Enphase Energy Inc (ENPH) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Enphase Energy's fourth quarter 2015 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

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 investor 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 closed 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 demand 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 describes 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 and 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 investor 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?

Good afternoon, and 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 have produced approximately 5 terawatts of clean energy. There are currently over 430,000 Enphase systems deployed in more than 100 countries. We're 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 benefit of the Envoy S, decrease instillation labor time, and reduce the cost of the system.

Our installer tool kit 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 US and international business increased, affecting our year-over-year revenue growth. However, during the year we continued to drive technology innovation 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's 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 their supply chain. Of course, all our new products 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 to help strengthen and enhance grid quality, while also illustrating the broader smart grid capabilities that Enphase can provide.

On the execution front, we are making great progress on our cost reduction road map and the development of our complete home energy solution. As previously discussed, we have 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 trials, 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 hours 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 gives 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 interest in complete energy solutions in many countries worldwide.

We are passionate about developing new technologies that make energy more intelligent, more connected, and more cost-effective than ever before. I'd like to thank our entire Enphase team for their 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 comments by noting 2016 is off to a good start. We are encouraged by the positive industry outlook, and are excited about the many opportunities ahead. The total available market in the US 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.

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 am 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 inverters 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 for AC Watts 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, [older] 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 on 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 maintained the necessary resources to execute on our product cost reduction road map, as well as our energy solutions 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 customers, 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. Unit 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 and megawatts 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 is just a tool in the 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 the growth of our business.

Now, I will open the line for questions.

(Operator Instructions) Edwin Mok, Needham & Company.

Hey, guys, thanks for taking my questions. First question I have is for your 1Q outlook, I guess a two-part question. First is, do you have any kind of year end jump in UK sales in the fourth quarter that -- should we expect some kind of digestion in UK? And that is factored in your first-quarter guidance? Also on the first quarter guidance, I assume you factor in some price declines, so as I look at the mid-point being flattish implying that you expect [warranty increase]? Are those two correct?

So Edwin, there was not much of a year end jump in UK for us, as you correctly note. The UK market has been severely affected by a reduction or almost elimination of their 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. 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.

Okay, great. That's helpful. Then maybe talk beyond first quarter. Just on the gen 5 target, or how you think about gen 5. So you mentioned on the call that 10% of your sales was your fifth generation microinverter. How do you think about a crossover from fourth generation and fifth generation? How much time do you think it would take before the market adopts more fifth than fourth generation? Then I think previously you guys laid out some cost reduction road map for fifth generation. Any updates to those road maps?

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. It is up and running in the lab. We are feeling 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. The guidance we gave about 25% this year and 25% next year is well on track.

In reference to the transition from one generation to the next, it is 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.

Okay, great. Last question I have, and I will let other guys ask. On the storage, you mentioned you're in trials right now, already, and have plans 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 other markets as well?

So the demand for storage is coming from pretty much every geography we are in, whether it is Latin America, obviously America, Europe, as well as the Asia-Pacific region. So we have made it very clear that we are launching initially in Australia, but by the end of this year I expect to have products both in Europe and in the US as well. So for us, it is a manage -- a matter of just managing the engineering resources we have to get the products certified and available in the new geographies. The fundamental architecture is the same; the fundamental product is the same. Just some minor 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 five 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.

Great. That was very clear. Sorry, I missed one part on the gen 5. I was wondering, with the gen 5 now launched, right, does it allow you to target more European markets that historically you might not have the [good] connection feature that you can target?

The answer is that our next generation product absolutely does provide some of the features 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're going to look at doing it in a way that keeps our OpEx under a very manageable level.

Great, that's all I have. Thank you.

Thank you.

Michael Morosi, Avondale Partners.

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 a new base off which the business might conform to more typical seasonal patterns?

Yes, so 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.

Okay. Then looking at the competitive landscape and maybe even from your customers' standpoint, one angle of the bear case was always that Enphase is over-exposed 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?

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 have seen that the tier 2s and tier 3s have, for the most part, very strong business models themselves. They are using -- they have access to multiple forms of financing. And we are seeing, whether it is a cash, whether it is leases, whether it is loans -- and we're seeing that segment of the market grow in a very healthy manner.

I think we are certainly -- we certainly have a great presence in the tier 1s. With the exception of one customer, SolarCity, we are in every other tier 1, and in many cases growing share in those tier 1s.

At the same time, to your point, the simplicity of an Enphase system, the ease of design, the ease of installation has definitely attracted a lot of the tier 2s and tier 3s, and we are seeing their businesses being very, very healthy right now and growing considerably.

Okay, thank you. Then, thanks for calling out the international sales. What was C&I as a percent of overall shipments, and how do expect this number to evolve over time as you roll out the next-gen products?

C&I right now is, give or take, 15% of our total number. We see that to stay relatively stable over time. We are doing very well in the commercial market. We are -- we're 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 will continue to exploit the commercial channel, we are going to focus most of our R&D dollars right now on the residential energy system.

Okay, and one more, if I may. This is a little bit of a higher level question. But I found the beginning of the monetization of the utility data data stream as being a pretty significant milestone for Enphase. So, how do you see that evolving going forward, in terms of 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, green-tech media, have referred to as inverter-as-a-resource?

Right. It is 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 our point, our relationship with Hawaiian Electric 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 US in many different ways. Whether it is 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's 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're looking at probably 2017. But there's a tremendous amount of work going on today, and we are going to be in trials with multiple utilities across the US, both for storage as well as solar as assets and as controllable assets on the grid this year.

Great, thanks a lot for taking the questions.

Thank you.

Jeff Osborne, Cowen and Company.

Great, good afternoon. 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 to try to get an apples to apples perspective?

Yes, so historically ASP per watt has come down on or about 10% year-over-year, but in the second half of 2015 we adopted the more aggressive pricing strategy. And so currently, I'd say second half of 2015, looking more at mid-to-high teens in terms of ASP reduction on a price per watt basis.

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

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

Got you. Just with the guidance on gross margins for Q1, obviously I assume that the margin profile of accessories is better than the 20% that you are guiding for. But is that flow through of the next-gen Envoy and other racking equipment -- is that largely played out and so you will revert back to a normal mix with that piece of the business?

And then a follow-up to that -- are you stepping on the gas one extra degree here in the first quarter, just given the gross margin guidance?

So let me answer the first part of the question, on accessories. Quarter-to-quarter, we see some fluctuations there. In some quarters, it has been as low as 20%, in other quarters it has been as high as 35% of total revenue. But it tends to fluctuate a little bit. It is 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've 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. So that definitely helps to increase the revenue from the accessory part.

In reference to the last part of your question, yes, we are being very aggressive on pricing for all the reasons we 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.

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

Yes.

Okay. Then how do we think about the inventory in the channel, and just your reach into that knowledge base? You factored that into the 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?

No, all of that is played through. We are looking at -- we ended Q4 with very normal inventory levels, and we fully expect to end Q1 with very normal inventory levels. That shouldn't affect our numbers.

That's both at the end customer as well as on your own books, which was a little high this quarter? Is that right, Kris?

Of course, we recognize 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 turns or reduce the inventory days outstanding.

Got it. The last question I had is, I understand for full-year you cannot 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, in this $27 million to $29 million, well below $30 million range over the course of calendar 2016, on a quarterly basis?

That is correct. That is correct. 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 road map. The second one, delivering on our energy solution strategy. 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.

Got it, thanks much. Appreciate it.

Colin Rusch, Oppenheimer.

Hi, gentlemen, 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 cells specifically, what are you seeing now on pricing? What kind of headroom is that potentially giving you, looking at a downward trend in pricing both in terms of addressable market and margin? Thanks.

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 are 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's 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 are making is exactly correct, that there is going to be significant elasticity in this market. And as that pricing comes down, and I think if you come 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 all 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 five kilowatt hours of storage in under two hours is, in and of itself, a tremendous, 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.

Right, and just as a follow up there, can you be specific about the range of chemistry cell pricing that you are seeing right now as you think about that integrating into your solution?

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

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

So we are 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.

I think if you talk to our customers, and this is 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 are seeing the results of that with the units in the field.

Right. Understood. Finally, you talked about it before, there's question about the role of the inverter in managing DERs. We were also at DistribuTECH. Spoke with 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 this is still fairly early, do you have a sense of what the revenue model might actually look like for the services you are providing? Have you had any early conversations with anyone about potential contracting, length of contract, how that all gets structured? Again, recognizing this is very early days.

Right, right, right. I'm 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 is 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.

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 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 queues from the utility, and then through our software and through our communication technology, making the appropriate provisions to those assets to either deliver VARs, to change their profile, or whatever's necessary to help stabilize and enhance the grid.

Right. We look forward to seeing those business models develop. Thanks so much.

Sure, thank you.

Philip Shen, ROTH Capital Partners.

Hey, guys, I'm jumping between calls here, so apologies if some of this has been addressed. Wanted to get back to ASPs for a moment. What is the rate of ASP decline that you maybe expect through 2016, by quarter?

So what we've said in the past, Phil, is that we're anticipating a 25% cost 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'm 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.

Great. Okay. 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?

Yes, so Phil, US, non-US is roughly 85%; 15% I think in the quarter. We were getting to 16% by now, international business. We definitely expect to grow our US business. There's a lot of TAM growth, and we feel good about our ability to go and gain market share in that US residential market. But at the same time, as well, there's 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're doing very well in France. We are probably the number one player there with 25%, 30% market share. We are going our share in the Netherlands. There's 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. 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. So, when you put it all together I do expect, in 2016, our international business to grow faster than our US business.

In terms of commercial, I think Paul already addressed that, but it is approximately 15% of our revenue. We continue to see some good demand for our dedicated commercial products, as well as addressing that commercial segment with our normal microinverter. We see that in the US. We also see that in Australia and 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 will maintain at or about 15% of our business.

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

So in Q4 it was only one customer, and it is 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 is a distributor that is serving multiple, multiple installers, and that was the only -- that one distributor was the only one customer more than 10%.

In reference to your last question about storage, we are ready yet to give guidance on that. The demand is tremendous, and as I said, the demand is coming from almost every region we are in right now. But it is very early days, and we are still trying to explore what the real demand actually is, so I think more to come on that.

Great. Paul, Kris, thank you very much.

Thank you.

Brian Lee, Goldman Sachs.

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

So you are asking about our market share, Hank?

No, just the overall rooftop growth.

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 back end of 2016 won't be as great as it was. But we are 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. The mix of customers may very well change, but I think we are seeing just in general very healthy growth.

Okay, thanks. And then on the credit facility with Wells Fargo, under what scenarios would you guys lean on that facility versus the cash generation, which looked good in this quarter on lower revenue?

We're already tapping into that working capital facility with Wells Fargo. It is an up to $250 million working capital facility that is committed. We have an accordion feature or uncommitted $25 million in addition to that, and we extended the maturity date until November of 2019. That facility is available to us. We are tapping into it. At the end of 2015, we draw down $17 million out of it and that's basically what we do with the line there.

All right, thanks.

Krish Sankar, Bank of America.

Hi, this is Chirag Odhav calling in for Krish. Just had a quick question regarding the megawatt shipments, through 2016. Wanted to know what your guidance was for the full-year 2016 on shipments, and any seasonality you see going forward.

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 its extension, I don't think we are going to see any abnormal patterns this year.

I see, thank you.

(Operator Instructions) Pavel Molchanov, Raymond James.

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

Right. So what we have said, what we reiterated, is that our target gross margin of 35% to 40%, that target is not changed. Clearly, in a very aggressive pricing environment we have to get in front of costs 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 a lot easier, and that simplicity is doing nothing but getting better with the advent of the AC module. It does nothing but get better with the advent of an AC battery and the AC combiner box. We effectively reduce 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 growing into new geographies. So it's really more about topline and market share.

Okay. Then one more, 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?

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 does not change, but there's an issue of certification, and there is some localization that has to occur for each country. And we are just trying to manage our engineering resources to best leverage them and move into as many countries as possible.

All right. Appreciate it, guys.

(Operator Instructions) At this time, I see no other questions in queue. I'd like to turn it back to Mr. Paul Nahi for any closing remarks.

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

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.