Enphase Energy, Inc. Q2 2026 Earnings Call

Good afternoon, everyone, and welcome to Enphase Energy's second quarter 2026 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone phones. To withdraw your questions, you may press star and two. Please also note this event is being recorded. At this time, I'd like to turn the floor over to Zach Freedman with Enphase. Please go ahead. Good afternoon, thank you for joining us on today's conference call to discuss Enphase Energy's second 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 second quarter ended June 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 and 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, 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 second quarter 2026 financial results.

We reported quarterly revenue of $291.9 million, shipped 1.59 million microinverters and 113.8 megawatt hours of batteries, and generated free cash flow of $25.9 million. Our Q2 revenue included $84.3 million of safe harbor revenue. We exited the quarter with channel inventory normal for batteries and slightly elevated for microinverters. On a GAAP basis, we delivered gross margin of 60%, operating expense of 42.3%, and operating income of 17.7%, all as a percentage of revenue. On a non-GAAP basis, we delivered gross margin of 46.8%, operating expense of 27.3%, and operating income of 19.4%, all as a percentage of revenue. Mandy will cover the financials later in the call. Our global customer service NPS was 80% in the second quarter as compared to 82% in the first quarter.

Our average call wait time remained approximately two minutes. We also made our Enphase Assistant available to 1.5 million homeowners worldwide. This gives our customers faster access to personalized system-specific support and making their energy systems easier to understand and manage, ultimately reducing the number of calls. Let's cover operations. In the second quarter, we shipped approximately 1.58 million U.S.-made microinverters and battery inverters from our Texas and South Carolina manufacturing facilities and booked the associated 45X production tax credits. We also shipped 43 megawatt hours of IQ Batteries from our Texas facility in the second quarter. We offer IQ Batteries that meet domestic content and FIOC requirements, helping lease and PPA customers qualify for ITC bonuses. Let's now cover revenue and regional performance. Our global Q2 revenue increased 3% compared to Q1.

Our global sell-through was approximately flat as compared to Q1 as growth in Europe offset the softness in the U.S. Our revenue mix was 78% from the U.S. and 22% from international markets. In the U.S., revenue declined 3% sequentially. Safe harbor revenue increased to $84.3 million in Q2 as compared to $34.5 million in Q1. Excluding safe harbor revenue, the U.S. revenue declined primarily due to us undershipping into the channel. Our U.S. sell-through in Q2 decreased 7% as compared to Q1. Excluding one-time orders in Q1 that did not recur in Q2, the sell-through was approximately flat sequentially. Our Q2 2026 sell-through declined 34% as compared to one year ago in Q2 2025, reflecting continued pressure from higher interest rates and transition following the expiration of the 25D tax credit.

Third-party market reports suggest that the broader U.S. residential solar market has stabilized with the industry-wide permits in June increasing 4% from May and upstream sales activity rising 5%. Both remain about 30% below prior year levels. Higher electricity cost markets are performing better while several Sun Belt states remain under pressure. The stronger industry-wide signals are for storage and commercial solar. National residential battery attachment remains near 40%, with materially higher levels in key markets. While the U.S. commercial solar permit activity increased 36% year-on-year in June. Taken together, these third-party data points suggest that the next phase of U.S. market growth will be shaped by storage economics, the commercial demand, financial availability, and utility rates. In Europe, our revenue increased 35% sequentially in the second quarter, while sell-through grew 30% with strong performance across both solar and batteries in multiple markets.

The growth was supported by higher power prices as well as accelerating battery adoption. As we have discussed, Europe is increasingly becoming a battery-led market. As self-consumption, dynamic tariffs, and VPPs gain importance, the company that owns the battery relationship is well-positioned to expand over time into the broader home energy system, including solar, EV charging, and VPP. In the Netherlands, our battery activations increased approximately 102% from the first quarter, as rising export penalties and the planned phase-out of net metering at the end of 2026 strengthened self-consumption. In France, lower feed-in tariffs are similarly shifting the market towards self-consumption and driving greater interest in batteries, particularly with new solar installations. The battery activations in France increased approximately 34% sequentially. In Germany, the growth was broad-based, with both microinverter and battery activations increasing approximately by 35% and 27%, respectively.

We are intensifying our focus on battery retrofits in both Netherlands and France, where we have a combined installed base of nearly 900,000 Enphase customers. Building on the success of our initial programs, we have increased the cadence of homeowner events and direct marketing campaigns. Our newly established insight sales team, supported by an improved lead management platform, is helping convert this demand into revenue. We also showcased our fifth-generation battery at Intersolar Munich, where customer feedback was positive, and we expect initial shipments before the end of this year. Let's now discuss our outlook for the third quarter. We expect revenue of $290 million to $320 million, representing approximately 5% growth at the midpoint. Our Q3 revenue guidance includes approximately $75 million of Safe Harbor revenue. We are currently over 70% booked to the midpoint of our guidance.

We expect global sell-through in Q3 to increase 10% as compared to Q2. Distributors remain cautious amid broader macroeconomic uncertainty, including interest rates, and our guidance assumes modest undershipment relative to sell-through. For batteries, we expect shipments between 130 megawatt hours to 150 megawatt hours as momentum continues to build in both U.S. and Europe. As reciprocal tariffs have moderated somewhat, we reduced battery pricing in late March, and we expect to take further targeted pricing actions as necessary to improve system economics and support demand. Turning to Safe Harbor, we have executed year-to-date agreements with third-party owners totaling approximately $1.1 billion. $202 million under the 5% ITC Safe Harbor method and $878.6 million under the Physical Work Test beginning of construction method. These agreements provide two important benefits.

They create a strong foundation for future battery attach opportunities as these systems are installed from 2028 through 2030. Moving to financing. Propel is entering a new phase of growth. Just to remind you, Propel is a TPO offering from SolSource Solutions that combines Enphase equipment, financing, loan financing provided by TriBeam Financial through the Concert Finance platform, and national distribution through Greentech Renewables. Purpose-built for the long tail of installers, Propel has expanded from four states to six states with recent launches in Pennsylvania and Colorado, and plans to reach a total of 12 states during the third quarter. Installer participation has grown to about 290. The Propel originations are running at approximately 200 per week, with battery attachment at roughly 75%. We expect this will begin to grow again as installers in new states start to ramp up.

SolSource is targeting 500 originations per week by the end of the year and scaling by securing sufficient warehousing capacity and tax credit buyers. In today's higher interest rate environment, Propel offers homeowners and installers a compelling alternative to conventional solar loans and can help restore a meaningful portion of the cash and loan market affected by the 25D expiry. Let's talk about products, starting with IQ Batteries. We showcased our fifth-generation IQ Battery G5 at Intersolar Munich in June, where it received a strong response. Built from stackable AC-coupled 5 kilowatt-hour modules that can scale up to 30 kilowatt-hours in one stack, the G5 uses 100 ampere-hour prismatic cells and is designed to deliver 50% higher energy density than our fourth-generation battery at roughly 40% lower cost per kilowatt-hour.

When shipments begin in the fourth quarter of 2026, we believe the IQ Battery G5 will stand out as one of the few truly stackable AC-coupled battery platforms in the market. Its combination of lower cost, flexible sizing, strong performance, high quality, high serviceability should make it highly competitive across the U.S., Europe, and Australia. We are also making good progress on our commercial battery called IQ Vault, targeted for both three-phase 208 and 480 volt market. The first product, called IQ Vault 80, is an 80 kilowatt-hour battery, again, three-phase, 480 and 208 volts with 40 kilowatts of continuous power. Basically, it is a 2-hour battery. Each outdoor cabinet uses 5 field-serviceable 16 kilowatt-hour LFP modules built with 314 ampere-hour prismatic cells, and up to 25 cabinets can scale the system to 2 megawatt-hours.

The 480-volt three-phase configuration is designed for larger commercial building, while the 208-volt three-phase configuration will address small commercial and multifamily properties, including applicable California projects driven by Title 24 requirements. The distributed architecture provides module-level fire suppression and is designed for self-consumption, peak shaving, time of use, VPP, and backup. We have completed the functional system demonstration in the last quarter, and we expect to open pre-orders soon, with initial shipments planned for Q1 2027. Turning to microinverters. We launched our GaN-based IQ9N residential microinverter across the U.S. and key European markets in June, followed by Australia and New Zealand earlier this month. We are also gaining traction in the U.S. commercial market with several promising national opportunities advancing with large retail customers.

During the second quarter, we began shipping the IQ9S-3P microinverter, our highest power microinverter to date, 548 watts based on gallium nitride, GaN, for 480-volt systems. This is designed to support solar panels up to 770 watts. With U.S. manufacturing, domestic content eligibility, and FEOC-compliant products, we believe our commercial business is well-positioned for continued growth. We recently opened pre-orders for our smart thermostat, a new control point for the Enphase Energy System. By bringing HVAC into the system, Enphase can optimize one of the home's largest energy loads alongside solar and batteries to improve savings, preserve backup capacity, and support VPP. The integrated display on the device also give homeowners a simple way to view their solar battery and home power live from inside the home. We expect shipments next month. Moving on to EV charging.

We are making strong progress on the DC-based IQ Bidirectional EV Charger, which we showcased at Intersolar Munich. Built on our GaN power platform, this is designed to support both 400-volt DC and 800-volt DC EV architectures and deliver up to 11.5 kilowatts of bidirectional power. ISO 15118-20 enables standardized communication between the vehicle and the charger, while our expertise in utility interconnection, grid code compliance, and distributed energy management supports V2H backup, V2G, and use cases like green charging. We are collaborating with three leading automotive OEMs in the U.S. and one in Europe, with additional engagements underway. Subject to the successful completion of applicable compliance testing, we expect to begin pilot shipments in the fourth quarter, alongside vehicle launches from one U.S. OEM and one European OEM. Finally, let me provide a more detailed update on our IQ Solid-State Transformer or IQ SST.

The rapid build-out of AI infrastructure is reshaping data center power architecture as rack densities rise from approximately 150 kilowatts today towards one megawatt and beyond. Delivering power at that scale will require a fundamentally more efficient, responsive, and reliable way to move medium voltage power directly to the compute rack. IQ SST is designed to meet that need by converting 13.8 kV or 34.5 kV medium voltage AC directly to 800-volt DC through a modular, single-stage architecture. At the core of the platform is our IQ SST power module, which utilizes our predictive control enabled by the custom silicon, GaN, which enables high-frequency switching, and innovation in medium voltage transformer design. Built on more than 20 years' experience in distributed power electronics, we are targeting approximately 98.5% efficiency, five nines reliability, and sub-millisecond response time. That response time is a key differentiator.

AI workloads can create rapid swings in power demand. IQ SST is designed to respond in real time to help stabilize the load as seen by the data center power system. This could allow most of the energy storage to be centralized in a BESS located in the data center's black space rather than placed beside every compute rack, freeing up valuable white space. This configuration would utilize a second SST for the BESS, effectively doubling our data center opportunity. For customers that still require storage near the rack, the same platform can also support a DC-DC configuration that charges and discharges a local high C-rate battery to help manage dynamic AI loads. U.S. manufacturing and a FEOC-compliant supply chain add another important layer of differentiation. They give customers greater confidence in supply continuity, product traceability, and the ability to deploy at scale without relying on restricted foreign entities.

For hyperscalers and data center operators making long-lived infra decisions, we believe domestic manufacturing, resilient sourcing, and a clear path to high volume production can be as important as product performance. Our new and existing customer engagements continue to deepen. We have advanced a few of these opportunities to the RFI and RFP stages, representing potential demand totaling multiple gigawatts. These engagements are directly shaping our roadmap across power level, input voltage, footprint, cooling, battery connectivity, and serviceability. Importantly, we have been able to address evolving customer requirements without changing the fundamental IQ SST power module, underscoring the flexibility of our platform. We have also made substantial technical progress over the last three months towards a fully working system later this year. Our team has now grown to about 120 people.

We have begun testing the second revision of the IQSSD power module. The results give us confidence that the next revision can become our production candidate. We have completed the build-out of our medium voltage lab and validated the medium voltage transformer design. We are now optimizing it for manufacturability and cost. This work has already generated meaningful IP, particularly around the transformer. At the system level, our power modules are connected in series on the medium voltage input side, and in parallel on the regulated 800-volt DC output side. Managing stability and balancing power across the series stack are mission critical. Through modeling and hardware experimentation, we have demonstrated that our proprietary droop control architecture can robustly manage the series stack and maintain balanced power across modules.

Specifically, we have demonstrated a 15 IQSSD power modules operating in series and are now advancing the complete first-generation system, including the thermal architecture, rack level controls, and mechanical design. The first-generation platform is designed to scale from 1.25 megawatts to 2.5 megawatts across 13.8 kV and 34.5 kV configurations. We remain on track for a fully working system later this year, customer pilots beginning in 2027, and commercial shipments in 2028. Beyond AI data centers, we are evaluating the broader applicability of the IQSSD platform across utility-scale solar, storage, and DC fast charging. In each of these markets, we believe IQSSD can connect directly to medium voltage AC, eliminating the need for a conventional transformer and simplifying the overall power architecture. This can reduce the number of stages, system complexity, footprint, and cost while preserving the same core advantages of high efficiency, fast control, and modular redundancy.

While these applications are at an earlier stage, we believe that the same underlying platform can ultimately support a much broader set of power conversion markets. Let me conclude. Our next phase of growth starts with residential energy systems. Across the U.S. and Europe, IQ 9 microinverters, our upcoming fifth-generation battery, and the IQ Bidirectional EV Charger significantly expand the value of the Enphase home. Together, they position us to win new battery-led systems, deepen engagement with our installed base, and address standalone bidirectional EV charging. In the U.S., prepaid lease programs like Propel add an important financing lever to support that growth. Beyond residential, we are expanding into small commercial energy systems. Our three-phase microinverter portfolio now spans both 208 volts and 480 volts applications. The IQ Bart with the 80 kWh battery adds commercial storage, and our EV charging portfolio broadens the opportunity further.

Together, these products give us the foundation for an integrated small commercial energy system spanning solar, batteries, EV charging, controls, and energy management. The next frontier is data center infrastructure that we talked about with IQ SST. The same architecture can extend into utility-scale solar, battery, and high power DC fast charging. These markets require the same fundamental capabilities: direct medium voltage connectivity, high efficiency, fast controls, modular redundancy, compact design, and competitive system cost. Our expansion from residential to commercial to data centers and ultimately to utility scale is built on the same core technology foundation. Single-stage power conversion, custom silicon-enabled control, high frequency GaN switching, and innovation in transformer design. We believe this positions Enphase to compound growth across progressively larger markets while leveraging the same differentiated architecture, technology, and execution capabilities that established our leadership in residential energy systems.

With that, I will turn the call over to Mandy for her review of our financial results. Mandy? Thanks, Badri, good afternoon, everyone.

I will provide more details related to our second quarter of 2026 financial results, as well as our business outlook for the third quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q2 was $291.9 million. We ship approximately 725.2 MW DC of microinverters and 113.8 MWh of IQ Batteries, above the high end of our battery guidance. Q2 revenue included $84.3 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install the inventory over more than a year. Non-GAAP gross margin was 46.8% in Q2, compared to 43.9% in Q1. GAAP gross margin was 60% in Q2, compared to 35.5% in Q1.

GAAP gross margin was positively impacted by 15.6 percentage points for the IEEPA tariff refunds received. Reciprocal tariff negatively impacted gross margin by two percentage points in Q2. Non-GAAP operating expenses were $79.8 million for Q2, compared to $77 million for Q1. The increase was driven by higher investment in R&D spending. GAAP operating expenses were $123.5 million for Q2, compared to $130 million for Q1. GAAP operating expenses for Q2 included $39.7 million of stock-based compensation expenses and $4 million of acquisition-related expenses and amortization, restructuring, and asset impairment charges. On a non-GAAP basis, income from operations for Q2 was $56.7 million, compared to $47.3 million for Q1. On a GAAP basis, income from operations was $51.5 million for Q2, compared to loss from operations of $29.6 million for Q1. On a non-GAAP basis, net income for Q2 was $61.5 million, compared to $62.3 million for Q1.

This resulted in non-GAAP diluted earnings per share of $0.46 for Q2, compared to $0.47 for Q1. GAAP net income for Q2 was $36.1 million, compared to GAAP net loss of $7.4 million for Q1. This resulted in GAAP diluted earnings per share of $0.27 for Q2, compared to diluted loss per share of $0.06 for Q1. We exited Q2 with a total cash equivalent, and marketable securities balance of $937.7 million, compared to $930.6 million at the end of Q1. In Q2, we generated $40.3 million in cash flow from operations and $25.9 million in free cash flow. Capital expenditure was $14.4 million for Q2, compared to $19.9 million for Q1. As of June 30, 2026, after monetizing the PTCs generated in 2025 and Q1 2026, we had approximately $193.5 million of PTCs on our balance sheet.

This included $108.3 million related to U.S.-made microinverters shipped to customers in 2024, and $85.2 million related to shipments in the first half of 2026. We elected direct pay for the 2024 PTCs, which are expected to be refunded through our 2024 tax return filed in April 2025. However, we have limited visibility into the timing of receipt of the $108.3 million due to IRS processing. As a reminder, in March 2026, we revoked our direct pay election. Going forward, we plan to sell PTCs on a regular basis to better align cash inflows with expenses. We expect these sales to be part of our normal course of business, and the impact of this approach is included in our quarterly gross margin guidance.

We announced a tax credit transfer agreement to sell $150 million of PTCs generated in 2026 to a leading financial institution, with four quarterly payments from April 2026 to January 2027. We received tariff refunds of approximately $41 million from U.S. Customs and Border Protection, or CBP, in the second quarter, with another $11 million received after the quarter end. Second quarter GAAP results were impacted by $52 million, of which $45.4 million was recognized as an increase to GAAP gross profit. $1.6 million was recognized as GAAP interest income, and $5 million was capitalized as a cost of inventory as of June 30, 2026. We have submitted additional refund claims that remain subject to CBP's review and validation. Now let's discuss our outlook for the third quarter of 2026.

We expect Q3 revenue to be in the range of $290 million-$320 million, including shipments of 130-150 megawatt hours of IQ Batteries. For the remainder of 2026, we anticipate recognizing $136.2 million of step-up revenue, with $75 million in Q3 and $61.2 million in Q4. We expect GAAP gross margin to be within a range of 42%-45%, including approximately two percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within a range of 44%-47%, including approximately two percentage points of reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expenses and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $120 million-$124 million, including approximately $44 million estimated for stock-based compensation expenses, acquisition-related amortization, and restructuring and asset impairment charges.

We expect our non-GAAP operating expenses to be within a range of $76 million-$80 million. With that, I'll open the line for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. We do ask that you please limit yourselves to a single question and one follow-up. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Praneeth Satish from Wells Fargo. Please go ahead with your question.

Okay, thanks. Good afternoon, everyone. Maybe on SST, recognizing it's early, just conceptually, how are you thinking about balancing a margin capture versus market share adoption? I guess based on our understanding, if you include 45X credits, the SSTs could potentially support very, very high gross margins. On the other hand, you've talked about, in your prepared remarks, ultimately selling the product into other markets like utility scale, solar, which presumably would imply setting maybe a more competitive ASP. Just trying to understand at a high level how you plan on navigating that.

We are not going to give you actual numbers, we are going to tell you how we are thinking about it. We are going to be extremely competitive, we are going to clearly focus on our value drivers. There are a lot of competitors also developing SST, therefore, the focus for us is what does Enphase do different and better compared to the competition? Our value drivers are like what we stated, fast response times. Because the SST can respond within sub-millisecond, we think the battery storage can move to the facility space, which is called the data center black space. That will be a key differentiator for our solution. In addition, our modularity, our redundancy, reliability, U.S. manufacturing are all other value drivers.

Like what I said, I'm not going to give out numbers, I just told you how we are thinking about it. Plus, you are correct on the 45X PTC. We are finalizing those details, that'll also help us to be highly profitable.

Got it. Maybe just shifting gears on Propel. Last quarter, if I remember correctly, you said originations were running at roughly 200 per week. It sounds like they're still tracking at around that same level today. Should we interpret the relatively flat sequential trend there as a function of financing capacity or are there supply-side constraints? I guess what's going to be the driver there that gets you to 500 originations a week by year end? Is that based on demand increasing or just based on your partners increasing financing capacity? Thank you. Yeah, I think we were clear.

We said Propel is running its pilot. We started with four states. We were conservative. SolSource is basically responsible in what they do. They are in the process of securing financing so that they can scale every phase deliberately, properly. It is simply a function of how many states we are in. For example, if I look at the first four weeks of this month, would say the numbers are running a little bit higher than the 200. What we are going to do is to scale it to 12 states. Today, Propel is in six states right now. SolSource is going to scale it to 12 states by the end of Q3. We expect more aggressive ramp in Q4. Their target is to exit the year with 500 originations per week.

Got it. Thank you. Our next question comes from Brian Lee from Goldman Sachs.

Please go ahead with your question.

Hey, everyone. Good afternoon. Thanks for taking the questions. I guess, Badri, for you, I'm curious. The safe harbor revenue, it's pretty significant both in the third quarter, appreciate you giving us the fourth quarter number as well. It seems to be tracking higher than you've been guiding to. Is this market share gain amongst TPOs? Maybe can you speak to what's driving that momentum? Then, I had a follow-up.

Yeah, I think we have, like what you said, we have strong relationships with a lot of our TPO partners. Some of our TPO partners are healthy. They are supported by a strong balance sheet in their parent companies. There are some new TPO partners as well who I'm sure you will see. They're going to show up. Basically, it's just the confidence that they have in either pursuing a 5% safe harbor strategy or a PWT, which is the Physical Work Test safe harbor strategy. For us, I think we said approximately $1.1 billion is the agreements that we have executed till date. Of that, the $202 million under the 5% method, $878.6 million under the Physical Work Test. It's just we have strong relationship with the TPO guys.

All right. Fair enough. Then, maybe just related to that. You sounded a little bit more positive on kind of a return of growth in resi, even in the near term. If we adjust for the undershipping in 2Q and exclude safe harbor, you're implying flat revenue from 2Q to 3Q. You're still undershipping, you said. I guess why undership in 3Q when demand is seemingly improving, based on some of your comments? Then how should we think about also 4Q seasonality? Do you expect to still be undershipping into 4Q? Should 4Q revenue, including safe harbor, be higher than 3Q including safe harbor all in? Thank you. Yeah. Basically, just to break it, our Q3 guidance at the midpoint is about $305.

Out of that, $75 million safe harbor. Core revenue of $230. Let's say I expect sell-through to be 10% higher in Q3. We are talking about a sell-through approximately in the $245 million range, we are talking about a modest undershipment of about $15 million. We are just cautious, we'd like to make sure we have a healthy channel inventory. We focused Q2 on getting healthier in the channel. That's why we said we are fine on batteries and slightly elevated on micros, we are going to bring that down. If you look at apples to apples, if you say the core revenue from Q2 to Q3, excluding Safe Harbor, that is increasing by approximately 10+%.

In Europe, as you know, Q3 is usually the summer holidays. Despite that, we think we'll be flat Q2 to Q3 in Europe. All of that growth is coming from the U.S. I also told you about third-party reports, talking about an increase of 5% on the permit side. We talked about that. In addition, as a company, we have a platform called SolarGraph, as you know. SolarGraph basically also monitors all of the proposals for both solar as well as storage. We are able to see an increase in proposals in Q2 as compared to Q1. That will reflect as installations in Q3. Triangulating all of these, with the third-party reports, with our own internal data, and what we see on a sell-through basis, plus what we have on Propel, we think we will grow by approximately 10% in Q3.

Our next question comes from Phil Shen from ROTH Capital Partners. Please go ahead with your question.

Hey, everyone. Thanks for taking my questions. First one is very topical. Just when your release hit for Q2 results, the FCC announced that they're working on a plan to ban Chinese inverters in the U.S. Wanted to check in with you on your views on this. It doesn't really impact your resi segments too much, given the limited exposure or mix of Chinese inverters. Was curious, how much share do you think you could take in your commercial business as a result of this? Of course, you have been addressing just a limited portion, and now you're going to expand that to a larger portion of the C&I market. How much Chinese inverters do you see out there? How much do you think you could grab of that? Thanks. I think there are two opportunities for us.

One is, like you rightly pointed out, the residential is not really there, not an issue because of FEOC, et cetera. The two topics are small commercial as well as utility scale solar. I'll focus on small commercial for now because we haven't yet introduced any products for utility scale. In the small commercial, basically, we are seeing lots of opportunities, especially with big retail providers, both in terms of small size installations as well as big size installations. Our revenue that I expect in Q3 for small commercial in the U.S. is approximately $10 million. I expect that number to grow from strength to strength as we advance through the year. We have introduced two products in the last six-month period. We introduced one product in December. That is the IQ9N with GaN.

It addresses the three-phase, 480 volt market. That's got a power of 427 watts. That can go up to, let's say, approximately 600 watt panels. We just introduced in June an IQ9S-3P product. That is 548 watts. That will be able to go up to 700 watts. From a product portfolio, we are fully covered. We are having the right discussions with everybody. In addition, I talked a little bit about small commercial storage. Small commercial storage is a fantastic opportunity for us. The market is a little tough to estimate. It is anywhere from one gigawatt hour to two gigawatt hour. It's a very diverse set of installations in small businesses. You can say schools, hospitals, churches, gas stations, retail shops. The product we are introducing is ideal for that. 80 kilowatt hour cabinet can be scaled.

25 of these can go to a site, can do two megawatt hours. For example, in the building that we are in in Fremont, we are going to have a megawatt hour of storage very shortly, comprised of 12 80 kilowatt hour cabinets. There, for example, same concept. FEOC-compliant, domestic content, and U.S. manufacturing. We have the portfolio. We have both small commercial solar, we have small commercial storage, and we expect to be ramping, not only this year, but 2027 could be big there.

Okay, thanks, Badri. Shifting over to the core U.S. resi solar market. The challenge that I see here, the root cause is weak capital flows and some challenges with the TPOs. In turn, they're slowing down the amount that they're investing in. The root cause of that is driven by tax equity and their caution with the FIOC and effective control guidance that Treasury has still not issued. We published back in March that it could be by end of the year. They're waiting to see how different Chinese companies are adjusting their corporate structures as well as their IP, and then they may want to close those loopholes. We wrote recently that it might not come out till the first half of 2027.

Is there a scenario where the U.S. resi outlook could still be challenged even as we get through a bunch of 2027, and how do you guys manage through that? Thanks. It is a good question.

Like you said, there is limited visibility on the Treasury guidance, but the market is adjusting. The FIOC guidelines, et cetera, are reasonable. Our TPO partners are becoming a lot more mature. Yes, there have been some hiccups, but those hiccups are being solved. We are hearing that tax equity, although it is tight, but we are hearing it is likely to improve. For us, our opportunity is a few things here. Our opportunity is, I talked about SolSource and Propel. That's a fantastic opportunity for us because it basically make the 25D loan market, which was getting approximately a 30% ITC, now has a chance to be replaced with the prepaid lease. That one. That's a big opportunity for us. The second big opportunity for us is we are getting a lot better on batteries.

We are going to be introducing the fifth-generation product in Q4 into the U.S., and that will be at a much reduced cost structure. While we will make good gross margins, that will enable us to help installers. With the positive reduction in tariffs that we got, we took the opportunity to make more pricing adjustments, in order to drive volumes with our fourth-generation product. Our fourth-generation product is also ramping from strength to strength. The meter collar is now qualified at 69 utilities, including Canada. It is by far the highest of any supplier. We expect the same to continue, meaning, with our fifth-generation battery, all of these 69 can be reused.

They are also going to be a big differentiator for a standalone BiDi, because a standalone bidirectional charger consists of the bidirectional EV charger, which has got 11.5 kilowatt inverter. That's what we have. In addition to that, we have a meter collar. Just two components, which will enable V2H, V2G in a seamless manner. For us, we are not stopping and waiting. We are not waiting for things to improve. We are taking matters into our own hands. It is about innovative financing. It is about innovative new products. It is about extending our range into commercial. Of course, the big one is data centers.

Great. Thanks, Badri. I'll pass it on.

Thank you. Our next question comes from Colin Rusch from Oppenheimer.

Please go ahead with your question.

Thanks so much. Badri, can you talk a little bit about the elasticity of demand on the batteries? You talked about drop in prices a little bit. Just want to get a sense of how much volume you feel like you can start driving as you make those pricing adjustments.

What we are doing is basically just to tell you some background here. There are two actions that we specifically took. One was in Europe where we were high-priced. There is no question. We were high-priced relative to the value we were generating. That was clear to us. Earlier in the year, we did a pricing adjustment in Europe. In addition in Europe, what we are extremely excited about is a business model change that we are driving. In addition to the B2B sales, which is Enphase selling to installers through distributors, we are actually generating organic battery demand from our own install base. We are doing that in Netherlands, we are doing that in France. We are doing right now, you guys may not believe, six homeowner events a week in Netherlands. Each homeowner event is attended by approximately 150 sites or 150 families.

The yield on these is quite good, of the order of 50%. What we are able to do is we are able to close these very quickly and then pass the leads to our installers. Of course, that requires sophisticated lead management to make sure the installers, after taking the lead, do not do any funny business and install only Enphase product. We are doing that, and we are seeing a lot of success in Europe, both in Netherlands and France. To answer your question, the actions in Europe are not just due to pricing, but what we are doing to generate organic demand. While the actions in the U.S., very similar. Pricing is only part of the equation. Product stuff, for example, the IQ Meter Collar, which I said, we are qualified at 69 utilities. The other big one is Propel.

Propel, by definition. There we have a 75% battery attach in Propel. We expect that to be driving more and more battery volumes. That is why in Q3, we expect shipments between 130 to 150, and then the big ramp will come from G5. The fifth-generation product has got 50% energy density. What does that mean for you? It is if you compare, for example, our third-generation product and the fifth-generation product. Why third generation? Because that's the one in Europe. The fifth-generation product will be roughly 40% in height as compared to the third-generation product. Similarly, it is also 50% higher, more energy density compared to the fourth-generation product. All of these improvements are going in. The fifth-generation product we expect will start to drive even more demand, especially with the same IQ Meter Collar qualifications, et cetera.

Not just pricing action, but pricing plus a few other actions to drive demand.

Thanks so much. That's super helpful. Then looking at the data center opportunity, it sounds like you're making a meaningful impact on the actual design of the facilities. I'm just curious how mature pricing conversations are at this point and how mature some of those designs really are that would embed the Enphase solution.

Just to give a quick complete overview, we are making very strong internal progress in our data center development, meaning IQ SST development for data centers, I mean. Our team, now we have about 120 full-time engineers. We are building the power module, and we are finalizing the design there. Interestingly, we demonstrated a 4.16 kV AC series stack. What does that mean? We can stack 15 power modules in series. 15 times 277, approximately 4 kilovolts AC. We demonstrated proof of concept there. Importantly, we have achieved significant milestone on the feasibility of the medium voltage transformer. That's on the technical side. We are making a lot of great progress there. On the active engagements there, we are engaged in conversations with hyperscalers, neo clouds, colos, EPCs, and the full ecosystem. We are engaged in a few RFI, RFPs.

In fact, some of the learning that we got on the product were from those RFPs. I mean, it was massive learning for us. We realized how powerful our platform was because we were able to get the product requirements, understand the product requirements from these customers, and then we were able to quickly rework our plan without any changes to the power module, because ours is a modular structure. For example, we were able to quickly adapt. We talked about supporting two kinds of storage. One kind of storage, which is where your question value proposition comes in, is because our SST is super fast in terms of response times, sub-millisecond response times, we envision the storage can be in the facility space or in the black space.

There are people who have a current architecture who might not be willing to deviate from that, who would want to put high C rate batteries closer to the rack. For those hyperscalers, we enabled a DC DC product in conjunction with the SST. We were able to repurpose the same SST, the same power module, in order to get that DC DC product as well, in addition to the SST. Our architecture is very flexible. We are learning a lot. We are adapting a lot. We understand what our value drivers are very clearly. Like what I said, it is the fast response time, it is the power module flexibility, it is the high reliability, which is yet to be proven. It is U.S. manufacturing. What is the next big milestone? The next big milestone is to build a full product.

Building a full product by approximately end of the year, likely November, and showing it to some of these customers, will open the gates for much bigger conversation and pilots. We are looking forward to that. Right now as I see here, we are on track to getting that done.

Our next question comes from Eric Stine from Craig-Hallum. Please go ahead with your question.

Hey, Badri. Just wondering, can you just talk a little bit about your thoughts on Europe or expand on that? I know last quarter you had some cautious optimism that there were some green shoots. Clearly you're more optimistic here coming off of Q2, and I know that's really going to be more of a battery-driven market. How do you view that? It sounds like 3 Q flat even with taking into account seasonality. Is that still kind of driven by a few markets? Is that something that you think it's becoming more widespread? Just how are you thinking about that here, I guess, over the remainder of 2026 and going forward?

Yeah. Just to recap, in Europe, we increased revenue by approximately 35% in the second quarter. More importantly, our sell-through grew 30% with strong performance across both solar as well as batteries. What markets am I excited about in Europe? 3 markets, which is basically Netherlands, France, and Germany. In Netherlands, as you know, because net metering is expiring at the end of 2026, there is a huge interest in batteries, and that is starting to materialize. Our activations basically increased by about 100%. The activations in Q2 compared to Q1 had increased by 100%. We have staffed our internal sales representative team, about 10 people and 10 sales folks who manage leads that come from the homeowner events. These homeowner events we haven't done before, but we are now ramping up on those. We started them 9 months ago.

We are now ramping up on those in a systematic fashion. We are talking 6 homeowner events a week, which is approximately something like 75 to 80 a quarter, 78 a quarter. That is generating a lot of interest, and it is a flywheel because once we help installers are likely to reciprocate. There, I think the inflection curve can be very big because the deadline is approaching. NEM is going to go away, and the only way that customers, consumers can be protected is if they have self-consumption, which is solar plus storage. Coming over to France. Okay, 1 more thing which I left out in Netherlands. We have a base of half a million solar homes there. That is how we are able to do the homeowner events.

That is how we are able to generate the battery leads, which we will continue to do. In the case of France, we have about 400,000 solar base in France. This is Enphase homes. In France, the economics are slightly different. In France, feed-in tariff is quite small for new installations. For existing installations, they are still grandfathering net meter. However, there is high sensitivity, maybe because of the war, I'm not sure, but high sensitivity on energy independence. In France, we find that it is almost to the same level as Netherlands, if not higher. We have exactly the same model there too. We are driving both demand organically from homeowners as well as working with our installers. That's going fine. Those are the two most exciting things that generate a lot of results. In the case of Germany, very attractive market.

I should say we have not yet exploited that to our fullest potential. Of course, we do have some fantastic partners there. Who are helping us, and I think we are going to grow from strength to strength there with our fifth-generation battery, which is going to help us everywhere. We are quite bullish. The last one, I have an excellent management team in Europe. We put an Enphase veteran in there, and he understands how to work with the internal teams to get products as well as understands customers very well. Part of our performance is attributed due to him in addition to his sales team as well. We are extremely bullish about Europe.

All right. Thank you. Our next question comes from Dylan Mezzano from Wolfe Research.

Please go ahead with your question.

Yeah. Hi. Thanks. Take my question. I just wanted to check if you had any updated views on the kind of shape of the cash flows from that $880 million Physical Work Test backlog. Just for modeling purposes, should we be amortizing that over the next couple of years? Is it more back-end weighted? And then how much, if you could, in the forward guidance for 3Q and 4Q, how much of that is 5% rule versus Physical Work Tests?

We already told you that, but let me repeat. The 5% Physical Work Test, essentially, just to give you a full context. In Q1 2026, we did approximately $34 million. In Q2 2026, we did approximately $84 million. In Q3 2026, we are guiding to $75 million. In Q4, we already gave you a number that it's about $61 million of ITC Safe Harbor. That is the 5%, and the 5% is done. The more exciting thing is Physical Work Test. In Physical Work Test, according to what we said, we have about $878.6 million is what we have signed this year, we signed one agreement last year, too. We haven't recognized any revenue from any of the Physical Work Test shipments yet. Any of the Physical Work Test that is signed this year, we haven't recognized any revenue yet.

That revenue, when will it be recognized? According to me, likely beginning 2028, because that is the whole point of ITC Safe Harbor. The tax credits remain open till the end of 2027. From 2028, they would have to utilize this PWT inventory, Physical Work Test inventory, and they would ask us to make microinverters with that Physical Work Test product. We will see normal microinverter run rate. We will see accessory run rate. We will see battery run rate if they decide to attach batteries. It's a long answer. It's quite difficult for us to predict. However, we think it will be linear. We think it will start 2028.

Okay, great. Thanks for clarifying that. Just quick follow-up on the tariff impacts in the guidance, specifically for batteries. I know in the past you had talked about kind of shifting your cell supply. Can you just update us? Have you completed that? Is there any more cells that you're getting from China? Yeah, thanks. Yeah. In general, the tariffs have come down under control.

We talked about We had base tariffs, let's say approximately a year ago, we had base tariffs. We had this reciprocal tariff that was introduced by this administration. We said because of reciprocal tariffs, we had approximately 5% gross margin impact. Our gross margins came down to the mid-40s. With the recent rulings, that impact, the reciprocal tariff impact, has reduced from 5% to 2%, which is quite positive for us. What we have done, again, we are taking our own actions. Our microinverter supply chain has diversified quite nicely. If there is any further tariff, for example, in a region, we can always move to another one.

To answer your question, yes, other than China, we have a non-China cell source as well, which we are able to leverage in the event Chinese batteries have a much higher tariff, we can always leverage that. We bought that into production. As we go more, we are looking very hard at U.S. sources as well. As we get into more commercial battery, as we get into our fifth-generation and sixth-generation battery, we are also looking at U.S. made cells.

We have a lot of suppliers there who want our business.

Thank you. Our next question comes from Corinne Blanchard from Deutsche Bank.

Please go ahead with your question.

Hi, good afternoon. Maybe just coming back to the SST, maybe this has been already a little bit addressed, but I wanted to come back on what has been the feedback you have received from customer. Maybe if you can share some detail on which kind of customer relationships you're trying to look for and achieve. Then I would have a question on the European market after.

I think I have to struggle. I think as Badri mentioned, we are talking to the entire ecosystem of SST, of the data center market, which includes, of course, the hyperscalers, the colos, the neo clouds, EPCs, et cetera, all the way even down to some of the server providers as well. We want to make sure that the solution that we are providing is not just a product, it's an entire solution set, from medium voltage to rack, as Badri mentioned, is covered, that we are addressing of the entire issue. The feedback has been quite positive. We have a very unique solution, relative to what others have done and what's been done in academia, is that we have a fully distributed architecture where we have hundreds of these power modules. Each power module is undersubscribed by about 10%.

The key value proposition of reliability plays very well. Plus, we also point out our history of almost 90 million microinverters shipped to date with a 500 DPPM failure rate. The combination of historical performance plus this architecture, which is fully distributed, really resonates very well with a lot of the players in terms of reliability. We also talked about, we have some intrinsic structural advantages in terms of cost, right? The components that we use in our products, they're all off-the-shelf, generally available parts or almost commodity parts, including GaN. We consider GaN to be anymore commodity. That helps us a lot on cost. We do what's called soft switching, and soft switching enables us to have a very light EMI footprint. A light EMI footprint means that we can package this device, this power module, in an engineered plastic enclosure.

That again, drives cost. Since it's only four kilowatts and very efficient, thermal management is also very easy. Combine all of that with high volume manufacturing, that is a standard line that we use today to manufacture microinverters. We have some intrinsic cost advantage as well. The combination of the value drivers that we talked about in terms of reliability, in terms of response time, which is sub-millisecond response time that can help eliminate the need for that high C rate battery from the 800-volt section and rely on the BESS to do all of the work. Those are the things that are resonating very well. Of course, U.S. manufacturing and a FEOC-compliant supply chain are all very positive feedbacks that we are getting.

Great. Thank you. Maybe the second question, can you talk about the European Cyber Act? I think we met with your team in Munich back in June, and I think there is a lot of focus during the Intersolar on the Cyber Act 2.0. Just wondering, what's your latest view and how do you think it could impact you?

I think we are fully tuned into all of the developments that are happening there. I think the key here is to make sure that we are ahead of any of the compliance requirements. So far, we are giving this incredible amount of importance. We have a person there who's exclusively focused on all of these new requirements that are coming, we have already met a number of the requirements. Any new requirements that are coming around cyber, we continue to meet. Both in Europe as well as in the U.S. as well. We understand that both inverters, SSTs, et cetera, or anything what are called as inverter-based resources, are going to be classified as critical infrastructure.

They will have an additional layer of scrutiny in terms of communication layer that each one of these devices have and how are they managed and all of the other security requirements or cyber requirements that are needed. We feel like we are on top of it. We feel like we are ahead of the curve there in meeting all of the requirements.

Great. Thank you so much.

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Vikram Bagri from Citi. Please go ahead with your question.

Hi, it's Ted on for Vic. Thanks for taking the questions. I wanted to just go back to the guidance, if we could maybe just touch on some of the assumptions there. The Netherlands storage activations were over 100% this quarter. Could you share what the guidance assumes for activations in three Q? Then just going back to the comment about under shipments, could you just elaborate on what the source of that caution is? Is it to do with EU demand? Is it a seasonal slowdown? Is it interest rate driven or is there anything else in there? Then I have a follow-up.

Yeah. Typically in Q3, there is summer seasonality in Europe. Basically, we expect more or less flattish performance from Q2 to Q3. However, we think from Q4 onwards, particularly in regions like Netherlands, which are seeing the expiration of net metering, there is going to be a big breakout on batteries. We don't usually break out volumes by region. That's why we gave you a percentage. The moment it becomes big enough, we will start breaking that down. That's what we are the most excited about. Enphase has got half a million solar homes, and all of them are going to be scrambling.

I mean, many of them, or I should say a small fraction of them, have converted or added batteries, and many of them are going to be scrambling in between now and the end of the year so that they can be ready when net metering goes away.

Thank you. The other question that you asked in terms of the undershipment.

Look, this question was asked before. What I said is our sell-through basically is approximately $245 million forecasted in Q3. We have a modest undershipment there, of approximately $15 million. That's why our core number is $230, plus Safe Harbor is $75. That's how you get the $305. It assumes a modest level of undershipment, not a lot. It's just out of caution, that's all.

Got it. Thank you. In terms of the SST product line, is there any clarity on what you recognize from a 45X standpoint? Just to clarify in terms of expected needs for that product, is that a 2027 or a 2028 then?

We previously said there's volume shipments in 2028 and pilots in 2027. Regarding 45X, we are working through the details, once we have a good understanding, we will be able to share more information in the upcoming quarters.

Got it. Thank you. Thank you.

Once again, if you would like to ask a question, please press star and one. It's showing no additional questions. I'd like to turn the conference call back over to Badri Kothandaraman for any closing remarks.

Yeah. Thank you all for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye. The conference has now concluded.

We do thank you for attending today's presentation. You may now disconnect your line.