Moses Sutton: Hi, thanks for fitting me in. So Badri, I missed the sell-through and how correction points as well as your answer to sale. What are your thoughts on the still shifting demand? So it looks like — if you look at the front-end data, there are still states where demand is still dropping in real time, like even into January and pricing for loans and leases haven’t inflected or haven’t at least changed to inflect organic market growth. How do you pull that together when you’re thinking through your comments specifically for 2H?
Badri Kothandaraman: Yes. I mean, look, we all know that there is seasonality factor from non-California states. But the fact of the matter is at least our data non-California states have, if you look at Q4 versus Q3, they’re flat in terms of microinverters. And we think they will bounce back coming off the seasonality. That’s what we think. And then I already talked about the puts and takes on Europe and why we think Europe will also move continuously not because they are at the bottom right now. California is, of course, a wildcard. But there, you see — I think our downside will be limited because, as I told you, the revenue of a NEM 3.0 system, is roughly 1.5x that of an NEM 2.0 system for us, considering the attach we are seeing. So I think in general, of course, if I could be wrong, if Q2 doesn’t recover seasonally, but that’s not what we have seen in the past.
Moses Sutton: Got it. Very helpful. And I guess just squeezing one more. In the unlikely event that I already risk is on the table, at least some modification to 45x credit. Would you still be comfortable with 70% of manufacturing capacity in the U.S.? Or would you shift back to some other balance?
Badri Kothandaraman: I mean, look, we — at that time, we will analyze the data in front of us. But look, that’s the way we break out for you, gross margin without IRA and gross margin with IRA because we never want to — we want to be straight with the gross margin. The native gross margin of the business. That’s why we break it out. So if it doesn’t make sense economically to manufacture here that we have the same two contract manufacturers worldwide. And our lines can be shipped anywhere in the world. Of course, it is tough and we will work with the contract manufacturer in terms of the labor, et cetera, and it is tough and we’ll do the right things there. But if the economics are there, we will not be here.
Operator: The next question comes from Maheep Mandloi of Mizuho. Please go ahead.
Maheep Mandloi: Hey, thanks for squeezing me in as well. Just on the gross margin. So it looks like the gross margins, excluding 45x is more or less in line quarter-over-quarter. But I guess the biggest delta is coming from the 45x tax credits in the quarter. Is that just a reflection of lower U.S. shipments? Or anything specific to kind of read into that on Q1 guidance?
Mandy Yang: Yes. Based on the Q1 guidance, our non-GAAP gross margin before IRA benefit is more or less in line with Q4 actual. But with IRA benefit non-GAAP gross margin dropped by five points, 100% attributable to the IRA units. We plan to ship only 500,000 units in Q1 and that translates into about $13 million be our benefit reduction in Q1 versus Q4, and that $13 million is about five points.
Maheep Mandloi: Got it. And on the IRA benefits, I’m not sure if this was asked, but is it — can you talk about like if you can get the benefit on the micro inverters added in the IQ batteries going forward?
Raghu Belur: Yes, that’s our expectation that the microinverters as long as they are manufactured here in the U.S. will also get this same benefits.
Operator: The next question comes from Tristan Richardson of Scotia Bank. Please go ahead.
Tristan Richardson: Hi, good evening guys. Just one for me. We’ll keep it brief. Badri, I know quarter in and quarter out, you make it clear that there’s always competition. And I know earlier in your prepared comments, you said market share has been — have been stable. Can you just talk about this concept of component integration. If a competing battery that has an integrated central soul of inverter, do you see any sort of threat in some of these high attached geographies where you could see a shift in preference over power architecture?
Badri Kothandaraman: Yes. I’m going to have Raghu.
Raghu Belur: Yes. So we have said this before as well, competition is not new for us. We’ve been in a very competitive environment since the inception of the company. Specifically, we’ve been in a very tough competitive environment when it comes to fighting against string inverters or centralized topology. So these are the kind of competitions we actually like. We have a very strong value proposition, vis-à-vis centralized our strong inverter topologies. The better performance, much higher reliability, much simpler to design, install and maintain as well as safety around not having any high voltage DC in our system. Now they added sophistication of our system with solar, integration of solar, batteries, EV chargers, heat pumps, and all the energy management software that we layer on top of that creates a better month.
So this is not just about widget sale or a piece of hardware. This is now a complete solution sale. Furthermore, the solution means you need to have upfront design tools, which can help the installer design the appropriate system for the homeowner. Of course, make it very simple plug-and-play to install. And then on the other hand, provide great customer service for serviceability so that the homeowner is taking care of. So competition is not new, particularly competition against centralized topologies is absolutely not new. We have been — we have honed our skills on that. But we are also very aware and paranoid about competition. So we make sure that we are continually improving our product.
Tristan Richardson: Great. Appreciate it, Raghu.
Operator: The next question comes from Vick Bagri of Citigroup. Please go ahead.
Vikram Bagri: Good evening guys. Really two quick questions. I wanted to ask about pricing slightly differently. You say a market share opportunity that you guys see with you holding stronger margin than your peers and room to sacrifice some of that margin to more permanent discounts than SBAs, especially, Badri, you talked about new markets, Italy and launching batteries in India. Do you see that as an opportunity to gain more market share rapidly? And then both broadly, is there anything else on your radar that may make you rethink pricing, is that — is it just competition and more sort of like cost cuts or component cost cuts that will drive pricing? Or if there’s anything else on your radar that could change your view on debt pricing?
Badri Kothandaraman: Yes. It’s a question I keep getting asked, we price products, we’ve done value. Value means our pricing is the next best alternative plus the value we generate on top of it. We don’t generate value, then yes, I mean we are a commodity product. So that’s not what our intention is. We have a differentiating value proposition. Microinverters its quality, its service, its reliability. It is superior for power production performance. And in batteries, we are getting there. So high quality for me is high price, right, we have the capability to demand the premium. And in microinverters, as you can see, even with those high prices, we — our market share is very healthy. So I don’t believe that we need to drop pricing in order to gain market share.
You need to have the product that solves the customer problems at the end of the day. You need to take care of customers well and then reward you by paying you the premium that you deserve. So that’s our philosophy, and we intend to take a risk to that.
Vikram Bagri: And the next question maybe for Mandy. I was wondering how you’re thinking about use of cash and intrinsic value here, $100 million of buybacks if price is significantly below $100 million given where the stock is trading, should we expect buybacks to meaningfully slow down? Or could you still look to offset these share based compensation dilution through buybacks in forthcoming quarters? Thank you.
Mandy Yang: Sure. So Q4, we said we already buyback $100 million, right and $85 per share. A quarter before, we bought $110 million, right at $130 per share, right. Q1, we plan to do similar magnitude of share buyback. As soon as we believe our share price is below the intrinsic value, right? We are very disciplined in doing share buyback. Every quarter, we look at the current share price and then we propose for the Board to approve and we execute.
Operator: The next question comes from Pavel Molchanov of Raymond James. Please go ahead.
