Enphase Energy Q3 2021 Earnings Call Transcript

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Provided by AlphaStreet
October 26, 2021
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Operator

Good day, and thank you for standing by. Welcome to the Enphase Energy's Third Quarter 2021 Financial Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Karen Sagot. Please go ahead.

Karen Sagot
Investor Relation at Enphase Energy

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Third Quarter 2021 Results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer; and Eric Branderiz, Chief Financial Officer. After the market closed today, Enphase issued a press release announcing the results for its third quarter ended September 30, 2021. During this conference call, Enphase's management will make forward-looking statements, including to, but not limited to, statements related to Enphase Energy's expected future financial performance, the capability of our technology and products, including availability and features; our operations, including in manufacturing and customer service; the anticipated growth in our sales and in the markets in which we operate and target; the potential benefits to homeowners and installer partners. These forward-looking statements involve significant risks and uncertainties and Enphase Energy's actual results and the timing of events could differ material from these expectations.

For a more complete discussion of the risks and uncertainties, please see the company's annual report on Form 10-K for the year ended December 31, 2020, which is on file with the SEC and quarterly report on Form 10-Q for the quarter ended September 30, 2021, which will be filed during the fourth quarter of 2021. Enphase Energy cautions you not to place any undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in its expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. The company has provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in its earnings press release posted today, which can also be found in the Investor Relations section of its website.

Now I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Good afternoon, and thanks for joining us today to discuss our third quarter 2021 financial results. We had a good quarter. We reported record revenue of $351.5 million, shipped approximately 2.6 million microinverters and 65-megawatt hours of Enphase Storage Systems, achieved non-GAAP gross margin of 40.8% and generated strong free cash flow of $100.7 million. We exited the third quarter at approximately 41%, 16%, 24%. This means 41% gross margin, 16% operating expenses and 24% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35%, 15%, 20%. Our CFO, Eric, will go into detail about our financials later in the call. Let's now discuss how we are servicing customers. Our Q3 Net Promoter Score worldwide was 67%, and our North American Net Promoter Score was 71%, both unchanged from Q2. Our average call wait time went up a little bit and was at 5.5 minutes in Q3 compared to three minutes in Q2, primarily related to the growth in our business. We are working on reducing call wait times to under a minute through additional staffing and training. We have increased the number of field service teams in the U.S. and Europe to provide on-site help to our installers, particularly for storage.

We remain laser focused on customer experience. Let's talk about manufacturing. As we have discussed in the past earnings calls, the global supply chain is under stress. Our situation is getting primarily better due to our hard work in qualifying alternate suppliers. For the AC FET drivers, we now have five suppliers qualified. Our supply of AC FET drivers is much better in Q4 than the prior quarters. For the ASICs used in our microinverters, we are a little bit tight on supply, but we expect to manage the situation. While we are happy with the overall supply for Q4, the situation is quite dynamic worldwide for both supply chain as well as logistics. We remain vigilant and cautious given the growing demand. So given our strong demand, we are adding a fully automated line in Mexico in Q4, bringing our quarterly capacity in Mexico to approximately 2.2 million microinverters. We have already added a second fully automated line in Q2 at our contract manufacturing partner in India, bringing that quarterly capacity to over 1.5 million microinverters in India. Along with our existing capacity in China, we expect to easily achieve our target global capacity of five million microinverters per quarter by the end of the year. We have now geographically diversified 2/3 of our contract manufacturing capacity outside of China.

Let's now talk about batteries. Our two sources for battery cell packs have increased their capacity to a total of approximately 180-megawatt hours per quarter from 120. Our existing suppliers are capable of adding more capacity required. In the meantime, we are working on adding additional suppliers in 2022 to achieve global diversification. Our lead times for Storage Systems are long today at approximately 14 weeks due to the global logistics challenges. These lead times will come down once the shipping constraints and port congestion improve. Despite these headwinds, we expect to increase shipments of our Enphase Storage Systems by approximately 45% sequentially in Q4. Let's move on to the regions. Our U.S. and international revenue mix for Q3 was 76% and 24%, respectively. The U.S. market demand was quite strong in Q3, and we reported record revenue. We had record sell-through from our distribution partners to installers for both microinverters and storage. While our microinverter channel inventory was at a healthy level at the end of Q3, our storage channel inventory remained tight due to strong demand and logistics issues. We expect microinverter channel inventory to remain manageable in Q4 and expect storage channel inventory to get better. In Europe, we reported record revenue in Q3.

We continue to have solid growth in Netherlands, France, Germany and Spain. Our Storage business in Germany is just getting started, and we are continuing to train a lot of installers. In September, we announced our entry into Italy, where we are providing IQ seven family of microinverters to residential installers. Earlier this month, in October, we began selling Enphase Storage Systems to customers in Belgium, further expanding the products availability in Europe. Overall, I'm very pleased with our growth in Europe. In Asia Pacific region, revenue declined a little bit in Q3, primarily due to ongoing COVID lockdowns in Australia. Despite the disruptions, we are pleased with the growth of the Enphase Installer Network, the continued adoption of our high power IQ 7A product and growing strength of our AC module partnerships. In Latin America, we reported record revenue in Q3, largely due to the increased sales of Solar and Storage Systems in Puerto Rico. We are quite optimistic about our business in Puerto Rico and expect steady growth in the next few quarters, especially in Storage. We also announced our entry into Brazil in September and started shipping IQ 7+ microinverters to installers in early October. Now that we have covered the regions, let's discuss the overall bookings for Q4. Our overall customer demand for Q4 once again exceeds the higher end of our guidance. The component availability is currently much better in Q4 compared to Q3, but not fully there yet. We are optimistic that our supply will catch up the demand by early next year.

Let's now move to an update on our Storage Systems. We shipped 65-megawatt hours of Enphase Storage Systems in Q3, which was a 51% increase from Q2. Let's discuss the training for our Enphase Storage Systems. By the end of Q3, we had trained 3,771 installer personnel, representing approximately 1,700 unique installation companies. Our hands-on storage installation training through our mobile vans and training centers also started ramping in Q3 with electricians and lead installers attending training sessions and experiencing valuable hands-on time with real systems. We are working diligently on our Enphase Storage Systems to improve commissioning times for installers. With the rapid increase in the number of long-tail installers, our average commissioning time is approximately 2.5 hours in Q3. We are working hard to bring this time down and made numerous updates in Q3. Our goal remains a sub-60-minute commissioning time, which will allow installers to visit the site, install and commission an Enphase Storage Systems in less than a few hours. We've recently introduced two new features for our Enphase Storage Systems. In late May, we introduced load control, which provides homeowners the ability to conserve their energy consumption by shedding nonessential loads during an outage, and thereby extending the backup duration. We have four circuits for load control designed into our smart switch.

These loads will be on when the grid is present and shed automatically in the event of a grid failure. This feature is configurable and controllable by the homeowner via our Enphase app. Last week, we announced that our home energy systems will soon integrate with most leading models of home standby AC generators, providing enhanced performance and a glitch-free transition for homeowners during power outages. Homeowners can monitor real-time the power flow, start and stop their generator remotely, set quite hours to prevent their generated from operating until their batteries fall below a certain state of charge, and control it all with the Enphase app. This new feature functions without a dedicated generator automatic transfer switch, and eliminates the power glitches that reset home appliances when switching to generator power. This new feature will be available to installers in the U.S. in November. With the addition of these new features, plus our laser focus on customer experience, we continue to see an acceleration in demand for our Enphase Storage Systems. As a result, we expect to ship between 90 and 100-megawatt hours of Enphase Storage Systems in Q4. Let's talk about new products. Yesterday, we announced the all-new all-in-one Enphase Energy System with IQ8 solar microinverters for customers in North America. IQ8 is Enphase's smartest microinverter yet. Unlike competing devices, IQ8 can form a microgrid during a power outage using sunlight, providing backup power even without a battery. Since the company's inception, we have invested in custom application specific integrated chips for our microinverters.

And today, we see a big payoff with a software-defined microinverters, smart enough to form a microgrid. Many homeowners often assume that their solar systems will function if the sun is shining even during a power outage. This is unfortunately not been true until today. Now with IQ8, homeowners can realize the true promise of solar to make and use their own power. IQ8 solar microinverters can provide sunlight backup during an outage even without a battery. The Enphase Energy System with IQ8 comes in four different configurations. The first is solar only, which is a standard grid-tied system that everybody is used to today. The second is sunlight backup, which I just talked about, without a battery. The third is very interesting, it's home essentials backup with a small battery for cloud cover and nighttime backup. The fourth is full energy independent, a solar system with IQ8 and a large battery. So while the first configuration, as I mentioned, is a standard grid-tied system. The remaining three configurations are grid-agnostic system, which need an Enphase System controller or a smart switch to which islands the home during an outage. For homeowners who want a battery, there are no sizing restrictions on pairing an Enphase battery with an IQ8 solar system. All the configurations can be customized for homeowners with the help of our valued Enphase installer partners.

We started piloting IQ8 to select installers in Q3, and we will be ramping shipments in Q4 beginning December. We expect the IQ8 ramp to take four to six quarters much like the IQ7 ramp. Let me also say a few words about IQ8D. So IQ8D is a high-power 640-watt AC microinverter capable of supporting two DC panels, primarily for the small commercial solar business. We expect to start piloting IQ8D with select installers in Q4 and begin production shipments in Q1. This product is very important to us, not only for the small commercial solar business, but also for our next-generation batteries as we increase the discharge power and improve our cost structure. Let's turn to digital transformation. Both of our recent acquisitions achieved record revenue in Q3. Enphase Montreal, which provides design and proposal software, added a significant number of new installers. We plan to release several new software features early next year to improve the installer experience. Enphase Noida, which provides proposal and permitting services for installers, also experienced a significant increase in customer demand and is focused on automating the creation of permit plan sets to further expand the installer base. Both teams will significantly leverage the Enphase Installer Network to grow and expand their business.

Let me now give you an update on our Enphase Installer Network or EIN. We have now onboarded approximately 1,000 installers to our Enphase Installer Network worldwide through a highly selective process focused on quality and homeowner experience. Our EIN in the U.S. has grown 57% since its introduction last year. We are very pleased with this initiative's progress and are thankful to our installers who act as our product evangelists and provide an exceptional experience to homeowners. Let's talk about grid services. Last quarter, we discussed our participation in the ConnectedSolutions program, which is an incentive program implemented by three utilities in the Northeast U.S. to reduce electrical demand during high-use periods. Our storage customers in Connecticut, Massachusetts and Rhode Island can sign up, monitor, track money earned and control participation in the program using the Enphase app. We were pleased to announce in Q3 our participation in the Hawaiian Electric's Battery Bonus grid services program. This program offers a new incentive for homeowners on the island of Oahu who installed a new home battery. The first customers accepted by Hawaiian Electric into the program will be eligible to receive $850 per kilowatt that they commit to make available during a fixed 2-hour period each day.

The program helps Hawaiian Electric realize the goal of 100% renewable power by 2045 and more homeowners than ever before can now have a solar plus storage system. We expect to engage with more such utilities and aggregators in our grid services program during the months ahead. In summary, we are pleased with the overall progress we have made this year. We now have solar, storage, load control, grid services and generator compatibility as part of our home energy management system. We are making significant progress on the digital platform for installers in order to cut soft costs. We will remain laser-focused on both the products and the digital platform to deliver a superior customer experience for both our installers and homeowners. I'd like to make one more important announcement. We will be hosting an Investor Day on November 16 to provide a deeper update on our business. More details will follow over the next few weeks.

With that, I will hand the call over to Eric for his review of our finances. Eric?

Eric Branderiz
Chief Financial Officer at Enphase Energy

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our third quarter of 2021 financial results as well as our business outlook for the fourth quarter of 2021. We have provided a reconciliation of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the Investor Relations section of our website. Total revenue for Q3 was $351.5 million, representing an increase of 11% sequentially an a quarterly record. We shipped approximately 913 megawatts DC of microinverters and 65-megawatt hours of Enphase Storage Systems in the quarter. Non-GAAP gross margin for Q3 was 40.8%, the same as compared to Q2. Non-GAAP gross margin was impacted by higher logistics and expedite costs partially offset by a price increase on microinverters and continued cost management. GAAP gross margin was 39.9% for Q3. Non-GAAP operating expenses were $57.3 million for Q3 compared to $51.7 million for Q2. The sequential increase was primarily due to increased investments in R&D, IT infrastructure and brand awareness marketing programs. GAAP operating expenses were $103 million for Q3 compared to $68.4 million for Q2. GAAP operating expenses for Q3 included $44 million of stock-based compensation expenses and $1.6 million of acquisition-related expenses and amortization for acquiring intangible assets. On a non-GAAP basis, income from operations for Q3 was $85.9 million compared to $77.2 million for Q2. On a GAAP basis, income from operations was $37.4 million for Q3 compared to $59.4 million for Q2.

On a non-GAAP basis, net income for Q3 was $84.2 million compared to $74.7 million for Q2. This resulted in diluted earnings per share of $0.60 for Q3 compared to $0.53 per share for Q2. GAAP net income for Q3 was $21.8 million compared to GAAP net income of $39.4 million for Q2. GAAP diluted earnings per share was $0.15 for Q3 compared to diluted earnings per share of $0.28 for Q2. Now turning to the balance sheet and the working capital front. Inventory was $65.4 million at the end of Q3 compared to $37.8 million at the end of Q2. The sequential increase was due to the expected higher demand for our Enphase Solar and Storage Systems in Q4 as well as longer lead times due to current global logistics and supply chain challenges. Days of inventory outstanding was 28 days at the end of Q3 compared to 18 days at the end of Q2 to support the growth in the demand. Our target is 30 days. Accounts receivable were $273 million at the end of Q3 compared to $281.2 million at the end of Q2. DSO of 54 days in Q3 decreased from 65 days in the prior quarter. We exited Q3 with a total cash and cash equivalent and market-related securities balance of approximately $1.4 billion compared to approximately $1.3 billion at the end of Q2. We did not make any share repurchases against our recently approved $500 million share repurchase authorization. In Q3, we generated $113.4 million in cash flow from operations and $100.7 million on free cash flow.

Capital expenditures was $12.7 million for Q3 to expand both, microinverters and storage manufacturing capacity as well as costs related to app development, website and IT. Now let's discuss our outlook for the fourth quarter of 2021. We expect our revenue for the quarter to be within a range of $390 million to $410 million, which includes shipments of 90 to 100-megawatt hours of Enphase Storage Systems. We expect GAAP gross margin to be within a range of 37% to 40% and non-GAAP gross margin to be within a range of 38% to 41%, which excludes stock-based compensation expenses. We expect our GAAP operating expenses to be within a range of $119 million to $122 million, including a total of approximately $52 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. We expect our non-GAAP operating expenses to be within a range of $67 million to $70 million. Let me provide some additional color on a few topics. The revenue guidance assumes an increase in microinverter shipments, including IQ8 as well as Storage System shipments. We expect to ship 90 to 100-megawatt hours of Enphase Storage Systems in Q4, representing approximately 45% sequential growth at the midpoint of the guidance. We expect improved component availability for microinverter production in Q4 and continued momentum for the Enphase Storage Systems. On the cost side, we are continuing to expedite components and finished goods in Q4 to ensure customers have an adequate supply of our products. We expect the quarterly expedite expenses to remain at similar levels of Q3.

Due to the steep increase in logistic costs and increase in component costs driven by inflation, we are implementing a modest price increase on all products starting in the second half of Q4. It is also prudent for us to maintain our baseline financial model as we continue to navigate the global component supply constraints and logistics challenges. Finally, I would like to touch upon our OpEx guidance. Our guidance for non-GAAP operating expenses, as a percentage of revenue, is expected to increase in Q4. As we mentioned on the last earnings call, our OpEx may be slightly above our 15% target at times, but we still expect to be comfortably above our baseline target of 20% operating income. We continue to invest significantly in R&D to further our competitive advantage. Significantly, we are more focused on semiconductor integration in -- of our ASIC and software advancement, including cloud software to increase our system performance, reduce cost and increase reliability. We also ramped up our marketing spend in the back half of the year with new product launches and brand awareness. For Q4, accruals for post combination expenses from prior acquisitions are expected to be approximately $3.6 million.

With that, I will now open the line for questions.

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Operator

Thank you. [Operator Instructions] Our first question comes from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee
Analyst at The Goldman Sachs Group

Hey, guys. Good afternoon. Thanks for taking the questions. Kudos on the strong results here. First one, I had, was just around the Storage business. Eric, Badri, you guys talked about 50% growth or close to 50% growth sequentially here, again into 4Q based on the guide. So just wondering with all the supply chain headwinds and concerns that are out there. I know you talked a little bit about the expedite. But is this product that's already in the channel? Or can you kind of talk about visibility into shipments and if there are any supply chain or logistical constraints that you're sort of embedding in that number or kind of how derisked it is?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. So to just give a general color on the Storage business so that you understand why our demand is picking up. We introduced the Storage Systems in July of 2020. It's a beautiful product, distributed architecture, modular AC-coupled lithium-ion phosphate safe chemistry, air cooled.

And of course, we had interesting features like power start, which helped us to optimize, starting an air conditioner, et cetera. And of course, Enphase customer service, which my expectations are that we will get better and better and better with our NPS beyond 70 in the future.

We've learned a lot in the last year, especially when it comes to homeowner experience, the kind of notifications they need to get and when it comes to installers, ease of use, ease of install, ease of commissioning. So a lot of learning has gone into it. We have made continuous hardware and software updates in the last year.

And I told you in the last earnings call that we introduced load control in May of 2021. Load control helped quite a bit in terms of customer experience. We are finding that's quite successful. There's a lot of uptick. And simultaneously, along with the introduction of load control, we also optimized our pricing. Initially, we did start a little bit high and then we thought it is the right time to optimize pricing. So we did that and we improved -- with the improvement in commissioning with load control, with the drop in pricing, we started seeing a lot of demand.

So Q3 obviously unleashed a lot of demand and that's the number you saw, 50% growth from Q2. And that demand has continued to stay healthy as we improve our product more and more and more. So there is no demand limitation for Q4. For Q4, we said we would do anywhere between 90 and 100-megawatt hours. And yes primarily, that's gated by logistics. As you know, the situation globally is quite dynamic. Containers are scarce to find.

The container costs have increased 8 times. Ocean freight has increased 8 times. The typical container used to cost a couple of thousand dollars is now $16,000. So there's a lot of stress in logistics, a lot of stress in supply chain situation. That's kind of limiting our supply in Q4. We are going to ship 90 to 100-megawatt hours.

However, one thing which I didn't talk about is, we are really happy at the adoption of the product by our long tail of installers. Really, if you see the statistics, it's kind of astounding. We have trained 1,700 installation companies through our Enphase University. And 1,000 -- over 1,000 of them are certified. Certified means not only they have to complete the training, they have to complete a real install with Enphase on the line guiding them. And there's over 1,000 installers were certified right now. So we expect that number to continuously increase.

We expect the demand to be broad-based. We expect the demand to go up and up and up. And of course, the logistics situation needs to improve globally. It's not situation specific to Enphase. We are covered from our contract manufacturers and our cell pack capacity, et cetera, like what I said, we are covered from that. It's purely a logistics issue, and we expect, therefore to ship 90 to 100-megawatt hours. With regarding Q1, yes, I'm afraid I cannot talk much right now about Q1 because now the situation is so dynamic that whatever I say will be wrong tomorrow.

Brian Lee
Analyst at The Goldman Sachs Group

Yes. Fair enough. Absolutely, it makes a ton of sense. Maybe just with that as a bit of a segue, I had a sort of zoom out question around the margins as well. I mean you guys have been navigating this environment as well as anyone out there. You've been tracking at this sort of 40% to 41% non-GAAP gross margin level, despite all these elevated costs, despite all the supply chain issues. And this year, you have the two price increases, you've got the IQ8 coming in. And then presumably less or lessening supply chain and logistics costs as you head into 2022. I know you can't crystal ball that, but if you kind of take all of that into account, it seems like there's a setup here, where you should be earning significantly higher gross margins at some point next year, assuming some of these things normalize. So can you kind of speak to that a bit? I mean, where you're at today and why you wouldn't be at a significantly higher gross margin at some point as you move through next year? Thanks guys.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Right. That is the following puts and takes. If you see our component suppliers, the folks who supply components to the microinverters and batteries are in the same situation as us. They are increasing a lot of costs on us. And some of the component costs have gone up by over 100%. And because the supply chain is so tight, I have to air ship many microinverters, which cost a lot of money. Not only on top of that, ocean freight, I just now told you, ocean freight is 8 times more expense. So you cannot hide here, right? Wherever I go, the costs are going up tremendously. What we did was, we have made a lot of cost reductions over the last year.

So we were able to absorb some of the cost increases. And we try to absorb a lot of them, but we are in a situation where we have to pass some modest cost increase, I mean, some modest price increase to customers. That's what we exactly did. Now I don't have a crystal ball with me. I do not know whether 2022 brings in better logistics anytime sooner. And I'm not sure what's going to happen to the elevated component costs that the suppliers are charging. But it's fair to say the next two or three quarters, the situation is probably not going to die down. And so our gross margins are -- I cannot predict what's going to happen in Q1. Q4, we gave you a guidance, and we are sticking with that guidance.

Brian Lee
Analyst at The Goldman Sachs Group

All right. Fair enough. I'll take the rest offline. Thanks guys.

Operator

Thank you. Our next question comes from Aric Li with Bank of America. Your line is open.

Aric Li
Analyst at Bank of America

Hey, good afternoon. Thanks for the questions. And congrats on the quarter. First, I wanted to touch on factors impacting the Storage lead times. I know you talked about an 8- to 10-week target before, and relative to 12 to 14 weeks in 2Q. And you mentioned 14 weeks just now. How much of that is driven by the worsened freight and logistics constraints? And how much of that have you been able to offset by your directly controllable efforts. If you can speak to progress on the latter as well?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. The situation is quite a bit different in Q4. We have no problems in our manufacturing. The constraint is all coming from the global logistics. It is -- transportation of dangerous goods is even more scrutinized. The costs are even more. And so the supply, it's all about the global logistics. And unfortunately, we cannot air ship batteries like microinverters. It just doesn't make sense economically to airship batteries. So therefore, we are in a place where we are stuck, where we transport these batteries through the ocean. And we are in the same game as everybody else. When the situation gets better in terms of all the port congestions now improving, in terms of the shipping constraints going away, then we'll start to see the lead-times drop to their natural number, which is around eight weeks. But for now, the lead times are over 14 weeks.

Aric Li
Analyst at Bank of America

Got it. So, over 14 weeks is embedding, you already accomplished your directly controllable efforts on the manufacturing. I appreciate the clarification there.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes, correct.

Aric Li
Analyst at Bank of America

And then on the 2Q update, you also talked about getting towards 120-megawatt hours. In 1Q, if the lead times were to drop towards eight to 10 weeks, given the higher lead time outlook of over 14 weeks, can you just give us an update on how you think about that volumetric ramp against the offset of the higher quarterly cell capacity at 180-megawatt hours? I appreciate it.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Well, like what I said, our two cell pack suppliers are capable of doing 180-megawatt hours a quarter. And right now, it is purely a logistics constraint. It is not a demand limitation. So it's too early for me to talk about Q1. But if you look at our past history, especially in 2021, we have had healthy growth -- healthy reasonable growth every quarter. And we expect to do the same going into 2022. However, but the exact guidance for Q1 and the exact growth, et cetera, we would have to give it to you in Q1 guidance.

Aric Li
Analyst at Bank of America

Thank you. I'll take the rest offline.

Operator

Thank you. Our next question comes from Moses Sutton with Barclays. Your line is open.

Moses Sutton
Analyst at Barclays

Hi. Thanks for taking my question. Congrats on the quarter. To confirm the modest inverter price increase, that starts in 4Q, mid-4Q or already into 3Q? Or was this another increase?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

This is another one starts in mid-4Q.

Moses Sutton
Analyst at Barclays

Great. Great. And then how much of the two recent acquisitions, the Sofdesk and DIN are contributing, maybe on a percentage of run rate revenue today, if we were to annualize it?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

We're not going to break out that, but let me give you some color. There are two companies that we acquired earlier this year. The first one was called Sofdesk, and the design and proposal tool for installers that they have is called Solargraf. Solargraf basically, the installers can go in there, they can draw the solar panels on the roof. They can get a proposal calculation, so that they can discuss at the kitchen table. And what have we done? The team is a very smart team.

Obviously, they were affected a little bit by COVID, they had some hiring limitations, but all of those are resolved. Right now, the team is firing on all cylinders. They understand exactly the improvements that we have to do, which is we are working on shading, we are working on 3D, we are working on adding storage, and we expect all of those to be added and released by early next year, and so that will become a best-in-class tool for installers.

Now the second one is another company called DIN. DIN does proposal and permitting services. This is, an installer says, here is the address of the home, I want a proposal in eight hours. or here are the details about the contract details, I want a permit plan set, you to create a permit plan set and give it to me in 24 hours. So the Enphase Noida team, Noida is a city in Northern India.

And that team basically does proposal and permitting services, very healthy growth in Q4 and servicing right now big installers. There, the name of the game for us is, how are we going to get the automation of the permit plan set. So that we can increase the quality and the turnaround time -- and keep the turnaround time to near 0. We are working on automation of those permit plan sets. And once that is done, then I will introduce that capability to all our long-tail installers.

Moses Sutton
Analyst at Barclays

Great. Very excited....

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Those two are doing -- just to summarize, those two are doing exceptionally well. They hit records in Q2. They hit new records in Q3, and I expect them to perform well going forward.

Moses Sutton
Analyst at Barclays

Great. Great. Thank you. Just to squeeze one last one. By 4Q, how much of your storage sort of as a percentage of shipments are outside the US?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

We just started shipping into Germany. It's really not material at this point. As you know, when you start shipping into a country, you need to get installers trained. Training of installers is not easy. The good thing about Europe is most of it -- most of the demand comes from long-tail installers. We know how to service long-tail installers. It means great -- a great product, which is easy to install, great training, great customer support, and it's not going to come just like that. It's a business we need to block and tackle and build steadily. So I would say it is not material at this stage. The international business right now, US is doing extraordinarily well in storage.

Moses Sutton
Analyst at Barclays

Great. Thank you. I'll take the rest of mate.

Operator

Thank you. Our next question comes from Mark Strouse with JPMorgan. Your line is open.

Mark Strouse
Analyst at JPMorgan Chase & Co.

Yes. Thanks very much for taking our questions. So just to the extent that supply chains are improving, I understand that, like you said, things are very fluid. But assuming that some of those improvements are sustained. Just curious how you're thinking about potentially accelerating the rollout of some of these products like IQ8 and the storage product more globally. Does that accelerate your plans at all, if this is sustained?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Well, so there are some things in our control. There are some things not in our control. I already talked about the logistics situation, which is not in our control. Whatever was in our control was the AC FET driver supply. What we did was? We basically pivoted. We had two suppliers early this year, which we -- which I think in Q2, it was 3, now it is five suppliers. So really, we have solved the problem of the AC FET driver simply by hard work and qualifying a lot more suppliers.

Now let's come to IQ8. IQ8 offers a lot of interesting possibility. Why is IQ8? Why we think IQ8 is going to make a huge difference is, till now homeowners are under the assumption that their solar system will not produce power or will produce power during a grid outage as long as the sun is shining. We -- only a few of us know that, that is not true. A standard solar system needs the grid voltage and frequency as a reference. So therefore, during a grid shutdown, you don't have that voltage and frequency as a reference.

Therefore, there is no power from a standard solar system. We are changing that paradigm. IQ8 is a microgrid forming microinverter. So we think this opens up very interesting possibilities. And one other thing about IQ8 is, it does not require any particular storage size to be paired with it. In other words, at the -- yes, in the extreme case, if there is no storage, the ratio of solar to storage is infinity. There is solar on the roof, there is no storage, you device the two it is infinity. So our IQ8 is blazing fast and can adjust itself to any kind of grid conditions.

Having said that, use case 2, which I talked about, sunlight backup. It's back up using the sunlight without storage. That's use case two in the event of a grid -- in the event of a grid outage. Now, we think our customers would mainly buy a small battery along with it because when a cloud cover comes, you don't want to lose power. So at that time, you want some immunity there. So a small battery will be perfect in order to make sure you have enough resilience that you don't need to buy a large battery. You can buy a small battery. Some people might say, no, I'm just happy with solar. I only need -- I only lose power twice a year. I'm happy with solar and sunlight backup, which is use case two, is perfectly fine. So homeowners have their own way of choosing what they want according to their needs. But Enphase will provide the entire range of what they need with the help of our installers, because installers are extremely important to educate the homeowners there. So that education process will take some time. And as normal with any new product, there will be a ramp, but this product is going to be a game changer. When you have a grid type product and when you have a grid agnostic product side by side, you have to question who is going to buy a grid product. So I'll just -- I didn't give you specific numbers, but we are excited about IQ8, and we think it's going to make a huge difference for our business going forward.

Mark Strouse
Analyst at JPMorgan Chase & Co.

Got it. Okay. I'll take rest offline. Thank you very much, Badri.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Thank you.

Operator

Thank you. Our next question comes from Colin Rusch with Oppenheimer. Your line is open.

Colin Rusch
Analyst at Oppenheimer

Thanks so much, guys. Can you speak to the potential of IQ8 enabling you to enter into the commercial rooftop market in a little bit more aggressive way even before you introduced IQ8D?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. We are imminently going to introduce IQ8D. And yes, we are a little bit late there. But the beta installations, which I call pilot installations are happening this quarter. And IQ8D is really a product with fantastic cost structure. You have 640 watts of AC and they are all packed into a form factor that's only slightly bigger than IQ8. And it is perfect for the small commercial business. Maintaining very high quality, still the Enphase quality and the small commercial business folks can accept a two-panel, one micro solution.

So to answer your question, we are going to be introducing IQ8. We are going to start ramping in the first quarter. Not only we are -- let me step back, we are actually thinking about IQ8 as a not a microinverter only. We are thinking about it as an entire system. What do I mean by an entire system is an asset manager or an installer comes to our website and wants to design a product for a building, for a gas station, for a hotel, for a school. We will enable all possible tools. He will be able to go and draw what he wants on the roof. He'll be able to estimate and get a quick proposal. He'll be able to go and do permitting services that he needs.

And in short, and one more important thing, fleet management. He'll be able to manage his fleet and have enormous flexibility on doing what he wants. He'll be able to see, on a given day, whether he was profitable or not, on a given day, if he made money, he'll be able to get incredible resolution on which microinverters doesn't work. And with the touch of a button, he'll be able to call Enphase. So we are thinking about it end-to-end fully. And this is with a view towards the asset managers, with the view towards the installers with an end-to-end system. So that's why we have taken a little bit of time. But having said that, like what I said, we are going to pilot it in Q4 and start ramping in Q1.

Colin Rusch
Analyst at Oppenheimer

That's helpful. And it's a nice segue into my second question. So with the additional functionality and all the data that you collect on these systems. Can you talk about your strategy for monetizing that data? It's been something that's kind of lingered around the company for a number of years. But I'm curious how you guys are approaching the potential to monetize a lot of that data and also the performance of these systems on a granular level?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Well, right now, in order to tell you the truth. Bluntly, we haven't monetized enough. But the places where it's helping us get better is by having information at our fingertips, we are able to predict problems better than -- than, meaning, in other words, we don't need the customers to call us. We can call customers. So that's in terms of customer service. And in terms of monetization, you want to go ahead?

Eric Branderiz
Chief Financial Officer at Enphase Energy

Yes, I mean the only thing that I will say is extreme value to us that outside the monetization is the incorporation of behavioral patterns of consumption and production to build algorithms, using artificial intelligence for tertiary controls, right? And that is super important in terms of the home energy management experience on top of the customer service element, the batteries is to resolve issues like immediate RMAs and so on. And ultimately, that information can be embedded into an energy training platform to do microgrid training. So there are multiple layers on that. So if you're thinking about packing that information and ultimately monetizing into, selling into a third party is not in the works right now. Right Badri?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

No. So what we think is in the small commercial business, what do people care about the most is they cannot even lose one day of savings. Extremely important for them. You cannot lose one day of savings. Therefore, if we are able to be -- if we can proactively look at that and if we can hyperanalyze that with our NOC or Network Operation Center and fix problems before they happen, that's the holy grail.

Eric Branderiz
Chief Financial Officer at Enphase Energy

For commercial projects, imagine an asset manager having all this information of the power or the fleet performance, how differentiated would be a platform sold within the IQ8D solution, right? As a bundled solution for that asset manager is going to be increased at the panel level, very transparent, very easy to follow, very easy to use, update, upgrade, monitor all the performance metrics of ROI and so on and so forth. And finally, one area that Badri developed is the grid services platform on understanding our ability to dispatch power and use what we call it the frequency regulation capabilities to allow the homeowner to monetize their asset as per will, meaning having that information available for forecasting and also for dispatching and doing voltage regulation -- frequency regulation and ultimately, power availability. So those are the grid data right now that we have in line.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes, we will talk a little bit more at the Analyst Day.

Colin Rusch
Analyst at Oppenheimer

Okay. Thanks guys.

Operator

Thank you. Our next question comes from Philip Shen with ROTH Capital Partners. Your line is open.

Philip Shen
Analyst at ROTH Capital Partners

Hi everyone. Thanks for taking my quesiotns. Congrats on the quarter. Wanted to dig into the chip supply situation a bit more. I know you gave a bunch of color already. But in terms of the component availability catching up to demand, seems like we're going to get a meaningful improvement in Q1. Is it fair to say that the bottleneck from chips might be limited by Q1? Or is it maybe Q2 or perhaps the back half of '22?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Well, Q4 is significant improvement from Q3. That's the first thing you should note. The AC FET driver shortage, we have effectively mitigated by qualifying five suppliers. I also mentioned constraint on the ASIC -- the ASIC situation. And I think we can reasonably navigate it for Q4. And what's the path going forward? Once again, it would be foolish for me to predict what's going to happen in Q1 because it's dynamic. But knowing what I know situation in Q1 should get better than Q4. I don't know how much, but the situation in Q1 should get better. And once the worldwide supply chain logistics situation gets solved, then we should be able to meet -- our supply should be able to meet demand. But right now, we live in a dynamic situation.

That's why it's not good for us to predict what's going to happen in Q1. Right now, this is what we are giving to you in Q4. Our Q4 supply is meaningfully higher for the AC FET drivers because we have enough of the AC FET drivers and ASIC. And that's what the guidance is based on.

Philip Shen
Analyst at ROTH Capital Partners

Great. Thanks for the color.

Eric Branderiz
Chief Financial Officer at Enphase Energy

I want to add one more thing, Phil. Remember also that Q1 tends to be a seasonal quarter, right? So those are the kind of things as you model and you think about this, the demand is there. The supply will -- you just heard the challenges from Badri, and then there is a typical seasonality.

Philip Shen
Analyst at ROTH Capital Partners

Great. Thank you both. As it relates to the next-generation products, you guys are just launching IQ8. Congratulations on that. And you have a 4- to 6-quarter ramp. But if we can get any color on the next-generation product, that might be interesting. Perhaps it's the IQ9 and what is -- perhaps talk through the feature set there and then perhaps the timing around when that could be released and what you're looking for with IQ9? Thanks.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

We'll talk a little bit more about IQ9 in the Investor Day. The -- on IQ9, just a quick thing. It is basically the power is getting higher and higher and higher. And if you want to dissipate the higher power through a same form factor, you need innovation. And when you start looking at innovation, there is innovation that needs to happen in the transistors, which are what I call is the output AC transistors as well as the DC transistors. Innovation needs to happen there.

The innovation needs to happen in the ASIC that's relatively easy, needs to run at a higher frequency. The innovation needs to happen at the transformer level because now the transformer can be a lot lesser if you run the AC transistors at a higher frequency. So it needs all three of these to work in tandem.

We need a transistor that's capable of tolerating much higher current and much small -- in much smaller form factor. The second is an ASIC that's capable of driving to that frequency.

The third is a transformer that can be miniaturized to gain advantage from the increased frequency. All three of them are going to be worked on in IQ9. So that we can deliver even more higher power with smaller form factor. I'll stop at that.

Bottom line, it's innovation, you'll hear it. And -- but in the meantime, we got IQ8. IQ8 is the innovation in the IQ8 ASIC enables the response time to grid events to be significantly faster, orders of magnitude faster than IQ7. That's how we can get away with any storage sizing. So IQ8 is, like what I said, I've already said it, we couldn't be more excited. And there's a lot of innovation in IQ8 that's still going to come as incremental products.

For example, IQ8H. IQ8H is the highest power version that we have today. That's the highest power version we have made at Enphase is 384 watts of ASIC. In IQ7, we had a IQ7A, which was 366 watts. So we'll continuously tweak the power as we -- to do incremental products. But IQ8 is a great product.

Philip Shen
Analyst at ROTH Capital Partners

Just a quick follow-up. Is the IQ9, do you think it's two years away? Or do you think it's further out?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

We'll talk more in the Analyst Day. I mean we want to have a particular cadence on our microinverters going forward, and we'll talk a little bit more about it in the Analyst Day.

Philip Shen
Analyst at ROTH Capital Partners

Great. Thank you.

Operator

Our next question comes from Connor McMahon with Wolfe Research.

Connor McMahon
Analyst at Wolfe Research

Hey guys, good afternoon. So just on competition, I have two questions here. So first, obviously, one of your peers gave more on their new micro solution at their Investor Day, a month or so ago. Just curious of any thoughts on how the Enphase offering compares here? Or just more broadly, how you expect the competitive environment to evolve over the next couple of years? And then secondly, are you seeing any risk of losing share due to the price increases you pushed through the next -- so far this year? Thanks.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes, you're talking about the competitor that introduced a microinverter. Now we have seen a lot of competition in microinverters over the year -- I mean, over the years. We don't neglect any of them. We take all of them seriously. In this case, the competitor is a formidable competitor. We have a lot of respect for them. They have a big balance sheet. We're not sure what they're going to do, but we are focused on what we can do. We have made eight generations of microinverters. We have very strong IP, 300-plus patents. All of these microinverters are based on the ASIC. The chip semiconductor architecture that has got an ASIC custom designed by Enphase. And that custom designed by Enphase enables us to do a single-stage architecture. Because we do a single-stage architecture versus the standard dual-stage architecture, what happens is, we use reduced number of components. Because we have reduced number of components, our heat dissipation is a lot lesser. Because our heat dissipation is a lot lesser, our quality is high.

As I always have said, my target DPPM is 500. 500 parts per million for microinverter. That's 0.05%. We are talking about. And that kind of outstanding quality comes due to our custom ASIC architecture and high level of semiconductor integration. So that's what we have done over time. And now to add icing on the cake, it is IQ8 is grid farming. It is -- it can do sunlight backup in the absence of a power grid without a battery. So that's where we are going. And when you ask me about next, I did talk a little bit on IQ9 and IQ10. Right now, IQ8 has got single-phase grid farming, soon, we will have 3-phase grid farming. So that's the direction we are going. So it's all about innovation for us. Innovation will drive high quality, high quality will drive great customer experience. That's what we are all about.

Connor McMahon
Analyst at Wolfe Research

Great. Just on the second -- just if you're seeing any risk of losing share due to the price increases you pushed through?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

No, we're not really seeing a risk. And look, the customers understand it is a container last year was $2,000 an ocean container, now it is $16,000. It is component costs have risen rapidly. For us, sometimes more than 100% incoming component cost. And because of the constraint we are forced to put inverters on planes to air shift them. In addition, the container cost make this overall situation tough, and you are seeing inflation in the U.S., exactly plus 5.4% compared to -- this September its 5.4% compared to last September in the U.S. So both times, we did a single-digit price increase, low-single digits, by the way. And we are incredibly sensitive to installers. Actually, we are incredibly sensitive to distributors, installers and homeowners. So, therefore, we try to take as much hit as possible. And when it comes to, okay, let's make sure we're pragmatic, we decided to pass a single-digit percentage price increase. So we think no one likes price increases, but we think our customers will understand. They will appreciate and I'm not worried about it.

Connor McMahon
Analyst at Wolfe Research

Okay. Thank you.

Operator

Thank you. Our next question comes from James West with Evercore ISI. Your line is open.

James West
Analyst at Evercore ISI

Hey good afternoon, Badri.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Hi.

James West
Analyst at Evercore ISI

So quick question on the margin guidance here, I know you're using your typical baseline guidance. But given you brought up freight a number of times, we know inflation is going to the system. Should we be concerned that as this continues, the logistics problems continue that we would be closer to the lower end of your guidance? Or do you feel like that was already all baked into to what you had in 3Q, and so that's -- we should be comfortable?

Eric Branderiz
Chief Financial Officer at Enphase Energy

Yeah. Well, thank you for the question. This is Eric. So James, I -- one of the things that Badri and I, we always are very cautious is making sure that whatever we guide is a number that we can stand behind it to the best of our knowledge as we stand today in front of you guys. And so the range is a range and it still remains a range.

If you look at our past track record on the way we deliver every quarter, we tend to be doing pretty well based on that range, right? So you can track our past record on that front, right? In terms of the moving parts, we feel in many ways that our detailed bottoms-ups forecasting process and the way we manage our cost and the opportunities that we have based on our technology that Badri just described, provide us unique visibility over perhaps a few quarters ahead of us.

But right now, based on the reality of the logistics, I mean, another example just to give you, the spot pricing on components, right? In many cases, the availability of components, we need to pay additional price, and so some of them can be short-term, some of them they may stay with us.

In the meantime, we continue very disciplined on our cost reduction road maps and attaining those. So within the visibility that we have, within the guidance that we provided that hopefully is very consistent. And the way we've been conducting ourselves in the past even under the extreme supply constraint challenges, we know how to manage fairly well within the quarter. So I hope with that, I answer your question and give you comfort that when we put something in front of you guys is the best that we can with a lot of analytics.

James West
Analyst at Evercore ISI

Yeah. It does. That was very helpful. Thank you. And then maybe, Badri, on IQ8, you're excited, we're excited. I mean, obviously, the technology is really exciting, and I look forward to seeing it at the Analyst Day. Curious if you could roll it out faster than that four to six quarters, maybe speed up the rollout of the technology?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Well, we've had experiences with rollouts, we did with IQ6 that took a similar time, we did with IQ7. This product requires a little bit of education, but it's obvious to most people. And we think it could be faster...

James West
Analyst at Evercore ISI

Okay.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

...but it's difficult for us to predict. Transitions are always hard. Transitions are complex, a lot of puts and takes. It is the installers, we are educating the installers. We are educating distributors. Actually, we did that. Now we have to educate the installers. And we need to make sure we help them to put the best foot forward with the homeowners. And that process does take a little bit of time. That's why we thought success for us is four to six. So obviously, four, I would be thrilled; six, I would look for a lot more improvements we can do in the future. But I think it's a reasonable number right now.

James West
Analyst at Evercore ISI

Okay, got it. Thanks guys.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Thank you.

Eric Branderiz
Chief Financial Officer at Enphase Energy

Thank you.

Operator

Thank you. And we have a question from J.B. -- I'm sorry. We have a question from Ameet Thakkar with BMO Capital Markets. Your line is open.

Ameet Thakkar
Analyst at BMO Capital Markets

Heartily thanks for squeezing me in guys and congratulations on the quarter. It looked like your international revenues were up, I think, about 5% sequentially. I was just wondering if you could give us a little bit of color on what kind of regions or specific countries that are kind of driving that?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yeah. Actually, it's pretty simple. Europe is doing very well. And in Europe, the countries that we are doing well are, Netherlands, France, Belgium, Spain, we're just starting to ramp in Germany. We introduced IQ7 into Italy, so that's going to start ramping very soon.

We introduced Enphase Storage Systems into both Germany and Belgium. We're going to see those effects. But it's really all about Europe. Latin America is a region that we are excited about, especially Puerto Rico. Puerto Rico is very strong for us in terms of storage.

We expect continued growth in Puerto Rico, both solar and storage in the next few quarters. Brazil is another one you should be looking at, you should be watching closely. And in Brazil, it's too early to talk about numbers, but it is a big market, 1.6 gigawatts of solar.

Of course, it is a cut-throat market, but I think with some intelligence with some -- with some intelligent way to sell the product and with products like the IQ8D, along with our products like the IQ7A, which is the highest power products, I think we should be able to make a serious debt coupled with innovative financing.

So we'll be working on that a lot, but we are excited about Brazil. It's a huge opportunity for us. So that's the color on international, mainly Europe for now.

Ameet Thakkar
Analyst at BMO Capital Markets

Great. Thank you, guys.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Thank you.

Operator

Thank you. Our next question comes from J.B. Lowe with Citi. Your line is open.

J.B. Lowe
Analyst at Smith Barney Citigroup

All right. Hey Badri, Eric, Karen, how you guys are doing? Question was on what kind of pricing and margins on the storage products are embedded in the 4Q guidance?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yeah. We have not broken out the margins individually by our product lines. And -- but yeah, I get that question a lot, is storage -- what's the margin on storage? What are you confident about, et cetera? I want to mention the following. We just started shipping storage last year. We are ramping. It took us some time to ramp.

We were in the early stages before. Our cost is usually -- its common knowledge that the cost is high, relatively at an earlier stage of ramp and that situation is changing. We are streamlining everything as far as the product is concerned, the supply chain, the manufacturing, the cost structure, et cetera.

We are also working on new products, which I will share with at the Analyst Day. Very often in storage the two metrics to focus on are basically kilowatt hours per liter, and actually, watt hours per liter and watt hours per kilogram. Those are the two metrics to focus on.

And for us, the way we can maximize watt hours per liter -- if you maximize that, obviously, your cost comes down, manufacturing cost, product cost comes down. And how do you maximize that is by building best-in-class power electronics, because things that cell pack is pretty decent.

But if you take the cell pack on one hand and if you take power electronics, those are the two things that you need to work on. Cell pack is already pretty decent. So we're working on power electronics to do best-in-class integration. And we'll share more of our thoughts in the Analyst Day, but we are working on those furiously.

And those will help us to achieve best-in-class cost structure on storage. And remember, we will not enter any business until we are confident, unless we are confident that they will meet our target baseline. That's why we set a target baseline, and we won't enter businesses where we cannot achieve that.

Eric Branderiz
Chief Financial Officer at Enphase Energy

At a minimum.

J.B. Lowe
Analyst at Smith Barney Citigroup

Okay.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. At a minimum.

J.B. Lowe
Analyst at Smith Barney Citigroup

Okay. That's helpful. Another question I had was, just on the rollout of the IQ8D. As you're talking to potentially kind of a new set of customers. I mean, I know there's those long-tail guys that do resi and small-scale commercial.

But can you give me something like, what are some of the new partnerships? Or are there a lot of new partnerships that you guys are going to need to forge to kind of really expand into that business? And how is that process going?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. To give you some color. It is right now, we think the long-tail installers are neglected in this segment, which is specifically -- and I won't call it as a niche segment, it's a small commercial segment. That means 20 kilowatts to 200 kilowatts. And very often, these installers are the same installers who do residential.

And we are talking about motels, hospitals, churches, gas stations. We are talking about relatively small installers here. And so, the name of the game for us is the same. Provide great customer experience to our installers, provide highest quality to our installers.

The installers do have a pain point. A lot of the solutions they have today are not high quality. That's where Enphase can add value. And that's what we are going to do with the IQ8D product. Address that 20 to 200-kilowatt segment and try to win over that segment, win over the installers who service that segment.

And one of the ways we think we can win over is by offering a complete solution. It's not just micros. It is, you talk about the design soft -- in solar design software and then proposals, then permits, then fleet management, then operations and maintenance, with best-in-class quality microinverter.

Now of course, I mean, one of the other things which again, we'll share our thoughts on the -- in the Analyst Day is a small commercial solar also begs the question of small commercial storage. So we'll share a little bit of our thoughts there. But for now, it is -- just to answer it in one line, it's a very similar dynamics of installers. They all want high-quality and great service. We are going to do exactly that.

J.B. Lowe
Analyst at Smith Barney Citigroup

Okay, great. Thanks.

Operator

Thank you. We have a question from Maheep Mandloi with Credit Suisse. Your line is open.

Maheep Mandloi
Analyst at Credit Suisse Group

Hey. Thanks a lot for taking my questions and congratulations on the quarter. Badri, you've been talking about strong demand, but at the same time, there's a lot of supply chain challenges. So just wanted to understand that better.

Is the issue or the challenge across the whole supply chain from sourcing, manufacturing to shipping? Or is there any specific pain point for -- in your value chain right now? And just had a follow-up on --

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. I mean, to simply put, if you segment the business into microinverters and batteries. In microinverters, we have largely solved the supply constraints. On the batteries, you have a logistics issue. That's huge.

In microinverters also you do have logistics issues, but on the batteries, it's bigger because we have a flexibility of air shipping microinverters, which we do not on batteries. And that logistics issues are nothing specific to Enphase.

Maheep Mandloi
Analyst at Credit Suisse Group

Got it and thanks for the clarification. And the follow-up is just on the third battery supplier. I know you were talking about getting someone or signing someone outside of Asia to resolve some of these challenges on the battery supply chain. Just curious on that status or when we could hear more on that?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Thanks. Right now, we have two battery cell pack suppliers. Both of them are in China. Originally, we said that together they will have a capacity, they can give us a capacity of 120-megawatt hours a quarter. Now because of our relationships, that capacity has increased to 180-megawatt hours a quarter. We can probably get a little bit more from them, even more than 180 per quarter, if we want. The -- however, what the point you raised is right, which is global diversification, which is what are you doing in the event there is a disruption in the supply chain in China? So we have a lot of interesting options that we are working on. I'm not prepared to share about any specifics yet, but that's the focus area for us and we are working on it. And when we have something concrete to announce, I share with you.

Maheep Mandloi
Analyst at Credit Suisse Group

All right. Thanks a lot for taking my question.

Operator

Our next question comes from Tristan Richardson with Truist Securities. Your line is open.

Tristan Richardson
Analyst at Truist Securities

Hey, good evening. I appreciate all the commentary on IQ8, very helpful. Just going back to that four to six quarter ramp, you noted that you hope to be successful by the end of that period. Just curious what success looks like? Can you frame that for us? Is it -- where IQ8 becomes prevalent amongst the EIN or that you're at a place of critical mass, where you can start pursuing a long-tail with this new product? Or just curious kind of what success looks like at the end of that ramp phase?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yeah. Success, I've thought about this, too. Success in a few areas, right? One is educating homeowners about the innovation from Enphase. I'm hoping that will happen here. And so that's one. That's the success. The second one is, we are able to enable -- I mean, we are able to have our realized cost effective Storage Systems sizes for the market. In other words, let's say, I have a 6-kilowatt solar system, I don't need a 16-kilowatt hour storage systems. How about I only get 6-kilowatt storage system just for the essential backup I mean. How about I have enormous flexibility in that choice, I should be able to get a three, if I need to 3-kilowatt hour because all I care is, let's say, my requirement as a homeowner, let us say, is only to keep the lights on or my UPS on. I should be able to do that with minimal cost with zero constraints.

So it's going to enable all kinds of use cases with a range of batteries. And hopefully, it's going to make the overall system affordable for a lot more people, right. And in the extreme case, the case with no storage, which is sunlight backup only, there may be some population who say, you know what, I'm okay. I lose power only like what I said earlier in the call, two times a year, maybe five times a year.

And at that time, I'm perfectly happy, if I get -- if I have back power only during the day, right? So success for me is the batteries become a lot more common, which is the use case three, which is IQ8 solar systems with small-sized batteries, just starts sprouting at every home. But that's me. With all due respect the homeowners have their own way of choosing things. And our installers are going to help them to make the correct choice for them. And all I can do is to speculate nothing more.

Tristan Richardson
Analyst at Truist Securities

That's helpful. And then just going back on the pricing side. Does the pricing dynamic include IQ8? Or is pricing on this product, it's is completely and it just reflects differentiated this is versus the remainder of the product portfolio?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. So we are not breaking out the exact specifics of IQ8 rising in this call. But IQ8 as a microinverter adds a lot more value than IQ7. So we've priced it based on that value. Obviously, the IQ8 ramp, there is -- right now in Q3, there was no IQ8 shipment. So none of the financials until Q3 include IQ8. But we do plan to start shipping IQ8 from Q4 expected in December. And it will be a higher price compared to IQ7. That's correct.

Tristan Richardson
Analyst at Truist Securities

Appreciate it. Thanks, Badri.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Thank you.

Operator

Our next question comes from Joseph Osha with Guggenheim Partners. Your line is open.

Joseph Osha
Analyst at Guggenheim Partners

Well, I made it. Hello, everybody.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Hi.

Joseph Osha
Analyst at Guggenheim Partners

Hi. Two questions for you. One financial. One technological. It sounds to me like you're saying that IQ9 is probably going to be the first product that steps away from IGBTs and uses some kind of widebandgap MOSFET. Is that fair to say?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Yes. I mean we've not been secretive about it. IQ9 will likely use GaN device.

Joseph Osha
Analyst at Guggenheim Partners

Okay. All right. So you have said that. Fair enough. And then the second question, just kind of to stand Brian's question on earlier, you've done a great job of protecting margins even in this kind of input cost environment. Going forward, given what you've said about long-term margin targets, is it going to be the strategy more to recoup that margin or maybe take lower input costs when they do arrive and use that to lower prices and take more share. Just curious how you think about that philosophically?

Eric Branderiz
Chief Financial Officer at Enphase Energy

I mean, we definitely always think about innovation and differentiation. So the numbers that we normally profile as part of the guidance and the framework that we use as a baseline are predicated towards not compromising growth. So that's the way we think about it, right? And as we continue innovating, improving our quality and delivering products that are superior or potentially even groundbreaking like IQ8, right? We seem to believe that those are not necessarily compromised at least in the mid short term, right? As you think in the long term, new product introductions, more acquisitions, more activity.

The company that you are looking today is a very different company than the company that I joined almost four years ago. And will continue to transform itself into the energy company that the market deserves. And we will continue delighting customers, continue discipline on our pricing strategies, cost reduction, again, using the best innovation available, negotiating with our vendors on a fair pricing based on volume discounts, providing the homeowner full visibility over their experiences. So therefore, they understand what they are gaining. So I think that, that's what he made us what it is today.

Joseph Osha
Analyst at Guggenheim Partners

Okay. Thank you.

Operator

Thank you. Our next question comes from Eric Stine with Craig-Hallum. Your line is open.

Eric Stine
Analyst at Craig-Hallum

Everyone. Just wanted a quick touch on the capacity. I know that you're on track to be at five million microinverters per quarter. By the end of the year, but as we think a little bit longer term and get out beyond some of the supply chain issues, I don't know if you're willing to discuss when you think you might need to take that number higher again?

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Well, I mean in Q3 we shipped 2.6 million microinverters. And we already gave you a plan on five million microinverters capacity. That, of course, is a supply capacity. It's a manufacturing capacity of our contract manufacturers. However, the components need to come into those plants and that's the enormously stressed supply chain. So we don't know when that will get alleviated. But once that gets alleviated, we should not be having any capacity issues or any supply issues until the capacity that we indicated.

And beyond that, all of these, if I look at our Guad factory, for example, if we want more capacity, we need to put more auto lines in. If we look at our Chennai factory in India, same deal. If we look at our China factory, same deal. And that is only manufacturing capacity. But on the other hand, we deal with many hundreds of suppliers. Each of them will need to up their gain, and we will need to qualify multiple suppliers.

For an example, for a PCB today in a printed circuit board, today we have a couple of suppliers. We may need to take that up to full suppliers if we are going to service extraordinarily higher demand beyond five million. So there's some structural changes, we will do, but it's something that we are used to doing. It requires a couple of quarters of notice in order to put an auto line, we can have it. It requires a couple of qualifications to be done with adding two extra suppliers like what we did on the ASIC drive, we can have it. It'll take a few quarters, but we're not afraid of the number five or 10 doesn't daunt us.

Eric Stine
Analyst at Craig-Hallum

Okay. Thanks.

Operator

Thank you. And that's all the time we have for questions. I'd like to turn it back to Badri Kothandaraman for any closing remarks.

Badri Kothandaraman
Chief Executive Officer at Enphase Energy

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again during our Investor Day on November 16. Thank you.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Karen Sagot
    Investor Relation
  • Badri Kothandaraman
    Chief Executive Officer
  • Eric Branderiz
    Chief Financial Officer
Analysts

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