Badri Kothandaraman: Right. So basically, that’s right. The — in general, the attach rate of an NEM 3.0 solar system is 80% according to the industry data. So attachment to our solar system. In the past, for a NEM 2.0, for example, for NEM 2.0 was about 10%. And that has increased now to 50% with — because it just makes sense to add a battery. That’s why we set our sell-through numbers became higher by — improved by 58% compared to the prior quarter. Now your question is why is Enphase market share not a 100%. Why aren’t all Enphase solar installations having Enphase batteries, because customers have a choice. Ours is an AC coupled system. And therefore, we have batteries that can tie into that AC coupled system. However, the situation is still a net positive for us, because the 10% battery attach is now a 50% attached. And we are constantly working on having this data and getting not the 50%.
Raghu Belur: I think we are doing a lot of work in improving the product. If you look at, both in terms of ease of installation, commissioning, serviceability, et cetera, and with our three gets better, our four gets even better, including it’s a very simple product to install. As Badri mentioned, the form factor is such that, it just makes it much easier to install. So we win the rest of the business as we go, as we’ve continue to make not only hardware product improvements, but also all of the software improvements that we are making. Both of those mean that we will win more of our business.
Operator: The next question comes from Joseph Osha of Guggenheim Partners. Please go ahead.
Joseph Osha: Hi, thanks everyone. Two quick questions. First, talking about storage, you used to talk a lot about commissioning challenges in the time that was involved. Here it seems like that’s gotten better. But — and I’m just wondering, if we look at — look at developers and we think about cost installation difficulties, exploiting things to the consumer. What do you think the real biggest challenges are right now in terms of selling storage, especially in California?
Badri Kothandaraman: Yes. I mean batteries are hard to sell. First of all, they add cost to your system. I mean a high interest rate environment, people think twice about adding them. Then second is batteries are messing. It is like, for example, if you have to do a full back up, you do have to plan for it properly and you cannot short change design. It should be a very high-quality product. It should — because when power goes, the batteries, the battery company is the utility company. So batteries are tough to do probably, also when there is a problem with the battery servicing is tough you have to get it off the wall. You have to ship it to the installer. Installer has to contact the supplier. Supplier has to ship a replacement, installer has to come back.
So for installers, it’s very difficult. And they have truck rolls, many truck rules on batteries, more than inverters, more than solar. So what we have tried to do in our third-generation battery and that is why our battery sales are picking up is, we have tried to take that in account. First of all, the commissioning experience is a lot simpler. So under an hour, you can commission it. Second, if you want to, you can use the battery in a grid tied environment even simpler, but it can be used for backup to. The third one, which is a very important one is 90% of the time, the batteries can be serviced in situ, in situ means on the wall, while the battery is still on the wall, which means the common problems that we see, very rarely, you see a problem with this cell pack.
Problems commonly that we see are with battery management and power electronics. For us, all of them are serviceable boards, which means a $40 board gets out and a new $40 board comes in. And our field service people, Enphase field service peoples are there, and we have 100 of them. And basically, they are there and they take that off the installers, especially in a critical time like this you don’t want the installer to do the service. You want the company responsible, which is Enphase here. Any issues, we take care of. It’s that installer can sell. So serviceability is becoming a big differentiator. So with our third-generation battery which is the one that we are shipping today in volume. All of those are best-in-class, commissioning, the quality of the batteries, the serviceability of the batteries, the modularity, we have 5 kilowatt hours.
It’s an LFP battery, lithium ion phosphate with UL 9540A is just a better battery on all fronts.
Joseph Osha: I’m sorry, go ahead.
Raghu Belur: We also have our design proposal tool solar graph that upfront allows the installer to do a very, very good design for the — whatever the homeowners expectations are in terms of payback period and upfront cost, et cetera. You can really fine tune the design of the solar plus battery system and generates a proposal. It takes it a step further. We can do single — we do single-line diagrams, permit plant generation, everything out of this tool. So it’s an end-to-end solution that we are providing the homeowner, everything from design to installation, the ease of installation, serviceability and really good customer service, and that’s what it’s going to take for broad white scale adoption of battery, and you’re seeing that happening. I think it’s being reflected in the numbers that we shared.
Joseph Osha: Okay. And then just as a follow-on to that, I guess my question is stipulating that you all have fix the product issues, which clearly you have. Does there need to be some kind of augmented effort to educate dealers and maybe bring them back into the fold if they’ve gotten their fingers burned trying to sell batteries in the past or is just saying, hey, we’ve got a good product, now trust us? Is that enough?
Badri Kothandaraman: So yes, absolutely. It’s not enough. We have to do a lot more. We have to do the events such as what we did in Netherlands. It’s got to be done at a higher frequency because the NEM 3.0 experience is telling us that we don’t need to help in whatever way we can. And we are going to do exactly that. We have our sales, I mean our team actually listening to our installers and their salespeople, we are we can do a lot more there in terms of simplifying our software so that we can really make sure that the selling at the kitchen table becomes a lot easier. And that’s what we are going to do in the next few months.
Operator: The next question comes from Gus Richard of Northland. Please go ahead.
Auguste Richard: Yes, thanks for taking the question. I just had, first of all, on gross margin, you guided down about 500 basis points sequentially. And I was just wondering, is that a function of mix? Or is it a function of underutilization? Or is it something else?
Badri Kothandaraman: It’s a function of mix and some underutilization reflected.
Auguste Richard: Okay. Can you sort of allocate to those two or?
Badri Kothandaraman: No, we are not breaking down numbers. You can see our microinverters is basically down compared to the prior quarter. So basically primarily attributed to that.
Auguste Richard: That’s fair enough. And then moving forward, you’ve got a number of cost downs coming in, Gen 4 [ph] battery and moving to GaN, IQ9, et cetera. I was wondering if you could just talk about how those new products and cost down sort of roll into the model over the next couple of quarters? And what, if any, impact we’ll have on gross margin? And that’s for me.
Badri Kothandaraman: Yes, I talked about the three things on batteries. Once again, just to refresh, cell packs costs are coming down. Microinverters are going to be made in America and then go into batteries. So that supply chain is going to become best in class. The third is, the first two are for all our batteries. The third is specifically for the fourth-generation, which has improved architecture integrating power conversion, and battery management. These three initiatives should take the battery gross margins up not in a very nice fashion. Then the other one, you talked about GaN-based product. For us, GaN we are essentially looking to release in our next generation inverter that’s called IQ9. IQ9, at this point, we are thinking of two power flavors and approximately 427-watts of AC and 540-watts of AC.
And the challenge for us, and that’s a challenge to the team is to basically get the cost structure of the 427-watt product to actually be smaller than the product we are shipping today, which is IQ8 product. And we think it is possible because of one particular innovation there is along with GaN, we have something called as BDS, bidirectional GaN. So today, we use four silicon transistors at the output stage. And that can go into two GaN facts, because they are bidirectional. So therefore, GaN can actually — even if the GaN transistors themselves, the overall cost of those GaN transistors may be the same as silicon. Even if that is the case, GaN comes with a lot of other advantages. Like for example, your transformers can now become a lot smaller.
If you run your fetz [ph] at a higher frequency. So in general, the inverter can get smaller. And the challenge for us is how do you pack that power 427 watt power into the same form factor as IQ8 with the reduced cost structure compared to IQ8, that will allow us to make a lot of money, plus make those inverters in the U.S.
Operator: The next question comes from Moses Sutton of BNP Paribas. Please go ahead.
