Good day, and welcome to the Enphase Energy's First Quarter 2025 Financial Results Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's first quarter 2025 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 of its first quarter ended March 31, 2025. 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, the timing of new product introductions and regulatory tax tariff, and supply chain matters. These forward-looking statements involve significant risks and uncertainties and 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 thanks for joining us today to discuss our first quarter 2025 financial results. We reported quarterly revenue of $356.1 million, shipped approximately 1.53 million microinverters and 170.1 megawatt hours of batteries and generated free cash flow of $33.8 million. Our Q1 revenue included approximately $54 million of Safe Harbor. As we exited Q1, our battery channel inventory was normal, while our microinverter channel inventory was a little elevated. For the first quarter, we delivered 49% gross margin, 22% operating expenses and 27% operating income, all as a percentage of revenue on a non-GAAP basis and including the net IRA benefit. Mandy will go into our financials later in the call. Our customer service NPS held steady at 77% in Q1 as compared to 78% in Q4. The average call wait time increased slightly to 3.5 minutes, largely due to the winter storms in the US. We are continuing to invest in AI and machine learning to make our support experience faster, smarter and more helpful. Let's cover operations. Our global capacity is around 7.25 million microinverters per quarter, 5 million of those are in the US. In Q1, we shipped approximately 1.21 million microinverters from our US contract manufacturers booking 45x production tax credits. Our domestically produced microinverters help residential lease/PPA providers and commercial asset owners to qualify for the 10% domestic content ITC adder. We expect to ship approximately 1 million microinverters from the US in Q2. Q1 was our second quarter of building the IQ Batteries in the US using domestically manufactured microinverters, battery management systems and packaging, while sourcing cell packs from China. We shipped 44 megawatt hours of batteries from our Texas facility, a strong step forward as we continue scaling US production. Let's cover tariffs. The newly announced 145% tariff on products…

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our first quarter of 2025 financial results as well as our business outlook for the second quarter of 2025. 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 Q1 was $356.1 million. We shipped approximately 688.5 megawatt DC of microinverters and 170.1 megawatt hours of IQ Batteries in the quarter. Q1 revenue included approximately $54 million of safe harbor revenue. In December 2024, we signed a safe harbor sales agreement for a total amount of approximately $95 million to ship in the first-half of 2025. As Badri mentioned, 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 for Q1 was 48.9% compared to 53.2% in Q4, primarily due to lower bookings of 45x production tax credit and product mix. GAAP gross margin was 47.2% for Q1 compared to 51.8% in Q4. Non-GAAP gross margin without net IRA benefit for Q1 was 38.3% compared to 39.7% in Q4, primarily due to product mix. GAAP and non-GAAP gross margin for Q1 included $37.9 million of net IRA benefit. Non-GAAP operating expenses were $79.4 million for Q1 compared to $83.3 million for Q4. The decrease was the result of restructuring actions initiated in the fourth quarter of 2024. GAAP operating expenses were $136.3 million for Q1 compared to $143.5 million for Q4. GAAP operating expenses for Q1 included $50.9 million of stock based compensation expenses, $2.9 million of amortization for acquired intangible assets and $3.2 million of restructuring and asset impairment charges. On a non-GAAP basis, income from operations for Q1…

We will now begin the question-and-answer session. [Operator Instructions] And your first question today will come from Praneeth Satish with Wells Fargo. Please go ahead.

Thanks. Good evening. Maybe just starting with the Q2 guidance, so it includes 2 percentage points of gross margin headwind from the tariffs. It sounds like that could go to 6% to 8% in Q3. So it would seem as if you're not fully passing through the entire incremental tariff cost to customers. And I guess maybe if you could just talk about what's driving your decision to absorb some of these costs versus passing them through, because I would imagine that many of your competitors are also sourcing battery cells from China? So maybe if you could talk through that.

Yes, you're right. Let me give a big picture. First of all, due to these tariffs and that is 145% tariffs on imports from China and 10% tariff on imports from other countries. So due to that, we are glad that our microinverters and accessories aren't affected much, and that's because our supply chain has done a fantastic job of global diversification. So that's the first good news. On batteries, more than 90% and I would venture to say 95% of the cells made in the world they come from China. We are no exception. We use Chinese sources for the cell packs. We have two ways that we produce batteries. One is we make batteries overseas, the full system. And the second is we get cell packs into the US and then we make the entire system, the rest of the system inside the US. As you can see when we bring it into the US, you have high US cost of manufacturing, but you have your tariff only on the cell packs that is coming in, plus any associated raw materials that are coming in from China or the other places. So it therefore turns out for us that whether we make it domestically or whether we make it outside the US, our costs are becoming approximately the same and the cost impact is significant. Why did we chose -- yes, we are going to pass fast a portion of it but we are going to absorb majority of the impact. And why is because first of all, we think we can recover this effect in a couple of quarters, in two to three quarters, that's what we mentioned. And what are we doing about it? Our job number one is to get cell sources outside China qualified. That's the job number one, which we have already identified the sources. We are working in aggressive task force mode and we expect to qualify these sources early next year. Therefore, considering that the impact is going to be only for a couple of quarters, two to three quarters, not couple of quarters, two to three quarters, we decided we would pass on a portion to the installers and we would absorb the majority ourselves. Now, I said 6% to 8% is the total impact in Q3. First of all, we aren't going to be that much impacted beyond 2% in Q2 because we have pre-tariff inventory. Then from Q3 onwards, that basically goes away. And we essentially are going to have an impact of about 6% to 8% as a result of all of these actions. We expect that impact, the gross margin impact to continuously improve as we go from Q3 to Q4 to Q1 and the impact to become zero in Q2.

Got it. That's very helpful. And then just right or wrong, there seems to be a bit of paralysis on the customer side as we wait for clarity around IRA. For the Q2 guide, are you accounting for any worsening of demand trends in Q2 as we wait for clarity or making any adjustments for Nova exposure in the guide? And then maybe on the flip side, do you think that sell-through could accelerate in the second-half once we get IRA clarity? I guess, what are you hearing from your dealers on any pent-up demand? Thank you.

Yes. I said a few things. I said my bookings right now is about 80%. So the guidance that we gave, we have accommodated that bookings in place, which is actually healthy. So that's the first thing. Yes, the lack of certainty is definitely a factor. One of the large national lease providers as you mentioned in financial trouble is another factor. What that financial trouble causes is basically our installers have difficulty in managing their cash flow. When our installers have very difficult in managing the cash flow, the originations suffer in Q1. Because the origination suffered, we do not see enough pull through from the distributors to the installers. Because as you must imagine, life must be pretty tough for them in terms of cash flow, but the good news is there are a lot of lease financiers now today compared to what there were two years ago. So it is a matter of time where those installers pick up the alternate financiers and hopefully restart the business again. However, that basically created a gap in Q1. And that's what we talked about. Our sell through was a little lower than normal. And having said that, we are entering the best seasonal part of the year. Q2 normally is the best-in terms of seasonality. Q1 to Q2 is what I'm talking about. And for Enphase specifically, what we have going for us, we expect to ramp our fourth generation batteries in Q2. We expect to ship meaningful volumes in production this quarter. And we basically, we expect that our cost for our backup installations will be equivalently as good as you know grid -- almost as good as grid type. We have done a great job in gaining market-share till now on our batteries, supporting grid tide installations with our third generation. This presents a huge opportunity for us to capture the backup market as well with a solution that is low cost. Earlier, we used to have a lot more components in our third generation system for backup. Now those will get significantly lesser because of two things. One is we have the collar, the second is we have a 10 kilowatt hour battery now instead of a 5 kilowatt hour battery. So specifically to Enphase, we are well-positioned to capitalize on the battery market. We also -- the clarity in terms of the policy will definitely give us a boost in the latter half.

Thank you.

And your next question today will come from Phil Shen with ROTH Capital Partners. Please go ahead.

Hi all, thanks for taking my questions. You talked earlier, Badri, about the margin trajectory as we get through even the first part of next year. Can we talk about what the revenue cadence might look like? So for Q3, is $375 million on the table. Would you expect Q4 to be up quarter-over-quarter or down and if you feel like you can share even Q1 of next year, that would be fantastic. Thanks.

Right. Phil, you know, that we normally don't guide for Q3 or Q4, but we have a few vectors going for us. I just talked about the fourth generation system, and we believe that's a huge factor for Enphase. Then we specifically regarding the US, we have the IQ9 that is going to be turning on in Q4. Then coming to Europe, all of the new products -- we have introduced a large array of new products, which we are already seeing some good traction, namely the FlexPhase Battery, which provides three phase backup for many countries in Europe. The Balcony Solar, which basically, we are about to introduce it this quarter. So it's no longer something out there. It's going to ramp-in this quarter. Balcony Solar is going to address , for example, the TAM in Germany alone is 400 megawatts. And after Germany, we are going to go to Belgium and many other European countries. After that, we will go to Japan and India as well. So we expect new product to also be introduced in Q2. And the next one is our IQ EV charger, the latest EV charger. We did a good job ramping-up so that we can service all 14 countries in Q1. And now we got to grow from strength to strength there in terms of installer partnerships and EV charger partnerships in general through other companies there. So while the policy situation, et cetera, is uncertain, Enphase is trying to control our destiny by introducing new products, by having discipline and these are the new product vectors that we are relying on for growth.

Okay. Thanks Badri,. Back to margins for a bit here. You talked about, I think the -- down 6% to 8% or 6% to 8% impact on Q3 margins. I think you mentioned that was the growth -- sorry, the net impact. Can you share what the gross impact is on tariffs on Q3?

Well, no -- I don't have the gross impact. All we are saying is, we are passing a small amount of percentage increase to the customers. We are taking a number of other actions to like, for example, we do have some work that we can do on the raw materials for the batteries moving them out of China. So all of that work is going to happen. Those are what I call as improvements and a lot of vectors there, 1,000 little things we are going to do in order to continuously improve our gross margin impact.

And your next question today will come from Brian Lee of Goldman Sachs. Please go ahead.

Hey guys, good afternoon. Thanks for taking the questions. I guess first question would just be, it sounds like you're passing through a little bit of the price on the tariff impact on batteries in the back half of the year. So you've been doing pretty well, 170 megawatt-hours of shipments quarter here to start the year, you've never had that kind of strength in the first-half, second-half usually better, but given tariff impact uncertainty and then maybe a little bit of price you're having to pass through, like what's the view on shipment volumes for battery storage in 3Q and 4Q? Can you continue to grow into the second-half? I guess that's also in the context of a new battery ramping. So just wondering kind of what's the volume view on top of what's happening with respect to cost and margins.

Yes, I mean this is a great battery. First of all, our third generation system was 5 kilowatt hours, fourth generation system is 10 kilowatt hours. We had separate battery management, separate power conversion in the third generation system. We have combined it and it's got deep level of integration, a combination of power conversion as well as battery management, resulting in cost decline. And then we are talking about the balance of system. In the balance of system, we have eliminated what was called the system controller in the third-generation. And now we have eliminated that box, replacing it with a small Meter Collar which is trivial to install. So bottom line, what I'm trying to tell you, Brian, is that the system cost for the Enphase installed with backup is going to be significantly reduced. And yes, the battery itself might go up a little bit in pricing, but the overall system cost reduction is quite good and quite tremendous. So we expect to continuously grow on batteries. We also expect to continue to grow on batteries in Europe. For the first time, we have had three-phase backup, a full three-phase backup. And that was not available so far. I told you about the Germany, the battery attach is 80%, 90%. But of that battery attached, how many have backup, 30% have backup. We are able to serve those 30% now. And we are extending that to everywhere in Europe. And we expect our batteries to significantly improve. That is why we are taking very swift efforts to realign the supply chain to have non-China sales in our source of supply.

That's super helpful. Maybe just a follow-up on that then Badri. So I think you guys were talking about doing something in the close to 35% gross margin on battery storage. If you kind of back-out the 6 to 8 percentage point tariff impact in the back half here, it implies your battery storage margins are going to be zero or negative, definitely negative in the US. So to get to back to kind of that 35% level, which I think you're inferring by Q2 of 2026, like how gradual is that? Or is that all just going to happen in like a quarter or two as you basically switch to non-China suppliers, it sounds like over Q1 or Q2 or is it all going to just happen in Q2? Maybe a little bit more color on the cadence, please? Thanks.

Yes. So basically, I told you about the impact in Q2 being small, which is clear. So the remaining quarters left, I also told you -- sorry, Q2 '26, I told you the impact is zero. So we are talking about three quarters basically. And in these three quarters, the efforts we are going to be engaging are two things. We are one is we are going to move the cells, the source of cells to, outside China and multiple sources . That's what we are already working on. Then the second is any raw materials used in the batteries which we use a lot of raw materials that are sourced from China those also we need to move away to low tariff countries. And as you imagine that the latter activity is a continuous activity. And the cell activity can turn on quickly, but that might need about three months-to ramp. So basically, my guidance to you is these numbers are rough numbers. 6% to 8% impact in Q3, but every quarter, Q4 '25 should be better than Q3. Q1 '26 will be better than Q4 '25 and Q2 '26 should disappear to zero.

And your next question today will come from Mark Strouse with JPMorgan. Please go ahead.

Great. Thank you very much. So, Badri, I just want to confirm on that last point with the battery adjusting the supply chain. The raw materials, the packed, it's still the same LFP chemistries, right? Or is there any redesign or recertification that would be needed of your product? And would that be added on top of this timeline that you're talking about through 2Q '26?

Yes. Good question. It is -- the whole point is to keep our LFP and we are not moving away from LFP. So -- and also the trick is how do we do this without redesigning everything. And so, right now our plans is mainly associated with the cell. However, the normal qualifications will be required because cell is the most basic entity of the battery and we need to make sure we do the appropriate qualifications.

Okay. That's great. And then just kind of near-term, wanted to go back to the 2Q guide. You said you're 80% booked into the midpoint of the guide. And I think you mentioned this in the past, it's been closer to 85% at least the last couple of quarters. Just kind of your thoughts on going with that 80% number instead of 85%, just kind of what gives you the confidence to go with that higher number?

Last quarter we reported two weeks late that was February 4th. This time, this is April 22nd. So which we are fine. There 80% is good. We expect to be 100% booked soon.

Thank you.

And your next question today will come from Colin Rusch with Oppenheimer. Please go ahead.

Thanks so much, guys. Given the VPP functionality that you guys can enable as well as some of the analytics, can you talk a little bit about market share gains, how you're seeing that sales process evolve and whether you're using price as a lever to take up market share a little bit here as you go forward?

Yes. Hey, Colin, this is Raghu. When you think about battery sales as well as actually EVSEs as well, it's now more than just batteries being used for providing resiliency or time of use or peak shifting. What you're seeing is this new value proposition that adds on to it, which is using your batteries to provide to either -- to participate in energy markets in de-regulated markets or a VPP construct where the utility can use your battery and discharge it and pay you for it. And so, at the end of the day, what that means is just improves the ROI for the homeowner and reduces the payback period. So the better that you can do it is actually a value proposition. You can be better than the competition. What I mean by that is providing very high quality APIs for your partners and that they can and then drive the battery and discharge the battery as needed, charge the battery as needed and participate in energy market. And all of that value proposition, which is good for the homeowner is the value proposition also that drives the adoption of your batteries. If we do it better than our competition, then clearly we gain market share. And that's what we are driving towards. We see that number of our partners buy our batteries because of our VPP and market steering capabilities.

That's super helpful. And then just from a logistics perspective, it looks like there's going to be some disruption in and around container ships. Can you talk a little bit about how you guys are mitigating that risk and what you're seeing in early returns on any of those elements so far?

Colin, can you kindly repeat that question, because....

Sure. I mean just from a logistics perspective and shipping, like if you're still importing from Asia on key components, what you're seeing from a logistics perspective in terms of disruption on available ships, space, getting through customs, any sort of incremental expenses that we could be thinking about, just make sure we're paying attention to all of those software costs.

Yes. I mean we do already see we make and maybe all of the folks do not know on this call, 85% of our microinverters are made in the US today, 85% of our global microinverter shipments are from the US. So already there is a healthy logistics train of raw materials, et cetera, coming into the US so that we can make our microinverter. So we don't expect any changes to that because we have diversified that well and we have not had any problems with logistics so far. On batteries also, 40%, I would say, let me say, we shipped 170 megawatt hours in Q1. 44 megawatt hours were made in Texas, approximately 25%. So how that works? Is we ship cell packs into Texas. We make microinverters in Texas. We make battery management in Texas. We make the enclosures at another state in the US. We make the chassis also in a neighboring state. So therefore, what is once again important there is the raw materials for making all of those. And our supply-chain is, we established this over three to four quarters ago. So for us, this is a -- although it is a disruption, for us, it's not that we have to learn everything from scratch. We have already ramped-up on a few areas. And we expect that 44 megawatt hours, which I said of US making batteries, we expect that to keep going up as we proceed into the year.

Thanks guys.

And your next question today will come from Christine Cho with Barclays. Please go ahead.

Good evening. Thank you for taking my question. I was wondering, could you remind us what the manufacturing plans were for 10C? I thought the initial rollout was going to have the US inverters shipped to China and then assembled there and shipped back to the US before all this tariff news and then the domestic content version was going to come out later. So first of all, is this correct? And if it is, are you changing these plans so that you're not importing the full battery into the US, which will be subject to a higher nominal tariff? And if that's the case, does this impact the rollout of 10C at all if you do have to change plans?

No, it does not roll out the impact of 10C. We are starting with the non-domestic version and that is correct. The microinverters for the non-domestic version will be made in the US and the rest of the battery is made outside the US but being shipped in. But we are quickly in about two months to three months’ time, we will quickly realign the supply-chain to have the domestic content product also available for the 10C. So right now, whatever we plan to ship in the second quarter will be the non-domestic version. And in a couple of months from then, the domestic version will be available.

Okay. And then your guide for the 2Q quarter on top line and battery shipments are about the same as 1Q. And even if I am to add back the 2 percentage points of the tariff impact, would you imply your gross margins are still down about 150 bps at the midpoint. What exactly is driving that? And even though you talk about being diversified on the supply-chain for microinverters and having a lot of domestic suppliers. So maybe you might not directly be seeing tariffs, but aren't your suppliers still seeing price increases on their raw materials in this inflationary environment?

Well, I mean, we said that the 2% increase was attributed to the tariffs for the current quarter. However, on batteries, I mean what you said is right. We plan to ship a smaller quantity than the usual full quarter quantity on batteries, while the fourth generation battery is new and let us say I ship and which I'm not guiding to the number. Let us say I ship 30 megawatt hours off the fourth generation battery and that would come with a little more tariff compared to the inventory that we will have on the third generation tariff. Hence, we guided to the 2% there. That's all.

And your next question today will come from Andrew Percoco with Morgan Stanley. Please go ahead.

Great. Thanks so much for taking our questions. I do just want to again come back to this battery storage concept for a second. I'm just curious, you mentioned at the beginning of Q&A, I think 95% of LFP sales come from China. So presumably, a lot of your competitors and peers are also trying to get their hands on the supply you guys are working on. So just curious how you see the cost environment for that non-China supply evolving over time and the conversations you've had with some of those suppliers? And then second to that, just trying to figure out, when you talk about getting to 0% gross margin impact by the second quarter of 2026, how much of that is dependent on just completely exiting China from an LFP perspective versus taking action on price? Just trying to get a sense for breakdown there. Thank you.

Yes. 95% of the LFP sales in China, yes, that's right. Don't forget that there are some Korean suppliers who do make NMC and we have never used NMC we've never liked NMC that's our opinion LFP is what we like in terms of safety so that's the first one. Then the question that you asked it is the biggest factor that affects the battery tariff is the cell you cannot get away from that. So if we cannot, meaning if our plans do not materialize for transferring the cells, that's a problem and then we would have to look at passing more of the cost impact to our customers. But right now, the right thing to do is we get the battery sales diversified out of China and we are working, we are not talking about unnamed suppliers, we are working with two great suppliers, and we have very tangible plans, we have tangible schedules. And since the timeframe we are talking about is two to three quarters, we thought the right thing to do is to basically absorb a fraction, a significant fraction of it ourselves and return back to normalcy very quickly.

Understood. Thank you for that. And maybe just to ask a higher level question here. I know you guys don't guide beyond one quarter, but I guess, how do you envision the market evolving over the balance of the year? You obviously have IRA uncertainty, which might not be resolved until 3Q, 4Q at some point? Obviously, tariffs have had an impact on recession concerns and consumer sentiment. So how do you expect the demand environment to evolve over the balance of the year just given the level of uncertainty and the impact that has had on broader consumer sentiment, which obviously could lead into and have an impact on end market demand for residential solar. So just curious how you're thinking about that at a higher level. Thank you.

Yes. I mean, look, Q1 is usually the seasonally worst quarter. We are past Q1. Q2, Q3 and even Q4 to an extent are normally, are the good seasonal quarters. So we are expecting that. In addition, our value proposition, the value proposition of solar and batteries relies a lot on utility rates and it is not exactly that the utility rates are going down everywhere. They are in fact going up. And so, as long as that happens the ROI of tomorrow will be better than today. And so utility rates is an important factor. You saw what is happening to NEM 3. NEM 3, just to remind you, did away with net metering and there is a small feed-in only small export compensation. That caused the battery attached in California to go to 90%, so it was a very difficult transition. We don't like how abruptly the transition was done, but at the end of the day things are looking more stable in California in terms of solar and storage with a very healthy value proposition. And that healthy value proposition came from the fact that utility rates are high. So that's a factor that will always be going for us. Then you have the explosion in AI. The explosion in AI, what it's going to cause is electricity supply is going to get stretched both front of the meter as well as behind the meter and we are not here to argue which one is better but you know it is that what we do is behind the meter, while a lot of capacity is put in place front of the meter. That's got a long cycle of approval the front of the meter. So we think in order to be balanced or in order to have a proper energy security for America, we need to have a thriving behind the meter business in addition to front of the meter. And behind the meter, we are talking about every home is a power plant, mini power plant, solar-plus-storage. And so, I think it is only a matter of time when people start seeing this and there is clarity on IRA, the ITC and PTC and I think demand will be unlocked after that.

Your next question today will come from Maheep Mandloi with Mizuho. Please go ahead.

Hi, this is David Benjamin for Maheep. Thanks for taking our questions. Does your Q2 guide assume any negative impacts from higher tariffs on Southeast Asia modules and the impact on US soil demand?

No, we don't deal with modules from Southeast Asia.

Okay. So you don't see any impact on overall solar demand. And then another question -- okay.

Overall solar demand maybe utility scale, maybe impacted to an extent. We don't expect any demand -- any impact on residential.

Okay. Thank you. And then you did mention that channel inventory was slightly up. Is that in Europe or is the US? And does that imply like any potential new destocking?

No, the channel inventory is, okay, is up because when your sell-through goes down, the channel inventory can go slightly up, out of our usual targets. Our targets are between eight and 10 weeks. So -- but when your sell-through is down more than what you anticipated, then that can go slightly up. The ways to recover it back are quite simple, not ship much into the channel and then improve the sell-through in a seasonal quarter like Q2, which is bound to have more sell-through in Q2 than Q1. So we believe it's a normal cycle, and we are disciplined to control the amount of material in the channel with that discipline, it should come back quickly inbound.

Your next question today will come from Julien Dumoulin-Smith with Jefferies. Please go ahead.

Hey, good afternoon, team. Thank you guys very much. Appreciate it. Maybe just follow-up on the last question a little bit further. Can you talk about what you're seeing in terms of end market demand, right? You talked about restocking and now destocking here and seemingly in the second quarter. What are you seeing in terms of year-over-year volume metric trends? I know you provided obviously second quarter, but can you talk about volumetric trends were at large, A. And then B, can you talk a little bit more about safe harbor as well? It seems like you're implying that the substantive amount of the $95 million is contemplated in the first-half and with fairly little safe harbor contemplated in the back half, but maybe you could talk about maybe early indications on that front?

Yes. I'll answer the second question first. Safe harbor, you're right, $54 million was in Q1, we said $40 million approximately in Q2. And right now we do not yet have safe harbor plans, meaning our customers haven't yet asked for them, but I'm sure that if they want stock due to something else, we will advise in the second quarter call. Volumetric trends. So, Volumetric trends is -- we talked about it so far the Q1 is the weakest in terms of demand, and now we had -- we talked about a large national leasing provider basically having some financial difficulties. So because of that, our installers have stumbling blocks and they need to recover, and they will recover by going to new financiers. In that time, the installation start. And so, that's why we saw a little bit worse sell through from our distributors to installers in Q1. We believe that there are a lot of financiers, other financiers now who can really pick-up the business. So we believe that, that trend will stop and normal sell through will take over. So we expect the normal seasonality to show up from Q1 to Q2. In addition, these one-time effects will take some time to clear. As for Q3 and Q4, I talked about it at length. There is some policy clarity that has to come. But for us, we are not stopping like what I said. Our fourth generation system is -- we expect to ship our fourth generation system product in the current quarter, and that makes backup extremely easy and extremely cost effective. So we expect to do that. We expect to introduce IQ9 in the fourth quarter, diversifying ourselves into the 480 volt, three phase small commercial business. IQ9, by the way, I talked at length about the innovation with GaN. With GaN, we are able to get our cost structure very similar to the prior generation, but provide 10% more power. So that means the cost per watt would be 10% down compared to our prior generation. So we have all of these vectors. And then, I talked about the utility rates going up. So we expect general growth through the year, primarily due to our new products and policy clarity will also help a little bit.

Your next question today will come from Kashy Harrison with Piper Sandler. Please go ahead.

Hi, good afternoon. Thank you for taking the questions. Just two quick ones for me. My first question, on the topic of GaN, are there alternative sources for gallium outside of China? Just trying to think through risk mitigation in the event that the trade war potentially gets worse before it gets better.

Yes, we have talked about this at length with our sources we have more than one source all of them are comfortable that they have it covered we are not worried about it.

Okay. And then my follow-up, you indicated that -- excuse me, you indicated that Europe is still challenging, but your sell-through was down 9%, which doesn't sound that bad from a seasonality perspective. And so I'm just curious, what are you seeing that makes you characterize the entirety of the region as challenging? Is it just France or is there some other dynamic that we need to be thinking about? Thank you.

No, I think we talked about that, that is the piece. The sell-through was a little down at 9%. But what I said is we introduced new products into the region. That's why our numbers were up. And we talked at length about all of the initiatives in Netherlands. In Netherlands, net metering will disappear in 2027. That means all of the customers are going to be looking forward to a battery solution in order to conserve or in order to lower their electricity bill. So it is a huge opportunity as well. But that will become a solar plus a storage market. We are working with our installers and the retail energy providers to transition that market properly. And the second one is France. We talked about the utility rate going down, but there again I think it is a short-term blip for a couple of quarters. We expect the VAT to be reduced there and we also expect the utility rates to go back up according to what we -- the public news available. So I think that one what we are doing, we are constantly introducing new products. Our three phase battery with backup we will introduce there shortly. We have introduced our newest IQ EV charger. We are introducing hot water heater capability there. That is, today in France, the feed in tariff is only EUR0.4 per kilowatt hour. And when you have EUR0.4 per kilowatt hour, it does not make sense to export energy. You would rather save energy. And if I take that solar energy and I divert it, steer it towards the hot water heater, that's a much better use of the energy. So that solution will be available in this quarter, current quarter. So I talked about that. Germany is really where we had a nice uptick in Q1, and that is because of the FlexPhase battery where we introduced three phase with backup. So what we are doing in Europe, although the market isn't terribly strong yet, our SAM has increased from strength to strength through these new products. And that's why we are more positive on Europe. That's why you saw our revenue went up in Europe.

Your next question today will come from Austin Moeller with Canaccord Genuity. Please go ahead.

Hi, good afternoon. Just my first question, given the administration's announcement of new tariffs on panels in Southeast Asia, I assume that your supply chain team is not expecting that a trade deal with China, be it Vietnam will benefit inverter or battery manufacturing and you're just going to accelerate the diversification of your supply chain out of China?

Yes. I mean, that's the general plan. We are accelerating the move specifically for batteries. We have already completed for microinverters like what I said, microinverters and accessories, they're almost done. That's right.

Okay. And just a follow-up. So I mean, the general assumption here is US installers are advanced, procuring inverters and batteries and waiting to sell product probably once interest rates go down. So do you think that the persistent high interest rate level right now is limiting some of the demand from customers to install ahead of potentially the 30% investment tax credit being repealed in 2026?

Yes, the high interest rates is absolutely an important factor. In the residential solar business, 60% of the business used to be loans. And now it has changed to leases and probably 30% is still with loans. And anything you're doing on the interest rates there will help and will help for demand. That's right.

Great. Thanks for your insight.

[Operator Instructions] And your next question today will come from Joseph Osha with Guggenheim Partners. Please go ahead.

Hi, everybody. Hi, Badri. Thanks for taking my question. Sorry to belabor this question of cell supply, but are you saying, say, a year from now that you think you'll be able to source LFP from outside of China at the same price you can get it from inside China? Or are you saying that you're going to pay what you have to pay and pass that on to customers? I'm trying to understand what your view of this is.

Yes, I mean, B, but meaning the second option that you said, but the prices of those fills aren't that high?

I'm sorry, I don't follow. So you're saying that you think cells will be more expensive relative to your current.

No. Let me tell you what. The cell pricing, the cell pricing is affordable, even if it -- let us say, goes up by 20%, it is affordable. But when you take a cell in China and you put it into a product, for example, you assemble it in any place, even outside China, even outside the US, you have to pay the 145% extra tariff because the cell is in China. Now what you could do is again to diversify your supply chain, you could make your cells, let us say Eastern Europe, you could make your cells in Eastern Europe, LFP cells, you could bring it in to the US, you could have a packing facility in the US and you could get in other raw materials into the US. It will be significantly cheaper to do because you no longer pay the 150% -- 145%. So even if those basic cells were 20% higher, it doesn't matter.

Okay. But clearly it's going to be more expensive than the status quo was prior to the tariffs and when you were able to source out of China without 145%. Right?

Yes, if you want to be legally right, it is going to be expensive, but does it matter? It doesn't matter.

Okay. Thank you for clarifying.

That's right.

This concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks.

All right, thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.