Enphase Energy, Inc. 2026 Q3 Earnings Call

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. 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-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 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 exited the quarter with channel inventory a little above normal for batteries and microinverters. 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 operating income of 18.3%, all as a percentage of revenue. Mandy Yang 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 microinverters 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 FEOC regulations, helping lease and PPA 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 $84.3 million in Q2. 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 2026 sell-through declined 35% compared to Q3 2025, reflecting pressure from higher interest rates and the transition following the expiry of the 25D tax credit. Third-party market reports suggest overall U.S. residential solar permits were also down approximately 35% year-on-year for Q3 2026.

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 compared to Q2 as sales of IQ9 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. Homeowner events have become a successful selling tool for us.

In France, however, battery activations were down by 12% compared to Q2, while microinverter activations fell 24%, reflecting summer seasonality and macroeconomic uncertainty that may 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 three 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 2027 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 five growth drivers. First, residential batteries. Second, recovering our U.S. residential solar business driven by Propel. Third, our commercial solar and battery business. Fourth, bidirectional 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 VPPs. In the U.S., third-party reports estimate Enphase's residential battery market share at approximately 15%-20%. 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-coupled 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 2027. We are also seeing VPPs move from small pilots towards large-scale commercial opportunity. Major utilities and hyperscalers are engaging with us on programs that compensate homeowners for making their batteries available to support the grid. This is particularly compelling in communities near data centers, where distributed batteries can help manage growing electricity demand while providing financial benefits to homeowners.