Good day, ladies and gentlemen, and thank you for your patience. You've joined Enphase Energy's First Quarter 2015 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. As a reminder, this conference may be recorded.
I would now like to turn the call to your host, Ms. Christina Carabino. Ma'am, you may begin.
Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's Q1 2015 results. On today's call are Paul Nahee, Enphase Energy's President and Chief Executive Officer Chris Kennesaw, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its Q1 ended March 1, 2015. We are providing an accompanying presentation with our earnings call that you can access in the Investors section of our company's website at www.enphase.com. 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 microinverters, advantages of its technology, market trends, future products and future financial performance.
These forward looking statements are based on the company's current expectations and inherently involve significant risks and uncertainties. Enphase Energy's actual results and the timing of events could differ materially from those anticipated in such forward looking statements as a result of these risks and uncertainties. Factors that could cause results to be different from these statements include factors the company described in its press release of today, especially under the section entitled Forward Looking Statements, as well as those detailed in the section entitled Risk Factors of the company's report on Form 10 ks for the year ended December 31, 2014. Enphase Energy cautions you not to place 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 Nagy, President and Chief Executive Officer of Enphase Energy. Paul?
Good afternoon and thanks for joining us today to discuss our Q1 2015 financial results. As usual, I'll start with my opening remarks and touch on some key highlights and then Chris will take us through the Q1 financials and the outlook for the Q2. After that, we'll open up the call for Q and A. After a groundbreaking year in 2014, we started 2015 with solid performance and continue to experience strong business momentum with all our customers in the domestic residential and commercial markets as well as international markets. During the Q1, we shipped 162 Megawatts of microinverter systems, an increase of 74% year over year.
We reported revenue of 86 point $7,000,000 for the Q1 of 2015, an increase of 50% year over year and non GAAP gross margin of 32.6 percent despite the fact that we lost approximately $1,000,000 in revenue and 1 full percentage point of margin due to unfavorable foreign exchange fluctuations. Enphase continues to be the leading choice for residential and small commercial installers in the U. S. And a growing number of installers in our international markets. In fact, Enphase is installed in more than 90 countries worldwide.
Since inception, we've now shipped more than 8,000,000 microinverters, representing more than 2 gigawatts of installed generating capacity. Enphase systems have reduced over 3 terawatt hours of clean energy. The demand for solar in the U. S. Remains very robust.
According to GTM Research, 2015 is expected to be another year of significant growth in the U. S. With a forecast of 1.8 gigawatts of residential PV, up approximately 50% year over year and a forecast of 1.5 gigawatts of commercial PV, up 40% year over year. In addition, outside the U. S, solar continues to take a bigger share of the energy market and continues to grow.
According to IHS Research, the global solar market, including all residential, commercial and utility scaled PV installations is expected to be 56.5 gigawatts in 2015, up 30% year over year. Our continued success in the U. S. And global markets is a result of several factors, one of which is the unique value proposition of our microinverter system. Our proposition benefits the entire ecosystem.
We address the system owner by providing a lower levelized cost of energy and therefore a better return on investment and our ease of design, installation and management helps our installers create a more efficient and profitable business. By providing better economics to all our customers, we've been able to see a dramatic rise in revenue and market share over the past several years. Our value proposition is predicated on quality and reliability. The quality and reliability in every component we select, every product we manufacture and every system we monitor. Our system offers high performance, safety, reliability, simplicity and intelligence.
In addition, our distributed networked architecture will make mainstream access to clean affordable energy a reality. Last year, we discussed our commitment to local job communities and job preservation through our American Pride microinverters, which are assembled in America. We're pleased to have recently partnered with Petersen Dean Roofing and Solar, the largest privately held roofing and solar company in the U. S. To provide products assembled in America.
Under the agreement, Enphase will supply American Pride microinverters for deployment in Petersen Dean's residential and commercial installations. The partnership brings together 2 leaders in the fast growing U. S. Residential and commercial solar markets, who share a strong commitment to American technology, domestic job creation and the emerging clean energy economy. We began shipping our C250 microinverter system to commercial solar customers in the U.
S. During the Q1 and are seeing strong interest from both new and existing customers. The C250 system delivers optimal performance and enables installers to use less wiring and fewer balance of system components, thus significantly reducing labor and overall installation costs. The C250 launch was accompanied by the growth of our Enphase Energy Services business, which provides system owners, operators and installers with scalable asset management and O and M services. We recently increased geographic coverage, adding service teams in the Northeast region of U.
S. Along with Arizona and Florida. Turning to our international business. Revenue was up 52% year over year. In the U.
Distribution channel and grew our business with residential and commercial installers, including Pretty Green Energy. We're working with Pretty Green Energy, a leading installer of PV systems to offer high end solutions in the residential and small to medium commercial PV market. Offer. In Continental Europe, we recently enhanced our local sales operations and added resources in the Netherlands to provide leading edge services and support to our expanding base of Dutch customers. Also in Europe, we continue to build our customer base and are working with partners such as MyLight Systems, a company in the solar self consumption space based in France.
This partnership focused on advanced energy management will integrate the Enphase Envoy, the intelligent networking hub of the Enphase system into MyLight monitoring systems, bringing installers a new level of energy management integration for residential and commercial buildings. In the APAC region, we've been pleased with our progress in Australia and New Zealand, where first quarter revenue increased over 300% year over year. During the quarter, I visited with several customers in Australia and New Zealand and came away with that we're poised for continued success in these markets. Our market share continues to increase and the Enphase brand is becoming more well known and respected in the markets we have entered. As an example, we formed a partnership with Energy Australia, one of the country's leading utilities to provide our microinverter systems to Australian customers.
This is a big win for our APAC operation because it is not only the first strategic partnership with an Australian utility, but also offers M Pays access to approximately 10% of the Australian market. As we discussed last quarter, MFA took big steps forward in our evolution from a microinverter systems company to an energy technology company with the announcement of our distributed network energy management system. The system will not only be able to generate, store and manage energy, it will also collect and utilize valuable grid level data. This data will provide impressive insight into the grid and will help us work with utilities to strengthen it. An Enphase system provides the best return on investment for the owner and the most support for grid operators.
A great example of this is our recent work in Hawaii, where our data, software and grid edge analytics saved Hawaiian Electric Company tens of 1,000,000 of dollars by improving the stability of the grid. As a service provider, we work with Hawaiian Electric to clear the backlog of solar customers awaiting interconnection on the island of Oahu. We're very proud to be part of Hawaiian Electric's pioneering work in developing the blueprint for the next generation electrical grid and the mass adoption of solar. This is just the beginning of our exciting collaboration with utilities and it demonstrates how utilities and innovative solar technology companies such as Enphase can work together to the benefit of ratepayers, while making large scale grid integration of solar a reality. As the density of solar grows in any particular utility area, the necessity to work well with a grid and to comply with the ever increasing complexity of grid requirements will become increasingly critical.
We were honored to be recently named to Greentech Media's GridEdge 20 for the 2nd consecutive year as one of the most innovative companies working to architect the electric power industry's future. Awardees were selected based on their contribution to grid edge technology, which is increasingly important at a time when utility business models are facing change and more distributed energy resources are coming online. As solar energy continues to thrive, storage will become an increasingly important part of the total solution. And it's important to note that storage must be accompanied with an energy management system to control the charging and discharging of the battery, while taking into account energy generation and usage. In discussions with customers all over the world, the Enphase AC battery is being extremely well received and we are well oversubscribed for our initial system tests to begin later this year.
We're increasingly confident that our AC battery with its modular architecture and seamless integration into Enlighten, our energy management system, will be unique in its simplicity, ease of installation, performance and cost effectiveness. I'll close my comments by noting 2015 is off to a great start for Enphase. We're encouraged by the positive industry outlook and are excited about the many opportunities ahead. We are as committed as ever to enhancing our core products and services and are moving forward with bold initiatives that will change the face of energy production, storage and management. Now I'll turn it over to Chris for his review of our financial results.
Thank you, Paul. I will provide some more details related to our financial results for the Q1 of 2015 and then I'll provide the business outlook for the Q2 of 2015. 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 Q1 of 2015 was $86,700,000 an increase 50% compared to the Q1 of 2014. The large year over year growth was driven by overall strong demand for Enphase Energy Microinverter Systems in our core U.
S. Residential and commercial markets as well as further market share gains in our international markets. We have been able to grow our top line by an impressive 50% year over year despite a reduction in customer concentration. A year ago in the Q1 of 2014, our largest customer accounted for 22% of our total revenue. And in the Q1 of 2015, this was reduced to 17% of our total revenue.
This speaks to the strength of our business, not only with our largest customer, but even more so with many other large, medium and small customers in the residential and commercial solar markets. On a sequential basis, revenue was down 18% from the Q4 of 2014, which is better than the 20% to 25% seasonal decline that we have historically experienced during the Q1 of each year, despite the fact that there were some harsh winter conditions this year with a lot of snow, especially in the Northeastern United States. We shipped 162 Megawatts AC or approximately 186 Megawatts DC during the Q1 of 2015, an increase of 74% on a year over year basis. The 162 megawatts shipped represented approximately 719,000 microinverters, of which substantially all were our 4th generation microinverter systems. The Enphase M250 represented approximately 30% of all units shipped.
Gross margin for the Q1 of 2015 was 30 2.6%, despite the fact that we lost approximately 1 full percentage point of margin compared to the Q4 of 2014 as a result of a weaker euro, British pound and Australian dollar. Our engineering and operations teams continue to execute very well on our cost reduction road map and we incurred less than expected freight and expedite costs. Inverter pricing came in as expected. Revenue from accessories during the Q1 of 2015 was soft, resulting in a decrease of our total revenue per watt, but this was offset by a similar decrease in total cost per watt. Operating expenses during the Q1 of 2015 were $30,700,000 approximately flat when compared to the Q4 of 2014, despite the fact that we continue to make major investments in research and development, not only to support the development and further cost reductions of our microinverter systems, but also to make significant investments in the development of our AC battery storage technology, energy management system and grid edge analytics.
R and D expenses were $12,300,000 sales and marketing expenses were $11,100,000 and G and A expenses were $7,300,000 Total non GAAP operating expenses excluded $2,800,000 of which $2,700,000 are stock based compensation expenses. We reported a non GAAP operating loss of $2,500,000 in the Q1 of 2015 compared to a non GAAP operating loss of $3,800,000 in the Q1 of 2014. On a GAAP basis, the operating loss for the Q1 of 2015 was $5,500,000 compared to a GAAP loss of $5,800,000 in the Q1 of 2014. For the Q1 of 2015, the non GAAP net loss was $3,200,000 or a net loss of $0.07 per share compared to a non GAAP net loss of $4,100,000 or a net loss of $0.10 per share in the Q1 of 2014. On a GAAP basis, the net loss was $6,300,000 or a net loss of $0.14 per share compared to a GAAP net loss of $6,200,000 or a net loss of $0.15 per share in the Q1 of 2014.
Turning to the balance sheet. Cash flow from operations during the Q1 of 2015 was a negative $11,500,000 Cash flow was impacted by 2014 bonus payments during the Q1 of 2015. Inventory increased to $34,700,000 as the labor dispute in the Port of Oakland was resolved quicker than expected resulting in a temporary increase of our inventory levels. Capital expenditures were $3,600,000 and depreciation and amortization was $2,500,000 We exited the Q1 with a total cash balance of $27,100,000 and continue to have access to our working capital facility of up to $50,000,000 At the end of the quarter, the facility remained undrawn and the company remains debt free. Now let's discuss our outlook for the Q2 of 2015.
We expect revenue for the Q2 of 2015 to be within a range of $100,000,000 to $105,000,000 We expect gross margin to be within a range of 30% to 32%. As foreign exchange rates continue to deteriorate, we have included in this outlook a negative impact on revenue of approximately $2,500,000 to $3,000,000 and a negative impact on gross margin of approximately 2 percentage points. We also expect non GAAP operating expenses for the Q2 of 2015 to be flat to up 2% compared to the Q1 of 2015. And now I will open the line for
of your smaller customers who have a much higher cost structure positioning themselves for a post ITC world? What do you think the implications are for them for a high ASP product because post ITC the attention is going to turn to cost?
And I had a follow-up after that. Sure.
So I would say our smaller customers today are focused on cost. I don't think a whole lot is going to change post ITC. The advantage that some of our smaller customers have is that they have an intimate relationship with it is actually the smaller it is actually the smaller customers that are asking us for more and more features, more and more functions, more and more things that they can sell to customers. So I think actually the post ITC world from a pricing sensitivity standpoint is going to look the same as it is now with a deep focus on making sure that we continue to reduce our prices. But I think the smaller customers are going to be able to leverage with their local customers and provide more and more services and more and more features.
Got it, Paul. And then as
a quick follow-up, you guys introduced your storage SPI. But I remember you didn't disclose the cost per kilowatt hour. I'm just kind of curious, do you have any updated thoughts around it? Is there any number you can give? Or if you cannot disclose it, how do you think the battery system compares to what some of your competitors have announced of late?
So the you're absolutely right. We announced our storage solution back in October. It was very well received and has since been increasingly more enthusiastically received. We have a very modular approach, 1 kilowatt hour systems. They're very simple to install.
You basically take one person can hang them up on the wall and just plug it in. It seamlessly integrates and automatically integrates into the Enlighten Energy Management System. So because of all that, we feel that the installation the ease of installation, the cost of installation is going to be much less than with some potentially competing solutions. In addition to that, as we look at the total system costs, we are very, very comfortable that we'll be extremely cost competitive with what's out there.
Thanks, Paul. Sure.
Thank you. Our next question comes from Colin Rusch of Northland Capital. Please go ahead.
Thanks guys. Can we just get a little
bit more detail in terms of the accessory sales? What I'd like to really be able to back into is your cost on a per watt basis. And it looks like the cost program has actually been more aggressive than we might have expected going from late last year into this year. So just give us a little bit more color around those accessories so we could start to triangulate those numbers?
Yes. Colin, this is Chris here. So we in the past, we have not disclosed or given a breakdown of our revenue between inverters and accessories and we are not planning on doing that going forward either. But we have seen some big fluctuations quarter to quarter. Just to give you a range, it fluctuates anywhere from on the low end 17% to revenue towards the high end more like 25% of revenue.
So we definitely have seen some fluctuations there quarter to quarter. Part of that is seasonal as well. Q1 2015 was definitely a soft quarter in terms of accessory revenue. And as a result of that, you see a substantial drop in the revenue per watt. Having said that, pricing of inverters, as I mentioned before, pricing as inverter is on our normal trends that we have disclosed before of approximately 10% on a year over year basis.
Great. And then can you just give us the currency assumptions that you're working with for the first or for the 2nd quarter guide just so we have a sense of how that might trend through the quarter as the currency moves?
Yes. So foreign exchange is definitely something that we watch very closely and there has been some hefty fluctuations starting the beginning of the year, but it went much worse in March April. We have based our forecast on a euro exchange rate of approximately 1.10. Currently, we are trading a little bit better there. So that is good news.
But of course, we'll have to see how that all plays out for the rest of the quarter.
Okay, great. And then just a quick question on the inventory. How long do you think it'll take you to clear all of that and get back to a more normalized level? Is that something that's just a matter of weeks? Or is it going to take a quarter or 2 to kind of work all of that through the system?
No. We target to finish that by the end of the Q2. There might still be a little bit of spillover there into the Q3, but most of it will be cleared by the end of the second quarter.
Excellent. Thanks a lot guys.
Thank you. Our next question comes from Edwin Mok of Needham and Company. Your question please.
Great. Thanks for taking my questions. First, actually housekeeping. Do you have any other 10% beyond the largest one?
I'm sorry, Edwin. Can you repeat that?
Yes, no problem. Did you have any other 10% customer beyond the first the largest customer?
So we do. And interestingly enough, the other large customers are all distributors. So in fact, you could look at those customers as proxies for the thousands of small, medium and large installers that we currently support.
I see. So actually that's a good point there. And then in terms of this impact of this port strike that we saw last quarter, does that cause your channel inventory to go up a little bit also in the quarter? Can you give some color on that?
No. So the port issue was definitely a big issue. And just to put that a little bit in perspective, as you know, we ship our product from Flextronics in China to the port in Oakland and normal transportation time before the labor issue was approximately 30 days. That stretched out all the way up till almost 90 days. And so that was definitely causing some balancing act there to manage our inventory levels.
The issue got resolved late February. As a result of that, 10,000 of microinverters that were floating around on boats got offloaded and became part of our inventory. And so that resulted in a spike of the inventory levels as reported at the end of Q1. And as I stated before, we expect to bleed that off towards the end of Q2.
I see. So no impact on the channel. Okay. So can you by the way, thanks for the color on the international market. It looks like you guys are doing really well, especially in Australia.
Can you give us some color idea about your percentage of revenue come from those markets right now? I was a little bit surprised frankly by the magnitude of the FX impact, because I thought international has only been around 10%, 15% of your sales. So maybe give us some color and how do we kind of think about that? Because it seems like it's growing faster in the company. That's a growth driver, but impact by FX it might be offset, right?
Yes. So our mix between U. S. Revenue and outside of the U. S, our international revenue has not really changed.
It's still an 80five-fifteen split, so 85% in the U. S, 15 Despite the fact that our international revenue is growing extremely fast in Q1, we had 52% year over year growth. But obviously, our U. S. Business continues to grow also extremely fast.
And so it's difficult for now to outpace the revenue that we see in the U. S.
I see. Okay. Great. Last question and I'll let the other guys ask. Ask.
Your commentary around Peters and Dean and your partnership with them, right, kind of installers could be a growth area for you guys. How do you kind of think about those customers? Is it an area that you believe will allow you to drive more growth in U. S? Is that an area that you think you can target more?
That's all I have. Thank
you. So the our current customer base really ranges from the largest Tier 1s all the way to the smallest installers. It is true that the environment is very volatile right now. There are a lot of new entrants and I think there are going to be a lot more new entrants in the upcoming years. Some of these are going to be maybe specialty installers, some of them maybe more generalists.
What is very clear is that the ability with an Enphase system to very quickly get up and running to be able to simplify their back end office logistics, the simplicity of the design, the simplicity of the installation, the simplicity of the O and M does enable a lot more people to get into solar than they could have before and that is a unique characteristic of a microinverter. So certainly we're going to do our best to attract those customers as well. But I would view that as just one part of a much broader initiative to continue our market share growth in the U. S. Residential market.
Okay, great. That's all I have. Thank you.
Thank you. Our next question comes from Philip Shen of ROTH Capital Partners. Your question please.
Hey, Paul, Chris. Thanks for taking my questions. First one is on pricing. I think I heard you mention that pricing the pricing outlook has not changed and you still expect 10%. Can you expand on that and talk about the current competitive dynamics in the marketplace and potentially provide us some additional color on what you're seeing out there?
Sure. So the competitive environment today doesn't look very much different than it did last year or the year before. Our competition is primarily string inverters, with or without DC optimizers. And we continue to increase our market share against the string inverters, again because of the value proposition of a microinverter. The as Chris had mentioned, we've been on a fairly consistent price reduction path year on year for quite some time now.
It's a bit variable, but I'd say that we're pretty much on that same path as we look forward to 2015 and even 2016. There is as a result of where we are in the technology curve on a microinverter, there is a tremendous amount of room in front of us for further cost reduction. We're actively engaged in that. That's helping us reduce our prices very aggressively while maintaining very healthy gross margins. And in addition to that, we're adding new features, new functions that are unique to Enphase, unique microinverters that will also help us I think on the pricing side.
So we have there's a lot of work going on both in the area of cost reduction and future enhancement to help support the current and the future pricing expectations that we have.
Great. Thanks, Paul. And then shifting gears here. Chris, I know you mentioned the international outlook or the international mix of sales is about 15%. I was wondering if you could comment on the full year 2015.
So what do you expect the mix of international sales to be as well as commercial sales?
Right. So as you pointed out, the breakdown between U. S. And international is 85.15%. The breakdown between residential and commercial is also 85.15%.
We, of course, continue to grow our business in the U. S. Residential market, which is 75% of our business. We see a tremendous amount of growth of the total available market. And we continue to defend grow our share in that market and that is fueling a lot of the overall growth.
In addition to that, of course, we have a strong focus on growing internationally U. K. And Australia and many other markets from Canada, Mexico to other Continental European countries and other countries in APAC region. As a result of that, we do expect our international revenue to grow faster than the U. S.
Revenue. And so we will probably move more towards an eightytwenty towards the end of this year from that perspective. 16 2017, of course, we will continue to look at entering into new countries. And there's a lot of action going on within the company to prepare for that. Similar on the commercial side, as you know, we have launched our dedicated commercial product, the C250 that has 4 80 volt, 3 phase, 60 cell and 72 cell.
So now we have a dedicated product to go and attack the commercial market. That product is very well received in the market. It's a little bit of a longer sales cycle. But as I said, the product is very well received and we expect that as well to grow towards the end of the year closer to an eightytwenty relationship resi commercial than currently 85fifteen.
Great. That's really helpful, Chris. So it sounds like you're at 8515 today in both. But as you transition through the year quarter by quarter, you'll end potentially end up in Q4 at that eightytwenty split?
That's correct. Great.
Thanks, Chris. I'll jump back in queue.
Thank you. Our next question comes from Vishal Shah of Deutsche Bank. Your question please.
Hi. Thanks for taking my question. Maybe Paul, can you talk about you're the largest customer? I believe there has been a transition now for that customer from maybe 1 supplier to 2. I mean, that's been a bit of a headwind in your sales.
I mean, do you expect that headwind to continue? Or you kind of think that your market share the customer stabilized in the near term?
So we've been talking about this for well over a year now. We've they've indicated that they were going to move very likely to beyond 2 vendors to more than that. That is on track. It's very hard for me to comment on what's going to happen in the future. You'd need to talk to that one large customer.
What I can say is that despite the fact that our percentage share in that customer has decreased, The actual revenue dollars has increased, but the revenue dollars outside of that customer has increased even faster. There is it's very easy to forget that there are many worldwide customers that we have not yet that we are not yet selling to. As Chris had just noted, we have far more markets in front of us than we're currently selling in. So while we are and we treat every customer very importantly and we recognize how the importance of our larger customers. At the same time, we also are very focused on growing our presence not just in the U.
S. Residential market, but the U. S. Commercial market, which is a very fragmented market and in international markets as well. So the all of the numbers that we're giving for Q2 take into account the fact that we're assuming that there's going to be more and more vendors in that tier in that in our top customer.
That's helpful. And just one other question on the margins. As we think about the rest of the year, the second half, do you expect your margins to stabilize at these levels? Or how should we think about the product mix particularly the 4th gen product impacting margins? And where you think margins can go from here?
So what we've said is that we have a financial strategy of balanced profitable growth, which means that we're trying to push the top line as hard as we can while increasing profitability year on year. We've been doing that for many years consistently and we're going to continue to do that. Our target gross margin of 35% to 40% remains our target gross margin and we are more confident than ever that we can achieve that. However, that is not our focus right now. We said that gross margins are going to bounce around in the low-30s and we're very comfortable with it.
We're not trying to optimize the gross margin number right now. What we are very focused on is the continued development of new technologies, increasing the features and functions of the energy system, which includes the microinverter itself, storage, energy management, providing an aggressive cost reduction roadmap to our customers and doing all of this while increasing the profitability. Remember that our R and D expenses include a lot of new products that we're not shipping. As Chris had mentioned, things like our AC battery solution, things like grid edge analytics, energy management, even some services that are part of the Enphase Energy Services offering are under development that we're not shipping. And we're able to invest in this and increase in profitability because of the growth in revenue and because of the healthy gross margins.
That's helpful. Thank you.
Thank you. Our next question comes from Mike Marosi of Avondale Partners. Your question please.
Hi guys. Thanks for taking my question. Obviously, there's some pretty big news recently as it relates to the storage opportunity in the industry. And I'd just like to see if you guys can walk us through how you're thinking about Enphase within the storage market and how the microinverter technology stacks up against other technologies in the storage context?
Sure. So we certainly share other companies' optimistic view on the global storage market. In fact, it's I think it would be accurate to say that as solar grows, storage will become an essential part of the total energy mix. We have often said that in the future, we will not be selling solar systems. We'll be selling energy systems, which will consist of generation, storage and energy management all wrapped into one package.
Having said that, it's clear that storage needs to be an important part of the mix and it is because of our 5th generation microinverter that is uniquely capable of bidirectional power flow that we're able to create the AC battery solution. Remember, this is a solution that's around £40 You literally hang it on a wall very much like a picture frame. You plug it in and both the chemistry, the battery itself as well as the inverter is all in that box. There is no additional material that's needed. So you hang it on a wall, you plug it in and because it's our communication system, Enlighten will automatically see it, automatically configure it and come up with a charging and discharging profile for it.
That simplicity of installation and simplicity of design, we think is extremely unique and is going to be extremely valuable. Having said that, there are going to be multiple solutions out there and we welcome all of it. We believe firmly that the storage market is a tens of 1,000,000,000 of dollar market in the making and there certainly is going to be more than one competitor. But the enthusiastic response that we have received from customers all over the world has really given us a great deal of confidence that we are on the right track. In fact, if you look at the markets that we are currently in, let's say Australia specifically, the demand for storage there is robust and is driven by a very clear economic model.
Our current presence in Australia, our growing customer base in Australia is going to give us a tremendous launching platform for the AC battery solution as well as other countries included.
Appreciate
it. Thank you. Your question please.
Yes. Thank you for taking my questions. It's probably a pretty naive one since it's my first time around. But clearly your nearest competitor with the DC Optimizer solution has claimed a very significant cost advantage. And I'm just wondering if the improvements that you have in mind over the course of the year next year or so close the gap materially.
Do you even accept that the gap is as wide as they say? And well, let's leave it at that for now. But the second question really is, is it are you tempted to lower your gross margins a bit to recapture some market share?
So to address the first part of the question, it's not at all clear to me that they have a cost advantage today. That I do not have any data to support that. The data that I do have doesn't support it. What's interesting is that if you look at our cost reduction roadmap going forward, it is extremely aggressive. It addresses every part of the system.
As I said earlier in the call, we're still in the very early days of technology development for a microinverter. There is a lot of work in front of us in terms of semiconductor development, semiconductor integration, system level design, cabling, mechanical engineering and we are investing heavily in all of these areas. The decision that we to make is where do we apply our R and D dollars. I could certainly apply all of them on cost reduction and get there sooner rather than later. But at the same time, we are looking at some very new and exciting markets, Japan as one of them.
We've said many times that we're very excited about the potential for Enphase to enter Japan and we are now going through the certification process. We're looking at as we've talked about already at length the AC battery solution, the energy management system. So we're balancing our development dollars between ongoing cost reduction coupled with feature enhancement. And we believe that that balance that we have struck between the 2 will allow us to maintain or increase our cost competitiveness against string inverters and continue to increase the features and functions that we believe consumers all over the world are going to be demanding.
Does the introduction of the 5th generation product potentially sort of reduce the cost significantly? Or is it all part of a smooth curve here?
What we have seen in the past and what we don't guide specifically to cost in the future, but I can tell you what we've seen in the past is that when we introduce a next generation product, we generally see a cost reduction, but it may be marginal. And then that gives us a new platform with which to apply a lot of cost reduction activities to continue to get that cost down. We've seen that 4 generations in a row and I don't see any reason why that would stop. Okay. Generations in a row and I don't see any reason why that would stop.
Okay. Thank you very much.
Thank As there are no further questions in queue, I'd like to turn the call over to Paul Naheed for any closing remarks. Sir?
Thank you. I'd like to close by acknowledging our recognition as one of the 2015 Best Places to Work in the San Francisco Bay Area by Francisco Business Times and the Silicon Valley Business Journal. We've always been proud of our corporate culture of creativity, collaboration and technology innovation and believe our employees are truly best in class. I want to thank our entire Enphase team for their continued hard work, passion and dedication. We look forward to speaking with you again next quarter.
Thank you, Mr. Nahy. And thank you, ladies and gentlemen for your participation. That does conclude Enphase Energy's Q1 2015 financial results conference call. You may disconnect your lines at this time.