world is directly transitioning from the fifth-generation product to the seventh-generation product. In Q3, we expect to have a significant ramp, and in Q4, we expect to complete the IQ7 transition. We are continuing to experience component shortages in our IQ7 rollout and are working diligently to resolve the issues. We believe IQ7, with its worldwide SKU, will help us access a gigawatt of new market opportunities.
This represents approximately a 20% increase to our served available market. The next lever for top-line growth is IQ7X. We look forward to the release of our IQ7X discrete microinverter solutions to address 96-cell modules. This high-performance product, with its 97.5% CEC efficiency, will enable us to address a significant market both in North America and worldwide, which was not possible with IQ6. The third lever for top-line growth is AC modules. We recently announced a strategic partnership with Solaria Corporation for the introduction of Enphase energized AC module, the Solaria PowerXT AC. Solaria will be integrating Enphase IQ7+ microinverters with its high output PowerXT 355-watt, 60-cell-equivalent modules. As stated in our last conference call, we are working with Panasonic to integrate IQ7X into Panasonic's 330-watt HIT modules. This will result in a high-performance module with 97.5% CEC efficiency, the first of its kind.
Let me remind you once again about the benefits of an AC module. In the recent interviews we conducted with the installers on their AC module experience, they reported installation time savings up to 20%, logistics savings up to 10%, and simpler inspection procedures when compared to discrete solutions. We now have three different IQ7 solutions for AC modules based on IQ7+, and IQ7X. We believe this pairing of Enphase microinverters with well-known module brands will help long-tail customers offer high-quality, high-performance residential solutions to homeowners. Let me now update you on our next-generation IQ8 product, which is yet another important and exciting catalyst for our top-line growth. IQ8 is based upon our grid-agnostic, always-on technology called Ensemble, that has the capability to transform our future by creating new market opportunities. As we have previously discussed, one of solar's biggest challenges is that it is grid-tied.
What this means is, if the grid fails and the sun is still shining, there will be no production out of your solar system. To address this limitation, we have invented a microinverter technology that is completely grid-agnostic. With IQ8, you can have a system that will continuously provide energy regardless of the presence or absence of grid. That is solar during the day and storage at night. This is what we refer to as always-on. The IQ8 platform, based on Ensemble technology, includes energy generation, storage, communication, and software. It has a unique capability to address off-grid, grid-tied, and grid-agnostic use cases all on the same platform. We are continuing to productize the technology, building on the significant ASIC milestone we achieved last quarter when we established technological feasibility.
We plan to introduce IQ8 solutions in a phased manner, beginning with off-grid solutions in Q4 2018, followed by grid-agnostic solutions in 2019. These off-grid installed systems can be remotely upgraded by software to become grid-agnostic in future. These systems can then function in grid-tied mode or off-grid mode, depending on the presence or absence of the grid, and seamlessly transition between the two, depending on the performance of the grid. We expect this grid-agnostic feature to be useful not only for energy access in regions with no grid or weak grid, but also for regions with stable grids as a valuable insurance policy against unexpected outages. We will continue to update you on IQ8's progress over the coming quarters. In summary, we are pleased with our overall progress during the past three months.
We are now applying the same rigor and discipline we used on gross margin improvement to drive profitable top-line growth, along with a best-in-class customer experience. Before I turn the call over to Bert to discuss our financial results, I would like to mention, we announced today that Bert is leaving Enphase to pursue other opportunities. He will continue as our CFO until June 30th, 2018. An external search is underway to identify a replacement, and Bert will support an orderly transition to his successor. We thank him for his eight years of service and wish him well in his future endeavors. With that, I will turn the call over to Bert for his review of our financial results. Bert?
Thanks, Badri. I'll provide more details related to our first quarter 2018 financial results, as well as our business outlook for the second quarter. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis, unless otherwise noted. Total revenue for the first quarter of 2018 was $70 million, a decrease of 12% sequentially and an increase of 28% year-over-year. Total net revenue per DC watt increased by 8% from the fourth quarter of 2017, largely as a result of changes in product mix. We shipped approximately 180 megawatts of DC in the first quarter of 2018, a decrease in megawatts of 19% sequentially and an increase of 12% from the year-ago quarter. The megawatt shift represented 611,000 microinverters, approximately 67% of which were our new IQ microinverter systems.
As Badri mentioned, we began shipping our IQ product in the U.S. during the first quarter. Non-inverter revenue, which includes our AC battery storage solution, onboard communications gateway, and all accessories, increased as a percentage of revenue compared to our prior quarter results. Non-GAAP gross margin for the first quarter of 2018 was 26.5%, compared to 24.2% for the fourth quarter. We are very pleased with the continued progress we've made expanding our gross margin. The increases reflect pricing management, supply chain optimization, and the IQ transition. I'll note that we continued to be impacted by component shortages, which negatively affected our Q1 gross margin by approximately 1%. Non-GAAP operating expense was $17.7 million for the first quarter of 2018, compared to $18 million in Q4. As compared to the first quarter of 2017, we reduced Non-GAAP operating expenses by 13%, or $2.5 million.
On a Non-GAAP basis, income from operations was $861,000, compared to $1.3 million in Q4, and a loss of $12.9 million in the year-ago quarter. This dramatic improvement in operating income is reflective of our hard work over the past year and underscores our commitment towards establishing a solid financial foundation. Now, turning to the balance sheet. Inventory levels were $18.5 million for the first quarter, compared to $26 million in the fourth quarter and $33.8 million in the year-ago quarter. Inventory levels decreased Q4 as we improved our working capital management. We ended with 32 days of inventory on hand as of March 31st, down from 39 days last quarter and 64 days in the year-ago quarter. Our target inventory level is 30 days, and as Badri mentioned, inventory management remains one of our key cash management initiatives in 2018.
We exited the quarter with a total cash balance of $53.3 million, compared to $29.1 million in Q4. The Q1 increase includes the net proceeds from the previously announced $20 million private equity investment. During the quarter, we generated $3.4 million in cash from operations, as well as approximately $2.3 million in positive free cash flow. Now let's look at our outlook for the second quarter of 2018. We expect our revenue for the second quarter of 2018 to be within a range of $72 million-$80 million. Turning to margins, we expect GAAP and Non-GAAP gross margin to be within a range of 26%-29%. Note that our Q2 gross margin guidance includes the negative impact of higher expedite fees resulting from industry-wide component shortages.
We expect Non-GAAP operating expense for the second quarter to be within a range of $17.5 million-$18.5 million and GAAP operating expense to be within a range of $19.5 million-$20.5 million, including an estimated $2 million stock-based compensation expense. Before we open up the line for questions, I'd like to take a moment to say it has been my great privilege to be part of the Enphase team for the past eight years, and I'm incredibly fortunate to have worked with so many dedicated and talented people. I want to thank our customers, vendors, partners, employees, shareholders, and of course, the board of directors for their support throughout the years. It has truly been an honor to be the CFO of Enphase Energy, and I wish the company much continued success. As Badri mentioned, I am committed to helping Enphase through an orderly transition to a new CFO.
With that, I'll open up the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Again, that is star, then one to ask a question. Our first question will come from the line of Philip Shen with Roth Capital Partners. Your line is now open
Hi, everyone. Thanks for the questions. Great job on the margins. I know that's been a focus of yours for some time now, and part of that is perhaps some trade-off of volume. With the Q2 guide being slightly weaker than expected, I think the midpoint is roughly flat year-over-year growth for Q2 of this year. Do you expect that to trend flat still in Q3 and Q4? I know it's still early. You don't provide official guidance, but some of the PG&E data, or sorry, California DG data suggested that the volumes in California for you guys were down 20%. Just walk us through how you see volumes, and also revenues trending as we get into Q3 and Q4. Thanks.
Phil, thanks for your question. Let me tell you how we think about market share. It should be very clear to all you guys that our top priority is to build a solid financial foundation. We are focused on consistent profitability than growing market share at any cost. We are consciously walking away from empty calorie revenue like I have repeatedly said. Having said that, since we are performing great on gross margins, that is ingrained into our business or into our DNA, we are starting to work on profitable top-line growth. The four vectors for top-line growth are IQ 7, the regional expansion, where the software configurability of IQ 7, helps us to be compatible to multiple regions, which was not possible before. That adds roughly a gigawatt of new market.
The IQ 7X is something that was not possible with IQ 6, where we are now addressing 96-cell modules. That was not possible before. Of course, you saw the color on ACM partnerships. We are partnering with a number of people. We have announced some are in the works, and we have AC modules for IQ 7, IQ 7 Plus, IQ 7X. We are a big believer in AC modules. That's going to propel our future. The last one, last but not the least, is IQ 8 and Ensemble. In fact, we announced that we are going to introduce off-grid solutions in Q4 of 2018, followed by grid-agnostic solutions in 2019. These are the four growth vectors that you should think about Enphase. Again, the main message is whatever we do, we will not compromise profitable growth.
Great. No, that's really helpful, Badri. Given that, can you give us a sense for-- We've seen some kind of flatness on the year-over-year growth in Q2. Would you expect that acceleration from these great revenue opportunities to kind of pick up in Q3 and Q4? Could it be sometime next year? What's your sense as to when the growth really starts to accelerate nicely?
We are not going to be guiding to any numbers for Q3 or Q4, I told you the four vectors, I think they're all very tangible ones. We have the product coming out. I'll talk a little bit about the IQ 7 transition, let me add some color on the IQ 7 transition. Basically, Q1 2018, we started shipping IQ 7 in the U.S. We did a limited quantity of IQ 7, which was by plan as part of a control ramp. In fact, 8% of our shipments in Q1 2018 was IQ 7. As we proceed to Q2, that number will get better, more IQ 7 shipments. We will start introducing IQ 7 to rest of the world. We will also introduce IQ 7X.
Q3 2018 will be a significant ramp for IQ 7, we'll complete the IQ 7 transition in Q4 2018. That gives you some sense of the timeline on the IQ 7 transition, I already told you, three of the four top-line growth vectors are dependent on the IQ 7 transition. That's how I'm going to answer your question.
Great, Badri. I know that you guys were targeting Q4 as the full ramp-up of IQ 7. If you can put any specific numbers around the IQ 7 mix for Q2 and three, that'd be great. Are we kind of looking at maybe 20% in Q2 and maybe 60% in Q3? Do those numbers kind of ballpark feel appropriate?
I'm not going to provide conversion numbers, Phil, but like what I told you, 8% in Q1, incremental progress in Q2, big ramp in Q3, completion in Q4.
Great. Okay, good. One last one, I'll pass it on. As it relates to the AC module, is there anything you might be able to share on the 201 tariff exclusion potential? I know, based on our work, it seems like you have a good shot at it. Additionally, I think SolarWorld left an opening for you guys. To what degree can you comment on timing as well as whether or not you think you might be able to get it? Thanks.
Let me make some general comment on the ITC ruling. While we expected the ITC ruling, what we did not expect was the impact on AC modules. We are working on an exception process to get exclusion on the microinverter portion of the ACM. We have submitted that exclusion request to the USTR, and we expect to hear from them by the end of June. Our overall direction as a company does not significantly change because of this tariff. Like what I said, profitable growth strategy, that doesn't change. We are working with a number of partners, some of who are affected by the tariff, some are not affected by the tariff. We'll wait and watch, but that's our strategy.
Great. Well, thanks very much. Bert, sorry to see you go. I look forward to catching up with you a little bit later as well. Badri, looks like you guys are making great progress, especially margins, and I'll pass it on.
Thanks, Phil.
Thank you. The next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.
Yes. Hello. It's Aaron Spychalla on for Eric Stine. Thanks for taking the questions.
Yeah.
Maybe first, on the 2Q rev guide, can you just talk a little bit more about the puts and the takes there? Is that just primarily the controlled ramp for the IQ7, like you were talking about, and then just maybe conservatism or depending on how the U.S. market looks? Are those kind of the two drivers, or is there anything else there?
Yeah. Yes, the Q2 guidance is between $72 million and $80 million. Like what I said, it is about the IQ7 transition. We also talked about the four vectors for top-line growth. We expect to introduce IQ7 in the rest of the world. We introduced IQ7, as you know, in the first quarter of Q1 2018 into the Americas. We now expect to introduce IQ7 into rest of the world in Q2 of 2018. That will be a continued ramp compared to the 8% number I told you. Q3 and Q4 is where the ramps happen. Like what I said, Q3 will be a significant ramp, Q4 will complete. Some of the top-line opportunities that we are working on will start coming into play during that time, along with the transition.
Okay. Thanks for the color. Maybe second on pricing, can you just kind of give us an update on your pricing outlook? Obviously, pricing management has been a key focus, like you said, and great margins this quarter. What are your thoughts for the rest of the year, on a year-over-year basis or something like that? Just anything on broadly Section 201 impact, as inventory moves through the channel?
Yeah. I'll give you some color on pricing. We have three levers on gross margin. The first one is pricing management, the second is supply chain optimization, the third is new product transition. I'll talk about pricing management. Pricing has been very important to us. We hired a VP of pricing almost a year ago. He taught us how to do pricing. Basically, our focus is value-based pricing. The way we do pricing is we look at the next best alternative. We look at what value we add on top of that next best alternative. That has taught us a lot. In addition, we are blocking and tackling on the transactional side to making sure that we are profit-focused and shed away empty calories. That has been one more discipline.
The way we think about products is, we think about product segmentation, how those products can be segmented from a pricing perspective, in order to generate value. Basically, we have changed our game on pricing. With regarding how we model pricing, we usually model a couple of percent every quarter. Historically for Q1 2018, for example, our pricing was flat. There has been not much change. In fact, it was up a little bit. We model 2% price erosion quarter-on-quarter for the three quarters in 2018.
Okay, good. Thank you. Then, maybe last for me, can you talk a little bit about the opportunity in South America following the strategic investment? Maybe just frame that out, what the opportunity looks like and how this investment helps the prospects down there, any thoughts on timing?
Hi, this is Raghu. Latin America is, again, one of our top-line growth initiatives when we think about regional expansion. Because of the benefit of the microinverter being software-defined, we are now certifying the product to be available in South America as well. Over time, we'll share with you more details about the market plan itself. Yes, we are gearing up to get our product out into that market.
Okay, sounds good. Thanks for taking the questions, again, congrats on the profitable performance.
Thank you.
Thank you. The next question comes from the line of Jeff Osborne with Cowen and Company. Your line is now open.
Yeah. Congratulations on the results. Just a couple questions from my end. One is on the international expansion in the second half of the year and into 2019. How do we think about OpEx as that plays out, all the training and seminars that you folks do? Is there any noticeable increase that we'll see from a P&L perspective?
I'll go to the OpEx. We have reduced OpEx very significantly as a company. From $108 million in 2016, we have dropped to $73 million in 2017. Our Q1 2018 non-GAAP OpEx is a little high at 25% of revenue, because primarily due to Q1 seasonality of revenue. We do expect our long-term OpEx to be consistent with the 30/20/10 operating model, which means close to 20%. We have certain investments that we make on profitable top-line growth, which we will not compromise on, and we will do them. In addition, the most important point there is, we have opened an R&D center in India, and we now have over 50 employees in India. India is a key strategy by which we can accomplish low OpEx as well as do all the things we need.
That makes sense. I appreciate it. Just two other quick ones. One, Bert, any update on the Tennenbaum facility in terms of ability to renegotiate the terms of that and the interest expense moving forward? You sort of answered in the prior caller's question, but just in terms of the competitive environment in the second half, do you think that there's a step function change in ASP, or is that kind of two-ish% sequentially each quarter, pretty consistent with what you're expecting based on your conversations with your customers?
Hey, Aaron. I think Badri answered the ASP question pretty well in terms of what our expectations are. I don't have anything more to add to that. With respect to the Tennenbaum facility, as you know, we did do a little bit of a recasting of that facility in the first quarter to push out 50% of the principal out of 2018. That was a direct result, as you can imagine, from our improving financial results. Gave us a little bit of opportunity to get creative on that and get constructive with them. As we continue to improve financially, we do expect to continue to improve financially, we do believe that we'll have similar opportunities in the back half of the year to do similar constructive work with Tennenbaum. It's definitely something that's on our radar.
Great. Good to hear. Thank you.
You bet.
Thank you. The next question comes from the line of Brad Meikle with G. Research. Your line is now open.
Hey, it's Brad Meikle, G. Research. Thanks for the questions. Bert, best of luck. Sorry to hear you're leaving. Two questions. I guess the IQ8, is that planned for January of 2019 for initial shipments, or do you have a sense of the timing of that?
Brad, as we said, we plan to release the off-grid solutions in Q4 of 2018, and it'll be followed by the grid-agnostic solutions in the first half of 2019.
Okay. Would you expect a ramp similar to the IQ7 in terms of the slope and penetration, or do you think you'll see still some balance of IQ7 shipments?
IQ 7 will be our bread and butter, but IQ 8 addresses a brand-new market. Once you address a brand-new market, there is a cycle of learning there. I'm sure we'll go through that cycle of learning. It's difficult for us to predict ramps, but the good news is we'll have the product out there.
Right. Thinking about the third and fourth quarter in terms of the IQ 7 ramp, obviously the international, I guess 20% or so of your business has not been IQ 6. With the ramp to 100%, I guess you should see a nice margin incremental boost off that. I guess the question is, how much are you going to pass along to customers at that point versus capture from a margin standpoint yourself?
Yeah. If you see our mix of international versus North America, we basically had 62 and 38, which basically means 62% is North America and 38% is rest of the world. Rest of the world is becoming a nice fraction of our business. We want that to grow more and more. It is important to note, the rest of the world is on the fifth-generation product, and it's directly transitioning to the seventh-generation product. Okay? That should give you some color on the gross margins.
How are the costs looking for the IQ 7 in terms of the cost reduction ramp for that?
Well, we're not going to be giving out cost numbers here, but the way we think about cost, in our supply chain initiatives, for example. We have a multi-sourcing strategy, which means no matter what the component is, you always have multiple sources. Zero-based costing approach, which means you do physics-based costing. You look at the stackup of the product, and you calculate the cost from first principles. The third one is clear supplier selection and analysis. Basically, methodical analysis of suppliers in terms of their quality, in terms of supply chain, in terms of reliability, performance, and having methodical scorecards. The fourth is focus on accessories. It is not just about the microinverter. Focus on accessories, because that is getting to be a sizable fraction of our business. This was previously neglected. Now we are applying a lot of focus there. The last one is overhead.
No matter how efficient the company is, there is overhead. The overhead is basically freight, service, stocking, things like RMA, the way they are handled, things like inventory, things like variants, warranty. There is a lot of hidden costs there. We are constantly blocking and tackling that. I think about this as a business process where we control costs in the company. The most important part is that everybody is involved in the cost improvements. It's not just the supply chain guys. It is the CTO, it is the engineering team, along with strong program management. While I'm not answering your question directly in terms of what is the cost, I'm just giving you color on that this is a business process we are doing methodically. We are grinding every day, that's why our costs are getting better.
Excellent. Thanks very much.
Thank you. The next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Thanks so much. Guys, the pace of the platform development has been fairly quick here over the recent quarters. Can you talk about expectations for whether that pace is going to continue on a multi-year basis, or are you going to slow that down and just continue to mine the supply chain and mix to optimize the profitability of the company?
Hi, this is Raghu. The way we think about it is the heart of our system is our chip itself, the ASIC. There's a lot of opportunity for us to continue the rapid pace of development of the ASIC in order to drive data functions and features as well as lower our costs. Just to give you an example, if you look at our IQ6 ASIC or IQ7 ASIC, it has 3.8 million gates. If you look at our IQ8 ASIC, which we mentioned came back and is fully operational, is 5 million gates. Gives us huge amount of leverage in terms of cost as well as functionality. The other thing to take into account is when we say platform, yes, the inverter itself may change because you're driving the brain of the system is changing.
The rest of the system, the cabling, the accessories, et cetera, we try to keep those as unchanged as possible. The advantage of that is you bring a lot of efficiencies to our installer partners. When they get on the roof, they're installing the same exact cabling system, same balancer system, but the inverters just get better and better with lower cost and better functionality.
Thanks so much, Raghu. Just to follow up with that point about the data management and collection, obviously you guys have done a couple of important upgrades on some of these inverters in various locations and have been working with utilities to figure out how to optimize the use of those data cases. Can you give us an update on where you're at in terms of monetizing those capabilities and what that business model can look like going forward?
That promise always exists about what can you do with the data, and can you monetize it. At this time, we are not announcing anything in terms of monetizing the data, but the data is extremely valuable. Let me speak about in a little bit more generality in that as our platforms change or as we progress through our generations of inverters, the reliance on software is becoming greater and greater. Between IQ 6 to IQ 7 to IQ 8, it's becoming more and more software-defined, more and more software-upgradeable functions, and more and more software capabilities are being included into the system. In the long term, we still believe that there will be opportunity to do that. At this time, the business plan is what we have right now.
Okay. Thanks so much, guys.
Thank you. As a reminder, if you have a question at this time, please press the star and then the one key on your touchtone telephone. Our next question comes from the line of Pavel Molchan with Raymond James. Your line is now open.
Yeah, thanks for taking the question. Another trade war question, from the other kind of side's perspective. We saw headlines a few weeks ago that Huawei is essentially pulling out of the U.S. market. I think that they have not actually sold any microinverters here, but they had talked about it. I'm curious your thoughts are about that decision and what it might suggest about the competitive landscape.
We have been hearing about Huawei a lot in the last year. We heard that they were in Europe. Now we are hearing that they plan to be in the U.S. in Q3. Like what you said, solar is a dynamic field. Things can change very fast. The competitive dynamics is amazing. Our strategy doesn't change. We are focused on profitable top-line growth. For us, it is the differentiation of the product that counts, and that's what I articulated in the four vectors of my top-line growth.
Can we also get an update on how things are looking with the battery product?
I'll give you a brief update on the battery product. Basically, we are seeing a sequential uptick in AC battery sales every quarter. The uptick that we are seeing, comes from both Europe as well as Australia. Our value proposition is pretty simple. It is the Enphase ease of installation combined with the modularity of the system. When I say modularity, is it's available as 1.2 kilowatt hour, small battery, easy to install, very easy to start small and then add on to it later. That's why it has started selling. We are very happy there. However, there is lot more work to be done. On IQ8, like what I have repeatedly said, solar plus storage is central to our strategy as we develop IQ8.
As we come closer to Q4 of 2018, when we release our off-grid solutions, we will start talking a lot more about our storage then.
Perfect. Thanks, guys.
Thank you.
Thank you. The next question comes from the line of Carter Driscoll with B. Riley. Your line is now open.
Thanks. Sorry to see you go, Bert. Hopefully onto a new opportunity for you. The question I had was, given SunPower's acquisition of SolarWorld, if I recall correctly, you had a potential working agreement on the AC module side with SolarWorld. Does the acquisition at all, either restart or put to bed the opportunity for a module with SolarWorld and/or its new parent?
Yes, you are correct. In the last year, sometime towards the end of last year, we were working with SolarWorld, and we did have an AC module ready, before the thing happened with SolarWorld. We heard about the announcement from SunPower. When we are not sure when the acquisition is going to close, et cetera. Once the acquisition closes, then I'm sure, the opportunities will come. Like what I said, we are a very strong believer in AC module, and SunPower is also a strong believer in AC modules. I think there is a lot of synergy there.
Maybe just a follow-up to that. Obviously Panasonic's making a lot of inroads in the U.S., and has a somewhat unique position because of 201. Can you talk about the timing maybe of the integration you have with their module product?
Yes. It is a two-phase approach. One is we are first introducing IQ 7X with discrete product, and it will go into the channel where it'll be combined with the 96 cell panels. That's the first phase. The second phase is where we are working with Panasonic in order to integrate our IQ 7X microinverter into their 330-watt HIT module. That is more, you know the Japanese, they're going to stress on the quality, which is the most important, right? Basically we expect that to be available by the later part of 2018 on the full-blown ACM.
Hi, this is Raghu. The IQ 7X, the discrete solution, our plan is to introduce it in Q2.
Yep.
Perfect. Thank you. Maybe just a few more quick ones for me. You talk about IQ 8 and your inroads potentially into Latin America. How do you think of that market? Obviously it's very diverse. There's a mix of, let's say stable grid and then some that might be a perfect solution for your IQ 8. Does that take a different sales approach on a country-by-country basis or a region-by-region basis? Does that take any incremental spend, at least vis-a-vis what you had to do in some of your more established markets? Trying to think of an SG&A spend as you try to target that market, particularly as you roll out IQ 8.
Yeah. Let me give you some color on IQ 8. Basically, IQ 8 is based upon a brand-new technology called as Ensemble, which was invented here at Enphase. As we said in the past, we got to technological feasibility last quarter when the ASIC was completely functional.
Yep.
Once again, I'll remind you that IQ 8 consists of energy generation, energy storage, communication, and software. Like, the use cases that IQ 8 addresses is enormous, like what you said. It is off-grid, it could be grid-tied, it could be grid-agnostic. The go-to market is involved, we don't claim we have understood everything, but we are going to introduce it for the off-grid markets first, which is basically a phased introduction. In the off-grid market, the obvious places for us to attack are to go and gain market share in would be Africa and India. Africa is no grid market, while India is weak grid market. Those are the places where we will begin. You're right, it will involve some SG&A spending. We have comprehended that. In a few places, we may enter with partners. More to come there.
You're exactly right. We are thinking about it the way you said, we are adopting a phased approach.
Just the last question, high level. Given the kind of 62/38 NA, rest of world split you just posted, could you hit parity a year in 2018 or probably more likely in 2019? Does that take a mix of IQ 7 and IQ 8 rollout, or would that be based just on IQ 7 when you hit the ROW by 3Q and full ramp by 4Q? Just trying to get a top level geo mix.
Yeah. There are a lot more quarters between now and 2019, if I want to be abstract about it, I'd say India is growing for us, Europe is growing. I would be happy if we can get to something like a 50/50 sometime in 2019, 2020 timeframe.
Appreciate you taking all my questions, guys. Again, sorry to see you over. Thanks, guys.
Thanks.
Thank you.
Thank you. As a reminder, if you have a question at this time, please press star and then the 1 key on your touchtone telephone. Thank you. This does conclude today's question and answer session. I would like to turn the call back over to CEO, Mr. Badri Kothandaraman, your line for closing remarks.
All right, thank you for joining us today. Our 30/20/10 execution is going very well. We have started working on several initiatives for profitable top-line growth. We look forward to speaking with you again on our call next quarter. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude your program. You may all disconnect. Everyone, have a great day.