Good day, ladies and gentlemen, welcome to the Enphase Energy first quarter 2016 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 be given at that time. If anyone should require operator assistance during the conference, you may press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Christina Karrabino. Ms. Karrabino, you may begin.
Good afternoon, thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2016 results. On today's call are Paul Nahi, Enphase Energy's President and Chief Executive Officer, and Kris Sennesael, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31st, 2016. We are providing an accompanying presentation with our earnings call that you can access in the Investors section of our company's website. 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, 2015, and in Enphase Energy's quarterly report on Form 10-Q for the quarter ended March 31st, 2016, which will be filed with the SEC in the second quarter of 2016. 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 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 Paul Nahi, President and Chief Executive Officer of Enphase Energy. Paul?
Good afternoon, and thanks for joining us today to discuss our first quarter 2016 financial results. We reported revenue of $64.1 million for the first quarter of 2016. We shipped 143 megawatts or 611,000 microinverters, an 11% sequential increase resulting from the expansion of our existing worldwide customer base and new customer wins that drove our market share growth during the first quarter. Enphase continues to be a leading choice for residential and commercial installers in the U.S. and a growing number of installers in our international markets. There are currently over 460,000 Enphase systems deployed in over 100 countries. Since inception, we've shipped approximately 11 million microinverters, representing more than 2.8 gigawatts of installed generating capacity. Enphase systems have produced over 5 terawatt-hours of clean energy.
As we discussed last quarter, the second half of 2015 proved challenging as pricing pressure in our U.S. and international businesses increased, affecting our year-over-year revenue growth. However, we continue to drive the adoption of the microinverter technology by providing our customers with more features and functionality and ever-increasing quality and reliability, all while we continue to simplify design and installation. We're doing all this at very competitive prices. In fact, we're seeing the effectiveness of our new pricing strategy with multiple new customer wins and an increasing share with existing customers. We're currently selling into 7 of the top 10 tier-1 installers in the U.S. residential market, and in addition, our market share has increased with tier-2 installers as well as with thousands of smaller installers across the country.
We also continue to drive revenue from other go-to-market channels, including the new home builder segment, roofers, HVAC installers, and new alternative financing providers. In addition, our work with multiple module manufacturers to develop an AC Module, a solar module with an integrated microinverter, is progressing very well, and we're looking forward to its introduction in early 2017. As anticipated, our revenue and gross margin results for the first quarter are impacted by lower pricing, but we are very encouraged by wins at new and existing customers and are confident they will continue to contribute to our growing market share. While the decline in gross margin is challenging, as expected, our pricing strategy is working, and we believe that we will see gradual improvements to our gross margin going forward. We continue to make great progress on our cost reduction roadmap and the development of our complete home energy solution.
Our next-generation microinverter, with higher performance and new advanced features, is currently going through our rigorous quality and reliability testing and is on track to meet our cost target by the end of this year. In addition, cost reduction activity is underway for 2017, and we are well on track to meet next year's cost target. The development of our home energy solution is progressing very well. Our storage solution is in trials in Australia and is being very well received. We're seeing excellent results and are looking forward to the launch of the AC Battery solution in Australia this summer. We're more enthusiastic about battery storage than ever before. The simplicity, ease of design and installation, modularity, and performance of our AC Battery is unique in the industry, and the advantages over competitive solutions are becoming increasingly clear.
The dynamics of the residential solar market in Australia make it one of the most storage-ready regions in the world. The robust market, as well as our strong presence and growing market share, make the Australian market the perfect place for the global launch of our AC Battery and home energy solution. We will also be providing our unique technology to other markets, as we see strong interest in a complete energy solution in many countries worldwide. I recently visited with current and potential customers in the EMEA region and came away encouraged and impressed with the strong interest in our home energy solution in Europe. The Enphase Energy System addresses regulatory requirements, increases the economic benefits of a solar system, and enables more energy independence. The solar industry in France and the Netherlands is expanding, and Enphase continues to grow its market share in these countries.
Our success and market share growth in Europe and the Asia Pacific region contributed to GTM Research recently naming Enphase as the number one provider of monitoring software for residential PV segment globally, while remaining the leader in the same segment for the Americas. I'll close my comments by noting we are encouraged by the positive industry outlook and are excited about the many opportunities ahead. We remain committed as ever to enhancing our core products and services that have the ability to change the face of energy production, storage, and management. I'll turn over to Kris for his review of our financial results.
Thank you, Paul. I will provide some more details related to our first quarter 2016 financial results, as well as our business outlook for the second quarter of 2016. 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 2016 was $64.1 million, in line with the business outlook we provided last quarter. We shipped 143 megawatts AC, or approximately 168 megawatts DC, during the first quarter of 2016, an increase of 11% compared to the fourth quarter of 2015. The megawatt shipped represented 611,000 microinverters, all of which were our fourth and fifth generation microinverter systems. Gross margin for the first quarter of 2016 was 18.8%. As we have previously discussed, we have been reducing our prices ahead of product cost reductions.
Revenue per AC watt for the first quarter of 2016 was $0.45, down 16% year-over-year and down 12% sequentially. Revenue from accessories during the first quarter of 2016 decreased 15% from the fourth quarter of 2015, contributing to the sequential decrease of our revenue per watt. Operating expenses during the first quarter of 2016 were $28.1 million, including $500,000 of bad debt expense. During the first quarter of 2016, R&D expense were $11.9 million, sales and marketing expense were $9.6 million, and G&A expenses were $6.6 million. Total non-GAAP operating expenses excluded $2.7 million, almost all of which was stock-based compensation expense. We reported non-GAAP operating loss of $16 million and a net loss of $15.7 million in the first quarter of 2016, resulting in a loss of $0.34 per share.
On a GAAP basis, net loss for the first quarter of 2016 was $18.8 million, or a net loss of $0.41 per share. Turning to the balance sheet, we exited the first quarter of 2016 with a total cash balance of $13 million. We ended the first quarter with a $20 million draw on our credit facility. We believe our current cash balance, as well as the cash available through our working capital facility, is sufficient to fund the growth of our business. We exited the quarter with $45.6 million in inventory. We will continue to take actions to drive down days of inventory outstanding during 2016. Current inventory levels are high. We continue to run the production lines in anticipation of the expected revenue and unit growth in both the second quarter and the second half of 2016.
During the first quarter, capital expenditures were $3.3 million. Depreciation and amortization was $2.7 million. Now, let's discuss our outlook for the second quarter of 2016. We expect revenue for the second quarter of 2016 to be within a range of $76 million-$82 million, as we are seeing the expansion of our business with wins at new and existing customers worldwide. At the midpoint of the range, revenue is expected to be up 23% sequentially. Megawatt shipments are expected to be up 32% sequentially, demonstrating further market share gains. We expect gross margins to be within a range of 17%-20%. We also expect non-GAAP operating expenses for the second quarter of 2016 to be within a range of $27 million-$29 million. Now, I will open the line for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number 1 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. Our first question comes on the line of Philip Shen with ROTH Capital Partners. Your line is open.
Hey guys, thanks for taking my questions. In terms of your competition, can you talk about how your competitors are reacting to your recent price cuts? Have you seen corresponding price cuts from them? Can you break out the, I guess insofar as you can break out the answer between string inverters, microinverters, and DC optimizers, that would be helpful.
As you correctly noted, we are taking very aggressive pricing actions, and we've been tremendously successful with it in terms of gaining market share. What we've seen as a result of that is that the microinverter architecture is definitely the preferred architecture if we can be at or slightly above competitive pricing. In doing so, we have seen some very aggressive moves from our competitors. The good news is that despite those moves, we continue to win share with our current pricing as it is. I think the existing pricing strategy is working very well. I think the thesis is playing out nicely. In terms of the specifics between string inverters and string inverters with optimizers, we actually don't make that distinction. For us, it's the micros, and then our competitors are one form of string or another.
We're seeing the reaction to our pricing sort of across the board.
Okay. Thanks, Paul. In terms of ASPs, can you talk about how you expect them to trend, perhaps beyond Q2? We saw down 16-ish% year-over-year in the first quarter. How do you guys see the ASPs evolving throughout the rest of the year? When do you expect you may need to take your next price action?
Again, we are very encouraged by the success of the pricing action, and while we do not guide to future price moves, what we can say is this: the confidence that we have in the cost reduction roadmap. Today, we have the product that will be introduced at the end of this year. It is up, it's running, it's in trials. It's going through our QA testing as we speak. It is on track and at the target cost. That provides the confidence for us to be able to continue to be aggressive on pricing throughout the end of the year. The specifics, as I mentioned, I'm not going to be able to provide for you, but I can say that we are very well-positioned and poised to continue on with the current strategy.
Okay. Great. One last question here from me. In terms of the balance sheet, Kris, you just talked about how your existing line of $20 million plus the existing cash, and so forth is enough to get you guys through this process. I was surprised that cash kind of fell to $13 million in the quarter. Can you just walk us through in more detail on how you manage through the next few quarters?
Yes, Phil, definitely. Happy to answer that question. I'll take maybe a little bit more time. The way I look at it is three basic parts to that question. First of all, we are improving the financial performance of the company. Secondly, we are driving further working capital improvements, especially on the inventory side. Thirdly, it's all about cash and having access to cash. Let me start with the first one, improving the financial performance of the company. First of all, we continue to see strong overall growth of the total available market in the markets that we play. The U.S. residential market continues to be strong, as well as many other markets that we play in. There is strong overall growth.
Since we've adopted our new pricing strategy, we are back to gaining market share in markets that are growing very strong, that results in top-line growth, as you can see by the guidance that we provided for the second quarter. We do expect the revenue to continue to grow and further improve, not only in the second quarter, but also in the second half. Also in part because in the second half of 2016, we will start adding revenue from the AC Battery storage solution that will go on sale there as well. In addition to that, as Paul just pointed out, we see some good traction on our product cost reduction roadmap that will, over time, gradually result in margin improvements.
Of course, we will continue to manage our operating expenses as we have done now for a couple of quarters in a row now by keeping them relatively flat. I do expect over time here, quarter after quarter, top-line improvements and bottom-line improvements, and that will help to reduce the cash burn. Secondly, it's about working capital and especially inventory. We ended Q1 with approximately $45 million of inventory, up approximately $5 million from what it was at the end of 2015. Current inventory levels are too high, but we felt comfortable with the inventory levels in anticipation of the increased revenue and increased unit growth that we expected and that we are seeing in the second quarter and beyond that.
Having said that, we are working on improving our inventory turns and bringing down the absolute dollar amount of inventory that we carry on our balance sheet. Thirdly, it's all about having the cash and access to cash. As you know, we ended the quarter with $30 million of cash. In addition to that, we do have a working capital facility with Wells Fargo of $50 million. In addition to that, we have an accordion feature of $25 million on top of that. Yes, we will continue to look at opportunities in the capital markets, especially the debt market. As you know, we do have a universal shelf of $35 million available to us. However, our point of view hasn't changed on that.
We currently do not have any intention to go and raise equity because again, we believe that a combination of improving the financial performance, driving down inventory levels, and the cash that we have, plus the access to cash that we have currently, is sufficient to go and fund the growth of the business.
Okay. Thank you, Kris. Thank you, Paul. I'll pass it on.
Thank you.
Thank you. Our next question comes from the line of Jeff Osborne with Cowen and Company. Your line is open.
Hey, good afternoon. I just wanted to follow up on that line of questioning. Is there any covenants that we need to be aware of? I can obviously look it up later tonight, but on the line of credit or the accordion minimum cash balances, minimum margins, anything like that?
No, on the working capital facility, there is a $15 million minimum liquidity, of which $5 million is coming from availability under the line. So that's the major, and I would say, only covenant that we have under that $50 million working capital facility.
Got it. Then, Kris, you've done a very nice job on the OpEx control over the past couple of quarters, as you highlighted, but you've called out inventory being high for a couple of quarters in a row. Can you just talk about, in hindsight, what the issue has been and what you're doing to rectify it?
On the OpEx?
Inventory.
No, I was saying you've done a nice job on OpEx, but you've also, for the past three quarters, highlighted inventory being a bit higher than normal, and unfortunately, it's still moving in the wrong direction. Can you just talk about, in hindsight, what's actually transpired and then what you're doing about it to accelerate the collections?
Yeah.
Is it just new customers that don't pay their bills or is it people in financial distress? I'm just trying to understand what the actual variables at play are.
No. If we talk about receivables, of course, as the business goes up, receivables will go up as well. We don't see any major issues in terms of collectibility or anything like that. That's on the receivable side. As I said, as business will go up, receivables will go up. On the inventory side, we definitely saw some softness in the second half of 2015, but we also adopted this more aggressive pricing strategy, which is resulting now in market share gains. We currently have too high of inventory, but we are going to burn that off as the unit growth and the revenue growth now starts in the second quarter and in the second half of 2016.
Got it. The last question I had is just can you explain the 9% delta on the revenue guidance and the megawatt shipment guidance? Is there an acceleration of pricing or is there a mix shift to accessories? Just what are the dynamics at play as it relates to the guidance?
There is no real shift there in the guidance Q2 versus Q1. Obviously, megawatts is always growing faster than revenue as there is ongoing price erosion.
Got it. Accessories should be pretty consistent. There's no one-time items like you've called out in the past?
There's always some fluctuations on accessories, and so some quarters are stronger and other quarters are a little bit less. For the second quarter, we don't expect any major shift there.
Thank you very much. Appreciate it.
Thank you. Our next question comes from the line of Edwin Mok with Needham & Company. Your line is open.
Hi. Thanks for taking my question. Follow-up to Jeff's last question. I noticed your gross margin is also guiding kind of flattish sequentially. Does it imply that you are expect to drive your cost down by a similar magnitude? I think my math tells me down around 7% sequentially for you to hit the midpoint of gross margin. I thought that a lot of your cost reductions come through a new version. What helps you to drive that cost down?
Yeah. Your math is somewhat in the ballpark there, right? We definitely have been able to drive down our cost per watt, in the mid-teens, on a year-over-year basis. Sometimes you see some acceleration when you look at one quarter versus another quarter. We definitely continue to see some major improvements in driving down our product cost. Keep in mind that the vast majority of the products that we ship right now is our fourth generation, and we are not done in driving down the cost on that fourth generation. We continue to drive down and execute on product cost reduction on the fourth generation, as well as the introduction of the fifth generation in the fourth quarter, where we continue to drive down the cost.
Later on, the sixth generation, which will become available late 2016, eventually the next generation in 2017 as well.
To underscore Kris's point, what he just described has been sort of the process of cost reduction for us from day one, where with the introduction of a next-generation product, we'll oftentimes see a step function decrease in price. Throughout the life of that product, we will continuously refine it and pull costs out. That's exactly what we're seeing right now with the fourth-generation product.
Okay, great. That's helpful, Paul. Paul, in your prepared remarks, you talk about gaining share, I think you call out international as an area that's of strength. Can you guys give us roughly how much of your revenues come from international right now, amounts at the various markets you sell into? Which market are you seeing the strongest strength or share gain you're seeing?
Our share in international has remained relatively stable, around 15%, but that's in large part because we're seeing good growth in the U.S. market. If we look at individual markets like Australia, we doubled our market share from 2014 to 2015, and we expect to see something very dramatic this year in terms of share gain as well. In France, I think we are likely the number 1 residential inverter with market share in the low 30s. Those are very strong markets for us. We're seeing very good growth in the Netherlands right now as well. In terms of the European markets, I think France, Netherlands, and then we're looking at some other countries. We have seen strong growth in Latin America as well. Mexico is doing very well for Enphase, as well as the Caribbean.
I think in Puerto Rico, we're again the number 1 residential inverter down there, and we're seeing good share growth in both of those geographies, as well as other Latin America countries like Panama and Central America and others. If you look at different growth areas for us in the Asia Pacific region, we're looking north to some of the island nations as well as potentially Southeast Asia. I mentioned that we're looking at different European countries and different Latin American countries. I'd say good, well-balanced growth in all the major geographies.
Okay, great. That's helpful. Any updates on the commercial product you guys launched?
We continue to see good success with our commercial product. In fact, you may have heard about the NRG win with Whole Foods. That's a very significant commercial design win that NRG Renew will be using Enphase for. Now, it's something we're very excited about, both our partnership with NRG as well as the Whole Foods agreement. I think it's certainly exemplary of the type of projects that we're winning on the commercial side. Now that's in the U.S. We're also winning multiple commercial deals in international countries as well. Again, a sort of a well-balanced approach to resi versus commercial.
Okay, great. Last question I have. On the AC Battery, I think you guys talked about launching the product summer of this year in Australia and potentially other markets sometime next year. Is there a way or have you guys done some estimate in terms of sizing the opportunity, or how much pull you expect initially in second half of 2016 or any way we can size the opportunity in 2017? Any color would be helpful. Thank you.
It's a difficult question to answer because the market is very nascent. Clearly, storage is going to be an instrumental part of this total energy solution. You're not going to be able to see the penetration in solar as we expect without a commensurate increase in storage. The storage product is part of the larger home energy solution for us, which includes the generation, the solar itself, the storage, load control, and an energy management system that manages that system for the consumer. For obvious reasons, I can't give any forward-looking numbers on specific battery sales. What we can say is this, that we're getting an increasing amount of demand from our installer and distributor customers to start taking pre-orders because the demand is certainly increasing. The demand is increasing, I think, for two reasons.
One is that the overall demand for storage is increasing, and two, now that we have some competitive products that are out there in trials, the clear differentiation between an Enphase system in terms of our simplicity, modularity, ease of installation, ease of use is more pronounced than ever, which is driving up demand. While I expect to see significant demand this year, the second half in the Australian region, we do expect that the storage revenue and the revenue from home energy solutions to be meaningful in 2017.
What kind of margins are you expect to generate from the storage product once it's ramped up? Is it similar to corporate average or about below?
We expect it initially to be at around corporate average.
Okay, great. That's all I have. Thank you.
Thank you.
Thank you. Our next question comes from the line of Michael Morosi with Avondale Partners. Your line is open.
Hi, guys. Thanks for taking the question. Are you seeing any changes in the competitive dynamics coming from the lower end of the market? I'm thinking specifically of Chinese competitors.
We are definitely seeing the competitive dynamics changing. What I would say, though, is that in the residential segment, we're not seeing as much in the way of offshore products. I think we're seeing that more in the commercial segment. In the residential segment, while there is plenty of pricing pressure, it's coming from either domestic or European products.
To the extent that you're beginning to ship the AC Battery solution in the second half of the year, and that should help with margin absorption, how likely is it, do you think that Q1, Q2 will represent your gross margin bottom for the cycle?
As we talked about, I'm not ready to provide longer-term guidance on gross margin. What I would repeat is that we are gaining more and more confidence in our cost reduction roadmap. As I mentioned, the product for this year is already in test, so we have a very good view on that. There is a lot of great work that's been done on the cost reduction activities that we will see in 2017, which is providing, yet again, more confidence in our ability to meet the 2017 targets. Both of these targets, by the way, as we noted before, are very aggressive. Meeting these targets is very exciting, and it gives us the ability to use pricing as necessary to maintain and grow our share in the markets that we're in. It's hard to predict exactly where pricing is going to land.
For us, with the success that we're having on the cost reduction and the success we're seeing in gaining market share as a result of more aggressive pricing, we're confident that we're going to be able to continue to gain share while we, over time, increase gross margin.
Thanks for that. Finally, do you have any exposure to SunEdison in terms of key hold?
Right. SunEdison is a less than 2% customer, of which the majority of that is actually outside of the U.S., mainly in Australia, which is not part of the SunEdison bankruptcy. Our exposure is limited. We did take some reserves, and we believe we are appropriately reserved for any remaining exposure that we have on SunEdison.
Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Vishal Shah with Deutsche Bank. Your line is open.
Hey, thanks for taking my question. This is Rakesh on behalf of Vishal. Just wanted to check on the Chinese string inverter size. Do you see these companies offering remote disconnect options? If so, how does this impact the market share of microinverter and optimizer companies?
It's very clear that rapid shutdown is a necessity right now in the Northeast, and it will very soon be a necessity across the continental U.S. It is a safety feature. It's the right answer for solar. For string inverters, the vast majority of them do not currently support rapid shutdown, and that has kept them out of the market for the most part. There are various potential solutions to that we've seen and heard of. All of them are really quite expensive. They're rather clunky. They require additional hardware on the roof, which is something that string inverters are not used to. I think that they're going to have to respond if they want to play in the U.S. market. However, it is something that is very foreign to them. Their current architectures, their current systems were never built to support that.
I think we're going to see sort of a clunky, perhaps a bit of some kludgy solutions to it. It's certainly going to increase pricing. It's going to increase the labor cost. It's going to force them to increase the reliability because now they have units on the roof that need to last the duration of the warranty. I think it's going to be interesting to see how this plays out, but clearly with products like Enphase that are correct by construction, not only do we comply to all the current regulations, but we comply with regulations that will be in place all the way through 2019 because of the architecture of the microinverter, that it is correct by design. For us, it's just a natural evolution of where the market's going.
All right. Thank you. Would it be possible to quantify the cash burn you expect to see in the next few quarters? Just a ballpark figure.
We don't provide guidance from a cash flow point of view, as I stated before, a combination of improving top and bottom line, working on the working capital side and reducing inventory will result in a further reduction of the cash burn.
All right. That's helpful. Thank you.
Thank you. Our next question comes from the line of Colin Rusch with Oppenheimer. Your line is open.
Thanks so much, guys. Can you talk a little bit about how you're toggling pricing and margin as we go forward? Obviously, you're talking about cost reduction, but if you, for some reason, are going to pass all that cost reduction down and maintain gross margins, we have to see revenue nearly double or a little bit more to get to a break-even level, even on a non-GAAP basis. As you guys go through the balance of the year, can you talk about how that decision-making process is happening and kind of what the response time is versus market signals to when you can respond?
Sure. The strategy hasn't really changed, that we are focused on top-line growth, market share growth, while moving as aggressively as we can towards profitable growth. This means that we need to moderate our pricing to ensure that we are competitive, that we can pull market share away from competitors, again, both domestically and internationally. Because of the confidence we have in our cost reduction efforts, it's a tool in our toolbox, and we'll use it as necessary. It's impossible to know how aggressive that pricing will need to be. I think we are very well-positioned to address whatever comes up. As I mentioned before, we've already seen some very aggressive countermoves by many of our competitors. The good news is that it hasn't been successful, and we've been able to, with our new pricing, continue to grow and take market share.
The goal right now is profitable growth, which means top-line growth, market share growth, and heading towards profitability. That strategy, which we outlined back late last year, has not changed.
Okay, and then on the supplier side, are you seeing any of your suppliers get nervous about the cash burn or look for letters of credit, anything like that changing with those suppliers?
Not in a particular way. We definitely need to address that, and I've talked about it already today. I think we have the right plan in place, and we feel that the cash we have, as well as the access to cash we have, as well as all the other stuff that we're working on, are sufficient and that is not a major issue for our suppliers.
Okay, great. Thanks a lot, guys.
Thank you.
Thank you. Our next question comes from the line of Krish Sankar with Bank of America Merrill Lynch. Your line is open.
Yeah, hi. Thanks for taking my question. I had a couple of them. Paul, I'm just kind of curious if I look at your pricing, obviously it is down like 15% last year, did about $0.45 a watt. Is this a race to the bottom? At what point do you say that we can't cut our price anymore? Or is there any kind of bogey for that where maybe it gets to $0.10 or $0.15 a watt or lower than that where you say, "This doesn't make sense"?
Is the pricing extremely competitive right now? You bet. I think we're going to see a very competitive environment throughout the rest of this year. However, we have to recognize that the $0.45 a watt that you noted is really not representative of our actual price. That includes or could include many of the peripherals, the Envoy, the AC Combiner Box, cabling, whatever else. The actual inverter price is actually considerably less than that. It is very much our belief that as we approach the cost/pricing of string inverters, and now I'm talking about low-cost string inverters, that the decision becomes very simple for our customers.
That for a pricing that is at or nearly at string inverter pricing, they can have the quality, the reliability of an Enphase system, the extra production that Enphase provides, the simplicity of design installation, the simplicity of working capital management for our customers. They get all of that with the Enphase support for a nominal increase. While we see and have seen a sort of a rather precipitous drop in ASPs, we do think that it definitely does start to asymptote and start to flatten out as we get lower on price. At that point, the full benefit of the Enphase system can be realized for a very marginal premium. More importantly, I think we're moving into an era where it's not about the inverter, it's going to be about the energy system.
The Enphase system is not only going to be the highest quality, the most sophisticated system out there, but it'll also be one of the most competitively priced.
Got it. All right. How big is the gap today between you guys and the string inverter guys in terms of absolute pricing?
It's a really hard question to answer. The range is very broad. Remember that with rapid shutdown, now all of a sudden the string inverters have to add a lot of complexity, more products. They have to significantly change their design in order to simply comply with the regulations that are occurring. Again, it's varied. It's hard for me to give you a specific answer, but as we've said before, we believe we get to cost parity or maybe slightly below cost of optimizers by the end of this year, by the second half of this year, then significantly below that and approaching or at low-cost string inverters by the end of 2017.
Got it. All right. That's all I had. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Pavel Molchanov, Raymond James. Your line is open.
Question, guys. Sorry to mention other troubled companies, following up on the SunEdison question, talking about Vivint, this was 12% of your revenue last year. Obviously, there's quite a bit of turbulence at that company. Can you give an update on where the business relationship currently stands?
I probably would take issue with the comment, other troubled companies. What I would say is that the market is undergoing a great deal of volatility right now. That shouldn't be terribly surprising given that the solar market is really a very disruptive force on a long-term energy market. In the process, businesses and business models need to be adjusted to accommodate what is a growing and an evolving market. We have an outstanding relationship with Vivint. We think very highly of the company, and we have a great deal of confidence that they're going to be able to continue to see success. We also have a great deal of respect for all the other solar companies out there. We recognize that the environment right now is challenging, whether it's pricing or whether it's customer acquisition cost. There's just a lot of change going on.
The dynamics of this market simply get better. We can't forget that there's an underlying foundation to the solar market, and people are buying solar today because it's less expensive than utility energy. We know that solar prices keep coming down, and we know that utility prices are going to continue to rise. The number of people for whom solar will become a more interesting product will continue to increase. What we need to do is make sure that we build our businesses around that evolving market, which means getting our costs down, keeping our OpEx low, so we can compete very competitively with existing forms of energy, which is coal and gas. That is occurring. That's occurring worldwide, and we see a very strong evolving market.
In the meantime, it's going to be a little bit volatile, and I think that's what we're experiencing right now.
Okay. Along those lines, can you share what percentage of your Q1 sales came from Vivint?
Yeah, it's less than 10%, consistent with what it was last quarter.
Okay. Appreciate it, guys.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one. One moment for questions. This concludes today's Q&A session. I would now like to turn the call back over to Paul Nahi for any closing remarks.
Thank you all for joining us on our call today. We look forward to speaking with you again next quarter.
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