Good day, ladies and gentlemen, and welcome to Enphase Energy's first quarter 2017 financial results conference call. At this time, all participants are in a listen-only mode. Later, we'll have a question and answer session and instructions will be given at that time. Should anyone require assistance during the conference, please press star then zero on your touch-tone telephone to reach an operator. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Christina Carrabino. You may begin.
Good afternoon. Thank you for joining us on today's conference call to discuss Enphase Energy's first quarter of 2017 results. On today's call are Paul Nahi, Enphase Energy's President and Chief Executive Officer, and Bert Garcia, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its first conference call. Enphase management will make of the risks and uncertainties. Please see the annual report on Form 10-K for the year ended December 31st, 2016, which is on file with the SEC, and the quarterly report on Form 10-Q for the quarter ended March 31st, 2017, which will be filed with the SEC in the second quarter 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. [inaudible]
The first quarter of 2017 turned out to be more of a challenge than expected. We are disappointed with our financial results. Our revenue for the first quarter was impacted by the extraordinarily wet winter in California, where we have a significant presence, and normal seasonality. According to source data, out of the 65 working days in California, only 21 were suitable for installations.
We estimate that our California residential PV volume in January alone was down approximately 23% from the average monthly volume for all of 2016 as a result of the winter weather. GAAP gross margin was 12.9%. Non-GAAP gross margin was 13.3%. Gross margin was lower than expected in the first quarter, primarily as a result of cost absorption on decreased revenue volume. While we continue to increase our presence in California, we've been successfully working to increase our market share in other parts of the U.S. and continue to additional strong markets where Enphase is well-positioned for growth. Enphase is by far the largest residential microinverter company in the world. There are currently more than 620,000 Enphase systems deployed in over 100 countries.
Since inception, we've shipped over 14 million microinverters, representing more than 3 gigawatts of installed generating capacity. Enphase systems have produced approximately eight terawatt-hours of clean, renewable energy. On our last call, we discussed our relentless focus on pulling in profitability. This required us
Ladies and gentlemen, please stand by. Your conference call will resume momentarily. Again, please remain on the line. Your conference call will resume momentarily. Ladies and gentlemen, please stand by. Your Enphase Energy's first quarter conference call will resume momentarily. Again, please remain on the line. We're experiencing technical difficulties, and we will resume momentarily. Ladies and gentlemen, we are resuming the Enphase 2017 financial results conference call. Sir, the floor is yours.
We reported a revenue of $54.8 million for the first quarter of 2017. We shipped approximately 138 megawatts AC or 573,000 microinverters. The first quarter of 2017 turned out to be more challenging than expected, and we were certainly disappointed with our financial results. Our revenue for the first quarter was impacted by the extraordinarily wet winter in California, where we have a significant presence, and normal seasonality. According to source data, out of 65 working days in California, only 21 were suitable for installations. We estimate that a California residential PV volume in January alone was down approximately 23% from the average monthly volume for all of 2016 as a result of the winter weather. GAAP gross margin was 12.9%, and non-GAAP gross margin was 13.3%. Gross margin was lower than expected in the first quarter, primarily as a result of cost absorption on decreased revenue volume.
While we continue to increase our presence in California, we've been successfully working to increase our market share in other parts of the U.S. and continue to target additional strong markets where Enphase is well-positioned for growth. Enphase is by far the largest residential microinverter company in the world. There are currently more than 620,000 Enphase systems deployed in over 100 countries. Since inception, we've shipped over 14 million microinverters, representing more than 3 gigawatts of installed generating capacity. Enphase systems have produced approximately eight terawatts of clean, renewable energy. On our last call, we discussed our relentless focus on pulling in profitability. This required us to make some very hard decisions, but we understand the importance of creating a strong financial foundation and delivering consistent profitability to our shareholders.
We believe that the actions we have taken over the past three quarters will result in a quarterly non-GAAP operating expense run rate of approximately $18 million beginning in the second quarter, and we remain committed to achieving sustainable profitability in the second half of 2017. Bert will go into greater detail about this and our financial results later in the call. As we continue to look critically at ways to improve performance and drive profitability, one of our key initiatives was optimizing the organization and increasing efficiency. We've done this in part by streamlining and consolidating the organization. To help facilitate this, we recently created a new role of Chief Operating Officer, filled by Badri Kothandaraman. Badri brings strong technical, operational, and management experience that will be instrumental in helping us increase efficiency and profitability.
On the product front, we began shipping our Enphase Home Energy Solution with IQ, our next-generation integrated solar, storage, and energy management solution in the U.S. toward the end of the first quarter and are very encouraged with our customer feedback. This solution features our sixth-generation Enphase microinverter system, which supports just about every 60- and 72-cell solar module and continues to simplify the design and installation process. The IQ 6 and IQ 6+ solidly meet the cost targets we set back in late 2015. We will be discussing this in more detail at our Analyst Day in June. Our seventh-generation microinverter, the IQ 7, is on track to begin shipping at the end of this year. The IQ 7 will continue to meet our aggressive cost targets while offering our customers the increase in quality, features, and functionality they've come to expect from an Enphase product.
Continual innovation is part of our DNA at Enphase. Our product roadmap is more exciting than ever. We're looking forward to the U.S. launch of the AC Module this quarter. We've already received purchase orders for tens of thousands of our microinverters from our AC Module partners and expect to start shipping them this quarter. Remember, the AC Module is defined as. By integrating our microinverters onto the module directly, we are creating an even simpler, more consolidated, and more reliable solution. Quality and reliability continue to be driving forces at Enphase. Our pursuit of continuous reliability improvement has resulted in industry-leading quality. Every generation of microinverter we introduce has to pass ever more demanding quality and reliability tests, resulting in relentless quality improvements.
Our design, manufacturing process, and quality testing are the result of the experience gained from millions of units deployed and monitored in real time globally over the past nine years. In fact, many of our quality tests are so stringent that it is unlikely that any other inverter manufacturer would even attempt them. As an example, before we ship a new product, it must pass our unique water ingress test. This test requires the inverter and cable-connected system to operate, that is, convert power, under 15 feet of water for three weeks while undergoing thermal stress. This is just one example of the type of testing an Enphase microinverter must pass before it is approved for release to our customers. While this increases the complexity of development, it results in improved operations and maintenance for our installer partners and improved peace of mind for system owners.
In addition to exceptional quality, Enphase Energy has a history of developing products that offer our customers higher energy production rates and lower maintenance costs, as well as a simplified design and installation process. We announced during the first quarter that Sunnova Energy Corporation, a market leader in residential solar services, and Enphase Energy expanded their partnership through an agreement, making Enphase Energy the preferred provider of inverters for Sunnova Energy. Sunnova Energy cited high reliability, ease of installation, and compliance with NEC 2014 and 2017 rapid shutdown requirements as drivers for this decision. We've been pleased with the positive feedback from our customers for our AC Battery storage solution. The simplicity, ease of installation, modularity, and performance of our AC Battery is unique in the industry and has resonated well with our customers worldwide. We are facing a more competitive pricing environment and are actively working to reduce our costs in 2017.
We believe the total addressable market is developing slower than anticipated. We expect to increase business in the markets we serve as the year progresses. Turning to our markets, first quarter revenue in the U.S. was lower than we expected due to the wet weather in California. We expect U.S. revenue to return to normal seasonal levels in the second quarter. In the APAC region, we've been pleased with our overall progress in Australia and New Zealand, as revenue increased 75% year-over-year. We saw significant share growth during 2016 and look forward to increasing market share in 2017 as the Enphase Energy brand has become well-known and respected in the region. In Europe, sales increased 58% year-over-year. We're the market leader in France, and we saw our share grow in both the Netherlands and Switzerland during the quarter.
Turning to our Latin America market, we believe we're the largest residential inverter company in Mexico, with more than 30% market share. We experienced significant momentum with tier 1 installers in Mexico during the quarter, and the improved regulatory framework continued to benefit Enphase Energy. We are the market leader in Puerto Rico and remain optimistic about the rest of Latin America business as we anticipate long-term potential in the region. In closing, we're encouraged by what we're seeing in the second quarter and beyond. We believe the success of our Enphase Home Energy Solution with IQ and the launch of our AC Modules in the second quarter will help drive long-term growth with new and existing partners and increase market share.
We remain committed to providing our customers with the features, quality, ease, and simplicity of an Enphase Energy solution while working diligently to achieve sustainable profitability in the second half of 2017. We will be hosting an Analyst Day on June 7th in New York, and we look forward to providing more details on our upcoming products and our path to sustainable profitability. I'll turn it over to Bert for his review of our financial results.
Thanks, Paul. I'll provide more details related to our first quarter 2017 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 2017 was $54.8 million, a decrease of 40% sequentially and a decrease of 15% compared to the first quarter of 2016. As Paul explained, our first quarter revenue was impacted by the extraordinarily wet winter in California. We shipped approximately 138 megawatts AC or 161 megawatts DC in the first quarter of 2017, a decrease in megawatts of 30% sequentially and a decrease in megawatts of 6% on a year-over-year basis. The megawatt shipped represented 573,000 microinverters, which included a mix of our fourth, fifth, and sixth generation microinverter systems.
Non-inverter revenue, which includes our AC Battery storage solution and accessories, was consistent as a percentage of revenue with our fourth quarter results. GAAP gross margin for the first quarter of 2017 was 12.9%. Non-GAAP gross margin was 13.3%. Non-GAAP gross margin excludes approximately $239,000 of stock-based compensation expense. Gross margins in Q1 were also negatively impacted by lower revenue and volumes, as our fixed overhead costs represented a much larger percentage of our revenue than anticipated. As I'll discuss later in our guidance, we expect gross margin to return to normal levels in the second quarter. Non-GAAP operating expense was $20.2 million for the first quarter, compared to $23.4 million for the fourth quarter and $28.1 million for the first quarter of 2016. Non-GAAP operating expense in the first quarter of 2017 excludes approximately $7.2 million of additional restructuring charges and $1.7 million of stock-based compensation expense.
The restructuring charges related to severance, restructuring-related professional services, and the consolidation of our corporate headquarter facilities and related asset impairments. We've taken several restructuring actions in the past three quarters to significantly reduce operating expenses and accelerate the timeline to profitability. These actions combined have resulted in approximately $38 million of cost reductions on an annualized basis, and we expect these actions will bring our quarterly non-GAAP expense run rate to approximately $18 million beginning in Q2. Our GAAP operating loss was $22.1 million for the first quarter, and our net loss was $23.3 million, resulting in a loss of $0.30 per share. On non-GAAP basis, our operating loss was $12.9 million and our net loss was $13.6 million, resulting in a loss of $0.18 per share. Now turning to the balance sheet.
Inventory levels were $33.8 million for the first quarter, compared to $32 million in the fourth quarter and $45.6 million in the year-ago quarter. Inventory levels increased slightly sequentially as we prepare for the seasonally stronger second quarter. On a year-over-year basis, inventories decreased significantly due to improved inventory and working capital management. We exited the first quarter with a total cash balance of $30 million. During the quarter, we raised approximately $26.5 million in equity financing and a net $14.1 million from the amendment of our term loan. As of March 31st, we had a $50 million balance on our term loan net of deferred financing costs. In summary, we believe the financing actions and restructuring initiatives we have taken over the past three quarters have helped to improve our liquidity and to create an operating structure that we believe positions us well to achieve maximum operating leverage.
Of course, we remain committed to our goal of achieving sustainable profitability in the second half of 2017. Let's discuss our outlook for the second quarter of 2017. We expect our revenue for the second quarter of 2017 to be within a range of $72 million-$80 million. Turning to margins, we expect GAAP.
The low single digit year-over-year shipment growth, can you talk about whether that's the result of overall market demand being somewhat slow, or are you seeing competitors become more aggressive in trying to take market share?
We actually think that we are continuing to take market share in the U.S. We have grown considerably outside of California, whether it's in the Northeast, the Southeast, the Midwest or the Texas region. We feel that we're on a consistent path towards market share gain across the board. I think what you are seeing is a slowdown of growth in the U.S. in general, in the residential market. It's hard to know what's going to happen the rest of the year, but we're anticipating somewhere in the neighborhood of, call it, 5%-10% growth in the market throughout the year.
Okay, got it. One final one for me here. Could you share what your mix of the IQ 6 inverter was in Q1, and how you see that mix changing in Q2, and then through the balance of the year?
Sure. We introduced the IQ just this quarter. We're very excited about the reception that it's getting. We do anticipate a very smooth and soft transition from the current product, from the M-Series to the IQ series, and we expect that transition to be complete by the end of the year.
Great. Thank you.
Thanks.
Thank you. Our next question comes from the line of Colin Rusch of Oppenheimer. Your line is open.
Thanks so much, guys. Can you talk a little bit about the sales dynamics with your distributor customers at this point? Are you seeing them ask for improved terms in terms of payment terms? Are they looking for a different set of products at this point, and how hard can they push the energy storage products?
We're not seeing any unusual movements or requirements or requests from our distribution partners. I'd say the only thing that was different in Q1 was the slowdown in the market, I think, that spooked them as well, and they were more reluctant to take in inventory. They did not know how long the downturn was going to last. I think the inclement weather, the rains were very extreme and unique to California. I think we were all taken a bit aback by the effect of it and unclear how soon it would recover. We clearly have seen it start to recover in Q2, so we feel good about that. In reference to storage, it's really not a distributor issue. It's really more about finding the right tariff and regulatory framework that creates an economic case for storage. In areas like Australia, that exists to some degree.
In Europe, it's being contemplated. In the U.S., there are some trials with some utilities, but it's still very experimental. As you know, when you're dealing with utilities, these things can take a while. We're as bullish about the storage market as ever, but I think we have to give it a little bit of time to evolve and develop.
Okay. Just changing gears to the data resources that you have. Obviously, you've collected an awful lot of data over a number of years. You've had some good projects where you've been able to augment grid performance. Can you talk a little bit about where you're at with utilities looking to access that data and potentially being able to monetize that?
Yeah, it's true that we have a tremendous amount of data. We're still collecting every day three to four terabytes of new data, that data tells us about the inverter, tells us about the module, and tells us about the grid. We have been able to, in the past, monetize some of that data to support some of our utility partners. I would say right now, those efforts have slowed down a little bit as a result of the OpEx reductions we've undertaken. One of the casualties was areas like our utility engagement. The reason for that is that those relationships take a very long time to develop. Right now, our capital is best used in the development of the IQ 7, storage, the home energy system.
We maintain that data, we actually maintain a dialogue with many of these utility partners, I'd say that developing a business that supports that is not a priority for Enphase at this time.
Okay. Thanks so much, guys.
Thanks, Colin.
Thank you. Our next question comes from the line of Brad Meikle of Craig-Hallum Capital. Your line is open.
Hey, good afternoon. In terms of the guidance, you're guiding on revenues and gross margins, but you've been burning cash for many quarters now. Why not guide on the bottom-line metric that matters? Can you give us some sense of what the free cash flow generation target would be for the second half of the year?
Hey, Brad. You're right. We do guide on revenue margin and OpEx. Of course, if you extend that down, you can get to operating income, middle of the range. It gives you, of course, about a $3 million loss on operating income, again, at the middle of the range. As far as the outlook for cash and cash burn, we did burn some cash in the first quarter. When we look at Q2, as we move into a seasonally stronger part of the year, we will burn a little bit of cash, but nothing on the order as we've seen in prior quarters. In fact, we're down in the single digits. We think that continues into 2017, the back half, where we actually begin generating cash. We've taken a lot of actions and a lot of work to make that possible.
The restructuring effort that we've undergone so far, the $38 million, certainly takes a lot of pressure off working capital and cash. We're not done, of course, but there's been a lot of work, again, towards the end of reining in cash burn.
Well, I guess that, do you feel like you're going to need to raise more capital? Is 10% free cash flow margin the right way to think about where your business can go as you roll out and fully the IQ 6 and IQ 7?
On your first question, the need to raise more capital, there's nothing in the pipeline at this point. We think the work we've done actually positions us pretty well to execute on the strategy for the balance of 2017 and into 2018. Thinking about the long-term model, I think that's really what you're asking about is, where do we see ourselves getting to from an operating income and percent of revenue basis? I don't think 10% is overly optimistic. I think the benefit that we expect to see from not only the new products that we've introduced, but also the lower cost of products on the inverter side, make that metric, I think, totally reachable. Again, in a longer-term horizon, but we're talking quarters, not years.
What percentage of the mix do you think IQ 6 will be in the second quarter?
In the second quarter, I think it's still going to be relatively small. Part of the problem is that demand has outstripped our ability to supply. There's some component shortages. I think that we're going to see, as I mentioned before, a gradual transition so that we'd be entirely IQ by the end of the year.
Well, say for the second half, what percentage of shipments would be IQ 6 version 1 or version 2, or possibly IQ 7?
As we get to the end of the year, it's going to be close to 100%.
No, just for the whole second half of the year.
A majority will be IQ. More than 50%.
Yeah. Can you say, in Q4, what % of your business was in California? Just how much it dropped in the first quarter, so we can have some sense of what that with all the talk about the rain in California. I know, I experienced it, but just wonder if you could quantify what portion of the business that is.
Well, on average, our business is about 40% in California. We saw a significant drop, a double-digit drop in Q1 as a result of the rains.
What was the percentage decline in the California business?
I don't have the specific number. Brad, we'll get it to you and send it to you.
All right, thanks. For the Analyst Day coming up, are you going to provide some guidance on the full year and some detail on storage shipments and what the new business model might look like from a margin standpoint?
Yes, we'll be talking a lot about the new products. I don't know that we'll be providing full-year guidance, but we'll be giving you more indication, more clarity on cost and on revenue breakouts.
Thank you.
Thanks.
Thank you again, ladies and gentlemen, if you have a question, please press star then one on your touch-tone telephone. Our next question comes from the line of Edwin Mok of Needham & Company. Your line is open.
Hi, everyone. This is actually Arthur on for Edwin. Thanks for taking our questions. In terms of the competitive landscape in the U.S. for your microinverters, can you talk about how maybe that has changed, or if you're seeing any new players enter the market?
In terms of specific microinverters, we're not seeing much of a change. We did talk about, at the last call, that SunPower has introduced an AC Module, and again, by definition, that must include a microinverter, and it's not ours. That hasn't changed quarter-on-quarter. We did hear that there was going to be a new Chinese entrant as early as Q1, Q2. The latest data that we have on that is that's probably postponed to at least Q4, maybe Q1. I believe that they're actually going to come out with an optimizer solution, not a microinverter solution. I don't know of any other microinverter entrants, either now or on the horizon. I think the only significant new entrant in the rooftop inverter market is a new entrant from China, and I think that's been delayed by at least a couple of quarters.
Got it. Thanks for that color. In the past, you've talked about good demand for your AC Battery in Australia and have provided pretty robust shipment forecasts. Can you just provide some color on what you're seeing in terms of demand in the market, and if applicable, how have your expectations changed?
Sure. We are very pleased with the reception that our product is getting. We're probably one of the top three equipment providers in the Australian rooftop market. The value proposition certainly resonates. The two issues which I mentioned in the prepared remarks have definitely affected our view on the slope of the ramp. One is that we have seen competitive products come in at a greatly reduced price. Also they have copied a little bit of our architecture. We introduced something called an AC coupled system, which originally we were the only ones doing it, and now everybody's sort of adopted that architecture. They've adopted the architecture and come in with a lower price. What we're seeing is that the overall size of the market is very likely not as big as anybody had predicted at the end of last year.
We had many tens of thousands of preorders that we came into the year with. I don't think we're going to see those materialize. I think the actual numbers are going to be substantially less. I think we're executing well. I feel that from a market share and presence, we feel good about it. I think we should assume that the market is going to take a little bit longer to evolve than we had originally planned.
Got it. Last question is just on, I think you talked about some initiatives to reduce the cost for the AC Battery to combat the ASP decline. Can you talk about what are some areas that you're looking at to reduce costs, and what level or to what extent we can think of a reduction in cost savings?
I'm not going to provide any specifics on cost on the ACB, I will say that yes, we have a program right now that will have a very material, a very significant effect on cost. Remember, the ACB was the first product we've ever introduced of that category. Generally, when that happens, you're going to come in probably a little bit higher cost than you should, for a whole host of reasons. Now that we have it, now that it's out there, now that we have that experience, we're looking at every aspect of it, from the chemistry to the mechanical engineering, to the inverter itself, to a lot of the internal workings of the ACB. We are going to continue to reduce price throughout the end of this year.
I think by the end of the year, we'll have yet again, a far more cost-effective solution.
Got it. Is it fair to say that the cost reductions can outpace the ASP pressures?
The ASP pressures exist today, I think that's the competitive environment we live in right now. I do think that in a very short period of time, we'll be able to see strong gross margins at pricing that can compete with any of the competitors out there.
Got it. Thank you.
Sure.
Again, ladies and gentlemen, if you have a question, please press star then one on your touch-tone telephone. Our next question comes from the line of Vishal Shah of Deutsche Bank. Your line is open.
Hi, guys. This is actually Tyler on for Vishal. Apologies if you addressed this already, but kind of going on the pricing point. Wondering what your pricing strategy is going forward in respect to wanting to gain some market share. Are you guys still selling at a premium to SolarEdge?
It's been our experience that we can charge a 10%-15% premium and win a majority of the deals. I think our customers appreciate the simplicity, the quality, the reliability of an Enphase solution. By the way, I think that is especially true with the AC module. We do anticipate further reductions in ASP throughout the year. I don't think it's going to be as substantial as we saw in 2016. We think anywhere from 10%-15% reduction throughout 2017 is probably more likely. Then we do think that ASP stabilize in 2018.
Okay. Thank you.
Again, ladies and gentlemen, if you have a question, please press star then one. I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Paul Nahi. Sir, the floor is yours.
Thank you for joining us today. We look forward to seeing you on June 7th at our Analyst Day and speaking with you once again on our call next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect.