Enphase Energy, Inc. (ENPH) Q4 2019 Earnings Call Transcript

Enphase Energy, Inc. (ENPH 2.69%)
Q4 2019 Earnings Call
Feb 18, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Enphase Energy fourth-quarter 2019 financial results conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Adam Hinckley. Please go ahead, sir.

Adam Hinckley -- Senior Director, Investor Relations, M&A, and Government Relations

Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's fourth-quarter 2019 results. I'm the head of investor relations for Enphase Energy, and I'm pleased to be hosting my first earnings call for the company. 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 ended December 31, 2019.

During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy's expected financial performance, technology, new products, operations, and sales and marketing. 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 annual report on Form 10-K for the year ended December 31, 2018, which is on file with the SEC, and the annual report on Form 10-K for the year ended December 31, 2019, which will be filed with the SEC in the first quarter of 2020. 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 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. 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 -- President and Chief Executive Officer

Good afternoon, and thanks for joining us today to discuss our fourth-quarter 2019 financial results. We had a good quarter. We reported revenue of $210 million and shipped approximately 2.1 million microinverters. Demand was strong for our microinverter products in Q4.

We are pleased with the pre orders for our Encharge battery, utilizing our Ensemble energy management technology and have started training installers to support the upcoming product launch. We exited the fourth quarter at approximately 37%, 12%, 25%. This means 37% gross margin, 12% operating expenses, and 25% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, we introduced our new baseline financial model of 35%, 15%, 20%, at our analyst day in December.

The baseline model represents the minimum financial performance we expect to achieve over the next 18 to 24 months, while demonstrating meaningful top-line growth. Eric will go into greater detail about our finances later in the call. Let's now talk about ease of doing business, how customers perceive us. Our Q4 Net Promoter Score was 56% in North America compared to 54% in Q3.

Our average call wait time is slightly over a minute, and we are working on several self-service initiatives to reduce call volumes. We recently opened our online Enphase Store with the objective of providing even better customer experience. Our target is to exit 2020 with an NPS score greater than 65%, a number that's considered very good in our industry. Let's talk about the impact of the coronavirus.

Our thoughts and prayers are with the people of China as they fight the virus. Our priority is to ensure the well-being of our teams, as well as our partners in China. Our contract manufacturing partner facility in China is steadily ramping back up following the Chinese New Year. The component supply chain is also ramping.

We are seeing some indications that the outbound logistics from China is constrained. Now coming to the first quarter, we are fully booked for the first quarter to the midpoint of guidance. In addition, with nearly seven weeks into the quarter, our shipments have been 100% linear to our revenue guidance. While we remain cautious and are watching the impact of the virus carefully, we do not see a big impact to the first-quarter revenue guidance at this point.

Depending on the situation with the outbound logistics, we may have to expedite some product through air ships from China, and we are getting prepared for that. We have already factored that in our revenue, as well as gross margin guidance to the extent we know. Now is a good time to talk about how Mexico is doing. We are very happy that Mexico is running well and provides us a good backup to service global demand in the event of supply disruptions elsewhere.

We manufactured more than 0.5 million IQ 7 microinverters in Mexico during Q4. Our current run rate in Mexico is a little over 50,000 units a week. We previously stated, our target is to double the capacity to 1 million microinverters per quarter by Q4 of 2020, and we are making very good progress toward that goal. I would like to acknowledge the hard work of numerous people, both on our team plus the Flex team, in order to make this happen.

Next, let's talk about safe harbor. The revenue related to safe harbor shipments was $36.4 million in Q4, an increase from $8 million in Q3. For Q1, we plan to recognize the revenue of $44.5 million for ITC safe harbor shipments. I would like to highlight that only a very small number of our customers engage in safe harbor activity, and that each of these customers has an ongoing relationship with Enphase beyond safe harbor sales.

These shipments are not merely onetime purchases, and growing share in their portfolio beyond safe harbor is an area of opportunity for Enphase. Let's talk a little bit more about Q1. We all know Q1 is a seasonally soft quarter for the solar industry, with double-digit percentage declines in revenue. And it is worthwhile for us to look at how we are doing, and our base business is doing with respect to the industry.

For example, if we include safe harbor revenue from our midpoint of Q1 '20 guidance of $205 million, our base revenue only drops by 8%, which is a pretty good result considering the typical seasonality. Although we will provide formal guidance for the second quarter of 2020 in our April earnings call, I would like to provide some color today. There will obviously be no safe harbor sales in Q2. Our bookings for Q2 look pretty healthy right now, considering where we are.

We expect a nice uptick in our base business for Q2 commensurate with the industry seasonality. We also expect Q2 to benefit from a full quarter of Encharge battery sales. As I said before, the pre orders for Encharge remain very healthy, and our installer training is already under way. Obviously, whatever we are saying with respect to Q2 is based on our current understanding of the coronavirus situation.

Let's move on to the regions. The U.S. and international mix for Q4 was 92% and 8%, respectively, excluding safe harbor revenue. The result is an obvious indication of strength of our North American business.

Our U.S. mix as a percentage is probably going to remain high for a few more quarters with the introduction of Ensemble in North America. Nevertheless, we are putting a lot of effort to grow our international business. You heard some updates on the analyst day, and I'm going to expand a little bit more on that now.

On Europe, we are making excellent progress. We are doing a few things that are different from before. We're pulling out all stops in order to bolster our sales force through both internal transfers and new hires. Some of those are already in place right now.

We have made several offers and expect to have the increased headcount in place in Netherlands, Belgium, France, Germany and Spain by early March. While the relationships with the distributors are very important to us, we are placing extraordinary emphasis on winning the long-tail installers by focusing on quality and customer experience. We are doing this by increasing our installer training significantly in Europe, and tracking installer visit metrics diligently. Our 2020 goal is to double the 2019 European sales, which was approximately $68 million.

Aside from our focus on the long-tail installers, our key initiatives in the region, our social housing, ACM partnerships and providing differentiated solutions, such as integrated improved solar with CREATON, which we announced last week. Let's now talk about Asia Pacific and Latin America. Both Asia Pacific and Latin America are small-sized business in our similar-sized businesses and quite small. Our business in APAC is mainly in Australia.

Just to remind you, we hired a general manager for that region in early 2019. We have the right team in place, along with the focus and the right metrics there. We are seeing very encouraging sell-through to the installers. In addition, you recently saw a press release where we partnered with the installers to support the Australian PV industry to introduce rapid shutdown as a requirement.

On top of this, Enphase's AC architecture means there is no high-voltage DC on the roof, thereby providing increased fire safety. With these initiatives, we expect this region to grow nicely in 2020. We will discuss products next. We had volume shipments of IQ 7A, our highest power product, a 349-watt AC, for SunPower, as well as other customers in the fourth quarter.

IQ 7A, like what I said, is our highest power microinverter for the residential space and pairs very well with the high-efficiency modules up to 450-watt DC in both 60- and 72-cell configuration. We're going to talk about AC module partners next. We continue to make steady progress with our AC module partners, including SunPower, Panasonic, Solaria, to mention a few. We are working to bring in a few more module partners, both in the U.S., as well as in Europe.

Enphase energized ACMs from our module partners have now been adopted by more than 740 installers in the U.S. as of this date. By the way, some of these ACMs are also available for both installers and homeowners to purchase directly from the Enphase online store. Next topic is our Encharge battery that uses Ensemble energy management technology.

The shipments for the Encharge battery are expected to begin in March of 2020. We have already started training installers. We are expecting to ramp trainings a lot over the next few months. The feedback has been really positive with very high NPS scores.

The installers clearly see Encharge as a safe, reliable and powerful option for the homeowners. However, they feel the biggest value for the homeowner is that, for the first time ever, they can easily generate energy, store energy and control energy in a single system, all completely designed by Enphase. That is the power of Ensemble. In the coming months, we will be expanding the training program beyond our Fremont headquarters to include many of our partner sites in order to increase our training throughput significantly.

In summary, we are very happy with our performance in 2019 across all fronts. We talked about our three pillars of differentiation at the analyst day: semiconductors, software, and Ensemble. This, combined with operational excellence and our scalable business model, is helping us win new customers. As we highlighted in the Analyst Day, our immediate growth driver is the Encharge battery followed by the IQ 8 solar micro inverters on the roof, then by IQ 8D for the small commercial space.

And finally, Ensemble in a box for the India off-grid markets. 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 of 2019 financial results, as well as our business outlook for the first quarter of 2020. We have provided a reconciliation of 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 2019 was $210 million, including approximately $36.4 million of safe harbor revenue.

Total revenue for the fourth quarter of 2019 increased 17% sequentially and increased 128% year over year. We shipped approximately 677 megawatts DC in the fourth quarter of 2019, an increase in megawatts this year of 16% sequentially. The megawatts shipped represented approximately 2.1 million microinverters. Non-GAAP gross margin for the fourth quarter of 2019 was 37.3%, compared to 36.2% for the third quarter of 2019.

Expedite fees are now normalized within our expected range and, therefore, did not have an abnormal impact in gross margin. Our component supply is stable, and as a result, we will no longer quantify this expense if it is within the normal course of business. Non-GAAP operating expenses were $26.1 million for the fourth quarter of 2019, compared to $25 million for the third quarter of 2019. GAAP operating expenses were $33.4 million for the fourth quarter of 2019, compared to $31 million for the third quarter of 2019.

GAAP operating expenses for the fourth quarter of 2019 included $5.6 million of stock-based compensation expenses, $545,000 of amortization expenses for acquired intangible assets, and $1.1 million of restructuring expenses. Our restructuring program was completed at the end of 2019, and at this time, we do not anticipate any further or future expenses related to restructuring. On a non-GAAP basis, income from operations was $52.3 million for the fourth quarter of 2019, compared to $40.2 million for the third quarter of 2019. On a GAAP basis, income from operations was $44.4 million for the fourth quarter of 2019.

This increase in operating income is reflective of the strong demand of our products and our focus on cost reduction and expense management. On a non-GAAP basis, net income for the fourth quarter of 2019 was $52 million, compared to $39.5 million for the third quarter of 2019. This resulted in diluted earnings per share of $0.39 for the fourth quarter of 2019, compared to $0.30 for the third quarter of 2019. GAAP net income for the fourth quarter of 2019 was $116.7 million, compared to $31.1 million for the third quarter of 2019.

This resulted in diluted earnings per share of $0.88 for the fourth quarter of 2019, compared to $0.23 for the third quarter of 2019. GAAP earnings per share for the fourth quarter of 2019 includes a $0.54 noncash benefit from the release of our valuation allowance against deferred tax assets that we highlighted on the Q3 2019 earnings call. I will address taxes shortly. The strong financial results for the fourth quarter of 2019 represent the fifth consecutive quarter of cash generation and GAAP profitability.

I would also like to highlight the significant milestone of achieving the first full year of GAAP profitability in the company's history. Now turning to the balance sheet. Inventory was $32.1 million at the end of Q4 2019, compared to $30.2 million at the end of Q3 2019. We exited the fourth quarter of 2019 with a total cash balance of $296.1 million, including restricted cash, compared to $203 million for the third quarter of 2019 and $106.2 million for the fourth quarter of 2018.

The restricted cash balance relates to first-quarter 2020 safe harbor deliveries. We expect the restriction to be lifted at the end of April 2020 and for all cash to be unrestricted by then. The cash balance benefited from prepayments of $49.9 million for safe harbor deliveries in Q1 2020, of which $5.4 million relate to products with deferred revenue component such as Envoy and Enlighten. Revenue from these products is deferred and recognized as revenue over the respective useful life.

As a result, our safe harbor revenue guidance of $44.5 million for the first quarter of 2020 differs from the prepayments we have received. We generated $102.3 million in cash flow from operations and $94.9 million in adjusted free cash flow for the fourth quarter of 2019. For calendar-year 2019, we generated $124.3 million of adjusted free cash flow. Capital expenditures were $7.4 million for Q4 2019, mainly to ramp up our microinverter supply capacity in Mexico and Encharge battery capacity in China.

Now let's discuss our outlook for the first quarter of 2020. We expect our revenue for the first quarter of 2020 to be within a range of $200 million to $210 million, including $44.5 million of revenue for ITC safe harbor shipments. Turning to margins, we expect GAAP and non-GAAP gross margin to be within a range of 36% to 39%. We expect our GAAP operating expenses to be within a range of $35 million to $37 million, including a total of approximately $7 million estimated for stock-based compensation expenses and acquisition-related amortization.

We expect non-GAAP operating expenses to be within a range of $28 million to $30 million. The sequential increase is primarily related to greater spending on R&D to support new products, as well as increasing sales headcount in Europe. In general, our operating expenses are expected to be in line or lower than our baseline financial model of 15% of revenue. Before wrapping up, let me address taxes.

During the fourth quarter, we released our valuation allowance against deferred tax asset based on our recent history of profitability that is forecast to persist. This will result in a GAAP tax benefit. We will now be subject to a 26% to 28% GAAP tax rate in 2020, inclusive of federal, state and international taxes. Cash taxes are expected to deviate materially from GAAP taxes as we have federal net operating loss carryforwards of $147.4 million, federal reserve credits of $12.4 million, state net operating loss carryforwards of $97.6 million and state research credits of $11.3 million.

Until we fully utilize these NOLs and research credit, most of the cash taxes will only relate to income from international operations, which represents the minority of our business. With that, I will now open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Brian Lee with Goldman Sachs. You may proceed with your question.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Thanks for the for the questions, and congrats on the strong quarter. I guess maybe first question on the Q1 guidance, the safe harbor revenue, appreciate all the granularity you're providing around the dollar figures. Can you also give us a sense of what the customer mix looks like? I know in Q4, you had specifically called out the one customer, Sunrun.

Is it the same customer in Q1? Is it a totally different customer in Q1? And if it's a different customer, are there multiple customers? That would be the first question I have.

Badri Kothandaraman -- President and Chief Executive Officer

It is a different customer. In fact, there are multiple customers, yes, for the safe harbor amount of $44.5 million.

Raghu Belur -- Chief Products Officer

OK. And Bardir, it's safe to assume that all tier 1 installers, as you mentioned during your prepared remarks, there's only a handful of companies that can do the safe harbor.

Badri Kothandaraman -- President and Chief Executive Officer

Yes.

Brian Lee -- Goldman Sachs -- Analyst

OK. Fair enough. That's helpful. And then I guess I don't want you to -- I don't want to corner you into giving more guidance than you're willing to provide, but you did try to provide us a little bit of sense around Q2.

So when I look back at Q2 revenue trends, historically, there's been about an average of 30%, give or take, sequential revenue growth and also a similar range for volumes. If I look back through the model dating all the way back to the 2010s, I know a lot has changed over the period. But is that the type of seasonality we should expect in Q2 this year as well, based on your comments around healthy bookings and seasonality on core revenues, again, assuming no safe harbor and then no incremental coronavirus impact being the base cases? Just wondering if that's sort of the read we should be taking away from your comments.

Badri Kothandaraman -- President and Chief Executive Officer

Yes. I mean, that's a good question. As you correctly said, Q2 is quite seasonally strong. Whether the number is 20% or 30%, it's hard for us to say at this point in time, but in general, we expect to outperform the industry seasonality.

Brian Lee -- Goldman Sachs -- Analyst

All right. And then maybe last one, if I could squeeze it in, just around the Encharge. It's encouraging to hear you guys are on schedule for the shipments in Q1. One of your peers who also has a new product in the market, just last week, Generac announced that they're raising their target for shipments by 50% versus their original view.

Any thoughts around kind of the market makeup as you're seeing early traction on preorders and also shift to March and just in the context of your 5% attach rate? Is there potentially some upside as you move through the year given how the market is developing?

Badri Kothandaraman -- President and Chief Executive Officer

Yes. I mean, look, we are extremely excited by our product. In fact, Encharge is running well at all three of our houses: my house, Eric's house, Raghu's house. We are all running.

In fact, I went off-grid this morning for about eight hours. So we are really happy with the performance of Encharge so far. And of course, it's time for us to bring to the market. If you really step back and think about it, why installers like our solution a lot, and this is what the installers told us, it's the all-in-one solar and storage system seamless experience for the homeowner, one number to call, very high quality, very high customer experience, safe AC architecture, all controlled by Ensemble energy management technology.

That's our value proposition. And we're sticking to our value proposition. There is obviously a lot of competition, a lot of noise in the market, but I think our value proposition is quite difficult to compete against. Many people are coming.

We will see them in the marketplace. You know, that's all I can say right now.

Brian Lee -- Goldman Sachs -- Analyst

OK. Thanks, guys.

Operator

Our next question comes from Mark Strouse with JP Morgan. You may proceed with your question.

Mark Strouse -- J.P. Morgan -- Analyst

Yeah. Thank you very much for taking our questions. Badri, I just wanted to go back to the comment that you made about the impact from coronavirus and what's included and what's not. I believe you said it's possible there could be some expedited shipping fees.

Is that included or excluded from the 36% to 39% guidance that you've given?

Badri Kothandaraman -- President and Chief Executive Officer

We have already included that in the guidance we gave you.

Mark Strouse -- J.P. Morgan -- Analyst

OK. Thank you. And then you've been talking about expedited shipping fees for several quarters now. Excluding the wildcard from coronavirus, can you just give an update there? Are you tracking expectations having your capacity be above expected demand?

Badri Kothandaraman -- President and Chief Executive Officer

Yes. I mean, look, we used to have expedite charges of more than 200 basis points before. That situation has changed. We are now normalized with respect to expedite.

It's really in the noise. Of course, due to coronavirus, we have planned a little bit more than usual, but that's already factored in the guidance. And going forward, if the situation normalizes with respect to coronavirus, we will expedite. It's going to become noise.

It's not going to be significant for us.

Mark Strouse -- J.P. Morgan -- Analyst

OK. Thak you. And then just one quick follow-up for Eric. Starting next quarter, with the Encharge starting to ship in March, how should we think about the -- any metrics that you're going to give around those shipments or those revenue beginning in 1Q?

Eric Branderiz -- Chief Financial Officer

Yeah. So we are considering the possibility that starting in Q3, we may start providing breakout on revenue. We haven't made the final decision yet. There are external reporting considerations.

But we understand that when this becomes meaningful or part of our ramp, it will create a little bit of a problem for you folks to be able to model it. So we are very sensitive to that, and we will address it when we have more visibility into how that will work out for external reporting.

Mark Strouse -- J.P. Morgan -- Analyst

OK. Very helpful. Thank you.

Eric Branderiz -- Chief Financial Officer

You're welcome. Thank you.

Operator

Thank you. Our next question comes from Maheep Mandloi from Credit Suisse. You may proceed with your question.

Maheep Mandloi -- Credit Suisse -- Analyst

Hi. Good evening. Thanks for taking the questions, and congratulations on the strong quarter. Maybe just on the other product launches you just mentioned on the analyst day, the IQ 8 and IQ 8D.

Could you probably just talk about how you're thinking about the rollout of those products, specifically given the supply chain disturbances in China, if any?

Badri Kothandaraman -- President and Chief Executive Officer

Yeah. I mean, for those, basically, we are thinking about the second half of the year. The rough order would be the IQ 8 microinverters on the roof would be the first, followed by the commercial microinverters, followed by the Ensemble in a box.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. And just probably going back to the Encharge. Could you just talk about, like, how much should we expect from Encharge in Q1 specifically? Or is it mostly a Q2 number?

Badri Kothandaraman -- President and Chief Executive Officer

We'll have small shipments of Encharge in Q2 -- I mean, in Q1, but nothing significant in terms of revenue. Q2 will have one full quarter of Encharge. Yes, and we expect that to be nice.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. And just lastly, on taxes, Eric, I just wanted to make sure we understood that correctly. So from a tax perspective, it's minimal cash taxes and like a standard GAAP tax rate in line with the U.S. corporate tax rates.

Is that a fair statement?

Eric Branderiz -- Chief Financial Officer

Yes, you got it. So think about $59 million of cash savings for the monetization of the NOL and tax credits, right? That's from a cash. And from P&L, we give you all the data to be able to model on a non-GAAP basis. When those are exhausted, we flip, GAAP and non-GAAP will be the same.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. Great. Thanks for taking the questions.

Eric Branderiz -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Colin Rusch with Oppenheimer. You may proceed with your question.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much. Can you guys talk a little bit about the growth in Europe, how effective you've been in being able to build out the sales team and how much of the 1Q guide is expected to come out of non-North American sales?

Badri Kothandaraman -- President and Chief Executive Officer

Yeah. I mean, we don't really break out the exact numbers for Europe, but I did give you some color this time on the total revenue for 2019 was $68 million. Our plan is to double it in 2020 to go to $136 million. And like what I told you, we have not been happy with our progress in Europe, but that has changed.

Now we are actually doing very well. We have hired already a bunch of sales guys in place. We have internal transfers from the U.S. already in place, they've already started.

And so I would say in terms of head count, approximately five salespeople was the number we had in 2019, and that number will triple as we get toward March and April, so we are tripling our sales headcount in Europe. We are focusing on the right regions. Our sales guy in Germany already started. He is driving the collaboration with CREATON.

We've already hired the guys for Spain. And we are doubling down on Netherlands, our most important area. We're also going to double down on France, where we have a very high market share already. Yes.

I mean, it's a good story right now. We are very confident that we're going to make progress. We are very confident of start seeing an uptick in revenue as early as Q1.

Colin Rusch -- Oppenheimer -- Analyst

Great. And then as you think about the battery supply chain and your cost structure there, how should we think about the cadence of cost reduction? I'm assuming that you're going to go through a series of costs, that's if you get to higher volumes. But just trying to get a sense of what the order of magnitude is on that and how quickly we might get to some of those cost breaks.

Badri Kothandaraman -- President and Chief Executive Officer

Yes. Like what I told you guys in the analyst day, cost reduction is embedded in our DNA. That's what I call is operational excellence. We look at all kinds of costs.

If I look at microinverter costs, I look at the transformer cost, defect cost, the connector costs, for example, the connector, yes, I can talk about that for hours. So we have a DC connector in our microinverter. Today, we have an adapter cable that converts the connection from the panel into a proprietary connector on the microinverter. We are going to eliminate that adapter cable by building the, what is called as an nc4 light connector on the microinverter.

That alone will save us roughly $2 to $3. But that's going to take some time. It's going to take some time. It's going to be done over multiple quarters.

That's just an example of one. We're focusing on transformers. We are focusing on always on sourcing the right AC sets. We're always working on combinations where we can integrate more components into our ASIC.

So that's on the microinverter. On the accessories, gateway is an entire exercise. Our Envoy is -- we're spending a lot of hours trying to take cost out of the Envoy, the same effort on the cable, and we'll apply the same diligence to Encharge going forward, so that's where you see our gross margins kind of sequentially going up. If you see the Q4 number, our Q3 number was 36%, Q4 '19, we did around 37%.

We are guiding 36% to 39% for Q1. So we are getting more and more -- executing well on the cost reduction.

Colin Rusch -- Oppenheimer -- Analyst

Thanks, guys.

Badri Kothandaraman -- President and Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. Our next question comes from Jeff Osborne with Cowen & Company. You may proceed with your question.

Jeff Osborne -- Cowen and Company -- Analyst

Good afternoon. Just a couple of questions on my end. I was wondering if -- I know I've asked you this in the past, Badri, but if you just confirm that with Encharge, the launch of that, the margin profile would be consistent with the corporate average. Or how do we -- I think Colin was trying to ask about that as well.

Is the initial phases of the launch pressuring margins in Q2 and Q3, and then as you take cost out, we'll come back to the targeted range?

Badri Kothandaraman -- President and Chief Executive Officer

No, it's not going to compress our margins. It's going to be right in line with our model.

Jeff Osborne -- Cowen and Company -- Analyst

Great. That's great to hear. And then can you just talk about IQ 8's introduction for solar-only deployments? Is that still targeted for Q2, Q3? So I know it's in the Encharge solution, but how do we think about it -- if somebody doesn't want storage, when will that be available?

Badri Kothandaraman -- President and Chief Executive Officer

Right. So as I said, it's in the second half of 2020, and yes, it's almost ready. And basically, as you rightly pointed out, it's already available inside the Encharge, but of course, we have to do a lot more work with a lot of flavors in IQ 8, which is IQ 8, IQ 8+, the IQ 8X, the IQ 8A. And then the real effort is to make sure that the gateway talks the same language as IQ 8 and ensuring that we do all the due diligence on quality on the various flavors.

So we might do it earlier if things go better. But for now, I'm not giving a quarter, but I'm saying generically, second half of 2020.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. And the last one I had, either for yourself, Badri or Eric. Just how do we think about the second half as your Mexico capacity ramps up to the $1 million a quarter target and what the implications are for pricing as you sort of reverse the higher prices that you had experienced in 2019 because of the tariff? Fully recognizing it doesn't impact the gross margins, but just -- it would be important for modeling as we think about ASPs per watt.

Badri Kothandaraman -- President and Chief Executive Officer

Like what I said, if you think about gross margin, gross margin is a combination of pricing and cost. We are continuously improving our cost. In terms of pricing, right now, the pricing environment is very stable. But of course, we always model 1% to 2% price reductions every quarter.

That's what we do.

Jeff Osborne -- Cowen and Company -- Analyst

Got it. Thank you.

Badri Kothandaraman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Philip Shen with ROTH Capital Partners. You may proceed with your question.

Philip Shen -- ROTH Capital Partners -- Analyst

Hey, guys, thanks for the questions. First one is on the coronavirus situation. I was just wondering if you could give us a little more color on what's happening on the ground there in your facility. So specifically, what kind of capacity utilization have you been running through this tough time? And then how do you expect that to trend in the coming weeks? And then what kind of potential impact do you think you could see in Q2? And then finally, do you source any critical components from Hubei province, specifically?

Badri Kothandaraman -- President and Chief Executive Officer

Right. So just to give you a quick thing, we make all our microinverters at Flex Fuyong, that's about 12-hours drive from Wuhan. We have done our homework in terms of raw materials, the supplier of the raw materials, etc. Most of our raw material suppliers are in Suzhou and Hangzhou, which are also a little bit away from Wuhan.

From our diligence checks, our raw materials, they aren't affected. And so if I were to think about the entire situation in terms of priority, I would think the following. Number one, is labor back in full force or not? The labor in our Flex factory is roughly about -- I would say because of the reduced labor, our throughput is roughly 50% of the full capacity, which is still pretty good for us. And then the second priority or the second constraint that we think about is logistics.

We hear that the outbound logistics from China is getting difficult. And so we are always watching our -- we are paying attention to that. The third is the raw materials that you pointed out, which we've done the homework. We think we are good there.

The fourth is, obviously, we are doing this conference call so late, seven weeks into the quarter. If the revenue guidance for the quarter is X, we have already shipped seven over 13 times X right now. That's what I mean by I am 100% linear. We have already shipped that revenue, seven over 13 multiplied by X is what we have shipped.

The last one is Guad. Guad is doing over 50,000 units a week. And of course, Guad depends on the raw material from China. And so there's always risk there, but we feel pretty good about that guidance right now.

We have factored all of this situation in both revenue, as well as gross margin guidance. And considering that we -- one of the data point is we are fully booked to the guidance that we gave you. We are fully booked. We're 100% linear.

We've done the homework in terms of raw materials. We are paying extraordinary attention to logistics, and so at this time, we feel pretty good. If situation materially changes because of something that we don't know, then we'll come back to you, but that's what we know now.

Philip Shen -- ROTH Capital Partners -- Analyst

OK. But as it relates to Q2, I know you haven't provided official guidance. You talked to Brian about seasonality kind of being in line to slightly better than historical or something like that. What is the risk to Q2? Obviously, you've already shipped for Q1.

So the question is, what's your view on how -- let's say, the current situation remains at this level, 50% of full capacity. How does that impact what you can deliver on Q2?

Badri Kothandaraman -- President and Chief Executive Officer

In the current situation -- I mean, if the situation remains the same, we'll be -- I don't think we'll be in -- and I don't think we'll have a problem for Q2 if it remains the same. The reason is, of course, we are making good progress in Mexico. That's starting to take the burden more and more. We are keeping a close eye on the raw materials.

So all things being equal, if it were exactly the same in a few days from now when Q2 is beginning, I'm still pretty optimistic about Q2. But realize that things can change by the day, so that's all I can tell you right now, Phil.

Philip Shen -- ROTH Capital Partners -- Analyst

OK. Great. No, that's very helpful. Shifting gears to pricing, I know you talked about that briefly.

But historically, you guys have talked about, as you ship away from China and from Mexico, that you'd pass along that pricing to customers. Earlier, call it a few months ago, you were talking about maybe a price cut starting April 1 to pass that on to customers. It seems like in our recent checks with customers that you're not necessarily getting -- you haven't been actively talking about that. What's your view on a potential for price reduction? And at what point in time would you expect that to possibly happen?

Badri Kothandaraman -- President and Chief Executive Officer

Right. Just so we are clear, when the supply chain right now is in turbulence due to the coronavirus, other suppliers are thinking about raising the prices. We are not. We basically value our customers this time.

We think that they've already taken a lot of burden on the tariffs, so we are not planning to raise prices. And it is not prudent for us to also drop prices without understanding the situation on the supply chain due to the virus. So if things stabilize, we will do exactly what I said, which is basically depending upon the percentage of manufacturing in Guad versus China. For North American shipments, we will basically reduce prices to that level, OK? And that will happen sometime in Q3 if the situation gets stable in terms of the coronavirus.

If not, you know, we've got to wait and watch.

Operator

Our next question comes from Brad Meikle with Williams Trading. You may proceed with your question.

Brad Meikle -- Williams Trading -- Analyst

Hi, guys, thanks for the question. So your U.S. business grew 137% year to year in 2019. So can you give us some detail in terms of the level of inventories in the channel today versus a year ago, so we can understand how much market share change that is? Because other checks are indicating that SolarEdge inventories are a lot higher in the channel than they were a year ago.

And I know you get POS data on your inventory in the channel. So can you add any color on that, please?

Badri Kothandaraman -- President and Chief Executive Officer

Yes. We think the reasonable level of inventories to have is usually eight to 10 weeks, and we try to maintain our channel inventory between eight to 10 weeks, like what I pointed out in the last earnings call. But what you said is right. We have grown a lot in the last year, mainly the growth is because of our IQ 7 product, fantastic product.

It's due to quality. It's due to customer experience. We have made a lot of announcements with tier 1s. We have made a lot of announcements with the long-tail installers.

We recently signed up Petersen-Dean and Sunrun as well. Things look good there. So as long as we don't take our eye off the ball in terms of customer experience, I believe we will continue to take share.

Brad Meikle -- Williams Trading -- Analyst

Can you quantify at all what that market share is today in U.S. residential versus a year ago?

Badri Kothandaraman -- President and Chief Executive Officer

I mean, we don't really track -- we don't really think market share. We control the inputs, but we don't really track the output. So it would be -- I don't know the number, and I'm not going to give out a number that I'm not standing by. OK?

Brad Meikle -- Williams Trading -- Analyst

Thanks. Yes, I mean, that's obviously a big number given that the market is growing at 25% and you grew at 137% without much inventory growth. So what about stores? Can you add any more color on the beta installs, however many 500, 800 that have been done, what your feedback has been from the customers? Have you gotten follow-on orders? It sounds like April is when production volumes really start up. Can you give us a sense for -- I know there was a day and a half training required for installer.

Can you give us some level of understanding of what the ramp-up might be, just kind of how -- I know it's a new business, but what does it seem like at this point?

Badri Kothandaraman -- President and Chief Executive Officer

Yes. Just to get our terminologies straight, right now, we are doing what are called as alphas. Alphas are basically near and dear people -- is what we are doing. And like what I said, so Eric's house, my house, Raghu's house are all running full Ensemble.

And that's what we have done. So we are giving feedback to the team. There aren't any major issues. There are always minor, in our teething issues that are there in this.

Now coming to the second thing is the training, the training of installers. We have trained all our beta installers, so they are what we call as the ambassadors that we trained in the first round. So we have trained about 70 installer personnel and 22 installation companies. These form our beta network.

And essentially, in the first week of March, they will start installing -- or in the second week of March, they will start installing beta systems, and we are going to get further feedback from that. By that time, our compliance will also be done. And so we'll be in a very good position in order to ship the product. But in terms of the performance of the product, we are actually exercising it.

Like in my house, like what I said this morning, I was off grid for about six hours, and everything was fine. And I didn't even -- someone had flipped my app to go from on-grid to off-grid, so we can enter it through the app. And they were doing a test on my house, and I didn't even know that I was off grid. That's a big deal.

If I can make that customer experience seamless, it's all going to be that. We can make that customer experience seamless, I think, so there is a lot of upside here.

Brad Meikle -- Williams Trading -- Analyst

Thank you.

Operator

Our next question comes from Jeffrey Campbell with Tuohy Brothers. You may proceed with your question.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Good afternoon, and congratulations on the strong quarter. Badri, at the analyst day, it was said that other than possibly the price that DC can't compete with Enphase, and that's what had me thinking about the IQ 8D and the small commercial solar. Just thinking, even with a higher unit ASP, the IQ 8D reduction in components should see system costs come down relative to the IQ 7. So is it fair to think of it that way? And could the IQ 8D be the first Enphase macro that will benefit from quality service and cost competitiveness?

Badri Kothandaraman -- President and Chief Executive Officer

Well, yes, but it's not because of the reason you said. Our architecture is a scalable architecture, fully resonant architecture, so we are able to -- what we told you at the analyst day is that the power density for our product is 50% higher for IQ 8D than IQ 8, which means we are able to pack a lot more power in the same form factor. And of course, that translates into cost. So of course, we are going to be competitive, but we do not price on cost.

We price on value. What is the differentiation with respect to our next best alternative, we'll have to look at what is in the competition and what value are we specifically providing. Is it higher quality? Is it better customer experience? Is it better installation, less labor? All of those factors need to be looked at, and then we will price our products.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

OK. Well, that's very helpful. And then I also want to ask about the CREATON partnership that you sent a press release out on recently. It looks like it's a large operation.

There's eight factories, but I have no sense of how large the clay tile rooftop market is or CREATON's place in that market. So some color there would be helpful. And I also wondered if the installer relationships in Enphase will build through CREATON, can go beyond clay tile installation.

Badri Kothandaraman -- President and Chief Executive Officer

Yes. The idea is very neat, right? If you basically have in-roof solar and you do it for new homes, you would think that it can -- yes, it basically can catch on like wildfire, right? But this is an entirely brand-new market. We have not seen it take off. I expect it will be a slow and steady growth because we are introducing it in a mature country like Germany.

And Germany is very strict on quality, is very strict on customer experience. They wouldn't ramp something as fast. It's going to be in a measured way, but the advantages are very, very clear. It's an AC roof.

It basically standardizes everything, and it will reduce the cost of an installation. By definition, the modules are built in the factory, including the microinverters, so quality is going to be very high. And it's, all in all, a good experience for the installer, so the installers, obviously, they want it. But yes, at this point, it's too early for us to talk about the ramp.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Thank you.

Operator

Our next question comes from Eric Stine with Craig-Hallum. You may proceed with your question.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Hi, everyone. A few quick questions here at the end. Maybe just on tier 1 customers. I know a couple of years back that you took the action to kind of step away there and, late last year, picked up Sunrun.

These new safe harbor customers that you referenced, just curious what kind of contribution you expect from those customers as they come back in 2020? Is it meaningful in 2020 and more of a 2021 event? Or do you expect that it could impact 2020 nicely?

Badri Kothandaraman -- President and Chief Executive Officer

Yes, we did the safe harbor with Sunrun in Q4, and we are doing safe harbor in Q1 with a couple of customers who are not new, who are our existing customers. The answer to your question is we expect them to use a lot of the safe harbor material, but that doesn't mean that they wouldn't place additional orders in the quarters. Of course, the orders will be in the reduced magnitude, but I think they'll still be sizable. That's what I think.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

OK. Got it. And maybe last one for me. I know it's early here in the new year, but the new home mandate in California, whether you're starting to see an impact or how maybe your view has changed or starting to become more clear.

And then just curious, I mean, do you have in mind kind of a share of that market since you're partnered with SunPower and the Petersen-Dean relationship?

Badri Kothandaraman -- President and Chief Executive Officer

I mean, it's one where, here, I have to rely on our partners, like SunPower, like Petersen-Dean, like Lennar Homes. These are our partners. They are our front-end to the homeowners -- I mean, to the home builders. And so we expect to do really well because of our partnership with SunPower here, and our partnership with Petersen-Dean.

And like our solution, imagine a house being fitted with -- like, for example, in the case of Petersen-Dean case, imagine a house being fitted with an all-in-one solar and storage system with the beautiful Encharge and the Enphase solar system. That's going to be an amazing customer experience for them.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Got it. So this is -- I mean, some things -- I mean, it hasn't changed either way? You still think it's a big opportunity and maybe still too early to tell the magnitude?

Badri Kothandaraman -- President and Chief Executive Officer

Absolutely. I mean, it's a nice opportunity for us. We are ideally placed because many of these will be small systems. And in these small systems -- and the whole point of microinverters is, I can do small systems very easily.

Whole point of Encharge is, I can do modularity, flexibility, very easily. I can do 3.3-kilowatt hour, 6.6, 9.9 or 10-kilowatt hour. Yes. And I can add chunks later depending upon the customer's need.

For example, Raghu has got a 10-kilowatt hour system. He wants to add two more 3.3s. I have a 16.8-kilowatt hour system. Eric has got a 20-kilowatt hour system.

So each of us are different. And the modularity really helps us to fine-tune exactly what we want.

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Thanks.

Badri Kothandaraman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Sameer Joshi with H.C. Wainright. You may proceed with your question.

Sameer Joshi -- H.C. Wainwright -- Analyst

Yeah. Good afternoon. Thanks for taking my questions. What are the products that are being pushed in Europe? Are they IQ 7 and 7+-based, or are you pushing for IQ 8 as well there?

Badri Kothandaraman -- President and Chief Executive Officer

Most of Europe right now today is 72-cell -- yes, 72-cell modules, I believe. And so that's basically IQ 7+ and IQ 7 are the predominant sales in Europe.

Sameer Joshi -- H.C. Wainwright -- Analyst

OK. Coming to the safe harbor sales, are the gross margins similar -- is the gross margin profile similar for safe harbor versus non-safe harbor sales?

Badri Kothandaraman -- President and Chief Executive Officer

Well, since we are actually shipping to tier 1, the gross margins themselves are a little bit lower. But as you can see, we have made extraordinary improvements in gross margin. So you can see, despite our huge shipments, our safe harbor in Q4, our gross margin increased from Q3 to Q4.

Eric Branderiz -- Chief Financial Officer

Same with the midpoint of the guidance for Q1, right? You've got a referencing point there, either the low end or high end of the range or in all cases.

Badri Kothandaraman -- President and Chief Executive Officer

Yes. In all cases, it's pretty healthy.

Sameer Joshi -- H.C. Wainwright -- Analyst

Understood. Moving down the operating expenses, the G&A costs or rather overall opex costs that have been guided for 1Q, are they representative of the rest of the year? Or do they have -- does the first quarter have some extra stock-based comp?

Eric Branderiz -- Chief Financial Officer

Yeah. So most of the infrastructure investment that we need to make for the headquarters, many of the IT improvements that we need to do actually will hit opex. So what I will say is that we provided the guidelines of 15% of revenue, and our view is that the way you guys, who model it, is by taking down one as your kind of baseline, and then it could be a little bit better than that. But for the most part, you should consider that to be an investment line through R&D increases, a little bit of the sales in Europe and some of the IT infrastructure, security, things that we need to do as a company.

That in the old days, those used to be capex. Most of the subscription-based or license-based IT investment that we need to make are now here in the P&L, so that's the way we're going to be subsidizing through the P&L in the form of investment in our infrastructure growth and supporting the growth.

Sameer Joshi -- H.C. Wainwright -- Analyst

Understood. And just maybe one last one. Clarification on the ASP per units per inverter. If I do a back-of-envelope calculation based on your revenues and total number of units sold, it seems that the ASP has actually reduced over the last several quarters.

I know it is not an accurate way of looking at it, but is this trend expected to continue?

Badri Kothandaraman -- President and Chief Executive Officer

No. I mean, it's not an accurate way of looking at it. It basically depends -- the way you look at it, your calculation, take revenue, overall revenue, divide it by the number of microinverters is not the real story because, for example, if we do ship our AC batteries, which are a first-generation battery, each of them has got an ASP of $1,000. So we've not break in those.

But your calculation includes those. If we ship a lot of cables, for example, if we ship a disproportionate amount of cables, the overall revenue will actually come down. If you ship -- I mean, the overall ASP will actually come down. So it's heavily dependent on mix.

But what I can tell you is this, we pay very close attention on what we call as customer variant. Then we reduce price at a specific customer and calculate that. And we rolled that up, and those numbers are actually very, very less. So there's really -- pricing is very healthy, pricing is flat.

And except for what I talked about in terms of the Guad transition, we don't see many changes to pricing.

Eric Branderiz -- Chief Financial Officer

We feel it's good for them to model some price erosion on their models, right? We always recommend that, right?

Badri Kothandaraman -- President and Chief Executive Officer

We always model 1% to 2% for our modeling, so that's the right way to think about it.

Eric Branderiz -- Chief Financial Officer

And it will get a little bit more complicated with Ensemble coming on board, right? So we will provide some help, hopefully, for you guys to model when the meaningful revenue of Ensemble starts to become more clear, right?

Badri Kothandaraman -- President and Chief Executive Officer

Yeah.

Sameer Joshi -- H.C. Wainwright -- Analyst

Thank you.

Operator

Our next question comes from Pavel Molchanov with Raymond James. You may proceed with your question.

Pavel Molchanov -- Raymond James -- Analyst

Thanks for taking the question. In its midterm review, the International Trade Commission talked about potentially adjusting or even setting aside the Section 201 tariff. As it relates to the AC module relationships you have, is there any read through depending on what the decision will be?

Badri Kothandaraman -- President and Chief Executive Officer

No, I think there was a lot of discussion about it, but we have not heard any more discussion on the unburned volume that is going away. And we also know that there's exclusions there. So I don't believe that that's in play right now.

Eric Branderiz -- Chief Financial Officer

Most of our volume business with SunPower is already excluded.

Pavel Molchanov -- Raymond James -- Analyst

Understood. And you've already asked about one of the new entrants, Generac. If I may, let me ask about another one, LG. Can you confirm whether LG is currently a customer for your microinverter as a component to LG's integrated module product?

Badri Kothandaraman -- President and Chief Executive Officer

No, they are not a customer.

Pavel Molchanov -- Raymond James -- Analyst

OK. Thank you very much.

Operator

Thank you. And that concludes our Q&A session. I would now like to turn the call back over to Badri Kothandaraman for any further remarks.

Badri Kothandaraman -- President and Chief Executive Officer

So thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again during our Q1 2020 earnings call in April. OK. Thank you.

Operator

[Operator signoff]

Duration: 66 minutes

Call participants:

Adam Hinckley -- Senior Director, Investor Relations, M&A, and Government Relations

Badri Kothandaraman -- President and Chief Executive Officer

Eric Branderiz -- Chief Financial Officer

Brian Lee -- Goldman Sachs -- Analyst

Raghu Belur -- Chief Products Officer

Mark Strouse -- J.P. Morgan -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

Jeff Osborne -- Cowen and Company -- Analyst

Philip Shen -- ROTH Capital Partners -- Analyst

Brad Meikle -- Williams Trading -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Eric Stine -- Craig-Hallum Capital Group LLC -- Analyst

Sameer Joshi -- H.C. Wainwright -- Analyst

Pavel Molchanov -- Raymond James -- Analyst

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