Enphase Energy, Inc. (ENPH) Earnings Call Transcript & Summary

Great. Thank you very much. Hi, everybody. Welcome to the second day of the JPMorgan Energy, Power & Renewables Conference. Thank you very much for joining. My name is Mark Strouse. I cover alternative energy here at JPMorgan. Very happy to have Raghu Belur, Co-Founder and Chief Products Officer of Enphase Energy joining us today. So I will begin our fireside chat with some questions. [Operator Instructions] So with that, Raghu, let's get started. Welcome. Thank you very much for joining.

Thank you, Mark. Thank you for having us in your conference.

Great. So maybe just assuming there's some folks that are new to the story, can you just kind of spend 2 or 3 minutes giving us a brief overview of what Enphase, it's all about?

Absolutely. So we got our start back in 2006. We were 2 guys doodling on a whiteboard about what we're going to do here in Silicon Valley. But going -- and our thesis to begin with was that when we looked at how solar was being done, it was all being -- all conversion was being done in a centralized manner. And our position was and our view was that should all be fully distributed. So instead of having big centralized inverters, we're going to do what's called microinverters. That was one. The second thing that we did was we said nothing should be an inverter by itself. It should be a complete system. So we had a microinverter system. And the rationale behind our thinking was that as technology evolves, coming from technology and being in technology for my entire career, along with Martin, our CTO, was that in the long run, everything moves to a distributed architecture, and it's for cost, performance and reliability reasons. But you have to take a very specific targeted approach to make that a reality. And that is you've got to rely heavily on silicon, semiconductors and software, right? And so when we took the distributed microinverter approach, we built it around a silicon and software core competency and architecture. That was back in the day when we started. And since -- and now here, we are getting ready to launch our generation 8 of our microinverter, probably been through 10 revisions of the ASIC itself, the chip, the custom silicon itself. We have a silicon team, complete systems. And we've gone through as industrial developer -- so as Enphase, has gone through some major product, technology and product transformations. The first one being going from just solar dumb inverters to going -- morphing to -- transitioning to smart inverters. Second, going from unconnected systems to fully connected systems. And now we are in the midst of our third major transformation, both industry and, of course, Enphase as well, where you're going from solar to energy by attaching energy storage to the solar system, by combining solar and storage. And now basically -- making people completely self-sufficient or self-reliant by -- they become their own -- they become prosumers, they produce their own energy they store the energy that they produce. And then they consume it at a very efficient manner. And that requires complete system experience, system knowledge as well as a lot of software.

Okay. Great. Okay. So I've got a bunch of list -- or a bunch of questions that I had prepared for this session. Given what's kind of occurred in the stock today. I just want to spend a few minutes addressing that, though. So there was a short report that was published today. It's, as far as I know, an analyst that put out another report a couple of years ago. It's obviously impacting the stock. I've had an extremely busy day responding to investors. I know that you've been busy with meetings, but you -- and you probably haven't seen the entire report. Can we just kind of go through some of the points that were made in that report there? So I think the first thing was -- my summary, anyway, of it is the first thing was about the potential view of channel stuffing, right? And then if you look at the megawatt shipments that Enphase reports every quarter, it has been higher than what some of the third-party installation figures would show you from like a Wood Mackenzie, for example. What's Enphase's response to that?

Sure. Yes, it's unfortunate that these kind of reports come out and yes, this exact company, I believe, put one out a couple of years back, and that's when the stock was at $5. And I think just like back then and now the claims are more outrageous. As far as the channel is concerned, we manage the channel extremely carefully. So we have very strong business process to manage the channel. We have what we call -- we track very closely everything from what -- of course, what we ship in. We track point-of-sale data. So what comes out of the channel, and we also track activations because, as I mentioned earlier on, our product is a fully connected product, and we have an always connected policy as well. So all systems are connected. So we make sure that the channel is extremely closely tracked. It's not in our best interest to stuff the channel. We don't stuff the channel in that sense. Now if you look at, as we have gone through, the company -- we've been growing at a very fast clip. You saw what happened from '18 to '19, and even into Q1 of 2020 and then corona. And as Badri mentioned, even on the call, we are very conservative when it comes to how we deal with the channel. And he mentioned that on the call, our midpoint of guidance -- actually, the bookings that we have exceeds -- the midpoint of our guidance exceeded. And yet, we are cautious about how we guide and we were very transparent about it. And we track it very closely. The whole point being that we want to make sure that we come out of Q2, which is kind of with COVID Q2 and come out into Q3 in a very healthy manner from a channel point of view. So it's very strong business process, very well tracked, very carefully tracked. We don't do things like stuffing and stuff like that.

Right. Okay. And then the next subject was kind of "accounting irregularities." And Raghu, you are the Chief Products Officer. I'm not interviewing the CFO here. So I understand you may not be able to answer all this, but just questions around recognition of deferred revenue, kind of the timing of when the finance and accounting organization was outsourced to India, kind of correlated with the ramp, the huge ramp that you've had in revenue. And so some accusations of some false doing there. Just any thoughts that you might have?

Sure. Obviously, I mean, it's kind of -- I don't even know where to begin. It's kind of so bizarre. The fact is that the entire finance leadership is all here located here in the Bay Area. We are a global company. We have got -- just like we have development offices locations all over the world. We've got offices in -- we have people in Austin, Petaluma, Fremont, New Zealand, Bangalore, everywhere. We do a lot of engineering work there as well. And it's part of rationalize -- making -- being very efficient from an operational point of view. Some part of the accounting, of course, went there, but the core -- went to India as an example. But the core leadership, CFO, the Chief Financial Officer, the Chief Accounting Officer, they are all here located here in Fremont. So this notion of -- or it was outsourced, there's nothing -- they're all Enphase employees, too. So it was -- outsourcing is kind of a mischaracterization. That was your first question. Your second question was around deferred revenue. The fact is we sell hardware-software together and accounting rules, we have to recognize the software portion of the sale over, I believe, 6.5 years. So you do see that we recognize it over that 6.5-year period. So that's what is getting deferred. In fact, deferring means you're actually going to get it pushed out, not recognizing everything upfront. So I still don't -- I don't get that logic either.

Okay. And then I think the last point that I'd like to bring up is just on the recent insider selling. We always say, there's one reason to buy a stock and there's a million reasons to sell a stock. So -- and you're kind of speaking for other people here. But just your view, I think that some of the -- T.J. Rodgers, who's had a big stake in the company for the last few years, and then one of your top holders recently sold some stock as well. Any thoughts you might have?

Yes. They all came in. And we're very thankful for when they came in. They came in when the stock price went -- they took a lot of risk, right, when they came in and the stock price was extremely low at that time. I believe, when T.J. came in and when the other investors came in, we are like low single digits. I believe somewhere in that range is when they came in. Look at what the return has been 30, 40, 50x, right? And so it's risk reward at that point. So you're seeing them taking -- recognizing the reward from the risk that they took at the time when they entered the company. And so I think the company is -- different investors come in, different risk profile, and I think it's a very -- my view is it's a very natural progression as we -- as the company grows and starts becoming bigger, right? So I don't see that as anything.

Okay. Well, thank you for that. So coming back to things that might be more near and dear to your heart. Can you just talk about the secret sauce for your microinverters? So Enphase has been disrupting the traditional inverters. Inverters have been around since the beginning of solar, right? And you've been disrupting those big companies. A lot of them have tried to get into the smart inverter space. Most of them have failed. So what is it that differentiates you?

Yes. When you think about -- first thing is -- trying to think about guideposts. Like I said, everything, if you look at technology in the long run, moves to a decentralized or a distributed architecture. If you look at what happened with your smartphones. If you think about what happened with mainframes to PCs. If you think about even data centers where thousands and thousands of blade servers instead of monolithic computing machines. All of that shows that everything goes -- becomes decentralized or distributed. And the reason for that is cost, performance and reliability. But if you look at all of those examples that I gave you, there is a common thread that runs through all of them, a couple of common threads. One is silicon or semiconductor, and software. And that is, I think the -- really, the core element of what's made Enphase successful is the choice of technology and -- architecture and the technologies that we have developed around it. So going distributed, and going to the -- move it and build it in the digital domain, so you can rely heavily on silicon and semiconductor integration and write a ton of software, too. So our entire system, every element of our system is software-defined. And that gives us incredible amount of leverage. Let me give you an example of that. First is just improved -- significant improvement in just raw performance of the devices themselves, right? Things like if you look at all the requirements for advanced grid functions, inverters are not dumb boxes anymore. They've all become very, very sophisticated. Things such as advanced grid functions, we do all of that in software. We have taken it to the extreme when you think about software in that we build one piece of hardware. Regardless of whether that is a connected to a 60-cell panel or a 72-cell panel, 66-cell panel or a 96-cell panel. We -- the difference in hardware is absolutely minimal, right? We build, again, one piece of hardware regardless of whether that's installed in the U.S., which is line 240 volts, line-to-line 60 hertz. Or in Europe, 230 volts, 50 hertz line to neutral. We also build the same piece of hardware, whether it's on the roof, behind the solar panel or inside your battery because we -- our inverters are fully bidirectional. And you can imagine, operationally, how much leverage that gives us. We make one piece of hardware, and we made 2.5 -- 2-plus million of those in Q4, and again, in Q1. So when you think about the secret sauce, it's everything from picking the right architecture so you can build incredible amount of technology. We have 300-plus patents. Silicon, software and then all of the operational efficiency and leverage that we get from picking that particular approach. And now applying that approach, which we did for solar, applying that to energy storage and energy management in general. And that's kind of the third big invention in our mind, which is ensemble the technology, which is the energy management technology for solar plus storage.

Yes. Okay. So can you talk about the product or solution road map over the last few years? Clearly, since Badri joined -- I mean this was actually part of the short report as well, just the monumental expansion that you've had in gross margins and being able to bring your costs down, Chief Product Officer. I mean how have you done that?

Yes. So multiple things here, right? So when you think about gross margin, pricing and costs. So let's tackle each one. From a pricing point of view, when -- we actually have a complete pricing team. We have a business process around pricing. We have a VP of pricing. So we take -- we are very diligent about how we manage our pricing on a by-customer basis. But more than that, even from a product point of view, we also created segmentation, right? Just I had mentioned, Mark, when we got IQ 7 out, unlike even IQ 6, IQ 5 -- the M series to IQ 6, which is when Badri joined in the beginning of 2017, we had launched IQ 6. That in and of itself was a pretty big transition from a cost point of view because we made a lot of changes from -- going from M series to IQ 6. And then when -- when Badri joined and then we lost IQ 7, we did segmentation. That means we launched at the time 7, 7+ and 7X. And subsequently, we launched 7A as well. And 7 is 250 watts, 7A is 366 watts. And from a cost -- product cost point of view, it's not significantly different, yet we get pricing segmentation because the power is significantly higher between the 7 and the 7A, as an example. So that's what we did on the pricing side. On the cost side, right, you think about it in terms of supply chain efficiency. Badri talked a lot about it. We worked really hard to make sure we're not single-sourced at all. So we get a lot of leverage. So our [ AVL ] is pretty full. We have multiple vendors on our approved vendor list. So we can get a lot of leverage by doing that. The third is, from an operational point of view, again, is just volume. When Badri first joined versus what we are doing right now, significant difference in the amount of volumes. We are now shipping more than 2 million units in the quarter compared to less than 1 million units -- much less than 1 million units when Badri first joined. And that gives you a lot of operational leverage. And the most important of all is just technology development, right, doing a lot of things within the inverter, silicon integration, bringing more parts -- reducing the parts count by putting more functionality into the inverter, looking at all the components of the system from a product point of view, not just the microinverter, but microinverter connectors, cables, the gateway, the combiner box, everything we attack. There is -- no product goes -- gets away with it. We drive the cost down on everything. So this is real hard work and very smart work in terms of not just on managing the pricing, the supply chain and engineering in order to improve the cost of the product -- the gross margin of the product, both price and cost.

Right. Okay. Can we talk about energy storage ensemble? Is that still on track for June release? And again, for people that might be new to the story, can you just kind of talk about -- I mean we're seeing all kinds of energy storage solutions being thrown about by -- press releases from competitors. What's unique about your solution?

Yes. We feel pretty good about what we are releasing for energy storage. The really important thing and what differentiates us from most of the people is that when we think about energy storage, actually, we think about it as part of the complete solution. So what we offer is kind of a one-stop shop, if you may, or a complete system. And it's really important, and I'll explain why. So for example, in our case, we do the solar piece, the storage piece, the communications, the software, the microgrid interconnect device. And the whole thing is built on our own platform. So everything will work very seamlessly. In the past, people have attempted to do and still do is, they'll put pieces together, somebody does the solar piece, somebody does the storage piece, somebody may do the interconnect piece, somebody may do the software and communications, and user experience, both for the installer, doing the installation and commissioning as well as the operation leaves -- has left much to be desired. What we are doing is ensuring that we provide the best customer experience. And the biggest difference that we have is that we are a one-stop shop and provide complete solution. Next is that just like what we did for solar, by taking a very distributed approach and distributed approach, like I said, is cost, performance and reliability advantages, we have taken that exact same approach for energy storage as well. So for example, our building block for energy storage is 3.3 kilowatt hours. But it's not just the cell in the cell pack. It's got the cell, the cell pack, the inverter, the charge controller, the communications, the software, everything built in. And it's 3.3 kilowatt hours. So you can scale the system to whatever size you want. So you can -- somebody wants 10-kilowatt hours. They can get that. Somebody wants 13, 16. So our quantization is about 3.3 kilowatt hours. And it's extremely important because not everybody is going to use the same amount of energy storage. I have a 10-kilowatt hour system at my house. Badri's got 16. And I think Eric has got 20-kilowatt hours. So you can rightsize your energy system to your application. Reliability is a very big deal, just like we are fully distributed architecture on the roof. And if you have -- if one inverter or one solar panel dies, the rest of the system continues to operate, the exact same approach is in the battery as well. So if you look at a 10-kilowatt hour battery, it's got 12 microinverters embedded in it. So if you do lose one, you lose about 8% of your -- 92% of your system is still operational, right? It's a very big deal, especially when you're doing mission-critical stuff with storage. And if you have an outrage, the last thing you want is your inverter to die and your entire system is dead. And from an installation point of view, when you have such a modular system, it's very, very simple to install. Just -- it's 2 people just hang it on the wall regardless of the system of size. They're using -- whether you're doing 3.3 or you're doing 30-kilowatt hours, it's 2 people hanging these devices on the wall and just connecting AC. And finally, safety, right? We use lithium iron phosphate for our chemistry, and lithium iron phosphate arguably is one of the safest chemistry. Lithium chemistries that are one of the safest ones out there, also has better performance. We have no high-voltage DC anywhere in our system, just like with solar. We have low-voltage DC. We use the exact same topology inside the battery as well. It's also low-voltage DC. So I think -- so everything from performance, reliability, simplicity, safety, our approach is very different. Of course, the most important thing being that it's a -- we are a one-stop shop. We provide the entire solution. And so what that also means from a share of wallet point of view, right, now we are looking at a homeowner who was -- our share of wallet for the homeowner was about $2,000 per home because there was about 20 micros, $100 per micro on average. You get to about $2,000. And now here, we are providing the complete solution, which means that about $800 a kilowatt hour on average, 10-kilowatt hour being what a typical home will have. You're looking at $8,000 plus $2,000, plus a little bit more than that for the interconnect device. So our share of wallet goes from $2,000 to well over $10,000.

Yes. Okay. And I missed it. Is that still on track for June or sometime soon?

Yes. Yes. We are on track. We've been running multi days now off-grid not just -- in a real-world situation, all certifications are all good. We're really excited about it.

Okay. Kind of turning to the near-term picture and COVID-19, can you just kind of give an update there on demand? And if we could kind of parse that out by geographic region, if you can?

Absolutely. I think no -- I'm assuming everybody is also hearing about the same things that there are some positive signs that are out there. April -- sorry, April versus May versus June. I think we are all seeing the same positive signs. For us, we actually have -- we are looking at it very closely because we get, like I'd mentioned, the business process around tracking points of sale, activations, phone calls into our customer service. All of the signs are positive as we speak here today -- as we sit here today, excuse me. Now things are opening up. And will there be a COVID 2.0? If it does, then things can change, but I think everybody is in the same boat thinking about that. But in general, we are seeing some really good positive signs. Europe has been actually ahead of the signs here in -- than even in the U.S. and definitely positive signs here in the U.S. as well and in all the relevant and the critical geographies like California, Florida, Texas, et cetera. So you're definitely seeing those signs. And again, I had mentioned earlier on, for us, managing inventory, making sure that we come out of Q2 very healthy from an inventory point of view so that we can take advantage of Q3 is actually also kind of a business strategy that we are employing.

Yes. Okay. So at the Analyst Day that you had late last year, international expansion was one of your main points. That was kind of temporarily halted because of -- maybe not halted but limited because of COVID. Can you just kind of give an update there? Are we ramping back up to where we thought we'd be? And kind of maybe for those that are newer, talk about just broader strokes, which countries you're ramping into?

Yes. So let me answer your first question right away, and then I'll give you the broader picture. Yes, so Europe's definitely, like I had mentioned, doing -- ahead of the U.S. Having said that, I mean, we did actually really well in Q1, we more than doubled our revenue from Q4 to Q1. We had talked about tripling our workforce. We did that. The workforce is in place. It's -- we had 5 people in sales, and now we have more than 15 people there. So -- and I think those are the things that are definitely paying off. We had originally set a target for us at Analyst Day that said we were going to double our revenue 2019 to 2020. We're not giving up on it. It's going to be tougher, given the COVID situation, but we haven't thrown in the towel yet. And I hope we don't, but we're going to fight for it. As far as geographies are concerned, and this comes back to product. And Mark, and I were talking, I have a natural gravitational pull towards talking about products. But again, that software-defined capability of the IQ 7 is really, really critical here because what that allowed us to do was make one hardware platform for all regions, but more importantly, get that same hardware platform adapted to the requirements of different countries. Every country has different requirements, interconnection requirements, in particular, and we could do all of that in software. So that gives us tremendous amount of development velocity and leverage as well, right? So now if you look at it in the past, we were really limited to Netherlands, France and U.K. and Belgium. And today, we added Germany, Austria, Switzerland. The majority of Switzerland. We were in the French part, now we are in the most of -- the rest of the Switzerland as well. Spain, Portugal, Hungary, Poland. So we really expanded the certifications, and we have started putting people in a lot of those regions. That's what we were talking about tripling our workforce. So we're super bullish about Europe, and we are doing a lot of things to make sure that, that happens. Having said that, the ratio is still going to be skewed between -- our percentage of business between U.S. and Europe, and it's because when -- that has been the focus, and now we are bolstering and bringing best practices from U.S. into Europe as well to grow that business. But I think it's going to get skewed more towards the U.S. as we launch energy storage because we are launching energy storage first in the U.S. market before we take it across to the European market. So from a dollars point of view, given just the size of the ticket, we're going to see the percentage numbers skew more towards the U.S. because of storage, but our European business is starting to really pick up as well.

Got you. Okay. And then I think maybe lastly, the -- most of your products or all of your products are residential focused at the moment. There are some, as far as I know, some small C&I customers that use your residential products. But you will have a dedicated C&I product at some point. Is that still on track for 4Q? And can you kind of talk about the business model behind that? Is that a different go-to-market strategy than your resi product? And what do the margins look like pricing, that kind of thing?

Yes. So I'm super excited about the IQ 8D, which is the small commercial product. We are really focused on the small commercial segment, the 200 kilowatt and below. There's a lot of value in that segment. Pricing is healthy in that segment. So that's kind of where we are focused. So residential and then small commercial, which is 200 kilowatts and below. 200 kilowatts would be in any Class A, Class B building, gas stations, convenience stores, churches, et cetera. And people would be doing 20 kilowatt, 50 kilowatt, 200 kilowatt of that order. The really nice thing about the go to market there is it's usually the same installers who do residential also do small commercial. In fact, they've been the one who have been coming in and saying, hey, we need a small commercial product. And we knew this was coming. IQ 8 was coming, and we're going to leverage the latest generation of technology to deliver the IQ 8D. So from a go-to-market point of view and a training point of view, our customers are super excited about it because it's the same customer base that was doing residential also does, for example -- also the small commercial. As an example, customers would -- they may do 50 to 100 installs a month of residential and they may pick up 2 or 3 little commercial jobs which are 20 to 50 kilowatts. So it's a very nice overlap. Second is, from a product point of view, U.S. -- starting in the U.S., it's -- you require rapid shutdown even in small commercial. So the things that they value, our customers value, quality, reliability, customer service, very simple to design, install and maintain, fire safety through rapid shutdown, all of those things that make us very valuable for our long-tail customers in the residential really apply to small commercial as well. So it seems like it is a very natural progression to go from residential into small commercial, and that's what we are doing with this particular product.

All right. And just to be clear, is that still on track for later this year?

Yes. It is on track for later this year, making solid progress there.

Great. Okay. Well, with that, we're out of time. Thank you so much, Raghu Belur. And everybody in the audience, thank you for your questions and for listening in. Appreciate it. Have a good day.

Excellent. Thanks, Mark. Thank you for having us. Goodbye.

Thank you.