Enphase Energy's (ENPH) CEO Paul Nahi on Q4 2015 Results - Earnings Call Transcript

| About: Enphase Energy (ENPH)

Enphase Energy, Inc. (NASDAQ:ENPH)

Q4 2015 Earnings Conference Call

February 23, 2016 4:30 PM ET

Executives

Christina Carrabino - Investor Relations

Paul Nahi - President and Chief Executive Officer

Kris Sennesael - Chief Financial Officer

Analysts

Edwin Mok - Needham & Company, LLC

Michael Morosi - Avondale Partners, LLC

Jeffrey Osborne - Cowen and Company

Noah Kaye - Oppenheimer & Co. Inc.

Philip Shen - ROTH Capital Partners

Hank Elder - Goldman Sachs

Pavel Molchanov - Raymond James & Associates

Operator

Good day, ladies and gentlemen. And welcome to Enphase Energy’s Fourth Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Ms. Christina Carrabino. Ma’am, please begin.

Christina Carrabino

Thank you. Good afternoon and thank you for joining us on today’s conference call to discuss Enphase Energy’s fourth quarter and year ended 2015 results. This call is also being broadcast live over the web and can be accessed in the Investors section of Enphase Energy’s website at www.enphase.com.

On today’s call are Paul Nahi, Enphase Energy’s President and Chief Executive Officer; and Kris Sennesael, Chief Financial Officer. After the market close today, Enphase issued a press release announcing the results for its fourth quarter and year ended December 31, 2015. We are providing an accompanying presentation with our earnings call that you can access in the Investors section of our company’s website.

During the course of this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy’s financial performance, market demands for its microinverters and future products, advantages of its technology and market trends. These forward-looking statements are based on the company’s current expectations and inherently involve significant risks and uncertainties. Enphase Energy’s actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties.

Factors that could cause results to be different from these statements include factors the company described in its press release of today, especially under the section entitled Forward-Looking Statements, as well as those detailed in the section entitled Risk Factors of the company’s report on Form 10-Q for the quarter ended September 30, 2015.

Additional information will also be set forth in those sections in Enphase Energy’s annual report on Form 10-K for the year ended December 31, 2015, which will be filed with the SEC in the first quarter of 2016. Copies of these documents may be obtained from the SEC or by visiting the Investors section of the company’s website.

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

Now, I’d like to introduce Paul Nahi, President and Chief Executive Officer of Enphase Energy. Paul?

Paul Nahi

Good afternoon. Thanks for joining us today to discuss our fourth quarter and year-end 2015 financial results. We reported revenue of $65.6 million for the fourth quarter of 2015. As we discussed during last quarter’s earning call, our fourth quarter revenue was impacted by a reduction of inventory in our distribution channel.

During the quarter, we significantly lowered channel inventory and ended the fourth quarter with normalized inventory levels. We reached another impressive milestone for Enphase Energy during the fourth quarter, we shipped our 10 millionth microinverter. Total Enphase systems represent more than 2.5 gigawatts of installed generating capacity, and it produced approximately 5 terawatts of clean energy.

There are currently over 430,000 Enphase systems deployed in more than 100 countries. We are very proud of these accomplishments as we move into our 10th year as a company.

During the fourth quarter of 2015, we started shipping our S family of products, the fifth generation S-Series Microinverter that comes in two power versions, the S230 and the S280. The fifth generation microinverter is the first-ever bidirectional microinverter that includes the most demanding advanced grid functions, as well as improved power conversion efficiency.

We also started shipping our new Envoy-S gateway with some exciting new features, such as consumption monitoring, revenue grade metering and cellular connectivity. In addition, we started shipping our AC Combiner Box, which is the most effective way to maximize the features and benefits of the Envoy-S, decrease installation labor time and reduce the cost of the system.

Our Installer Toolkit mobile app for smartphones and tablets makes it yet again simpler and easier to install and commission an Enphase system. 2015 was an exciting year for Enphase, although the second-half proved challenging as pricing pressure in our U.S. and international business increased, affecting our year-over-year revenue growth.

However, during the year we continued to drive technology and took big steps forward in our evolution from a microinverter systems company to an energy technology company.

We announced new partnerships with LG Electronics and SolarWorld during 2015 to develop a new generation of integrated AC solar modules for the worldwide market. There is a significant increase in demand from large solar distributors, installers and fleet owners for a reliable, cost effective and high performance AC module to reduce product and installation costs, while streamlining the supply chain.

Of course, all our new product and features are supported by Enphase’s world-class customer support and O&M services team. We also continue to leverage our cloud-based energy management system, Enlighten, and partnered with utilities such as Hawaiian Electric, helped strengthen and enhance grid quality while also illustrating the broader smart grid capabilities that Enphase can provide.

On the execution front, we’re making great progress on our cost reduction roadmap and the development of our complete Home Energy Solution. As previously discussed, we’ve adopted a more aggressive pricing strategy and are seeing its effectiveness with multiple new customer wins and an increase in share with existing customers.

Our next generation microinverter with lower cost, higher performance and new advanced features is on track for release by the end of the year. In addition, our storage solution is in trial and development is proceeding very well. The simplicity, ease of installation, modularity and performance of our AC Battery is unique in the industry.

In fact, we’ve demonstrated that 5 kilowatt hour of our AC Battery storage solution can be installed by one person in less than two hours. We believe this is the fastest install time in the entire industry.

The combination of more aggressive pricing and the introduction of our total energy solution give us great confidence in our ability to grow market share worldwide. We continue to roll out new components of our Home Energy Solution and are looking forward to launching the AC Battery storage system this summer in the Australian market followed by other regions as we see huge interests in complete energy solutions in many countries worldwide.

We’re passionate about developing new technologies that make energy more intelligent, more connected and more cost-effective than ever before. I would like to thank our entire Enphase team for the ongoing hard work, passion and dedication as we work together on bold initiatives that will change the face of energy production, storage and management.

I’ll close my comment by noting 2016 is off to a good start. We’re encouraged by the positive industry outlook and are excited about the many opportunities ahead. The total available market in the U.S. residential segment will continue to grow in 2016 and beyond, supported by the five-year extension of the federal investment tax credit as well as some favorable net metering rulings, including the recent favorable decision by the California Public Utilities Commission.

Now, I’ll turn it over to Kris for his review of our financial results.

Kris Sennesael

Thank you, Paul. I will provide some more details related to our fourth quarter and full year 2015 financial results. And then, I will provide the business outlook for the first quarter of 2016. As a reminder, the financial measures that I’m going to provide are on a non-GAAP basis unless otherwise noted.

Total revenue for the fourth quarter of 2015 was $65.6 million, in line with the business outlook we provided last quarter. Revenue during the fourth quarter of 2015 was impacted by the reduction of inventory levels in the distribution channel which have now returned to normalized levels.

We shipped 129 megawatts AC or approximately 152 megawatts DC during the fourth quarter of 2015. The megawatts shipped represented 547,000 microinverters of which 90% were our fourth generation microinverter systems.

During the fourth quarter, we began shipping our fifth generation microinverters, the S230 and the S280, which ramped up nicely and accounted for 10% of all our inverter shipments during the fourth quarter.

Gross margins for the fourth quarter of 2015 was 24.5%, also in line with the business outlook that we provided. Revenue per AC watt for the fourth quarter was $0.51, down 13% year over year, but up 9% sequentially from the third quarter. The sequential increase in revenue per watt was driven by a larger part of revenue related to our accessory products, such as the cabling system, the Envoy gateway as well as the new AC Combiner Box.

This new combiner box includes our new Envoy with revenue grade metering, other electrical components and a cellular connection. This also drove a sequential increase in cost of goods sold per watt. Operating expenses during the fourth quarter of 2015 were $27.8 million. As previously discussed in our last earnings call, we took some restructuring actions during the fourth quarter and brought down the operating expense level well below $30 million per quarter.

We made sure that we maintain the necessary resources to execute on our product cost reduction roadmap as well as our energy solution strategy. During the fourth quarter of 2015, R&D expenses were $11.2 million, sales and marketing expenses were $10.2 million and G&A expenses were $6.4 million. Total non-GAAP operating expenses excluded $3.1 million, of which $2.8 million were stock-based compensation expenses.

We reported non-GAAP operating loss of $11.7 million and a net loss of $11.5 million in the fourth quarter of 2015, resulting in a loss of $0.25 per share. On a GAAP basis, net loss for the fourth quarter of 2015 was $15.8 million or a net loss of $0.35 per share.

Turning to the balance sheet, we exited the fourth quarter of 2015 with a total cash balance of $28.5 million. At the end of the year, we had a $17 million draw on our credit facility, which was renewed and extended until November 2019 on more favorable economic terms.

Cash flow from operations in the fourth quarter was $8.1 million, mainly driven by a significant reduction in accounts receivable and despite a further increase of our internal inventory levels. We exited the year with $40.8 million in inventory. We will continue to take action to drive down days of inventory outstanding during 2016. During the fourth quarter, capital expenditures were $2.8 million, and depreciation and amortization was $2.8 million.

Now, let’s discuss some of our full year 2015 highlights. Revenue grew 4% year over year to a record level of $357.2 million. Excluding one of our largest customer, revenue increased 20% year over year. International revenue was 16% of total revenue and was up 14% year over year, driven by strong growth in Australia. We shipped a record 706 megawatts AC or approximately 830 megawatts DC, a 23% year over year increase.

Units sold in 2015 increased to 3.1 million. Again excluding one of our largest customers, megawatts shipped increased 37% year over year. Gross margin for the year was 30.6% with revenue per watt down 15% year over year and cost of goods sold per watt down 12% year over year.

Operating expenses were $115.7 million in 2015. Non-GAAP operating loss for 2015 was $6.3 million and non-GAAP net loss was $8.1 million or a net loss of $0.18 per share. GAAP net loss was $22.1 million or $0.49 per share.

In summary, 2015 was a challenging year for Enphase, but we continue to grow our revenue in megawatt shipped on a year over year basis, further driving the global adoption of the Enphase microinverter technology in our key markets, while continuing to drive technology innovation towards a complete energy solution.

Now, let’s discuss our outlook for the first quarter of 2016. We expect revenue for the first quarter of 2016 to be within a range of $63 million to $69 million. We expect gross margin to be within a range of 18% to 21%. The lower gross margin reflects our more aggressive pricing strategy. We also expect non-GAAP operating expenses for the first quarter of 2016 to be within a range of $27 million to $29 million.

Finally, before turning the call over for questions, I want to point out that on February 12, the universal shelf that was filed with the Security and Exchange Commission was declared effective. We do not have any immediate plans to use the shelf. It’s just a tool in a CFO toolbox and we believe it is good corporate housekeeping to have an effective shelf on hand.

Our current cash balance as well as the cash available through our working capital facility is sufficient to fund to grow of our business.

And now, I will open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Edwin Mok of Needham & Company. Your line is open.

Edwin Mok

Hey, guys, thanks for taking my question. First question I have is for your 1Q outlook. I guess two quick questions. First is, did you have any kind of a year-end jump in UK sales in the fourth quarter? And that - should we expect some kind of digestion in UK, and that is factored in your first quarter guidance?

And also, on the first quarter guidance I assume you factor in some price decline. So as I look at midpoint being flat, it should be implied that you expect warranty increase. Are those two correct?

Paul Nahi

So, Edwin, there was not much of a year in jump in UK for us. As you correctly note, the UK market has been severely affected by a reduction, almost elimination of the feed-in tariff. We’ve seen a slow decrease once that announcement was made throughout the end of the year in 2015, so nothing dramatic there.

And in reference to price declines, yes, we have been aggressively reducing pricing really since Q4 of 2015. So certainly that would be accounted for in the Q1 revenue.

Edwin Mok

Okay, great, great. That’s helpful. And then maybe talk beyond first quarter, just on the Gen 5 kind of a target or how do you think about Gen 5? So you mentioned on a call that 10% of your sales were your fifth generation microinverter. Any kind of - how do you kind of think about a crossover from fourth generation to fifth generation? How much time do you think we take before a market adopt more fifth and fourth generation?

And then, I think previously you guys laid out some cost reductions roadmap for fifth generation. Any update to those roadmaps?

Paul Nahi

So in reference to the last question, the cost reduction initiatives are going extremely well. The product that we will be introducing the end of this year is already in alpha testing, is up and running in the lab. We are filling very, very confident in our ability to achieve the cost reduction target, while increasing reliability, while increasing performance with that product, so increased confidence there. And increased confidence in the work we are doing for the product that will come out in 2017 as well. So the guidance we gave about 25% this year and 25% next year is well on track.

In reference to the transition from the one generation to the next, it’s a very smooth long-term transition. A lot of it is dependent on the availability of higher power modules, which is something that we really can’t predict. We don’t expect any dramatic shift at one time or the other, but just a soft transition over the next number of quarters.

Edwin Mok

Okay, great. Last question I have and I’ll let other guys ask. On the storage, you mentioned you are in trials right now already and had planned for mid-year launch. Is that mostly focused on Australia right now, regarding the trials and the plan for initial launch? Or have you started to work in auto markets as well? Any update there?

Paul Nahi

So the demand for storage is coming from pretty much every geography we’re in, whether it’s Latin America, obviously America, Europe, as well as Asia-Pacific region. We have been in very clear that we are launching initially in Australia. So by the end of this year, I expect to have products both in Europe and in the U.S. as well. So for us, it’s a matter of just managing the engineering resources we have to get the product certified and available in the new geographies.

The fundamental architecture is the same. The fundamental product is the same, just a minor of modifications and certifications necessary for the different regions.

I will take this time to point out the fact and reiterate the fact that, to our knowledge the ability to install 5 kilowatt hours of storage, not just battery, but the entire storage system by one person in under two hours is simply unprecedented. And installers and customers worldwide are clamoring for this product right now, in part because of its modularity and simplicity.

Edwin Mok

Great. That was very clear. Sorry, I missed one part of the Gen 5. I was wondering with the Gen 5 got now launched, right, does it allows you to target more European markets that historically might not - you might not have the grid connection feature that you can target?

Paul Nahi

So the answer is that our next generation product absolutely does provide some of the feature that allows us to move into more and more European countries. However, the decision to move and the decision on timing to move into new countries is not just dependent on the technical applicability, but also the application of our human resources. So we are planning to move into new geographies this year. Certainly, the new products that we are introducing will help accelerate that. But we are going to look at doing it in a way that keeps our OpEx under a very manageable level.

Edwin Mok

Great. That’s all I have. Thank you.

Paul Nahi

Thank you.

Operator

Thank you. Our next question is from Michael Morosi of Avondale Partners. Your line is open.

Michael Morosi

Hi, guys, thanks for taking the question. I guess, first of all, flat quarter over quarter in 1Q is a good result, if you look at typical seasonality of down 15% to 20%. How should we think about seasonality going forward? Is this kind of a new base of which the business might conform to more typical seasonal patterns?

Kris Sennesael

Yes, Michael. First of all, Q4 and Q1 this year are somewhat abnormal, because in Q4 we went through this inventory correction in the distribution channel. But thinking about seasonality, yes, Q1 is our softest seasonal quarter and so we do expect the business to grow sequentially in the second and third quarter. And then, the fourth quarter is kind of flat to slightly up. So we do expect the same seasonality going forward.

Michael Morosi

Okay. And then, looking at the competitive landscape and maybe even from your customer standpoint, one angle of the bear-case was always that Enphase is kind of overexposed to the Tier 2 and Tier 3 customer base. But in a lot of respect, those customers benefited the most from the ITC extension. So what are you seeing in terms of the competitive dynamics among that part of your customer base and how do you see that to evolve going forward?

Paul Nahi

So that’s actually a very good point and I would agree with you that the Tier 2s and the Tier 3s certainly do benefit tremendously from the ITC extension. And in many cases what we’ve seen that the Tier 2s and Tier 3s have, for the most part, very strong business model themselves. They are using - they have access to multiple forms of financing, and we’re seeing whether it’s a cash, whether it’s leases, whether it’s loans. And we’re seeing that segment of market grow in a very healthy manner.

So I think we’re certainly - we certainly have a great presence in the Tier 1s with the exception of one customer, Solar City. We are in every other Tier 1 and in many cases growing sharing those Tier 1s. At the same time to your point, the simplicity of an Enphase system, the ease of design, ease of installation has definitely attracted a lot of the Tier 2s and Tier 3s. And we’re seeing their businesses being very, very healthy right now and growing considerably.

Michael Morosi

Okay. Thank you. And then, thanks for calling out the international sales. What was C&I as a percent of overall shipments? And how do you expect this number to evolve overtime as you roll out the next gen products?

Paul Nahi

So C&I right now is give or take 15% of our total number. We see that to stay relatively stable over time. We’re doing very well in the commercial market. We are - we are getting some new design wins all the time. We have some things happening in Latin America that are very, very exciting in that avenue as well.

At the same time, we are very focused on the development of a residential energy system, which includes storage and load control and energy management. We see that as a huge potential that leverages a lot of our capabilities, a lot of our strengths. So while we continue to exploit the commercial channel, we’re going to focus most of our R&D dollars right now on the residential energy system.

Michael Morosi

Okay. And one more if I may and this is a little bit of a higher level question. But I found the beginning of the monetization of the utility data stream as being a pretty significant milestone for Enphase. So how do you see that evolving going forward in terms of your materiality, when could we expect that to start to move the needle in terms of actual revenue recognition? And then, does this at all open up what some in the industry, Greentech Media, have referred to as inverter as a resource?

Paul Nahi

Right. It’s a great question. We have long been a proponent of leveraging the solar systems out there as grid assets and leveraging that for both increased visibility on the grid as well as more and more control and stability. To your point, our relationship with One Electric [ph] has proven to be very beneficial I think to both parties. And it did represent the first time we’ve been able to monetize those features.

We just recently presented at DistribuTech and the result there was probably just short of overwhelming. We are now engaged with multiple utilities all across the U.S. in many different ways, whether it’s to help in terms of grid stabilization, whether it’s to work with them on the rollout of solar programs in their regions. The solar systems there will also act as resources for the grid, to help stabilize the grid. So there is a tremendous amount of work going on within groups inside of Enphase to accelerate that.

The only challenge there is that utilities by definition tend to move a little bit slower. So I think that in terms of materiality we are looking at probably 2017. But there is a tremendous amount of work going on today and there is work - we were going to be in trials with multiple utilities across the U.S. both for storage as well as solar as assets and as controllable assets on the grid this year.

Michael Morosi

Great. Thanks a lot for taking the questions.

Paul Nahi

Thank you.

Operator

Thank you. Our next question is from Jeffrey Osborne of Cowen and Company. Your line is open.

Jeffrey Osborne

Hey, great. Good afternoon. I have a couple of follow-up questions. I was wondering if you can just touch on the ASP in the fourth quarter. Do you happen to have, Kris, what that was excluding the accessory benefit that you talked about? Just trying to get an apples-to-apples perspective.

Kris Sennesael

Yes. So historically ASP per watt has come down on or above 10% year over year. But in the second-half of 2015 we’ve adopted a more aggressive pricing strategy. And so currently, let’s say, second-half of 2015, you are looking more at mid to high teens in terms of ASP reduction on a price per watt basis.

Jeffrey Osborne

I assume that declines are more acute in the fourth quarter versus the third quarter, just given the pace of being aggressive.

Kris Sennesael

Yes, slightly more in the fourth quarter compared to the third quarter.

Jeffrey Osborne

Got you. And then, just with the guidance on gross margins for Q1, obviously I assume that the margin profile of accessories is better than the kind of 20% that’s you’re guiding for. But is that kind of flow through of the next gen Envoy and other racking equipment? Is that largely played out and so you’ll revert back to a normal mix with that piece of the business? And then, a follow-up to that, are you kind of stepping on the gas one extra degree here in the first quarter, just given the gross margin guidance?

Kris Sennesael

So let me answer maybe the first part of the question on accessories. So quarter to quarter we see some fluctuations there. In some quarters it has been as low as 20% and other quarters it has been as high as 35% of total revenue, but it tends to fluctuate a little bit. It’s obvious that Q3 of 2015 was on the low-end of that range, Q4 was on the high-end of that range.

Looking forward, we do believe it will be more at the high-end of that range, because we have added a lot of additional features and functionality to our accessory product offering. We have now an Envoy including a revenue grade meter. We have the AC Combiner Box. We offer a cellular connection and so on and so on. And so that definitely helps to increase the revenue from the accessory part.

Paul Nahi

And in reference to the last part of your question, yes, we are being very aggressive on price for all the reasons we’ve said. That coupled with the total revenue number, the total unit number, which would mean a slightly higher fixed cost absorption may account for some of that. But we are being very aggressive on pricing.

Jeffrey Osborne

Got it. So sequentially further downtick versus the aggressive stance you had in the fourth quarter then is what I’m reading between the lines there, Paul?

Paul Nahi

Yes.

Jeffrey Osborne

Okay. And then, how do we think about the inventory in the channel and just your kind of reach into that knowledge base? Are you - you factored that into Q4 guidance. Is inventory still an issue at any of your customers or has all that played through and you have high confidence in that for Q1 and looking forward?

Paul Nahi

No, all that’s played through. We are looking at - we ended Q4 with a very normal inventory level, and we fully expect to end Q1 with very normal inventory level. So that shouldn’t affect our numbers.

Jeffrey Osborne

And as both at the end customers as well as on your own books, which as well high this quarter, is that right, Kris?

Kris Sennesael

Well, of course, we recognized revenue on a sell-in basis and so inventory in the distribution channel is important for my revenue level. The inventory on our own books doesn’t have any impact on revenue level. As stated before there, we ended Q4 with $40.8 million of inventory, which is still a little bit on the high-end.

But as I explained before, Q1 is a seasonally softer quarter. We do expect some substantial revenue growth in the second quarter and the third quarter. And that will help us to improve our inventory returns or reduce the inventory days outstanding.

Jeffrey Osborne

Got it. My last question I had is just - I understand for full year you can’t give revenue and margin comments for obvious reasons. But OpEx is something you can control to a much better degree. Is the plan still to stay flat kind of in this $27 million to $29 million level or $30 million range over the course of calendar 2016 on a quarterly basis?

Kris Sennesael

That is correct, that is correct. So we did some restructuring in the fourth quarter, brought it down below the $30 million per quarter. While at the same time, of course, making sure that we have the adequate resources to go and execute on our two main focus items: the first one, execution on our product cost reduction roadmap; the second one, delivering on our energy solution strategy.

And we believe we have those resources, and will enable us to go and execute on those two key focus items while keeping the operating expenses below the $30 million per quarter.

Jeffrey Osborne

Got it. Thanks so much. I appreciate it.

Operator

Thank you. Our next question is from Colin Rusch of Oppenheimer. Your line is open.

Noah Kaye

Hi, gentleman. This is Noah Kaye on for Colin. Thanks so much for taking the question. Maybe if we could just start with the energy storage side. Thinking about the battery technology and battery itself specifically, what are you seeing now on pricing? What kind of a room is that potentially giving you? You’re looking at a downward trend pricing, both in terms of addressable market and margin. Thanks.

Paul Nahi

So I think I understand your question. Right now, when you look at the storage system, really by far the most expensive component in that is the chemistry itself. And the chemistry itself is still expensive, in part because the market that we’re talking about fixed storage is still brand new. We are in the very, very early days, really in the infancy of this industry.

So I think there is a tremendous amount of headroom for the cost of the chemistry to come down in the coming years. And if I understand your question correctly, I think the supposition you’re making is exactly correct, that there is going to be significant elasticity in this market. And as that pricing comes down and I think it can down in terms of hundreds of dollars per kilowatt hour. It is going to open up new markets and it is going to make storage more viable for a larger part of the population.

Having said that, we are also working on cost reduction in the storage arena both on the inverter side obviously, as well as well on the mechanical design as well. It is worth at this point I think pointing out that, and I’ve said it once before so forgive me for repeating myself, but for one person to be able to install 5 kilowatt hours of storage in under two hours is in it of itself a tremendous cost saving for installers.

So the combination of the architecture that we have that allows for that modularity and simplicity coupled with the headroom we have on the chemistry pricing coming down, I think will open up the markets very dramatically in 2017 and 2018 and beyond.

Noah Kaye

Right. And just as a follow up there, I mean, to be specific about kind of the range of chemistry sell pricing that you’re seeing right now, I should think about that integrating into your solution.

Paul Nahi

So we really can’t speak to the specific cost of the chemistry as a component of our system. But what I can say is that the cost will be coming down in the range of hundreds of dollars per kilowatt hour in the coming years. So it is a little bit expensive right now, but still creates a cost-effective solution and will be getting more cost-effective over time.

Noah Kaye

Sure, sure. Could we briefly just touch on the subject of warranty and maybe any potential customer concerns that you’re hearing about warranty rates? Maybe just speak to where failure rates are trending potentially alleviating those concerns?

Paul Nahi

So we’re not seeing anything about warranty issues with our customers. Our RMA rates right now are the lowest they’ve ever been in the history of Enphase. And I would venture to say that we are most probably the most reliable product in the market, period. So I think if you talk to our customers, and these are our customers worldwide, one of the hallmarks of an Enphase system is its quality.

We invest a tremendous amount to ensure that every unit that goes out is that represents Enphase in terms of its quality and reliability. And we’re seeing the results of that with the units in the field.

Noah Kaye

Right, right, understood. And finally, you talked about it before, there’s a questioning about the role of the inverter and managing DERs, where also at DistribuTECH spoke that a lot of folks who are doing work on this right now, many utilities doing work on it.

I guess, the main question is, recognizing it’s still fairly early, do you have a sense of what the revenue model might actually look like for the services that you’re providing? Do you have any kind of early conversation with anyone about potential contracting, length of contract, kind of how that all get structured, again recognizing it’s very early days?

Paul Nahi

Right, right, right. I am glad you said that, because it is very, very early days. And I think any level of specificity would be premature right now. I can share with you some general discussions that we’ve had, and nothing has been contracted yet. So these are really more discussions about intent and ideas as opposed to an actual business model. But utilities are looking at wanting to control these resources, again for both visibility on the grid, as well as stability on the grid, and whether it’s done through a discount of the system itself to the homeowner, while allowing the utility to control it for some number of hours or some period of time a day, that’s one option that’s being bantered around.

And another one is that the system will go - the system will be installed and that the consumer will be paid a certain amount for its usage by the utility, which would be contracted to be no more than a certain number of hours in a period of time, which is more of a sort of a several revenue potential for the consumer.

In either of these cases, Enphase’s role would be that of the DER resource controller. So we would be managing the actual resources, taking cues from the utility; and then through our software, through our communications technology making the appropriate provisions to those asset to either deliver VArs, to change a profile, whatever is necessary to help stabilize and enhance the grid.

Noah Kaye

Right. Well, we look forward to seeing those business models evolve. Thanks so much.

Paul Nahi

Sure. Thank you.

Operator

Thank you. Our next question is from Philip Shen of ROTH Capital Partners. Your line is open.

Philip Shen

Hey, guys. I am jumping between calls here. So apologies if some of this has been addressed. I wanted to get back to ASPs for a moment. What is the rate of ASP decline that you may expect through 2016 and by quarter?

Paul Nahi

So what we have said in the past, Phil, is that we are anticipating at 25% costs reduction. We haven’t really telegraphed anything about pricing yet. That depends on a lot of other factors, everything from competition through geography and many others. So I am not comfortable right now telegraphing that. What I will say is that we are putting ourselves in a position to be more and more aggressive on pricing to take further and further market share. And we plan to do this not just in 2016, but in 2017 as well.

Philip Shen

Great, okay. And then, in terms of international markets, I know - it sounds like it was 15% in the quarter. Can you talk about what kind of mix you see between domestic and international in 2016? And then, also talk about the mix of commercial as we go through 2016?

Kris Sennesael

Yes. So, Phil, so U.S., non-U.S. is roughly 85-15. I think in the quarter, we were getting to 16% by now international business. We definitely expect to grow our U.S. business. There is a lot of timed growth and we feel good about our ability to go and gain market share in that U.S. residential market. But at the same time as well there is plenty of opportunity for us to continue to grow our share in the international markets. As you know, we are doing pretty well in Mexico and some other Latin American countries. In Europe, we are doing very well in France. We are probably the number one player there with 25%, 30% market share. We are growing our share in the Netherlands.

There is a little bit of a setback in the UK, because of the feed-in tariff reduction there. And that will hurt all the players in that market. And then, last but not least, of course, our business in Australia and New Zealand and some other Southeast Asian countries there, but especially Australia is growing very well. We are getting into double-digit market share there in a very attractive market.

And so, when you put it altogether, I do expect in 2016 our international business to grow faster than our U.S. business.

In terms of commercial I think, Paul, already addressed that. But it’s approximately 15% of our revenue. We continue to see some good demand for our dedicated commercial product as well as addressing that commercial segment with our normal microinverter. We see that in the U.S., we also see that in Australia and then some in Latin America and in Europe as well.

It is definitely somewhat opportunistic, because we are making a lot of investments in our home energy system, but we do believe that also in commercial we will - that business will grow at or about the same speed as our residential business. And so, we’ll maintain at or about 15% of our business.

Philip Shen

Great. That’s helpful, Kris. A couple of other quick ones here; in the quarter, can you share with us the number of customers that were greater than 10%? And then, insofar as you can address, your targeted installed watts of storage or watt hours in 2016? Thank you very much.

Kris Sennesael

So in Q4 it was only one customer and it’s our largest distributor, of course, which is serving hundreds of installers. So I don’t really look at that as being a customer concentration there. It’s a distributor that is serving multiple installers. And that was the only - that one distributor was the only one customer more than 10%.

Paul Nahi

And in your reference to your last question about storage, we’re not ready yet to give sort of guidance on that. The demand is tremendous. And as I said, the demand is coming from almost every region we’re in right now. But it’s very early days and we are still trying to explore what the real demand actually is. So I think more to come on that.

Philip Shen

Great. Paul and Kris, thank you very much.

Paul Nahi

Thank you.

Operator

Thank you. Our next question is from Brian Lee of Goldman Sachs. Your line is open.

Hank Elder

Hi, guys. This is Hank Elder from Goldman Sachs on for Brian Lee. Could you guys talk about your U.S. rooftop growth expectations in 2016 versus what they might have been just three or four months ago before the extension? And then, what are your discussions with customers suggest?

Paul Nahi

So you’re asking about our market share, Hank?

Hank Elder

No, just the overall rooftop growth.

Paul Nahi

So we’re very bullish on it. I think what the ITC extension did is it took some of the pressure off of 2016. So perhaps the backend of 2016 won’t be as great as it was. But we’re still anticipating something north of 40% this year, year over year. And what will hopefully be a more stable growth in 2017 and 2018 and beyond. So the mix of customers may very well change, but I think we’re seeing just in general very healthy growth.

Hank Elder

Okay. Thanks. And then on the credit facilities - Fargo, under what scenarios would you guys kind of lean on that facility versus the cash generation, which looks good in this quarter on lower revenue?

Kris Sennesael

No, we’re already tapping into that working capital facility with Wells Fargo. It’s in up to $50 million working capital facility that is committed. We have accordion feature or uncommitted $25 million in addition to that. And we extended the maturity date till November of 2019. That facility is available to us. We are tapping into it. At the end of 2015 we drawdown $17 million out of it, and they end up, so that’s basically what we do with the line there.

Hank Elder

All right. Thanks.

Operator

Thank you. Our next question is from Krish Sankar of Bank of America. Your line is open.

Unidentified Analyst

Hi, this is Shiragodev [ph] calling in for Krish. Just had a quick question regarding the megawatt shipments, through 2016, I wanted know what your guidance was for the full year 2016 on shipments and any seasonality you see going forward?

Paul Nahi

So we don’t guide full year megawatt shipments. So you wouldn’t have heard that from us. And in terms of seasonality I think there is nothing necessarily unusual that’s going to happen in 2016 that’s different than years past. The only thing that could have disrupted that was, if the ITC had not been extended. But given this extension, I don’t think we are going to see any abnormal patterns this year.

Unidentified Analyst

I see. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from Pavel Molchanov of Raymond James. Your line is open.

Pavel Molchanov

Thanks for taking the question, guys. So you are looking at three straight quarters including Q1 of margin compression, as you are pushing very hard on pricing. Given what you’ve said at the Analyst Day about seeing a long-term margin outlook, 30% to 40%, what’s the kind of implied math to get there if you have to cut costs by 50% and nearly double your margin from where you are correctly?

Paul Nahi

Right. So what we have said, what we’ve reiterated, is that our target gross margin is 35% to 40%. That target is not changed. Clearly in a very aggressive pricing environment, we have to get in front of cost with price, which is adversely affecting our gross margin right now. But having said that, we believe that our cost reduction coupled with the additional features and the benefits of an Enphase system will allow us to see gross margin expansion in a more meaningful way, perhaps sometime in 2017.

What we have seen repeatedly is that if Enphase is at or even slightly above competitive offerings, the customer will choose Enphase. And they’ll choose Enphase because we are easier to design, easier to install, more reliable, far easier back-end logistics. We just make the system lot easier. And that simplicity is doing nothing but getting better with the advent of the AC modules. It does nothing but get better with the advent of an AC Battery and the AC Combiner Box.

We have effectively reduced all the elements of a system to its most basic, to turn a solar system into a plug and play system.

So with that and with our cost reduction, we feel that - we still feel very comfortable in the target gross margin. However, for the next number of quarters we are not focused on gross margin. We are going to continue to focus on market growth, on customer acquisition, and going into new geographies and so it’s really more about top line and market share.

Pavel Molchanov

Okay. Then one more, I think going back to one of the earlier questions about the storage opportunity, you talked about starting to ship, I believe, into the Australian market in Q2 of this year. Is that still the case and are there any other geographies where you may have commercial-scale storage shipments by the end of 2016?

Paul Nahi

By the end of 2016, so, yes, we are on track to ship to Australia, no change there. As we’ve said, beyond Australia we plan to be both in Europe and the Americas, with storage this year in 2016. So I expect to be in multiple countries by the end of the year. Again, the fundamental system doesn’t change, but there is an issue of certification and there are some localization that has to occur for each country and we are just trying to manage our engineering resources to best leverage them and moving to as many countries as possible.

Pavel Molchanov

All right. I appreciate it, guys.

Operator

Thank you. [Operator Instructions] One moment for questions. At this time, I see no other questions in queue. I’d like to turn it back from Mr. Paul Nahi for any closing remarks.

Paul Nahi

Okay. Thank you very much for joining us on our call today. And we look forward to speaking with you again next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.

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