Philip Shen: Hey, guys. Thanks for taking my questions. First one’s on pricing as a follow-up to a prior question. Our check suggest pricing through the US resi ecosystem is coming down rapidly. So US resi solar module pricing is down 15% to 30-plus percent. Powerwall pricing is down. Meaningfully some of your inverter peers have lowered inverter pricing. We’ve heard that you guys have — you may have lowered pricing as well for specific larger customers on a one-off basis. I think, Badri, you just mentioned that you don’t see any drop in pricing, but can you talk — can you give us some more color on how you expect to maintain price, especially in this more difficult environment? And can you talk about price specifically in Q3 and Q4, if you expect it to hold, how does it hold? And if there is some risk, maybe talk about that risk? Thanks.
Badri Kothandaraman: You can see our numbers. Gross margin is 2 percentage points better in Q1 than Q4. It basically comes because of our disciplined pricing management plus the conversion for us to IQ8. IQ8 comes with an outstanding cost structure. And right now, we are at 65% converted to IQ8. We expect to be at nearly 90% converted to IQ8 by Q3. So — and we have an active cost reduction effort going on. So even if we do one-off deals, for example, in order to accelerate our market share, these are not going to cause a dent for us. So we expect pricing to be generally stable. The same thing is true on batteries. On batteries, we are learning rapidly. We are learning a lot on costs, especially the overhead costs on the battery returns.
The serviceability of batteries are tough if you ask anybody in the industry. And I think we are getting better and better and better at those, basically improving the battery quality by root cost corrective action, by understanding defects, by eliminating the defects, by putting in permanent corrective actions in place. Then also building in serviceability into our new products. So why take down $3,000 products from the wall? Why not take down a $40 board from the wall instead? Why not repair it in situ? Why not service right there in 30 minutes? So there’s a lot of money to be taken out of batteries from a cost perspective. That’s what we are doing.
Philip Shen: Great. Really appreciate that color. As a follow-up there, Badri, to what degree do you think you may be giving up on some volume? So I think Tesla is a string inverter, they’re ramping up, and I think they’re selling inverters only. And yes, I know your technology is meaningfully better, does many things that they can’t do. But in this tough economic environment, installers may be prioritizing cost. So with the high gross margin where you are now, you may be able to maintain some share without giving much on price, but still keeping some of that volume. So how do you make that trade-off between price and volume as we get through the next few quarters?
Badri Kothandaraman: Yes. I don’t. For me, it is high quality leads to high price. And why? Because it’s the entire cost of ownership. Installers have become smart — smarter. Basically, they understand it is not about just the price of the inverter. The time, the money, it causes them to go and address the failure is so huge compared to a few dollars move on the inverter for high quality. So high quality is what we focus on, and installers have realized that. And they are continuing to work with us. And you can see the latest energy say the reports for the data. And the data is there. So we don’t plan on changing our strategy there.
Philip Shen: Great. Thank you so much for the color.
Operator: Our next question comes from Andrew Percoco from Morgan Stanley. Please go ahead with your question.
Andrew Percoco: Great. Thanks so much for the time. I just wanted to follow-up, Badri, on some of your prepared remarks around the health of the customer base, specifically the long tail. Can you just maybe talk about what you’re seeing from some of those customers? Talk a little bit about working capital needs? But just when it comes to the financing environment, the confidence level and their ability to get financing. And then maybe on the other side of that, to the extent the core long tail doesn’t perform as expected, what’s the optionality to sell to some of the larger players in the market? And what might that mean for pricing and margins?
Badri Kothandaraman: Yes. Just to recap what I said — and it’s good for everyone to hear it again, is our overall sell-through of microinverters in the US was 21% lesser in Q1, compared to Q4. California was only 9% out of that because we understand the situation with NEM 2.0. So the NEM 2.0 rush basically compensated for any weakness due to the macro. On the rest of the US, the sell-through dropped by 25%, compared to Q4. And the most notable drops were seen in the states with the lowest utility rates, Texas, Florida, Arizona. Then — we then did an analysis on how did the long tail installers do in comparison with the Tier 1 and 2 installers? We found in our analysis, the sell-through rate of long tail installers was quite better compared to the Tier 1 and 2 installers.
Now I’m not exactly sure of the reasons, I can only speculate. Maybe they’re local. There they do a better job of servicing the client, maybe they deal with high-value clients. But we thought from the questions we had that long tail was going to be a little more stressed, but we found the opposite in our data. But having said that, I mean all installers are affected by three things like what we said. The interest rates are high. That’s the first thing. So basically, it’s getting more difficult to — solar with loans is getting a little more difficult to sell. Basically, earlier, they used to do low APR loans with high dealer fees. And that was common, whether it’s long tail or Tier 1 and 2 installers. Now they are switching to higher APR with lesser dealer fees, sometimes no dealer fees.
A cash flow issue. That is the milestone on payment is a lot reduced now. That’s causing stress. Some of the — our expectation was some of the Tier 1, 2 installers may be able to handle that situation better than long tail, but we didn’t — the data didn’t indicate that. For us, the data said that the long tail is okay, it’s holding up. And we think it is a matter of time. We think the industry as a whole is going to adjust. Of course, there are a few installers who may actually find it difficult. But in general, the industry is going to adjust to the new loan structures. Probably, it’s a big opportunity for more people to come in to the market to offer loans and leases to long-tail installers, leases to long tail installers hasn’t been ramp until now, but that’s an opportunity that we see already a few players come in.
So I think it’s going to be interesting to watch the situation in the next few quarters. But I think this is a resilient industry. And I believe things are only going to get better from here. Q1, as I indicated, is usually the worst quarter of the year due to seasonality. And so that — Q2 is usually a good quarter in terms of seasonality and with the adjustments installers are making in running their business, we expect things to be incrementally better.
Andrew Percoco: Got it. That’s helpful. And maybe just last one for me on net metering, officially took effect, I guess, a week or so ago. Any kind of first indications from the installers in terms of what they’re seeing? In terms of, to your point, some of the friction potions around coating and installations. Are they — any indications of how much growth might slow in California now that it’s officially taken effect? I know it’s only a weekend, but any color that you have there would be helpful.
Badri Kothandaraman: It’s only a week, as you said, we have talked to a number of installers. All of them are optimistic that their solar plus storage business can boom. They are all — we shared solar graphs with them. We shared the designs. We showed them three examples per utility. We showed them how a pure solar case looks. We showed them that solar now in west-facing roofs is not bad. We showed them solar plus storage is actually better than NEM 2.0. or equivalent. So, now actually storage has got meaningful savings right now. Earlier with NEM 2.0, storage didn’t have value in terms of savings, but had a lot of value on resilience. Now, storage provides economic advantage in addition to it. So installers are getting it.
As I said, they do have a little time on their hands in order to start accelerating the originations. But I think the data is there, that’s a put. And we do expect — like in Germany, we do expect grid-tied batteries to become popular too because imagine you have 8-kilowatt solar system, and the crew is already there. They’re installing the solar system. And all I need to do is to install one of Enphase’s 5-kilowatt-hour battery. That battery is not big. It is small. It can be done very quickly on the wall. There is no partial home, whole home, nothing to worry about. There’s no work on the main panel. It’s a simple 5-kilowatt-hour battery and they provide savings right away. So, selling needs to pick that up. I’m sure they can sell it.
Andrew Percoco: Understood. Thanks so much for your time.
Badri Kothandaraman: Thank you.
