Enphase Energy Q1 2022 Earnings Report

Enphase Energy EPS Results

• Actual EPS: $0.44
• Consensus EPS: $0.43
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.48

Enphase Energy Revenue Results

• Actual Revenue: $441.29 million
• Expected Revenue: $434.21 million
• Beat/Miss: Beat by +$7.08 million
• YoY Revenue Growth: N/A

Enphase Energy Announcement Details

• Quarter: Q1 2022
• Date: 4/26/2022
• Time: After Market Closes

Enphase Energy (NASDAQ:ENPH) is a US-based technology company focused on the solar power industry. It was founded in 2006 by Martin Fornage and partner Raghu Belur after inspiration from Fornage. The company’s goal is to help residential consumers harness the sun for daily use and provide the ability to sell excess production back to the grid.

Mr. Fornage noticed a low-performance problem with a solar array at his ranch. The array was linked to a central inverter, as most are still to this day which poses a problem. When linked together, the DC current generated by an array of solar panels is limited to the weakest output. To solve this issue, Fornage and the company will develop proprietary microinverters and install one on the back of each panel of an array, an arrangement that increases output and total efficiency. The solar inverter is important because solar panels generate DC current which is not compatible with the electric grid, it converts the DC to AC and is a necessary component of all solar power generating facilities.

The company launched its first product, the M175, following a capital raise in 2007. The follow-up product, the M190, sold about 400,000 units in its first year alone and helped the company secure 13% of the residential market share by 2010. Enphase went public in 2012 and then decided to enter the battery-storage industry as well. The company will continue growing through 2020, releasing new products and entering new markets. By the end of 2020, Enphase has 48% of the US residential inverter market which is more than 70% of the world microinverter market but less than 2% of the total inverter market.

The post-2020 period is focused on new acquisitions and building out an SaaS network for home power generation and storage. By the end of 2022, the company had sold more than 50 million inverters, expanding its offerings and deepening its penetration. Part of the strategy is to branch out into services, including microinverter solutions for small businesses.

Today, Enphase Energy operates through a network of subsidiaries. The company is in business designing and developing solar power and alternative energy solutions for the residential market. It manufactures and sells semiconductor-based home energy solutions including microinverters, batteries, solar leads and software solutions to help operate and maintain the systems. Total revenue in 2021 topped $1.38 billion.

Among the many products now offered are EV charging stations. The Clipper Creek subsidiary is the leader in home EV charging solutions and will install a model best suited for each consumer's make and model vehicle. Chargers are compatible with all models sold in the US and come with a 25-foot charging cable for ultimate flexibility.

Enphase is helping to accelerate the shift to solar power by making solar power generation and storage more accessible and affordable for residential consumers. The future of renewable energy is broad networks of micro-generating facilities, such as homes and small businesses, that are backed up by battery storage capacity.

Enphase Energy Q1 2022 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by, and welcome to the Enphase Energy's First Quarter 2022 Financial Results Conference Call. [Operator Instructions] I would now like to introduce your host for today's program, Karen Sagot. Please go ahead.

[Karen Sagot, Head of Investor Relations at Enphase Energy]

Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2022 results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer; Mandy Yang, Chief Financial Officer; and Raghu Belur, Chief Products Officer.

After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2022. During this conference call. Enphase management will make forward-looking statements, including but not limited to, statements related to our expected future financial performance, the capabilities of our current and future technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply and demand, the anticipated growth in the market and in our sales and regulatory 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 annual report on Form 10-K for the year ended December 31, 2021 on file with the SEC and our quarterly report Form on 10-Q for the quarter ended March 31, 2022 which will be filed with the SEC in the second quarter of 2022. 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 posted today which can also be found in the Investor Relations section of our website.

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

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Good afternoon, and thank you for joining us today to discuss our first quarter of 2022 financial results. We had a good quarter. We reported record quarterly revenue of $441.3 million, achieved non-GAAP gross margin of 41% and generated free cash flow of $90.1 million. We ramped IQ8 microinverters in the first quarter and started piloting IQ8D microinverters to small commercial customers. We exited the first quarter at approximately 41-15-26, this means 41% gross margin, 15% operating expenses, and 26% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35-15-20. We will go into our financials later in the call. Let's now discuss how we are servicing customers.

Our Q1 Net Promoter Score worldwide was 68% compared to 69% in Q4 and our North American Net Promoter Score was 74% compared to 73% in Q4. Our average call wait time decreased to 3.2 minutes in Q1 compared to 8.9 minutes in Q4. We reduced call wait times through staffing and training. During Q1, we added field service technicians in the U.S. and Europe to provide onsite help to our installers, particularly for batteries.

Let's talk about microinverter manufacturing. As we have discussed in the past calls, the global supply chain situation is still under stress. But our situation is table due to supplier management and qualification of alternate suppliers. With the growing demand for our microinverters, we remain vigilant regarding the global supply chain and logistics challenges due to COVID disruption. I'm very proud of our teams who have worked hard to manage the difficult situation. Currently, our quarterly capacity across all contract manufacturing facilities is a little bit more than 5 million microinverters. Mexico has a quarterly capacity of 2.5 million microinverters, India with Salcomp 1.5 million, and the rest is in China. To support the increased demand and improved delivery times to customers in Europe, we are adding an automated line at Flex's factory in Romania. This line will have quarterly capacity of approximately 750,000 microinverters starting in Q1 of 2023, and will enable a global capacity of nearly 6 million microinverters per quarter.

Let's now talk about batteries. Our two sources for battery cell packs currently have a total capacity of 180 megawatt hours per quarter. Our existing cell pack suppliers can add more capacity if needed. We are also on track to add a third cell pack suppliers in the second half of this year. Our lead times for batteries are still long at about 14 to 16 weeks, primarily due to global logistics challenges. The lead time should come down once shipping and port congestion conditions improve.

Let's move on to the regions. U.S. and international revenue mix for Q1 was 84% and 16% respectively. In the U.S., revenue increased 9% sequentially and 49% year-on-year. We are pleased to report record sell-through for microinverters and record revenue for batteries in Q1. The channel inventory for both microinverters and batteries were at a healthy level at the end of Q1. In Europe, revenue decreased 6% sequentially, while increasing 39% year-on-year. The sequential decrease was due to unforeseen shipment delays towards the end of Q1. Homeowners in Europe have a strong desire for energy independence. We recently teamed up with [Indecipherable], a German installer group to deliver microinverters and batteries to customers in Europe. We are currently shipping IQ batteries to Germany and Belgium, and plan to introduce them in other European countries throughout 2022. Our batteries are now compatible with most brands of third-party PV inverters.

We continue to see strong growth in our existing markets in Europe, including Netherlands France and Belgium and we're also pleased with our growth in newer markets, including Italy, Spain and Portugal. We expect our momentum in Europe to continue with more than 40% sequential revenue growth expected in Q2 versus Q1. We are continuing to expand the team and are very excited about our growth in the region. In Latin America, revenue increased 13% sequentially and more than doubled year-on-year. We had steady growth in our Solar plus storage business in Puerto Rico during the first quarter.

Now, I'll provide some color on Australia, Brazil and India. In Australia, we expect to introduce IQ batteries in the second half of 2022. We think regulatory changes, designed to improve solar installation practices will favor our safe AC approach as grids and utilities require more intelligent and safer solutions. As for Brazil, we have started shipping IQ7+ microinverters to installers in Q1, and expect to ramp continuously. We also expect to introduce an IQ8D version into Brazil to optimize cost. In India, we are making steady progress and adding more installers into our network, ramping digital sales and planning to introduce IQ batteries in early 2023.

Let's now discuss the overall bookings for Q2. Our overall customer demand for Q2 is quite robust for both microinverters and batteries and exceeds the higher end of our guidance range. The component availability is better than what we have experienced in the last 18 months. But there are still global challenges, which are not specific to Enphase. We remain optimistic that the lead times will come down by the end of this year.

Let's talk about batteries. We shipped 102.4 megawatt hours of IQ batteries in the first quarter, a 20% increase from Q4 of 2021. We are working diligently on improving commissioning times for installers. While we have done various fixes to improve quality and homeowner experience on the batteries, we are still not where we would like to be on commissioning and installation experience. We are doubling down on this in this quarter and expect to make good progress. Our goal remains to get the commissioning time down to an hour and ensure installers have a seamless experience. We expect to ship between 130 and 140 megawatt hours of batteries in Q2. Due to the increase in logistics and component costs driven by inflation, we implemented a modest price increase on our batteries in March of 2022.

Let's now discuss the installer training and certification on batteries. By the end of the first quarter, we have certified more than 1,300 installers in the U.S. on a cumulative basis. Our hands-on storage training in the U.S. uses mobile vans located in the East and West goes along with regional training centers. We started with an Enphase YouTube channel in Q1 for training, where installers can and access videos to learn installation tips and tricks.

Let's talk about new products. In Q1 we had shipments on IQ8 microinverters in North America and are receiving positive feedback about the product in general. As a reminder, IQ8 solar microinverters can form a microgrid during a power outage using only sunlight, providing backup power even without a battery. IQ8 grid farming technology eliminates traditional ratio requirements between solar system size and battery size. And with our sunlight jumpstart feature, IQ8 microinverters can start up home energy system using sunlight only after prolonged grid outages that may result in a fully depleted battery. We also expect to introduce IQ8 microinverters internationally into Europe and Australia during the second half of this year.

Let's talk about IQ8D microinverters for small commercial applications. We started piloting IQ8D 640 watt AC microinverters to select installers in North America during the first quarter and we expect production shipments in late Q2. The value proposition of IQ8D is the ease of installation, high quality and rapid shutdown capability. On batteries, we plan to introduce our next new product IQ Battery 5P later this year. This battery will deliver twice the power of our current battery at lower manufacturing cost, enabling homeowners to start heavier loads. Also, going forward, we will enhance our communication using Control Area Network, which is a robust required protocol for connectivity between the battery, the gateway and the system controller. We expect this to further streamline installations and simply commission.

Let's now discuss ClipperCreek, an acquisition which we completed in Q4 of 2021. The acquisition is performing in line with our expectations with reasonable gross margins and profitability in Q1. We are doing a few things to ramp the business. We are introducing EV chargers to our solar distributors and installers this quarter. We are also on track to begin manufacturing EV chargers at our Flex facility in Mexico in the fourth quarter of this year. We believe this will help us scale better and drive down costs. As for new products, we expect to introduce a smart EV charger to customers in the U.S. and Europe in early 2023. This will provide connectivity to the cloud through WiFi, as well as local connectivity into the Enphase home energy system.

The increasing penetration of electric vehicles have significant implications for home energy management. The energy consumed by the home will significantly increase with an EV. This increase will drive adoption of more solar and storage, which will enable homeowners to save money and charged to their vehicle in a green manner. The large EV battery could also be used for home backup called Vehicle-to-Home, as well as helping the grid in the future, called Vehicle-to-Grid. This acquisition plays extremely well into our strengths in energy management, ultimately helping the homeowner solar, storage, EV and other home loads. We are in discussions with a few EV makers to enable proof of concept for V-to-H and V-to-G features.

Let me cover grid services. During the first quarter, we announced that Vermont based utility Green Mountain Power will offer Enphase Energy Systems to its customers in a cutting-edge battery lease grid services pilot program. We have previously announced our participation in Connected Solutions covering three utilities in the Northeast U.S., Hawaiian Electric's Battery Bonus grid services program and Arizona Public Services Residential Battery grid services program. We also recently announced a partnership with Swell Energy to participate in VBP programs in California, New York and Hawaii. We also have many new grid services engagements in the pipeline and look forward to working with utilities and aggregators.

Let's discuss the installer platform. We are working on Solargraf Pro, a design and proposal tool with shading analysis, ability to detect obstructions on the roof and 3D modeling of homes. Approximately 900 installers use the Solargraf tool today. We expect to launch the Solargraf Pro, a higher version -- advanced version of the product in Q2, and already have a few installers piloting the software. In addition, we plan to expand the availability of Solargraf Pro internationally, starting with Germany. In March of 2022, we acquired SolarLeadFactory, which provides high quality leads to solar-installers in the U.S. Our objective is to substantially increase the lead volumes and conversion rates to help drive down customer acquisition cost for installers. We plan to expand the team, optimize lead management and offer this service broadly to our installers network.

We have made four acquisitions in the last 15 months, to strengthen our installer platform in the areas of lead generation, solar design software, permitting services and O&M software. In addition, we have robust and homegrown mobile apps for commissioning and monitoring of solar and storage systems. We plan to integrate all of these seamlessly onto one platform and offer them to our installation network, simplifying their lives and reducing soft costs.

Let me now give you a quick update on our Enphase Installer Network or EIN. We have now onboarded approximately 1,200 installers to our EIN worldwide through a highly selective process focused on installation quality and an exceptional experience to homeowners across the globe.

Next, I'd like to comment on some recent policy issues that are impacting the U.S. solar industry. As you aware, The U.S. Department of Commerce is investigating the circumvention of anti-dumping and countervailing duties on some premium margins. This is a time of great change in the energy market. Utility costs are rising, climate changes happening, geopolitical issues are driving energy security and EVs are taking off. At a time like this when there needs to be fully support for renewables, an AD/CVD investigation creates massive uncertainty in the marketplace, which we believe will impact U.S. jobs, raise electricity prices for homeowners and increase import from China, all of which are counter to the goals of the current administration. We are hoping that the current administration takes this problem seriously and results it rapidly well before the proposed August timeframe.

As it relates to Enphase, our products aren't directly impacted by AD/CVD as we don't make modules, but based on conversations with some of our partners, it is our opinion that the module supply for the residential segment will be less impacted than other segments. Many of our partners are currently working on securing module supply for the latter part of this year. Module pricing is expected to be higher in the interim. And we think the residential segment may be able to absorb higher price. All of this further underscores the importance of supporting domestic manufacturing through a production based tax credit or PTC, so we can proactively increase domestic manufacturing rather than reacting to such a market disruption. The support of domestic manufacturing is well aligned with the administration's goals to promote renewables, increase U.S. jobs, reduce electricity pricing for homeowners and lessen the dependency on imports from China. We would like to see rapid resolution of both AD/CVD, as well as implementation of PTC as soon as possible.

I would also now like to comment on the California NEM 3.0 proposed decision or PD which was announced in the December of 2021. We expect a modification to the current PD and an opportunity for stakeholders to participate and provide their feedback to the California PUC. We have been actively participating in the process and we'll continue to work diligently with various stakeholders to try and influence the best outcome.

Let me wrap up. Full home electrification and slowly but surely coming. EVs are ramping up considerably for obvious reasons, and so are heat pumps. Climate change coupled with situations like the Ukraine is forcing European countries and others to think hard about their reliance on oil, coal and natural gas. Countries like Germany are leading the way in adopting renewable technologies such as solar and batteries to support heat pumps, EVs and other home loads. Self consumption is becoming the norm and consumers want energy independence. There is no doubt that other countries will follow suit. It is just a matter of time. Our strategy is pretty simple. We create best-in-class solar plus storage home energy systems. We sell them to homeowners through our installation and distribution partners enabled by our installer platform. Our top most core value is customer first, and we are focused on providing a great experience to installers and homeowners. We are well placed to capitalize on the trend towards for the home electrification and look forward to ramping our presence in Europe in a significant manner over the coming months and years.

With that, I will hand the call over to Mandy for her review of our financial results. Mandy?

[Mandy Yang, Chief Financial Officer at Enphase Energy]

Thanks. Badri, and good afternoon everyone. I will provide more details related to our first quarter of 2022 financial results as well as our business outlook for the second quarter of 2022. We have provided reconciliations of these non-GAAP to GAAP financial results in our earnings release posted today, which can also be found in the IR section of our website.

Total revenue for Q1 was $441.3 million, representing an increase of 7% sequentially, and a quarterly record. We shipped approximately 1,029 megawatt DC of microinverters and 124 megawatt hours ofIQ batteries in the quarter. Non-GAAP gross margin for Q1 was 41.0% compared to 40.2% in Q4. The increase was driven by favorable product mix and lower expedite costs. GAAP gross margin was 40.1% for Q1. Non-GAAP operating expenses were $66.3 million for Q1, compared to $68.2 million for Q4. The decrease was driven by lower marketing expenses offset by continued investment in R&D and customer service. GAAP operating expenses were $115.1 million for Q1, compared to $105.6 million for Q4. GAAP operating expenses for Q1 included $45.3 million of stock-based compensation expenses, and $3.6 million of acquisition related expenses and amortization for acquired intangible assets.

On a non-GAAP basis, income from operations for Q1 was $114.5 million, compared to $97.7 million for Q4. On a GAAP basis, income from operations was $61.8 million for Q1, compared to $57.7 million for Q4. On a non-GAAP basis, net income for Q1 was $109.7 million, compared to $102.8 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.79 for Q1, compared to $0.73 for Q4. GAAP net income for Q1 was $51.8 million, compared to GAAP net income of $52.6 million for Q4. This resulted in GAAP diluted earnings per share of $0.37 for both Q1 and Q4. We exited Q1 with a total cash, cash equivalents and marketable securities balance of approximately $1.1 billion compared to approximately $1.0 billion at the end of Q4. In Q1, we generated $102.4 million in cash flow from operations and $90.1 million in free cash flow. Capital expenditure was $12.4 million for Q1. To increase manufacturing capacity, as well as costs related to IT infrastructure, R&D equipment and international facility.

Now, let's discuss our outlook for the second quarter of 2022. We expect our revenue for the second quarter of 2022 to be within the range of $490 million to $520 million, which includes shipments of 130 to 240 megawatt-hours of IQ batteries. We expect GAAP gross margin to be within the range of 37% to 40% and non-GAAP gross margin to be within the range of 38% to 41%, which is through stock-based compensation expenses and acquisition related amortization. We expect our GAAP operating expenses to be within a range of $127.5 million to $130.5 million, including a total of approximately $57 million estimated for stock-based compensation expenses and acquisition-related expenses and amortization. The estimated stock-based compensation expenses include approximately $4.8 million accrual for the earn-out now tied to certain performance targets to be paid in company's stock for the acquisition. We expect our non-GAAP operating expenses to be within the range of $70.5 million to $73.5 million.

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

Questions and Answers

[Operator]

Certainly. [Operator Instructions] Our first question comes from the line of Julien Dumoulin-Smith from Bank of America. Your question, please.

[Julien Dumoulin-Smith, Analyst at Bank of America Merrill Lynch]

Hey, good afternoon and thank you so much, team, for the time. Congratulations on the continued results and the performance here. If I can, just kicking it off here. Can you talk a little bit more about the European expansion that you guys just emphasized a moment ago in the prepared remarks? Can you talk about what exactly you're doing to infiltrate those markets, if you will. You obviously talked a lot about training, how should we expect that to filter through in terms of operating expenses and especially against your model on opex. And then related to that, how should we expect that to filter through on top line, as you think about your revenue mix here in Europe as well as gross margin impact?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Right. So just quick on the background for Europe, in general we are quite strong in Netherlands, France, Belgium, and those businesses or those regions continue to grow pretty well on the solar side. The new regions, if we talk about actually, are Germany, Italy, Spain and Portugal. So let me talk about Germany.

Germany, extremely interesting market. The residential solar is well north of a gigawatt a year, maybe even up to 2 gigawatts a year right now, on residential. Battery is at 80%. Most of our installers state for a given home when they mean solar, they mean solar, battery, EV charger and the heat pump. So they are much more advanced, probably the most advanced, I would say in terms of full home electrification.

So there is an incredible opportunity there for us. And the companies that will do that -- that will be successful or companies that can manage all of these resources: solar, storage, EVs and heat pumps, that's what we do. We make best in class home energy systems. And now with ClipperCreek, we have an EV charger, we are quite strong and solar and storage. So we are working on expanding our sales force in Germany. We are working on business development, we are working with a lot of installers. We are ramping things that at a pretty nice clip. And our natural advantages are we do things with very high quality, the Germans care about. We care a lot about customer experience, customer service. So that's on our site. So we are very optimistic about Germany. I was there late February to early March with our team and it's really, really clear that the opportunity is big and now.

And when you compare to that, the next biggest is Netherlands. Netherlands it's primarily a solar market today. But storage is coming according to all of the installers. And installers that all -- they like Enphase a lot, primarily due to the attributes I told you: quality, customer experience. If you go to Italy, Italy has been promoting the heck out of batteries. The ECO Bonus and the Super Bonus program, Super Bonus almost says that the batteries are virtually free. And there we are going to participate with some of our partners, and these programs will extend multiple years. May not be the Super Bonus, but at least the ECO Bonus will be there. So Spain, for example, we have a natural advantage because of small systems in Spain.

Each country is a diverse -- each country needs to be understood well because you go from Germany, you have a 12 kilowatt, 13 kilowatts of PV, you go to Spain, which is probably 4 kilowatt -- 3 or 4 kilowatts of PV. So each market is different and requires in-depth understanding. We are going to be there. We are going to have sales force in each region, we are tripling down on Europe in terms of spending. So there is no bad years there and we are doing well. In fact this quarter, the second quarter, we expect our revenue to be 40% higher then the first quarter.

And regarding the opex, you should continue to think of our opex as right at the baseline. We are very disciplined as a company. Our opex is our baseline numbers, financial numbers are opex equal 15% of sales. That's the number that you need to be thinking about.

[Julien Dumoulin-Smith, Analyst at Bank of America Merrill Lynch]

Excellent. Thank you. Just typically, if I can ask you to elaborate here as well, just a 15 megawatt-hour increased quarter-over-quarter on the battery side, just what are you seeing on margins today? Do you feel comfortable, just given the macro that you elaborated on the prepared remarks, especially relative to raw material inflation? How do you think about price inflation, again just to pass at a longer, or how're you think about the battery part of the mix, both in terms of the trajectory and acceleration, as well as the price points that you're entering at, to make in...

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

We don't break out the individual products. We don't break out but is the gross margin on microinverters and what's the gross margin on batteries. But what we do is, our baseline gross margin is 35%. We never launch a product that does not have the capability to hit 35%. And we are maniacal about costs. You see, last quarter we guided 38% to 41%, we landed at 41%. So with regard to your specific question on raw materials, yes, cell pack costs, I mean, a little bit up because our suppliers are facing issues in their supply chain too. And we already said, we are doing a modest price increase effective March on batteries. So that will keep the gross margins in check. So yeah, we are quite healthy on overall gross margin of the company.

[Julien Dumoulin-Smith, Analyst at Bank of America Merrill Lynch]

Excellent. I'll leave it there. Thank you, guys. Best of luck. Congrats again.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Mark Strouse from JP Morgan. Your question, please.

[Mark Strouse, Analyst at J.P. Morgan]

Yeah, good afternoon and thank you very much for taking our questions. In the past you have talked about how your order visibility into the coming quarter has -- either it had been in line or even exceeded at times what your guidance has been. I understand what you're saying about your supply chain being stable at the moment, but just given AD/CVD, lockdowns in China that are happening, maybe in other areas of the value chain, can you just talk about where your visibility into your 2Q guidance stands as of today?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, we got a lot of visibility into the second quarter and we got visibility into the third quarter in terms of backlog too. So we only guide and this quarter, meaning the second quarter and we are very comfortable with these numbers. Like what I said in the prepared remarks, and our demand is quite north of the higher-end of the guidance range. Regarding COVID shutdowns in general, we are also seeing some shutdowns in China, but our factories remain open, the shipping lines remain open, there are hiccups in raw materials, getting into manufacturing in China from time to time, but we are managing it. And the situation regarding component availability is obviously much better than what it was last year for us. We have made all of the necessary adjustments there. We have a number of suppliers for each each part. So we have learned how to mitigate our risks a lot. And so, you know, I cannot predict what's going to happen tomorrow, but I can say right now, our situation is quite stable.

[Mark Strouse, Analyst at J.P. Morgan]

Okay, thank you. And then just a quick follow-up to Julien's question on Europe. So, you mentioned the new markets you're entering into, you're obviously signing up new new dealer partners. I mean the 40% growth that you're talking about in 2Q, how should we think about that as far as kind of market share gains versus just market expansion?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

I think it's both, I mean in in places like Netherlands and in Germany, I would say the market is growing so much. It's part of market expansion. And of course, we do take market share because of our quality and customer experience. I can't quantify how much is each, but yeah, I would say that it will be a healthy mix of both. Regarding new regions like Spain et cetera, they come to us because of our quality. And even in Netherlands, we continue to gain market share because of our service and quality. In Germany, we do gain market share from some string inverters, because of, one, is we do supply all the components, we can do both solar plus storage, and we can manage the complete home energy system. In the future, we can add in EV chargers, in the future, we are able to work with heat pumps as well. So they like our capability as energy management -- home energy management supplier and sometimes we get the nod because of that. So it's a multitude of both.

[Mark Strouse, Analyst at J.P. Morgan]

Okay, thank you very much.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Philip Shen from ROTH Capital Partners. Your question, please.

[Philip Shen, Analyst at ROTH Capital Partners]

Hi, everyone. Thanks for taking my questions. Congrats on the strong quarter. As it relates to the lockdown in Shanghai, was wondering if you could drill in a little bit deeper on the potential impact, if any, on the cell supply? And then as another follow-up on batteries, with rising battery chemistry costs, can you talk through how much you can reduce your battery COGS ahead as you reduce the board count from 7 to 1 with the new chip? Can you keep margins flat, for example, without raising prices? Thanks.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, so as far as the supply is concerned, right now we have two sources of cell packs. Both of them are situated in China. And we are adding third cell pack suppliers in the second half of the year. You talked about the lockdowns. I explained it. In terms of the lockdowns, our factories are still operating in China. Our shipping is still active. The batteries are generally on the board with a lot of weeks in advance. Now, we are planning for a long-cycle time, 14 to 16 weeks. We are able to absorb any minor disruptions. We don't see a big deal on the batteries side. On the microinverter side, I was mentioning about some of the connectors, some raw materials. We see some hiccups from time to time due to COVID disruptions. But so far, so good. Like I said, I cannot predict tomorrow. But so far, it seems to be okay.

On the battery costs, there are couple of ways that we are working on battery costs. First is obviously the cell pack costs. And for that we have multiple sources of cell packs and therefore we do all the standard price negotiation, but we are also sensitive to their increasing costs, and so there is limited things we can do in the timeframe, but there's a lot of things we can do partnering with them over the long term in terms of optimizing the battery pack. In terms of what we can do is, and what I call is overhead, meaning you have the cell pack, and then you want to convert that cell pack from DC to AC. This involves battery management, power conversion and associated electronics. And that's where I think we can add a lot of value, which we are. So first thing we are doing is the battery that's coming out in the second half, it goes to a slightly higher modularity, meaning instead of 3.3 kilowatt-hours, we are going to 5 kilowatt-hours, so we can amortize the overhead over the 5 kilowatt-hours making the overhead less. And so in addition that battery has got double the continuous and peak power.

So that's got the natural cost advantage due to the amortization, the higher modularity. In addition, it provides customers with a superior customer experience compared to our current generation batteries. Then, on top of that we are going next year into our mix, what I call it the next generation battery where we are taking individual microinverters, the same microinverters that we use on the rooftop plus extra battery management circuitry plus a bunch of connector boards. We are taking overall 7 boards and collapsing them into one which is integrating the battery management plus power conversion into a big microinverter as well as utilizing some advanced technologies and a unique architecture which we call as a full-bridge architecture. So that one will help us to do a very high power microinverter, and we basically will be able to cut the volume of the battery almost by 40% because everything is consolidated into a single-board versus 7 boards. So the energy density of the batteries is going to be up almost by 50%, the volume is going to be cut by 40% and it's going to be much easier to install.

And along with this integrated -- deep integration comes cost reduction. So quite significant. We are not ready to quantify yet, but definite reduction in manufacturing cost for us. So all of these initiatives basically blocking and tackling for the present going to the next generation battery for the second half -- sorry, going to the high power battery for the second half, and the next generation battery for 2023 will continuously improve our gross margins and also enable us to do the appropriate thing for customers in terms of price.

[Philip Shen, Analyst at ROTH Capital Partners]

Great. Thanks, Badri. Next question here is on IQ8 versus 7. Our work a couple of months ago suggests that you were and are forcing top customers to IQ8 from IQ7, starting this quarter in Q2, due in parts, I believe, to some chip issues for the IQ7. Can you talk through that a bit? And also the mix of IQ8 and 7 by quarter this year? And then what exactly caused the IQ7 shortage, when you expect it to get resolved, if at all, and does this possibly mean that there could be pent-up demand later? Thanks.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, just for the record, we never force customers. Customers have their own choices, they can make all these decisions. We are incredibly respectful of them, sometimes if the problem is entirely ours, we will be able to give them the appropriate adjustments for the given timeframe. For some customers, the movement to IQ8, they wanted to be on the latest and greatest product, and they negotiated for a good deal to transition faster. And each customer, there is this story, each customer we -- is unique, and we don't force anything wholesale on customers.

And that's one. And then number 2, what caused the issue? IQ7 uses an ASIC, and that ASIC is made in a foundry in Taiwan, TSMC. And basically you know, in general the foundries, they run allocation and so we basically were short of that ASIC. But the beautiful thing is IQ8 uses another foundry from another manufacturer and there is plenty of supply there. So basically, we were able to mix and match IQ7s and IQ8s and were able to support customers. And we were happy that we supported customers. For some customers, we gave them some concessions for that quarter where it -- in your language, it seems like we forced them, but in reality we didn't.

Then in terms of the customer conversion, I've always said, it takes us four to six quarters to convert from 7s to 8s. In the first quarter, of our total shipment of overall microinverters, 20% of them was IQ8. This Q1, I'm talking about. So -- and it's just math. As I said, when you take 100%, divide it by 5, that's 20% a quarter. And so next quarter, we roughly expect that. Sometimes it may take five, sometimes it may take six sometimes it might take four. It depends. So North America, we expect that transition. For Europe, we are going to introduce IQ8 in the second half of 2022. And so that will come with its own transition there. So bottom line, IQ8 is going quite healthy.

[Philip Shen, Analyst at ROTH Capital Partners]

Great, thanks. One very quick follow-up on EU, you already talked a lot about it, but wanted to see if there is potential for a new line beyond the one you've already talked about, which is 750,000 units per quarter by year-end. When do you think you might make a decision on yet another line in Europe?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, I mean is easy for us. Now we -- once we have Flextronics, great partner, by the way, we have a great relationship. We started -- we are starting with an auto line that 750,000 units. And if we think we need more, it only takes us three months. We are now very experienced, we know all the puts and takes it takes to order an extra or two line. So if we need it, we'll pull the plug on ordering it. So we are not worried about that. And what's interesting is and what's exciting is our demand in Europe. I mean this quarter, like what I said, I think we'll will ship more than 40% compared to last quarter. And we are very excited about Germany, Netherlands, like what I talked about.

[Philip Shen, Analyst at ROTH Capital Partners]

Great. Thank you so much.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Brian Lee from Goldman Sachs. [Operator Instructions]

[Brian Lee, Analyst at The Goldman Sachs Group]

Hey guys, thanks for taking my questions. Badri, just on the new battery, I was curious, it sounds like it's going to be higher gross margin than the current battery product you're shipping into the market but it also sounds like lower cost. So, are you going to be in a position in 2023 when you're shipping the new battery, to be more aggressive on price? So you're driving both volume upside as well as margins on the new battery. And then also similar to how you give us the progression of new generations like IQ8 versus IQ7, any sense of how much of your mix you would target for the new battery in '23 versus the current generation?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, the -- good question on the next gen battery. That's the little bit out. So it's probably too early to give some numbers out, but the idea is generally that. Meaning, today we have a extraordinarily, meaning that the situation is extraordinary in terms of inflation, supply chain, et cetera. It's not going to last forever. Eventually, batteries need to come down the cost reduction curve and this provides us -- we are healthily placed there because we are reducing the fundamental cost structure of our products. And whenever you reduce cost structure, you basically integrate, you -- instead of seven boards, you have one board, that's all goodness. So it depends upon the situation at that time. But you're right, we may use it for market share gains while still retaining a healthy gross margin. And it will -- once we come to that, we will make a decision.

And with regarding the next battery, I mean there is no reason why that cannot follow a similar process like the microinverter. In fact it can be accelerated. If it provides a lot of benefits for customers like form factor is quite less and other things, we may be able to do the transition in two to three quarters instead of four to five. So we've got to get there first, we've got to make sure our product is -- new product is released, and then I think our plans will get more front.

[Brian Lee, Analyst at The Goldman Sachs Group]

Okay, that's super helpful. And then just my follow-up on Europe. I know there's a lot of questions on Europe, but the 40% growth sequential here for for 2Q is quite robust. Is some of that a function of, I know that of our reseller market, are you kind of filling in the channels that you're newer to some of these markets and that's the big growth. And so how does that translate to kind of what do you think sequentially is sustainable through the back-half, like can you keep growing in Europe at those rates, or is this kind of a big first quarter fill-in and then things start to moderate? Thank you.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, I mean that's a good question as well. Is it you're filling the channel for the first time, is your question. That's relevant for new markets. Usually, we are very disciplined in filling the channel or not, and we always look at point of sales. Point of sales means regardless of what we ship from Enphase to a distributor, are the installers purchasing from the distributors. We have a very meticulous meeting, meaning review every week where we look at point of sales in Europe by country, by distributor. We look at that. So there may be a little bit of creating a channel in some really -- regions where we have never shipped before, but that's not the primary reason. The primary reason is, especially for countries like Netherlands in general booming solar, for countries like Germany, especially considering the Ukraine situation everybody wants to go towards self consumption. And so basically solar plus storage there. So these are the biggest markets by large and and of course closely followed by Italy, where the government is making it very easy. And all of these three regions, yeah, actually, Italy, you can argue that some of the channel thing is there, but at least in Netherlands and Germany we are -- we have been present for some time. So I would say more the robust growth. Of course, we cannot say whether we are going to grow every quarter like that, but we'll give you -- we'll will do the same thing next quarter. We'll talk about about the third quarter. We'll take it one quarter at a time.

[Brian Lee, Analyst at The Goldman Sachs Group]

Alright. Thanks a lot. I'll pass it on.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Colin Rusch from Oppenheimer. Your question, please.

[Colin Rusch, Analyst at Oppenheime & Co. Inc.]

Thanks so much. And guys, can you just give us a sense of where channel inventories are right now? I'm curious to understand a little bit both in the U.S. and Europe how much of the guidance is really channel fill at this point?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Historically, I've always said that reasonable channel inventory is 8 to 10 weeks. And we don't usually quantify it every quarter, but that's a healthy inventory. U.S., I would say, is quite healthy. Europe, I would say it's a little bit less in terms of channel inventory, and they need product and that should be obvious because of the demand increase.

[Colin Rusch, Analyst at Oppenheime & Co. Inc.]

Great. And then the change in the Battery volume. I guess I'm curious what's driving that change? Is there some cost reduction driving that, is there an issue at the installer level in terms of placement of that but just the logic and kind of the purpose of that change and how quickly we can see that shift in all the product that's out in the field?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

I mean the logic is we release new products and new products get better and better over time. So as simple as that. We -- today our battery basically does 3.84 kilowatts of continuous power for 10 kilowatt-hour battery, and 5.76 kilowatts of peak power for a 10 kilowatt-hour battery. And very often when you have air conditioners, and then when you have pool pumps, et cetera, what you do, the tendency is to buy a lot more kilowatt -hours to solve the kilowatt problem. Now with this, we don't need homeowners to buy kilowatt hour just for the heck of it -- for solving a power problem. Of course, if they needed for energy, they need it for energy. But at least what we did is right now with the high power battery, which is going to be released in the second half of this year, we will be able to support 7.68 kilowatts for a 10 kilowatt-hour battery, continuous, and something like 11.0 something kilowatts peak power. So we'll be able to start some really nice loads with a 10 kilowatt-hour battery, for example. And so that's the customer experience thing.

And of course when we did the design, what we said is, okay, our previous modularity or batteries that we are shipping today have a modularity of 3.3 kilowatt-hour. These new batteries, if we have a modularity of 5 kilowatt-hour, then you can amortize our overhead, what I call is anything other than the cell pack over a higher kilowatt hours. So that gets better. So cost gets a little better, manufacturing cost, and then you go to the next generation, which is in next year 2023, is, we talk about transforming the overhead to something that is -- was a lot to something that's very less, seven boards go into one board, which is integrate -- integrate power conversion, integrate battery management, all into one board, and making our microinverters a high power microinverter. And that microinverter will be like approximately a 2,000 watt microinverter. A single board. And that single board can be on the side of the cell pack. So you can see a drastic volume reduction of 40%.

[Colin Rusch, Analyst at Oppenheime & Co. Inc.]

So really helpful. I'm sorry to interrupt your answer, but yeah, I appreciate it.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah.

[Operator]

Thank you. Our next question comes from the line of Kashy Harrison from Piper Sandler. Your question, please.

[Kashy Harrison, Analyst at Piper Sandler Companies]

Hi, good afternoon. Thank you for taking the questions. So first one from me. There has been just broader concern in the market about a economic deceleration entering Q2 and beyond just globally. You've already highlighted a meaningful 40% sequential revenue growth in Europe. So we know demand is rocking and rolling over there. However, I was wondering if you could just give us a sense of what you're hearing from your customers in the U.S., specifically in April. I'm trying to get a sense if you're seeing any signs of deceleration in U.S. Resi demand in April, or it seems like demand is still strong within the U.S. based on your most recent discussions.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Okay. Yeah. Demand is very strong in the U.S. As simple as that. And we -- that's why we told you that our demand is well north of our higher-end of guidance. And it is broad based. We work with a number of installers of all shapes and sizes. We work with long-tail installers, we work with big installers, and everywhere the demand is up. And we are continuing to take market share in the U.S. So that's good. And then you talked about Europe. So those two are the biggest for us.

[Kashy Harrison, Analyst at Piper Sandler Companies]

Yeah, that's good to hear. And then maybe just switching gears to the battery side, you said you're adding a third battery supplier in the second half of the year. Can you talk about how much capacity you are adding? And then are you adding the third supplier, because you anticipate demand up and beyond what you're suppliers are capable -- currently capable of delivering, or is this more of an attempt to get down to that 8 to 10 week target of lead times as opposed to where you are right now at 14 to 16 weeks? And that's it, thank you.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, I mean we are adding a third supplier. And when we actually add it, I will provide more details on the capacity, but I have no doubt it will be comparable to the others. Then in terms of the motivation to add it, it's all of the above. We have noticed -- I mean, we have realized that based upon the last couple of years on supply chain for the microinverters, there are some products that we need five suppliers. And they are critical components. So like that, the batteries are very -- the cell pack. If we don't get cell packs, we are dead. So more number of suppliers, it helps us in terms of -- yeah it helps us in everything, price negotiation, it helps us on supply, it helps us on delivery, it helps us on volume. So it helps us an upside. So this is a long-term strategy. It's got nothing to do with the short-term. And we'll continue to add -- this this supplier is also based in China and we will continue to look for diversification opportunities elsewhere, outside China. That's a top priority for me. But right now, all of our three cell pack suppliers are in China.

[Operator]

Thank you. Our next question comes from the line of James West from Evercore ISI. Your question, please.

[James West, Analyst at Evercore ISI]

Hey, good afternoon, Badri.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Hi.

[James West, Analyst at Evercore ISI]

So you've made several acquisitions that are going to strengthen your installer platform, including the SolarLeadFactory, I guess was the most recent one. Is the acquisition phase here done? And then could you talk about the integration of these businesses and how quickly you can get integrated product out to the installer base?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah. The installer platform has got a few elements to it. Lead generation and management, number 1; design and proposal, number 2, with the connectivity to the fintech patents, that's number 2; number 3 is permitting; number 4 is installation and commissioning.

[James West, Analyst at Evercore ISI]

Right.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Number 5 is monitoring, and number 6 and is operations and maintenance. So we have made acquisitions on lead management through SolarLeadFactory. They -- very healthy business, profitable business. They work with about 10 installers mostly, 90% of the revenue comes from 10 installers. They are very competent in lead management. Those installers love them. The name of the game for us is to take that business, generate lot more leads, increase the quality of leads, make sure those leads have a very high conversion rate into actual installs and kind of make sure we we proliferate the long take. So that's the name of the game on the first one, lead generation and management.

Number 2, design and proposal. We bought a company called Solargarf in January of 2021. The business is doing quite healthy. I would say this quarter that business will do 50% higher than one year ago. And essentially the business services 900-plus installers right now. But that design too lacks shading capability, lacks 3D, lacks storage modeling, which we are all fixing. We are fixing right now we are, we are piloting that we are going to introduce it to many more of our installers and all of them are waiting for it. And it's an opportunity for them to utilize that that platform there. Also another important thing is Solargraf, or software, that software has got connectivity to various fintech partners. So that's important, ease of access of fintech partners is very important for our installers. That's 2. So that business doing well. We have lots of plans for it, we are going to introduce these new features, we are going to become the best in class there. And we are patient, we don't expect miracles. It's a steady progress.

Now, number 3, permitting services. We have a team in Noida, approximately 80 installers. We -- the volume that we do is a lot there, we almost do proposal and permitting services. Meaning an installer say, generate this proposal for me, I don't want to use this software, just generate this proposal for me. Or, here is the details of the proposal, I want a permit plan set from you in 24 hours. So we have a large team there, 80 installers doing very well. Again that revenue is ramping quite nicely, very profitable. There, the name of the game for us is automate the permit plan set so that we can reduce the cycle time from hours to minutes and we can service the long-tail well with highest quality. That's permitting services.

Now installation, and commissioning is what we do for a living. Monitoring is what we do for a living. We have over hundreds of manyears invested into the installer app and the monitoring app for homeowners. So we are continuing to make that better and better and better. We are still not happy with our commissioning on batteries, like what I indicated. And that's a major goal for me. It's got a lot of points for me. And we are going to make that better. So -- but we don't need to buy a company for that. We already have homegrown efforts for the last several years.

The last one is the new one that we bought end of December. And that one is probably the most amazing of them. The concept being -- it's like an Uber for an installer or Uber for an asset manager. Basically, if I have a problem with a particular asset, I -- and I I've already charged the customer for an O&M contract and I'm short of labor which happens all the time, we can -- the platform can basically find -- the platform is the labor market place for you. There are about 300 installation companies which are logged into the platform and when you as an asset owner or you are a service provider, want to service a particular asset, but you don't have the manpower to do so because your crew is busy on new installs, you then log into the platform, submit a work order, it automatically gets routed to the next labor service provider who is free, and there is a match that happens and Enphase gets paid for at both ends of the platform as a software fee. And that's the newest of them all, which we need to basically -- we need to introduce that company to our installers but we will not do that unless they have a -- the software is high quality, the platform is high quality, we have enough number of service providers on the platform. So those are the aspects we are working on in terms of O&M.

So I gave you a very long answer, but the way we think about it is -- and all of these are coming together. We are stitching them all into a seamless flow. Some are basically less mature than the other, but all of them are geared only one thing: making installers' lives simple.

[James West, Analyst at Evercore ISI]

Thanks, Badri.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

I'll stop.

[James West, Analyst at Evercore ISI]

That's great, I appreciate it, Badri. Thanks for the answer. I'll turn it back.

[Operator]

Thank you. Our next question comes from the line of Maheep Mandloi from Credit Suisse. Your question, please.

[Maheep Mandloi, Analyst at Credit Suisse Group]

Hey, good evening, and thanks for taking the questions. Badri, you have a very large installer network, in the U.S. and have access to most developers and installers. Is that something you could do to help installers with procuring these solar modules in the short term to ease some of these issues in the supply chain we are seeing in the short term?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

No, we are not in that business. No.

[Maheep Mandloi, Analyst at Credit Suisse Group]

Got you. And just two other questions from me. Outside of Europe, how fast is the international business growing in Q2? And how should we think about the, the $1.1 billion of cash use this year in terms of M&A or buybacks? Thanks.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, I mean, we made five acquisitions in the last 15 months, all of them are small ones, but they add up. And the mixed -- so what are our priorities for cash. We have $1.1 billion, as you noted. Our first priority is to obviously take care of the needs of the business, make sure we have plenty of cash for working capital, make sure that we make the necessary capital investments on the software side, make sure we invest in anything on batteries that we need. So take care of the current needs of the business. That's number 1.

Number 2, we do have a lot of interesting ideas, interesting pipeline in terms of mergers and acquisitions. And obviously, we are rounding out the digital platform and we are looking at energy management. Like what I talked about, Germany is leading the way in every home having solar, storage, EV, heat pump and other home loads. And effectively managing that requires a lot of software talent. And a lot of software, including buying companies. And because the market in Germany is reasonably mature. Like for example, not all systems may use Enphase. Enphase -- actually solar. Some may only use Enphase storage, might have third-party solar, might have someone else's EV charger and somebody else's heat pump. But Enphase has come to the party -- Enphase needs to come to the party by having the comprehensive energy management software that aggregates all of these together and presence, the single interface to the homeowner. That's extremely important. That's what I call interoperability. So we are going to do that. So that requires heavy investments in home energy management, which we are prepared to do. So, including considering acquisitions.

Of course we got into EV, EV charging we think most of charging is going to be done at home, 80% of charging is going to be done at home. So we are always looking forward networking opportunities on EV chargers that enable -- that basically enable dynamic access, which is both inside and outside the home. So we are looking -- we're always interested in software companies there. And new technologies, where are we interest, batteries are something that we are always and also looking for, how can we reduce costs, increase performance. Those are the areas where we will double down. So once we look at that, make sure we have enough cash for the M&A pipeline, and then we look at, okay, if we still have cash leftover how is our, what's the current share price, how is the current share price, and is the share price below a conservatively calculated intrinsic value. And it's nothing more than taking a page from Warren Buffett's book. We do exactly what he recommends and it just makes sense for us. So we did -- for example, last year we bought back -- mainly we bought back 3.2 million shares. We bought back 3.2 million shares last year, bought back at $155 a share. And if the share price goes down, we will consider opportunistic scenarios like that to do more buyback, provided number 1 and number 2 are taken care of.

[Maheep Mandloi, Analyst at Credit Suisse Group]

Thanks for the answer. And just quickly on the other part, on international business growth in Q2?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Internationally, the biggest is Europe. The other area that we are working on, as I said, Brazil is something that we are very excited about. I haven't talked about it too much, but we have an outstanding guy running Brazil. We have a very strong team and I think it's a matter of time before which we start seeing meaningful revenues from Brazil. And they are going to get the IQ8D variant of the product, which will help them on the cost structure. That's pretty soon. Other than that we are ramping up on Australia. We have not introduced a storage yet in Australia, which we are working on. And they should have their storage in the second half of this year. So that will provide them some growth. And in addition, we are now focusing on other Southeast Asian countries as well. All of them are small efforts and when they become meaningful, I'll talk more.

[Maheep Mandloi, Analyst at Credit Suisse Group]

Awesome. Thanks for the answers.

[Operator]

Thank you. Our next question comes from the line of Joseph Osha from Guggenheim Partners. Your question, please.

[Joseph Osha, Analyst at Guggenheim Partners]

Hello, and good afternoon. Two questions for you. First, just looking at your installer network and hearing from different sources that just simple labor availability for the install process has been a bit of a challenge. So I'm just wondering if you can comment on feedback that you're getting from your network?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, you're right, I mean, the demand is quite high. The demand is very robust, like what I pointed out. So installers are always looking for skilled labor. And when I say skilled, electricians are in a very hot demand. And then there is a technician which is slightly below electrician. So Labor is in hot demand.

[Joseph Osha, Analyst at Guggenheim Partners]

Are you -- is that gating the ability of your dealers to get stuff done at this point, do you think?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

I mean, from our case -- you saw our guidance, you saw our demand. I'm sure they can do even more but yeah right now they are limited. That's right.

[Joseph Osha, Analyst at Guggenheim Partners]

Okay, fair enough. And then the other question. We've talked a lot about M&A, but in particular as regards grid services, right, aggregating and bidding assets in the frequency regulation markets or what have you, that's pretty challenging. I'm just wondering if you feel like the current skill set you have inside Enphase is sufficient or if that is perhaps one area that you're inclined to do additional shopping? And that's it from me, thank you.

[Raghu Belur, Chief Products Officer at Enphase Energy]

Yeah, grid service is really is focused on providing capacity, not necessarily frequency regulation at this time. That really is for front of the meter type applications. So we are focused on the residential market. And if you look at all of the grid services programs that we participate in are really focused around that, which means that during the period of stress, typically are on -- when the grid is stressed between 4:00 PM and 9:00 PM, the batteries get a signal to discharge the batteries for the duration of that period. So we really are focused on that market. We have a very strong team, they are doing some very interesting work in how to enable utilities to provide this service very easily. We also have a very easy way for the homeowner to sign up for these programs through the app. So we have a very strong team, both on the battery side to enable the battery to discharge, the homeowner site for the homeowner to sign up simply, as well as a platform or a grid services manager, as we call it, where the utilities have very clean, a very simple, acts as one view access into all of the assets that are available to them. We of course work, in some cases, with the utilities, but we also work with aggregators. And in that case we provide them with APIs and API access for the entire fleet to allow them to discharge the battery. So yeah, very strong team. As you can see, we have made significant amount of progress with this team and they're developing very strong tools and products to meet the requirements.

[Joseph Osha, Analyst at Guggenheim Partners]

Okay. Thank you very much.

[Raghu Belur, Chief Products Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Eric Stine from Craig-Hallum. Your question, please.

[Eric Stine, Analyst at Craig-Hallum Capital Group]

Hi, everyone. Maybe just on the IQ8D, you talked about it a little bit, but maybe if you could expand on expectations for the ramp here throughout 2022. And then, just curious, I mean what percentage do you think C&I can be of your business if you look out three to five years.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, I mean so remember this IQ8D only addresses the small commercial market. The small commercial market in the U.S. is we are talking about at a time, maybe a little more than a gigawatt. And we are talking about small schools, churches, hospitals -- small hospitals, gas stations. And when I say a small commercial, that means 20 kilowatts to 200 kilowatts. So we think our microinverters can be extended there with the use of IQ8D. Having said that, we just are getting started. We are piloting with about, I would say 10-plus installers. And if the pilots go well, which we will find out in the next few weeks. We always make some changes, we always find issues invariably. We basically will do some tweaks, modifications and then we will release the product to production. We expect that to happen in this quarter. And then onwards, it is a business that will take some time to develop, but we are confident with our principles, quality customer service, our rapid shutdown capability, our easy-to-use product, that this will get good adoption. And first, we will start off with North America, the market size, I mentioned was primarily North America. And then we will extend it to other regions as well. And if we are successful and success means that we are like residential where we can capture significant share, and then we will look at the next follow on, which is the real commercial market. For that we need a 480 product basically.

[Eric Stine, Analyst at Craig-Hallum Capital Group]

Okay. Thank you for that. Thank you. Our next question comes from the line of Sophie Karp from KeyBanc. Your question, please.

[Sophie Karp, Analyst at KeyBanc Capital Markets]

Hi, good afternoon. Thank you for your time. Couple of questions, I have. So, you mentioned the whole home electrification and obviously you've been making acquisitions from the lines of, you know, you have an inverter product and storage and now you -- with ClipperCreek, you have EV chargers as well. And you mentioned heat pumps a bunch of times. So just kind of wondering if there is something that could make sense for you to add as the time progresses, to your technology package. How should we think about that?

[Raghu Belur, Chief Products Officer at Enphase Energy]

Yeah. Hi, this is Raghu. So the way we think about it is, we have the technology, energy management technology platform and its role is to manage a whole family or disparate set of distributed energy resources. So we obviously do solar today, storage, we manage the grid, we integrate generators, and now we are integrating EV chargers as well. We are -- by making the EV charger very smart so we can do green charging, but there are other elements also that we need to integrate. And that's -- those are heat pumps. Obviously, we will not be selling heat pumps, but our goal is to develop -- either develop or buy companies that can through software, integrate all of these other heat pumps et cetera, and other loads as well, and effectively bring them onto the platform. And when we bring them onto our energy management platform, we can then manage how the loads get services, what's the most economical, what's the most reliable and what's the most green way of servicing the load. In the case of EV, for example, if the homeowner may choose that I only want to charge my car through green electrons, which is obviously the first choice would be your own solar system, or if you get a signal from the grid that says a grid is green at this time, then you can charge from the grid as well. In general, it's about managing all of these different type of resources and we'll do that with software, primarily. And you are seeing is a lot of standardization, that's starting to take place where all of these different kinds of loads, different types of heat pumps and different types of EV charges, et cetera, are starting to adopt certain standards. And those standards will make it easier for us to integrate them onto our platform.

[Sophie Karp, Analyst at KeyBanc Capital Markets]

Great. Thank you so much. This is very helpful. And my other question was maybe taking another stab at the supply chain situation, as you have managed the supply chain, much better than your peers and competitors. Not just your competitors, but other companies in other sectors, the large ones at that. What sets you apart, what makes you more or less immune to these trends at this point? I guess is that the fact that most of the component you use are more specialized and there is less competition for them from maybe bigger industries? Is that just the location of where the manufacturing facilities are? What should we think about here?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

I mean, to tell you, you're giving us a lot of credit. Last year, we didn't -- we had a supply problem last year in 2021. And what we learned from that, the learning is what can we do. For critical components, we need to have multiple sources. How can we plan better, for critical components, how can we make sure of that short-term disruptions, we know there are always going to be short-term disruption, how can we smoothen all of those into what's right for the customer. So, we have just learned to plan better. And I think planning better and executing on multiple factories, multiple sources, and it also helps that we don't have a lot of SKUs. We -- the way we design is one single piece of hardware with -- we try all our microinverters have one single piece of hardware. And then -- so that every region, we can load the appropriate grid profile and software so that that can get functioning. And that way we don't need to make one SKU for one country. We try. And it's hard to do, it's hard to reduce the number of part count. Many companies bloat up on part counts. But again, I think with the software defined architecture that we have, it helps us a lot. So to answer your thing, it is upfront product architecture, diligent supplier management, qualification of multiple sources, planning better and some look too. Yeah, hopefully, we have had -- hopefully, luck is on our side. We don't know what's going to come tomorrow in terms of COVID disruptions, but I think it's safe to say that we anticipate and we are prepared for it.

[Sophie Karp, Analyst at KeyBanc Capital Markets]

Thank you so much. It's all coming.

[Operator]

Thank you. Our next question comes from the line of Cameron Lochridge from Stephens. Your question, please.

[Cameron Lochridge, Analyst at Stephens]

Hey, thanks for squeezing me in here, guys. Good afternoon.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Hi.

[Cameron Lochridge, Analyst at Stephens]

Well, I was hoping we could start just very quickly on this Department of Commerce investigation. I understand this is on modules and this is not where you guys play, but you mentioned residential is like a little bit more insulated from any effects of this, it sounds like your customers are working on module procurement for the second half, if you could just offer us any kind of framework for how you're thinking about the potential impact, if any, to your business in the second half, or even if you want to take stab at it this way, if you think about your outlook for 2022, how does it change now versus what it may have been three months ago?

[Raghu Belur, Chief Products Officer at Enphase Energy]

You know, really we are not -- as we sit here today, based on all of the discussions that we have had with our customers, based on what we see out in the marketplace, we don't see any impact on our business. Obviously, we are expecting, and we have heard that module prices are going up. So, in our opinion, can those module prices -- increase in module prices be absorbed by the residential customer? And we believe that magnitude of module price increase that we are seeing, can easily be absorbed by the customers. So our opinion is that we won't see any impact on our business. And also bear in mind that most residential systems are financed systems. So what the homeowner actually sees is a small increase in their monthly payment. And we believe that those monthly payments are not going to be larger than what the utility rate increases that they are experiencing. So all of those things point to the residential segment that is probably going to be much more resilient segment than any other segment.

[Cameron Lochridge, Analyst at Stephens]

That's great. That's very helpful. Thank you, Badri. And then just switching gears to your European strategy. I was hoping you could talk a little bit about your installer strategy there. I mean you've had tremendous success in the U.S. obviously with the long-tail installers. Maybe just talk about, does the same dynamic exist in Europe, is it different -- basically just do you think you can replicate your installer strategy? You've had success with it in the U.S. Can you replicate that in Europe?

[Raghu Belur, Chief Products Officer at Enphase Energy]

Yeah, the same principles hold. If you say U.S. has got a lot of long-tail installers, Europe is even more long-tail. So, Germany, for example, has got 5,000 installers. And I think -- yeah I'm not sure about it, but I was told that a top installer is an installer who does approximately 10 to 20 megawatts a year. So basically, the same definition holds, the same principles hold for us as we think those installers will obviously care about quality, care about customer experience. So as long as we do a good job there, good things will happen for us.

[Cameron Lochridge, Analyst at Stephens]

Great. Thanks very much. I'll turn it back.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. Our next question comes from the line of Pavel Molchanov from Raymond James. Your question, please.

[Pavel Molchanov, Analyst at Raymond James]

Thanks for taking the question. Two quick ones about Europe. Obviously, in the current geopolitical situation, all of the frontline states in the eastern portion of Europe are in the headlines. Do you see signs that rooftop solar in places like Poland, Czech Republic, Hungary is starting to develop? And if so, will you be playing in that geography?

[Raghu Belur, Chief Products Officer at Enphase Energy]

Yes, obviously. We do pay attention to the regions and pay attention to opportunities that lie. And we'll continue to do that. at this time, we are very focused on the countries that we talked about. We are -- the market is really expanding very strongly. And in the countries that we are already in, which is Netherlands, France, Belgium, Germany and the new markets, which include Spain, Italy and Portugal, and we need to bring all our products, we need to bring IQ8 there, we need to make sure we have batteries in all of those countries as well. And so right now we are focused on these. But we keep an eye out. We pay attention to what's happening in the country that you referred to.

[Pavel Molchanov, Analyst at Raymond James]

Okay. Last year, EV market share in Europe was 4 times higher than the United States, 19%. Is there room for ClipperCreek to get a slice of that infrastructure build-out?

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

There is always room for ClipperCreek, and the angle is what I said, which is when an installer basically goes to a homeowner and who is even thinking about an EV, there are so many incentives that an installer actually told us, that even if the homeowner doesn't have an EV, I still install and EV charger. So what that means is this: when an installer is there, selling the homeowner solar storage, EV charger, and heat pump, in that sale even can make life better by having a comprehensive home energy management system. ClipperCreek definitely has its place. And so we are planning to introduce an EV charger basically into Europe in Q1 of '23. But in the interim, we are working hard to make our system interoperable with other EV chargers so that the homeowner still gets the right experience.

[Pavel Molchanov, Analyst at Raymond James]

Got it. Thank you very much.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Thank you.

[Operator]

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Badri Kothandaraman for any further remarks.

[Badri Kothandaraman, President and Chief Executive Officer at Enphase Energy]

Yeah, thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Karen Sagot, Head of Investor Relations
• Badri Kothandaraman, President and Chief Executive Officer
• Raghu Belur, Chief Products Officer

Analysts

• Mandy Yang, Enphase Energy
• Julien Dumoulin-Smith, Bank of America Merrill Lynch
• Mark Strouse, J.P. Morgan
• Philip Shen, ROTH Capital Partners
• Brian Lee, The Goldman Sachs Group, Inc.
• Colin Rusch, Oppenheime & Co. Inc.
• Kashy Harrison, Piper Sandler Companies
• James West, Evercore ISI
• Maheep Mandloi, Credit Suisse Group AG
• Joseph Osha, Guggenheim Partners
• Eric Stine, Craig-Hallum Capital Group
• Sophie Karp, KeyBanc Capital Markets
• Cameron Lochridge, Stephens
• Pavel Molchanov, Raymond James