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Enphase Energy Inc  (NASDAQ:ENPH)
Q4 2018 Earnings Conference Call
Feb. 20, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Enphase Energy's Fourth Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Christina Carrabino. Ma'am, you may begin.

Christina Carrabino -- Investor Relations

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter and year-end 2018 Results. On today's call are Badri Kothandaraman, Enphase's President and Chief Executive Officer; Eric Branderiz, Chief Financial Officer; and Raghu Belur, Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter and year-ended December 31st, 2018.

During this conference call, Enphase management will make forward-looking statements including, but not limited to, statements related to Enphase Energy's technology, products and financial performance; operations, including supply and lead times; and current and future market and customer demands and trends. These forward-looking statements involve significant risks and uncertainties, and Enphase Energy's 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 the Company's quarterly report on Form 10-Q for the quarter ended September 30th, 2018, which is on file with the SEC, and the annual report on Form 10-K for the year ended December 31st, 2018, which will be filed with the SEC in the first quarter of 2019. Enphase Energy cautions you not to place any undue reliance on forward-looking statements and undertakes no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in its expectations.

Also please note the financial measures used on this call are expressed on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. The Company has provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the Investor Relations section of its website.

Now I'd like to introduce Badri Kothandaraman, President and Chief Executive Officer of Enphase Energy. Badri?

Badri Kothandaraman -- Chief Executive Officer

Good afternoon, and thanks for joining us today to discuss our fourth quarter and full-year 2018 financial results. We had a solid quarter. We reported revenue of $92.3 million. We had strong customer demand as our financial strength and robust balance sheet reaffirmed customer confidence. Our biggest challenge in Q4 was meeting the additional demand due to component shortages that constrained our revenue. We are fully booked for Q1 '19 just as we saw in Q4 '18. I will provide an update later in the call on our plans to mitigate component shortages.

Our non-GAAP gross margin in the fourth quarter was 30.7%, and our non-GAAP operating income was $8.6 million. Our gross margin was negatively impacted by 4.3%, due to expedite fees related to component shortages. The expedite fees were in the form of air shipments that we chose to make in order to service our customers.

We exited the fourth quarter with a cash balance of $106.2 million, net of a $10 million final payment to SunPower. The strong cash balance also enabled us to completely repay on January 28, 2019, our high interest-bearing senior secured term loan of approximately $39.5 million plus accrued interest and fees.

Now let's talk about 30-20-10, our target financial model. We introduced 30-20-10 at our Analyst Day in June of 2017 and committed to meeting the model in Q4 of '18. 30-20-10 stands for 30% gross margin, 20% operating expense and 10% operating income. We made significant progress toward making that model a reality as we exited 2018. Eric will go into greater details about our financial results later on the call.

An important focus item that we discussed in the past few quarters is ease of doing business, how customers perceive us. Quality and customer service are the cornerstones of our strategy, and our objective is to deliver exceptional customer experience. Our business processes are maturing, and we are prioritizing customer experience to be Number 1 in all aspects of our business.

During Q4, we made several improvements in our call center and online support, particularly, in Europe and Asia Pacific. We also rolled out an Enphase upgrade program, a service program for early adopters of our legacy microinverters and announced that over 1,000 homeowners have joined the program. The key metric we use to measure customer experience is Net Promoter Score or NPS. This metric is calculated based on feedback from customer surveys on how likely customers or partners will recommend Enphase to a friend or colleague. Our NPS in North America was approximately 51% in Q4, and our target is to achieve a worldwide NPS of 60% or higher in 2019.

Now let's talk about the 301 tariffs that became effective in September of 2018, impacting Enphase microinverters and accessories. As we discussed last quarter, we are mitigating the existing 10% 301 tariffs by sharing the cost increases with our customers and expanding our manufacturing agreement with Flex in Mexico starting Q2 of '19. This additional line in Mexico is expected to help Enphase better service our North American customers by cutting down cycle times and streamlining inventory at a similar manufacturing cost as Flex, China.

Now turning to our regions. Our US and international mix for Q4 was 77% and 23%, respectively. All of our regions were impacted by component shortages. Our fourth quarter revenue in the US was up 38% sequentially and up 29% year-on-year due to strong customer demand across the board. Note that the US revenue includes volume shipments of our IQ 7XS microinverters to SunPower, as we previously planned.

In Europe, revenue was down 2% sequentially, but up 27% year-on-year. The megawatt shipments were up 26% sequentially and up 31% year-on-year, setting a new record for Europe. Note that the Q3 '18 revenue for Europe included a $3.3 million of milestone achievement from a partner on IQ 8. We are encouraged by the growth outlook in the new build and social housing sectors in Europe.

In APAC, our revenue was down 61% sequentially and down 74% year-on-year. As we previously mentioned, the region had built up significant channel inventory over time, and we took this opportunity to bring the inventory down. We recently appointed Wilf Johnston as our new General Manager for the region, and we believe his years of international executive management experience will help strengthen our APAC business.

In Latin America, fourth quarter revenue was down 41% sequentially and down 14% year-on-year. Unfortunately, component shortages significantly impacted our Q4 sales to this region as well.

Now that we are financially stable, a large portion of our time is spent on profitable top line growth. We plan to achieve this growth through differentiated products and services. Our four levers for profitable top line growth remain IQ 7 regional expansion, high-power and high-performance products, AC modules and Ensemble solar and storage technology.

The first lever for profitable top line growth is IQ 7 regional expansion. Approximately 84% of our microinverter shipments in Q4 were IQ 7, up from 78% in Q3. As I mentioned earlier, component shortages constrained our revenue in Q4. We have been working with our customers and partners to manage these shortages, and we are thankful for their efforts and patience. The additional capacity based on an investment we made with one of our suppliers earlier in 2018 is now online. This has allowed to increase our microinverter supply for Q1 '19. But with the growth we have seen, our lead times are still around 13 to 15 weeks. We have recently signed two new long-term contracts for additional high-voltage transistors. This additional supply is expected to become available in the second half of this year, which we believe will help improve our microinverter lead times to six to eight weeks.

The second lever for profitable top line growth is releasing high-power and high-performance new products. The IQ 7X product addresses 96-cell PV modules up to 400 watt DC. And with its 97.5% CEC efficiency, it's ideal for integration into high-power modules like SunPower and Panasonic. In addition, we shipped limited quantities of our new product, IQ7A (ph) which addresses up to 450 watt DC modules.

The third lever for profitable top line growth is AC modules. We had volume shipments of our IQ 7XS microinverters to SunPower in the fourth quarter. And as previously announced, we expect a continuation of the ramp in 2019. In addition, we are making steady progress with module partners such as Solaria and Panasonic in ramping Enphase Energized AC Modules. These integrated systems allow installers to be more competitive through improved logistics, reduced installation time, faster inspection and training. Since their release in October of 2017, Enphase Energized ACM from our module partners have been adopted by about 420 installers in the US as of today.

Finally, a major catalyst for our profitable top line growth in the long-term is around Ensemble solar and storage technology. The IQ 8 system is based on grid-agnostic, always on technology called Ensemble. This system has four components, energy generation, which is accompanied with a grid-agnostic microinverter IQ 8; energy storage, which is achieved by Encharge Battery with capacities of 3.3 kilowatt hours, 10 kilowatt hours, 13.2 kilowatt hours; communication and control called on power, which consists of the automatic transfer switch and the Combiner Box with the Envoy gateway; and the fourth and final component is Enlighten, which is IoT cloud software.

We are working hard on each of these four components of the IQ 8 system. There are over 100 engineers working on the project across multiple time zones. However, given the high complexity of the technology in terms of hardware and software, we are running a little bit late. We believe in making the right decisions for the long term and getting the customer experience right, therefore, we now anticipate introducing Ensemble in a phased manner starting in the fourth quarter of 2019.

Let me remind you that there are two major market segments Ensemble technology addresses. One is the pure off-grid segment and the other is the grid-agnostic segment. We just talked about the grid-agnostic solution being delayed to the fourth quarter of 2019, however, the pure off-grid microinverter solution is on track. We shipped limited quantities to our partner on IQ 8 during the fourth quarter of 2018, and we expect to ramp production in the first half of 2019. We also expect the final milestone revenue from this partner in the first quarter of 2019.

In summary, we are encouraged by our progress in 2018. Our top priorities remain providing superior customer experience and focusing on our four profitable top line growth vectors. I would like to thank our employees for their hard work, and our customers, partners and shareholders for their strong support.

With that, I will turn the call over to Eric for his review of our financial results. Eric?

Eric Branderiz -- Chief Financial Officer

Thanks, Badri. I will provide more details related to our fourth quarter and full-year 2018 financial results as well as our business outlook for the first quarter. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis, unless otherwise noted. 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 Investor Relations section of our website.

Total revenue for the fourth quarter of 2018 was $92.3 million, an increase of 18% sequentially and an increase of 16% year-over-year. We shipped approximately 257 megawatts DC in the fourth quarter of 2018, an increase on megawatt of 25% sequentially and an increase of 16% from the year-ago quarter.

The megawatt shipped represents about 820,000 microinverters, approximately 84% of which was IQ 7. Both IQ 6 and IQ 7 represented 91% of Q4 microinverter chip shipments. Non-inverter revenue, which includes our AC Battery storage solution, Envoy communications gateway, Combiner Box and accessories, increased as a percentage of revenue compared with the prior quarter.

Total revenue for 2018 was $316.2 million, up 10% from 2017. In 2018, we shipped approximately 2.8 million microinverters, representing 972 megawatts DC, a 13% (ph) year-over-year increase in megawatts shipped. Non-GAAP gross margin for the fourth quarter of 2018 were 30.7% compared to 32.8% for the third quarter. Note that Q3 '18 non-GAAP gross margin included a $3.3 million milestone achievement from a partner on IQ 8. Even though we share some of the expedite fees with our partner, component shortages negatively impacted our Q4 gross margin by approximately 4.3%. Non-GAAP operating expenses were $19.7 million for the fourth quarter of 2018 compared to $18.6 million in Q3 and $18 million in the fourth quarter of 2017.

2018 was our first year of SOX-compliant effort, and as a result, we incurred higher-than-expected expenses in internal audit plus additional consulting and advisory fees. This higher-than-normal expenses will also continue into Q1 2019. Non-GAAP operating expenses for 2018 were $75 million compared to $72.8 million in 2017.

GAAP operating expenses were $23.2 million for the fourth quarter of 2018 compared to $25.6 million in Q3 and $21.1 million in the fourth quarter of 2017. GAAP operating expenses for the fourth quarter, included $1.5 million of the stock-based compensation expenses, $1.5 million of restructuring expenses and approximately $400,000 of acquisition-related expenses and amortization.

GAAP operating expenses for 2018 were $92.8 million compared to $95.4 million in 2017. On a non-GAAP basis, income from operations was $8.6 million in the fourth quarter of 2018 compared to $7 million in Q3 and $1.3 million in the year-ago quarter. This improvement in operating income is reflective of our improved operational excellence and continued total leadership.

On a non-GAAP basis, net income for the fourth quarter of 2018 was $5.1 million compared to $4.6 million in Q3 and $683,000 in the year-ago quarter. This resulted in basic earnings per share of $0.05 and diluted earnings per share of $0.04 in the fourth quarter of 2018 compared to basic and diluted earnings per share of $0.01 in the year-ago quarter. GAAP net income for the fourth quarter of 2018 was $709,000. We are happy to report that this was the first quarter in the Company's history that we reported GAAP net profitability.

Now turning to the balance sheet. Inventory was $16.3 million in the fourth quarter of 2018 compared to $17.9 million in Q3 and $26 million in the year-ago quarter. We ended at 23 days of inventory on hand as of December 31st, 2018, significantly below our target of 30 days and down from 31 days in the third quarter and also down from 39 days in the year-ago quarter. Although most of the inventory reduction was due to high demand constrained by component shortages, inventory management continues to remain one of our key cash management initiatives. We exited the fourth quarter of 2018 with a total cash balance of $106.2 million compared to $115.2 million in Q3.

The Q4 balance includes the final payment to SunPower of $10 million for the acquisition of its microinverter business. We also generated $1.9 million in cash flow from operations and $4.1 million in adjusted free cash flow. The $1.9 million in cash flow from operations in Q4 would have been $5.9 million as we allocated $4 million out of the $10 million payment to SunPower in operating cash flow for the acquired customer relationship acquisition-related intangibles.

As Badri mentioned, on January 28, 2019, we repaid in full our high interest-bearing senior secured term loan with Tennenbaum Capital Partners, an indirect, wholly owned subsidiary of BlackRock, Inc. The repayments included a principal amount of approximately $39.5 million plus accrued interest and fees. The repayment also terminated the liens of all Enphase's asset, providing greater operating flexibility going forward.

Now I will discuss our outlook for the first quarter of 2019. We expect our revenue for the first quarter of 2019 to be within the range of $90 million to $95 million. Turning to margins, we expect GAAP and non-GAAP gross margin to be within that range of 31% to 34%. Note that our Q1 gross margin guidance include a negative impact of approximately 2% to 3% due to expedite fees resulting from component shortages.

We expect our GAAP operating expenses to be within a range of $25 million to $26 million, including a total of approximately $4.5 million estimated for stock-based compensation expenses, additional restructuring expenses and acquisition-related expenses and amortization. We expect non-GAAP operating expenses to be within the range of $20.5 million to $21.5 million.

With that, I will now open the line for questions.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Brad Meikle with Williams Trading. Your line is now open.

Brad Meikle -- Williams Trading -- Analyst

Hi. Thanks for the question. Could you add a little more color in terms of your visibility into second quarter or in the second half of the year from a demand standpoint? And also as you're ramping, it sounds like you prioritize the ramp of the IQ 7 and to alleviate the shortages and catch up with customer demand. Can you comment on how much more capacity you'll have as you go into the second and third quarter? Thanks.

Badri Kothandaraman -- Chief Executive Officer

Yes, Brad, thanks for the question. As you know, we're not going to provide guidance beyond the quarter, and we guided $90 million to $95 million of revenue for Q1 of '19. Having said that, we are unlocking three of the four top line growth vectors that I said. The first one was IQ 7 regional expansion. The second is the AC modules, and the third is the high performance, high power products. So I'll take each of them.

In the first one, obviously, our balance sheet has significantly improved. We are very financially stable. We have a great cash in our cash balance. So customers are coming back to us. In addition, we pride ourselves on offering the highest quality and customer experience. So with all of this, our demand has started to increase. And what we did was we recognized this sometime last year, and we -- basically, we work with one of our suppliers to increase our 600-volt transistor supply, which is a key component in our microinverters. And we did that early in 2018. We locked some capacity down, and that capacity is coming on in Q1 '19. Yes, in fact, it is online right now.

But having said that, as we unlock more of our top line growth vectors, we found that, that is not enough. We found that in the fourth quarter, that we had to scramble for more capacity. And I personally went down and talked to the CEOs of these companies, and we were able to get two additional long-term contracts done. The result is that from middle of 2019, meaning from the second half of 2019, the incremental supply will turn on, and we will start to service customers a lot better. The answer to your question is Q1 '19 will be better than Q4 of '18, Q2 '19 will be better than Q1 of '19, and Q3 and Q4 will be a lot more comfortable for us.

Brad Meikle -- Williams Trading -- Analyst

Thanks, Badri. I guess just to ask it another way, I think you'd said in the past that the new power MOSFET line could be 60% of your output when ramped, and I'm not sure exactly how long that takes to ramp. But that really implies close to doubling of capacity depending on how your existing contracts sort of look, but is that the right way to think about that?

Badri Kothandaraman -- Chief Executive Officer

Well, I mean, yes, that is the right way to think about it. Let me say this. In the second half of the year, we will be in a very comfortable spot in terms of our supply. Supply -- I hope supply will not be a major problem in the second half.

Brad Meikle -- Williams Trading -- Analyst

And are you sold out through the second quarter at this point as well?

Badri Kothandaraman -- Chief Executive Officer

We're not going to talk about the second quarter, Brad. The -- we are sold out for the first quarter though.

Brad Meikle -- Williams Trading -- Analyst

Okay. Thanks. And just last question, could you speak to the battery ramp? And we've heard of some high attach rates in California of 25% plus and obviously, you make probably eight times as much on a storage installation with your customers. So could you comment on what you're seeing from customers that you're talking about in terms of storage attachment and what that could mean for the business? Thanks very much.

Badri Kothandaraman -- Chief Executive Officer

Yes, we are extremely excited about storage. As I said in the prior quarter, storage represents a significant opportunity for us to increase the revenue potential for home from $2,000 to $10,000. And a key part of Ensemble is Encharge. Encharge is going to have capacities of 3.3 kilowatt hour, 10 kilowatt hour, 13.2 kilowatt hour. It is going to have a C/2 charging rate. It's going to have LFP chemistry, which is going to be very safe for residential application. It is -- I mean, most importantly, it's going to use IQ 8 and the same IQ 8 microinverter. So we are furiously working on Encharge. Having said that, like what I said, it is a little bit delayed. It is a little bit delayed to the fourth quarter of 2019, but we are extremely optimistic about our prospects in storage. And yes, I'll leave it at that.

Brad Meikle -- Williams Trading -- Analyst

Thanks. I'll get back in the queue.

Operator

Thank you. And our next question comes from Carter Driscoll with B. Riley FBR. Your line is now open.

Carter Driscoll -- B. Riley FBR -- Analyst

Maybe just talk about your assessment of the opportunity for Ensemble and the grid-tied versus not necessarily having been grid-tied and the delay of when you're going to ramp the second portion of that market? Just trying to get a sense of relative market opportunity.

Badri Kothandaraman -- Chief Executive Officer

Right. So Ensemble is designed to service two markets, one is the grid-agnostic market segment, and the other is the off-grid market segment. In terms of the off-grid market segment, where we are on track, we started sampling the product to our lead customer in the fourth quarter of 2018, and we are expecting to ship significant quantity to them in the first quarter of 2019. So what I'll say is this. I mean, if you look at off -- yes, if you look at the countries where the off-grid technology is going to play a major part, it's going to be places like India and Africa.

India and Africa are places where you will see -- of course, the PV and storage systems are not going to be that big. They're going to be small, but imagine a hut having one or two AC modules or one or two modules with microinverters. And so, that will be just perfect for the architecture of a microinverter. It's still too early for us to assess to talk about volumes and talk about ramps, but we're excited that our product is there. Our product is sampling. We have a strong partner, and we will talk about it in the coming quarters, on the progress.

So that's on the off-grid, pure off-grid microinverter. On the grid-agnostic one, it gets more exciting. The grid-agnostic one, obviously, there are a lot of cases. We service somebody who wants to be completely grid-independent. We service somebody who wants to be totally dependent on the grid, but just wants backup as a peace of mind. So Ensemble is a technology that can do whatever the customer wants. That's why we call it as grid-agnostic. And Ensemble is complex. It has got four components, which is the micro, the battery, the automatic transfer switch and the combiner and the cloud.

Having working all of these together seamlessly in terms of hardware and software is something that we have been challenged with, and I think that's why we are experiencing the delay. But the way I think about it is two big opportunities on the Ensemble side is one is the storage, which is Encharge, which takes our revenue per home from $2,000 to $10,000. And the other is even if there is not much storage attachment, the -- what would people want, a grid-agnostic solar or a grid-tied solar? I mean, we think that most people would want a grid-agnostic solar given a choice. So once again, we are extremely excited about that technology. We're extremely excited about Ensemble, but we did not want to get ahead of ourselves. Right now, we are basically having our heads to the table. We are focused on execution, and we are focused on getting this product out in the fourth quarter of 2019.

Carter Driscoll -- B. Riley FBR -- Analyst

Okay. Just another one. Maybe talk about the percentage shipped in AC modules and the form factor or a range where you have been in 4Q and where you think it could go by, say, year-end '19.

Badri Kothandaraman -- Chief Executive Officer

We're not going to break out the percentage shipments, but AC modules have been increasing slowly and steadily. And it starts with customers like SunPower, which is all AC modules, or the microinverters, IQ 7XS, that we shipped to SunPower is in their Equinox AC modules. In addition, partners like Solaria are all gaining a lot of traction in their market. Solaria has got a 355-watt AC module that use our IQ 7+ microinverter, which is a 295-watt AC output. So basically a DC/AC ratio 1.2 there. And Solaria value proposition, it's effective module, it is aesthetic, and that's why everybody likes it. That's that. And earlier in the year, we announced our partnership with Panasonic. That's slowly getting to be a reality, and we'll announce when we are ready there. So basically, these are our very strong partners. And in addition, we have a few more that we are working on in the international regions, which we'll announce when we are ready.

Carter Driscoll -- B. Riley FBR -- Analyst

Maybe just the last one for me. To get to the high and low end of your margin guidance for 1Q, can you just talk about the factors? Is it some combination of mix, obviously, which you've done potentially in terms of sharing the tariff impact? Maybe just talk about those factors, more important ones, to get to that 300 bps delta?

Badri Kothandaraman -- Chief Executive Officer

Yes, I mean, look, we are already sharing the tariff costs with our customers. We did that effective in Q4 of '18, which is what we've said we would. So we're doing that. Really, the puts and takes on gross margin, the 4.3% really comes from air shipping our microinverters, so that we provide customer service. And so, I didn't -- to tell you the truth, I prioritized customer service in Q4, and therefore, we spent a lot of money air shipping product. Now a few of our customers were also willing to pay for air ships, so that basically offset us a little bit. But even after that, we still had a gross margin hit of 4.3%, as we said. And now in Q1 of '19, with the supply situation a little bit better, we're not going to be spending so much of money, but still, it is significant. 2% to 3% in terms of air shipments is still significant, and that's really accounted in the guidance of 31% to 34%.

Carter Driscoll -- B. Riley FBR -- Analyst

Sorry, if I may just sneak in a last one. Just talk about the competitive environment, whether from existing and then maybe new entrants, what you're seeing, both last quarter and what you expect in 2019?

Badri Kothandaraman -- Chief Executive Officer

I mean, the competitive environment remains pretty, I mean, pretty much the same. There is not much change. Of course, we are all talking about Huawei. We do not see them that much in the residential space right now, but of course, they're a formidable competitor. We are watching the space. But let me remind you that our product is unique. Our product is differentiated. It's a microinverter, and we focus on differentiation through innovation. So we'll be prepared to meet competition.

Carter Driscoll -- B. Riley FBR -- Analyst

Appreciate taking all my questions. I'll go back in the queue guys. Thank you.

Operator

Thank you. And our next question comes from Eric Stine with Craig-Hallum. Your line is now open.

Eric Stine -- Craig-Hallum -- Analyst

Hi, everyone. Maybe just wanted to start with SunPower, and I might have missed this, but did you break out the percentage of your revenues in fourth quarter there? And then just curious if you could talk about the ramp, I know it's still early, but the ramp and maybe how it's progressing versus your expectations when you made the acquisition a couple months ago.

Badri Kothandaraman -- Chief Executive Officer

We are not going to break out the percentage of SunPower revenue. But I'll tell you what, I mean, it is -- the ramp is very much in line with our expectation. I expected volume shipments beginning Q4 of '18, and we're exactly at that point, where we had volume shipments to SunPower on our IQ 7XS microinverters in Q4 of '18. I expect Q1 '19 to be a ramp, a nice ramp, and I expect us to be done by Q2 of '19, as I previously communicated.

Eric Stine -- Craig-Hallum -- Analyst

Okay. And I guess you touched on this on your answer to previous questions. But I'm just curious -- with SunPower, with some of the traction you're getting with some of your other AC module partners, just curious what you're seeing from the rest of the market. I mean, what that's doing in terms of interest, people coming to you looking for their own solution. Anything along those lines would be helpful.

Badri Kothandaraman -- Chief Executive Officer

Yes, I mean, if you really see -- the AC module is actually perfect when you see that the modules are going to higher and higher power because we can easily scale our microinverters. So it's actually advantageous for us in terms of gross margin as well. And having said that, SunPower is the biggest, and then people like Solaria, for example, like -- I'll reemphasize that again, it's a 355 watt AC module, and it is really neat module, 72-cell module and very high aesthetics, black on black, and it really looks nice. So those are the kind of partnerships we are actually getting, and we are getting many such partnerships across the world. Like for example, Europe, yes, in Europe, there are a couple of partnerships which we are working on. We cannot announce them yet, but they are making rapid progress.

Eric Stine -- Craig-Hallum -- Analyst

Got it. Maybe last one for Eric, just on the OpEx. You mentioned that in the fourth quarter, you had some professional fees and some other SOX-related items that ran a little hotter than you thought. And the guide for first quarter, I mean, it sounds like it's going to persist. But maybe beyond first quarter, maybe a way to think about OpEx at a more normalized level.

Eric Branderiz -- Chief Financial Officer

Yes, I think that we -- when we think about OpEx for 2019, except for the qualifications on Q4 and Q1, Eric, we should think it in terms of the model, the financial operating model that we set out, right, which is cash generating. So the 20% number is still relevant. It may go up a little bit. It may go down. It's the whole model of the 30-20-10 that we basically live by, and that will be the guiding principle outside this unique, specific circumstances, right?

Eric Stine -- Craig-Hallum -- Analyst

Okay. Thanks for that.

Operator

Thank you. And our next question comes from Jeff Osborne with Cowen and Company. Your line is now open.

Jeff Osborne -- Cowen and Company -- Analyst

Maybe just following up on Eric's question. Eric, is there a way you can quantify what the OpEx increase was in Q4 for SOX and professional fees? Or will that be broken out in the 10-K?

Eric Branderiz -- Chief Financial Officer

Yes, it will be broken out in 10-K. You actually can see that as well, I believe, in the tables of the press release, right? And for the most part, you can see there the stock component 1.5 (ph), another portion associated with the restructuring fees. So everything is neatly easy to follow there compared with the prior quarter, and then you can take it into the following impact.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. And then I think Badri had in his prepared remarks a comment about the last, if I heard you right, Badri, the last milestone payment would be showing up in Q1 from your partner for IQ 8. Can you, a, confirm that? Then B, is there a way to think about what the magnitude of that payment is?

Badri Kothandaraman -- Chief Executive Officer

Yes, confirmed. Yes, it will be Q1 of '19, and it will be under $1 million.

Jeff Osborne -- Cowen and Company -- Analyst

Okay. I just noticed you hadn't -- you didn't break that out when you were talking about the puts and takes on the gross margins side, but it's under $1 million. And is that the last of the payments? Or is there any additional payments in the future?

Badri Kothandaraman -- Chief Executive Officer

That's the last of the payments.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. And then another question on SunPower. I know you can't break out specifics, but is there a way you can talk about what your level of engagement is with their channel, their dealer network? Is that something that you have more than half of their channel has been exposed to the product? Or is that still an uphill battle over the next six months for you to penetrate that channel?

Badri Kothandaraman -- Chief Executive Officer

No, I mean, it's not an uphill battle, but it is not for us to penetrate the channel. SunPower is going to exclusively use Enphase microinverters, and therefore, it is in SunPower's best interest to promote these microinverters and the future microinverters to their dealer network. So our job is a little bit easier there because SunPower is taking all -- I mean, is making all the effort to make sure that everybody is trained, the dealer network is trained, and of course, we are helping them every step of the way.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. That makes sense. The last question I had was on the component side. Two-part question, one is on IQ 8. Does that use more or less of these 600-volt transistors? I know it's a slightly different form factor and more cost optimized, but I wasn't sure if it's more intensive on the transistor side in particular.

Badri Kothandaraman -- Chief Executive Officer

The IQ 8 uses the same for high-voltage transistors.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. And then as part of these now, I guess, three contracts you have on supply, is there any notable cash payments upfront that would be disclosed in the 10-K as that's published or how does the mechanics of these work? And the second part of that question would be, what are the general duration of these types of contracts just in the events that the auto industry or some other industry comes back and these components continue to have a problem later in the year and in 2020?

Eric Branderiz -- Chief Financial Officer

Yes, we have two arrangements that we have on top of the one that we have existing before. One of the two that are new, that Badri set out, is actually a continuation of the existing one with some prepaid arrangements similar to what we have before. The other one is with another one with -- it has a take-or-pay that is very short time frame, right? So probably, I wouldn't think beyond 18 months to two years, right, which gives us enough runway to get the problem resolved, but at the same time, doesn't commit the Company on a structured pricing arrangement on a take-or-pay for a long term.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. That's very helpful, Eric. I appreciate it.

Operator

Thank you. And our next question comes from Amit Dayal with H.C. Wainwright. Your line is now open.

Amit Dayal -- H.C. Wainwright -- Analyst

Thank you and good evening guys. Most of my questions have been asked. Maybe just on the leverage of the business. Now that we're seeing some revenue ramp coming through, what is the opportunity over here? Should we expect operating cost to sort of normalize at these levels? Or should these expected to increase with the ramp in revenues?

Badri Kothandaraman -- Chief Executive Officer

Right now, you should think about the OpEx as -- our long-term model is 20% of revenue. We are not going to deviate from that. We incurred restructuring expenses to make sure we have the right people in the right places, so we are very confident that we can meet that. Yes, that's not an issue. So we are -- while we ramp revenue, we will control OpEx at 20% of sales, OK?

Amit Dayal -- H.C. Wainwright -- Analyst

Got it. So the 30-20-10, no update to that, maybe in the next few quarters?

Badri Kothandaraman -- Chief Executive Officer

Look, I mean, the 30-20-10 is more and more looking like 32-22-10. So I mean, what you should be looking at is the 30-20-10 spirit is what, it's the 10% operating income. So as long as that is met, the numbers will fluctuate a little bit, yes, but having said that, we feel good about our profitable top line growth vectors. We feel good that even if Ensemble is late, we feel that the other three vectors are actually kicking in and more than compensating for that. And so, we feel really good about that, but -- and still, we are not going to guide more than one quarter out, and we know this is a solar industry, anything can happen overnight. We know if the government sneezes on this a little bit, things can go south. So we're not going to update more right now.

Amit Dayal -- H.C. Wainwright -- Analyst

Right. And in the context of pretty strong sort of guide for the first quarter relative to the fourth quarter, Ensemble, should we expect Ensemble to really contribute anything meaningful this year? Or should that be pushed out in terms of expectations from 2020?

Badri Kothandaraman -- Chief Executive Officer

Look, I mean, when we introduced the product in the fourth quarter, obviously, that will be only the ramp, right? There won't much significant revenue from Ensemble in 2019.

Amit Dayal -- H.C. Wainwright -- Analyst

Got it. That's all I have guys, I'll follow-up offline. Thank you.

Operator

Thank you. And our next question comes from Colin Rusch with Oppenheimer. Your line is now open.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much guys. It looks like you increased the working capital a little bit here with AR getting up to almost 78 days for the quarter. Can you talk a little bit about what happened there and what your expectation is for working capital needs as you go into the first part of 2019?

Eric Branderiz -- Chief Financial Officer

Yes, I'll take the first part, and Badri can probably cover the business aspect of it, Colin. But if you think about it, the FiT (ph) supply component made some shortages, right? It has created charges on our linearity, right? So what you see is significant amount of shipments taking place sometimes on even on an expedited costing basis and air shipping toward the end of the quarter, right? And that has been aggravated since Q3, and so now, I believe we are turning a corner, right, in which you can see receivables with days sales outstanding of 70 days, right?

And at the same time, that compensated with the payables side of it, right, which we have a lot of purchases of inventory taking place toward the end of the quarter. So with that being said, you end up with super low levels of inventories on the working capital front, maybe a little bit below our comfort level for operational flexibility. And now we're at 23 days with a total cash conversion cycle of 24 weeks of working capital in the quarter, right? So we believe with the linearity challenges being started to get resolved in Q1 and pretty much gone by the end of Q2, we are in good shape to normalize our business back again and start seeing receivables, payables getting to our own internal target, right?

Colin Rusch -- Oppenheimer -- Analyst

And as you go into 2019, so you're expecting that (inaudible) should be a source of cash in your expectations for March and June?

Eric Branderiz -- Chief Financial Officer

I didn't quite follow your question. Say that again.

Colin Rusch -- Oppenheimer -- Analyst

You should be generating a bit of cash from the working capital as you go into March and June or you feel like you're going to consume that as you ramp up.

Eric Branderiz -- Chief Financial Officer

Yes, it's just (inaudible) little bit, right? We feel confident about our cash generating capability based on our financial operating model that we have, right? 30-20-10 or, like Badri put it 32-22-10 (ph) right? That model is a cash-generating model, right? We don't see all the things that we took into account, I believe, we're going to continue going forward into the year by resolving the linearity challenges and increasing our cash cover, right?

Colin Rusch -- Oppenheimer -- Analyst

Okay, that's helpful. And then you broke out international and domestic sales. As you look into 2019, how is that shifting at all? And is there a price component that you're going to see a benefit or any sort of headwinds on from mix on a geographic basis?

Badri Kothandaraman -- Chief Executive Officer

Look, I mean, it's still going to be heavily skewed toward North America because of SunPower. Having said that, we are really excited about Europe. We had the highest megawatt in our shipments, like what we noted, but really excited about the social housing boom in Netherlands, and we have very strong distribution partnerships in France. And once the component shortages are resolved, we hope to break into other regions like start ramping in Germany, start ramping in Austria. Those are the places we would like to start ramping.

And then if you look at Australia and the Asia Pacific, Australia and New Zealand, et cetera, there we really took this opportunity with the component shortages in order to correct our inventory, correct the inventory in the channel. And we did that in Q4. We brought on a general manager and his expertise. He's a solar guy. He understands storage as well, and we really want him to grow the battery business there. And then, the last one is India. We were not talking about India much, but with the off-grid products starting to come, the pure off-grid product, I'm really excited about the prospects in India as well. There are some niche applications that I'm not going to talk about right now, but as our pure off-grid product rolls out in the first half of the year and as Ensemble turns on, there are exciting new prospects there as well.

Colin Rusch -- Oppenheimer -- Analyst

Okay. Thanks so much guys.

Operator

Thank you. And our next question comes from Philip Shen of ROTH Capital Partners. Your line is now open.

Philip Shen -- ROTH Capital Partners -- Analyst

Thanks for the questions, guys. I'll follow up on the last question there by Colin. I think we're seeing some really nice growth internationally. Is there a situation where you can see the international growth rate actually being faster than the US or do you kind of look at it in that way at all? And if so, do you see potential for getting to an international versus US mix of, call it, 60-40, even 50-50, someday in the near, call it, medium-term, two to three years out?

Badri Kothandaraman -- Chief Executive Officer

Yes, I mean, that's our goal, Philip, to obviously get to parity in terms of US versus Europe versus Asia to get to something like 33-33-33. But having said that, the US business is the strongest at this point in time, especially with SunPower, especially with financial stability, with the long tail of customers coming back because of our product quality, because of our customer experience, US is really firing on all cylinders right now. And I think 2019 is going to be about the US and -- but I'm optimistic that 2021 time frame, we can start being more balanced in terms of all the deals.

Philip Shen -- ROTH Capital Partners -- Analyst

Great, that makes a lot of sense. And we're even starting to hear about some really aggressive growth rates for the overall US market. I think people are going to think about 15% year-over-year growth, but I'm hearing now a 20%, maybe even 25% or 30% growth in the US as a market overall. Are you guys seeing any of that? Let's put your internal supply constraints or component shortages aside, when you look at the US market, is there any validation or potential, you think, that the overall US market can actually grow 25% year-over-year '19 versus '18? Let me specify that for residential, and if you want to speak to commercial feel free.

Badri Kothandaraman -- Chief Executive Officer

Yes, I mean, I'm going to talk only about the residential space. And yes, I mean, look, what I said in the last conference call is that we could not ship more than $10 million of demand. And in the -- I said that in the Q3 conference call and that number is a little bit higher for Q4. So basically, yes, there is a lot of demand out there, and we are seeing a lot of demand because of our financial stability, because of our strong balance sheet. Because IQ 7 is the latest and greatest product that we have, our customer experience, our high quality, and so demand is strong. And it is also supply limited at this point in time, and I expect the next two quarters like that. But I'm optimistic about Q3 and Q4.

Philip Shen -- ROTH Capital Partners -- Analyst

Great. And following up on that thought there, Badri, can you talk about Q1? Your official guide is $90 million to $95 million. I know you're sold out. I know you had internal constraints, but how much revenue do you think you're leaving on the table as it relates to Q1 specifically?

Badri Kothandaraman -- Chief Executive Officer

So Phil, we are not going to break that out. I broke that out in Q3 because -- just to show that our top line is starting to break out. Now we are not going to get into the habit of breaking that out. But I'd just tell you this, I mean, we feel really good. The demand is strong. And what we feel bad is we're not -- I mean, we are still not servicing customers well in terms of deliveries, and we need to fix that. That's what I'm working on day and night. That's what our top priority is, to not be internally focused but to be focused on what customers want, and we need to do a lot more work there.

Philip Shen -- ROTH Capital Partners -- Analyst

Great. One last one for me, on the competitive dynamics in Europe. I know we were just talking about Huawei, more skewed to the US. But in Europe, they have been selling their product for some time. Can you talk about whether or not you're running into them at all? As it relates to installers and customers, is their storage product getting -- like, are you competing with them, do you think? Or do you feel like the demand, overall market demand, is so strong, it's really not an issue? Would love to hear your thoughts on that in Europe. Thanks.

Raghu Belur -- Co-founder and Chief Products Officer

Hey, Phil, this is Raghu. Yes, we definitely see them in the market in Europe. We are competing with them very effectively, of course, in the markets that we are more active, in Holland, Netherlands, and in France and a couple of other countries in that region. So we do run into them, but we clearly have been very effective there and doing well given that in Q4 we had the highest megawatt shipped ever in Europe both in terms of megawatts actually as well in terms of unit. So I think it is -- but he mentioned this earlier on, it's because we have a really well-differentiated product. We do microinverters. We do strings with or without optimizers, right?

So I think the fact that it's a microinverter that is the highest performance and very high quality and reliability as well as the customer experience itself, including customer support and the work that we have done is what's, I think, separating us from all the other string players that are out there, which obviously, there's more than just Huawei. The other thing also is, and we touched upon this earlier on, that ACM, AC modules could be very interesting in Europe. We are now actively engaged with a few partners that we'll announce when we are ready, and there's clear value to be -- value generation when installers install AC modules, both in terms of the savings, both on the logistics side as well as the installation time and quality of installation, training, inspection, et cetera. So all in all, we feel pretty -- we feel very good about Europe, and it's shown in the numbers, right? Like I said, we did record numbers in Q4.

Philip Shen -- ROTH Capital Partners -- Analyst

Great, thanks Raghu and Badri. I'll pass it on.

Badri Kothandaraman -- Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Pavel Molchanov with Raymond James. Your line is now open.

Pavel Molchanov -- Raymond James -- Analyst

Thank you for taking the question guys. Given the deleveraging that you've recently accomplished with a debt paydown and the cash flow that you'll likely generate in 2019, I'm curious if you're becoming more open to acquisition opportunities above and beyond what you've purchased from SunPower? I know that it hasn't historically been the Enphase business model to do M&A, but any changes on that front?

Eric Branderiz -- Chief Financial Officer

Yes, so the conversation about the strategic, targeted, accretive, short payback acquisitions similar to something like SunPower on different parts of the spaces, right, more in line with the -- complementary to Ensemble or provision in the commercial sector are always part of the discussions here, right? The success on how we integrate it, pay for, and we are starting harvesting the benefit associated with the SunPower transaction put a high bar in terms of what we are trying to achieve, right? We have cash. We feel very comfortable, but we want to be very careful on how we're going to go about spending it and targeting. Trust me, Pavel, I mean, there will not be kind of big diversions to what we are trying to do for 2019 strategy or potentially decisions that we eventually will need to have a payback that extends beyond 18 months or maybe two years, right? So that's kind of how we are seeing it.

Pavel Molchanov -- Raymond James -- Analyst

Okay. And can we get a quick update on the tariff exception process with relation to the AC modules? I know that's been kind of a work in progress for a while.

Badri Kothandaraman -- Chief Executive Officer

Yes, you can get an update, and the update is that we have not heard back.

Pavel Molchanov -- Raymond James -- Analyst

I can understand how that can be. All right, thanks guys.

Operator

Thank you. And our next question comes from Brad Meikle with Williams Trading. Your line is now open.

Brad Meikle -- Williams Trading -- Analyst

Thanks. Just as a follow-up. So you've spoken about one power MOSFET line that's running, another one that's coming up and as well as a couple of contracts, I think, from a supply standpoint. So obviously, it implies a lot more demand out there and a lot more supply. Can you speak to your level of confidence that the demand is there and what -- I know you're not guiding on the second half, but just kind of what your demand visibility is for the second half. And just as part of the capacity ramp up, also wanted to know what portion you expect of US demand to be from Guadalajara in the second and third quarter? Thank you.

Badri Kothandaraman -- Chief Executive Officer

Brad, so like what -- I mean, you already know, we're not going to be talking about specific demand in the -- beyond Q1. But having said that, our objective is to basically make sure we take all supply related problems off the table. That's what we would like to do. That is why I went and did -- in the last couple of months, I went and did these additional two long-term contracts. And Guadalajara coming on is an interesting dynamic. It doesn't change anything on the supply scenario, but it does one thing, which is streamline inventory and cycle time to our customers, which we think is important, especially, as we service the US. So if we do a good job in ramping the Flex, Mexico, there is no reason why we cannot ship almost all of the North American demand from Mexico. Time will tell in terms of the quality of that plant, et cetera, which we would like to see, but we are working toward that.

Brad Meikle -- Williams Trading -- Analyst

Thank you. And just last question is, I guess, solarquotes.com.au in Australia reported that SolarEdge threatening to sue some of the customers around the failure rates being higher, I guess, than expected in that region. We've heard about it in the US as well. Can you speak to whether you think that Enphase will benefit from market share shift away as a result? And just broadly speaking, what you're feeling is in terms of your potential for a market share gain? Thanks.

Badri Kothandaraman -- Chief Executive Officer

Brad, we are not going to comment on the competition, what their strategy is, et cetera, but like I sound like a broken record. The -- what -- where we really -- our core strengths are the product quality, superior customer experience. That is what we do. Ease of use, high quality, high customer service, and so we will continue to offer that to customers. And if they pick us, we are more than happy. Meaning to solve these component shortages, we can start servicing them right.

Brad Meikle -- Williams Trading -- Analyst

Thank you.

Operator

Thank you. (Operator Instructions) And I am not showing any further questions at this time. I would now like to turn the call back over to Badri Kothandaraman for any further remarks.

Badri Kothandaraman -- Chief Executive Officer

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you once again on our call next quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.

Duration: 62 minutes

Call participants:

Christina Carrabino -- Investor Relations

Badri Kothandaraman -- Chief Executive Officer

Eric Branderiz -- Chief Financial Officer

Brad Meikle -- Williams Trading -- Analyst

Carter Driscoll -- B. Riley FBR -- Analyst

Eric Stine -- Craig-Hallum -- Analyst

Jeff Osborne -- Cowen and Company -- Analyst

Amit Dayal -- H.C. Wainwright -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

Philip Shen -- ROTH Capital Partners -- Analyst

Raghu Belur -- Co-founder and Chief Products Officer

Pavel Molchanov -- Raymond James -- Analyst

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