Enphase Energy, Inc. Stock

Good afternoon, and welcome to the Enphase Energy's Third Quarter 2026 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Zach Freedman. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's third 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, Enphase issued a press release announcing the results for its third quarter ended September 30, 2026. The -- 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 or operations, including manufacturing, customer service and supply demand, anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax 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 those -- 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 due to your 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 third quarter 2026 financial results. We reported quarterly revenue of $293.3 million and shipped 1.42 million microinverters and 129.9 megawatt hours of batteries. Our Q3 revenue included $85 million of safe harbor revenue. We exhibited the quarter with channel inventory a little above normal for batteries and micro inverters.

On a GAAP basis, we delivered gross margin of 43.3%, operating expenses of 41.1% and operating income of 2.2%, all as a percentage of revenue. On a non-GAAP basis, we delivered gross margin of 45%, operating expenses of 26.7% and and operating income of 18.3%, all as a percentage of revenue. Mandy will cover the financials later in the call.

Our customer service NPS was 79% in the third quarter compared to 80% in the second quarter, while the average call wait time was approximately 1.9 minutes. Our AI assistant has been rolled out to all our homeowners worldwide and we are now rolling it to Enphase installers in this quarter to help them manage their fleet.

Let's cover operations. In the third quarter, we shipped approximately 1.4 million U.S.-made micro inverters and battery inverters from our U.S. manufacturing facilities and booked the associated 45x production tax credits. We also shipped 63.8 megawatt hours of IQ batteries from our Texas manufacturing facility in the third quarter.

We offer IQ batteries that meet domestic content and to regulations, helping lease and BPA customers qualify for ITC bonuses.

Let's now cover revenue and regional performance. Our global Q3 revenue increased approximately 1% compared to Q2. Our global sell-through also increased by 1% compared to Q2. This fell short of our original expectation for sell-through growth of approximately 10%, which contributed to us delivering revenue towards the lower end of our guidance.

Our revenue mix was 80% from the U.S. and 20% from international markets. In the U.S., revenue increased approximately 3% sequentially. Safe harbor revenue was $85 million in Q3 compared to $84.8 million, our U.S. sell-through in Q3 increased by 5% compared to Q2, a more modest increase than expected, primarily due to the impact of interest rates on the residential solar market.

On a year-over-year basis, our Q3 26 sell-through declined 35% compared to Q3 reflecting pressure from higher interest rates and the transition following the expiry of the 25 D tax credit. Third-party market report suggests overall U.S. residential solar permits were also down approximately 35% year-on-year for Q3 '26.

With our results in line with these reports, we believe we continue to hold our market share reflecting balanced exposure across channels, including TPOs. Our U.S. commercial sell-through grew approximately 50% in Q3 and compared to Q2 as sales of IQ 9 commercial microinverters ramped.

Our current commercial volumes are mostly channel-based with larger direct opportunities emerging for 2027. In Europe, revenue decreased approximately 11% sequentially in the third quarter, while sell-through also declined approximately 12%, in part due to summer seasonality and a modestly weaker demand environment, particularly in France.

Europe is evolving into a battery led market with approximately 50% of our revenue in the region coming from storage systems in Q3. In Netherlands, our battery activations increased 23% in Q3 compared to Q2, a counter-seasonal increase building on the 102% growth in Q2 versus Q1. hormone events have become a successful selling tool for us.

In France, however, battery activations went down by 12% compared to Q2. while microinverter activations fell 24%, reflecting summer seasonality and macroeconomic uncertainty that we continue in the short term.

In Germany, overall activations were down 5% as compared to Q2.

Let's now cover the outlook for the fourth quarter. We expect revenue for the fourth quarter between $225 million and $255 million, including approximately $51.2 million of safe harbor revenue. For batteries, we expect shipments of 100 to 120-megawatt hours. We are currently about 70% booked to the midpoint of our revenue guidance.

Our global sell-through has remained relatively flat over the first 3 quarters of 2026. We are not seeing any meaningful recovery in the U.S. demand. We do expect the global sell-through to decline approximately 10% sequentially in Q4, which is approximately $20 million.

With Q1 '27 expected to be seasonally slow, we anticipate distributors will remain cautious about building inventory heading into the new year. Accordingly, we plan to ship approximately $20 million below sell-through in Q4 to further reduce channel inventory. While the near-term market environment remains challenging, I am very excited about the growth drivers we have established and would like to spend the rest of my remarks on how we see Enphase growing in 2027 and beyond.

I will walk through 5 growth drivers. First, residential batteries, second, recovering our U.S. residential solar business driven by Propel; Third, our commercial solar and battery business. Fourth by directional EV charging and fifth, AI data centers with our IQ Solid State transformer.

Let me start first with where we are today. In 2026, we expect that approximately 72% of our revenue would have come from residential solar, 21% from residential batteries and 7% from commercial solar, EV charging and other.

Now let me walk through each of our growth drivers. Our first growth driver is residential batteries. Global adoption continues to accelerate driven by demand for energy resilience, self-consumption and VPP. In the U.S., third-party reports estimate Enphase's residential battery market share at proximately 15% to 20%. And with approximately 50% share of the U.S. solar inverter market, we see a significant opportunity to achieve a similar market share in residential batteries over time.

A key catalyst will be our next-generation IQ battery G5, our fifth generation product. This is because the installers have been asking us for a compact stackable AC comparative battery that scales up to 30-kilowatt hours in a single stack with higher energy density, faster installation and an improved cost structure.

Beyond new solar installations, we also have a substantial retrofit opportunity across approximately 3 million Enphase solar households in the U.S. many of whom could benefit from backup power, energy independence and VPP income. We expect the IQ Battery G5 pilots in the fourth quarter and volume shipments next quarter, Q1 '27.

We are also seeing VPPs move from small pilots towards large-scale commercial opportunities. Major utilities and hyperscalers are engaging with us on programs that compensate homeowners for making their batteries available to support the bid. This is particularly compelling in communities near data centers where distributed batteries can help grow -- help manage growing electricity demand while providing financial benefits to homeowners.

We expect utility programs to contribute to growth in 2027 with larger utility and data center-driven VPP opportunities developing in 2028 and beyond. In Europe, our largest near-term opportunity is the Netherlands, where approximately 0.5 million existing Enphase solar-only customers represent nearly a $2 billion battery retrofit opportunity with net metering ending at the end of this year, 2026, the economics of adding storage have become increasingly attractive.

We are reaching these customers directly through homeowner events, e-mails and webinars. Beyond our installed base, approximately 2.5 million Dutch homes with non-Enphase solar systems also represent another substantial opportunity. Our universal AC covered battery architecture allows us to serve this huge market, which we are targeting through social media campaign. We expect a strong growth in battery activations seen, which was seen throughout 2026 to accelerate further in 2027.

We are also excited about Australia, where the median residential battery installation is about 30 to 40-kilowatt hour. Until now, we have not been well positioned to compete in this high-capacity market with our third-generation battery, our Gen 5 or the fifth generation battery changes that with up to 30-kilowatt hour per stack, combined with improved cost structure, G5 gives a tremendous opportunity to penetrate Australia's 12 gigawatt hour per year market.

Putting it all together, we expect residential battery shipments of approximately 450-megawatt hours in 2026, and we believe we can grow this business approximately by 50% and in 2027 with a highly competitive product, millions of existing solar customers, expanding VPP opportunities and access to new international markets we see a substantial multiyear growth opportunity ahead on residential backing.

Our second growth driver is the recovery of the U.S. residential solar market. Propel is central to how we see that happening for Enphase. The expiry of the 25-day tax credit removed a meaningful portion of the cash and loan market, which has historically been the core of our long-tail installer business.

In today's high rate -- high interest rate environment, a third-party ownership offering with 48-day tax credit is a practical thought for many of these homeowners. Propel a prepaid lease offering from sole source solutions that combines Enphase equipment loan financing by Tridem Financial and national distribution through Green Tech Renewables is purpose built for long tail installers.

Propel is now available in 13 states and installer participation has grown to approximately 350 as compared to 290 in Q2. Weekly originations of Propel have increased to over 300 compared to approximately 200 in Q2 with a battery attachment at roughly 1% a Sol source recently announced $300 million in capital raised to support its growth and important milestone in today's environment. Sol source is actively working to secure additional capital to support the next phase of expansion into new markets.

We expect the growth in propel originations to translate into higher Enphase equipment sales as these systems get installed in the first half with growing installer participation, strong battery attach and opportunities to expand into additional states, Propel can become a meaningful driver of our U.S. residential solar and battery business in 2027.

Our third growth driver is our commercial business. U.S. commercial solar has been one of the most resilient segments of the market in 2026, with permit activity up approximately 13% year-to-date. We expect strong fundamentals to continue into 2027, supported by rising electricity rates and investment tax credits. The recently announced FCC restrictions are new foreign-produced inverters create a significant competitive advantage for Enphase as a U.S.-based manufacturer with domestic manufacturing capabilities.

Our 3-phase microinverter portfolio spans 208 volt to 480-volt applications, including the IQ 9F 3P, our highest power 548-watt GaN-based microinverter. Beyond expanding our distribution channel business, we are pursuing several large national accounts that could meaningfully accelerate growth in 2027. We are also excited about our entry into the U.S. small commercial storage market with the IQ battery C80, a fully integrated 480-volt AC copper system delivering 80-kilowatt towers of energy and 40 kilowatts of continuous power.

A key application here is demand charge reduction, where the battery discharges during seek demand periods to lower electricity bills. It also supports time of use, solar self-consumption and grid services. Customers can scale up to 2-megawatt hours of capacity by combining 25 battery units, each with 80-kilowatt hours of storage. The battery will be manufactured in the U.S. and designed to make fiopregulations and qualify for domestic content incentives. We opened preorders in August and have seen encouraging initial demand.

We expect to sell approximately 100-megawatt hours of commercial batteries in 2027. We expect it to do pilots in Q1 '27 and volume shipments in Q2 2017. Putting it all together, we anticipate our commercial revenue in 2026 will be approximately $30 million. We believe it could grow to over $100 million in 2027. Over time, we expect to target 40% market share of the U.S. small commercial market, which across solar and batteries could represent an approximately $250 million annual revenue business for Enphase.

Our fourth growth driver is bidirectional EV charge, which brings Enphase directly into the automotive market. EVs, carry batteries 5 to 10x the size of a typical home battery with bidirectional charging, the vehicle becomes part of the home energy system, providing backup power, time of use optimization and VPP participation.

Our IQ bidirectionally be charging solution is built on our GaN power platform and will support both AC and DC bidirectional charging architectures. Our DC solution integrates the bidirectional inverter directly into the charger, while our AC solution combines our standard unidirectional AC charger with an additional V2X kit to enable bidirectional functionality.

The DC solution will support both volts as well as 800 words vehicle architectures with up to 11.5 kilowatts of bidirectional power. We expect pilots in this quarter and volume shipments in Q1 '27. We are collaborating with 3 top global auto OEMs in the U.S. to bring these solutions directly to their battery EV and plug-in hybrid EV customers.

We believe our bidirectional charging solutions offer some of the simplest, lowest cost installations in the market backed by our best-in-class quality and customer service. We believe this expansion into the automotive market also creates a compelling cross-selling opportunity as every EV customer could also become potential customer for Enphase solar and battery systems.

For bidirectional EV charging, we anticipate a $15 million to $20 million revenue opportunity in 2027. We have a substantially larger growth opportunity in 2028 and beyond with the potential to generate over $100 million in annual revenue as they ramp combined with our cross-selling opportunities, we see multiple avenues for additional growth from this business.

Our fifth and final growth driver is IQ SST, which brings Enphase's power conversion expertise into the rapidly expanding AI data center market. IQ SSD is designed to convert 13.8 kV or 34.5 kV medium voltage directly into regulated 800 BDC through our modular single-stage architecture.

We are targeting approximately 98.5% efficiency fine ninth reliability and sub-millisecond response times. By eliminating multiple power conversion stages, we believe IQ SST can fundamentally improve the efficiency, reliability, cost and simplicity of AI data center power infrastructure. We recently achieved a major technical milestone successfully demonstrating 13.8 kV AC to 800 BDC conversion in our Austin laboratory we expect to demonstrate 34.5 kV capability very soon in the fourth quarter.

We are also preparing megawatt scale full system demonstrations this quarter, both at our Austin facility as well as at the national lab with customer participation in both locations. These are important steps towards validating our technology at scale and operating conditions required by AI data centers.

Our customer engagement is accelerating. Since our last update in July, our pipeline has expanded significantly to more than 50 potential customers. Of note, we are developing specific IQ SSD solutions for the AI data center needs of 2 global technology leaders, a hyperscaler and a global AI computing leader. These collaborations are helping shape our product road map and system architecture. We remain on track for customer pilots in 2027, followed by initial commercial shipments in 2028. By 2030, we believe IQ SST has the potential to become a $1 billion annual revenue business for Enphase in the data center market alone.

Three things stand out from our customer discussions. First, reliability is paramount. Our distributed architecture built on more than 2 decades of microinverter experience offers inherent redundancy and fault isolation, providing a powerful foundation for the reliability requirements of AI data centers; second, our successful 13.8 kV demonstration and upcoming 34.5 kV validation gives us increasing confidence in our ability to meet customer development time lines. Third, our U.S. manufacturing capabilities and supply chain readiness are important competitive advantages as customers prepare for large-scale deployments.

We recognize the substantial engineering qualification and execution work ahead but we also recognize the magnitude of this opportunity, and we are executing with the agency to make this vision a reality.

Let me conclude. We do not believe today's financial results reflect the full potential of where Enphase headed in 2027 and beyond. We are working with determination to build a stronger, more diversified company with 5 powerful growth drivers, residential batteries, driving residential solar with prepaid leases commercial solar and batteries, bidirectional EV charging and solid state transformers for AI data centers.

What makes these opportunities especially compelling is that they are all built on the same foundation. Our world-class power electronics technology. Our unique single-stage power conversion architecture, our custom-designed ASICs, state-of-the-art magnetics, proprietary predictive control software, an industry-leading GaN technology. All of these give us the ability to deliver smaller, more efficient more reliable and lower cost power conversion solutions across multiple markets.

We remain confident in the long-term recovery of residential solar, while prepaid leases can help drive adoption in the near term via propel while -- and rising utility rates will help. So will expanding virtual power lines. And finally, the homeowners growing desire for energy independence will support the market over time. But we are not waiting for that recovery we are building new businesses entering new markets and positioning Enphase for a much larger future.

We believe these opportunities have the potential to more than double the size of our company over time.

With that call 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 third quarter of 2026 financial results as well as our business outlook for the fourth quarter of 2026. We have provided reconciliations of these non-GAAP to give financial measures in our earnings release posted today, which can also be found in the IR section of our website.

Total revenue for Q3 was $293.2 million. We ship approximately 655.2 megawatts DC of microinverters and 129.9 megawatt hours of IQ batteries. Q3 revenue included $85 million of safe harbor revenue. As a reminder, we define 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 45% in Q3 compared to 46.8% in Q2.

The decrease was primarily due to product mix. gross margin was 43.3% in Q3 compared to 60% in Q2. Q2 gross margin was positively impacted by 15.6 percentage points for the EPA tariff refunds received. Reciprocal tariffs negatively impact our gross margin by 1.3 percentage points in Q3. Non-GAAP operating expenses were $78.4 million for Q3 compared to $79.8 million for Q2.

Operating expenses were $120.7 million for Q3 compared to $123.5 million for Q2. GAAP operating expenses for Q3 included $39.4 million of base compensation expenses and $2.9 million of acquisition-related expenses and amortization.

On a non-GAAP basis, income from operations for Q3 was $53.6 million compared to $56.7 million for Q2. Our GAAP basis Income from operations was $6.5 million for Q3 compared to $51.5 million for Q2.

On a non-GAAP basis, net income for Q3 was $54 million, compared to $61.5 million for Q2. This resulted in non-GAAP diluted earnings per share of $0.41 for Q3 compared to $0.46 for Q2. Tenet income for Q3 was $23.4 million compared to $36.1 million for Q2. This resulted in give diluted earnings per share of $0.17 for Q3 compared to $0.27 for Q2.

We incurred $26.5 million of impairment in investments, which reduced third quarter non-GAAP and GAAP diluted earnings per share by $0.14 and $0.15, respectively, net of tax. We exited Q3 with a total cash, cash equivalents and marketable securities balance of $931.8 million compared to $937.7 million at the end of Q2.

In Q3, cash provided by operations was approximately $90,000, while capital expenditures were $11.5 million, resulting in negative free cash flow of $11.4 million. The negative free cash flow primarily reflected negative working capital changes, including the timing of safe harbor revenue prepayment and PTC monetization.

As of September 30, 2026, we had approximately $228.5 million of PTCs on our balance sheet. This consisted of $108.3 million related to U.S. main micro inverters shipped in 2024 and $120.2 million related to shipments during the first 9 months of 2026. We expect to receive the refund from the IRS for the $108.2 million of 2024 PTC by the end of the year.

As a reminder, in April, we announced a tax credit transfer agreement to sell $150 million of 2026 PTCs to a leading financial institution with 4 quarterly payments from April 2026 through January 2027. As of September 30, we had monetized $75 million under the agreement. Subsequent to the quarter end, we monetized an additional $37.5 million, bringing year-to-date 2026 PTC monetization to $112.5 million.

Now let's discuss our outlook for the fourth quarter of 2026. We expect Q4 revenue to be in the range of $225 million to $255 million, including shipments of 100 to 120-megawatt hours of IQ battery. We anticipate recognizing approximately $51.2 million of safe harbor revenue in Q4. We expect GAAP gross margin to be within a range of 38% to 41%, and and non-GAAP gross margin to be within a range of 40% to 43%.

Both ranges include approximately 2 percentage points of reciprocal tariff impact. The lower sequential margin outlook is primarily due to product mix, better price adjustments and increased freight costs associated with our new product production. Non-GAAP gross margin excludes stock-based compensation expenses and acquisition-related amortization.

We spend our GAAP operating expenses to be within the range of $119 million to $123 million, including approximately $43 million estimated for stock-based compensation expenses and acquisition-related amortization. We spent our non-GAAP operating expenses to be within the range of $76 million to $80 million. We remain focused on cost discipline, aligning our spending with the revenue environment and prioritizing resources toward our highest impact opportunities.

Throughout this process, we will protect the customer experience and continue investing in innovation, including IQ SST and other strategic growth priorities.

With that, I will open the line for questions.

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

Badri, I know there are some moving pieces here, but could you clarify. I think you said 4Q guidance includes a $20 million under shipment, so without that, I guess the math implies revenue would be flat at the midpoint ex safe harbor from 3Q to 4Q. I guess is that right?

And then with the $20 million under shipment, how does that impact kind of opportunity if $210 million is sort of the normalized midpoint for 4Q. Is that down another 10% to 20% on normal seasonality into 1Q? Or -- just how should we think about the revenue range of outcomes for 1Q given the undershipment and also the interplay with some of the new product and new end market opportunities you have heading into 2027?

Yes. Brian, thank you. So let me just give you the full color. Basically, what we have -- what we said is that our global sell-through in the first 3 quarters of this year has been kind of flat at roughly roughly $230 million a quarter. That's the global filter. What we are seeing right now for Q4, what we said is we are seeing we anticipate a 10% reduction in that file. So you can do the math, that's about $210 million of sell-through -- global sell-through expected in Q4.

Now we all know that Q1, there is seasonality. So therefore, distributors are going to not talk a lot of inventory in Q1 because of seasonality. And we want to get ahead of that by basically under shipping $20 million from that $210 million number. So basically $190 million into the channel. So that's what we are talking about.

And big picture for 2027, the way you should think about it is excluding safe harbor, our core revenue has been approximately $200 million per quarter in the last 2 to 3 quarters, approximately $200 million. So you take $200 million multiplied by 4 for 2027. And then you add the $200 million of growth drivers that we gave you, which comprises of -- we said that the battery number goes from 450-megawatt hours to 675-megawatt hours.

We talked about commercial going from $30 million to $100 million. We did not quantify Propel, but that would be -- that could be some upside. We then talked about bidirectional EV charger, adding a modest $15 million to $20 million because we have the top 3 OEM partnerships. So -- while we are not guiding for 2027, that's a framework that we are thinking about, like $200 million core plus these growth opportunities.

Now with regarding your specific question coming into Q1, Q1 is, of course, going to be seasonally down. We have all seen that. However, what is good in the growth vectors that I outlined. We have 5 growth vectors. Many of them are actually going to start in late Q4, early Q1. Like for example, our fifth generation battery is going to do pilots in Q4 and introduced very early Q1.

Our commercial battery is going to do a significant number of pilots in Q1 our bidirectional charger is going to do pilots in Q4 and volume production in Q1, Propel is an ongoing business. So we have some growth drivers there for Q1.

So while I'm not going to give you guidance, that's the way you can think about Q1 is there is some seasonal offset in the core business plus Enphase specific growth vectors where we are not depending on the market to come back, but these are additional revenue drivers.

Super helpful. And maybe just focusing on one aspect of the growth, if we kind of look at the different drivers you mentioned, the 50% growth in battery storage megawatt hours in 2027, that seems to be probably the single biggest year-on-year delta for potential revenue growth. What -- I guess, what's the cadence of that? How much visibility do you have? I mean it's pretty heady growth, is a lot of that in the second half of '27? And then any pipeline leads kind of you can speak to for visibility into that level of growth into next year?

Yes, I mean, the product, we expect this to be a transformational product. First of all, just so you have the backroom Europe, Australia, international regions will be going from the third-generation battery to the fifth generation battery. While the U.S. will be going from the fourth generation battery to the first generation battery.

The single biggest driver. The single biggest driver for our fifth generation battery is one box on the wall, one box on the wall. So for example, with our third-generation battery if you need 3 boxes on the world for a 15-kilowatt hour, it will be 1 year.

And the other big thing is because the energy density is so much better we are able to reduce the cost structure. If we are able to reduce the cost structure, we can compete at a good price, maintaining gross margin. So therefore, we are extremely excited about Australia. Australia, for example, the median median kilowatt hours is approximately 30 to 40-kilowatt hours, and we can address it with 1 or 2 stacks.

So therefore, the form factor becomes amazing. And Similarly, we can address Germany, for example, with just 1 stack. In places like Netherlands, we are going to go into turbocharge, which is come 2027, batteries are going to become the norm because Dutch are going to see their builds start to increase. There, we have 0.5 million homes where we can really drive adoption of the battery, and we are driving the adoption of the third-generation battery today, and that will become even better with the fifth generation battery.

So similarly, in France, we have 0.5 million or 400,000 homes in France, where we apply the same concept. So while for us, we are going to start ramping in Q1, meaning pilots in Q4, volume shipments in Q1, as you know, there will obviously be a transition there with -- it will take usually a couple of quarters for the batteries to transition from the generation, the new generation may even take 3.

So therefore, you would expect naturally in the back half to be a nice growth compared to the first half.

[Operator Instructions]. The next question will come from Philip Shen with ROTH Capital Partners.

We published yesterday that the '27 outlook for resi solar could actually be down year-over-year. I wanted to see if you could kind of comment on the overall market sentiment as well. It seems like first half next year with seasonality, Q1 is going to be be lower, certainly versus Q4? And could you -- I wonder if it could even be weaker.

And then Q2 could be weak as well, given the delay on the treasury department issuing fee guidance? And so -- can you comment on what you see for the market overall? And if you see potentially even some downside risk to your $200 million per quarter baseline?

In general, I'm commenting on today's market, you're correct. Today's market is weak due to the higher interest rates and due to a compliance issue or guidance not being very clear and so there is reduced visibility. So you're correct about that. It's difficult for us to difficult for us to see how 2027 is, which is why I focused on our growth drivers, which are independent of the market.

And for us, I will go back to the to the same growth drivers. I mean, those growth drivers, for example, the battery will help us get additional market share in all regions. Starting with the U.S., Europe, new market share, for example, in Australia as well as Europe increasing market share in the U.S., that's what we are targeting.

The next one is Propel. Propel is going from strength to strength. Last time we talked about 200 originations. Now Propel is in 13 states, 300 origination, over 300 originations a week. And of course, Propel has raised its first round of funding. And every time they go to additional states they will need new rounds of funding. That's always -- that's something they have to execute on.

But if they execute on that, Propel is clearly demonstrating growth. And the -- from originations to it showing up in PTO usually takes 3 to 4 months for us. And so all of those, we expect to start seeing the results of all of those in 2027. And the next one is commercial. So commercial, again, is independent of what we are talking about, the residential weakness.

In commercial, we have -- this year, we have introduced 2 good products. They are the 3-phase 480 volts and 3 Phase III words IQ427watts and 548 watts, all gallium nitride. Why are we going to do well in commercial? Same principles. We have a, we do U.S. manufacturing we comply to FAC regulations. We have domestic content per panel monitoring is a very big deal for the commercial asset turns.

Most of the time, that's the differentiator and, of course, our high quality. Now what we are doing there is to have a full-fledged commercial energy management system, which means what commercial solar and commercial storage. Commercial storage is -- I would almost say it's a niche market in the U.S. There aren't clear enough clear players like residential solar or utility scale solar. It's a good opportunity for us.

And there, once again, an 80-kilowatt hour battery extendable to 2-megawatt hours solving real problems of demand charge. Demand charge is the single biggest application. They're in addition to the usual VPP self-consumption type of use. For example, one of our opportunities is utility company in Texas who wants to put these commercial batteries in a distributed way front of the meter. So we are entering -- of course, the business here will -- the growth here will be measured, commercial take is a design-in product. It will take time. But that's completely different vector we are talking about, commercial solar plus commercial batteries.

And the fourth one is bidirectional EV charge. By directional EV charger Again, I'm very excited to highlight that we have 3 big automotive OEMs who have recognized that our product the Enphase product, both AC [ BiDi ] product as well as BC Bidi product is 1 of the easiest, easiest to use, easiest to install. Easy in terms of installation cost, et cetera, and just works. So we have been -- in the last year, we have been doing lot of pilots with those EV OEMs.

So we are very excited about that. And that product is coming imminently with pilots in the current quarter and going on. And then the last one I talked about at length is SST. SST for us is we got to do a few things in SST. SST -- we showed the 13.8 kV demonstration, although it is not full megawatt scale, but that was a proof of concept. Very soon, we are going to show proof of concept of 34.5%.

And then towards the end of the year, we are going to show megawatt scale megawatt scale demonstration of the SST. The moment we do that, we are then going to go into compliance. So once we go into compliance, and finish compliance successfully, we will do DVTs or pilots with end customers. So that's the path there. So I know it's a long answer I gave you, but many of our vectors are about diversification and reducing the reliance on the residential market.

Got it. Next one here is related more to pricing and margins. We recently published also that you may have lowered some pricing on batteries, ADLP, the authorized distributor list price. And I think in Mandy's comments, you talked about battery price adjustments contributing to the lower sequential margin outlook. I was wondering if you can talk about how much did you lower that battery price by? And then going forward, is that another lever that you -- or is that a lever that you might pull again maybe through '27. And what's really the right margin we should be thinking for a normalized level as we get through '27?

Right. We -- this change was done a couple of months ago where we basically reduced the list price of our batteries in the U.S. by approximately, I would say, by approximately 8% to 9% to distributors. That's what we did. And -- to answer your question on, do we see more price reductions.

The whole point why we have been working on our fifth generation is an we understand the battery business is a tough business. We understand that consumers expect better pricing over time. Hence, we embarked on the fifth generation product, the fifth generation product uses 100 amperes, users an energy density that is -- I won't say exactly double, but almost double of what we have with respect to the fourth generation product. You should look at the form factor of our first generation. It is very compact, enabling one box on the wall, which means most installations can fit into one stack.

So the whole point is to make our cost a lot more competitive, so that we can participate in segments where we couldn't participate before, for example, in Australia, for example, in certain parts of Europe. So we are looking forward to do that. You asked what does that mean for gross margin? The way I always think about there may be hiccups in the short term on gross margin, but the company's model the company's target is always 40%.

That's the way to think about it. So any business that we get into, we make sure we have a 3-year line of sight to achieving 40%. It might take 1 to 2 quarters sometimes or a little more, but our target is 40%.

The next question will come from Eric Stine with Craig Hallum.

Just wanted to confirm, obviously, you are talking about pretty significant storage growth. But just thinking about last quarter, seems to me that you were maybe more optimistic about storage and the outlook going forward. So first, I guess, maybe confirm that? And if that is the case, I mean, is France, the main culprit there because the other end markets you're talking about, I don't think your optimism has changed at all versus last quarter.

Yes. I think in general, in the short term, we are seeing weaknesses in the U.S. primarily due to interest rates in the short term. And that's my comment on the U.S. weakness and hence, our guidance is appropriately this time between 100 and 120. But like what I said, our -- what we are looking at is to introduce our fifth generation product, which will make us -- which will make us competitive everywhere.

We are looking to take market share in the U.S. Right now in the U.S., we have 15% to 20% depending on the third-party reports. If you look at them, we have 15% to 20% market share. It's a too-hard phrase the U.S., and we would like to basically increase market share are like how we have on the solar inverter side in the U.S.

But we do see tremendous opportunity in Netherlands come 2027. Our optimism there has not changed. In terms of France, we do see, again, a huge opportunity for us to market to our own homeowner base of 400,000, and I already talked about Australia. So there is some short-term hiccups here in the U.S., but with our fifth-generation battery, we should start to grow again.

Yes. Okay. And then just to clarify on EV charging the collaboration with I think you said 3, and I'm just curious, for those 3 in the U.S., I believe in the past, you've also talked about one in Europe.

All 3 are in the U.S. right now. And there is one in Europe, which is ongoing.

The next question will come from Colin Rusch with Oppenheimer.

I just want to follow up on the pricing question on batteries. Can you talk about how much elasticity you've seen with those price declines in terms of being able to move product to your distributors and then through the channel?

Yes. since we did the action only a couple of months ago, it is too soon for us to comment on the elasticity. Let me leave it at that, Colin.

Okay. And then in Europe, in the Netherlands has been this big opportunity to sell into that market, and it seems to not be materializing in the way that everyone had hoped it might. Can you just talk about where the friction is? Is it a price issue? Is it a customer education issue? Is it a financing issue? I just want to get a sense of what -- where the real friction point is.

Customers aren't going to react until they see their electricity bill. And they're going to start seeing their electricity will go up quite a bit in 2027. Just a note for you is our activations, our activation for batteries have grown about 102% from Q1 to Q2. and grown by 23% from Q2 to Q3.

We just held a roundtable last week with a lot of Netherlands installers. And everyone is extremely excited and going into 2027. All of them expect the volumes to go up. What are we doing about it? The multiple angles. We are conducting 6 homeowner events a week, 6 homeowner events a week, which means from we invite homeowners, about 150 come -- we give them a presentation for an hour. We talk about -- we talk about the value of a battery post in 2027 post NIM. And then we see a nice conversion there.

We also have our inside sales people in the room. They are taking the orders. And sometimes, we do these events with installers. Sometimes, we just do it. So 6 home order events a week times 13, 78 homeowner events. Each homeowner event is about 150 people. Obviously, there is some yield there. So that's 1 act 1 avenue of growth.

Then we take the leads from that, and we essentially funnel it to our installers. We funnel it our installers, and that increases the loyalty a lot because they not only get free leads from us. They also are running a business, and therefore, they tend to use Enphase for their business as well as for the leads that we give them.

Then the second one is actually webinars. Webinars have been again huge source of leads for us. That, again, we are doing a live webinar. That's also done frequently every week. The other opportunity is -- I mean, the other opportunity, which is -- which we plan to take advantage of going into 2027 is because our battery is an AC coupled battery.

We have a huge opportunity to take the 2.5 million non-Enphase solar homes. So there is 8 million homes in Holland or the Netherlands 8 million homes. Of that, there is 3 million homes with solar, of that, there is 0.5 million Enphase homes with solar. So you have a balance of 2.5 million homes with non-Enphase solar. And we are basically actively targeting that, and we expect the demand from that also to add up soon.

So the vectors were as in Netherlands are continue continue the homeowner events, establish a direct relationship because they all know in phase well. And therefore, if they know that a huge company is behind it, they -- and they understand it is a premium and phase is a premium player. They do want the premium support experience.

So we plan to do that. We plan to do webinars. We plan to go after the non-Enphase homes because our technology is AC-coupled. And then Gen 5 is now coming. Gen5 will take the number of boxes on the ward to one. And so that will make the cost structure better, will be easier to install installer doesn't need to have multiple points on the wall. It will be stackable, easy to install. Yes. So we are incredibly excited about Netherlands.

The next question will come from Mark Strouse with JPMorgan.

Badri, the last few years, you've been very disciplined with your focus on operating margins. Not looking for 2027 guidance, but just kind of targets over the near term. To the extent that the residential business weakens further, how we should think about pro forma OpEx as a percentage of sales in the context of all of these growth initiatives that you're trying to ramp at the same time?

Right. Enphase has always been disciplined when it comes to gross margin, the same thing when it comes to OpEx, the same thing. So we are going to be looking at our annual operating plan as we go into 2027. And and we are not going to be afraid to make all of the necessary changes in order to be profitable. And no matter what you can count on Enphase to innovate, spend the correct dollars on innovation, like assist, like commercial battery, like fifth generation battery going to a 6-generation battery and so on.

We are all seeing AI help us in productivity as well. So the answer is we will continue to be disciplined and we will continue to be profitable.

Okay. Okay. Understood. And then just a follow-up on the -- I believe you mentioned a possibility for about $1 billion in revenue from SST by 2030. And -- can you just give a bit more color on how you're coming up with that metric? Is that a top-down view with an assumed market share? Is it some kind of risk-adjusted bottoms-up you? Anything there would be helpful.

I'll have Raghu elaborate on how SST is going conversation with customers and then answer your question as well.

Yes. So we are making a lot of progress on SSDs. You saw the announcement that we made this morning. about 13.8 kV product working and generating 800 volts PC. The core of our SSD, just to remind everybody is that power module. It's basically a large microinverter that uses our -- use the technology that we have worked on for the last 20 years and 9 generations of products, 5 generations of ASIC. And it's basically a large microinverter. That's what we do, and it's our core core competency and core expertise, we are actually on our third revision of that product.

So we already have 3 cycles of learning underneath our belt. And what we have done, just to the technology itself, it's a very high frequency, single-stage power conversion, custom ASIC, predictive control and GaN, including BDS can or bidirectional gain. We have been -- we have shown it working at 13.8% for us to go to 1 from 13.8% to 34.5%. We go from -- we just take additional number of power modules or microinverters.

One another key element of the device that's really interesting in there that we have spent a lot of time on and we have a lot of IP is that high-frequency transformer. -- because our high frequency transformer needs to be what's called partial discharge PDF or partial discharge free to operate at 34.5%. So a lot of work has gone on there.

We have demonstrated 13.8%, well show 34.5% shortly as well as demonstrate $34.5 million at scale. And then we'll do that both at our Austin lab as well as at another national lab. And all of this is in discussions with hyperscalers and other big players in the ecosystem. So they're very familiar with what we are doing. They like our approach. They see the benefits of the modularity in terms of the reliability that we do.

We have undersubscribed all our our modules by 6%. We have a very fast response time, which means we could potentially eliminate that low-voltage battery that's in the system. 85% of the supply chain for our power module is the same as our microinverters that we have today. So from a FIACcompliance standpoint, which is a huge deal because SST will get classified as it's an inverter-based resource and will get classified as critical infrastructure.

So we have a FIAC compliant or meet regulations. And U.S. manufacturing, it leverages the same manufacturing line that we have for our microinverters today. So we already have an established manufacturing line to build these power modules, which go into our IQ SSD. So we are having very good conversations, 50-plus engagements with customers, including hyperscalers and large ecosystem players there, and they are, in fact, guiding us towards what exactly they would like to see in the product.

Of course, OCP is coming out with their specifications as well in terms of the SSD requirements. As far as the total addressable market is concerned, you do see a lot of variability there in terms of the size of the market. We had said 11 gigawatts by 2030. Obviously, we think that's a very conservative number. When we talk to some of our hyperscaler customers, one hyperscaler as an example, itself is talking about in the tens of gigawatts. So it can vary anywhere between 11 to 30 gigawatts or even higher than 30 gigawatts. So we looked at those numbers.

We took what we assume would be a reasonable market share and at a price that we think is the right price and came up with that $1 billion number by 2030.

The next question will come from Dylan Nassano with Wolfe Research.

Just want to dial in a little more on Europe to better understand kind of what's happening on the ground there? I mean I know you specifically called out France, I think, is being a little bit softer. But just trying to understand why core resi solar in Europe isn't kind of acting stronger here given -- I mean we're tracking energy prices are still relatively elevated. Yes, just any thoughts there would be helpful.

Yes. The Europe usually in Europe, summer seasonality is quite high. And that's what we saw. That's what we are reporting. We saw our sell-through basically was approximately, I mean, a little over 10%, I think, 12% down. And I think that was in line with the past seasonality. Europe, there was a small time during Q1 and Q2 where the war basically accelerated energy, the need for energy independence. So we saw a spike. That acceleration seems to have worn off.

Now it's back to regular demand. And for us, the big opportunities in Europe are with batteries. And with our -- what we sell today is our third-generation battery. We sell today, our focus countries are Netherlands, France, Germany and U.K. These are our focus countries. We believe all of them can be changed dramatically with our first iteration battery. And our opinion is that once we get the battery, then solar will automatically come attached. We also have a beautiful home energy management system in Europe, which is ability to work with third-party EV chargers, including ours as well as third-party heat pumps.

So really for us is with Q9 micro inverters with the fifth generation battery with a full-fledged home energy management system and now soon to be added by directional charging, we have a complete best-in-class ecosystem will follow.

Got it. And then just a quick follow-up on the bidirectional EV charger. We noticed that there were some announcements recently with automotive companies kind of coming out with the next generation of more affordable bidirectional EVs. Just any thoughts there on how your product kind of compares or is positioned relative to a bidirectional EV.

Yes. I mean that's what we are talking about. There is 2 types of bidirectional EV chargers, DC based bidirectional EV charger and an AC based by directional EV charger. We will have solutions for both, and they will be shipping in volume in Q1 '27. Our engagement with the top 3 OEMs in the U.S. are basically for both some engagement, meaning one engagement is on BC. And the other 2 engagements are on both AC and DC. So for us, it is a huge opportunity there.

Our product works very well already with most EVs even unofficially it works, but we will not claim any compatibility unless that OEM, green and certifies the same. So what we do in America is that's why it may be a little slow the top 3 OEMs. For example, OEM one is introducing a car with bidirectional capability. We start testing that like 9 months ago.

And in that way, we can certify that our bidirectional chargers are compatible, and they will have to certify that, not us. And we are well underway with these 3 OEMs. And the installation is going to be very simple and sleek. We have the meter color which we have now -- we have over -- if I remember right, over 65 utilities. Yes, I may be getting that wrong. We have the metric color qualified by these utilities. And all we need is a meter collar and the DC by directional charter. -- components. And in fact, you won't even see the meter color because it is hidden behind the meter.

So you have our inverter and it can do B2, which means it can function like a generator, which is in the case of a blackout, the relay in the meter collar opens and the car is powering the home. You can also obviously make it do vehicle to grid, subject to the utility approval where the car can feed the grid in times of need. That DC bidirectional chargers in the U.S. has got 11.5 kilowatts of power, plenty, plenty enough, so we anticipate interesting combinations.

We anticipate people to buy this DC bidirectional charger and then add solar, for example. So there is -- like what I stated in my prepared remarks, we see a very good cross-sell opportunity. But first things first is essentially release and work with the OEM, with the approval of the OEM launch the bidirectional chargers 1 by 1 of each of their models and you will see press releases that will come.

The next question will come from Corinne Blanchard with Deutsche Bank.

Maybe shifting gears for Intevia, can you talk about your view about the midterm election since maybe some investors have become a little bit more optimistic on some of the conversation going on to maybe see potential tax credit extension. So just wondering what you guys think and how that could maybe be a positive as well going into 2027.

Yes. This is Raghu. Without commenting on getting into the details of the politics of it. But yes, there is discussion. Actually, some of the discussion is bipartisan in terms of extension of some of the investment tax credits for sure as well as some of the production tax credits as well. So I think there is a broad view that the election results may help renewables in general, but be specific, these particularly these 2 tax credits, it seems like has bipartisan support.

So I think we'll wait to see what the outcomes are, but it seems like we are going to see good support for extensions and because it makes sense.

And maybe just to continue on that one. Would that change anything in terms of your strategy for maybe bringing more manufacturing footprint in the U.S. Or would you rather stay put, given the current domain context in the U.S. market and just wait maybe a few more quarters to see how that evolves.

Yes. I mean we have all of the capacity we need. And when, for example, the SST starts ramping, we can easily scale that, we can easily scale that. Our capacity here is quite good. So we won't hesitate we won't hesitate to scale levers manufacturer. And there's no obstacles to that right now.

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

This is Carter on for Julien. Just a follow-up on SST. You called out a leading hyperscaler as well as a global AI computing leader, specifically in the release. Just curious if there's any color on those relationships, specifically feedback you've gotten so far. But are they working with you exclusively on SST. So you have really just any color on those, those ones you called out in the release.

Yes. We won't go into any details there. That's the extent of what we are saying. But in general, they are working closely with us. We have shown them the power modules. They have seen -- they have even visited our Austin lab and seeing how we are progressing, and we are keeping, obviously, everybody up-to-date on how the development is progressing. So the 13.8 kV announcement this morning was a pretty exciting announcement.

And for us, when we think about going from $13.8 million to $34.5 million, we use the same power module. It's not like we are changing our power module. And of course, the fact that we are using GaN is very interesting to them because of the reliability of -- particularly because of the reliability of Gan.

But more importantly, it's also about the reliability of the entire system. So it's the reliability at the component level, within the power module. But the way our SST is constructed itself gives us some intrinsic, the modularity of the power module gives us big advantages as well.

So when you think about -- we hear this discussion a lot around GaN versus silicon carbide. For us, GaN was a natural organic fit for us. We have and wide bandgap technologies in general. But for us, because of the reliability that GaN has particularly in terms of AT surge robustness, the withstand capability the BDS support that GaN has, which also gives us additional withstand GaN is commodity product, very large, very high volume. It's very -- from a manufacturing point of view, again, is very easy to manufacture because it is GaN on top of silicon.

So it's a small IP layer on top of mostly silicon. And what GaN also allows us to do is to run the controller at higher and higher frequency and because we run it at higher frequency, we get the response time that we need we get benefit in terms of the magnetics being much smaller. So it is a really good choice for us to go to with GaN in particular.

So to summarize, really working closely with the hyperscalers have been really informative for us because we are working very closely. And they, in fact, inform us a lot on our product development and exactly how they would like to see the evolution of the product in terms of both the technology, the performance, et cetera.

And the nice thing about the power module that we have, the GaN-based power module is it gives us a lot of flexibility in terms of meeting their specific requirements, whether that is in size or dimensions or support for a low-voltage battery, the seat of the battery to match the state of the battery, et cetera. So it's been -- it was -- it's been very, very good for us to be working with demanding customers like these because they just make you better.

Great. Just from a timing standpoint, if you guys are doing megawatt-scale demos by the end of this year, then you go into a compliance period, when could we start to see pilot announcements into 27? I guess I'm thinking like how long that compliance period would end or would last.

Yes. I think the compliance will start with the demonstrations this year, exactly like you said. We expect that in the second half, we should start -- we should be through our compliance by the first half of year and then heading to pilots in the second half. We should be realistic about that because some of the U.S. standards are still an outline of investigation. So we need to work closely with you all get through that. If you look at something like UL-2877or3347A. So we've got some work to do there.

But again, we expect that the first half of the year will be focused around getting through compliance and then depending on how that goes, depending on how some of the early testing with the hyperscaler goes, we will enter the pilots in the second half of the year and then close to the end of the year and early 2028, we go into commercial production. I think it will all be gained by those 2 elements.

Now I think we will be, from a manufacturing point of view, I expect that we'll be ready to meet that time line. In fact, in discussing with all these larger customers, it seems like it aligns well with their time line. So I think we are in a good place from that point of view.

The next question will come from Sunaina Ocalan with Bernstein.

I really appreciate the color on the previous answer. Maybe if I can just follow up to that. Can you comment on what the commitments are from the hyperscaler and the other company? Are they essentially technical evaluations? Or are there some form of risk sharing funded development with you? And maybe if I can follow up, what -- are they the same architecture on both sides? Or -- do they require different designs from your part?

This is our own development. But we do talk to them about testing, test plans, et cetera. talk to them about what their specific requirements are. But all of the development is ours, the IPs are, everything is Enphase driven. And it is -- at this stage, while, yes, there are discussions on the business aspects of it, of course.

We do, at this stage, given where we are the 13.8% announcement this morning and 34.5 shortly, we are actually keeping it a little bit more technology focused but there is definitely discussions on the business aspect of things as well.

The next question will come from Jonathan Kees with Daiwa Capital Markets.

Great. I wanted to, I guess, ask a couple here, 1 on the financials. Q4 was a negative free cash flow, cash burn was Q3 -- I'm sorry, with Q4, you've got lower revenues. Can you kind of indicate what are the puts and takes there in terms of working capital for Q4, I guess that impacted the Q3 numbers in terms of the cash burn there.

And then I also want to ask about France. I mean you talked about some weakness there, but also the potential still the strong possibility there including like your embedded base of like 400,000 residential customers there. have the riots had any impact? I mean, I would think they would kind of slow deter the installers from -- and even the reach-out sessions, in site sessions to increase the word in terms of G5 and other products that you have for these customers?

Mandy will answer the question on free cash flow and working capital. Go ahead.

Sure. So Q4, as we expect to get the 2024 tax refund, as I say, in remarks, right, $108 million related to our 2024 PTC. We expect to get a sizable free cash flow in Q4.

Good. And France, the weakness in France is because France had a feed-in tariffs before and that feed-in tariff is going to 0. But that's an opportunity as well because now the entire system sale is a solar plus battery sale. So France is evolving from -- was pure solar, but now solar plus battery sale. And we have a lot of plans for France. We used to dominate the French market in terms of solar before. Now that market is slowly eroding and becoming a solar plus battery market.

So there are 2 things we are doing. End of this year, we are introducing a product called like 9, that's a 548-watt microinverter, the highest power product that is available in residential solar period, and that will go to France first at a very attractive price point.

The second, of course, is the Gen 5. So basically, we are catering to exactly creating a best-in-class solar plus battery system, and that will have a good adding, we are very well known in France. Our brand is very well known. So we also plan to ramp up social media in order to take advantage of this and focus on IQ 9 and Gen 5 based energy management systems.

So you've seen no disruptions from the recent ridding then in France?

Yes. I mean those are short term, we don't -- no negligible.

The next question will come from Maheep Mandloi with Mizuho.

Yes. And maybe some clarification earlier on Brian's question then. Could you just talk through the seasonality you expect in the charters in 2027, especially on the $200 million opportunity. How should we kind of think about that? And like does that ramp up in Q1? Or is it more the second half for next year?

Yes, I answered that, that also, basically, the way you think about it is $200 million a quarter of core plus $200 million total of growth drivers, which I actually outlined. Many of those growth drivers are going to take into effect by Q1. Like for example, the fifth-gen battery is going to pilot in Q4, take into effect Q1 similarly the bidirectional product. Commercial battery is going to pilot in Q1, take into effect in Q2. So we expect a few of those growth drivers to affect us in Q1. And that will counter the typical seasonality that we have.

This concludes our question-and-answer session. I would like to turn the conference back over to Badri Thandaraman for any closing remarks.

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

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

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 Phase 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 arches.

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 2 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 costs. That's our operations.

In the second quarter, we shipped approximately 1.58 million U.S. made micro inverters 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 FAC requirements, helping lease and PPA customers quality for a [indiscernible] 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 -- 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 25 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% and 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 sales 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 BP. 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 full 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 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 2 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 sole source solutions that combines Enphase equipment financing, loan financing provided by Tribine Financial through the concert finance platform and national distribution through GreenTech renewables.

Purpose-built for the long tail of installers Propel has expanded from for states to 6 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. Sole Source 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 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 Bolt targeted for both 3 Phase III and 480-volt market. The first product called IQ Volt 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 5 fields are visible, 16 kilowatt-hour SP modules built with 314 Npower prismatic cells and up to 25 cabinets can scale the system to 2-megawatt house. The 480-volt prephase configuration is designed for a larger commercial building, while the 28 World 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, BPP 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 IQ 9S3P microinverter, our highest power microinverter till date 548-watt based on gallium nitride game for 48-volt systems. This is designed to support solar panels up to 770 watts. With U.S. manufacturing domestic content eligibility and FOP 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 resume 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 World DC and 800 World-based EV architectures and deliver up to 11.5 kilowatts of bidirectional power.

I sold standard 15-118-20 enablers standardized communication between the vehicle and the charger while our expertise in utility interconnection, grid code compliance and distributed energy management supports B2C backup V2G and use cases like green charging. We are collaborating with 3 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 Air 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 case 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 and 13.8 kV or 34.5 kV medium-voltage AC directly to 800 World 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 Five 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 track freeing up valuable white space. This configuration would utilize the send SST for the BESS, effectively doubling our data center opportunity.

All 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 FIA-compliance 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 SSD 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 more DC output sites, 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 JC, 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 prephased microinverter portfolio now spans both 208 volts and 480 volts applications.

The IQ bought 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 power conversion, custom silicon-enabled control high-frequency gas switching and innovation in transformer design.

We believe this positions and face 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. Andy?

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 save 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 micro inverters and 113.8 megawatt hours of [indiscernible] 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. The 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 IEPA tariff report received. Receivable 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. Sales 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 $62.2 million for Q1. This resulted in non-GAAP diluted earnings per share of $0.46 for Q2. compared to $0.47 for Q1. Hemnet 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 $40.2 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 $108.2 million related to U.S. main micro inverters 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 revote 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 test credit transfer agreement to sell $150 million of PTCs generated in 2026 to a leading financial institution with 4 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 CPP'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 million to 150-megawatt hours of [indiscernible] 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 spend 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 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 all we said Propel is running its pilot. We started with 4 states, we were conservative. And sole source 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 million. So what we are going to do is to scale it to 12 states.

Today, Propel is states right now, and sole-source is going to scale it to 12 states by the end of Q3, and we expect a more aggressive ramp 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 tip 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 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 standard 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 apple 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 Solar graph, as you know. Solar graph, 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 up that?

Yes. I think there are 2 opportunities for us. One is, like you rightly pointed out, the residential is not really there, not an issue because of [indiscernible] et cetera. So the 2 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 state. .

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, we have introduced 2 products in the last a 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 barrels. We just introduced in June an IQ9S3phase 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 2 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, FIA 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 FIAC 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 [ FIAC ] 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 sold. 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 Solars and Propel, that's a fantastic opportunity for us because it basically make the 25B 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 [indiscernible] of any supply -- so -- and we expect the same to continue, meaning with our shift generation battery, all of these 69 can be reused.

And they are also going to be a big differentiator for a stand-alone by die because a stand-alone bidirectional charger can consist of the bidirectional EV charge, which has got 11.5 kilowatt inverters. That's what we have. In addition to that, we have a major color.

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 -- 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.

Bob, 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 50 sites or 150 families. And the yield on these is quite good, up 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 in face 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 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 color, 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 proper so that -- we expect that to be driving more and more battery volumes. So that is why in Q3, we expect shipments between $130 million to $150 million and then the big ramp will come from G5. The fifth generation product has got 50% energy density.

What does that mean for you? If you compare, for example, our third-generation product and the fifth generation product. Why is third generation? Because that's the 1 in Europe. The fifth generation product will be roughly 40% in 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 major color qualifications, et cetera.

So not just pricing action, but pricing plus a few other actions to directive.

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.

Yes. So just to give a quick complete overview. We're making very strong internal progress in our data center development meaning IQS SST development for data centers, I mean, our team, now we have about 120 full-time engineers. We are building the power module and we are finalizing the design there.

Interestingly, we demonstrated a 4.16 kV AC series stack. What does that mean? We can stack 15 power modules in cities. So 15x 277, approximately 4 kilovolts AC. We demonstrated proof of concept there. And importantly, we have achieved a significant milestone on the feasibility of the medium voltage transformer. So that's on the technical side. We are making a lot of great progress there.

On the active engagements there, we are engaged in conversations with hyperscalers newcos, EPCs and the full ecosystem. We are engaged in a few FI RFPs. In fact, some of the learning that we got on the product were from those RFPs. I mean it was massive learning for us. But then we realized how powerful our platform was because we were able to get the product requirements, understand the product requirements from these customers and then we were able to quickly rework our plan without any changes to the power module because ours is a modular structure. And for example, we were able to quickly adapt -- we talked about supporting 2 kinds of storage.

One kind of storage, which is where your question value proposition comes in, is because our SST is super fast in terms of response time, sub-millisecond response signs, we envision the storage can be in the facility space or in the black space. But there are people who have a current architecture who might not be willing to deviate from that who would want to put high sea rate batteries closer to the rack and first and for those hyperscalers, we enable a DC, DC, DC product in conjunction with DSST.

And we were able to repurpose the same SSP, same power module in order to get that DC DC product as well in addition to the assist. So our architecture is very flexible. We are learning a lot. We are adapting a lot. We understand what our value drivers are very clearly.

Like what I said, it is the first response time, it is the power module flexibility. It is the high reliability, which is yet to be proven. It is U.S. manufacturing. What is the next big milestone -- the next big milestone is to build a full product, building a full product by approximately end of the year, likely November and showing it to some of these customers will open the gates for much bigger conversation and pilots.

So we are looking forward to that. And right now, as I see here, we are on track to getting that time.

Our next question comes from Eric Stine from Craig-Hallum.

Just wondering, can you just talk a little bit about your thoughts on Europe or expand on that? I know last quarter, you had some cautious optimism that there were some green shoots. I mean, clearly, you're more optimistic here coming off of Q2.

And I know that, that's really going to be more of a battery-driven market, but I mean, how do you view that? It sounds like 3Q flat even with taking into account seasonality, is that still kind of driven by a few markets? Is that something that you think it's becoming more widespread? Just how are you thinking about that here, I guess, over the remainder of '26 and going forward?

Yes. So just to recap, in Europe, we increased revenue by approximately 35% in the second quarter. And more importantly, our sell-through grew 30% with strong performance across both solar as well as metrics. What markets am I excited about in Europe, 3 markets, which is basically Netherlands, France and Germany. .

And in Netherlands, as you know, because net metering is expiring at the end of 2026, there is a huge interest in batteries, and that is starting to materialize. And our activations basically increased by about 100% compared to, I mean, the activations in Q2 compared to Q1 has increased by 100%.

We have staffed our internal sales representative team, about 10 people and 10 sales folks who manage leads that come from the hormone events. These homeowner events, we haven't done before, but we are now ramping up on those we started them 9 months ago. We are now ramping up on those in a systematic fashion.

We are talking 6 homeowner events a week, which is approximately something like 75 to 80 a quarter -- 78 a quarter. So that is generating a lot of interest, and it is a flywheel because once we help installers, installers are likely to reciprocate.

So there, I think the inflection curve -- I mean, the inflection can be very big because the deadline is approaching, NIM is going to go away. And the only way that customers, consumers can be protected is if they have self-consumption, which is solar plus storage. Now coming over to France.

One more thing which I left out in Netherlands. We have a base of 0.5 million solar homes there. So that is how we are able to do the homeowner events. That is how we are able to generate the battery leads, which we are -- we will continue to do. In the case of France, we have about 400,000 solar base in France.

This is phase homes. And in France, the economics are slightly different. In France, feed-in tariff is quite small for new installations, but for existing installations, they are still an fathering net meter. But however, there is high sensitivity maybe because of the war, I'm not sure, but high sensitivity on energy independence.

So in France, we find that it is almost to the same level as Netherlands, if not higher. And we have exactly the same model there, too. We are driving both demand organically from homeowners as well as working with our installers and that's going fine. So those are the 2 most exciting things that generate a lot of results.

In the case of Germany, very attractive market, we have I should say, we have not yet exploited that to our fullest potential. Of course, we do have some fantastic partners there who are helping us. And I think we are going to grow and strength to strength there with our fifth generation battery, which is going to help us very well.

So we are quite bullish and the last one, I have an excellent management team. in Europe. We put -- we put an Enphase veteran in there, and he understands how to work with the internal teams to get products as well as understands customers very well.

So part of our performance is attributed due to him in addition to his sales team as well. So we are extremely bullish about Europe.

Our next question comes from Dylan Nassano from Wolfe Research.

I just wanted to check if you had any updated views on the kind of shape of the cash flows from that $880 million physical work test backlog, just for like modeling purposes, should we be amortizing that over the next couple of years?

Is it more back-end weighted? And then how much if you could in the forward guidance for 3Q and 4Q, how much of that is 5% rule versus physical work post.

We already said -- we already told you that, but let me repeat. So the 5% physical work test, essentially -- just to give you a full context, in Q1 2016, we did approximately $34 million. In Q2 2016, we did approximately $84 million. In Q3 26, we are guiding to $75 million.

And in Q4, we already gave you a number that it's about $61 million of safe harbor. So that is the 5% and the 5% is done, then the more exciting thing is physical work test, according to what we said -- we have about $878.6 million is what we have signed this year, plus we signed one agreement last year to -- we haven't recognized any revenue from any of the physical work test shipment yet.

Any of the physical work test that is signed this year, we haven't recognized any revenue yet. That revenue, when will it be recognized if according to being likely beginning 2028 because that is the whole point of safe harbor. The tax credits remain open until the end of 2027.

And from 2028, they would have to utilize this PWT inventory physical votes inventory. And they would order they would ask us to make micro inverters with that physical work test product. So we will see normal micro inverter run rate. We will see accessory run rate. We will see battery run rate if they decide to do attach if they decide to attach batteries. So it's a long answer. It's quite difficult for us to predict. However, we think it will be linear -- we think it will start 2028. .

Okay. Great. And then just a quick follow-up on the tariff impacts in the guidance specifically for batteries. So I know in the past, you had talked about kind of shifting your cell supply. Can you just update us? Have you completed that? Is there any more sales that you're getting from China.

Yes. In general, the tariffs have come down under control. We talked about our we had base tariffs, let's say, approximately a year ago, we had base tariffs. And then we had this reciprocal tariff that was introduced by this administration. We said because of resi broker tariffs, we had approximately 5% gross margin impact.

So our gross margins came down to the mid-40s. But then with the recent rulings, that impact, the reciprocal tariff impact has reduced from 5% to 2%, which is quite positive for us. What we have done, again, we are not -- we are taking our own actions. Our microinverter supply chain has diversified quite nicely. So if there is any further tariff, for example, in the region, we can always move another one.

To answer your question, yes, we have other than China, we have a non-China cell source as well, which we are able to leverage in the event it is -- it is in the event, the Chinese batteries have a much higher tariffs. We can always leverage that. So that is -- we bought that into production.

And as we go more, 1 are looking very hard at U.S. sources as well as we get into more commercial battery as we get into the our fifth generation and sixth generation battery, we are also looking at U.S. met cells. And we have a lot of suppliers there who want our business.

Our next question comes from Corrine Blanchard from Deutsche Bank.

Maybe just coming back to the SST and maybe this has been already is a bit address, but I wanted to come back on what has been the feedback you have received from customer -- and maybe if you can share some detail on which kind of customer production ships you're trying to look for and achieve? And then I will have a question on the European market after

I think -- this is Raghu. I think as Badri mentioned, we are talking to the entire ecosystem of SST of the data center market, which includes, of course, the hyperscalers, the [indiscernible] the neo clouds, EPCs, et cetera. All the way even down to some of the server providers as well because we want to make sure that the solution that we are providing, it's not just a product.

It's an entire solution set from medium voltage to Rack, as Badri mentioned, is covered that we are addressing of the entire issue. And the feedback has been quite positive. We have a very unique solution relative to what those are done and what's been done in academia is that we have a fully distributed architecture, where we have hundreds of these power modules.

And that brings -- and each power module is undersubscribed by about 10%. So the key value proposition of reliability plays very well. Plus we also point out our history of almost 90 million microinverters shipped to date with a 500 DPPM failure rate. So the combination of the historical performance plus the new plus this architecture, which is fully distributed really resonates very well with a lot of the players in terms of reliability.

Now we also talked about we have some intrinsic structural advantages in terms of cost, right? If you -- the product -- the components that we use in our product all off the shelf, generally available parts are almost commodity parts, including GaN, we consider GaN to be any more commodity. So that helps us a lot on cost.

We do what's called soft switching, and soft switching enables us to have a very, very light I footprint. And like my footprint means that we can package this device this power module in an engineered plastic enclosure, and that again drives cost.

And since it's only 4 kilowatts and very, very efficient thermal management is also very easy. Combine all of that with high-volume manufacturing. And that is a standard line that we use today to manufacture micro inverters we have some intrinsic cost advantage as well.

So the combination of the value drivers that we talked about in terms of reliability, in terms of response time, which is sub-millisecond response time that can help eliminate the need for that high seat battery from the 800-volt section and rely on the BSS to do all of the work.

Those are the things that are resonating very well. And of course, U.S. manufacturing and FA compliant supply chain are all very positive feedbacks that we are getting.

Great. And maybe the second question. Can you talk about the European Cyber Act? I think we met with your team in Munich like in June, and I think there is a lot of focus during the Intersolar CyberArc 2.0, but just wondering what's your latest view? And how do you think it could impact you?

I think we are fully tuned into all of the developments that are happening there. I think the key here is to make sure that we are ahead of any of the compliance requirements. And so far, we are giving this incredible amount of importance.

We have a person there who's exclusively focused on all of these new requirements that are coming. And we have already met a number of the requirements and any new requirements that are coming around cyber, we continue to meet, both in Europe as well as in and as well as in the U.S. as well.

We understand that both inverters, SSPs, et cetera, or anything, what I'll call it inverter-based resources are going to be classified as critical infrastructure. And so they will have an additional layer of scrutiny in terms of communication layer that each one of these devices have and how are they managed and all of the other security requirements or cyber requirements that are needed.

So we feel like we are on top of it. We feel like we are ahead of the curve there in meeting all of the requirements.

[Operator Instructions] Our next question comes from Vikram Bagri from Citi.

It's Ted on for Vik. I wanted to just go back to the guidance. If we could maybe just touch on some of the assumptions there. The Netherlands storage activations were over 100% this quarter. Could you share what the guidance assumes for activations in 3 key and then just going back to the comment about under shipments.

Could you just elaborate on what the source of that caution is? Is it to do with demand? Is it a seasonal slowdown -- is it interest rate driven? Or is there anything else in there? And then I have a follow-up.

Yes. So typically, in Q3, there is summer seasonality in Europe. So basically no, we expect more or less flattish performance from Q2 to Q3. However, we think from Q4 onwards, particularly in regions like Netherlands, which are seeing the expiration of net metering, there's going to be a big breakout on batteries. .

And we are -- we don't usually break out volumes by region. That's why we gave you a percentage and the moment it becomes big enough, we will start breaking that down. But that's what we are most excited about. There is Enphase has got 0.5 million solar homes and all of them are going to be scrambling.

I mean many of them or I should say, a small fraction of them have converted or added batteries and many of them are going to be scrambling in between now and the end of the year so that they can be ready when net metering goes away.

Another question that you asked in terms of the under shipment, look, what I said, this question was asked before, what I said is -- our sell-through basically is approximately $245 million forecasted in Q3. And we have a modest under shipment there, so of approximately $15 million.

That's why our core number is $230 million, plus safe harbor is 75. So that's how you get the $305 million. So just -- it assumes a modest level of under shipment, not a lot, and it's just out of caution that's all.

And then in terms of the SSP product line, is there any clarity on what you could recognize from a 45x standpoint? And then just to clarify, in terms of expected needs for that product? Is that a 2 or a 2020 event?

Yes. We expect -- we have previously said this volume shipments in 2028 in pilots in 2027. With regarding 45x, we are working through the deals and once we have a good understanding, we will be able to share more information in the upcoming quarters.

[Operator Instructions] And there's showing no further question. I would like to turn the conference call back over to Badri Kothandaraman for any closing remarks.

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

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.

Good morning, and thank you for joining us on today's call to discuss Enphase Energy's business. With us today is Badri Kothandaraman, Enphase's President and Chief Executive Officer. [Operator Instructions]

Please note that management may be making forward-looking statements about the company's current plans and expectations with respect to its business, technology and products. Actual results may differ materially from current plans and expectations, so I encourage you to read our SEC filings where we discuss the risks inherent to our business. You'll find detailed discussions in our filings with the SEC, including our annual report on Form 10-K for fiscal year 2025 and our quarterly report on Form 10-Q for the quarter ended March 31, 2026.

Please note that non-GAAP financial measures referenced during this presentation are reconciled to their most directly comparable GAAP financial measures found in the investor presentation posted on our website at investor.enphase.com.

With that, I will turn the call over to Enphase Energy's President and Chief Executive Officer Mr. Badri Kothandaraman to give a short report on the company.

Good morning. Quick overview of the company as usual, founded in 2006, approximately 2,700 employees. I'm talking to you from Fremont, California, that's our headquarters. Our customers are distributors, installers, homeowners as well as business owners. We have shipped approximately 87.8 million microinverters cumulative, big numbers, over 5 million systems in more than 165 countries. We are rapidly making progress in storage. We have shipped over 2.5 gigawatt hours of storage. 2025 revenue was approximately $1.5 billion. We are profitable.

Let's go to the next page. Brief recap here. Core differentiation is a semiconductor integration. You see the zoom there on the left, and that's our ASIC. That's our chip, that's our silicon, custom silicon. We continue to innovate on that silicon. IQ9 uses silicon or Swift along that was the same in IQ8 as well. Going forward for the next generation, we are working on a on a custom silicon called Kestrel, and that will also be used in our solid-state transformer. So a lot of innovation happening on the custom silicon. That's the brain. That helps us to do predictive control, which keeps the architecture to a single stage in converting DC to AC and vice versa.

Software-defined architecture, most of the issues that arise, be it a quality issue, customer issue, we will be able to usually take care of it with software. And our product is incredibly flexible. It is one hardware and software defined according to the country of operation.

Ensemble is our energy management technology, basically, it is the architecture on how an AC-coupled system works and how it interact, how each component interacts with the other. But the general concept is it's a distributed architecture, it's AC coupled and that's the AC bus that you see on the right. Everything we do, for example, microinverters are in the convert DC from solar into AC for the home, storage basically takes the AC and then you have microinverters inside storage, stores it as DC. I get an EV charger, for example, bidirectional EV charger that taps into the DC port of the car. There are inverters, grid forming inverters that once again, DC converted into AC and so on. So AC-coupled architecture. It's modular it helps us to extend the architecture regardless of when a customer bought the system, he should be able to upgrade the system with our latest and greatest products.

Next. So that's the benefit of what I talked about, semiconductor technologies, software and our Ensemble is higher quality. So I told you about the single stage possible because of our custom silicon, and that means fewer components, reduced heat on the batteries, no high-voltage DC. We operate at low voltage DC. LFP, very safe chemistry. We believe in LFP right from the get-go. We haven't changed it. And the industry also adopted LFP now. I talked about the flexibility. Efficiency is high once again because we have a single-stage architecture. So supply chain, quality, efficiency, cost, all of them are interrelated and all points towards our semiconductor technology with the ASIC.

Next. Again, our quality targets have not changed. 500 defects, defective parts per million. That means it's a 0.05% number. And we continue to do well there. Margins, our gross margins are quite good. We are in the mid-40s, and it is possible because of two things. One is value-based pricing and the other is working on world-class costs. We continue to do that well. We established a team, and I joined the company in 2017. That team is growing from strength to strength.

Our customer service is also one of the strongest points. Worldwide NPS has now climbed from the 70s into the 80s now, which is good. And we are taking it to the next level. We are introducing an AI assistant in the homeowner app. 100,000 homeowners have that today already, and we are planning to extend it across the fleet very, very soon. And that can do some pretty amazing things. Similar AI assistant for the installers also is coming, where the installers will be able to get a very quick snapshot of everything in their fleet, and they will be able to intensify issues and it will help them to zoom on to the right issues.

Cost, of course, cost, like what I said, cost very closely related to the -- our architecture, to the semiconductor architecture, to the ASIC. They are all intertwined together. The architecture dictates the components because single stage means less number of components that we have. And semiconductors are miniaturized now, so we take advantage of Moore's law. And we focus on both digital integration, which I talked about ASIC as well as analog integration, too. So we can integrate a bunch of things into high-volume, low-cost semiconductors.

Next. Business models have not changed. It's an efficient manufacturing footprint. OpEx, most of our engineering development is in India, along with New Zealand is our -- it's still our key place where we do brand-new microinverter architectures.

Next. The supply chain not much has changed. We are predominantly making most of our microinverters, I would say, greater than 95% of our microinverters in the U.S. Basically, we get production tax credits there, which is good. And we also make at least, I would say, 50%, maybe 40% of our battery volumes in the U.S., too, and that is increasing. Globalization is important for us. And we are slowly but surely diversifying away from China on batteries.

Next. So this is a big deal. This is what we do. We -- contrary to other companies that have to extract things for ESG. ESG is what we do. We ship microinverters that basically prevent CO2. So these are the statistics over time. So big one to note is 137 terawatt hours of clean energy production over time.

Next, this is important, so I'm going to slowly walk you through this, build best-in-class distributed energy systems and deliver them to homes and businesses through our installer and distribution partners, enabled by a comprehensive platform.

We are getting more into commercial. So that's why the business is there. And distributed energy system, I talked about Ensemble, which is a distributed architecture. So installer and distribution partners are very important for us. So our business is through our installers. So therefore, a lot of our decisions are based upon the ease of doing business for distributors, installers and ultimately, the homes, which is why the installer platform is very critical for us, how to ensure that we are easy to do business with and how to ensure that installers can get their job done with -- not only with the products but also with tools and software.

Next. Actually go back to that page. I'd like to point out the picture there. That's our fourth generation system that -- the one on the left is the Meter Collar. The Meter Collar, we introduced it last year, June time frame to the market. It is now qualified in 64 utilities across the country, qualified in all the major utilities in California. And that basically makes backup very, very easy. And we expect this to help our business considerably as we roll this out more -- to more utilities across the nation.

Next. So a brief recap on what does the Enphase Energy system contain. We started with microinverters. You see on the roof, you have microinverter, that's how the company started. The basic building block for us is still the microinverter, the semiconductor-based software-defined microinverter. So you see microinverters there and then you see the battery there, and I talked about the Meter Collar. You have an EV charger there that is now becoming bidirectional. The Enphase app. Yes. So system is slowly growing. So solar, batteries, EV chargers, home energy management.

Next. So this is the one I was telling here is a more clearer picture. The left is the Meter Collar and the right most box is our 10-kilowatt hour battery, which is our fourth-generation battery. It's more compact than our third generation. And we started shipping this from June last year.

Next. This one, IQ9. IQ9 is our ninth-generation grid-forming microinverter based on GaN technology. As the power becomes higher and higher, silicon has got some limitations, GaN can handle a lot more power. So we started shipping commercial microinverters based on GaN 427 watts in December. Till now, Enphase did not have a 3-phase 480 volts product in the U.S., and that has changed in the last 6 months. We have started shipping. And we have also started shipping in select places, the IQ9 and residential microinverters as well. And that's going to become more mainstream in this quarter.

Today, we announced that we were taking 3 orders on a product, which is IQ9S 3-phase 480 volts. The 480 volts is line to line, it's return 277 that is line to neutral. So why is IQ9S is important? While this product that you're seeing here IQ9N is 427 watts, IQ9S is 548 watts. In the commercial business, the panels are now quite high wattages. The panels can go anywhere from 600 watts to 650 watts. And when you have 650 watts DC commercial panel, you need the correct microinverter to be paired with it. So one obvious was to make a 548 watts, and that was easy to make with our GaN platform. And of course, this is made in the U.S., which is important for the commercial system owners, and it means -- it is free of complain.

Okay. Next. Just a recap of batteries. We entered the battery business. Originally, we entered it in a very small way in 2016, we introduced what we call it first-generation batteries in Australia. That was a very small battery, 1 kilowatt hour. But then we really started getting into the battery business in 2020. So batteries that you see on the left are the ones we shipped at that time, 3 kilowatt hours, 3.3 kilowatt hour building blocks and the 10 kilowatt hour battery would be 3 of the 3.3 kilowatt hours.

The one on the right-hand side is our third-generation product, and that is being used a lot by Europe. Europe uses the FlexPhase version of the third generation because it is -- everything is 3 phase there. 3-phase backup is important. Again, the third generation has got substantially higher power than it's got double the power of the first and second generation.

Next. Then I talked about the fourth generation product. We introduced it in June. The main event here is the Meter Collar. And of course, the compactness of the battery, 62% lesser wall space compared to our third generation. Now we are working on our fifth generation. We expect to pilot the battery there. That will be even more smaller, even more cost effective. It uses 100 ampere hour prismatic cells and the form factor is quite amazing. We will be able to have a stack of 30 kilowatt hours, which means to the end consumer, it will appear as one box on the wall.

Okay, next. PowerMatch technology, this is also an interesting feature. Basically, what this means is you can see on the right, that's the third-generation battery. It's got 6 microinverters in it. And when the home is consuming less watts, for example, 500 watts, which is typical for the most part, 80% to 85% of the time, the home consumes less nominal power, 500 watts. So all of the inverters in the battery do not need to be on. And that's the advantage of an architecture where -- it is a distributed architecture, which means you have -- I have 6 of these microinverters, 640 watts each. So in the case I just now described, I would not have -- I mean I would have 5 of them in standby. I would only have 1 microinverter active.

And what's the advantage of that? All inverters, they need current, meaning they burn current to operate. That's called as a tare loss, which is the -- inherently, they need circuitry in them to be active. And so that consumes current. And by putting them into standby mode, we can eliminate that. So we can exactly tailored these microinverters according to the load, while that is not exactly possible. If you have 1 monolithic string inverter, if your consumption is 500 watts, that string inverter is still active. So this is a big deal. It helps you to save kilowatt hours and stored energy, for example, can last up to 40% longer than competition. So that's available now with the over-the-air software upgrade for both our third-generation and fourth-generation, and it will be default for us going forward.

Next. This is a new one. This is an IQ Vault commercial battery as we -- you saw we got into the 3-phase solar business in the U.S. This will complement solar business and because batteries are getting popular, they save money, basically self-consumption. They provide backup. There is demand charges. So batteries are getting very popular for commercial. And this is for the small commercial business. We are talking about schools, hospitals, gas stations, small businesses, many more applications there. It's a 80 kilowatt hour. This is an 8-kilowatt hour cabinet that you see, and that can be -- 25 of these can be strung together in a site giving up to 2 megawatt hours. It supports 2-hour and 4-hour configuration, which means that 40 kilowatts of continuous power for a 2-hour configuration. Once again, uses exactly our principles, which is distributed architecture uses 314 ampere hour prismatic cells, have 15-year warranty. So this is, again, taking it to a next level here. This -- we expect to pilot this product in Q1 '27.

Next. EV Charger. We have introduced the EV Charger into -- we first introduced it into Europe. And a few months ago, we introduced into the U.S. And this is a beautiful product. It is a completely redesigned product. It's got a lot of bells and whistles, green charging, supports dynamic phase switching, dynamic load balancing, which is -- dynamic load balancing is quite simple, which is, let's say, you have a fixed main panel rating at home, let us say that it's 100 amperes. And you have turned down your charger, the charger is charging at its maximum current. And then suddenly, you turn something else on in the home, that consumes a lot of current. The charger is capable of throttling down itself in order for you to still meet your 100 ampere so that your breaker doesn't trip. So once again, very, very smart, a lot of other features here, seamless integration into Enphase's ecosystem to help homeowners maximize savings. So this is starting to ramp nicely in both Europe as well as America.

Next. Based on that charger architecture, this is a bidirectional charger. What is the bidirectional charger? The charger on the previous page does not have any active circuitry in it. While this one, this bidirectional charger has got grid-forming microinverters inside the charger. And what does it do? This charger taps into the DC port of the car, and converts energy from the car into the home. DC from the car into AC for the home. So can do V2H, which is vehicle to home, which means providing backup for the home as well as vehicle to grid and participate in grid services.

You can see here, again, the architecture is very simple. Meter Collar that we already have, which is actually hidden behind the meter and then one Bidirectional EV Charger. You can only start with this. You don't need solar. And this will give you a vehicle to home. While, of course, solar would be the right economic choice because you need to pay for the charging. So solar will be a good economic choice. This can work. You can have a solar system and you can have a Bi-Di EV Charger. That will work, too. In addition, you can have a solar home battery as well as a Bidirectional EV Charger with the car battery. So it's extremely flexible, and we expect to start shipping this product in Q4.

Next, Energy Management. This is Energy Management, more popular in Europe than the U.S. So customers have things like third-party EV chargers, heat pumps, hot water heaters. So we are able to basically with the IQ Energy Router, we are able to take all of those and then interface it with our Home Energy Management System, so that customer only has got 1 app to work with. And we have a nice feature called AI-based optimization. So a customer doesn't need to bother on how to extract maximum efficiency, how to extract full self-consumption out of his setup. This will be done automatically for.

Next. Installer platform, I'll just briefly touch upon this. This Solargraf is our Installer platform. And it consists of lead management, design and proposal, working with various financing companies, generation of automated permit plan sets. And of course, we have our installation and commissioning software plus O&M. We do O&M with Enphase Care. Enphase Care is getting slowly popular among our fleet.

Next. Let me cover AI and Enphase is offering now IQ SST. SST stands for solid-state transformer. Let's go to the next page. We announced this a couple of weeks ago. This product is for AI data centers. There are three constraints emerging here. Demand is growing much faster than the AI-dedicated capacity and the power infrastructure. That's one. AI loads can swing from idle to full power several times per second, stressing the grid. And then the legacy architectures today have too many conversion stages between grid and compute. So all of these three things need to be addressed because the rack power is slowly increasing. Today, it's of the order 100 kilowatts and that is increasing to 1 megawatt soon in a couple of years. And so whatever architecture that is present today will not work in the future.

Next. This talks about the demand/supply gap. Next. Just a quick background, why we think we are entitled to play in this area is that what we are talking about is power electronics, that's what we have experienced in. We have shipped 9 generations of microinverters we have shipped -- this is what we do for a living 87.8 million microinverters, 5 million systems. And a lot of things I already talked about. So we think our architecture is perfect for addressing the challenges with the data centers.

Okay. Next. This is our IQ Solid-State Transformer. This is a 1.25 megawatt building block. It is a supercluster of 342 power modules. And each power module is approximately, you can think about it as approximately 4 kilowatts. We will support 35 kV and 15 kV class, which means -- what's the definition? I mean, what does the solid-state transformer do? Takes medium voltage AC and converts it into 800 volt DC. Medium voltage AC is the 35 kV class, 35,000 volt class and 15,000 volts that's medium voltage AC.

What's called the low voltage in the industry is actually may not seem low voltage to us, but that's the terminology, that's 800 voltage. So the 800 volt DC is directly going to go into the AI rack, and then you're going to have that 800 volts DC further step down to approximately 1-volt, which is where the NVIDIA chips operate. So the architecture is going to get substantially simplified. There are several power conversions stages in between today, today's architecture is not an 800 volts DC. It is approximately 50 volt DC. So NVIDIA introduced the 800-V DC architecture. The entire industry is working to support that ecosystem and what we are going to be doing is to introduce an SST volume shipments in 2028, plan pilots in 2027. And there may be something like 4 SSTs per skid, which is the last comment, which is 5 megawatts per skid. Once again, each SST is 1.25 megawatts first bullet. And you see in the picture, there are 342 power modules there.

Next. That's the building block. That's the power module. So 4 kVA power module, distributed architecture, single-stage power conversion because of the ASIC advantage I talked about, that's the Custom Kestrel ASIC. GaN, GaN provides us with switching efficiency and high power, 98.5% peak efficiency. Brand-new transformer design. Probably the biggest complexity is the transformer design, because now you're talking about going from 35 kV class, to 800 volt DC. Soft switching design. We are able to -- because we operate at the microinverter scale, we have our soft switching design, low EMI, plastic enclosure, Therefore, we can target microinverter class reliability. There's also built-in redundancy into the product because the availability we need to cater to the data centers is five 9s, 99.999. So that requires us to have clever redundancy, which is what the distributed architecture automatically gives.

Next. Heart of the power module. It's not anything different from what we have today, Kestrel ASIC, fifth-gen custom 22-nanometer custom silicon powering the single-stage converter. Multi-core software, built-in communication, security and safety. Tandem function. Now we have two sections in the power module. One is medium voltage, and that's tens of thousands of volts and then the other is low voltage. There is now a fiber-optic interface between the two. So for communication there. GaN BDS. BDS is a bidirectional switch, that helps us to go from 4 silicon FETs to 2 bidirectional switch for our IQ9 microinverters. This enables compact, very high efficiency power conversion and of course, support fast switching, which is not easy to do when you start switching at -- with silicon carbide, for example.

Next. Who do we believe we have an advantage? Because our response time, because we are single stage, our response time is very good, sub-millisecond response. Because the sub-millisecond response is good, there is potential for us to reduce or eliminate the sidecar infrastructure. Sidecar infrastructure has got the BBU, battery backup units and capacitor backup units as well. We might need a little bit of the CBU, but the BBU can be potentially eliminated. And there is more work to be done there, obviously.

Five-nines availability. I talked about it. Lower field service cost. The whole point is to have built-in redundancy. So it is easy, meaning field service will not be necessary. But if field service were necessary, hot swap is possible. U.S. supply chain. One of the problems is that the transformer supply chain is completely full now. This is the traditional transformer supply chain, and that is completely full. But what we are doing is now a semiconductor-based software-defined supply chain. That's what we bring in, and we have experience doing that till now. So you will no longer rely on the traditional transformer supply chain. And we can do all of this in the U.S. It's high volume. It's -- these are high-volume components available and semiconductors, and we know how to do it here in the U.S.

Next. A quick overview on the financials. Basically, you can see, 2025 was not bad. We grew from 2024 a bit there. 2026 is interesting because what we just went through Q1, Q1 '26 was the first quarter where the 25D tax credit was eliminated for cash and loan business. So obviously, that was not a desired result, but we have to look forward, not look back. And so the industry is adjusting. We have our plans there. You heard a robust introduction of new product pipeline. You saw the expansion into commercial. You saw the foray into data centers.

And in addition, we are working with a few partners on prepaid leases. And this prepaid lease helps us to restore the 25D customer, meaning the cash and loan customer base. It helps us to bring that back. So we are excited about that product, the prepaid lease product, and we expect that to start ramping through the year. But you can see the healthy thing here is regardless of the macro, we continue to make money, and we continue to generate positive free cash flow.

Next. So conclusion, so we are proud of our tech 550 patents and pending applications. Now we not only have products for residential, we are branching aggressively into commercial and data centers. The SAM, served available market is $19 billion as of today, but that is going to expand when we introduce the product for the data centers, that's going to expand significantly. When we introduce product for the small commercial batteries early next year, that SAM is going to expand. And then the Bidirectional Charger when we introduce that, that SAM is also going to expand to that of electric vehicles. So that's a massive market. So that's it. Thank you.

[Operator Instructions]

I do see a question here. Any planned demo in 2026 for existing U.S. AI data centers?

In 2026, our internal plans are to get a full system demo first internally, and then we expect to be doing pilots in 2027. Any questions?

I have a question. So Badri, if you could tell us a little bit what's the dynamics of the worldwide markets? Where do you see most opportunities, U.S. versus Europe, [indiscernible], can give us a perspective from this point of view.

U.S., again, is an attractive market for us. In U.S., the dynamics are -- the dynamics have changed in the last few years. Originally, solar was the thing to do. So net metering drove that a lot. The economics were good. And then all of a sudden, solar becomes not very sustainable because of the Duck Curve. So you find in the U.S., although most of the states are still solar, you are slowly but surely seeing them all gravitate towards solar plus storage. So net metering is getting replaced with the form of net metering, example, California, where there is not much of export incentives. So every state, my prediction is every state sooner or later in the next 10 years will become solar plus storage.

So I think we are well positioned there. So the batteries that will -- the systems that will win are systems that can effectively integrate solar batteries, things like the Bidirectional EV Charger and do proper energy management. So that's my perspective there. And I'm talking mainly about the solar plus battery business, not yet talking about data centers.

Coming to Europe. Europe is actually a little bit ahead of the U.S. In Europe, many countries have already recognized that -- recognize the value of self-consumption. Many countries have something called as a feed-in tariff, which is really another way to say that your export incentive is gradually reducing. Some countries have the export tariff close to 0. Like, for example, France, 2 or 3 years back, France had an export incentive. Now their export incentive is approximately 0, which is like EUR 0.04 per kilowatt hour. It's very, very less. So Germany moved to solar plus storage. Netherlands is now moving to solar plus storage because they are considering to eliminate net metering. France is doing its own thing. They're also going to solar plus storage. And so every country is going in that direction, and that will happen much sooner.

In the U.S., I said 10 years, but in Europe, it's already there for the most part. So therefore, what people are looking for, they are -- Europe consumers are quite cost sensitive. So they are looking for us to give them cost-effective solutions on solar, batteries, Bi-Di, Bidirectional EV Chargers, we believe, will take off in Europe as well. So that. And the key is to make sure the system -- it's a full system, all-in-one system and available for them, at low system prices. Where I think the -- in Europe, today, if you ask me, I have to be candid about it, there is a lot of Chinese product in Europe. What happened was when the Ukraine crisis happened, at that time, the demand skyrocketed. At that time, everyone realized that supply was a massive problem. And so the Chinese suppliers recognized this first, and they started ramping up their presence in Europe ever since then.

And they do -- these are not bad products. They do service the customers decently, but they are point products. The point products means it is not a full solution, but it is, let us say, a battery. So where Enphase can win is if we not only help in overall system cost reduction, but if we offer a comprehensive energy management solution and all-in-one solution that comprises of solar, batteries, bidirectional chargers, normally EV chargers, heat pumps, hot water heaters, everything, around doing Home Energy Management, that will be a lot more value added to the consumer.

And what we are doing on our new products, the fifth-generation battery, for example, will eliminate the illusion that Enphase products are -- or Enphase batteries are high priced. This one will -- it will not only -- it's going to be cost effective. Volume-wise and it uses 100 ampere hour prismatic cells. So it's very, very compact. The energy density is actually 50% higher than our fourth-generation battery, which means that the size, the cost the functionality is going to be always an AC-coupled functionality. PowerMatch, I talked about PowerMatch, we are able to do PowerMatch because we have microinverters in there. We are able to shut them off. So we are able to do a lot of innovation there to add value.

So that's what I see. So I see demand going up for solar and batteries. I see us innovating there with IQ9 on the solar side, soon IQ10, fifth-generation battery with our commercial battery, with the Bi-Di product. And then the last one is -- I mean, last but not least, the data center opportunity is huge for us. The data center opportunity, once again, it solves a real problem for the data centers, which is simplifying power conversion. And the power conversion is simplified now instead of adding multiple stages from medium voltage AC, you now have on solid-state transformer there. And it uses not a brand-new architecture. It uses the architecture that we have tried and tested for years.

When will -- okay, let me -- the one at start at the bottom. There is an uphill in terms of market penetration regarding SST with many data centers already, how do you plan to penetrate and what effort are you currently doing?

So like what I talked about, SST, very -- I mean, brand-new segment. There are a few start-up players. There are a few established players. And I believe everyone is approaching it with the conventional architecture. Our architecture is so unique that if you ask me what do you think the differentiation is? The differentiation for us is going to be a fast response time. Our fast response time, coupled with the distributed architecture, providing the service level with high efficiency is something unique to the microinverter architecture, and we expect to be highly differentiated from that perspective.

Having said that, it is still early days there. And so there is still some ways for us to go in order to going from prototypes to real full systems to actual pilots running for months and showing the concept of sidecar optimization. So we do have some work ahead of us.

When will Bidirectional Charger preorders start for delivery in Q4 2026, what is the price?

We will let you know about the price. But we expect the preorders to begin in Q3.

Given the critical importance of GaN, is there any constraint? How much of the substrate comes from China?

There is not any constraint right now. Our suppliers don't have any constraints there.

Okay, vis-a-vis SolarEdge, how significant is the Made in U.S.A. label to gain further market share on SolarEdge for that matter, elsewhere in the world.

The Made in U.S.A. is important for us on a couple of things. One is the domestic content is critical for the third-party -- TPO suppliers. The domestic content -- products with domestic content enables the third-party, the TPO players, third-party owners, to get their ITC -- to get ITC tax credit. You get your base ITC. And then if you have domestic content, you can get 10% additional. So therefore, that is a requirement.

In addition of what got created by the Biden administration was the IRA. And that provides manufacturing incentives for companies in the U.S. And one such incentive is a production tax credit. In order for us to produce inverters in the U.S., we do get production tax -- we get production tax credit there. So those are the reasons to do it in the U.S.

Is it significant in terms of installers like? Yes, some installers who are actually in favor of Made in U.S.A., they are able to sell that well. But yes, competition -- I expect our competition to also catch up here.

Do you have a plans to offer step-up transformers for the commercial and utility scale solar technology platform, specifically dedicated pad mounted substation transformers, that go from inverter output voltages to medium voltage for grid interconnection?

No. But if you look at it, what we are trying to do here and one possible application of the SST, which I haven't yet focused on, but I don't mind sharing is, if you have a utility scale solar, for example, the utility scale solar, the panel DC voltage is approximately 15 mini panels are strung together and you have 1,500 volt DC. Imagine that 1,500 volt DC directly going to medium voltages, you do not need a low voltage AC inverter. You can directly go to medium voltage AC to the grid. So utility scale solar can benefit a lot through the SST architecture.

You don't need the conventional transform. Similarly, you look at your DC fast charging. DC fast charging if you see medium voltage comes in and then there is a custom transformer. And then you have low voltage AC, and you build a DC charger. So that is not required. You can directly go from medium voltage AC to low voltage DC with one stage, SST, single-stage trend -- single-stage conversion from medium voltage AC to low voltage DC, and you can create all of a sudden fast DC charger by reducing the number of stages. So SST has got a number of applications. And right now, we are leveraging the first one for the data centers, which will reduce the number of power conversion stages, which will directly take medium voltage AC into the compute rack with 800 volt DC.

Is there any plans to reduce microinverter prices to tackle Europe?

Yes, we already did last -- late last year in December, around November, December time frame, we did reduce our microinverter prices in Europe by 20%. And we also reduced earlier this year, we reduced the microinverter prices in the U.S. as well by approximately 20%, I think, 15% to 20% in Q1.

We have also adjusted pricing on batteries. We adjusted pricing on batteries in the U.S. in March, approximately by 10% to 12%. And we adjusted pricing on batteries in Europe just now in the last week. And I said that in the earnings call, we adjusted pricing by another 10% in Europe. So we are able to do that because our cost structure is getting better. And then also with the reversal of the tariff ruling, the IEEPA, we no longer have to pay a lot of tariff. So we were able to get approximately improvement of 2% of gross margin there. And we thought that this would be the good investment for us to basically reduce the prices there. And that will be aligned to our fifth-generation battery, which is coming very soon.

So that was the last question. Thank you again for your attendance today and for your continued support of Enphase Energy.

Thank you.

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

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's First Quarter 2026 results. On today's call are Badrinarayanan Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer.

After the market closed today, Enphase issued a press release announcing the results for its first quarter ended March 31, 2026. During the conference call, Enphase management will be making forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers, our operations, including manufacturing, customer service and supply demand anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax tariffs and supply chain matters.

These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations.

Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K which can also be found in the Investor Relations section of our website.

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

Good afternoon, and thanks for joining us today. to discuss our first quarter 2026 financial results. We reported quarterly revenue of $282.9 million, shipped 1.41 million microinverters and 103-megawatt hours of batteries and generated free cash flow of $83 million.

Q1 revenue included $34.5 million of safe harbor revenue. We exited the quarter with channel inventory above normal levels for both microinverters and batteries.

On a non-GAAP basis, we delivered gross margin of 44% and operating expenses of 27% and operating income of 17%, all as a percentage of revenue. Gross margin was above the midpoint of our guidance range. Mandy will cover the financials in more detail later in the call.

Our customer service NPS, Net Promoter Score was 82% in Q1, a record for Enphase compared to 79% in Q4. We are laser focused on customer experience for the last few years, and our average call wait time in the first quarter was approximately 1.4 minutes. We have also begun a soft rollout of our Enphase AI assistant in the homeowner app to approximately 100,000 homeowners, and we expect this to expand over time. The AI assistant is trained on Enphase product knowledge, historical service cases and relevant customer support data with access to sales force information, to help answer specific system-specific questions more accurately. It also supports multiple languages, helping homeowners get faster, more intuitive health wherever they are. We expect to pilot a similar AI assistant for installers during this quarter to help them do fleet management in a much more efficient manner.

Let's cover operations. In Q1, we shipped approximately 1.39 million microinverters from our Texas and South Carolina manufacturing facilities and booked the associated 45x production tax credits. These U.S.-made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the holiday for the 10% domestic content ITC added.

We shipped 49.5 megawatt hours of IQ batteries from our Texas manufacturing facility in Q1. We offer IQ batteries that meet domestic content and [ FEOC ] requirements, helping lease PPA customers qualify for ITC bonuses.

Let's cover to the regions. Our U.S. and international revenue mix in Q1 was 83% and 17%, respectively. In the U.S., our revenue declined 23% sequentially, primarily due to lower residential solar and battery demand following the expiration of '25 [indiscernible] tax credits and typical seasonality.

Safe harbor revenue increased to $34.5 million in Q1 compared to $20.3 million in Q4. Our overall sell-through declined 48% sequentially as Q4 was elevated by significant demand pull forward ahead of the tax credit expiration.

On a year-over-year basis, which better reflects the underlying impact of the policy change. Q1 '26 sell-through declined 18% compared to Q1 2025.

Our U.S. commercial microinverter sales more than doubled in Q1 as compared to Q4, driven by positive market reception for IQ9 microinverters. We now serve both major U.S. pre-phase commercial grid types, the 480 volts as well as 208 volts. In Q3, we expect to begin shipping our high-power 548 watts IQ9s microinverter for 480 volts 3-phase systems, which can support solar panels up to 770 watts DC.

We also expect to see near-term safe harbor demand from customers placing orders between now and early July. With U.S. manufacturing, domestic content eligibility and [ FEOC ] compliant products, how we believe our commercial business is well positioned for continued growth.

In Europe, our revenue increased 36% in Q1 compared to Q4, primarily because selling levels rose towards sell-through levels after we undershipped the European channel in Q4. We are beginning to see green shoots in April with solar and battery activations, up healthy double digits across multiple European markets compared with the monthly averages in Q1. This is being driven by rising power prices and increasing battery adoption. Europe is increasingly becoming a battery critical market.

As self-consumption dynamic tariffs and VPP become more important, the company that wins the battery relationship is well positioned to win the broader home energy system over time, including solar, software and VPP.

In the Netherlands, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1, as rising export penalties and the planned phaseout of net metering by the end of 2026, strengthened the case for self consumption.

In France, the reduction of feed-in tariff is also shifting the market towards self-consumption and increasing the interest in batteries, especially for new solar installations. Our battery activations in France increased approximately 20% in April from the monthly run rate in Q1, a more modest but positive trend.

In Germany, our battery activations rose approximately 27% in April, compared to Q1's monthly average. We have approximately 475,000 in phase residential solar system in Netherlands and approximately 400,000 in France, creating a meaningful retrofit opportunity in both markets. We are increasing homeowner events, doing direct marketing to consumers and working with the retail energy providers, along with strong support by our technologies such as power match technology and our upcoming fifth generation battery.

We have also built strong inside sales teams and the lead management platform across France and Netherlands in the last 3 months, and we are hoping to convert this demand into revenue with a much higher throughput.

Competition remains intense across Europe, particularly from low-cost string inverters and battery providers. In response, we are reducing our distributor list prices for batteries by approximately 10% in May, which follows a 20% reduction for microinverters already implemented from December last year.

In addition to this sharper pricing, we are instituting a stronger homeowner demand engine and a more competitive product road map, which includes IQ9 and our fifth generation battery, which is coming very soon.

Together, these actions improve our competitiveness today and position us for stronger growth as Europe shifts towards self-consumption, VPP and flexible storage.

In Australia, we are bullish on the battery opportunity. Australia is one of the world's most mature rooftop solar market with more than 4 million rooftop solar systems in start which is roughly one in every three homes is already using solar. Battery adoption is now accelerating, supported by the federal cheaper home batteries program, which provides an upfront discount for eligible small scale batteries connected in new or existing rooftop solar. The program is evolving on May 1 to better support rightsized systems and reduce incentives for oversized batteries. We believe this plays directly to our advantages, including our upcoming fifth generation battery which has a stackable and scalable architecture that gives homeowners flexible capacity and the ability to add more over time.

Let's now discuss our Q2 outlook. On the last earnings call, we said we expected Q2 revenue to be higher than Q1, driven in part by strong safe harbor demand. In line with those comments, our Q2 revenue guidance is $280 million to $310 million, including approximately $85 million of safe harbor revenue.

Since we exited the channel with a high inventory in Q1, we are under shipping approximately $25 million compared to the real demand. At this point, we are approximately 85% booked to the midpoint of our guidance.

We expect modest underlying sell-through growth in Q2 as compared to Q1. That said, our Q1 sell-through results and Q2 sell-through expectations are roughly 10% to 15% below our prior view, a weaker start to the year, primarily due to unfavorable weather conditions and TPO financing challenges. We expect to offset some of these pressures in the second half of this year through prepaid lease adoption, which I'll talk about soon, U.S. commercial growth and potential international recovery.

For batteries, our guidance is 100 to 110-megawatt hours. We recently lowered our battery list prices to distributors in the U.S. by approximately 12% to 14% in March, supported by the recently reduced reciprocal tariff rates.

Combined with our pricing changes in Europe, we expect higher battery sales volumes in the second half of this year. And just to repeat our Q2 revenue guidance anticipates us under shipping end market demand by $25 million in order to correct for Q1's over shipment.

Let's talk about safe harbor. We have executed new agreements year-to-date with third-party owners for approximately $843.6 million of product. $89.6 million under the ITC 5% safe harbor method and $754 million under the physical work test method. This is in addition to the 67.7 million physical work test orders secured in Q4.

These microinverter orders create two important benefits for in Enphase. First, they secured a significant multiyear volume for our microinverter business. And second, they position us very well for future battery attached sales from 2027 to 2030 when these systems are expected to be installed. These also underscores our strength with the TPO providers.

Moving to financing. Prepaid lease adoption continues to build momentum. Prepaid leases give homeowners an upfront -- lower upfront cost today and the option to own the system after 5 years. The TPO initially owns the system, claims the [ 480 ] tax credit and share that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. This lowers the homeowners' effective cost and helps restore the economics closer to the 30% 25 day tax credit era.

We continue to support [ Propel ], a TPO led prepaid lease program that exclusively uses Enphase equipment and is being field tested with our loan and distribution partners. The pilot is designed to service the long tail of installers and has expanded from 40 installers at the time of our February earnings call to more than 200 installers to date, across four states. We are now seeing a run rate of approximately 200 net originations per week and are encouraged by early customer adoption trends.

It must be noted that the battery attached to those originations is approximately 84%. That's not very surprising because one of the states [ Propel ] is now being piloted is in California. We expect to complete the pilot this quarter and expand the program more broadly beginning in July after validating customer experience, installed execution, which is happening now and financing performance at scale.

Let's talk about products, starting with IQ batteries. Our fourth generation IQ battery [indiscernible], delivers a smaller footprint, higher energy density and simpler installation with the IQ meter color. The meter color is now approved by 64 U.S. utilities and growing, covering approximately 34 million customer accounts.

In California, the color is approved by all three major investor-owned utilities and the largest customer-owned utility. We believe this gives Enphase the broadest utility approval for print of any major battery provider today. Our fifth generation AC [ corporate ] battery is built from stackable 5-kilowatt hour modular blocks, that can scale up to 30-kilowatt hour. This battery uses 100-amp prismatic cells and target roughly 50% higher energy density than the fourth generation battery and about 40% lower cost. Paired with our power match software we believe it will deliver a compelling combination of performance, flexibility and value for installers and homeowners. We expect to begin pilots in Q3 and begin shipping in Q4.

We are also making strong progress on IQ Board, our commercial badly. The first product here is an 80-kilowatt hour AC-coupled commercial battery designed for small and medium commercial markets in the U.S. Our internal estimates indicate that this small commercial market represents an annual opportunity of approximately 1 gigawatt hour. The IQ Board uses 314-amp of prismatic cells in a compact building block architecture and will be even more cost effective. It can scale up by stringing up to 25 units together for approximately 2-megawatt hours of capacity. The platform is designed to support backup, self-consumption shaving time of use optimization as well as VPP participation all managed through Enphase software. We believe IQ Board brings our distributed architecture, our electronics expertise and system level intelligence into commercial storage, giving customers a flexible, high-quality platform for resilience and cost savings. We expect to begin pilots in Q1 '27.

Turning to microinverters. We began shipping our IQ9 3-phase commercial microinverter in December, built on our GaN architecture. IQ9 opens up the 480 3-phase U.S. commercial segment for Enphase for the first time, representing a new TAM of approximately $400 million annually. The installer feedback has been strong with customers valuing Enphase quality, our panel monitoring, simpler system design, lower installations, cost and balance of system costs and higher system efficiency. We expect to introduce the higher power IQ9s 3-phase product in Q3, supporting 548 watts of AC power and pairing with this -- pairing with solar panels up to 770 watch DC. We also expect to introduce IQ9 for global residential markets this quarter.

Moving on EV charging. We are making excellent progress on our IQ bidirectional EV charger, which is built on our 650 Volt GaN power platform and engineered to work with Model 800 work DC EV architectures. This is a clear example of our ability to move power efficiently and bidirectionally between grid phasing AC and high-voltage DC systems with tight control and protection. The product is especially compelling because it simply pairs with the meter color in the U.S. or a backup switch in Europe, enabling streamlined home backup and VPP participation. We are in advanced discussion with multiple auto OEMs, including two partnership opportunities that are progressing well. We will share more as these discussions mature. We are targeting initial availability in Q4, starting with limited deployments as we complete the certifications, utility coordination and vehicle compatibility validation.

So finally, we are excited to announce today the development of our IQ solid state transformer product for AI data centers. AI is driving [ rack ] power from roughly 150 kilowatts to more than 1 megawatt. The industry is moving towards higher voltage DC architectures, including 800 volt DC, as outlined in NVIDIA's white paper last September. We estimate the initial annual U.S. addressable opportunity for IQ SST in AI data centers to exceed 11 gigawatts by 2021, a creating a significant new market for a high-efficiency medium-voltage power conversion.

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

IQ SST is designed for reliability and serviceability. It is modular includes built-in redundancy and support hot swapping without shutdown. It is also expected to deliver cost and supply chain advantages through fewer components, standard high-volume parts, automated manufacturing and U.S.-based production. Our SST platform will be able to scale from a single 1.25-megawatt [ rack ] to multi-megawatt systems. Supporting multiple grid voltages and extends beyond data centers into other adjacent high-power markets as well.

We are now engaged with more than 20 prospective customers and are expanding our partner ecosystem. We have completed product feasibility, built working power modules and converged on the system design. In Q1, we restructured the company to fund SST within our existing operating framework and create room for the strategic program. More than 80 engineers are now working on SST across power electronics, ASICs, software, mechanical design, manufacturing and reliability. As we continue to drive productivity with AI across the company, we are targeting to fund the SST program within our current operating expense structure.

We expect a full system demo later this year pilots with customers in 2027 and volume shipments in 2028. We also expect revenue to build over time. but the strategic logic is clear. IQ SST is a direct extension of our core strength in distributed power electronics, custom silicon software-defined control and high-volume U.S. manufacturing. We believe this architecture is the right way to power the next gen of AI infrastructure and our positioning Enphase to lead in this transition.

Let me conclude. The market is going through a transition, especially in the U.S. residential sure, but we are focused on what we can control: execution, cost, innovation, financing solutions and customer experience. We are seeing early traction in several important areas. Prepaid leases are gaining momentum in the U.S. Europe is beginning to show signs of recovery. With batteries becoming increasingly critical to the customer decision.

In the U.S., commercial solar is starting to ramp, supported by IQ 9 microinverters and our domestic manufacturing position. Our road map is also strengthening. Our fifth generation battery bidirectional EV charger, our IQ volt commercial battery and the IQ9 family of microinverters all expand what Enphase can deliver to homeowners, installers and commercial customers. These products strengthen the core and open new growth opportunities.

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

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2026 financial results, as well as our business outlook for the second quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website.

Total revenue for Q1 was $282.9 million. We shipped approximately 627.6 megawatts DC of micro inverters, and 103.1 megawatt hours of IQ batteries in the quarter. Q1 revenue included $34.5 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install their inventory over more than a year.

Non-GAAP gross margin was 43.9% in Q1 compared to 46.1% in Q4. The gross margin was 35.5% in Q1 compared to 44.3% in Q4. The gross margin was negatively impacted by 6.7 percentage points from the sale of our 2025 PTCs, which totaled $235 million and were sold at 93% of its value. This resulted in a discount of approximately $16.5 million, plus approximately $2.5 million of transaction-related fees.

[ Reciprocal ] tariffs also impacted our gross margin by 4.3 percentage points in Q1. Non-GAAP operating expenses were $77 million for Q1 compared to $78.8 million for Q4. [indiscernible] operating expenses were $130 million for Q1 compared to $129.6 million for Q4. Safe operating expenses for Q1 included $45.4 million of stock-based compensation expenses, $3.8 million of acquisition-related expenses and amortization and $3.8 million of restructuring and asset impairment charges.

On a non-GAAP basis, income from operations for Q1 was $47.3 million compared to $79.4 million for Q4. On a GAAP basis, loss from operations was $29.6 million for Q1 compared to income from operations of $22.4 million for Q4. On a non-GAAP basis, net income for Q1 was $62.3 million compared to $93.4 million for Q4. This resulted in non-GAAP diluted earnings per share of $0.47 for Q1 compared to $0.71 for Q4. [indiscernible] net loss for Q1 was $7.4 million compared to [indiscernible] net income of $38.7 million for Q4. This resulted in GAAP diluted loss per share of $0.06 for Q1 compared to earnings per share of $0.29 for Q4.

We exited Q1 with a total cash, cash equivalents and marketable securities balance of $930.6 million compared to $1.51 billion at the end of Q4. The 5-year convertible notes we raised in 2021 were due on March 1, 2026, and we settled all the outstanding principal amount of $632.5 million with our cash on hand.

As part of our anti-dilution point, we spent approximately $18.7 million in Q1 with holding shares to cover taxes on employees divesting, reducing diluted shares by 441,448 shares. We did not repurchase common stock during the quarter as we are prioritizing disciplined cash allocation and preserving flexibility for strategic investments and potential acquisition opportunities. We had approximately $269 million remaining under our share repurchase authorization and remain confident in our long-term business outlook.

In Q1, we generated $102.9 million in cash flow from operations and $83 million in free cash flow, including proceeds from the sale of the 2025 PTCs. Capital expenditure was $19.9 million for Q1 compared to $9.7 million for Q4. The increase was primarily due to continued investment in U.S. manufacturing.

As of March 31, 2026, after monetizing the PTCs generated in 2025, we had approximately $162.9 million of PTCs on our balance sheet. This includes $108.3 million related to U.S. main microinverters shipped to customers in 2024 and $54.6 million related to shipments in Q1 2026. We elected the rate pay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to extended IRS processing time lines.

In March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business. And the intel of this approach is included in our quarterly gross margin guidance.

In addition, on February 20, 2026 the U.S. Supreme Court issued a ruling embedded in certain tariffs previously imposed under the International Emergency Economic Powers Act or IEPA. On April 20, 2026 U.S. customs and border protection launched an online portal for companies to submit IEPA tariff refund requests. As of today, we have submitted approximately $50 million of refund claims through the portal. Subject to approval, we currently expect to receive the refund within the next 90 to 120 days.

Now let's discuss our outlook for the second quarter of 2026. We saw our revenue for Q2 to be within a range of $280 million to $310 million, which includes shipments of 100 to 110-megawatt hours of IQ batteries. The revenue guidance includes approximately $85 million of safe harbor revenue. We see gross margin to be within a range of 42% to 45%, including approximately 3 percentage points of reciprocal tariff impact. We spend non-GAAP gross margin to be within a range of 44% to 47%, including the reciprocal tariff impact.

Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $120 million to $124 million, including approximately $45 million estimated for stock-based compensation expense, acquisition-related expenses and amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $75 million to $79 million. With that, I'll open the line for questions.

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

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

So Brian, our safe harbor revenue for Q2, the estimate is $85 million. That's what we said. Your question is safe harbor estimate for Q3. It is difficult for us to estimate right now. But if I were to give you a number that between $40 million and $50 million is what I expect, safe harbor revenue for Q3. And that's my opinion there.

Then, yes, I talked about we expect modest underlying sell-through growth in Q2, the current quarter we are in compared to Q1. That said, like what I said, Q1 and Q2 sell-through expectations are roughly 10% to 15% below our view. Weaker start is basically due to the challenges we are seeing in general, [ EPO ] financing and unfavorable weather for us.

But what we are very excited about is [ Propel ], which is our prepaid leads offering through our partners. And I gave you some color on the prepaid lease offering. Basically, the last earnings call, I told you we had 40 installers from [ Propel ], now we have, as of last week, we have 200 installers.

We still have the same four states because we are disciplined in not entering additional states until we finish the pilot. But our originations have increased at a very, very healthy rate. 200 net originations a week.

In fact, I mean, that is a very nice number. That amounts to roughly 90 to 100-megawatt annual run rate if I freeze that 200 as of today -- 200 per week as of today. So extraordinary reception for [ Propel ], and we have to thank our partners to make that happen. So for us, [ Propel ] is something we are very excited about.

The other one that I'm excited about is in [ Propel ], our battery attach is 84%. Obviously, California drives a lot of battery attached. So when we expand it to other states, it might be a little bit lesser than that. So we are excited about that because that means for us more megawatt hours very soon. And we expect that in the second half of the year, for sure.

Then the other one we talked about is what we are seeing in Europe. We gave you color. In fact, we gave you a lot of color on Europe, saying that what we are seeing in April compared to monthly run rate in Q1.

For example, we are seeing our double-digit increases for most of the Europe regions, double-digit percentage increases for most European markets compared with the monthly average that we saw in Europe in Q1. And that's being driven by the rising power prices and increasing battery adoption.

In Netherlands alone, our battery activations in April increased by approximately 75% compared to the monthly run rate in Q1. In France, that number was 20% in April from the monthly run rate in Q1. In Germany, 27% in April compared to the monthly run rate in Q1.

So a long answer to your question is basically we are very encouraged by [ Propel ]. We are very encouraged by the fact that we are seeing some green shoots in Europe. But having said that, the market is fickle right now. You're seeing a lot of dynamics in the market. We don't want to [ answer ] a guess for Q3 and Q4, but this is what we are doing from our side. And I haven't talked about the new products, but we are actively working on four new products. And to be brief, that's the fifth gen battery, the bidirectional charger, the commercial battery as well as the IQ 9 high-power version for commercial. And of course, the big announcement we made is the SST and that one is more a 2028 revenue opportunity.

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

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

So when you are a completely distributed or a decentralized architecture, it enable 342 power modules that ranged in the supercluster really brings a tremendous amount of value. What it does is, for example, you get sub-millisecond response types. And when you have sub-millisecond response time, now you can target how to get rid of the site car completely. So no [ BBU ] or no storage anywhere in the low-voltage system. You can now move all your storage to the medium voltage section via [ BFF ]. We all know this. When you're a completely distributed architecture, you get very, very high reliability.

When you have 342 of these devices, we have built in 10% redundancy. So you can achieve very high uptime, and our target there is [ Five9 ] which is very good and serviceability of that device without having to take the entire rack down.

We talked about U.S. supply chain and volume manufacturing. It leverages the same platform that already -- that we already have in -- from a manufacturing point of view.

And then on the cost, again, people don't appreciate this very much is the technology that we have, the single-stage resident converter we do what's called soft switching, which means that electromagnetic interference or EMI signature is extremely low. We don't have to build big metal and closures to enclose these devices to reduce your EMI. That's why this device is the power module is in a part of polymeric enclosure. So we really drive the cost down. The single-stage power conversion means very few components. We drive the cost down.

Of course, we'll price to value, but our costs are going to be very, very low. So very good response time, which means we can target completely eliminating the site card, eliminating the site card means you can replace that with a compute rack, more compute rack means more tokens, more tokens means more revenue. We talked about rail and you have a super cluster of 342 of these power modules, you get architecturally correct redundancy and you get very high reliability, and you can target [ Five9 ] uptime, supply chain, volume manufacturing and, of course, cost.

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

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

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

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

Yes. We did in Q1 a little more than $5 million. We did in the high single digits. A little more than 5%. Having said that, C&I is a very lumpy business. And at least for us, until we have a nice pipeline established we do expect it to be lumpy. But the opportunity for us is that C&I installers, C&I developers do have a safe harbor window as well. And that safe harbor window will be closing in. They have to make their plans by early July.

And for that, we have two things, we have actually three products for that. One is our already existing 208-volt 3-phase product, which is [ IQ80 ], which we have been supplying for some time. The other is our brand new IQ9 and [ 427 ] product, which is what we introduced very recently. The third one, which is coming, and we plan to start shipping in Q3. That product is the 548 watts, even high-powered version. That is suitable for safe harbor, which is because if they are going to be using these later in the years, the panel sizes are going to be even more.

Today, for example, the panel sizes are between 595 watts and 650 watts, in the commercial business. It's going to go -- keep going up a little more. So that's why the 548 watch is also exciting. So we're very excited by the C&I business. In general, directionally, we expect it to continuously grow until we establish a pipeline. But in terms of quarterly, it is going to be a little lumpy at the beginning.

The next question will come from Colin Rusch with Oppenheimer.

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

It's mostly the U.S.

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

Yes. We have talked to of the order of 20 customers or so prospective customers. And I think the most important thing is to get a dental demonstration system ready, which is what we are targeting for this year.

Once that's done, the all natural following step, there are enough people out there who want to will be willing to test the system, but we need to get to the demonstration system, which is what we will be ready with this year. And that's what we are singularly focused on.

And then followed up by 2027 will be about customer pilots and then 2028 will be about volume shipments. So that's the sequence of events that [ Q4 ].

We have -- we do have a detailed investor presentation, which is on the website as well as on the SST page. One of the things we'd like to highlight is we started working our team, Raghu and the CTO team, they basically recognize the opportunity that we have in the SST data center space about 9 months ago, and we started working on feasibility 9 months ago.

And so since then, over time, we have gradually signed approximately 18 engineers in the company to be working on SST and they're all working full time. We also took the opportunity to think strategically and said, how do we create a lot more room for SST. So we restructured the company in Q1, basically to focus on SST. And you saw focus on assist without changing our operational expense structure. And so we got that done.

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

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

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

Yes. I mean at this point, I will tell you what I see, but that's basically like what I told you the last time. That's my opinion.

As we said, we expected Q1 sell-through to be around in the $250 million range, and we were 10% to 15% below that number, basically. And so we overshipped approximately $25 million in Q1. That's why I said we ended the channel with a little more inventory than what we would have liked. We are correcting that immediately within 1 quarter itself by under shipping in Q2 by that number.

We do expect the native sell-through in Q2 to be a little better than Q1, driven by the usual seasonality. What could surprise us in Q3 and Q4 is the few factors that I just highlighted a few minutes ago. What could surprise us is the [ Propel ] could surprise us. There, we are proceeding with some caution. We are piloting in four states now. We are at a run rate of 200 originations a week, which is a nontrivial number. under originations a week. And that percentage increase on the originations a week is fast. I mean, we are very happy with the percentage increase.

We are also very happy with the number of installers. Our vision with [ Propel ] was to give prepaid lease to our long tail of installers. And I won't declare success right now because we are still in the pilot, but it is going in the right direction. [ Propel ] comes with an 84% storage attached. Of course, that's a high number because of California. But that's a very encouraging number for our batteries as well. So that's one vector.

The other vector is basically what I talked about in Europe. We talked about the business starting to show some sign strength on batteries in Netherlands, in France and in general, even for solar. So we are already seeing that in April compared to Q1. So that's the second thing.

The third one is the IQ battery can see -- of course, the volumes in Q1 were a little light due to the '25 abrupt cut off, but we are making a lot of progress on the IQ battery [ latency ]. We are qualifying and 64 utilities have accepted our major color. And with the [ Propel ] ramping, IQ battery can see will also be ramping with new installers who haven't used in [indiscernible]. So that's that.

And then on the small commercial front, I talked about more opportunities in small commercial in terms of -- before the safe harbor window closes I believe the commercial developers are going to need a solution for '27 through '30 -- I mean, '28 through '30. So I expect both steady increase in the commercial business as well as some potential safe harbor in -- which will be shipped in Q3 order hopefully by the end of Q2.

So as you can see, there are a lot of moving parts. We see the challenges in the last few weeks, like you correctly pointed out, tax equity challenges, installer bankruptcies, they are never good for the business, but we are not the ones to complain. We try to do whatever we can do. And I think all of these initiatives are something that we'll be working on.

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

It's very early to tell, Phil, about what our cost is what price and cost is going to be. We have a -- we have a rough estimate of it, but it's way too early to tell. Right now, we are focused on continuing the development so we can get to that customer demo by the end of this year.

And we're also investigating because we are using a very similar module to what we already do for solar, we are looking at if there is any IRA advantages here for us as well.

So too early to tell. Right now, the focus is on getting this 1.25-megawatt customer demo by the end of this year. But over time, as we get deeper and deeper into the design, we'll be happy to share with you the details.

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

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

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

Right, right. yes, [ Propel ] is offered through our partners. So we are working very closely with them. there. Having said that, my wish is to basically get up to a run rate of 500 originations a week by the end of Q4. And that's my wish.

Today, we have 200 installers that are using [ Propel ] again, my desire on why we launched [ Propel ] basically, that number should be a healthy multiple of $200 million. That's why we launched. That's one of the reasons us and our partner, distribution partner, we launched this [ TPU ] led program [ Propel ] is because we wanted to bring that access to the long tail installers with an ease of doing business. The tax equity question is a better question for [ Propel ]. We are not going to make any comments on that right now there.

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

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

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

Again, I am trivializing there their work. They have a lot of work to do. So -- and we need to prove that the entire chain works properly. And until then, we will not be doing a drop launch, like what I stated.

Having said that, what are we piloting for? We are piloting to see if we can support a lot of installers. And the answer to that is yes. Since the last earnings call, at that time, they were 14, now they are $200. The last earnings call, the number of originations is an order of magnitude low. Now it is 200 a week, which is -- and climbing rapidly. So we are closely monitoring it. We are working with our partners. And the moment we are ready to launch. We'll be transparent about it.

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

That's right. I think you're thinking about it right, positively impacting the second half and also in 2027. That's right. And don't forget the other things, which are what we do nuts and bolts is basically the Europe opportunity is a big one. We are doing well there, especially Netherlands has picked up steam. France has picked up steam. And there, we are actively doing things. Once again, we are holding two to four homeowner events a week. Each of these homeowner events are attended by almost 150 homeowners each one. And our target for on every event, I told my team every event should at least generate 0.5 megawatt hours. So basically, if you do four events that should generate 2-megawatt hours a week and that should only compound as we go. So we are going to replicate the same thing in France as well, where we have 400,000 installed base.

And we are introducing our third-generation battery third-generation battery. The form fact of -- sorry, 5th generation battery. The form factor is very, very small. It's 50% energy density using 100-amp prismatic cells, a 40% lower cost -- our cost -- internal costs, and we expect to translate that into a lower price for our distribution partners. So that's another very exciting product.

The other one, I didn't talk too much on the buyback. On the day, we are gearing up for a launch in the fourth quarter. Again, a very simple product, which is along with the meter color, and just the charger of it can provide V2H, which is both V2H, vehicle-to-home resiliency and vehicle-to-grid, V2G. So that's another product. And there, we have two partnerships with North American OEM car providers, which we will announce when we are ready. So that's that.

And then, of course, IQ9, we are launching IQ9 residential markets. We have already launched for the commercial market. We are going to introduce higher power higher-powered version. So that business, especially with our domestic content compliance, U.S. manufacturing, all of that is a very big advantage there. That business takes a little time. It's a design in business, and so we expect to make steady progress there.

The last one, which I talked about is the commercial battery. The commercial battery, it's a gigawatt hours of TAM, and we are talking about batteries for small and medium businesses, schools, hospitals, churches, small businesses, the gas stations, convenience stores all of those, they typically need battery size anywhere between a 50-kilowatt hour system and 250 to 300-kilowatt hour system. So now basically, we will be able to offer that along with IQ9 on the [ PB ] side, on the solar side, and now we will have 80-kilowatt hour battery, and you can string 25 units of those, you can go up to 2-megawatt hours. So we are extremely excited by that offering as well.

So we're doing lots of things, and we expect sequential growth. Of course, it's a turbulent market, but we are controlling what we can. And of course, the IQ SST, which we talked about.

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

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

Yes. I mean it is anybody's guess. Yes. I shared with you the question and the concern. Last time it was an extended the Ukraine crisis basically led to an explosion of demand this one may be more modest. But nevertheless, we are seeing an increase. I'm not sure how long it will last. But there are some fundamentals there, which is basically batteries are good in general. And Europeans are -- I have to say that Europeans are a little more advanced. And the U.S. here, almost every region is accelerating to a battery-first market.

And battery-first pulls everything else, solar, EV chargers, energy management, it puts everything. And what we are going to be doing there is, of course, we are going to get more competitive. We talked about sharper pricing. We already made necessary pricing corrections on microinverters in December. We are making pricing corrections on batteries in May, which is next month. And we already made battery pricing corrections in the U.S. in March. So we are laser-focused on expanding our battery business. I talked about that.

In Europe, we are going to go from a third-generation battery to our fifth-generation battery in Q4. And so that will be a massive leap there in terms of cost, in terms of pricing, in terms of installation, in terms of space. So we just did -- one of the things we -- before we finalize our design, it's our practice to show it to installers and get a group of installers and get limited or get some feedback from them. So we did that in the first quarter. We did that in France, in Netherlands, in Germany, and we got a lot of feedback on the battery and mostly very positive. So for us, it is all about batteries there and batteries were pulled through solar and I think we are making the right necessary steps for us to grow through 2026.

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

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

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

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

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

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

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

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

Good day, and welcome to the Enphase Energy's Fourth Quarter 2025 Financial Results. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Zach Freedman. Please go ahead, sir.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter 2025 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, Enphase issued a press release announcing the results of -- for its fourth quarter ended December 31, 2025.

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 TPO 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 thanks for joining us today to discuss our fourth quarter 2025 financial results. We had a good quarter. We reported quarterly revenue of $343.3 million, shipped 1.55 million microinverters and 150-megawatt hours of batteries and generated free cash flow of $37.8 million. Our Q4 revenue included $2.3 million of safe harbor revenue. U.S. consumers pulled forward purchases ahead of the Section 25D tax credit deadline, helping us exit 2025 with [ the lean ] channel.

For Q4, we delivered 46% gross margin, above the high end of our guidance range, 23% operating expenses and 23% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Our global customer service NPS was 79% in Q4 compared to 77% in Q3. Average call wait time was 1.6 minutes.

We piloted an AI assistant in the Enphase app in Q4 and plan to roll it out in Q1 to help customers manage their systems intuitively. We also plan to pilot an AI assistant for installers in Q1 to help them manage their fleet and identify upgrade opportunities.

Let's talk about operations. In Q4, we shipped approximately 1.31 million microinverters from our Texas and South Carolina manufacturing facilities [ in ] booked associated Section 45X production tax credits. These domestically made microinverters helped residential [ leads ] and PPA providers as well as commercial asset owners qualify for the 10% domestic content ITC adder.

In Q4, we shipped 51.1 megawatt hours of IQ Batteries from our Texas manufacturing facility, meeting applicable domestic content requirements and helping lease PPA customers qualify for ITC bonuses. We continue to differentiate through our ability to deliver domestic content and meet FEOC requirements as regulatory standards tighten. Also, we expect to receive our first non-China battery cells in Q1 and remain on track to scale non-China cell supply into battery production in the first half of 2026.

Let's now cover the regions. Our U.S. and international revenue mix for the -- for Q4 was 89% and 11%, respectively. In the U.S., our revenue decreased 13% in Q4 compared to Q3, primarily due to safe harbor revenue of $20.3 million compared to $70.9 million in Q3. The overall sell-through of our products increased 21% in Q4 compared to Q3 to the highest level in more than 2 years. The strong demand trends that we saw at the beginning of Q4 continued till the end of the year, driven by increased solar and battery installations ahead of the expiring Section 25D tax credit.

In Europe, our revenue decreased by 29% in Q4 compared to Q3, while our sell-through decreased by 23%. The overall business environment across the region is still challenging. We are staying disciplined in managing the channel and focusing on targeted growth areas for 2026. I will provide some additional color on the key markets in Europe.

In the Netherlands, solar demand remained soft in Q4, but we are making steady progress towards a large battery retrofit opportunity driven by structural changes in the market. Rising solar export penalties and the planned phaseout of net metering by the end of 2026 are shifting economics decisively towards self-consumption, strengthening the case for batteries. With an installed base of approximately 475,000 Enphase residential solar systems, we estimate a total opportunity of roughly $2 billion for batteries. We are seeing early traction for -- from targeted homeowner outreach, including homeowner events and direct marketing, and are expanding partnerships with retail energy providers that offer compelling VPP economics. With continued rollout of software capabilities like PowerMatch and the launch of our fifth generation battery later this year, we believe we are very well positioned to lead the battery transition in Netherlands.

In France, reduction in feed-in tariffs are shifting residential solar economics towards self consumption, increasing the interest in batteries, particularly for new installations. With approximately 375,000 Enphase residential solar systems installed in France, the retrofit opportunity is more modest than in the Netherlands due to fixed energy contracts, but overall battery adoption is still gaining traction. New business models including battery leasing are emerging, and we expect the battery demand in France to build steadily through the year, supported by anticipated increases in utility rates and evolving dynamic tariffs.

Across Europe, competition remains intense, and pricing pressure is high as installers adapt to a tougher demand environment. We are responding by controlling costs within our current products and aligning pricing to market realities, including our microinverter price reductions which we implemented across Europe in November. At the same time, we are investing in next-generation products very strongly, both IQ9 microinverters and our fifth generation battery platform. We expect to deliver structural cost improvements in these products, which enable attractive pricing and sustain healthy gross margins. Our focus remains on supporting our installers and competing effectively as the market evolves.

In Australia, we see a meaningful battery growth opportunity supported by a mature rooftop solar base and accelerating customer interest in self-consumption, resilience and VPP. The market is installing larger, more capable storage systems to take advantage of current incentives, and installers are increasingly asking for solutions that are simple to size, expand and commission. With our fifth generation system expected later this year, we believe our stackable, scalable AC-coupled architecture is well aligned with what installers want and what homeowners increasingly value: flexible capacity today with the ability to add more over time.

Let's now discuss Q1 outlook. During last quarter's call, we shared a view of Q1 revenue to be around $250 million. Today, we are providing Q1 revenue guidance of $270 million to $300 million. We are approximately 90% booked to the midpoint of our revenue guidance. We continue to believe Q1 marks the low point for underlying demand, with improvement expected through 2026, particularly in the second half. Installer sentiment is also improving as higher utility rates strengthen the customer value proposition, including in several Northeast and Midwest markets that have seen double-digit residential electricity price increases over the last year. The feedback on prepaid lease offerings is also encouraging, giving installers yet another effective tool to drive solar and battery adoption this year.

Let's talk about financing. Enphase is well positioned to support all major TPOs today. In Q4, we announced 2 TPO orders totaling $123 million, including $55 million under the 5% safe harbor method and $68 million under the physical work test method. We collaborate with TPUs on tax equity support, domestic content and FEOC-compliant offerings, O&M services through [ Enphase Care ] and an integrated workflow through Solargraf for design, proposal and permitting while also partnering on innovative financing structures.

We continue to see prepaid leases as an attractive option, which give homeowners a lower upfront cost today and the option to own the system after 5 years. In the structure, the TPO owns the system initially and claims the 48D tax credit, then share that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. The result is a lower effective cost for the homeowner and economics that look much closer to what customers were used to when the 30% Section 25D tax credit was available.

We are supporting a TPO-led prepaid lease program that is being [ fully ] tested with a loan partner as well as a distribution partner. The program, which uses Enphase equipment, is currently in pilot across 4 states, with approximately 40 installers. We expect a broader rollout to happen upon completing the pilot successfully and validating the customer experience, installer execution and financing performance at scale. We expect to share more as the program matures in the coming months.

Let's cover product, starting with IQ Batteries. Our fourth generation IQ Battery 10C continues to ramp in the U.S., delivering a smaller footprint, higher energy density and a simpler installation process enabled by the IQ Meter Collar. The Collar is now approved by 52 U.S. utilities and growing, serving approximately 30 million customer accounts. We believe this represents the broadest utility approval footprint of any major battery providers today. In California, the Meter Collar is approved by all 3 major investor-owned utilities.

We also launched PowerMatch in Q4, a software-enabled technology that dynamically matches the IQ Battery output to real-time home demand, increasing usable energy, extending battery life and improving performance by up to 40%. Unlike hybrid systems that push all power through a single large inverter, PowerMatch activates only the microinverters that are needed, reducing the losses at low power consumption so customers get more usable energy from the same battery capacity.

Let's now cover our fifth-generation battery. We are making significant progress on this battery. It is built from stackable 5-kilowatt hour modular blocks and will scale up to 20-kilowatt hours in the U.S. and up to 30-kilowatt hours in other regions. The design targets roughly 50% higher energy density than the fourth-generation battery at about 40% lower cost. When paired with PowerMatch, we believe this platform will offer a compelling combination of performance, flexibility and value for installers and homeowners. We expect to start pilots in the third quarter of 2026 and start shipping in the fourth quarter.

We are making strong progress in partnering with retail energy providers and VPP operators across the globe that are seeking flexible distributed capacity. Through these programs, homeowners can earn attractive incentives from that energy provider for installing and enrolling Enphase batteries. In Q4, we added several programs, the notable being a home battery leasing program with GMP in Vermont and eligibility under San Diego Community Power Solar Battery Savings Program. These partnerships can drive meaningful battery volumes, and we are targeting many more additional VPP partnerships this year.

Let's come to microinverters. In December, we began shipping the IQ9-3P Commercial Microinverter built on our GaN-based power conversion architecture. IQ9 is a major step forward for Enphase, expanding us into [indiscernible], 3-phase commercial systems in the U.S. for the first time and represents an approximately $400 million total addressable market. The demand is encouraging, with more than 50,000 microinverters ordered for Q1, and early feedback confirms the market need for reliability, FEOC compliance and domestic content that IQ9 delivers. We expect to introduce IQ9 for the global residential markets in the first quarter of 2026 and the higher powered 548-watt version for both residential and commercial markets in the third quarter.

More broadly, [ our IQ ], our GaN-based microinverter platform, gives us a step change in speed, efficiency and controllability, capabilities that matter as the grid and large electrified loads increasingly demand fast response times and load shaping. We are increasing our R&D investment in these areas to extend our core capabilities to address these demanding use cases. More to come here as we make progress.

Let's cover EV charging. In December, we began shipping our new IQ EV Charger 2 to customers across the U.S. This charger supports a fast level 2 charging up to 19.2 kilowatts on 240 volt service and up to 22.1 kilowatts where 277 volts is available. It also works as a stand-alone charger or fully integrated with Enphase solar and battery systems. The charger is also available in Europe, Australia, New Zealand and Canada, with additional availability planned for 2026.

Let me share an update on our IQ Bidirectional EV Charger built on our GaN power platform, engineered to work seamlessly with modern 800-volt DC EV architectures. It is a concrete example of our ability to move power efficiently between grid-facing AC and 800-volt DC backbone and to do so bidirectionally with tight control and protection. We continue to target initial availability in the fourth quarter of 2026, starting with limited deployments as we complete required certifications, utility coordination and vehicle compatibility validation. The product is compelling because it [ pass ] simply with the IQ Meter Collar in the U.S. and a backup switch in Europe to enable a streamlined configuration for seamless home backup, which is [ V2H ], and VPP participation, which is [ V2G ]. We are also in active discussions with multiple auto OEMs on partnerships and will share more as those discussions mature.

Let's cover Solargraf, our all-in-one design and proposal platform built for installers. We continue to deliver meaningful upgrades, including fully customizable proposals with in-line editing, battery-only proposals and racking integration to generate a complete bill of materials. We are also expanding AI capabilities, including one touch, design and automation and lighten integration to help installers reduce operational overhead. Looking ahead, we are adding support for commercial system designs to align with our expanding commercial products. Solargraf remains a core installer enablement tool, especially as TPO integration accelerates.

Let me conclude. We are executing well through a challenging period, and our focus on innovation, quality and customer service continues to support healthy margins and good market share in U.S. residential solar. We are now extending these strengths into commercial solar, where we believe we can build a meaningful business. We expect the underlying demand to stabilize from current levels with improvements developing as several tailwinds build.

Rising electricity costs are making energy affordability a priority for households. New financing options are expanding how consumers can buy solar, and easing interest rates can further improve affordability. In 2026, we are continuing to evolve from a single product and end market company into a broader technology platform that can apply our power electronics and energy management strength to significantly larger markets. The transition began 5 years ago with our entry into residential batteries and is now accelerating with our expansion into commercial solar and our planned entry into commercial batteries, bidirectionally recharging and additional adjacencies in the year ahead.

As the world's power needs grow larger and more complex, we believe Enphase brings a differentiated best-in-class power management foundation to meet them. We remain laser focused on the near-term revenue levers that we can conclude. Number one, accelerating IQ Battery 10C growth. Number two, scaling IQ9 GaN microinverters to expand our 480-volt 3-phase commercial footprint. Number three, unlocking battery retrofits across Netherlands and France. Number four, ramping IQ EV Charger 2 while preparing for bidirectional EV charging later in 2026. Number five, launching our fifth generation residential battery, along with IQ9 microinverters to materially lower system costs and strengthen solar economics.

With that, I will turn the call over to Mandy for a further review of our financials. Mandy?

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2025 financial results, as well as our business outlook for the first quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website.

Total revenue for Q4 was $343.3 million. We shipped approximately 682.6 megawatts [ DC ] microinverters and 150.1 megawatt hours of IQ Batteries in the quarter. Q4 revenue included $20.3 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install their inventory over more than a year.

Non-GAAP gross margin for Q4 was 46.1% compared to 49.2% in Q3. GAAP gross margin was 44.3% for Q4 compared to 47.8% in Q3. Reciprocal tariffs impacted our gross margins by 5.1% in Q4. Non-GAAP operating expenses were $78.8 million for Q4 compared to $78.5 million for Q3. GAAP operating expenses were $129.6 million for Q4 compared to $130.1 million for Q3. GAAP operating expenses for Q4 included $48.6 million of stock-based compensation expenses and $2.9 million of acquisition-related amortization, offset by $600,000 of restructuring and asset impairment benefit.

On a non-GAAP basis, income from operations for Q4 was $79.4 million compared to $123.4 million for Q3. On a GAAP basis, income from operations was $22.4 million for Q4 compared to $66.2 million for Q3. On a non-GAAP basis, net income for Q4 was $93.4 million compared to $117.3 million for Q3. This resulted in non-GAAP diluted earnings per share of $0.71 for Q4 compared to $0.90 for Q3. GAAP net income for Q4 was $38.7 million compared to $66.6 million for Q3. This resulted in GAAP diluted earnings per share of $0.29 for Q4 compared to $0.50 for Q3.

We exited Q4 with a total cash, hedge equivalents and marketable securities balance of $1.51 billion compared to $1.48 billion at the end of Q3. The 5-year convertible notes we raised in 2021 are coming due on March 1, 2026, and respect to stakeholder principal amount of $632.5 million in maturity with our cash on hand.

As of December 31, 2025, we have approximately $337 million of production tax credit, or PTC receivable on our balance sheet, net of income taxes payable. $109 million is related to U.S. main microinverters shipped to customers in 2024, and $228 million is for shipments made in 2025. As we elected direct pay for 2024, the net PTC will be refunded by the IRS through our completed 2024 tax return. We have limited visibility to when we will receive 2024's $109 million refund from the IRS due to its extended processing time lines. We are evaluating our options to get paid sooner for our 2025 PTC.

As part of our anti-dilution plan, we spent approximately $1.4 million by withholding shares to cover taxes for employees divesting in Q4 that reduced the diluted shares by 41,767 shares. We did not repurchase our common stock in the quarter because we are prioritizing the most disciplined use of our cash, including preparing for the $632.5 million of debt maturing next month and preserving flexibility for strategic investments and potential acquisition opportunities. We have approximately $269 million remaining under our share repurchase authorization, and we remain confident in our long-term business outlook.

In Q4, we generated $47.6 million in cash flow from operations and $37.8 million in free cash flow. Capital expenditure was $9.7 million for Q4 compared to $8 million for Q3. This increase was primarily due to continued investment in our U.S. manufacturing and R&D equipment.

Now let's discuss our outlook for the first quarter of 2026. We expect our revenue for Q1 to be within a range of $270 million to $300 million, which includes treatments of 100 to 120-megawatt hours of IQ Batteries. The revenue guidance includes approximately $35 million of safe harbor revenue.

We expect GAAP gross margin to be within a range of 40% to 43%, including approximately 5 percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within a range of 42% to 45%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within the range of $137 million to $141 million, including approximately $60 million estimated for stock-based compensation expense, acquisition-related expenses and amortization and restructuring and asset impairment charges.

We expect our non-GAAP operating expenses to be within a range of $77 million to $81 million. As part of our efforts to better align our workforce and cost structure with Enphase's business needs, strategic priorities and ongoing commitment to profitable growth, we recently reduced headcount by around 6%. We expect to reduce our non-GAAP operating expenses to be in the range of $70 million to $75 million per quarter, starting from the third quarter of 2026.

In closing, we managed well with our financial discipline through a difficult global environment in 2025. We maintained profitability and strong gross margins. In addition, in 2025, we generated approximately $95.9 million of free cash flow and approximately $228 million of net PTC receivable. We exited the year with $1.51 billion in cash, cash equivalents and marketable securities while repurchasing 2.3 million shares of our common stock for approximately $130 million.

With that, I will open the line for questions.

[Operator Instructions] And the first question will come from Phil Shen with ROTH Capital Partners.

First one is on the cadence for the year. I know you don't guide for other quarters, but I was wondering if you could give us a little bit of color on what Q2 might look like? You talked about Q1 being the low point. And so should we expect Q2 to be flat or up or slightly down? And then from a margin standpoint, would you expect a little bit of expansion in or kind of similar levels to Q1?

Right. We expect Q2 to be up, but it's too early for us to talk about it. And like what I said in the prepared remarks, there are a few things which are -- which we believe is tailwinds for us. And there are a few things that Enphase is specifically doing. So the tailwinds are -- you can see the utility rates. So the utility rates are going up everywhere in the U.S. And we see a lot of increases in the Northeast, in the Midwest. So I think that is going to be a definite tailwind for us.

New financing options such as the prepaid leases are starting to sprout, not just the ones that we are involved in, but in general. So I think that would be an opportunity to essentially replace the loan demand, the loan TAM prior to the 25D expiration, the tax credit expiration.

And then the last one is, although interest rates didn't come down in the recent announcement, I think we will see some easing interest rates through the year, and I think that will further improve affordability. So those are 3 strong tailwinds that we see. They should get better as the year progresses.

What are we doing? We are just not sitting and watching. We are doing a few things like what I listed, accelerating IQ Battery 10C. Now we are approved at all 3 IOUs in California. So there is no barrier for the Meter Collar. We are approved at 52 utilities. So -- and we expect to add 50 more utilities in 2026 overall. So that's going quite well. Also, 70% of our U.S. battery shipments are now the IQ Battery 10C. We also expect the prepaid leases to help accelerate our battery volumes. In addition, we expect FEOC and domestic content to be a good value proposition that Enphase can offer, which should also increase the volume sequentially through the year. So that's on the batteries.

We are very excited about the IQ9 product, the IQ9N product. The IQ9 product addresses the 480 volts commercial market, which we have not played in before. We just started shipping the product in December. We already have a backlog of more than 50,000 microinverters for Q1. And I think there, we expect to grow from strength to strength. It's a new market. Of course, there's going to be a cycle of learning, but I think we bring some things unique like reliability, quality and domestic content via compliance, all of those we bring. So that's very exciting.

The third one, unlocking the battery retrofits across Netherlands and France, big deal. We are doing something we have never done before. We are organizing homeowner events in Netherlands. We are organizing 2 homeowner events every week. And so we are talking of 100 homeowner events for the year. Every homeowner event will generate preorders. While it's too early for us to share those details, we believe it will meaningfully change our battery demand in Netherlands. So we are extremely excited about that.

Same deal in France. Although in France, the -- it is not like -- in Netherlands, the energy contracts aren't fixed for a very long time. They change every 1 to 3 years. But in France, they are fixed. So retrofit opportunity isn't as compelling as Netherlands, but still, people who would like to own batteries for resilience and new installations, certainly, self-consumption is required because the [ field and ] tariffs have dropped off a lot. So we are very excited there as well, both the opportunity to sell to our installed base as well as new installations, new business models. So that's number three.

Number four is we just introduced our IQ -- latest and greatest IQ EV charger into the U.S. It's a state-of-the-art -- one, it's a beautiful looking product, and it's doing quite well in Europe. We expect it to do very well in the U.S. But the real exciting thing there is the bidirectional charger. The bidirectional charger is a demonstration of how powerful the inverter architecture is. We interfaced to 800 volt DC on the cost side and then to home AC using the same single-stage power conversion that Enphase is known for. So just with our bidirectional chargers, which has got the inverters in grid forming inverters in it, plus the Meter Collar, that is enough to do both [ V2H and V2G ]. So we're excited about that one, which will come about in production in Q4.

And the last one, we are already going to -- preparing ourselves to launch IQ9 residential microinverters in the first quarter in a few weeks from now, both U.S. as well as international. Then we expect to introduce our fifth generation battery. Fifth-generation battery will have the energy density close to about 100-watt hour per liter, which is best-in-class. The cost of that battery will be 40% down compared to the fourth-generation battery. Therefore, it will allow us to basically reduce our enterprising for the consumer, which is necessary as batteries -- battery adoption increases and yet maintain our gross margins in line with the [ corporate gross molecule ]. So those 5 levers are all entirely in our control, and we plan to make full use of them in addition to the 3 tailwinds we talked about.

Great, Badri. I had a quick follow-up on the -- you said Q2, I think you meant revenue would be up, but you don't know or can't quantify how much. Just want to understand if that's versus the $285 million from Q1 with safe harbor or versus the $250 million without safe harbor?

We usually make the comments regarding -- with respect to the core revenue. But we also expect -- although we can never forecast safe harbor, we also expect healthy safe harbor in the second quarter because it's natural. The reason is TPO partners are going to formulate plans for '28, meaning 2028, 2029, 2030. So there is going to be some safe harbor activity happening in both. And we'll have the time to ship it through Q3, I believe. So yes.

Great. And as for my follow-up here. In terms of the data center market and the 800-volt architecture and what you guys might be able to do for that, I know it's super early, but just -- in so far as you can kind of comment on how you could address that market, what the timing might be, that would be fantastic. But if you can't talk about it, I get it. Just wanted to see if we might be able to get some color.

Sure. We are very aware of the industry's trend going towards 800 volt DC for the data center. Where that actually intersects, our expertise is that -- is in front-end power conversion, specifically how medium-voltage AC, and we are talking about 13.8 kV and 34.5 kV AC can be efficiently converted, controlled and managed into 800 volt DC before the power reaches the AI rack.

So having said that, we are evaluating multiple next-generation power conversion architectures as part of our long-term R&D. But we are not in a position to discuss any specific products or time lines today.

The next question will come from Brian Lee with Goldman Sachs.

First one I had was just on margins, maybe for Mandy, maybe for Badri. I think the 5% reciprocal tariff impact, it seems to be stabilizing and peaking here. I think last year, you talked about fully offsetting it by 2Q of 2026. So any updates there on the ability to offset the tariff impact? Is that still a 2Q target? Maybe if you can kind of quantify magnitude and cadence for us off this 5% level that you're still guiding to for Q1? And then I had a follow-up.

Right. So Brian, if you remember the last time, what happened was the tariff -- meaning approximately, let's say, 3 to 4 quarters ago, that was a tariff specifically with respect to China. And at that time, what we said is we are going to make plans to move into non-China manufacturing, which we are on track to do. And we would be able to avoid any significant tariffs by doing that.

However, the situation now has changed. And every country now has got a tariff, including -- that is what is called as the reciprocal tariff. I have -- if I go to Malaysia, there is a tariff. If I go to Vietnam, there is a tariff. Everywhere, there is tariff. And for us, the 5% tariff, just to give you more color, is distributed across -- 2% of the impact is on microinverters, 2% is on batteries, 1% is on accessories. Why? For example, on microinverters, we will have to bring in raw materials into the U.S. in order to make our microinverters into the U.S. -- in the U.S. So therefore, those get hit.

So therefore, there is no safe play which has got no tariff for us. What we believe, to answer your question, because that's still a valid question, what you got to -- how are you going to offset that 5% reciprocal tariff -- for us, the answer is in innovation. The answer is in IQ9, the answer is in the fifth generation battery. Those are -- IQ9, for example, is despite the power going up by 10%, we are able to maintain a smaller form factor. And we expect to take advantage of that in terms of higher gross margins with IQ9. As you can imagine, higher power products that produce higher power get more production tax credit, $0.11 a watt. So naturally, we expect to make higher gross margins there.

Then in addition, on the batteries, that's where the big lever for us is. We are rapidly getting close to releasing our fifth-generation battery. The fifth generation battery uses very compact, compact cells. These are prismatic cells. And therefore, we essentially are able to reduce that entire form factor, the full battery by a very significant amount. And we are able to do a stackable battery. Ours will be unique. It will be an AC coupled, stackable battery. Energy density, like what I said, 50% higher than our current battery fourth generation. Cost structure will be 40% lower. This will enable us to make good gross margins and overcome that 5% reciprocal tariff.

The follow-up would be on one of the specific products here. You talked a lot about the IQ9 Commercial Inverter, the $400 million TAM. If my math is right, it seems like the bookings activity, Badri, you mentioned maybe you're tracking the $5 million to $10 million right out of the gate for that new product. One, is that right? And then two, kind of how do you see yourself scaling up this year against that $400 million TAM? Is this tens of millions of dollars of revenue by the second half of the year?

Yes, you're approximately right. It is between 5 and 10 for the first quarter. And you should think about it the following way. I think what we are -- this product is -- it offers a compelling value proposition in terms of quality, reliability, FEOC compliance, domestic content. Customers haven't had such a choice before. So we are getting a lot of good traction.

And what we have shown in the residential market is that over the long-term, high quality, high serviceability wins. And we, therefore, expect to demonstrate the same in this small commercial market, and we expect over a 3-year time frame to get into the similar market share as what we have on the residential.

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

I guess just maybe on the prepaid lease product, assuming the pilot performs well that you're doing, can you share any more details in terms of the time line of when you would expand into additional states? And would it happen gradually or more of kind of a larger push? And can you get your coverage potentially nationwide by the end of 2026? And then just on prepaid leases in general, for the other prepaid lease offerings that are being -- that are out there, how do you think about your market share with those programs, I guess, relative to your traditional cash and loan channels?

Yes. I think those are good questions, but we are in very early stages right now. We are in pilots right now. We are, as I said, operational in 4 states. And we have over 14 [ starters ]. We are starting to get reasonable originations. But what we want to do is to test out the entire cycling. That's why it's called as a pilot. And when we test out the entire cycle, then the kinks will be obvious to us, and then we can either expand rapidly or take a measured step going forward. Our desire is to do it sooner rather than later. And let me actually limit that right now.

That's fine. And maybe shifting gears. If you can give us an update in terms of IQ 10C battery sales, how that's shaping into Q1? Looking at the market share data, it did seem like it kind of ticked up a little bit in December. Has that momentum kind of carried over into Q1? And then what's been the feedback from installers in California now that the Meter Collar's approved with all of the utilities? Do you think you can get your -- I think your market share is roughly around 15%, plus or minus. Do you think you can get that back up over 20% with the fourth gen battery? Or do you think it's really the fifth gen battery where you start to see a lot of market share recapture?

Yes. The -- I think the fourth-gen battery will do it a bit because it's got a very nice form factor. It's -- the Meter Collar is now approved in 52 utilities, California IOUs. All of them are now taking the Meter Collar. We had the last one come through in late part of Q4. So all of the barriers essentially are now removed.

Installers, you asked me for installer feedback. We do roundtables with installers almost every week. And installers like the product, they like the installation. They like the commissioning times, which are under an hour. That's not to say that there are no problems at all. There are a few, which we are rapidly taking care of. There's a couple of things that we are doing is we are releasing third-party solar compatibility for IQ Battery 10C, which we expect that battery to be used with non-Enphase PV installations, too. So that will be a big deal. It's in very high demand by our installers. So we think that, that will increase our share more.

In addition, like what I said, we'll start to see the effect of FEOC and domestic content. The December uptick was probably related to 25D. So I wouldn't read that much into it, although we'd like to take some credit for it. Yes. And -- so we do expect progress with the fourth generation.

On the fifth generation, yes, we do expect to definitely take a lot of share there too in addition, simply because the battery will come with much more compelling economics. Even with all of the tariffs in place, I will be able to make good gross margins as well as offer excellent consumer pricing. So we're excited about the fifth generation bet.

The next question will come from Colin Rusch with Oppenheimer.

Can you talk about where battery inventories are right now in the channel, particularly in Europe as you look at some of the demand that's growing in both Netherlands and France and even in Australia? I just want to get a sense of how lean the channel is and if there's some product that needs to move through before you start growing in the second quarter.

In general, I would say our -- we are very happy where we ended the channel in both the U.S. as well as outside the U.S. Our -- in the past, I have told you, what we consider normal is 8 to 10 weeks. And in the U.S., the channel is actually much more leaner. That means it's better than 8 to 10 weeks.

While going forward, if you account for the demand reduction in 2026 versus 2025, I would say forward-looking weeks on hand is in the normal range. So there isn't anything bloated in the channel. We are doing a good job. Channel management is ingrained in our DNA right now. We don't expect that to be a problem.

And then just thinking about VPPs and some of the capabilities of your system. Can you talk about some of your functionality around reactive power, voltage management and your ability to serve some of those ancillary services markets that may be differentiated versus some of your peers?

Yes. This is Raghu. Yes, I think we look at it very broadly. We look at not just the battery as being the only flexible resource that's available. You can think about as we look at the EV charger today, that's a flex resource. As we think about bidirectionally recharging, that's, again, a flex resource. Solar itself is also can be considered as a flex resource. So our view is much broader than just simply thinking about 1 element of it.

So every product that we release, every new product that we release, we think about it in the context of its participation in VPP. So we make sure that we have best-in-class APIs available so people can then exercise all of those resources. Because they're value-generating resources, they can actually help with homeowners' ROI. So all of the grid services that you mentioned, which is reactive power, voltage support or just capacity, resource adequacy, all of these functions are organically built into all of the products that we build because we expect they'll all be flexed as we see the VPP market evolving.

So -- and so far, while the focus has been around batteries, our VPP participation has been very strong with a number of partners. We mentioned two of them in our prepared remarks with the San Diego Community Power as well as Green Mountain Power. Those were the two examples that we provided, but it's much broader than that. So we're pretty excited about all the work that we have done with our VPP.

We -- it's a metric that we track very closely in terms of availability of our VPP APIs, how well our servers are working in order to service the demand. This is U.S., whereas what we are seeing is all of the VPP work that we are also doing in Europe with particularly in the Netherlands, where we are providing capacity imbalance, dynamic tariffs. Others, where they're creating our batteries into the market, in some cases, as often as a few seconds. So we see this as a very critical evolution of the business in general because as you think about data center demand really overwhelming the grid, I think behind the meter resources will play a pretty big role in helping alleviate some of that pressure.

And so aggregating all of these resources and participating in the market is very key. And we have seen that trend, and we are on top of it and really driving our products to make sure that it's best-in-class with regards to participation in the market.

The next question will come from Eric Stine with Craig Hallum.

Just wondering if we can talk about safe harbor a little bit. So just the -- sort of confirm, $63 million in the order and some of that coming in Q1, you've included that in your guide. So I guess a similar amount in Q2, you did mention that you think that you could recognize some revenue in Q3 for the out years. I mean, curious, do you -- is there a magnitude, any indications you're getting from your partners what those orders might look as you start to think about as you called it, in '28 and '29 for safe harbor?

No, it's too early for us to forecast any safe harbor orders, we don't really know right now. And they usually based upon the deadline that we see, TPO partners have until approximately July 1 week to finalize their plans. And so we do expect a lot of frenzy activity in Q2.

We did -- what we announced, we announced basically two or two transactions that we announced. One was I think in the 50s, and another was in the 60s. And so one was physical work test, and the other was a 5% safe harbor. We even expect some of those customers to do repeat safe harbor orders. But right now, it's too early for us to -- yes.

No, understood. I appreciate that. And then I know you talked about share on the storage side, but just curious as you think about the year, it seems that this would be a trough. Like you're thinking it is for the overall business. What type of linearity or what trends do you see in storage based on timing of some of the product introductions, et cetera?

Yes. In general, storage should be very positive because the tax credits are going to be valid for a much longer time. So batteries are in favor I think until 2030 or 2031, I forget. So storage, storage market is going to definitely take off. You can see that almost every state -- my prediction -- and this is only my prediction -- is in the next coming years, every state will start to adopt battery storage. Solar plus storage will become the norm. Because at some point, uncontrollable export of solar is not desired.

So California is ahead. We all didn't like NEM 3.0 initially because of the way it was implemented. But the concept of NEM 3.0 is right. And in fact, California is a solar plus battery market with 100% attach now. It's got good economics, 6 to 8 years of payback. So my prediction is every state in the next 10 years will become solar plus storage. So storage is going to boom. It is going to actually -- batteries will pull solar. It's going to become the reverse.

It is already like that in Europe. If you go look at Europe, you look at Germany, the attach rate is 80%. You look at Italy, the attach rate is also in the similar range. You look at Netherlands, that's now going to start to move in that direction. You look at France, the feed-in tariffs have dropped a lot. So there is -- solar plus storage will become the norm. So controllability, VPPs, self-consumption, those are what -- they are going to drive the economics. And they're all in the direction of reducing the utility bill for the homeowner. So -- yes. Is there something you want to share, Raghu, on that?

No, I think you're seeing that even happening with NEM 3.0, where it's -- even beyond self-consumption, you're starting to see things where you -- there's a pricing signal that you get. And based on the pricing signal, you charge or discharge your battery, you export to the grid because you get compensated for it. In Europe, they do that as day-ahead pricing, so -- and I think you'll see that things such as VPP, day-ahead pricing, dynamic tariffs, et cetera, are really going to be very compelling economics for the homeowner to adopt battery.

And that's how you saw California evolve in that direction. And I agree that it's going to happen even maybe faster than 10 years, that you'll see traditional NEM will slowly sunset.

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

Badri and team, nicely done on the continued progress here. Just wanted to come back to a couple of things that were mentioned. First off, what do you think batteries go to the corporate average here? I mean, you just made -- you gave us a little backtrack about the outlook here. How do you think about margins evolving there and normalizing upwards? And again, I get that can be by product here in the evolution.

And then separately, can you talk back again about the market evolution here as it pertains to prepaid lease adoption? And ultimately, as you say, this is essentially offsetting the impact of 25D going away. Can you talk about the cadence of that happening, both your own PPL piece of it? And then separately, your commentary about essentially offsetting 25D, is that market wide? And how do you think that playing out just time line-wise?

Yes. On the batteries and gross margins, especially with the tariffs now, the gross margins on batteries are slightly below corporate average. And what we'd like to do is to bring it above. And that's what I extensively talked about. It is -- today, we are -- I mean, we have 45% tariff on the cell packs that we get from China. And that is a tough number to work with in terms of margins. Plus, we have tariffs on other raw materials that are coming into the U.S. So we get hit many ways.

We have recognized that the best way for us to counter that is with innovation. So that's why I talked extensively about the fifth generation battery. Our cost structure will be radically different. So even with these tariffs, I can comfortably make even above corporate gross margins on my batteries.

We are not stopping there. We are already thinking about our sixth generation battery. So we'll share more as soon as the fifth generation battery is out. So it's going to be a nice cadence for us. We have got to be -- I mean, we've got to bring out approximately every generation of battery -- every generation in 18 months, that's what we'd like to do.

So next question. On the PPL time line, I mean -- it's early for us to share any time lines given that we are in the process of pilots. But the dream is that it is to replace the pre-25D loan TAM with prepaid lease. And there is still several things that have to be ironed out, that's what the pilots are doing. Operational issues, ease of doing business, customer and consumer confidence, installer performance, financing. All of those, we are trying to solve with the pilots.

And we are running in 4 states. So far, the installers -- installer feedback is very positive. They like the extra -- they like this prepaid release as a tool that helps them counter the TAM loss due to loan. So we like what we see so far. I think in the next 3 to 6 months, we will know everything. And we are confident that we'll be able to expand through a lot more states in that time frame.

And your comment assumes you gain market share? Or is that more about just the market overall?

We do expect to gain market share.

The next question will come from Moses Sutton with BNP Paribas.

Badri, how many well-capitalized prepaid lease competitor programs are you seeing out there? And by competitor, I mean that is a broader good thing as it would help stimulate the market, as Julien was noting. And then also on the IQ9 residential, do you have -- do you expect a significantly slower uptake relative to the IQ7 to IQ8, considering its benefits rely on the larger panel [indiscernible] and the market is emerging still smaller panel sizes and they have to like sort of grow into the larger panels?

Good questions. On the prepaid lease, it is still early days. We see -- I don't know the details personally about the remaining players, but I've heard their names. I've heard that some of them do a good job, but time will tell.

On IQ9 -- and IQ9 addresses one more thing. It not only addresses higher power for 27 watts. It also addresses panels that operate at 16 amperes. So if you look at it in Europe, Europe is already starting to operate at 16 amperes right now. So IQ8 had the capability to go up to 14 amperes, and IQ9 will extend that capability to 16 and even 18 amperes. The [ IQ9S ] product that will be coming in the third quarter will extend it up to 18 amperes. So we believe Europe will be the first to ramp, along with Australia and the international.

U.S. is a little behind in terms of panel tech there. And so we expect in the U.S., IQ9 to ramp a little more slowly. However, in the commercial space, IQ9 is the only option. IQ9, 480 volts. There, the panels are at 595 watts to 640 watts. So there, IQ9 is the only option. And there, we are going not only the 427 watts can service the 480-volt market, the 548 that we will be introducing in the second or third quarter, that will also help a lot, including safe harbor.

Very helpful. And maybe if I could squeeze 1 in on the Netherlands. Is there a potential for actually material pre demand ahead of the loss of the grandfather -- of the net metering? Basically, most assume that, that story kicks off next year, but are you seeing that there's a significant amount of customers that don't want to see a gap in their solar systems' value next year so they want to self-consume early and therefore, they have to move this year?

Yes, there is -- yes, yes to that. I'll tell you why. First of all, if they have batteries now, they won't have to pay a penalty, one. Also, there is a nuance to it. There are several customers whose energy contracts will be expiring right now because they all have limited a 1- to 3-year contract. So when they are going to sign a new contract for the next 2 years, they are going to know the full picture. The utility is going to give them the full picture of how the next 2 years are going to be. And in order for them to really get low rates, the only option they will have is to buy a battery. So I think the education is happening now.

Just to elaborate a little more on what we are doing -- and I'm not sure whether you heard my comments before -- we are -- we have not done this before at Enphase. We are holding homeowner events. Every homeowner event is attended by approximately 200 to 300 people. And let's say, from a family, 2 people show up, so approximately 150 families. And they basically get education. And there is a lot of interest in ordering batteries. Preorders are usually quite high from such an event. Of course, 10 events is not representative of what is going to happen in the year. We plan to hold at least 100 events in 2026. And we plan to basically quantify. Every event should generate an average, let's say, x kilowatt hours. Or let's say, something like 0.5 megawatt hours per event or 1 megawatt hour per event.

And so that's how we are thinking. We are thinking that the first step that we have to do is to -- is actually education. So in that process, we are helping our installers. We are starting to do that. It's getting fantastic reception. In fact, our partners are also coming to our distributors. I'm now happy that we are doing an organic thing for lead generation instead of depending on only the installers. And the installers are happy because they are getting leads that they didn't plan on before. So yes.

The next question will come from Vikram Bagri with Citi.

Good evening, everyone. Badri, you mentioned keep your partners have until July 4 to safe harbor. Could you share what the lead time to safe harbor is that you've seen recently? I imagine a month or more to safe harbor, which would mean TPOs have less time to decide than the deadline. And then wondering when should we expect the frenzy to begin based on that lead time?

Related to that, based on what you've seen, is the safe harboring so far being done by the TPO partners? Is that being done expecting growth in forward years? Even all the drivers that you've mentioned rates, electricity price increases, policies, et cetera, or the TPO partners are conservatively to safe harbor in current volumes or multiple years so far?

A question for the TPOs, which we cannot answer everything for them, but I'll just give you my opinion based on what we are seeing. For example, if they do the 5% method, let's say they got their order in December, let's say, the last week of December 2025. We would have approximately 105 days from that date to ship that product. That's how it works. And they still get all of the benefits because they place the order within the year -- within the end of the year. And they have to prepay us with the 5% method.

With the physical work test, it is similar, but there is a nuance in terms of custom component, et cetera, which you already know. The question on consumers taking into account future demand increases, I don't know. It is hard for them to take that into account, not -- no one really knows. So it's a real question for them. My thought right now is I don't think that is happening. But that's just my guess.

And as a follow-up, a quick housekeeping question on inventory. You mentioned healthy inventory exiting fourth quarter. Is that trailing 13 or 52 weeks? I ask because looking back, the inventory, the channel may be normal, but accounting for a drop in revenues in first quarter, it seems like the channel could be higher than like 10 days of inventory that you typically sort of like, keep. Is the inventory comment made on first quarter revenues, excluding safe harbor or the inventory government is backward -- looking backward, looking 13 or 52 weeks?

Yes. If you calculate the inventory in terms of backward looking, then we are very, very lean. If you calculate the inventory based on forward-looking demand, we are normal. That's the way you should look at it.

The next question will come from Christine Cho with Barclays.

Last quarter, you kind of said that you anticipated sell-through in 4Q to be 350 to 400. Just curious if you can sort of confirm that you landed there? And then if you would be able to give us the split between [ MIs ] and storage? And then also if you could give sort of that split for what you're expecting for 1Q ex the safe harbor revenue?

Yes. The -- we landed right at the midpoint there, between 350 and 375 -- I mean, 350 and 400 sell-through. So that's good. And then just on the split up, in fact, our sell-through on batteries was higher, was 27%. And the sell-through on microinverters was I think approximately...

21.

Around 20-ish percent.

I'm sorry, those percentages are up quarter-over-quarter?

Yes, 27% up. The sell-through in Q4 in the U.S., 27% up on batteries with respect to Q3. And sell-through of microinverters in the U.S., up approximately 20% with respect to Q3.

And then the split for 1Q?

Split for 1Q, we do not know. Right now.

But what about your sell-through expectations for 1Q? Just given...

We are not going to break that out right now.

Okay. And just sort of on the prepaid leases, I guess, when we do -- like with the deadline for safe harbor coming up, are you getting a sense of, at least with your partners, if they're leaning towards 5% or physical work test? And I guess why -- do you have any sense of why they wouldn't lean more towards physical work test, just given it's easier on the balance sheet?

That's right. I mean, I asked the same question, too, but it depends upon how comfortable they are with respect to they and their tax partners are. So yes, I mean, the physical work test, if gives them a legally good mechanism to take care of themselves for '28, '29, '30. But what we are seeing is we are seeing a mix of both. We are seeing -- in some cases, we are seeing some TPO partners adopt a mix that is -- they do a portion, physical work test. They do a portion, 5% safe harbor. Some partners only rely on physical work test. It's a mix. There is no general trend.

We are capable of providing either -- whatever the TPO wants, we are here to provide that. There was a misconception that Enphase cannot do physical work test, not true. We do physical work test, and we are engaged with the multiple TPO providers on that.

The next question will come from Chris Dendrinos with RBC Capital Markets.

I wanted to follow up on the commentary about [ terming reprice ] in Europe and your response to the competitive dynamic there. Can you maybe just comment on the demand impact from that? Are you seeing, I guess, any type of benefit there?

We expect to see some benefit there. We reduced the list prices at distributors by approximately 20% on our microinverters.

Got it. And then maybe as you think about the U.S., I mean, is that a consideration in the U.S. to potentially cut price as well? And I apologize, I know this gets asked every quarter.

Yes. I mean, it is -- we are always looking at it. And right now is the best time for us to help our installers. So we are always looking at it. We do an installer roundtable every week. We are carefully evaluating it. And when we think it is appropriate, we will do that, and we will inform you.

The next question will come from Maheep Mandloi with Mizuho.

You talked about access to non-China battery supplier. Can you just talk about like the pricing environment you're seeing over there? A little more supply coming. Are we seeing costs come down over there, or it seems kind of stable for the next year or 2 there?

Yes. In general, I think the battery suppliers are having some pressure on their costs. So I would say we aren't seeing huge price decreases. They are kind of flat. When we move from China to non-China, we would expect about anywhere about 20% increase in the cell pack pricing to us, 20% to 25%. So for example, if there is a 45% tariff on product from China and there's 0% from a non-China country, it would make sense. So that's what we took into account. And we are working with the battery cell suppliers that will enable us in the non-China market or in the non-China battery manufacturing. We expect to start ramping that in the second quarter.

The next question will come from Gus Richard with Northland.

Inventory on the balance sheet was up $99 million sequentially quite a bit. Days of inventory went up quite a bit. And I'm just wondering if you could walk me through why that happened?

Yes. The -- what we did was we basically -- in order to ensure FEOC compliance, we took ownership of the inventory from our contract manufacturer. And so everything was clean. And so we did that in the fourth quarter. That factory exists for us. We are managing the factory. And we -- it was a little high, like what you state, $100 million more, but we expect to continuously bring that down. Our operations had -- and mean we are laser focused on inventory, and we have clear plans to get that down.

Okay. Got it. And then on the fourth generation battery, I understand that the tear loss is relatively high as what it is with your competitors. I'm just wondering if you're going to address that in the Gen 5 battery? And is that a concern with your customers?

It is a general concern with all batteries. And the [ tab loss ] is something important. Just for the benefit of everybody, [ a tab loss ] is how much of power the circuitry inside the battery consumes, not what is supplied or not what is provided to the loads in the home. So it is -- a [ tab loss ] is a wasted energy is what we call it, is unusable energy.

So we recognize that we have introduced a new feature called PowerMatch. PowerMatch is a technology -- software-enabled technology that dynamically matches the output of the battery to real-time home demand. What does that mean is only whatever microinverters are necessary to be on are on. The rest of the microinverters are switched off. So battery life improves, usable energy improves.

If you contrast it -- compare and contrast towards hybrid inverters or hybrid systems, hybrid systems have a single large inverter. So especially when the customer is operating with very low consumption, that burns a lot of unnecessary power or wastes a lot of power. While in the case of an Enphase battery, PowerMatch basically activates only the microinverters that are necessary.

For example, in the home is consuming 500 watts, we are not going to burn a 10-kilowatt inverter. We are only going to turn on, let's say, a kilowatt what often inverter that we have. And the rest of the inverters are going to be off. Similarly, if there are multiple batteries which are not required to be on, they will all be off. So PowerMatch helps in reducing losses at low loads. And we have found approximately a 40% improvement compared to competition.

So we issued a press release I think late in Q4, very nice video on PowerMatch that explains exactly how it works. And PowerMatch will -- is a big integral part of the first generation battery as well. And the microinverter architecture has got an intrinsic advantage here.

If I may, the modularity is not just for rightsizing the battery to a home. You can now use that leverage the modularity to rightsize how much power you're using in real time. So it's an incredible advantage that a decentralized or a distributed architecture like what Enphase has brings to the table to make sure that your delivery of power is very -- done very efficiently. You're not wasting power because you have a tail loss and a large inverter just running all the time, even though the demand of the house may be 1/10 of what the capacity of that large inverter is.

[Operator Instructions] And we have one more question with Dimple Gosai with Bank of America.

Thanks for getting me in here. One question as it relates to the prepaid leases. What is the attach rate for batteries in your opinion? And how does that kind of compare to the cash and loan channels? And just as a follow-up, what kind of changes the attach rate most? Do you think it's more about like payment structure or the system sizing or maybe even the utility tariff design. Any views on that?

Sorry, it's just too early for us to answer. But I mean, the obvious answer in California, it's -- we expect it to be 100% attached in California. We don't have enough for a presentation, not enough statistics from other states to tell you meaningfully. So hopefully, in another 3 months, we'll be able to share a lot more.

This concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

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

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

Good afternoon, everyone, and welcome to the Enphase Energy's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the floor over to Zach Freedman. Sir, please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Third Quarter 2025 Results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur Officer.

After the market closed today, Enphase issued a press release announcing the results of its third quarter ended September 30, 2025. 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 TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax tariffs and supply chain matters. These forward-looking statements involve significant risks and uncertainties and our actual results and the timing of events could differ materially from these expectations.

For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations.

Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial matters 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 thanks for joining us today to discuss our third quarter 2025 financial results. We had a good quarter. We reported quarterly revenue of $410.4 million, our highest revenue level in 2 years. We shipped 1.77 million microinverters and the record 195-megawatt hours of batteries. We generated free cash flow of $5.9 million. Our Q3 revenue also included $70.9 million of safe harbor revenue. As we exited Q3, our microinverter channel inventory returned to normal while our battery channel inventory was slightly elevated due to sell-in of our new food generation battery.

For the third quarter, we delivered 49% gross margin, above the higher end of our guidance range, 19% operating expense and 30% operating income, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefit. Mandy will go into our financial retain the call.

Our customer service NPS was 77% in Q3 compared to 79% in Q2. The average call wait time was 2 minutes. To further enhance the customer experience, we are preparing to launch our AI-powered assistant in the NPS app, which will help customers find answers quickly, troubleshoot issues and manage their systems more intuitively. Our data engineering team continues to strengthen the intelligence behind our support systems and leveraging analytics and machine learning to identify common issues, predict service needs and reduce response time across our regions.

Let's cover operations. In Q3, we shipped approximately 1.53 million microinverters from our U.S. facilities, booking [ 45x ] production tax credits. Our domestically made micro inverters help residential lease PPA providers and commercial asset owners to qualify for the 10% domestic content ITC error. We grew our U.S. battery production in Q3, shipping 67.5 megawatt hours compared to 46.9 megawatt hours in Q2. We are now building our fourth generation battery, the IQ Battery 10C in the U.S. using domestically made microinverters, domestically made thermal and battery management systems as well as packaging while only sourcing cell pack from China. These batteries have greater than 45% domestic content and help our lease PPA customers qualify for ITC bonuses. We remain on track to source non-China sell packs by the end of this year, scaling into battery builds in the first half of '26. Therefore, we expect limited exposure to the recent China-related tariffs as our supply chain transitions away from China.

In summary, our U.S. made microinverters and batteries can help customers qualify for domestic content ITC bonuses as well as meet Fia compliance even as the criteria becomes increasingly stringent each year, a big differentiator for Enphase.

Let's now cover the regions. Our U.S. and international revenue mix for Q3 was 85% and 15%, respectively. In the U.S., our revenue increased 29% in Q3 compared to Q2, primarily due to increased demand as well as higher safe harbor revenue of $70.9 million compared to $40.4 million in Q2. The overall sell-through of our products was up 9% in Q3 as compared to Q2. In Europe, our revenue decreased by 38% in Q3 compared to Q2, while overall sell-through decreased by 27%. Europe negatively impacted our Q3 revenue by approximately $25 million compared to Q2, a larger sequential decline than expected. The overall business environment across the region is still challenging, but we are maintaining our discipline on the channel as well as targeting specific growth areas that could drive higher 2026 revenues.

I will now provide some color on key markets in Europe. In Netherlands, the solar demand remained soft in Q3. We are making steady progress towards the sizable battery retrofit opportunity we see in 2026 and beyond, rising solar export penalties and the planned sunset of net metering at the end of 2026 are creating a compelling use case for storage with an Enphase installed base of about 475,000 residential solar systems in Netherlands, we estimate a $2 billion total opportunity for batteries.

We recently announced a collaboration with Essent, one of Netherlands' largest residential energy providers or REPs, enabling customers to add IQ Batteries and participate in essence, smart steering VPP program. This program is designed to boost self-consumption and lower utility bills. Through the smart steering, participating customers may receive fixed monthly compensation of up to EUR 122 depending on the battery size. Essent intelligently controls, charging and discharging to optimize value for the home and the grid supporting a more reliable energy system. Building on this momentum, we are advancing additional partnerships and expect battery sales in Netherlands to be a growth driver in 2026 and beyond.

In France, the residential demand remained muted in Q3. Many households waited for the October 1 VAT cut of 5.5% for sub-9 kilowatts, but its limited scope and dependence on low carbon panels reduce the impact. Meanwhile, 2025 policy changes have extended the payback period, creating a tougher market for installers. We are focusing on self-consumption where low export incentives strengthen the value proposition for solar plus battery solutions.

In Germany, the residential market remained weak in Q3. lower export value and stop-start incentives have kept many households on the sidelines, softening demand for both solar and batteries, even though our performance was relatively stable, supported by our partnership with leading installers and the strong uptake of the flex space battery, which provides both self-consumption as well as 3-phase backup.

In the U.K., the residential solar and storage adoption is stable, driven by time of use tariffs, low export rates and a growing focus on resilience and self-consumption. We are deepening ties with our REPs and supporting them with a robust API platform. In Q3, we also added backup capability for our batteries in U.K., which was long overdue and further expanded our resilience offering.

In Australia, the residential storage demand is accelerating following the July 2025 Battery Rebate Program with installers bundling, PV and batteries and average battery size is increasing as low export rates per cell consumption. Distribution operators are rolling out dynamic export limits and interoperability standards favoring systems with fast controls and 3-phase backup. Against this backdrop, we launched the Flex phase battery in Q3, delivering 3-phase backup as well as flexible power to meet evolving DSO requirements. We also launched IQ8P high-power microinverters for higher power modules as well as our newest IQ EV chargers strengthening our position in the strategic market.

Let's discuss our outlook for Q4. We are seeing a further ramp in the U.S. demand in Q4, primarily due to homeowners moving to capture the expiring 25D tax credit before the end of this year. In the first 3 weeks of October, our U.S. sell-through was up over 20% compared to the Q3 average. We anticipate this elevated activity will continue for much of Q4. We also anticipate that our overall sell-through for the company to be between $350 million into $400 million in Q4. However, our revenue guidance is in the range of $310 million to $350 million. And for IQ batteries, we expect to ship between 140 and 160-megawatt hours. There are 2 reasons contributing to this lower revenue guidance. First, we had $70.9 million of safe harbor revenue pulled in from Q4 to Q3 as customers wanted the product before the U.S. Treasury guidance in Q3. And second, we are reducing shipments of product to the channel in order to destock the channels as we head into 2026. This positions us to enter 2026 with a healthy channel, setting us up for a clean Q1 and beyond.

Currently, we have approximately 75% booked to the midpoint of our Q4 revenue guidance. Safe harbor opportunities are not yet included in our Q4 guidance, but similar to Q3, they present upside opportunity. We are working closely with several TPO partners on safe harbor planning and are well positioned to support both methods of safe harbor. The 5% method as well as the physical work test method based on each partner's preference.

Let's look ahead to 2026. While we don't typically guide beyond the next quarter, we are sharing our preliminary views to frame expectations. For Q1 '26, we anticipate a larger than normal seasonal decline, following the expiration of '25 tax credit and estimate a company revenue of $250 million. We view Q1 as the cycle trough with conditions improving through the rest of the year. While are we constructive on the balance of the year, there are 3 external drivers that could support recovery. First, the U.S. power prices are rising. About 5% this winter with additional increases expected in 2026. Second, interest rates are declining, using affordability. Third, new and attractive financing solutions are entering the market to help offset the loss of 25D. Taken together, these drivers could enable a second half of 2026 rebound and set the stage for growth.

In addition, we see several Enphase specific revenue drivers that are expected to fuel growth through 2026. Our fourth generation battery, the IQ Battery 10C is positioned to capture share through lower installation costs for backup. We are now entering the 480-volt commercial solar market with our IQ 9 and GaN microinverter, which we expect to ship this December and ramp in 2026. We are also leveraging strategic partnerships to capture the battery retrofit opportunity in Netherlands.

Our newest IQ EV chargers and upcoming IQ bidirectional EV chargers are poised to expand our market and our fifth generation battery system paired with IQ 9 residential microinverters will drive a step change reduction in system costs in both the U.S. and Europe. While there is uncertainty around 2026, we remain confident in our ability to execute and deliver growth across these vectors.

Now let's talk about financing. The industry is moving towards the TPO model in 2026. Enphase supports all the major TPOs today. We are further strengthening these relationships through safe harbor and tax equity support, providing domestic content as well as VOC-compliant products offering O&M services solar graph integration and helping to implement innovative financing solutions.

Looking ahead, we see a strong trend developing in the market towards prepaid lease offerings, which can provide homeowners with the option of ownership after 5 years. In this model, the TPO captures the 48E tax credit and in turn, offers the homeowner and attractive lease prepayment or a lower monthly payment when paired with the loan. This structure makes the economics similar to today's solar loan economics with the 30% '25 detax credit. Furthermore, financing providers like the Enphase system value proposition, which includes not only the Enphase equipment but support for operations and maintenance as well as solar graph integration to offer an overall attractive package to consumers. We believe the TPO market is poised to growth in '26 and see multiple ways for Enphase to support their growth.

Let's talk about products, starting with IQ Batteries. In August, we began shipping our IQ Battery 10C supplied by our manufacturing facilities in the U.S., delivering domestic content, which is significant value in the growing TPO market. As a reminder, we introduced our fourth-generation battery towards the end of June. The fourth generation battery stands out for its smaller footprint enhanced features, easy installation and reliability. It delivers 30% more energy density, occupy 62% lesser wall space and reduces installation cost of backup compared to our prior products.

In addition, our fourth-generation battery system also includes the IQ meter color which simplifies backup and IQ combined 6, which seamlessly integrates solar, batteries, EV chargers and load control. The IQ meter collar is now approved by 39 U.S. utilities, and that list is growing every week.

We are making strong progress in building partnership with REPs as well as BPP operators around the world that are looking for flexible distributed energy capacity. Homeowners can receive attractive compensation for installing Enphase batteries as part of these programs. In addition to the asset program I mentioned earlier, we signed multiple new contracts with the utilities, including one recently with San Diego community pulp with advanced APIs, our battery seamlessly integrate into VPPs, in regulated markets like the U.S. and participate in wholesale energy markets in deregulated regions such as Europe and Australia.

We are actively engaged currently and over 53 VPP programs worldwide, and this is growing at a strong pace. Let's talk about micro inverters. In September, we opened U.S. preorders for the IQ 9N commercial microinverter, our first microinverter powered by gallium nitride organ. We expect to begin shipping the product in December. As I said earlier, we believe IQ 9 marks a major leap in performance and platform flexibility. And most importantly, unlocks a 2 gigawatt market opportunity by enabling us to service 480 volt 3-phase commercial systems in the U.S.A. for the first time. This represents an approximately $400 million total addressable market for Enphase, which we believe will help drive additional revenue in 2026 and beyond. IQ microinverters are expected to meet SEC compliance as well as domestic content right off the back, offering a powerful and reliable alternative in a market still dominated by Chinese equipment.

Wide GaN matter, GaN replaces legacy silicon power devices to deliver faster switching, better thermal performance and higher reliability we have invested over 5 years in the conductor technology, and this rollout sets a new trajectory for cost and performance across our next-generation micro inverters, batteries, bidirectional EV chargers and move.

Let's talk about EV charging. We are now shipping our latest and greatest IQ EV charger 2 across 18 European countries as well as Australia and New Zealand. The charger supports up to 22 kilowatts 3-phase charging and works as a stand-alone unit are fully integrated with Enphase solar and better. We have opened U.S. preorders and expect Q4 shipments into the U.S. with further expansion planned in additional European markets and India.

Let me share an update of our IQ bidirectional EV charge are expected to launch in mid-2026. We showcased this 11-kilowatt solution powered by 3 high-performance GaN-based microinverters of 3.84 kilowatts each at the recent REs trade show. The IQ Bidi EV charger only needs to be paired with the IQ meter color for a simple, powerful configuration that enables home backup and grid services together. These 2 components offer one of the lowest cost and simplest ways to provide whole home backup even without rooftop solar or home batteries. Homeowners can just start with this configuration and expand over time by adding Enphase solar and batteries to build a full energy system. Let's now switch to solar graph, our all-in-one platform, purpose built for installers. We have been rolling out major enhancements, including seamless integration with TPO partners, an express editor that allows installers to quickly adjust proposals on the spot, a powerful custom tariff builder, advanced installer management tools and a simplified AI-driven design experience. We believe these updates make it easier for installers to service more homeowners at the kitchen table with greater flexibility, speed and financial transparency. We plan to expand the solar draft platform into additional markets and countries and introduce new features to support productivity, sales velocity and customization for solar installers.

Let me conclude. There is a significant change occurring in our markets. The loss of the 25% tax credit is a near-term headwind that will impact our results in early 2026. But we believe there is also reminds positive change that is bolstering the long-term outlook for our business. We are entering an interest rate reduction cycle, which historically has been the catalyst for residential solar sector.

Power price outlooks are surging on the back of AI power demand as well as overall electrification growth. Utilities are struggling to keep up with this demand, creating bottlenecks and price inflation across the grid that are poised to accelerate. We provide homeowners and commercial businesses with an easy off-ramp from this price inflation with a solution that can be interconnected in 90 days. The U.S. residential and commercial rooftop solar industry brings on nearly 2 gigawatts of new power interconnected to the grid every quarter with the 48 tax credit expanding to more customers in 2026 through innovative financing solutions like the prepaid leases we see an attractive value proposition for solar driving recovery in the second half of 2026 and beyond.

We are laser-focused on the revenue drivers we can control, growing battery sales with our fourth generation battery, expanding into the 480-volt commercial market with GaN microinverters, capitalizing on battery retrofits to our solar installed base in Netherlands. Ramping our new EV chargers now and the Bidi EV chargers, which will launch later in 2026.

And last, launching our fifth generation residential batteries, along with IQ 9 residential microinverters to reduce system costs significantly for residential solar for both U.S. as well as Europe. As always, we remain focused on operational excellence, product reliability and quality and customer service, delivering best-in-class solutions for our long-term growth markets.

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 third quarter of 2025 financial results as well as our business outlook for the fourth quarter of 2025. We have provided a reconciliation of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website.

Total revenue for Q3 was $410.4 million. We shipped approximately 784.6 megawatts DC of microinverters. And a record 195-megawatt hours of IQ Batteries in the quarter. Q3 revenue included $70.9 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install the inventory over more than a year.

Non-GAAP gross margin for Q3 was 49.2%, compared to 48.6% in Q2. GAAP gross margin was 47.8% for Q3 compared to 46.9% in Q2. Non-GAAP gross margin without the net II benefit for Q3 was 38.9% compared to 37.2% in Q2. Receivable tariffs impacted our gross margin by 4.9% in Q3. Given non-GAAP gross margin for Q3 also included $42.5 million of net II benefit.

Non-GAAP operating expenses were $78.5 million for Q3 compared to $77.8 million for Q2. Ship operating expenses were $130.1 million for Q3 compared to $133.5 million for Q2. Ship operating expenses for Q3 included $47.4 million of stock-based compensation expenses, $2.9 million of acquisition-related amortization and $1.3 million of restructuring asset impairment charges.

On a non-GAAP basis, income from operations for Q3 was $123.4 million compared to $98.6 million for Q2. On a GAAP basis, income from operations was $66.2 million for Q3 compared to $37 million for Q2. On a non-GAAP basis, net income for Q3 was $117.3 million compared to $89.9 million for Q2. This resulted in non-GAAP diluted earnings per share of $0.90 for Q3, compared to $0.69 for Q2.

GAAP net income for Q3 was $66.6 million compared to $37.1 million for Q2. This resulted in GAAP diluted earnings per share of $0.50 for Q3 compared to $0.28 for Q2. We exited Q3 with a total cash, cash equivalents and marketable securities balance of $1.48 billion compared to $1.53 billion at the end of Q2. The 5-year convertible notes we raised in 2021 are coming due on March 1 next year, and we expect to sell the principal amount of $632.5 million at maturity with our cash on hand.

As of September 30, 2025, we have approximately $280 million of production tax credit, or PTC, receivable on our balance sheet net of income taxes payable. $108 million is related to U.S. in microinverters shipped to customers in 2024 and $172 million is for shipments made in the first 9 months of 2025. As we elected Direct Pay, the net PTC will be refunded by the IRS through our annual tax return filing. Due to extended IRS processing time lines, we expect to receive 2024s $108 million payment from the IRS in Q2 next year. We expect to receive our 2025 test refund sometime in the first half of 2027, based on the current estimated IRS processing time.

As part of our anti-dilution plan, we spent approximately $1.7 million by withholding shares to cover taxes for employees start vesting in Q3. That reduced the diluted shares by 49,023 shares. There were no repurchases of our common stock in Q3 due to our limited free cash flow generation in the quarter. We are evaluating opportunities to accelerate the monetization of our PTC. Our remaining buyback authorization is approximately $269 million, and we remain confident in our overall business outlook over the long term.

In Q3, we generated $13.9 million in cash flow from operations and $5.9 million in free cash flow. Capital expenditure was $8 million for Q3 compared to $8.2 million for Q2.

Now let's discuss our outlook for the fourth quarter of 2025. We expect our revenue for Q4 to be within a range of $310 million to $350 million, which includes shipments of 140- to 160-megawatt hours of IQ Batteries.

The revenue guidance doesn't include any safe harbor transaction. We expect gross margin to be within a range of 40% to 43%, including approximately 5 percentage points of reciprocal tariff impact. We spent non-GAAP gross margin to be within a range of 42% to 45%, including the receivable tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization.

Given the vast majority of our manufacturing occurs in the U.S. and due to fluctuating tariff impact to our international manufacturing cost baseline. We will no longer be guiding and reporting gross margin without the net IRA credit. As always, gross production tax credit earned will be reported in our 10-Q quarterly statement and 10-K annual financial report filed with the SEC.

We expect our GAAP operating expenses to be within a range of $130 million to $134 million, including approximately $53 million estimated for stock-based compensation expenses, acquisition-related amortization and restructuring and asset impairment charges. We our non-GAAP operating expenses to be within a range of $77 million to $81 million. For 2025, we our GAAP tax rate of 18% to 20%, and a non-GAAP tax rate of 14% to 16%.

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

[Operator Instructions] And our first question today comes from Colin Rusch from Oppenheimer.

Can you talk a little bit about the dynamics going into the first quarter next year in terms of the amount of inventory that you feel like is appropriate? Are you still thinking about kind of 8 to 10 weeks' worth of inventory out in the channel as you enter into the first quarter of next year?

Colin, you may not have heard our comments in the prepared remarks. We anticipate an overall sell-through for the company to be between $350 million to $400 million in Q4, but we are only guiding Q4 revenue from in the range of $310 million to $350 million. So therefore, you can do the math. And that represents approximately $45 million of under shipment at the midpoint. So we are very cautious. We want 2026 to have a very healthy setup in the channel. And therefore -- and our rule of thumb is 8 to 10 weeks. That's a rule of thumb. So we'd like to basically be abundantly cautious and not overload the channel. That's why we gave the revenue guidance from $310 million to $350 million. Also, another reason for a reduced Q4 guidance is we had about $70 million of safe harbor pulled in from Q4 to Q3 as customers wanted the product before the U.S. Treasury guidance in Q3. So we beat the guidance handily for Q3, but we are more cautious for Q4.

I'll take the clarification offline. With the new battery, can you talk about pricing dynamics. Are you being able -- are you able to push through incremental price increases with the incremental functionality? Or are you using some of that functionality as a way to pick up share?

Yes. We are not raising any prices. In fact, I'm sure you know, over the last 2 quarters, there have been tariffs. So we pay approximately about a 40-plus percent tariff on the cell packs that are coming from China as well as the cost of making batteries in the U.S. is quite expensive. So -- but on the other hand, what we have done is not change our pricing. And our position is basically to capture share. You see our gross margins are already pretty healthy. Our gross margins for Q3 were 49% despite us paying or despite us including a 5% tariff in that 49%.

So our gross margins are good. The way our gross margins will become even better on batteries is we are working on our fifth generation battery. And that fifth generation battery will take the cost down significantly. It is a 100 amp-hour cell pack. It is a much higher energy density, almost 50% compared to the fourth generation battery. And it's got -- the power electronics is actually collapsed into one single bullet. So it's a very elegant form factor. It is a stackable battery. You can put 20-kilowatt hours. And you will not -- and it will appear like a monolithic structure on the wall, not as for boxes.

So we are going in the right direction on batteries. The fourth generation we expect to make a dent with it because what we have done and we have said this very clearly before. Our third-generation battery was very good for grid tide backup, which is prevalent in California However, our fourth-generation batteries can do both grid-tie and back up for almost the same cost. The backup comes a little more, slightly more because of the addition of the meter collar, which is a few hundred dollars only. And we introduced that product into the channel, which started shipping in June. And installers basically started originating around that time frame, and it takes installers anywhere from 60 to 90 days from that origination time to start the installations. In addition, we introduced the domestic content fourth generation battery in August, manufacturing in the U.S. So -- but we are in a very healthy clip. Just as a statistic in Q3 of our total battery shipments into the U.S., the fourth generation battery constituted 40% of the overall U.S. shipments.

Our next question comes from Brian Lee from Goldman Sachs.

I had two just kind of around the guidance. One is the non-U.S. revenue, I know you, Badri, walked through some of the European country statistics. But I mean it's really the lowest it's been since 2021 non-U.S. revenue. So I'm just trying to understand a little bit what's going on. I know there's seasonality in Europe. I know the market is weak, but it seems like you're underperforming peers. So is there something company-specific going on, whether it's product shift or market share or pricing? And then can you give us a sense of kind of what the go-forward is. Is 4Q going to be about the same? Is it down further? Just trying to understand what the recovery path looks like given this low base we're at now? And then I had a question on margins as well.

Yes. You're correct on what you said that Europe has got seasonality in Q3. So we are seeing a portion of that. But the markets we are in basically, Netherlands, I described the dynamics to you. It is the end of net metering in Netherlands. So it's an uncertain time for solar. There what recovery looks like is we just announced a large partnership with Essent. It's a huge opportunity there. We have 475,000 homes, with solar. And unlike the U.S., their energy contracts in Netherlands expire are only valid for 1 to 3 years, for example.

So when they have the new energy contract at that time, their utility bills for people who have put solar are going to be higher. In order to -- in order to prevent that situation, there is a very elegant option there, which is by batteries for self-consumption for the customer, while the utility pays you in order to support imbalance for the utility. So it's really a beautiful option, which should spur our battery sales throughout 2026.

So basically, weak solar market due to net metering going away, but has got the potential to become a strong solar plus battery market. That's in the Netherlands. In France, what has happened is, again, in 2025, the feed in tariffs France used to be quite healthy. France used to have net metering and the feed in tariff was also quite good, which is the export incentive was not as high as the import incentive, but it was pretty good, that export incentive has now been reduced to a very small amount.

So in France, also self-consumption is the name of the game. And because of that, the market in France has reduced quite significantly. As you know, Enphase has more than 50% market share in France. And so we see that However, what we are doing there is basically to sell solar plus storage through end consumers. Their payback is going to go up compared to what they had before, but will be manageable of the order of 8 to 10 years.

For people who cannot afford to add batteries, we are also coming up with a solution to steer their solar and not exported back to the grid. Steering the solar can be diverting the solar to an EV charger diverting excess solar to a heat pump or diverting an excess solar to a hot water heater, we have introduced all of those solutions as well. So -- in France, it is the elimination of the 5.5% VAT tax for sub-9 kilowatts installation should give a boost, but it is not giving today because of an added criteria of low carbon content panels. The industry is trying to meet that by ramping on low carbon panels. That may take a little bit of time, but we expect the market to recover. However, it is going to be a solar plus battery market. This is not going to be the same as what it was before.

Similarly, in Germany, there have been various start tops, there have been reduction of feed-in tariffs. Germany, our performance is a little better because we work with a couple of the leading installers in Europe who are headquartered in Germany. So we're doing okay there. In U.K., we have a strong partnership with one of the top the same thing there. It's the solar plus storage market. We just introduced backup capability as well. So that market is stable. So really, what we are talking about is Netherlands and France. We have clear plans there. I would say, because of the big reduction in the time, there is a lot of competition. I do have to acknowledge that competition.

So -- what are we going to do? We believe our response to the competition is innovation. What are we going to innovate on. Our -- today, our third-generation flex phase battery is the mainstream battery in Europe. In a couple of quarters from now, we are going to have the fifth generation battery, which is going to take the costs down significantly. And it is going to add a lot of value. It is the an AC corporate battery with modularity with the high with high quality, with superior serviceability and now it is going to be stackable with an outstanding cost structure.

So in addition to that, we are also going to be introducing IQ 9, starting early 2026 for residential microinverters. IQ 9 with GaN also can support up to 10% higher power for the same cost structure. So cost for what -- for the installers is a big deal. And we are going to make sure that the system cost is reduced significantly. So I talked a lot, but that's how the trajectory looks for us in Europe.

No. I appreciate all that additional color. Maybe just one on the margins. The guidance at the midpoint, non-GAAP gross margin guidance is 43.5%. I mean, it's lower than you've seen in some time. you did the 49% this quarter. Can you kind of help bridge the gap why margins are down so much? And then sort of additional margin decline should we expect on the $250 million revenue low point that you telegraph for Q1 next year?

Yes. The -- our margins basically are impacted, as we said, by a 5% reciprocal tariff. So that's the straight answer. Without the reciprocal tariff that was introduced in 2025, we would be at 48.5%, which is a reasonable number. Now where -- on which products is that affecting us. It's mainly on batteries for us because the batteries have a 40% tariff. We have diversified our supply chain well enough on microinverters in the last 3 to 5 years. Our microinverter impact is not that high as compared to batteries. So what does recovery in gross margin look like? The recovery in gross margin is when our battery costs come down. And that is by moving to non-China sources, which we are going to move by early 2026 when we plan to ramp up our non-China batteries as well as our fifth generation battery, which will result in a step change in cost.

So at this time, it is too early for us to talk about our Q1 gross margins. But look, I mean, you can see that we have managed the last 2 years. In fact, with our gross margin quite stable. Our gross margins have been in the 45 to 50 range. All the time in the last 2 years, where there has been significant pressure in revenue. So we expect to manage like that. It's too early to talk about Q1 guidance.

Just a super quick clarification. So I think 3Q, you said the gross margin result included a 4.9% tariff impact. So you're saying there's an incremental 5 percentage point impact in the 4Q guidance, so it's not flat impact Q-to-Q, it's an incremental 5%. I just want to quantify that.

Let me say like this, in Q3, we shipped a lot more microinverters because of the $70.9 million safe harbor shipments, which was all microinverters. So therefore, our gross margin was elevated. And yes, that is correct. Our gross margin was 49%. And if we did not have the reciprocal tariff, the gross margin would have been 54%. What we are saying in Q4, our gross margin is 43.5%, and that reflects more a normal mix. We have not yet indicated any safe harbor right now at this point in time, that could change. But with the current mix, we are talking about 4.5%, including a 5% tariff impact. That means without that 5% resi broker tariff impact, our gross margin would have been 48.5%.

Our next question comes from Phil Shen from ROTH Capital Partners.

Wanted to ask if we could get some more color around the safe harbor approach using the physical work test. Thus far, historically, at least through this safe harbor season, you guys have done more safe harbor, I think, or all safe harbor with the 5% of FMV with your customers. And so with the physical work test that you guys announced or talked about today. Can you talk to us about how you're helping your customers satisfy that test? In the past, I've heard something about a customized bracket or something. And so I was wondering how you guys are helping your customers do that? And then from a revenue contribution standpoint, I think typically, the physical work test likely is less revenue as it's not buying the full microinverter versus the 5% safe harbor efforts. So I just was wondering if you might be able to talk through that as well.

Yes. I cannot talk about the details because it is customer specific on the physical work test, but we are in very active discussions with all our TPO partners. And the concept is quite simple. It is a custom product that needs to be done for them with higher performance than the standard product. And with custom component that is not in our normal inventory. So that's the high-level view. So in fact, it is -- if they are comfortable, meaning the TPO partners are comfortable. Their tax folks are comfortable. This is not a bad way to do safe harbor. Because it reduces their cash outlay. At the same time, from our perspective, we do not like all of that revenue in a lump sum manner, too. It is -- it reflects that they only buy that custom component from us, and therefore, they will come back to buy the main microinverter from us at a later stage when they really need it. So it's really the best of both worlds. It is for us. It represents classic linear revenue -- quarterly revenue with no lump sum, which is what we like. And then for them, it represents a possible connect reduction in the cash that they have to paid compared to the 5% method. So it's all goodness.

And when do they do it? When do you do the 5%. You do the 5%, perhaps, I'm not an expert in it. If you want to safeguard 2028, 2029 and 2030. And of course, as always, the 5% as well as the physical work test has to be approved by their tax partners.

Great. Shifting to the prepaid lease concept we heard from Tesla on the last their last earnings call that I think they're launching a PPL. And I was wondering if you can talk through some of the efforts that you might be seeing out there -- is this something that you guys might actually participate in on your side? And on a different topic, C&I, it seems like the outlook might be kind of improving there. In the sense that a lot of small resi EPCs that historically were dependent on the 25C, maybe shifting over to the small-scale C&I market and I was wondering if that might be a source of strength for you guys as some of these smaller EPCs, maybe the megawatts are down in resi, but they can gain some of that back in, again, that small-scale C&I.

Got it. Yes, there has been a lot of talk about PPL or prepaid lease in the industry. We have heard independently of us that a few companies are looking at PPL and going to offer PPL. We are also working with a few partners closely. Our opinion, this is our opinion only. We think that the PPL with a loan could be very attractive. The consumer has the option of ownership after year 5. The TPO gets the 48E tax credit, while the consumer gets a lower monthly payment with no escalator. So this has the economics of a loan structure with the 25 tax credit. So we believe that there is a promise for this structure in order to revive we all talked about the '25 deal loan market will go away. But with the prepaid lease with the loan may help that market to be That's our opinion. Of course, it is going to take some time to introduce this to get everybody comfortable. But our job, what's our job in it. Our job is to support our TPO partners. Our job is to basically bring our long tail of installers and give them access to such a structure. Our job is to help them in O&M, operations and maintenance because we are really the right people to do it. Our job is to help them in solar graph, where modeling of such a prepaid lease can be done in a relatively simple manner.

In addition to things like safe harbor support, or tax equity support. So we are looking to work looking forward to work with our partners to bring that structure. While all the communication will come from those partners, it will not come from us. Our job is to help and support them. Let me leave it at that.

Great. Just a quick follow-up on that. As it relates to your job. You mentioned tax equity support. So could that mean you could provide some of your tax liability? And from a financial standpoint, how much might you guys contribute to this effort?

Yes, we are not going to give a number. Also, you asked about -- I realize I forgot to answer the question on C&I. C&I, we're very excited. It's the first time Enphase has done a 480 volt 3-phase product. And really, if you look at the small C&I market, 80% is 480, 20% is the 208 vole 3-phase. With gallium nitride, we are now able to do the 480-volt market. It's 480 volt line to line to 77 line to neutral, the advantages are of the microinverter are the same: Exceptional reliability, exceptional thermal performance, rapid shutdown compliance. U.S. manufacturing, domestic content, PIC-compliant. So really an excellent product, and we are going to be selling and marketing this very aggressively, and we expect this to make a dent. As far as what you've said, we are also seeing the same thing. Some of our residential installers are also considering to get into the small commercial solar opportunities because that is a more stable market right now.

Our next question comes from Praneeth Satish from Wells Fargo.

Maybe just starting on the Q1 '26 outlook of $250 million. Can you provide any more detail on how you're sizing the expected decline in the U.S. post 25D? So is that based on consultant forecast or I seem to recall, you have kind of a real-time feed of demand. And so are you seeing any change over the last few weeks now that it's presumably too late to secure the 25D credit?

Yes. I mean, we're not going to give you any numbers on that. We thought we will give you a preliminary look and that look is $250 million. The -- that's not guidance, but that's a preliminary look. The way our forecasting -- let me describe the forecasting process is, we run a process in the company, which is a rolling 6 quarter forecasting and we look at it on a monthly basis. So every month, the job of every sales guy is to go look at his accounts bottoms up, talk to his customers and then roll up the view for the headquarters and then we have a meeting about it and decide what to do. So I'm not saying we have a 100% certain view, but we usually understand the trend reasonably, and we can make some informed decisions. And that is how we decided to give you our preliminary look today.

Got it. And then maybe just following up on that. On the battery side, can you comment on like why in the Q4 guidance, it's showing a 50-megawatt hour drop. And then for the outlook, recognizing it's preliminary, but is that based on the Q4 battery level? Or does it assume any pickup market share gains tied to the 10X launch?

Yes. I think it's mainly a function of getting into 2026 with a healthy channel. That's it, for the $140 million to $160 million guide. For Q1, we expect to do well in batteries. Batteries, we don't expect batteries to be impacted too much next year. And that is because the batteries are still in reasonable shape on -- as far as 48E is concerned, the batteries have a much longer lease of life. And we are well positioned in batteries. We have FIAP compliance. We have domestic content our IQ meter color is now qualified with 39 utilities, arguably similar to our leading competitor there. And we are able to cut cost of installations for backup quite significantly. We're very excited about the battery. The installation times are also pretty small. I'm talking physical installation time as compared to the third-generation battery. The only thing about the batteries is the tariffs are high. And we have not made any -- we have not increased prices. We have held the pricing. We want to gain more share there. the tariffs are high, and I describe how we are going to improve the gross margins of batteries are not going to go there again. But that's our strategy.

Our next question comes from Christine Cho from Barclays.

Just a follow-up on that $250 million revenue number for 1Q? Would you say that this is kind of what you're expecting sell-through to be? Or would you expect some destocking to continue in the first half of next year?

I would expect equilibrium there is what I would expect. I would expect maybe slightly higher, but it's too early for me to say.

Slightly higher what?

Yes, sell-through is slightly higher than $250 million.

Okay. And then apologies if I just missed this, but -- with the prepaid lease structure that you've been talking about that you're going to launch with partners, when should we expect like an update with more detail? And with respect to safe harbor for this entity, should we think that it's going to be fiscal work test year? Or would it be 5%? and if the latter, how would you and the partners go about forecasting annual demand for this product, just given that there hasn't been great historical data to lean on?

Yes. I mean that's a lot of loaded questions there. So I was quite simple. The prepaid lease will be announced by our partners. So -- and we are not going to tell you an exactly. You'll see it when you see it. That's one, hopefully in Q4. Yes, hopefully, in the current quarter. Number two is, again, too early for me to talk about safe harbor physical or test of 5%. But let me give you some general color. We are talking with all TPO partners about both farms. There was a misconception that Enphase will not do 5% physical work test. They yes, -- sorry, Enphase will not do physical work test, we'll do only 5% safe harbor. That is not true. We do whatever the TPO partner wants and whatever the TPO partner is comfortable with. So options and physical work test, and I already described in detail when people use physical work test, and when we reduce 5%. So we work -- with our TPO partners, we work on cloth methods of safe harbor, and we plan to do that even with the PPL.

And our next question comes from Dylan Nassano from Wolfe Research.

I appreciate the early look into 1Q '26. I guess my question is, are you expecting to have to take any further actions to reduce OpEx heading into that? And can you just give us some color around what kind of OpEx model you're considering for 2026 just given the uncertainty around how demand could ramp through the year?

Yes. I'd just point you to how we have managed OpEx again in the last 2 years of the downturn. So this quarter, for example, with almost half the revenue that we once had, we are talking about 49% gross margin. The OpEx was approximately 19% and 30% of our operating income. So we are laser-focused on operating income, laser-focused on operational excellence. So our run rate today is $80 million a quarter, non-GAAP. It is safe to say we are going to be looking at our expenses to trim down spending in order to track revenue. And it's also safe to say that we won't compromise on any innovation activity or anything that affects customers adversely.

Okay. And then just my follow-up. If we can go back to the conversation around the PPL, Badri, I think you were saying that how Enphase is well suited to offer the O&M service. Can you just clarify, is that expected to be like an enhanced revenue stream for you guys? And if so, could you just kind of level set us on what that could look like in terms of margins or how much you could get?

Yes. It is too early for me to talk about any numbers there, but the concept is quite simple. We -- if the TPO partner uses our equipment, we are the best ones to do operations and maintenance. We have a very big data analytics team who basically looks at problems, identify trends, fix problems online and, if necessary, send our field service technicians on site. There is a reason why our NPS is 77% with the call wait time of 2 minutes. So we are really the best in our partnership with the TPOs, they find this one attractive -- like, for example, in a market like Puerto Rico, for example, if we are able to come in and help in terms of O&M for batteries, that's something that TPOs would welcome and similar opportunities elsewhere. So it also helps us to structure partnerships where we might offer incentives on the O&M. So each TPO partnership is unique, we cannot generalize it. And at the same time, it's too early for us to give you color on the numbers. In addition, there is solar graph as well. Now we are -- I mean we've been in the design and proposal and permitting business. Solar graft has become very robust. We have worked on the platform for 3 years. We have a lot of installers using the platform. And we are building all of the TPO partners, they all can be accessed through the platform. Similarly, the PPL can be accessed through the platform and can be sold at the kitchen table by the installer. Of course, there is a lot of work that needs to happen for that. But we are there in order to do that work the solar graph integration, operations and maintenance, safe harbor support and tax equity support on -- with -- on an as-needed basis. Those are the benefits that we offer.

Our next question comes from Julien Dumoulin-Smith from Jefferies.

Appreciate it. Look, maybe to follow up on this $250 million. Obviously, you guys are speaking to the year-over-year trends here. How do you think about that annualizing? Like what's the early expectation about the offsets here, right? Like BPL plus loan or what have you, that would otherwise mitigate it, right? You described it as a seasonal trend in exacerbated seasonal trend of 1Q. But what it suggests that, that doesn't persist, right? I mean if you adjust your 1Q million for the safe harbor, it looks like it's down almost 20%, which is kind of consistent with industry trends that are contemplated for the full year '26. Can you speak to maybe the cadence of '26 what you're seeing? You talked about these early strong developing trends on PPL, is that supposed to mitigate in the back half of next year, for instance?

Yes. I mean we -- it's impossible now for me to provide any quantification. But what we said is the following. We, in fact, said we are constructive on the balance of the year. We said there are 3 external drivers that support recovery. One is the power pricing, which you're aware. It is increasing by 5% this winter with additional increases expected in 2026. AI is going to make these increases even more. Second, the interest rates are declining using the affordability I think there is multiple interest rate cuts for next year. Third is the PPL. New attractive financing solutions are entering the market to help offset of the loss of the 25D. And really, the PPL with the loan could help there to offset the loss of the loan portion of the 25D. These drivers could enable a decent recovery in the second half. That's what we think. That's our view. Then in addition, we see several Enphase specific revenue drivers. I'm very excited about the progress with the fourth generation battery, 40% of our shipments in Q3 into the U.S. belong to the fourth generation. installers are just getting their hands on and starting to install the product. And we are qualified now at 39 utilities with the meter color. The major color is indeed a differentiated installed because it reduces the cost back up significantly.

Next one, we are entering the 480 volt commercial market, which we didn't have with IQ9 GaN microinverter, which we expect to ship in December, which is a couple of months from now. This is going to for the ramp in '26. So that's in phase specific. Third is the strategic partnerships that we recently announced to capture the battery retrofit opportunity in Netherlands.

Fourth, our newest IT EV chargers, along with the bidirectional EV chargers. The bidirectional charger alone is a game changer. That is a beautiful way to do vehicle to home, which is backup olone backup and vehicle to grid, which is grid services with a very simple product, a color and the charger. The charger has got our 3 of our GaN microinverters in depth. It's 11-kilowatt charge. It taps directly into the DC port on the car. We are working with a couple of OEMs there, and we will announce we'll announce them when we get ready.

Then the last one really is the most exciting one is our fifth generation battery. I can't stop talking about it. Our fourth-generation battery uses a 64 MPRs -- Our fifth generation battery uses 100-amp or sell. Energy density is 50% higher. It's a very compact form factor. Although each modular unit is 5-kilowatt hour, there can be 5 -- 4, 5 kilowatt-hour batteries, 20-kilowatt hours, which can be stacked one on top of the other. It's got excellent serviceability, which means you never need to remove the entire battery of the wall. You can simply remove the battery for to replace either the battery management circuit or the microinverter, you can just simply do as well.

So most important there, the system cost is going to drop a lot because our architecture helps us to reduce the cost significantly. And we are going to pass that cost on to the homeowner, while maintaining our gross margin because the cost is low. Similar IQ9, for example, IQ9, the first flavor that we are releasing this December is 27 watts. The next one that's coming is 548 watts. That will come in middle of the year. The 27-watt product we are able to achieve the same dollar cost structure for 10% more wattage. So therefore, we expect to drive those costs continuously down. And also the more power for the microinverter, we do get more PTC. So -- those all are going in the right direction. So there's a lot of Enphase specific drivers. There are the 3 general market drivers. The combination, we see revenues growing in the back half.

Quick follow-up there, if I can, just a response to the earlier comments. Just with respect to the battery in Net Netherlands, can you comment a little bit around what the total opportunity is? Like how would you quantify the 475,000 household and the potential for battery retrofit? Like how would you begin to quantify that for '26-'27 in terms of the rate of adoption there?

I'm not going to quantify it right now, but I will tell you a way to think about it. It's 475,000 homes. If each of them were to get -- let us say, 7.5 kilowatt hour battery. We are talking about 3 gigawatt hours, I think. And then if you -- but if you say there is only a 10% attach of that, you can do the math. And so it's significant. And what we need to do is to make that 10% happen through strong partnerships, and that's not a done deal. It's not easy to do. 10% take rate is tough to do because customers have their own way of deciding what is good for them. What we need to do is to is these VPP partnerships. One of the big drivers of demand there is a utility like the partnership that we announced, Essent, paying consumers for their battery, paying consumers up to EUR 122 a month for a battery, which is 20-kilowatt hour battery. I think that's a big deal. Programs like that can significantly reduce the payback, but they need to be with other utilities too. This is one utility. It is the largest utility, but it needs to be with the others, too. So lot more things coming there, but we are -- we are excited by this opportunity. It's a tremendous opportunity for us.

[Operator Instructions] Our next question comes from Maheep Mandloi from Mizuho.

This is David Benjamin on for Mohit. I know we talked about Europe. Can you talk a little bit about the international markets outside specifically in the past there's some enthusiasm about Japan. Where does that stand today? Is there still a strong outlook there?

Yes. We introduced the product into Japan in April. That's when we introduced the product. We are very excited by that market. What is the driver there? Tokyo. Tokyo has got a mandate that all new construction needs to have solar. And what's unique about Tokyo is small roofs of the order of 2 to 3 kilowatts in regular size is shading. And therefore, microinverter is really a beautiful, beautiful opportunity that it is the best product for the Tokyo roofs. In fact, Japan has recognized that, and we do -- the homeowner gets an incentive for the microinverters, which is, I think, almost $0.13 a watt if I remember. So it's a big incentive. But all of you know that the Japanese market is slow to react. We have a great partner. Our partner -- and we are working now we are working with that partner to train a lot of installers. We are in the training phase. We are meeting with several of them. We have established an entity in Japan. We will have a big office there. We will have approximately 10-plus people in Japan by early next year. So we are making all of the necessary investments there. We are making further a couple of more new products for Japan in order to unlike backup, which is a feature that they would like to do. So lot more to come. The revenue growth will be slow and steady. They don't expect any hockey stick.

Similarly, in Australia, Australia is actually a great story. And from July, there is a rebate from the government. It's very similar. It's not a tax credit, but it's a rebate. but it's similar to the 30% amount that we have used to in the U.S. So that significantly reduces the cost of batteries that is causing people to buy a lot more batteries than what they would. The attach rate in Australia has gone from approximately 10% to 20% to 80% to 90%. And we are starting to see that in our -- both our sell-through data activation data. However, we're reacting there we are introducing -- or we just introduced the flex phase battery, which can do 3-phase backup, which is required in Australia. FlexPhase battery also has got the ability to adjust the power according to DSO requirements. Many of them originally felt the power of our battery was too high for Australia. That is a 5-kilowatt hour battery has got 3.8 4 kilowatts of power, and that's scaled. So we now have options that can help them scale the power all the way, even half of that amount. And that is taken care of during commissioning of the battery for the newest 3-phase battery. So we've introduced that new product in Q3. We are ramping up on that. Our teams are very excited. They are, in fact, right now at a trade show in Australia. In addition to that, we introduced our IQAP product, which is IQAP is 480 watts AC. As the panels start to become more than 500 watts. Our 384 Watt AC products is no longer enough. Therefore, we introduced a 480 watts AC and that's been received very well. We introduced our latest IQ EV chargers there. And now we are planning to introduce hot water heater capabilities. So they have the entire ecosystem. It's one system. It can be Enphase solar can be in phase battery and EV chargers. -- hot water capability, it's a complete system. So we are very excited. We hope to make a dent there shortly.

And then I know there's also a lot of enthusiasm around Balcony Solar. Is there any -- are you still continuing to see that growth in that product?

Yes. Balcony Solar, we just introduced the product. We've had some hiccups in Balcony Solar. And we resolved all of them. We are ready to ramp again. We are going to be introducing several variants of that product, more focused towards the end consumer. B2C is an area where we need to learn a little bit more. And we are doing exactly that. We are launching an e-commerce team. We are doing aggressive things there. We hope to ramp on that throughout 2026.

And our next question comes from Vikram Bagri from Citi.

Badri, I wanted to understand the framework to think about 2026 revenues or outlook historically or previously, you've mentioned that installs in the U.S. may be down 20% year-on-year. But when I look at the inventory reduction in third quarter, so of $45 million and potentially more inventory reduction in first quarter of next year. It seems like you're preparing for a 30% -- 25% to 30% decline in installs from an inventory reduction standpoint. Is that one, my understanding of inventory reduction right to do you know more about the outlook today than you did before? That's why the inventory traction is so high? Or there is conservatism in that inventory reduction? And then finally, is it a function of new product launches, so you're clearing the channel? I'm trying to compare what you said historically about decline in U.S. residential installs year-on-year versus the magnitude of the reduction you're looking for in the channel inventory?

Right. If anybody tells you that they know what is going to happen in Q1, they're wrong, that it's not many people know. But what we gave you a preliminary view of our number, $250 million. However, you should think about historically Q1 has been done even for a normal, let's say, there is no 25D happening, Q1 is historically down by 15% as compared to the prior quarter Q4. This time, there is additional pressure from 25D. So the industry as a whole will expect anywhere between 20% and 30% reduction in the overall market. And that those are range numbers because different folks believe different things. But the reduction comes from one thing. The reduction comes from the fact that the cash and the loan market are the ones to see that decline because for them, the 25D, 30% tax credit is going away. That is why financing structures, financing solutions like the prepaid lease with the loan can alter that trajectory and alter that assumption.

So right now, we are assuming that Q1 will be stressed, but the numbers we have seen on the prepaid lease with the loan, make us believe that a portion of the loan market, which was thought to be gone has got a good chance to come back.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Badri Kothandaraman for any closing remarks.

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

SP541324311 And ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.