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

Good afternoon, everyone, and welcome to Enphase Energy's Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please also note, this event is being recorded. At this time, I'd like to turn the floor over to Zach Freedman with Enphase. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Second Quarter 2026 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today and Enphase issued a press release announcing the results for its second quarter ended June 30, 2026. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply and demand, anticipated growth in existing and new markets, including the TPL market, the timing of new product introductions and enhancements to existing products and regulatory tax, tariff and supply chain matters. These forward-looking statements involve significant risks and uncertainties, and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri?

Good afternoon, and thank you for joining us today to discuss our second quarter 2026 financial results. We reported quarterly revenue of $291.9 million shipped 1.59 million microinverters and 113.8 megawatt hours of batteries and generated free cash flow of $25.9 million. Our Q2 revenue included $84.3 million of safe harbor revenue. We exited the quarter with channel inventory normal for batteries and slightly elevated for microinverters. On a GAAP basis, we delivered gross margin of 60%, operating expense of 42.3% and operating income of 17.7%, all as a percentage of revenue. On a non-GAAP basis, we delivered gross margin of 46.8%, operating expense of 27.3% and operating income of 19.4%, all as a percentage of revenue. Mandy will cover the financials later in the call. Our global customer service NPS was 80% in the second quarter as compared to 82% in the first quarter. Our average call wait time remained approximately two minutes. We also made our AI assistant available to 1.5 million homeowners worldwide. This gives our customers faster access to personalized system-specific support and making their energy systems easier to understand and manage ultimately reducing the number of calls. That's our operations. In the second quarter, we shipped approximately 1.58 million U.S. made microinverters and battery inverters from our Texas and South Carolina manufacturing facilities and booked the associated 45X production tax credits. We also shipped 43-megawatt hours of IQ Batteries from our Texas facility in the second quarter. We offer IQ Batteries that meet domestic content and FEOC requirements, helping lease and PPA customers qualify for a ITC bonus. Let's now cover revenue and regional performance. Our global Q2 revenue increased 3% compared to Q1. Our global sell-through was approximately flat as compared to Q1 as growth in Europe offset the softness in the U.S. Our revenue mix was 78% from the U.S. and 22% from international markets. In the U.S., revenue declined 3% sequentially. The safe harbor revenue increased to $84.3 million in Q2 as compared to $34.5 million in Q1. Excluding safe harbor revenue, the U.S. revenue declined primarily due to us under shipping into the channel. Our U.S. sell-through in Q2 decreased 7% as compared to Q1. Excluding onetime orders in Q1 that did not recur in Q2, the sell-through was approximately flat sequentially. Our Q2 '26 sell-through declined 34% as compared to 1 year ago. In Q2 '25, reflecting continued pressure from higher interest rates and transition following the expiration of the 25D tax credit. Third-party market reports suggest that the broader U.S. residential solar market has stabilized with the industry-wide permits in June, increasing 4% from May and upstream sales activity rising 5%. Both remain about 30% below prior year levels. Higher electricity cost markets are performing better, while several Sunbelt states remain under pressure. The stronger industry-wide signals are for storage and commercial solar. National residential battery attachment remains near 40% with materially higher levels in key markets. While the U.S. commercial solar permit activity increased 36% year-on-year in June. Taken together, these third-party data points suggest that the next phase of U.S. market growth will be shaped by storage economics, the commercial demand, financial availability and utility rates. In Europe, our revenue increased 35%, sequentially in the second quarter, while sell-through grew 30%, with strong performance across both solar and batteries in multiple markets. The growth was supported by higher power prices as well as accelerating battery adoption. As we have discussed, Europe is increasingly becoming a battery led market. As self-consumption dynamic tariffs and VPPs gain importance. The company that owns the battery relationship is well positioned to expand over time into the broader Home Energy System, including solar, EV charging and VPP. In the Netherlands, our battery activations increased approximately 102% from the first quarter as rising export penalties and the planned phaseout of net metering at the end of 2026 strengthen self consumption. In France, lower feed-in tariffs are similarly shifting the market towards self consumption and driving greater interest in batteries, particularly with new solar installations. The battery activations in France increased approximately 34% sequentially. In Germany, the growth was broad-based with both microinverter and battery activations increasing approximately by 35% and 27%, respectively. We are intensifying our focus on battery retrofits in both Netherlands and France, where we have a combined installed base of nearly 900,000 Enphase customers. Building on the success of our initial programs, we have increased the cadence of homeowner events and direct marketing campaigns. Our newly established inside sales team supported by an improved lead management platform is helping convert this demand into revenue. We also showcased our fifth generation battery at Intersolar Munich, where customer feedback was positive, and we expect initial shipments before the end of this year. Let's now discuss our outlook for the third quarter. We expect revenue of $290 million to $320 million representing approximately 5% growth at the midpoint. Our Q3 revenue guidance includes approximately $75 million of safe harbor revenue. We are currently over 70% booked to the midpoint of our guidance. We expect global sell-through in Q3 to increase 10% as compared to Q2. Distributors remain cautious amid broader macroeconomic uncertainty, including interest rates and our guidance assumes modest under shipment relative to sell-through. For batteries, we expect shipments between 130 to 150-megawatt hours as momentum continues to build in both U.S. and Europe. As reciprocal tariffs have moderated somewhat we reduced battery pricing in late March, and we expect to take further targeted pricing actions as necessary to improve system economics and support demand. Turning to safe harbor. We have executed year-to-date agreements with third-party owners, totaling approximately $1.1 billion, $202 million under the 5% ITC Safe Harbor method and $878.6 million under the Physical Work Test beginning of construction method. These agreements provide two important benefits. They secured meaningful multiyear volume for our microinverter and accessory business. And second, they create a strong foundation for future battery attached opportunities as these systems are installed from 2028 through 2030. Moving to financing. Propel is entering a new phase of growth. Just to remind you, Propel is a TPO offering from SolSource Solutions that combines Enphase equipment financing, loan financing provided by TriBeam Financial through the Concert Finance platform and national distribution through Greentech Renewables. Purpose-built for the long tail of installers Propel has expanded from four states to six stages with recent launches in Pennsylvania and Colorado and plans to reach a total of 12 states during the third quarter. Installer participation has grown to about 290. Propel originations are running at approximately 200 per week with battery attachment at roughly 75%. We expect this will begin to grow again as installers in new states start to ramp up. SolSource is targeting 500 originations per week by the end of the year and scaling by securing sufficient warehousing capacity and tax credit buyers. In today's higher interest rate environment, Propel offers homeowners and installers, a compelling alternative to conventional solar loans and can help restore a meaningful portion of the cash and loan market affected by the 25D expiry. Let's talk about products, starting with IQ Batteries. We showcased our fifth generation IQ battery G5 at Intersolar Munich in June, where it received a strong response, built from stackable AC coupled 5-kilowatt hour modules that can scale up to 30-kilowatt hours in one stack, the G5 uses 100 ampere prismatic cells and is designed to deliver 50% higher energy density than our fourth-generation battery at roughly 40% lower cost per kilowatt hour. When shipments begin in the fourth quarter of 2026, we believe the IQ Battery G5 will stand out as one of the few truly stackable AC-coupled battery platforms in the market. Its combination of lower cost, flexible sizing, strong performance, high quality, high serviceability should make it highly competitive across the U.S., Europe and Australia. We are also making good progress on our commercial battery called IQ Vault targeted for both 3-phase 208 and 480-volt market. The first product called IQ Vault 80 is an 80-kilowatt hour battery. Again, 3-Phase 480 and 208-volt with 40 kilowatts of continuous power. Basically, it is a 2-hour battery, each outdoor cabinet uses five fields serviceable 16 kilowatt-hour LFP modules built with 314 ampere hour prismatic cells and up to 25 cabinets can scale the system to 2-megawatt house. The 480-volt 3-phase configuration is designed for a larger commercial building, while the 208-volt 3-phase configuration will address small commercial and multifamily properties including applicable California projects driven by Title 24 requirements. The distributed architecture provides module-level fire suppression and is designed for self-consumption, peak shaving, time of use, VPP and backup. We have completed the functional system demonstration in the last quarter, and we expect to open 3 orders soon with initial shipments planned for Q1 '27. Turning to microinverters. We launched our GaN-based IQ 9 and residential microinverter across the U.S. and key European markets in June followed by Australia and New Zealand earlier this month. We are also gaining traction in the U.S. commercial market with several promising national opportunities advancing with large retail customers. During the second quarter, we began shipping the IQ9S-3P microinverter, our highest power microinverter till date 548-watt based on gallium nitride GaN for 480-volt systems. This is designed to support solar panels up to 770 watts. With U.S. manufacturing domestic content eligibility and FEOC compliant products, we believe our commercial business is well positioned for continued growth. We recently opened preorders for our Smart Thermostat a new control point for the Enphase Energy system. By bringing HVAC into the system, Enphase can optimize one of the homes largest energy loads alongside solar and batteries to improve savings, preserve backup capacity and support VPP. The integrated display on the device also gives homeowners a simple way to view their solar, battery and home power live from inside the home. We expect shipments next month. Moving on to EV charging. We are making strong progress on the DC-based IQ bidirectional EV Charger, which we showcased at Intersolar Munich, built on our GaN Power Platform, this is designed to support both 400-volt DC and 800-volt DC EV architectures and deliver up to 11.5 kilowatts of bidirectional power. ISO standard 15118-20 enablers standardized communication between the vehicle and the charger while our expertise in utility interconnection, grid code compliance and distributed energy management supports v2h backup, V2G and use cases like green charging. We are collaborating with three leading automotive OEMs in the U.S. and one in Europe with additional engagements underway. Subject to the successful completion of applicable compliance testing, we expect to begin pilot shipments in the fourth quarter alongside vehicle launches from one U.S. OEM and one European OEM. Finally, let me provide a more detailed update on our IQ solid-state transformer or IQ SST. The rapid build-out of AI infrastructure is reshaping data center power architecture as rack densities rise from approximately 150 kilowatts today towards 1 megawatt and beyond. Delivering power at that scale will require a more fundamental -- will require a fundamentally more efficient, responsive and reliable way to move medium-voltage power directly to the compute rack. IQ SST is designed to meet that need by converting 13.8 kV or 34.5 kV medium-voltage AC directly to 800-volt DC through a modular single-stage architecture. At the core of the platform is our IQ SST power module, which utilizes our predictive control enabled by the custom silicon, GaN, which enables high-frequency switching and innovation in medium voltage transformer design. Built on more than 20 years' experience in distributed power electronics, we are targeting approximately 98.5% efficiency, 5/9 reliability and sub-millisecond response time. That response time is a key differentiator AI workloads can create rapid swings in power demand and IQ SST is designed to respond in real time to help stabilize the load as seen by the data center power system. This could allow most of the energy storage to be centralized in a BESS located in the data centers black space rather than placed beside every compute rack, freeing up valuable white space. This configuration would utilize the second SST for the BESS, effectively doubling our data center opportunity. For customers that still require storage near the rack, the same platform can also support a DC, DC configuration that charges and discharges a local high C-rate battery to help manage dynamic AI loads. U.S. manufacturing and a FEOC complianc supply chain add another important layer of differentiation. They give customers greater confidence in supply continuity, product traceability and the ability to deploy at scale without relying on restricted foreign entities. For hyperscalers and data center operators making long-lived infra decisions, we believe domestic manufacturing, resilient sourcing and a clear path to high-volume production can be as important as product performance. Our new and existing customer engagements continue to deepen. We have advanced a few of these opportunities to the RFI and RFP stages, representing potential demand totaling multiple gigawatts. These engagements are directly shaping our road map across power level input voltage footprint, cooling, battery connectivity and serviceability. Importantly, we have been able to address evolving customer requirements without changing the fundamental IQ SST power module underscoring the flexibility of our platform. We have also made substantial technical progress over the last 3 months towards a fully working system later this year. Our team has now grown to about 120 people. We have begun testing the second revision of the IQ SST power module and the results give us confidence that the next revision can become our production candidate. We have completed the build-out of our medium voltage lab and validated the medium voltage transformer design. We are now optimizing it for manufacturability and cost. This work has already generated meaningful IP, particularly around the transformer. At the system level, our power modules are connected in series on the medium voltage input side and in parallel on the regulated 800-volt DC output side, managing stability and balancing power across the series stack are mission-critical. Through modeling and hardware experimentation, we have demonstrated that our proprietary control architecture can robustly manage the series stack and maintain balanced power across the modules. Specifically, we have demonstrated a 15 IQ SST, our modules, operating in series and are now advancing the complete first-generation system including the thermal architecture, rack level controls and mechanical design. The first generation platform is designed to scale from 1.25 megawatts to 2.5 megawatts across 13.8 kV and 34.5 kV configurations. We remain on track for a fully working system later this year, customer pilots beginning in 2027 and commercial shipments in 2028. Beyond AI data centers, we are evaluating a broader applicability of the IQ SST platform across utility scale solar, storage and DC fast charging. In each of these markets, we believe IQ SST can connect directly to medium voltage AC, eliminating the need for a conventional transformer and simplifying the overall power architecture. This can reduce the number of stages system complexity, footprint and cost while preserving the same core advantages of high efficiency, fast control and modular redundancy. While these applications are at an earlier stage, we believe that the same underlying platform can ultimately support a much broader set of power conversion markets. Let me conclude. Our next phase of growth starts with residential energy systems. Across the U.S. and Europe, IQ 9 microinverters, our upcoming fifth generation battery and the IQ bidirectional EV Charger significantly expand the value of the Enphase Home. Together, they position us to win new battery led systems, deepen engagement with our installed base and address stand-alone bidirectional EV Charging. In the U.S., prepaid lease programs like Propel add an important financing lever to support that growth. Beyond residential, we are expanding into small commercial energy systems. Our 3-Phase microinverter portfolio now spans both 208-volts and 480-volts applications. The IQ Vault with the 80-kilowatt hour battery adds commercial storage and our EV charging portfolio broadens the opportunity further. Together, these products give us the foundation for an integrated small commercial energy system spanning solar, batteries, EV charging, controls and energy management. The next frontier is data center infrastructure that we talked about with IQ SST and the same architecture can extend into utility scale solar, battery and high-power DC fast charging. These markets require the same fundamental capabilities. Direct medium voltage connectivity high efficiency, fast control, modular redundancy, compact design and competitive system cost. Our expansion from residential to commercial, to data centers and ultimately, to utility scale is built on the same core technology foundation. Single-stage power conversion, custom silicon-enabled control high-frequency GaN switching and innovation in transformer design. We believe this positions Enphase to compound growth across progressively larger markets while leveraging the same differentiated architecture. Technology and execution capabilities that establish our leadership in residential energy systems. With that, I will turn the call over to Mandy for her review of our financial results. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our second quarter of 2026 financial results as well as our business outlook for the third quarter of 2026. We have provided a reconciliation for this non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q2 was $291.9 million, received approximately 725.2 megawatts DC of microinverters and 113.8 megawatt hours of IQ Batteries. Above the high end of our battery guidance. Q2 revenue included $84.3 million of safe harbor revenue. As a reminder, we defined safe harbor revenue as any sales made to customers who plan to install the inventory over more than a year. Non-GAAP gross margin was 46.8% in Q2 compared to 43.9% in Q1. GAAP gross margin was 60% in Q2 compared to 35.5% in Q1. The gross margin was positively impacted by 15.6 percentage points for the IEEPA tariff refunds received. Reciprocal tariffs negatively impacted gross margin by 2 percentage points in Q2. Non-GAAP operating expenses were $79.8 million for Q2 compared to $77 million for Q1. The increase was driven by higher investment in R&D spending. GAAP operating expenses were $123.5 million for Q2 compared to $130 million for Q1. GAAP operating expenses for Q2 included $39.7 million of staff-based compensation expenses and $4 million of acquisition-related expenses and amortization, restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q2 was $56.7 million compared to $47.3 million for Q1. On a GAAP basis, income from operations was $51.5 million for Q2 compared to loss from operations of $29.6 million for Q1. On a non-GAAP basis, net income for Q2 was $61.5 million compared to $62.3 million for Q1. This resulted in non-GAAP diluted earnings per share of $0.46 for Q2 compared to $0.47 for Q1. GAAP net income for Q2 was $36.1 million compared to GAAP net loss of $7.4 million for Q1. This resulted in GAAP diluted earnings per share of $0.27 for Q2 compared to diluted loss per share of $0.06 for Q1. We exited Q2 with a total cash, cash equivalents and marketable securities balance of $937.7 million compared to $930.6 million at the end. In Q2, we generated $40.3 million in cash flow from operations and $25.9 million in free cash flow. Capital expenditure was $14.4 million for Q2 compared to $19.9 million for Q1. As of June 30, 2026, after monetizing the PTCs generated in 2025 and Q1 2026 we had approximately $193.5 million of PTCs on our balance sheet. This included $108.3 million related to U.S. main microinverters shipped to customers in 2024 and $85.2 million related to shipments in the first half of 2026. We elected to repay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to IRS processing. As a reminder, in March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business and the impact of this approach is included in our quarterly gross margin guidance. We announced a tax credit transfer agreement to sell $150 million of PTCs generated in 2026 to a leading financial institution with four quarterly payments from April 2026 to January 2027. We received tariff refunds of approximately $41 million from U.S. Customs and Border Protection, or CBP, in the second quarter with another $11 million received after the quarter end. Second quarter GAAP results were impacted by $52 million of which $45.4 million was recognized as an increase to gross profit, $1.6 million was recognized as GAAP interest income and $5 million was capitalized as a cost of inventory as of June 30, 2026. We have submitted additional refund claims that remain subject to CBP's review and validation. Now let's discuss our outlook for the third quarter of 2026. We expect Q3 revenue to be in the range of $290 million to $320 million, including shipments of 130 to 150-megawatt hours of IQ batteries. For the remainder of 2026, we anticipate recognizing $136.2 million of safe harbor revenue with $75 million in Q3 and $61.2 million in Q4. We expected gross margin to be within a range of 42% to 45% in including approximately 2 percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within the range of 44% to 47% including approximately 2 percentage points of reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expenses and acquisition-related amortization. We expect our GAAP operating expenses to be within the range of $120 million to $124 million, including approximately $44 million estimated for stock-based compensation expenses, acquisition-related amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $76 million to $80 million. With that, I'll open the line for questions.

[Operator Instructions] Our first question today comes from Praneeth Satish from Wells Fargo.

Maybe on SST, recognizing it's early -- but just conceptually, how are you thinking about balancing margin capture versus market share adoption, I guess, based on our understanding if you include 45x credits, the SSTs could potentially support very, very high gross margins. But then on the other hand, you've talked about in your prepared remarks, ultimately selling the product into other markets like utility scale solar, which presumably would imply setting maybe a more competitive ASP. So just trying to understand at a high level how you plan on navigating that?

Yes. We are not going to give you actual numbers, but we are going to tell you how we are thinking about it. We are going to be extremely competitive. But we are going to clearly focus on our value drivers. A lot of competitors also developing SST. So therefore, the focus for us is what does Enphase do different and better compared to the competition. Our value drivers are like what we stated. Faster response times. And because the SST can respond within sub millisecond, we think the battery storage can move to the facility space, which is called it the data center black space. That will be a key differentiator for our solution. In addition, our modularity, our redundancy, reliability, U.S. manufacturing are all other value drivers. So like what I said, I'm not going to give out numbers, but I just told you how we are thinking about it. Plus you are correct on the 45x PTC. We are finalizing those details, but that will also have a -- that will also help us to be highly profitable.

Got it. And then maybe just shifting gears on Propel. So last quarter, if I remember correctly, you said originations were running at roughly 200 per week. And then it sounds like they're still tracking at around that same level today. So like should we interpret the relatively flat sequential trend there as a function of financing capacity or other supply-side constraints? And I guess what's going to be the driver there that gets you to 500 originations a week by year-end. Is that based on demand increasing or just based on your partners increasing financing capacity?

Yes. I think we were clear. We said Propel is running its pilot. We started with four states, we were conservative. And SolSource is basically responsible in what they do. They are in the process of securing financing so that they can scale every phase deliberately properly. So it is simply a function of how many states we are in. For example, if I look at the first 4 weeks of this month, would say the numbers are running a little bit higher than the 200. So what we are going to do is to scale it to 12 states. Today, Propel is in six states right now, and SolSource is going to scale it to 12 states by the end of Q3, and we expect a more aggressive ramp in Q4 and their target is to exit the year with 500 originations per week.

Our next question comes from Brian Lee from Goldman Sachs.

I guess, Badri for you. I'm curious, the safe harbor revenue, it's pretty significant, both in the third quarter and I appreciate you giving us the fourth quarter number as well. And it seems to be tracking higher than you've been guiding to. So is this market share gain amongst TPOs? Or maybe can you speak to what's driving that momentum? And then I had a follow-up.

Yes. I think we have -- like what we said, we are always -- I mean, we have strong relationships with a lot of our TPO partners. And some of our TPO partners are healthy. They are supported by a strong balance sheet in their parent companies. There are some new TPO partners as well who ensure you will see they're going to show up. So basically, it's just the confidence that they have been either pursuing a 5% safe harbor strategy or PWT, which is the Physical Work Test, safe harbor strategy. And for us, I think we said approximately $1.1 billion is the agreements that we have executed till date of that, the $202 million under the 5% method and $878.6 million under the physical work test. So it's just -- we have a strong relationship with the TPO guys.

Fair enough. And then maybe just related to that, you sounded a little bit more positive on kind of a return of growth in resi even in the near term. But if we adjust for the undershipping in 2Q and exclude safe harbor, you're implying flat revenue from 2Q to 3Q, you're still under shipping you said. So I guess why under ship in 3Q when demand is seemingly improving based on some of your comments? And then how should we think about also 4Q seasonality? Do you expect to still be under shipping in the 4Q, should 4Q revenue, including safe harbor be higher than 3Q, including safe harbor all in?

Yes. So basically, just to as to break it. Our Q3 guidance at the midpoint is about $305 million out of that $75 million safe harbor. So core revenue of $230 million. Let's say, I expect sell-through to be 10% higher in Q3. We are talking about a sell-through approximately in the $245 million range, and we are talking about a modest under shipment of about $15 million. We are just cautious and we'd like to make sure we have a healthy channel inventory like we focused Q2 on getting healthier in the channel. That's why we said we are fine on batteries and slightly elevated on micros and we're going to bring that down. But if you look at apples-to-apples the core revenue, if you say the core revenue from Q2 to Q3, excluding safe harbor that is increasing by approximately 10-plus percent. And in Europe, as you know, Q3 is usually the summer holidays. Despite that, we are -- we think will be flat Q2 to Q3 in Europe. So all of that growth is coming from the U.S. Then I also told you about third-party reports talking about an increase of 5% on the permit side. So we talked about that. In addition, as a company, we have a platform called Solargraf, as you know. Solargraf, basically also monitors all of the proposals for both solar as well as storage. And we are able to see an increase in proposals in Q2 as compared to Q1. That will reflect as installations in Q3. So triangulating all of these, we think with the third-party reports with our own internal data and what we see on a sell-through basis, plus what we have on Propel, we think we will grow by approximately 10% in Q3.

And our next question comes from Phil Shen from ROTH Capital Partners.

First one is very topical. Just when your release hits for Q2 results, the FCC announced that their working on a plan to ban Chinese inverters in the U.S. And so I wanted to check in with you on your views on this. It doesn't really impact your resi segment too much. Given the limited exposure or mix of Chinese inverters. But I was curious how much share do you think you could take in your commercial business as a result of this. Of course, you have been addressing just a limited portion and now you're going to expand that to a larger portion of the C&I market. And so how much Chinese inverters do you see out there? And then how much do you think you could grab of that?

Yes. I think there are two opportunities for us. One is, like you rightly pointed out, the residential is not really there, not an issue because of FEOC et cetera. So the two topics are small commercial as well as utility scale. Solar. So I'll focus on small commercial for now because we haven't yet introduced any products for utility scale. In the small commercial, basically, we are seeing lots of opportunities, especially with big retail providers, both in terms of small size installations as well as big size installations. Our revenue that I expect in Q3 for small commercial in the U.S. is approximately $10 million. And I expect that number to grow from strength to strength as we advance through the year. We have introduced two products in the last 6-month period. We introduced one product in December. That is IQ9N with GaN. It's a 3-phase 480-volt addresses the 3-Phase 480-volt market. And that's got a power of 427-watts that can go up to, let's say, approximately 600-watt panels. We just introduced in June an IQ9S 3-Phase product. That is 548 watts, that will be able to go up to 700 watts. So from a product portfolio, we are fully covered. We are having the right discussions with everybody. In addition, I talked a little bit about small commercial storage. Small commercial storage is a fantastic opportunity for us. The market is a little tough to estimate. It is anywhere from one gigawatt hour to two gigawatt hour. It's a very diverse set of installations in small businesses, you can say, schools, hospitals, churches, gas stations, retail shops. The product we are introducing is ideal for that 80-kilowatt hour, 80-kilowatt hour cabinet can be scaled. 25 of these can go to a site can do 2-megawatt hours. For example, in the building that we are in Fremont, we are going to have a megawatt hour of storage very shortly, comprised of 1280-kilowatt hour cabinets. So there, for example, same concept, FEOC compliant domestic content and U.S. manufacturing. So we have the portfolio -- we have both small commercial solar. We have a small commercial storage, and we expect to be ramping not only this year, but 2027 could be big there.

Okay. Thanks, Badri. Shifting over to the core U.S. resi solar market. The challenge that I see here, the root cause is weak capital flows and some challenges with the TPOs and in turn, they're slowing down the amount that they're investing in. And so the root cause of that is driven by tax equity and their caution with the FEOC and effective control guidance that treasury has still not issued, we published back in March that it could be by the end of the year, they're waiting to see how different Chinese companies are adjusting their corporate structures as well as their IP. And then they may want to close those loopholes. And then we were reading that it can -- that it might not come out until the first half of 2027. So is there a scenario where the U.S. resi outlook could still be challenged even as we get through a bunch of '27? And how do you guys manage through that?

Yes. It is a good question. Like you've said, I mean there is limited visibility on the treasury guidance, but the market is adjusting the FEOC guidelines, et cetera, are reasonable. Our TPO partners are becoming a lot more mature. Yes, there have been some hiccups, but those hiccups are being solved. We are hearing that tax equity, although it is tight, but we are hearing it is likely to improve. For us, our opportunity is a few things, here. Our opportunity is -- I talked about SolSource and Propel, that's a fantastic opportunity for us because it basically make the 25D loan market, which was getting approximately a 30% ITC, now has a chance to be replaced with the prepaid lease, that one. So that's a big opportunity for us. The second big opportunity for us is we are getting a lot better on batteries. So we are going to be introducing the fifth generation product in Q4 into the U.S., and that will be at a much reduced cost structure. So while we will make good gross margins, that will help -- it will enable us to help installers. With the positive reduction in tariffs that we got, we took the opportunity to make more pricing adjustments in order to drive volumes with our fourth generation product. Our fourth generation product is also ramping from strength to strength. We are now qualified at -- the Meter Collar is now qualified at 69 utilities, including Canada. It is by far the highest of any suppliers. So -- and we expect the same to continue, meaning, with our fifth generation battery, all of these 69 can be reused. And they are also going to be a big differentiator for a stand-alone BiDi because a stand-alone bidirectional charger can consist of the bidirectional EV charger, which has got 11.5 kilowatt inverters. That's what we have. In addition to that, we have a Meter Collar. Just 2 components, which will enable V2H, V2G in a seamless manner. So for us, we are not stopping and waiting. We are not waiting for things to improve. We are taking matters into our own hands. It is about innovative financing, it is about innovative new products, it is about extending our range into commercial. And of course, the big one is data centers.

Our next question comes from Colin Rusch from Oppenheimer.

Badri, can you talk a little bit about the elasticity of demand on the batteries. You talked about drop in prices a little bit. Just want to get a sense of how much volume you feel like you can start driving as you make those pricing adjustments.

Yes. I mean, what we are doing is basically -- just to tell you some background here, there are 2 actions that we specifically took. One was in Europe where we were high priced. There is no question. And we were high priced relative to the value we were generating. And that was clear to us. So earlier in the year, we did a pricing adjustment in Europe. In addition, in Europe, what we are extremely excited about is a business model change that we are driving. In addition to the B2B sales, which is Enphase selling to installers through distributors. We are actually generating organic demand from -- organic battery demand from our own installed base. And we are doing that in Netherlands. We are doing that in France. We are doing right now -- you guys may not believe 6 homeowner events a week in Netherlands. Each homeowner event is attended by approximately 150 sites or 150 families. And the yield on these is quite good, of the order of 50%. So what we are able to do is we are able to close these very quickly and then pass the leads to our installers. And of course, that requires sophisticated lead management to make sure the installers after taking the lead, do not do any funny business and install only Enphase product. So we are doing that, and we are seeing a lot of success in Europe, both in Netherlands and France. So to answer your question, the actions in Europe are due to -- are not just due to pricing, but what we are doing to generate organic demand. While the actions in the U.S., very similar. So pricing is only part of the equation. Product stuff, for example, the Meter Collar, which I said, we are qualified at 69 utilities. The other big one is Propel. Propel by definition, has got -- there, we have a 75% battery attach in Propel, so that -- we expect that to be driving more and more battery volumes. So that is why in Q3, we expect shipments between 130 to 150 and then the big ramp will come from G5. The fifth-generation product has got 50% energy density. What does that mean for you? It is if you compare, for example, our third-generation product and the fifth-generation product. Why is third generation? Because that's the one in Europe. The fifth-generation product will be roughly 40% in height as compared to the third-generation product. And similarly, the -- it is also a 50% higher -- more energy density compared to the fourth-generation product. So all of these improvements are going in. The fifth-generation product we expect will start to drive even more demand, especially with the same Meter Collar qualifications, et cetera. So not just pricing action, but pricing plus a few other actions to drive demand.

That's super helpful. And then looking at the data center opportunity, it sounds like you're making a meaningful impact on the actual design of the facilities. I'm just curious how mature pricing conversations are at this point? And how mature some of those designs really are that would embed the Enphase solution?