Operator: Thank you. [Operator Instructions] And our next question comes from the line of Kashy Harrison from Piper Sandler. Your question, please.
Kashy Harrison: Hi. Good morning. And thanks for taking the questions or question, I should say.
Aaron Jagdfeld: Good morning.
Kashy Harrison: So Aaron, I think you indicated that HSB activations were down modestly year-over-year. Can you just help us quantify that? What does modestly mean? And then you also indicated HSB shipments and activations were aligned in February and March. And so I was just wondering if, York, if you could just help us think through 2Q residential revenues. I’m just trying to understand how we get from being up 2% in 1Q to being up low double digits for the full-year? Thank you.
Aaron Jagdfeld: Yes, Kash. So the – from an activation standpoint, I mean, modestly, it’s kind of that mid-single-digit range, which is, again, not too far off of our expectations in terms of year-over-year. We just – we kind of expected it to be a little bit softer coming out of the – we had IHCs in Q4 were lower as a result of the weaker power outage environment, frankly, Q3, we really didn’t have much of a season last year in terms of the outage environment. So kind of the back half of last year maybe wasn’t – didn’t play out as strongly as it might have historically. And as a result, it just – you see that play out in fewer installs here year-over-year in the quarter. But again, not dramatically so, which I think is good.
And I think when you look historically, the category is still up it’s up dramatically from where it was kind of you go to 2019 ranges, those levels of activations and we’re up significantly from that area. So the category is quite a bit bigger today than it was then. But I think just a little bit off near term here from the weaker power outage environment in the last couple of quarters.
York Ragen: Yes. And then your comment about like as residential paces from Q1 to Q2, we did – in Q1, we still did undership the market. We are still bringing field inventory down and again, by the tail end of the quarter and we get into Q2, we feel like we’re back to normal for the most part. So we still did undership the market. If you recall, we undershipped 2023 by around $300 million. I guess, I would say, a quarter of that probably a little less than a quarter of that was what we undershipped the market in Q1 here. So we got back to normal. So you won’t have that in Q2, that undershipping. And then just the seasonality of the business picks up from Q1 to Q2 in that category. So that’s again, that’s – you got to look back at what historical seasonality looks like in that, again, supports the guide for residential products in the future.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Jon Windham from UBS. Your question, please.
Jon Windham: Hi. Yes, thanks for taking the questions. I’ll keep it quick as we’re running a bit long. Just any sort of comments around, you mentioned some weakness in the non HSB residential market. But one of the really strong markets right now is storage deployments. Residential storage deployments are up 200% year-on-year in California. Just some comments about the competitive landscape and your ability to compete in that market? Thanks. I appreciate all the insight to that.
Aaron Jagdfeld: Yes. Thanks. Yes. So storage attach rates are up dramatically. Solar plus storage install rates, as we understand them, certainly, new solar projects are down significantly. 50%, 60% year-over-year in California. And so you are seeing greater attachment rates because of the NEM 3.0 position. And that’s where storage I think you’re seeing just the absolute numbers are probably up because of that higher attach rate. California for us, that’s a market largely dominated by Tesla. It’s not a market that we’ve historically been strong in. So we’re just – we’re really not participating dramatically in that. I will say, I mean, our storage business is up year-over-year. So it’s not double. It’s not 200%. But that’s an area that we are seeing some growth off of a pretty hard bottom as we’ve described over the last several years.
But actually, as we also called out, I think the bigger challenge in the other residential products, actually, it was portable generators. We haven’t talked a ton about that. I mentioned in our prepared remarks, but both domestically because of the softer outage environment here over the last several quarters. And then internationally, international portable gen sales were down hard Q1 year-over-year. There was a lot of power security concerns in the year ago quarter in Europe, largely related to the Russia-Ukraine war. And that’s abated somewhat. And so we’ve seen the portable gen demand come off hard in the international markets for us, which is specifically kind of the European markets. And then our chore business, which we don’t talk about a ton, but that suffered from – that’s really suffered last year.
The longer-term trends there coming out of the pandemic, there’s a lot of kind of buy ahead on equipment, both at the end market level as well as the distribution level. And you can see all the public comps out there that are involved in this space on the residential chore product space. And it’s been a pretty brutal market over the last – really the last 1.5 years. And we were hoping that if we got a little bit of a spring weather here, and that was kind of built into the forecast, that, that would be helpful. But what we found is distribution partners – they didn’t sell through their snow season. It was a weak snow season, which with high snow inventories, they were reticent to invest in spring chore products. So that’s been delayed a bit.
Now thankfully, weather is picking up here, trends more near term or a little more positive with chore products, but it’s still been – it’s been a rough go. So it’s really chore and then those energy tech markets that have been softer and then the portable generator pullback that we talked about, which were kind of headwinds for us in the quarter.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Jordan Levy from Truist. Your question, please.
Jordan Levy: Good morning, all. Thanks for squeezing me in.
Aaron Jagdfeld: Hey, Jordan.
Jordan Levy: Appreciate all the comments on gross margins here. And I just wanted to see on the cost side, if you could give us some more specifics around what the input cost reductions were that you’re realizing in the first quarter? And as a quick second part of that question, just curious on the sensitivity of costs overall to copper prices, specifically given what that commodity has done over the last month or 1.5 months?
York Ragen: Yes. No, I think it’s a number of things in terms of – well, steel is probably our largest input and we’ve really – those steel costs, I guess, over the longer term have come down. And as we’ve been turning through our higher cost inventory, we’re just seeing those lower steel costs come through, again, maybe a little bit faster than we originally anticipated. So steel is an important factor. Obviously, logistics, freight costs, while those came down throughout last year and again, we’re starting to turn through that inventory and the realization of those lower freight costs, we’re starting to see that’s part of the improvement, just better plant efficiencies. I think that’s better plant absorption. We’re seeing that as well in terms of strong execution there.
So I would say those are probably the biggest factors on sort of how we were able to realize the better gross margin faster than we originally anticipated. In copper, I guess, copper, it does have an impact, but I would say it’s lesser or so than…
Aaron Jagdfeld: And there’s lag there. I mean…
York Ragen: To the steel side, yes. So copper has gone up. But that, I would say, is in terms of lower impact relative to steel.
Operator: Thank you. [Operator Instructions] And our next question comes from the line of Vikram Bagri from Citi. Your question, please.
Vikram Bagri: Good morning, everyone. I wanted to ask about R&D expense, which increased noticeably in the quarter. I was wondering if you can share whether your R&D dollars are being spent. In your previous question – answer to your previous question, you had mentioned that there are no plans of launching products that directly target the data center market. So I imagine R&D is being largely focused on energy technology. If you can share the progress of next-gen MLPE storage products, is the target to compete in that market at a lower price point with lower failure rates or an ease of installation or there are new features or USPs, we should keep in mind that give you an edge against the competition in that market? And then lastly, you had mentioned OpEx will be roughly 23% of sales last quarter, but wasn’t mentioned today, I wanted to make sure the guidance has not changed given the early spending update on your comments on lead generation spending this quarter?
Thank you.
York Ragen: Yes. This is – on the last part on the OpEx guidance. I did – in our prepared comments, we did mention that the outperformance in Q1 on the gross margin would get roughly offset by a little bit higher OpEx, again, as we continue to invest in those strategic initiatives. It’s early. So we basically held the EBITDA margin guide where we had it from last quarter with the offset – the gross margin outperformance slightly offset by the OpEx side.
Aaron Jagdfeld: Yes. And then on the – Vikram, on the R&D side, yes, we’re spending very heavily largely a lot of those R&D dollars. I mean it’s across the board on all of our products, but obviously, the energy tech products. We are knee-deep in our next-generation storage devices in the residential side that we’ll be bringing to market here later this year. And then, of course, our rooftop solar products, power generation products, inverter products that we continue to invest in. We have our next generation of those products coming to market in early 2025. So there’s a tremendous amount of effort right now. We’ve been building teams. You may have seen our announcement. We opened a tech center in Reno, Nevada. We’ve been filling that with people.
We’ve got tech offices in Portland, Maine. We’ve got tech offices in Vancouver. We’ve got tech offices in Bend, Oregon, in L.A., in Denver. And so we’ve really cast a pretty wide net here as we build out the talent level needed to compete with obviously some very formidable companies there that supply not only storage but also on the inverter side. So from a USP standpoint, again, we’ll talk more about these product launches as we get closer, but we believe we’ve got some novel approaches to certain elements of the tech – but we also think that there’s the integration of all of these products together more seamlessly. Today, if you want to put together a solar system with a storage device with an EV charger with thermostatic controls with even a generator for longer-term backup, load management, all of these different devices, that’s three, four, five different apps you’ve got in your hand.
We’re working on a project that is unifying all of these technologies on a single platform, really utilizing the Ecobee experience. It was the central part of our strategy in the Ecobee acquisition. The ML and AI that they deploy today in the thermostatic controls environment and the really high-quality user experience that they bring together. We want to bring that to all these products. And we think that will be unique to the marketplace. When you look across the market today, we don’t think anybody has the breadth of offering that we have and putting it all together on a single platform to help homeowners in particular, to help them control not only resiliency, which is central to our approach here, but also comfort and cost, which are as electrical rates, utility rates continue to drive upward.
Cost is going to be, I think, one of the things that is going to creep up on rate payers in a way you’re already seeing evidence of it in certain markets like California. And it’s going to drive homeowners to investigate other solutions, distributed solutions, solutions that help them give them more information and more control over the power that they generate, the self-generation that they store, that they export back to the grid and the resiliency that they absolutely demand in their own homes. So I think that over time, this will become more evident as these products get into the market. But I think and with our brand and our distribution and our sales and marketing competencies, I think you’re going to see that we believe we’ll have success there in the long-term.
