Day, ladies and gentlemen, and welcome to Enphase Energy's 3rd Quarter 2017 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 As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Christina Carrabino.
Ma'am, please go ahead.
Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Q3 of 2017 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer Bert Garcia, Chief Financial Officer and Raghu Balour, Co Founder and Chief Product Officer. After the market closed today, Enphase issued a press release announcing the results for its Q3 ended September 30, 2017. 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 and Enphase Energy's actual results and the timing of events could differ materially from these expectations.
For a more complete discussion of the risks and uncertainties, please see the company's annual report on Form 10 ks for the year ended December 31, 2016, which is on file with the SEC and the quarterly report on Form 10 Q for the quarter ended September 30, 2017, which will be filed with the SEC in the Q4 of 2017. Enphase Energy cautions you not to place any undue reliance on forward looking statements and undertakes no duty or obligation to update any forward looking statements as a result of new information, future events or changes in its expectations. Also, please note that certain 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. Now I'd like to introduce Badri Kassandraaman, President and Chief Executive Officer of Enphase Energy.
Badri?
Good afternoon, and thanks for joining us today to discuss our Q3 2017 financial results. So we had a good quarter. The 30, 20, 10 transformation is going very well. We were almost breakeven in non GAAP operating income during the Q3 and we have stabilized our cash position. We reported revenue of $77,000,000 for the Q3 of 2017, an increase of 3% compared to the Q2 of 2017.
We shipped approximately 231 megawatts or 790,000 microinverters. Our GAAP gross margin was 21.4% and non GAAP gross margin was 21.8%. Our focus on operational excellence resulted in gross margin expansion, lower OpEx and overall improvement to our financial position in the 3rd quarter. We are laser focused on further gross margin improvement through supply chain optimization, new product introduction and pricing management and are on track to reach our 30, 2010 target operating model by the Q4 of 2018. Bert will go into greater detail about our financial results later in the call.
So turning to our markets. The 3rd quarter revenue in the U. S. Was up 2% sequentially. We completed the transition to our IQ6 product for our U.
S. And Latin American customers during the quarter and nearly all 4th quarter inverter shipments to these regions will be the IQ6 product. Shipments for our AC module product also increased sequentially. In the Latin American market, the 3rd quarter revenue was down 9% sequentially as a result of the devastating hurricane in Puerto Rico at the end of the quarter, which impacted overall shipments to the region. We look forward to playing a key role in the future as the island rebuilds and diversifies its electrical infrastructure.
Raghu, our Chief Product Officer, will provide details later in the call on a key new technology that will be central to this effort. In the APAC region, the revenue increased 35% sequentially as the demand for our products continue to grow. We established new partnerships with distributors, installers and module manufacturers in India during the quarter, resulting in our first shipments to the region. In Europe, revenue was up 3% sequentially and 114% year on year. The 3rd quarter was a record quarter for unit shipments and revenue in the region as we continue to grow our customer base.
Moving on to products. We believe the IQ6 microinverter system and our AC modules will help drive profitable growth with new and existing partners, thus increasing our share of market. We remain focused on operational blocking and tackling to achieve this goal. With the introduction of our IQ7 product in the Q1 of 2018, we expect to grow revenue by increasing our served available market. IQ7 will be a single worldwide product SKU that allows us to penetrate new markets in Europe, Asia Pacific and Latin America, while also helping to drive gross margin expansion.
In summary, we are pleased with our overall progress during the past 3 months. My top priorities over the next 6 months are to improve cash flow, further expand gross margin with the introduction of IQ7 Worldwide and achieve sustained profitability, creating a solid financial foundation. We will also continue to provide customers with the value, quality and customer service they have come to expect from Enphase. With that, I would like to turn the call over to Raghu, our Chief Product Officer to provide an expanded update on our products.
Thanks, Badri. As part of our commitment to deliver increased value to our customers, we transitioned over the past few quarters from our M Series to our iQ Series product. IQ is an integrated solar, storage and energy management platform that enables self consumption and delivers our core value proposition of yielding more energy, simplifying design and installation and improving system availability, uptime and reliability. In addition, IQ provides advanced grid functions that are capable of meeting worldwide regulatory requirements. IQ also enables our AC module product, further simplifying the installation process, reducing installation time and streamlining logistics.
IQ6 delivers more power and higher efficiency, while further reducing the balance of system cost due to its simplified wiring, reduced size and weight. Much of IQ6 performance was achieved by silicon integration with our new ASIC. With IQ7, we will yet again offer greater power and a smaller, lighter and easier to install product. What is unique about our IQ7 is that it's a single worldwide SKU achieved as a result of our software defined architecture. Similar to IQ6, we have developed a new ASIC for IQ7 that enables greater semiconductor integration.
Solar plus storage, which includes our AC battery product is central to our product strategy. Our storage business continues to expand worldwide because of the unique features of our AC battery solution. We believe the storage market will continue to improve over the next 12 months as costs come down and as utilities better understand how to incorporate distributed storage onto the grid. Now let me talk about our next generation IQ8 product expected to be introduced in 2019 based on our always on technology called Ensemble. 1 of Solar's biggest challenges is that it is grid tied.
What this means is that if the grid fails and the sun is still shining, there will be no production out of your solar system. Most customers are unaware of this limitation with today's solar technology. So to address this limitation, we have invented a microinverter technology that is completely grid agnostic. This means that even if the grid fails and there is sufficient sunlight, the Enphase system will continue to produce energy and meet the demands of the home or business. The Enphase microinverter system's capability is further enhanced when the Ensemble technology is incorporated into our AC battery storage solution.
With IQ8, you can have a system that will continuously produce energy regardless of the presence or absence of the grid that is solar during the day and storage at night. That is what we mean by always on, and it can address challenges like those experienced in Puerto Rico, other island nations and countries with weak grids. We also believe IQ8 will grow our total addressable worldwide. For example, there are over 1,200,000,000 people with limited or no access to energy in regions such as India and Africa. IQ8 is uniquely positioned to address the energy challenges inherent in these and other regions of the world.
We'll continue to update you on IQ8's progress over the coming quarters. Now
I'll turn the call over to Bert for his review of our financial results. Thanks, Raghu. I'll provide more details related to our Q3 2017 financial results as well as our business outlook for the Q4. As a reminder, the financial measures that I'm going to provide are on a non GAAP basis unless otherwise noted. Total revenue for the Q3 2017 was $77,000,000 an increase of 3% sequentially.
Total net revenue per DCWatt was unchanged from the prior quarter, reflecting relatively stable ASPs. On a year over year basis, total net revenue per DCWatt decreased by 11%, directionally consistent with the broad reduction in ASPs. We shipped approximately 231 megawatts DC in the Q3 of 2017, increase in megawatts of 3% sequentially and a decrease in megawatts of 3% on a year over year basis. The megawatt shift represented 790,000 microinverters, approximately 60% of which were our new IQ microinverter systems. As Madhuri mentioned, we completed the transition to our IQ6 product for our U.
S. And Latin American customers during the Q3 and as a result, nearly all 4th quarter shipments to these regions will be our IQ6 products. Non inverter revenue, which includes our AC battery storage solution, Envoy communications gateway and all accessories was consistent as a percentage of revenue with our prior quarter results. Non GAAP gross margin for the Q3 of 2017 was 21.8% compared to 18.4% in the 2nd quarter. Non GAAP gross margin excludes approximately $347,000 of stock based compensation expense.
The improved gross margin reflects the transition to our IQ microverter system in North America as well as the improvements to date that we've been implemented on our supply chain optimization initiatives. The improvement to our gross margin was slightly offset by approximately negative 1.8% related to expedite fees that we incurred as a result of industry wide component shortages mentioned on our Q2 call. Non GAAP operating expense decreased $865,000 sequentially from $17,800,000 in Q2 to $16,900,000 in Q3. As compared to the year ago quarter, we reduced non GAAP operating expense by 41 percent or $11,700,000 reflecting the cumulative impact of restructuring actions and operational efficiencies we've implemented. Non GAAP operating expense in the Q3 of 2017 excludes $4,100,000 of restructuring charges and $1,400,000 of stock based compensation expense.
On a non GAAP basis, income from operations was essentially breakeven with a loss of $102,000 compared to an operating loss of $4,000,000 in Q2. We're extremely pleased with the progress we've made on operating income and have increased confidence in our ability to achieve non GAAP operating profitability in the 4th quarter. Our non GAAP net loss was $964,000 resulting in a loss of $0.01 per share compared to a net loss of $6,600,000 in Q2 or loss of $0.08 per share. Now turning to the balance sheet. Inventory levels were $25,300,000 for the 3rd quarter compared to $20,800,000 in the 2nd quarter $39,100,000 in the year ago quarter.
Inventory levels increased from the 2nd quarter, primarily a result of the timing of shipments. We exited the quarter with a total cash balance of $28,900,000 a slight decrease from the Q2 balance. We expect to be cash flow positive in the 4th quarter. Now let's look at our outlook for the Q4 of 2017. We expect our revenue for the Q4 of 2017 to be within a range of $72,000,000 to $80,000,000 Turning to margins, we expect GAAP and non GAAP gross margin to be within a range of 21.5% to 24.5%.
Note that our Q4 gross margin guidance includes the negative impact of higher expedite fees resulting from industry wide component shortages. Non GAAP gross margin excludes approximately $300,000 of stock based compensation expense. We expect our GAAP operating expense for the Q4 to be within a range of $19,500,000 to $21,500,000 and non GAAP operating expense to be within a range of $16,000,000 to $18,000,000 excluding an estimated $1,400,000 of stock based compensation expense and approximately $2,100,000 of additional restructuring expense. I'll note that we do not expect to incur significant restructuring expense beyond the Q4. At the midpoint of our guidance range, we expect to be profitable on a non GAAP operating income basis in Q4.
With that, I'll open up the line for questions.
Our first question comes from the line of Eric Stine with Craig Hallum. Your line is now open.
Hi, everyone. Thanks for taking the question or the questions. Maybe just starting with the AC modules, maybe just some commentary on early returns. And are you still targeting an additional module partner by the end of the year?
So let me give you some color on AC modules. This is Badri. We started shipping AC modules to LG in the Q2 of 2017. We said in the June Analyst Day presentation that we shipped about 18,000 units to LG. Our shipments increased sequentially in Q3 of 2017.
LG, as you know, introduced the IQ6 Plus Neon AC module in July. That product is making its way through the channel now. It's too early to say, but we have done a lot of interviews with the installers and those interviews have been very those interviews have been very encouraging. There is clear savings on installation time as well as streamlined logistics on the ACM. We announced the Jinko Eagle IQ6 AC module at SPI and we expect to start shipping that shortly.
We also announced Wari, a module partner in India. We are working with a few other partners as well, and we'll announce when we are ready.
Okay. Sticking with India with Wari, is that a little bit different version? I mean, what you're able to talk about, is that a little different version or scaled down version versus LG or Jinko? And if so, is that something that you're working to replicate with other partners in different markets?
No, it's not a scaled down or a different version. We have a AC module product strategy and it is in line with all the other partners as well. The only difference being LG would be is a 60 cell module and Wadi will be a 72 cell module because in India, primarily the 72 cell modules. On the same product works on both 60 cell and 72 cell modules.
Got it. Okay. Thanks for that color. Maybe last question for me. Just an update on installer trends.
You mentioned the good feedback you're getting early with LG, but clearly things move into Tier 2 and Tier 3 installers. So just any thoughts or color there would be helpful. Thanks a lot.
Yes. We are continuing to reach out to all the installers who have either done the installs as well as we are on roadshows collecting data and the feedback has been pretty consistent. There is the value is there. There is install time the good matching between the power production because of the inverter and the module being closely matched. And then the qualitatively speaking, good quality install as well because it's a very fast and very clean install.
So a lot of outreach is going on. We're on the road right now showing it to number of the tier the long tail installers as well. So the feedback has been good.
And just market share there, I mean, just overall share with Tier 2 and Tier 3, any thoughts on how that's trended? I know you gave an update at the Analyst Day, but maybe anything that might be refreshed from over the last couple of months?
No, it's too early to tell at this time.
Okay. Thank you.
Our next question comes from the line of Brad Michael with Coker Palmer. Your line is now open.
Hey, guys. Good afternoon. First question is, do you think that the revenues we're able to achieve this quarter were limited by the 201 case impact, which has increased module prices and made them more scarce in some cases and also due to the component shortages that you've had?
So, hey, Brad. No, I think there's been as everybody can understand a lot of concern around the 201 case. And as I think everybody saw the preliminary recommendations that were made were certainly less punitive than I think everybody was expecting. That's good news. That said, looking at the Q3, we really didn't see any impact related to 201 in terms of revenue shipments.
The second part of your question was about the component shortages?
Yes, I'll take that.
If revenue is limited, we're limited by component availability, yes.
So Brad, the revenue was not limited by component shortages, but what we but the gross margin was limited. As we noted, the Q3 gross margin was negatively impacted by about 1.8%, resulting from expedite fees. And those expedite fees were a result of us having to do airships compared to ocean ships. And in Q4 'seventeen, we still see continued pressure on memories and high voltage FETs and that's why we said we expect to incur expedite fees in Q4 2017 as well. We are putting in some business processes in place like qualifying multiple sources as mitigation actions, but we really need the supply situation to improve.
And at this point, we see the situation persisting into the first half of twenty eighteen.
Yes. It sounds like lead times have come down already for the FETs. But on the IQ7, is there a what portion of the market would you say is high voltage modules that had not really been suitably served by your power rating on the M280 or the IQ6? Like how much more of the market does it open up to you?
Sure. Hey, thanks, Brad. This is Raghu. One of the nice things about again the IQ7 being a universal platform, almost like a worldwide SKU, is that it does open up the market for the 96 cell module as well. So there are a couple of players who are doing 96 cell modules as well.
So Panasonic has now entered the market with a 96 cell product. We already know there's another player here locally who's also a 96 cell product. But the IQ7 does open up those markets for us as well from a technology point of view.
Yes, yes. I think it's about a quarter or a third of the U. S. Residential market probably, is that right?
Yes, probably a little bit off that order a little bit less actually.
Okay. And just last question, thanks for the time, on the IQ8. Could you talk a little bit more about the types of companies that are currently serving this market? I've read about half dozen that are well capitalized in Africa, doing small one panel installations that enable light. And some articles have talked about AC output enabling air conditioning and refrigeration, which is limited by the current DC output.
So I would love to hear any more about the dynamics of what you see out there in that market.
I think it's Africa and it's also India as well. I think there are a number of players. The go to market is the problem that needs to be solved there. I think we have solved the technology problem. So clearly, there are we have seen this that both in India and Africa and in India, there are a number of companies that are working on the go to market problem and have had varying degrees of success there.
So yes, there are a number of companies that are out there. We're not making any announcements at this time.
All right. Thank you.
Our next question comes from the line of Philip Shen with ROTH Capital Partners. Your line is now open.
Hey, guys. Thanks for the questions. First one here is on the IQ7. I think in your release you talked about getting that out there in Q1 'eighteen. So what do you expect the mix of IQ6 and 7 to be starting in Q1 'eighteen?
And how do you expect that mix to trend as we go through 2018?
Just to give you some color on IQ6, the IQ6 transition took us 3 quarters to complete. We expect the IQ7 transition to take us similar time, maybe a little bit lesser. A new product transition, as you know, is always tough to predict, but we are doing a lot of detailed planning to counter surprises. Having said that, the IQ7 platform uses the same balance of system as IQ6. So that will make it a little bit easier.
And also one more thing is the transitioning, for example, IQ7 to North American customers is going to be easier than transitioning worldwide. So I expect that to be done faster, maybe in a couple of quarters compared to worldwide that might take full 3 quarters timeframe. So more to come there, but we are planning we are doing a lot of detailed planning.
Good. Thanks, Wajid. And if you can remind us or update us on what kind of margin benefits we should see as you fully transition from IQ6 to 7? P.
McKim:] Right. So as I told you, we are focused on building a healthy financial foundation and we are laser focused on gross margin and operational excellence leading to profitability. We told you that we will reach the 30, twenty, ten target operating model by Q4 of 2018 and we are on track to do so. The 30, twenty, ten stands for 30% gross margin, 20% OpEx and 10% operating income. The IQ 7 transition will not only help in improving gross margin, but will also help to expand the served available market into more regions in Europe and Asia Pacific to increase the top line.
And we also see the ACM as an important driver of the IQ7 platform. So with IQ7, with all the supply chain optimizations that we are doing, we expect to reach our target operating model by the timeframe that we said, which is Q4 of 'eighteen.
Okay, great. So taking the question to the top line a bit. I think your blended ASP decline in the quarter was roughly 12% year on year. Do you continue to expect that rate of decline? I think that was for Q3.
So do you continue to expect that for Q4? And then what are you seeing now for Q1 and what do you expect for 2018?
Well, for 2018, we have a number of factors. I'll come to that later. But for Q4, I see the pricing pretty stable at about 2% erosion a quarter. So in 2018, I have a couple of factors that which could contribute to the pricing environment. 1 is the Sunniva trade case.
We all don't know what the final outcome is going to be in January. So that could influence that. And the second one is a potential Huawei entry in middle of 2018. If I pretend that those 2 were not there, I expect a pretty stable pricing environment, yes, similar to 2017.
Okay. Good. And then finally, as it relates to your non GAAP profitability, it sounds like you're on track for Q4. I know you haven't provided guidance for 2018, but do all signs kind of give you a sense that you can maintain that 3.18? And what are the puts and takes?
Maybe you just mentioned a couple with the 201 and Huawei, but how are you thinking about profitability as we go through 2018?
Yes. Hey, Phil, it's Bert. You're right that we did signal non GAAP profitability at the midpoint of the range for the Q4. If we transition out into 2018, you're right, we don't provide guidance out that far. But clearly, the work we've done to date to restructure is begin to yield significant benefits for us.
And if we think about the transition to IQ7, that's certainly going to continue to help not only margin expansion, but also help grow the top line. As Bhagri mentioned, the IQ7 does open up a couple of new markets fast and that's certainly helpful. But bear in mind, a lot of the work we've done around restructuring, even here in the tail end of 2017, we'll continue to bear fruit out into 2018. It's more of a process, not event, so to speak. So we do expect to continue to see benefit from our broad supply chain optimization and our focus on operational excellence, also continue to help move margins and profitability along in 2018.
Great. Thanks, Bert. I'll pass it on.
Thanks. Our next question comes from the line of Edwin Mok with Needham and Company. Your line is now open.
Great. Thanks for taking my question. First, just in terms of the 4Q guidance, can you talk a little bit about the puts and takes on that? Is that mostly it seems like you're guiding flattish, right? Is it mostly your seasonality in the Q4?
Or do you see the market recovering after this 201 is settled? Do you have any color on that?
So I think what you're seeing in our guidance really is this holding share. So the way we're thinking about it. But more importantly, what you're seeing, Edwin, is some pricing discipline. We're being very, very, very disciplined on pricing, optimizing for profitability, if you will. And that is, of course, reflected in our top line guidance.
In
terms of puts and takes, again, it's as I mentioned to you, we're not seeing any impact from Sunniva on our top line, that's not really a factor in our guidance. But really it's a factor of us holding share and being disciplined on pricing.
Okay, that's helpful. And then maybe talk about gross margin, given that you have this exercise fee continue to happen because of the shortage, right? How much impact have you factored that into your gross margin guidance? And do you have any kind of view when we should start to have this stabilized and you can stop paying this fee?
Yes. So just to level set and anchor you back, in Q3 it was about 1.8% impact, negative impact on Q3. We expect somewhere between 1% to 2% in Q4 and then expect to start seeing it tailing off into 2018. So it's a little early in these things. We not entirely within our control, but our best guess right now is that we'll start to see a tailing off of that impact in Q1.
Okay, that's helpful. I guess I'll speak to Rupert. I thought in the balance sheet receivable has been going up and then I think payables also gone up a lot this quarter, right? Do you expect those to normalize as you go to Q4 or would that take some time?
Yes. So yes, we do expect to normalize and they are somewhat related. So on the receivables line, it was really impacted by the linearity of sales in Q3 relative to Q2. So that's really what drove the increase there. On the AP side, it was actually related to inventory.
We had some late receipts of inventory in September. That's reflected in the increase sequentially in inventory. It's also in our AP. The other thing that's in our AP line that's beyond the inventory and it's really part of the work that we've been doing on supply chain optimization and working capital management, in particular inventory management is working with our vendors to get gentle return and you see some of that in our AP in Q3, just a slight improvement in AP terms.
Okay, great. One last question I have. On IQ 7, I think you mentioned 1Q you start to launch that and you mentioned it will penetrate some new markets. Is it just kind of software feature allow you to kind of have all these grid interface for different regions of the world? What allows you to penetrate these new markets?
And I noticed that Japan is not mentioned there. What do we say on Japan?
So, yes, I mean, this is Raghu. The architecture is such that, as you know, it's a digital architecture, it's a piece of power electronics, not a big box power. So we are built around an ASIC. So it is a completely software defined device that allows us to profile to configure them based on the geography that you're in to meet the interconnection requirements and the regulatory requirements. That's correct.
Of course, right now we are focused on IQ7 is our SAM expansion plan and Japan is on the roadmap. We are not exactly talking today about the timing on that, but it does open up. It's a as I said, it's a worldwide SKU that is capable of being configured for virtually all the geographies. So we should so we're going to be attacking more geographies over time.
Do you see IQ7 accelerate ACM adoption or does that are those mutually exclusive?
Oh, no, absolutely. IQ7 is again, it's much smaller, much lower profile. It's actually been designed and architected with the ACM in mind because ACM is absolutely a very key strategy for us. So yes, it does in fact accelerate ACM and accelerate new partners as well.
Great. That's all I have. Thank you. Appreciate it.
In the interest of preventing background noise, we ask Our next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Thanks so much. Guys, can you talk a little bit about the pricing dynamics on a regional basis? It looks like you're flat quarter over quarter, but with the growth in Asia, is that offsetting some price pressure in other geographies?
P. Vijay
Kumar:] So with regarding the pricing environment, like what I said, we see pricing pretty stable at about 2% erosion quarter on quarter. If you ask me what it was for 2017, it was about 7% to 10%. Okay?
Okay. So you're seeing that 2% across the board, regardless of regions. Okay. And then with the working capital dynamics, as you guys get into a more robust financial position and operational cash flow, are you seeing opportunities to go back to your suppliers and get better terms and support some of the balance sheet with longer payment terms on the payables line?
Yes, that's in fact, I just mentioned on the last with the last caller that one of the things that's driving AP up a little bit sequentially are those better terms. You're hitting on something that's really important, Colin, which is as our financial performance improves, naturally my cost of capital comes down, I expect to see that reflected in terms not only with my vendors, but also with our lender. And we're excited about the opportunity to go back and recast some of those relationships in a more positive light.
Okay. And then the last question for me is really about the warranty obligations. They haven't really moved much here for a little while and obviously you've got growing sales. So can you talk a little bit about some of the reliability data that you're seeing and how those things are rolling off for you guys in terms of the forward risk?
Sure. So I can handle both of those here. I may ask Raghu to weigh in a little bit on the reliability piece. Let's just take them in reverse order. On the reliability piece, we're seeing tremendous reliability returns from our most current product, it's really, really performing very, very well.
So the reliability is very high and as a result, the returns are understandably low. From a warranty perspective, bear in mind, you're right, our installed base is growing, but we are relieving the warranty liability as we build it. So what you're seeing is really the netting of those two things over time. So again, as we ship more units into the installed base, the warranty liability would go up. As we settle the warranty obligations for a large and growing installed base, you'd see that liability to come down.
And Colin from a product point of view, that what's core to our product strategy is semiconductor integration. And every generation of product from the M Series to IQ6 to IQ7 has been we have
a new ASIC in there,
a new chip in there and what that chip does is more and more integration to went from 1,800,000 gates to 2,800,000 to 3,800,000 gates now with the IQ7. More integration means just better reliability because you have got fewer and fewer components on it. So and internally and all our testing has just gets more sophisticated over time. The data that comes back from the field, as you know, all our systems are connected. So we get very high quality data from the field and how our systems are performing.
All of that informs the quality and reliability of our product. So the combination of a semiconductor strategy, which is core to end phase, coupled with all of the feedback that we get from the field, just creates this nice virtuous cycle that's really of having a digital architecture in power electronics.
Great. Thanks so much guys. I'll hop
back in queue.
Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.
Thanks for taking the question guys. Given that Jinko and a few other Chinese companies as your partners do not have manufacturing assets in the U. S. Currently, would anything change in your relationship depending on how the tariff decision ends up coming out?
No. We don't expect any significant change there. Again, as far as tariff is concerned, it's on the module. We don't know all the details out there, but our expectation is that it won't change. 2nd is we also think about ACM as a worldwide SKU.
It's not just simply a North American SKU alone. So and coupled with the fact that IQ7 is a worldwide product and it's going to also inherit the ACM, we think that the risk is low or manageable.
Okay. And there was a comment you guys made earlier about the percentage of non inverter revenue remaining stable quarter over quarter, if I heard that correctly. Will that percentage in theory increase over time, particularly as battery sales become more meaningful? I mean, should it be increasing?
Yes, it's very intuitive. It should. You're right. As ACV becomes a larger and larger portion of our mix, it would be an increasing portion of that non inverter revenue mix. That's right.
All right. That's it for me. Appreciate it.
Thanks, Pavel.
Our next question comes from the line of Vishal Shah with Deutsche Bank. Your line is now open.
Yes. Hi. Thanks for taking my question. Just a couple of questions on the pricing environment and the competitive environment. You mentioned stable pricing in the near term.
What are your conversations with your customers suggesting as its pricing is going to be in the next quarter or 2? And what kind of seasonality are you seeing in the business? And then you mentioned Huawei is rolling out product in the second half of 'eighteen. What's the initial feedback you're hearing from the field on that product from your customers? Thank you.
As I talked about, the pricing environment has been pretty stable. It's at about 2% erosion per quarter. For the entire year, we have been at about 7% to 10%. Yes, coming to 2018, so there are 2 factors like what I said again, Sunniva as well as potential Huawei entry. In the case of Sunniva, the final outcome is not yet out.
So after that, we'll be able to see what happens. In the case of Huawei, we don't even understand what their product is yet. And once that is announced, we can react better. But let me give you some color on our pricing management. The way we think about pricing is by doing value based pricing.
What do you mean by value based pricing? So we take the next best alternative, which is offered by our competition. And then we think about what value does our product offer compared to the next best alternative. For example, in ACM, it is installation time savings, it is streamlined logistics, it is improved quality, it is enhanced power production. And then we say here is the value we ascribe to that and we tell the customers that look, we'll share some of that value with you.
So we do that we do this transactional discussion with every one of our customers. And this is transactional pricing, which means it's literally hundreds of line items every quarter. And in some cases, if the customer doesn't see the value, then we go and look at what we should do on that case. But there are literally lot of cases like that. It is a process.
It is not an event. We are getting better at it. And pricing management is key for us to improve our gross margin and to reach our thirtytwentyten operating model by Q4 of 2018.
That's helpful. Just a follow-up on the Q1 outlook. Are you seeing a slowdown as normal seasonality would suggest? Or you think the Q1 of this year would be or next quarter next year would be different considering some of the 201 dynamics? Thank you.
Yes. So Vishal, we don't guide beyond the current quarter, but there's no reason to believe that normal seasonality patterns aren't going to hold and are likely not going to be necessarily impacted by Sunniva.
Okay, great. Thank you.
All right.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Badri Kothandaraman for any closing remarks.
Yes. Thank you for joining us today. We are extremely pleased with our progress in the Q3 towards our thirtytwentyten target operating model. We look forward to speaking with you again on our call next quarter.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.