Title

Presentation

Enphase Energy, Inc. beats earnings expectations. Reported EPS is $0.47, expectations were $0.43.

Operator: Good day, and welcome to Enphase Energy’s First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Zachary Freedman: Good afternoon, and thank you for joining us on today’s conference call to discuss Enphase Energy’s First Quarter 2026 results. On today’s call are Badrinarayanan Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2026. During the conference call, Enphase management will be making forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply demand anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax tariffs and supply chain matters.

These forward-looking statements involve significant risks and uncertainties and our 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 our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K which can also be found in the Investor Relations section of our website.

Now I’d like to introduce Badrinarayanan Kothandaraman, our President and Chief Executive Officer.

Badrinarayanan Kothandaraman: Good afternoon, and thanks for joining us today. to discuss our first quarter 2026 financial results. We reported quarterly revenue of $282.9 million, shipped 1.41 million microinverters and 103-megawatt hours of batteries and generated free cash flow of $83 million. Q1 revenue included $34.5 million of safe harbor revenue. We exited the quarter with channel inventory above normal levels for both microinverters and batteries. On a non-GAAP basis, we delivered gross margin of 44% and operating expenses of 27% and operating income of 17%, all as a percentage of revenue. Gross margin was above the midpoint of our guidance range. Mandy will cover the financials in more detail later in the call. Our customer service NPS, Net Promoter Score was 82% in Q1, a record for Enphase compared to 79% in Q4.

We are laser focused on customer experience for the last few years, and our average call wait time in the first quarter was approximately 1.4 minutes. We have also begun a soft rollout of our Enphase AI assistant in the homeowner app to approximately 100,000 homeowners, and we expect this to expand over time. The AI assistant is trained on Enphase product knowledge, historical service cases and relevant customer support data with access to sales force information, to help answer specific system-specific questions more accurately. It also supports multiple languages, helping homeowners get faster, more intuitive health wherever they are. We expect to pilot a similar AI assistant for installers during this quarter to help them do fleet management in a much more efficient manner.

Let’s cover operations. In Q1, we shipped approximately 1.39 million microinverters from our Texas and South Carolina manufacturing facilities and booked the associated 45x production tax credits. These U.S.-made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the holiday for the 10% domestic content ITC added. We shipped 49.5 megawatt hours of IQ batteries from our Texas manufacturing facility in Q1. We offer IQ batteries that meet domestic content and [ FEOC ] requirements, helping lease PPA customers qualify for ITC bonuses. Let’s cover to the regions. Our U.S. and international revenue mix in Q1 was 83% and 17%, respectively. In the U.S., our revenue declined 23% sequentially, primarily due to lower residential solar and battery demand following the expiration of ’25 [indiscernible] tax credits and typical seasonality.

Safe harbor revenue increased to $34.5 million in Q1 compared to $20.3 million in Q4. Our overall sell-through declined 48% sequentially as Q4 was elevated by significant demand pull forward ahead of the tax credit expiration. On a year-over-year basis, which better reflects the underlying impact of the policy change. Q1 ’26 sell-through declined 18% compared to Q1 2025. Our U.S. commercial microinverter sales more than doubled in Q1 as compared to Q4, driven by positive market reception for IQ9 microinverters. We now serve both major U.S. pre-phase commercial grid types, the 480 volts as well as 208 volts. In Q3, we expect to begin shipping our high-power 548 watts IQ9s microinverter for 480 volts 3-phase systems, which can support solar panels up to 770 watts DC.

We also expect to see near-term safe harbor demand from customers placing orders between now and early July. With U.S. manufacturing, domestic content eligibility and [ FEOC ] compliant products, how we believe our commercial business is well positioned for continued growth. In Europe, our revenue increased 36% in Q1 compared to Q4, primarily because selling levels rose towards sell-through levels after we undershipped the European channel in Q4. We are beginning to see green shoots in April with solar and battery activations, up healthy double digits across multiple European markets compared with the monthly averages in Q1. This is being driven by rising power prices and increasing battery adoption. Europe is increasingly becoming a battery critical market.

As self-consumption dynamic tariffs and VPP become more important, the company that wins the battery relationship is well positioned to win the broader home energy system over time, including solar, software and VPP. In the Netherlands, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1, as rising export penalties and the planned phaseout of net metering by the end of 2026, strengthened the case for self consumption. In France, the reduction of feed-in tariff is also shifting the market towards self-consumption and increasing the interest in batteries, especially for new solar installations. Our battery activations in France increased approximately 20% in April from the monthly run rate in Q1, a more modest but positive trend.

In Germany, our battery activations rose approximately 27% in April, compared to Q1’s monthly average. We have approximately 475,000 in phase residential solar system in Netherlands and approximately 400,000 in France, creating a meaningful retrofit opportunity in both markets. We are increasing homeowner events, doing direct marketing to consumers and working with the retail energy providers, along with strong support by our technologies such as power match technology and our upcoming fifth generation battery. We have also built strong inside sales teams and the lead management platform across France and Netherlands in the last 3 months, and we are hoping to convert this demand into revenue with a much higher throughput. Competition remains intense across Europe, particularly from low-cost string inverters and battery providers.

In response, we are reducing our distributor list prices for batteries by approximately 10% in May, which follows a 20% reduction for microinverters already implemented from December last year. In addition to this sharper pricing, we are instituting a stronger homeowner demand engine and a more competitive product road map, which includes IQ9 and our fifth generation battery, which is coming very soon. Together, these actions improve our competitiveness today and position us for stronger growth as Europe shifts towards self-consumption, VPP and flexible storage. In Australia, we are bullish on the battery opportunity. Australia is one of the world’s most mature rooftop solar market with more than 4 million rooftop solar systems in start which is roughly one in every three homes is already using solar.

Battery adoption is now accelerating, supported by the federal cheaper home batteries program, which provides an upfront discount for eligible small scale batteries connected in new or existing rooftop solar. The program is evolving on May 1 to better support rightsized systems and reduce incentives for oversized batteries. We believe this plays directly to our advantages, including our upcoming fifth generation battery which has a stackable and scalable architecture that gives homeowners flexible capacity and the ability to add more over time. Let’s now discuss our Q2 outlook. On the last earnings call, we said we expected Q2 revenue to be higher than Q1, driven in part by strong safe harbor demand. In line with those comments, our Q2 revenue guidance is $280 million to $310 million, including approximately $85 million of safe harbor revenue.

Since we exited the channel with a high inventory in Q1, we are under shipping approximately $25 million compared to the real demand. At this point, we are approximately 85% booked to the midpoint of our guidance. We expect modest underlying sell-through growth in Q2 as compared to Q1. That said, our Q1 sell-through results and Q2 sell-through expectations are roughly 10% to 15% below our prior view, a weaker start to the year, primarily due to unfavorable weather conditions and TPO financing challenges. We expect to offset some of these pressures in the second half of this year through prepaid lease adoption, which I’ll talk about soon, U.S. commercial growth and potential international recovery. For batteries, our guidance is 100 to 110-megawatt hours.

We recently lowered our battery list prices to distributors in the U.S. by approximately 12% to 14% in March, supported by the recently reduced reciprocal tariff rates. Combined with our pricing changes in Europe, we expect higher battery sales volumes in the second half of this year. And just to repeat our Q2 revenue guidance anticipates us under shipping end market demand by $25 million in order to correct for Q1’s over shipment. Let’s talk about safe harbor. We have executed new agreements year-to-date with third-party owners for approximately $843.6 million of product. $89.6 million under the ITC 5% safe harbor method and $754 million under the physical work test method. This is in addition to the 67.7 million physical work test orders secured in Q4.

These microinverter orders create two important benefits for in Enphase. First, they secured a significant multiyear volume for our microinverter business. And second, they position us very well for future battery attached sales from 2027 to 2030 when these systems are expected to be installed. These also underscores our strength with the TPO providers. Moving to financing. Prepaid lease adoption continues to build momentum. Prepaid leases give homeowners an upfront — lower upfront cost today and the option to own the system after 5 years. The TPO initially owns the system, claims the [ 480 ] tax credit and share that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. This lowers the homeowners’ effective cost and helps restore the economics closer to the 30% 25 day tax credit era.

We continue to support [ Propel ], a TPO led prepaid lease program that exclusively uses Enphase equipment and is being field tested with our loan and distribution partners. The pilot is designed to service the long tail of installers and has expanded from 40 installers at the time of our February earnings call to more than 200 installers to date, across four states. We are now seeing a run rate of approximately 200 net originations per week and are encouraged by early customer adoption trends. It must be noted that the battery attached to those originations is approximately 84%. That’s not very surprising because one of the states [ Propel ] is now being piloted is in California. We expect to complete the pilot this quarter and expand the program more broadly beginning in July after validating customer experience, installed execution, which is happening now and financing performance at scale.

Let’s talk about products, starting with IQ batteries. Our fourth generation IQ battery [indiscernible], delivers a smaller footprint, higher energy density and simpler installation with the IQ meter color. The meter color is now approved by 64 U.S. utilities and growing, covering approximately 34 million customer accounts. In California, the color is approved by all three major investor-owned utilities and the largest customer-owned utility. We believe this gives Enphase the broadest utility approval for print of any major battery provider today. Our fifth generation AC [ corporate ] battery is built from stackable 5-kilowatt hour modular blocks, that can scale up to 30-kilowatt hour. This battery uses 100-amp prismatic cells and target roughly 50% higher energy density than the fourth generation battery and about 40% lower cost.

Paired with our power match software we believe it will deliver a compelling combination of performance, flexibility and value for installers and homeowners. We expect to begin pilots in Q3 and begin shipping in Q4. We are also making strong progress on IQ Board, our commercial badly. The first product here is an 80-kilowatt hour AC-coupled commercial battery designed for small and medium commercial markets in the U.S. Our internal estimates indicate that this small commercial market represents an annual opportunity of approximately 1 gigawatt hour. The IQ Board uses 314-amp of prismatic cells in a compact building block architecture and will be even more cost effective. It can scale up by stringing up to 25 units together for approximately 2-megawatt hours of capacity.

The platform is designed to support backup, self-consumption shaving time of use optimization as well as VPP participation all managed through Enphase software. We believe IQ Board brings our distributed architecture, our electronics expertise and system level intelligence into commercial storage, giving customers a flexible, high-quality platform for resilience and cost savings. We expect to begin pilots in Q1 ’27. Turning to microinverters. We began shipping our IQ9 3-phase commercial microinverter in December, built on our GaN architecture. IQ9 opens up the 480 3-phase U.S. commercial segment for Enphase for the first time, representing a new TAM of approximately $400 million annually. The installer feedback has been strong with customers valuing Enphase quality, our panel monitoring, simpler system design, lower installations, cost and balance of system costs and higher system efficiency.

We expect to introduce the higher power IQ9s 3-phase product in Q3, supporting 548 watts of AC power and pairing with this — pairing with solar panels up to 770 watch DC. We also expect to introduce IQ9 for global residential markets this quarter. Moving on EV charging. We are making excellent progress on our IQ bidirectional EV charger, which is built on our 650 Volt GaN power platform and engineered to work with Model 800 work DC EV architectures. This is a clear example of our ability to move power efficiently and bidirectionally between grid phasing AC and high-voltage DC systems with tight control and protection. The product is especially compelling because it simply pairs with the meter color in the U.S. or a backup switch in Europe, enabling streamlined home backup and VPP participation.

We are in advanced discussion with multiple auto OEMs, including two partnership opportunities that are progressing well. We will share more as these discussions mature. We are targeting initial availability in Q4, starting with limited deployments as we complete the certifications, utility coordination and vehicle compatibility validation. So finally, we are excited to announce today the development of our IQ solid state transformer product for AI data centers. AI is driving [ rack ] power from roughly 150 kilowatts to more than 1 megawatt. The industry is moving towards higher voltage DC architectures, including 800 volt DC, as outlined in NVIDIA’s white paper last September. We estimate the initial annual U.S. addressable opportunity for IQ SST in AI data centers to exceed 11 gigawatts by 2021, a creating a significant new market for a high-efficiency medium-voltage power conversion.

The IQ SST product is designed to convert medium voltage AC directly to low-voltage DC in a single stage, creating the potential to eliminate site car batteries and [ rack ] level backup while improving efficiency, reducing cost and complexity. IQ SST will be built as a distributed modular architecture. It is expected to deliver approximately 1.25 megawatts through a super cluster of 342 power modules with 800 volt DC output for next-generation AI racks. At the core of each power module will be our custom silicon, [ testolasic ] and a high-frequency GaN-based about the power platform which enables precise control, high efficiency and fast response of the order of 1 to 3 milliseconds. This fast response will enable advanced grid functions, improved handling of load and grid transient and support centralized energy storage at the facility level.

IQ SST is designed for reliability and serviceability. It is modular includes built-in redundancy and support hot swapping without shutdown. It is also expected to deliver cost and supply chain advantages through fewer components, standard high-volume parts, automated manufacturing and U.S.-based production. Our SST platform will be able to scale from a single 1.25-megawatt [ rack ] to multi-megawatt systems. Supporting multiple grid voltages and extends beyond data centers into other adjacent high-power markets as well. We are now engaged with more than 20 prospective customers and are expanding our partner ecosystem. We have completed product feasibility, built working power modules and converged on the system design. In Q1, we restructured the company to fund SST within our existing operating framework and create room for the strategic program.

More than 80 engineers are now working on SST across power electronics, ASICs, software, mechanical design, manufacturing and reliability. As we continue to drive productivity with AI across the company, we are targeting to fund the SST program within our current operating expense structure. We expect a full system demo later this year pilots with customers in 2027 and volume shipments in 2028. We also expect revenue to build over time. but the strategic logic is clear. IQ SST is a direct extension of our core strength in distributed power electronics, custom silicon software-defined control and high-volume U.S. manufacturing. We believe this architecture is the right way to power the next gen of AI infrastructure and our positioning Enphase to lead in this transition.

Let me conclude. The market is going through a transition, especially in the U.S. residential sure, but we are focused on what we can control: execution, cost, innovation, financing solutions and customer experience. We are seeing early traction in several important areas. Prepaid leases are gaining momentum in the U.S. Europe is beginning to show signs of recovery. With batteries becoming increasingly critical to the customer decision. In the U.S., commercial solar is starting to ramp, supported by IQ 9 microinverters and our domestic manufacturing position. Our road map is also strengthening. Our fifth generation battery bidirectional EV charger, our IQ volt commercial battery and the IQ9 family of microinverters all expand what Enphase can deliver to homeowners, installers and commercial customers.

These products strengthen the core and open new growth opportunities. Finally, we believe IQ SST can give Enphase access to significantly larger end markets. It is a natural extension of what we have built over the last 20 years, reliable power electronics, semiconductor innovation, software intelligence and distributed system design. We believe Enphase is well positioned for the next phase of growth. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Mandy Yang: Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2026 financial results, as well as our business outlook for the second quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q1 was $282.9 million. We shipped approximately 627.6 megawatts DC of micro inverters, and 103.1 megawatt hours of IQ batteries in the quarter. Q1 revenue included $34.5 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install their inventory over more than a year.

Non-GAAP gross margin was 43.9% in Q1 compared to 46.1% in Q4. The gross margin was 35.5% in Q1 compared to 44.3% in Q4. The gross margin was negatively impacted by 6.7 percentage points from the sale of our 2025 PTCs, which totaled $235 million and were sold at 93% of its value. This resulted in a discount of approximately $16.5 million, plus approximately $2.5 million of transaction-related fees. [ Reciprocal ] tariffs also impacted our gross margin by 4.3 percentage points in Q1. Non-GAAP operating expenses were $77 million for Q1 compared to $78.8 million for Q4. [indiscernible] operating expenses were $130 million for Q1 compared to $129.6 million for Q4. Safe operating expenses for Q1 included $45.4 million of stock-based compensation expenses, $3.8 million of acquisition-related expenses and amortization and $3.8 million of restructuring and asset impairment charges.

On a non-GAAP basis, income from operations for Q1 was $47.3 million compared to $79.4 million for Q4. On a GAAP basis, loss from operations was $29.6 million for Q1 compared to income from operations of $22.4 million for Q4. On a non-GAAP basis, net income for Q1 was $62.3 million compared to $93.4 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.47 for Q1 compared to $0.71 for Q4. [indiscernible] net loss for Q1 was $7.4 million compared to [indiscernible] net income of $38.7 million for Q4. This resulted in GAAP diluted loss per share of $0.06 for Q1 compared to earnings per share of $0.29 for Q4. We exited Q1 with a total cash, cash equivalents and marketable securities balance of $930.6 million compared to $1.51 billion at the end of Q4.

The 5-year convertible notes we raised in 2021 were due on March 1, 2026, and we settled all the outstanding principal amount of $632.5 million with our cash on hand. As part of our anti-dilution point, we spent approximately $18.7 million in Q1 with holding shares to cover taxes on employees divesting, reducing diluted shares by 441,448 shares. We did not repurchase common stock during the quarter as we are prioritizing disciplined cash allocation and preserving flexibility for strategic investments and potential acquisition opportunities. We had approximately $269 million remaining under our share repurchase authorization and remain confident in our long-term business outlook. In Q1, we generated $102.9 million in cash flow from operations and $83 million in free cash flow, including proceeds from the sale of the 2025 PTCs. Capital expenditure was $19.9 million for Q1 compared to $9.7 million for Q4.

The increase was primarily due to continued investment in U.S. manufacturing. As of March 31, 2026, after monetizing the PTCs generated in 2025, we had approximately $162.9 million of PTCs on our balance sheet. This includes $108.3 million related to U.S. main microinverters shipped to customers in 2024 and $54.6 million related to shipments in Q1 2026. We elected the rate pay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to extended IRS processing time lines. In March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses.

We expect these sales to be part of our normal course of business. And the intel of this approach is included in our quarterly gross margin guidance. In addition, on February 20, 2026 the U.S. Supreme Court issued a ruling embedded in certain tariffs previously imposed under the International Emergency Economic Powers Act or IEPA. On April 20, 2026 U.S. customs and border protection launched an online portal for companies to submit IEPA tariff refund requests. As of today, we have submitted approximately $50 million of refund claims through the portal. Subject to approval, we currently expect to receive the refund within the next 90 to 120 days. Now let’s discuss our outlook for the second quarter of 2026. We saw our revenue for Q2 to be within a range of $280 million to $310 million, which includes shipments of 100 to 110-megawatt hours of IQ batteries.

The revenue guidance includes approximately $85 million of safe harbor revenue. We see gross margin to be within a range of 42% to 45%, including approximately 3 percentage points of reciprocal tariff impact. We spend non-GAAP gross margin to be within a range of 44% to 47%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $120 million to $124 million, including approximately $45 million estimated for stock-based compensation expense, acquisition-related expenses and amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $75 million to $79 million.

With that, I’ll open the line for questions.

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Operator: [Operator Instructions] The first question will come from Brian Lee with Goldman Sachs.

Brian Lee: First one, just on the safe harbor as it’s so lumpy here. Can you kind of give us any sense on what the safe harbor expectations are 3Q and then I know you said, Badri, 10% to 15% below run rate you originally expected due to the start of your weakness you kind of give us a sense of where you think core revenue trends are into 3Q and 4Q? Are you going to recapture that kind of volume in the back half of year? Are you any sense on payments from here ex the safe harbor? And then I had a follow-up on the [ FET ].

Badrinarayanan Kothandaraman: So Brian, our safe harbor revenue for Q2, the estimate is $85 million. That’s what we said. Your question is safe harbor estimate for Q3. It is difficult for us to estimate right now. But if I were to give you a number that between $40 million and $50 million is what I expect, safe harbor revenue for Q3. And that’s my opinion there. Then, yes, I talked about we expect modest underlying sell-through growth in Q2, the current quarter we are in compared to Q1. That said, like what I said, Q1 and Q2 sell-through expectations are roughly 10% to 15% below our view. Weaker start is basically due to the challenges we are seeing in general, [ EPO ] financing and unfavorable weather for us. But what we are very excited about is [ Propel ], which is our prepaid leads offering through our partners.

And I gave you some color on the prepaid lease offering. Basically, the last earnings call, I told you we had 40 installers from [ Propel ], now we have, as of last week, we have 200 installers. We still have the same four states because we are disciplined in not entering additional states until we finish the pilot. But our originations have increased at a very, very healthy rate. 200 net originations a week. In fact, I mean, that is a very nice number. That amounts to roughly 90 to 100-megawatt annual run rate if I freeze that 200 as of today — 200 per week as of today. So extraordinary reception for [ Propel ], and we have to thank our partners to make that happen. So for us, [ Propel ] is something we are very excited about. The other one that I’m excited about is in [ Propel ], our battery attach is 84%.

Obviously, California drives a lot of battery attached. So when we expand it to other states, it might be a little bit lesser than that. So we are excited about that because that means for us more megawatt hours very soon. And we expect that in the second half of the year, for sure. Then the other one we talked about is what we are seeing in Europe. We gave you color. In fact, we gave you a lot of color on Europe, saying that what we are seeing in April compared to monthly run rate in Q1. For example, we are seeing our double-digit increases for most of the Europe regions, double-digit percentage increases for most European markets compared with the monthly average that we saw in Europe in Q1. And that’s being driven by the rising power prices and increasing battery adoption.

In Netherlands alone, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1. In France, that number was 20% in April from the monthly run rate in Q1. In Germany, 27% in April compared to the monthly run rate in Q1. So a long answer to your question is basically we are very encouraged by [ Propel ]. We are very encouraged by the fact that we are seeing some green shoots in Europe. But having said that, the market is fickle right now. You’re seeing a lot of dynamics in the market. We don’t want to [ answer ] a guess for Q3 and Q4, but this is what we are doing from our side. And I haven’t talked about the new products, but we are actively working on four new products. And to be brief, that’s the fifth gen battery, the bidirectional charger, the commercial battery as well as the IQ 9 high-power version for commercial.

And of course, the big announcement we made is the SST and that one is more a 2028 revenue opportunity.

Brian Lee: Yes. No, I appreciate all that color. Maybe just on that last point, the timing for IQ SST 2028, that’s helpful. I know you gave a bigger lot sizing for that opportunity. Can you give us a sense of kind of the revenue dollar opportunity for Enphase? And then also, how does the Enphase offering differ from what you’re seeing from peers for those that you know actually have the product?

Raghuveer Belur: Let me take the second one first. This is Raghu. Brian, so I think we are fundamentally different from at least some of the announcements that we have seen in the market, in that we leverage our 20 years of experience in developing a distributed architecture product. So think about it in a single-stage resident converter, which is what is our core technology that we have dropped since the inception of the company, high frequency design, soft switching, custom [ ASIC ] new band gap devices. We were the first guys in 2008 to deploy white band silicon carbide diodes as an example, now we are doing GaN. So when you are a completely distributed or a decentralized architecture, it enable 342 power modules that ranged in the supercluster really brings a tremendous amount of value.

What it does is, for example, you get sub-millisecond response types. And when you have sub-millisecond response time, now you can target how to get rid of the site car completely. So no [ BBU ] or no storage anywhere in the low-voltage system. You can now move all your storage to the medium voltage section via [ BFF ]. We all know this. When you’re a completely distributed architecture, you get very, very high reliability. When you have 342 of these devices, we have built in 10% redundancy. So you can achieve very high uptime, and our target there is [ Five9 ] which is very good and serviceability of that device without having to take the entire rack down. We talked about U.S. supply chain and volume manufacturing. It leverages the same platform that already — that we already have in — from a manufacturing point of view.

And then on the cost, again, people don’t appreciate this very much is the technology that we have, the single-stage resident converter we do what’s called soft switching, which means that electromagnetic interference or EMI signature is extremely low. We don’t have to build big metal and closures to enclose these devices to reduce your EMI. That’s why this device is the power module is in a part of polymeric enclosure. So we really drive the cost down. The single-stage power conversion means very few components. We drive the cost down. Of course, we’ll price to value, but our costs are going to be very, very low. So very good response time, which means we can target completely eliminating the site card, eliminating the site card means you can replace that with a compute rack, more compute rack means more tokens, more tokens means more revenue.

We talked about rail and you have a super cluster of 342 of these power modules, you get architecturally correct redundancy and you get very high reliability, and you can target [ Five9 ] uptime, supply chain, volume manufacturing and, of course, cost.

Operator: The next question will come from Praneeth Satish with Wells Fargo.

Praneeth Satish: So we’ve seen some changes on the installer landscape recently, [ Sunrun ] exiting their affiliate channel, Freedom forever, filing for bankruptcy. From what I can tell, neither were really major Enphase users. So I guess do you see an opportunity for Enphase to pick up share as that demand kind of reallocates? And are you seeing any early indications of that today? Or is that something that could play out over the next quarter or 2?

Badrinarayanan Kothandaraman: We are not going to talk about our customers. Today [ Sunrun ] as our customer. We have a very good relationship with them. We’re not going to talk about that. But on Freedom, we do 0 business with them. So we view that the market will redistribute itself amongst the existing installed base, and we do expect to get our fair share of it.

Praneeth Satish: Got it. And then maybe shifting gears to C&I. So I think for Q1, you previously indicated potentially generating around $5 million or so of revenue for C&I. Maybe I missed it, but is that — can you share where C&I revenue landed in Q1? And then what is your — what’s embedded in the Q2 guide for C&I? And should we expect C&I revenue to increase every quarter this year based on the pipeline that you’re seeing?

Badrinarayanan Kothandaraman: Yes. We did in Q1 a little more than $5 million. We did in the high single digits. A little more than 5%. Having said that, C&I is a very lumpy business. And at least for us, until we have a nice pipeline established we do expect it to be lumpy. But the opportunity for us is that C&I installers, C&I developers do have a safe harbor window as well. And that safe harbor window will be closing in. They have to make their plans by early July. And for that, we have two things, we have actually three products for that. One is our already existing 208-volt 3-phase product, which is [ IQ80 ], which we have been supplying for some time. The other is our brand new IQ9 and [ 427 ] product, which is what we introduced very recently.

The third one, which is coming, and we plan to start shipping in Q3. That product is the 548 watts, even high-powered version. That is suitable for safe harbor, which is because if they are going to be using these later in the years, the panel sizes are going to be even more. Today, for example, the panel sizes are between 595 watts and 650 watts, in the commercial business. It’s going to go — keep going up a little more. So that’s why the 548 watch is also exciting. So we’re very excited by the C&I business. In general, directionally, we expect it to continuously grow until we establish a pipeline. But in terms of quarterly, it is going to be a little lumpy at the beginning.

Operator: The next question will come from Colin Rusch with Oppenheimer.

Colin Rusch: Can you talk a little bit about the geographic distribution of where the channel inventories? Is it primarily in the U.S.? Are you seeing some channel inventories built up in the EU as well?

Badrinarayanan Kothandaraman: It’s mostly the U.S.

Colin Rusch: Okay. And then can you talk about the customer maturity with the solid-state transformer, how soon can we start seeing some pilot in that product? And how many customers are you engaged with now in terms of potential testing here over the near term?

Raghuveer Belur: Yes. We have talked to of the order of 20 customers or so prospective customers. And I think the most important thing is to get a dental demonstration system ready, which is what we are targeting for this year. Once that’s done, the all natural following step, there are enough people out there who want to will be willing to test the system, but we need to get to the demonstration system, which is what we will be ready with this year. And that’s what we are singularly focused on. And then followed up by 2027 will be about customer pilots and then 2028 will be about volume shipments. So that’s the sequence of events that [ Q4 ].

Badrinarayanan Kothandaraman: We have — we do have a detailed investor presentation, which is on the website as well as on the SST page. One of the things we’d like to highlight is we started working our team, Raghu and the CTO team, they basically recognize the opportunity that we have in the SST data center space about 9 months ago, and we started working on feasibility 9 months ago. And so since then, over time, we have gradually signed approximately 18 engineers in the company to be working on SST and they’re all working full time. We also took the opportunity to think strategically and said, how do we create a lot more room for SST. So we restructured the company in Q1, basically to focus on SST. And you saw focus on assist without changing our operational expense structure.

And so we got that done. And then we have worked on the basic power module. Again, you can find a lot of details in the Investor Relations deck as well. We have built the basic power module. We have it functional, and now the next step is to basically put together the full system, which is a lot more complex, and we expect to demonstrate that by the end of the year. Once we do that, the customer engagements are going to be there, and we target pilots — customer pilots throughout 2027 and volume shipments in ’28.

Operator: The next question will come from Philip Shen with ROTH Capital Partners.

Philip Shen: Badri, you said that the Q2 sell-through was 10% to 15% below expectations. You cited TPO challenges. We’ve been talking about tax equity pausing and there’s just a fair amount of I guess, challenge out there. So I was wondering with the core revenue for Q2 being down to about $210 million, down from $250-ish million in Q1, what does Q3 and Q4 look like? This is a seasonally strong time, Q2 and 3, but this TPO challenge with this tax equity pause, may endure or linger for a bit. So I know you can’t guide or you haven’t guided for Q3, but I was wondering if you might be able to give us some qualitative color on — or quantitative on Q3 and Q4?

Badrinarayanan Kothandaraman: Yes. I mean at this point, I will tell you what I see, but that’s basically like what I told you the last time. That’s my opinion. As we said, we expected Q1 sell-through to be around in the $250 million range, and we were 10% to 15% below that number, basically. And so we overshipped approximately $25 million in Q1. That’s why I said we ended the channel with a little more inventory than what we would have liked. We are correcting that immediately within 1 quarter itself by under shipping in Q2 by that number. We do expect the native sell-through in Q2 to be a little better than Q1, driven by the usual seasonality. What could surprise us in Q3 and Q4 is the few factors that I just highlighted a few minutes ago.

What could surprise us is the [ Propel ] could surprise us. There, we are proceeding with some caution. We are piloting in four states now. We are at a run rate of 200 originations a week, which is a nontrivial number. under originations a week. And that percentage increase on the originations a week is fast. I mean, we are very happy with the percentage increase. We are also very happy with the number of installers. Our vision with [ Propel ] was to give prepaid lease to our long tail of installers. And I won’t declare success right now because we are still in the pilot, but it is going in the right direction. [ Propel ] comes with an 84% storage attached. Of course, that’s a high number because of California. But that’s a very encouraging number for our batteries as well.

So that’s one vector. The other vector is basically what I talked about in Europe. We talked about the business starting to show some sign strength on batteries in Netherlands, in France and in general, even for solar. So we are already seeing that in April compared to Q1. So that’s the second thing. The third one is the IQ battery can see — of course, the volumes in Q1 were a little light due to the ’25 abrupt cut off, but we are making a lot of progress on the IQ battery [ latency ]. We are qualifying and 64 utilities have accepted our major color. And with the [ Propel ] ramping, IQ battery can see will also be ramping with new installers who haven’t used in [indiscernible]. So that’s that. And then on the small commercial front, I talked about more opportunities in small commercial in terms of — before the safe harbor window closes I believe the commercial developers are going to need a solution for ’27 through ’30 — I mean, ’28 through ’30.

So I expect both steady increase in the commercial business as well as some potential safe harbor in — which will be shipped in Q3 order hopefully by the end of Q2. So as you can see, there are a lot of moving parts. We see the challenges in the last few weeks, like you correctly pointed out, tax equity challenges, installer bankruptcies, they are never good for the business, but we are not the ones to complain. We try to do whatever we can do. And I think all of these initiatives are something that we’ll be working on.

Philip Shen: Okay. Secondly, as it relates to a quick housekeeping question. In your 10-Q, you guys had commentary about how you entered into a $30 million secured revolving credit facility with a probably held company. I’m wondering if this might be sole source, the company that you guys do propel with? And then back on SST for a moment, Badri, I think you talked about pricing the value with your low cost structure. Just was wondering if you could share what margins you guys might be targeting for this SST product?

Raghuveer Belur: It’s very early to tell, Phil, about what our cost is what price and cost is going to be. We have a — we have a rough estimate of it, but it’s way too early to tell. Right now, we are focused on continuing the development so we can get to that customer demo by the end of this year. And we’re also investigating because we are using a very similar module to what we already do for solar, we are looking at if there is any IRA advantages here for us as well. So too early to tell. Right now, the focus is on getting this 1.25-megawatt customer demo by the end of this year. But over time, as we get deeper and deeper into the design, we’ll be happy to share with you the details.

Badrinarayanan Kothandaraman: And on the $30 million line, we are not breaking out in the customer.

Operator: The next question will come from Julien Dumoulin-Smith with Jefferies.

Julien Dumoulin-Smith: Maybe I should just to pick it up off where Phil left it off. Maybe just to pick up on the tax equity piece and the target. You talked about 200 originations a week. I mean what are you thinking quarter-over-quarter into 4Q, what that target installer partnership would look like? I mean, how many are you pursuing? How do you think about tax equity as a limitation on the [ Propel ] program to ramp? What are the other factors when you think about continuing to get this program up and going, if you can speak to it in those terms. In theory as part of your conscious ramping?

Badrinarayanan Kothandaraman: Right, right. yes, [ Propel ] is offered through our partners. So we are working very closely with them. there. Having said that, my wish is to basically get up to a run rate of 500 originations a week by the end of Q4. And that’s my wish. Today, we have 200 installers that are using [ Propel ] again, my desire on why we launched [ Propel ] basically, that number should be a healthy multiple of $200 million. That’s why we launched. That’s one of the reasons us and our partner, distribution partner, we launched this [ TPU ] led program [ Propel ] is because we wanted to bring that access to the long tail installers with an ease of doing business. The tax equity question is a better question for [ Propel ]. We are not going to make any comments on that right now there.

Operator: The next question will come from Eric Stein with Craig Hallum.

Eric Stine: So maybe just sticking with [ Propel ]. Can you just talk about — I know you’re piloting in four state. I mean what is the limiting factor to expanding that to other states? I mean, is this I mean I would assume when you’re talking about piloting it you going hand-in-hand with your TPO partner to installers, educating those installers. I mean in my Am I thinking about that correctly? And what would that time frame be to expand to different states?

Badrinarayanan Kothandaraman: Right. It is — yes, once again, I’m answering on behalf of our TPO partner. So basically, what we want to look at is that entire chain that is — you want to basically start from originations, you want to look at installations, you want to look at M2 — M1, M2, M3 then you want to be able to appropriately monetize the tax credits. So that takes time. So therefore — and the usual time could be from originations to monetization could be 4 to 5 months. And we are still — that’s why we are still in the pilot. All of that needs to execute flawlessly. Ease of doing business for the installers is very critical. We cannot keep changing parameters on the installers. We need to be able to needs to be able to monitor — I mean, to monetize the tax credits property.

Again, I am trivializing there their work. They have a lot of work to do. So — and we need to prove that the entire chain works properly. And until then, we will not be doing a drop launch, like what I stated. Having said that, what are we piloting for? We are piloting to see if we can support a lot of installers. And the answer to that is yes. Since the last earnings call, at that time, they were 14, now they are $200. The last earnings call, the number of originations is an order of magnitude low. Now it is 200 a week, which is — and climbing rapidly. So we are closely monitoring it. We are working with our partners. And the moment we are ready to launch. We’ll be transparent about it.

Eric Stine: Yes. Is it — I know that you — that [ Propel ] is one of the things that potentially mean improvement in the second half of the year. But I mean, fair to say that this is much more about 2027 and beyond than potentially positively impacting the second half.

Badrinarayanan Kothandaraman: That’s right. I think you’re thinking about it right, positively impacting the second half and also in 2027. That’s right. And don’t forget the other things, which are what we do nuts and bolts is basically the Europe opportunity is a big one. We are doing well there, especially Netherlands has picked up steam. France has picked up steam. And there, we are actively doing things. Once again, we are holding two to four homeowner events a week. Each of these homeowner events are attended by almost 150 homeowners each one. And our target for on every event, I told my team every event should at least generate 0.5 megawatt hours. So basically, if you do four events that should generate 2-megawatt hours a week and that should only compound as we go.

So we are going to replicate the same thing in France as well, where we have 400,000 installed base. And we are introducing our third-generation battery third-generation battery. The form fact of — sorry, 5th generation battery. The form factor is very, very small. It’s 50% energy density using 100-amp prismatic cells, a 40% lower cost — our cost — internal costs, and we expect to translate that into a lower price for our distribution partners. So that’s another very exciting product. The other one, I didn’t talk too much on the buyback. On the day, we are gearing up for a launch in the fourth quarter. Again, a very simple product, which is along with the meter color, and just the charger of it can provide V2H, which is both V2H, vehicle-to-home resiliency and vehicle-to-grid, V2G.

So that’s another product. And there, we have two partnerships with North American OEM car providers, which we will announce when we are ready. So that’s that. And then, of course, IQ9, we are launching IQ9 residential markets. We have already launched for the commercial market. We are going to introduce higher power higher-powered version. So that business, especially with our domestic content compliance, U.S. manufacturing, all of that is a very big advantage there. That business takes a little time. It’s a design in business, and so we expect to make steady progress there. The last one, which I talked about is the commercial battery. The commercial battery, it’s a gigawatt hours of TAM, and we are talking about batteries for small and medium businesses, schools, hospitals, churches, small businesses, the gas stations, convenience stores all of those, they typically need battery size anywhere between a 50-kilowatt hour system and 250 to 300-kilowatt hour system.

So now basically, we will be able to offer that along with IQ9 on the [ PB ] side, on the solar side, and now we will have 80-kilowatt hour battery, and you can string 25 units of those, you can go up to 2-megawatt hours. So we are extremely excited by that offering as well. So we’re doing lots of things, and we expect sequential growth. Of course, it’s a turbulent market, but we are controlling what we can. And of course, the IQ SST, which we talked about.

Operator: The next question will come from Dylan Nassano with Wolf Research.

Dylan Nassano: Badri, I would just love to get your take, I guess, on Europe, just in terms of how durable you think this bump is, I mean, that market went through a boom for kind of similar reasons back in 2022 and it was followed by a pretty severe kind of destocking cycle. So just wondering if you could kind of compare and contrast where we’re at today?

Badrinarayanan Kothandaraman: Yes. I mean it is anybody’s guess. Yes. I shared with you the question and the concern. Last time it was an extended the Ukraine crisis basically led to an explosion of demand this one may be more modest. But nevertheless, we are seeing an increase. I’m not sure how long it will last. But there are some fundamentals there, which is basically batteries are good in general. And Europeans are — I have to say that Europeans are a little more advanced. And the U.S. here, almost every region is accelerating to a battery-first market. And battery-first pulls everything else, solar, EV chargers, energy management, it puts everything. And what we are going to be doing there is, of course, we are going to get more competitive.

We talked about sharper pricing. We already made necessary pricing corrections on microinverters in December. We are making pricing corrections on batteries in May, which is next month. And we already made battery pricing corrections in the U.S. in March. So we are laser-focused on expanding our battery business. I talked about that. In Europe, we are going to go from a third-generation battery to our fifth-generation battery in Q4. And so that will be a massive leap there in terms of cost, in terms of pricing, in terms of installation, in terms of space. So we just did — one of the things we — before we finalize our design, it’s our practice to show it to installers and get a group of installers and get limited or get some feedback from them.

So we did that in the first quarter. We did that in France, in Netherlands, in Germany, and we got a lot of feedback on the battery and mostly very positive. So for us, it is all about batteries there and batteries were pulled through solar and I think we are making the right necessary steps for us to grow through 2026.

Operator: [Operator Instructions] The next question will come from Vikram Bagri with Citi.

Unknown Analyst: It’s Ted on for Vik. I wanted to ask about the guidance for 2Q. It looks like it still includes tariff impact. Are you able just to share how much of the inventory roughly is still impacted by those tariffs? And would there be any interplay between the possible refunds that you may receive on that? And then could you just also talk about the progress being made on ramping the non-China battery cell supply. What’s the outlook for that mix?

Badrinarayanan Kothandaraman: Yes. The — in terms of tariffs, like what I said, we do expect — Mandy said, we have applied sort of $15 million refund and we do expect that to basically the decision and the refund to come within 90 to 120 days. As far as we are concerned on our gross margin guidance for Q2 that basically includes — there is a benefit for us of a couple of percent, 2% in gross margin due to the change in reciprocal tariff, note that still even now — all of most of the countries are at 10% right now. So right now incorporated in our current guide is a benefit in gross margin of approximately 2%. And we said in our prepared remarks that this tariff — the reduction in tariffs helps us to be a little more aggressive on our batteries, and we have taken advantage of that to increase our demand by adjusting the pricing to be a little bit sharper in both Europe as well as the U.S.

Unknown Analyst: Got it. That’s very helpful. And I have one follow-up. Just going back to the prepaid lease offering, do you have a view on where you think the prepaid lease products could be as a portion of the total TPO market this year? So not necessarily for [ Propel ], but just looking at the market as a whole.

Badrinarayanan Kothandaraman: It’s hard to say, and my comments should be taken with a grain of salt because we are still in a pilot. And right now, we are at a run rate of approximately like what I said at 200 originations a week, it corresponds to something like 90 to 100 megawatts a year. So that’s the number at 200 originations run rate a week. So you can do your math on how does it compare to the [ TP ] market.

Operator: [Operator Instructions] Showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Badrinarayanan Kothandaraman for any closing remarks.

Badrinarayanan Kothandaraman: Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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