Enphase Energy - Q4 2025

Transcript

Operator (participant)

Good day and welcome to Enphase Energy's fourth quarter 2025 financial results. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead, sir.

Zach Freedman (VP and Head of Investor Relations)

Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter 2025 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer, Mandy Yang, our Chief Financial Officer, and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter ended December 31, 2025. During this conference call, Enphase management will make forward-looking statements including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products, and the benefits to homeowners and installers, our operations including manufacturing, customer service, and supply and demand, anticipated growth in existing and new markets including the TPO market, the timing of new product introductions and enhancements to existing products, and regulatory, tax, tariff, and supply chain matters.

These forward-looking statements involve significant risks and uncertainties, and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis unless otherwise noted and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures, and our earnings release furnished with the SEC on Form 8-K, which can also be found in the investor relations section of our website.

Now, I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri.

Badri Kothandaraman (President and CEO)

Good afternoon, and thanks for joining us today to discuss our fourth quarter 2025 financial results. We had a good quarter. We reported quarterly revenue of $343.3 million, shipped 1.55 million microinverters, and 150 MWh of batteries, and generated free cash flow of $37.8 million. Our Q4 revenue included $2.3 million of safe harbor revenue. U.S. consumers pulled forward purchases ahead of the Section 25D tax credit deadline, helping us exit 2025 with a lean channel. For Q4, we delivered 46% gross margin above the high end of our guidance range, 23% operating expenses, and 23% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Our global customer service NPS was 79% in Q4 compared to 77% in Q3. Average call wait time was 1.6 minutes.

We piloted an AI assistant in the Enphase app in Q4 and plan to roll it out in Q1 to help customers manage their systems intuitively. We also plan to pilot an AI assistant for installers in Q1 to help them manage their fleet and identify upgrade opportunities.

Let's talk about operations. In Q4, we shipped approximately 1.31 million microinverters from our Texas and South Carolina manufacturing facilities and booked associated Section 45X production tax credits. These domestically made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the 10% domestic content ITC add-on. In Q4, we shipped 51.1 MWh of IQ batteries from our Texas manufacturing facility, meeting applicable domestic content requirements and helping lease PPA customers qualify for ITC bonuses. We continue to differentiate through our ability to deliver domestic content and meet FEOC requirements as regulatory standards tighten. Also, we expect to receive our first non-China battery cells in Q1 and remain on track to scale non-China cell supply into battery production in the first half of 2026.

Let's now cover the regions. Our U.S. and International revenue mix for Q4 was 89% and 11% respectively. In the U.S., our revenue decreased 13% in Q4 compared to Q3 primarily due to safe harbor revenue of $20.3 million compared to $70.9 million in Q3. The overall sell-through of our products increased 21% in Q4 compared to Q3 to the highest level in more than two years. The strong demand trends that we saw at the beginning of Q4 continued till the end of the year driven by increased solar and battery installations ahead of the expiring Section 25D tax credit. In Europe, our revenue decreased by 29% in Q4 compared to Q3 while our sell-through decreased by 23%.

The overall business environment across the region is still challenging. We are staying disciplined in managing the channel and focusing on targeted growth areas for 2026. I will provide some additional color on the key markets in Europe. In the Netherlands, solar demand remained soft in Q4, but we are making steady progress towards a large battery retrofit opportunity driven by structural changes in the market. Rising solar export penalties and the planned phase-out of net metering by the end of 2026 are shifting economics decisively towards self-consumption, strengthening the case for batteries. With an install base of approximately 475,000 Enphase residential solar systems, we estimate a total opportunity of roughly $2 billion for batteries. We are seeing early traction from targeted homeowner outreach including homeowner events and direct marketing and are expanding partnerships with retail energy providers that offer compelling VPP economics.

With continued rollout of software capabilities like PowerMatch and the launch of our fifth-generation battery later this year, we believe we are very well positioned to lead the battery transition in Netherlands. In France, reduction in feed-in tariffs are shifting residential solar economics towards self-consumption, increasing the interest in batteries, particularly for new installations. With approximately 375,000 Enphase residential solar systems installed in France, the retrofit opportunity is more modest than in the Netherlands due to fixed energy contracts, but overall battery adoption is still gaining traction. New business models including battery leasing are emerging, and we expect the battery demand in France to build steadily through the year supported by anticipated increases in utility rates and evolving dynamic tariffs. Across Europe, competition remains intense, and pricing pressure is high as installers adapt to a tougher demand environment.

We are responding by controlling costs within our current products and aligning pricing to market realities including our microinverter price reductions which we implemented across Europe in November. At the same time, we are investing in next generation products very strongly, both IQ9 microinverters and our fifth-generation battery platform. We expect to deliver structural cost improvements in these products which enable attractive pricing and sustain healthy gross margins. Our focus remains on supporting our installers and competing effectively as the market evolves. In Australia, we see meaningful battery growth opportunities supported by a mature rooftop solar base and accelerating customer interest in self-consumption, resilience, and VPP. The market is installing larger, more capable storage systems to take advantage of current incentives, and installers are increasingly asking for solutions that are simple to size, expand, and commission.

With our fifth generation system expected later this year, we believe our stackable, scalable AC coupled architecture is well aligned with what installers want and what homeowners increasingly value: flexible capacity today with the ability to add more over time.

Let's now discuss Q1 outlook. During last quarter's call, we shared a view of Q1 revenue to be around $250 million. Today, we are providing Q1 revenue guidance of $270 million-$300 million. We are approximately 90% booked to the midpoint of our revenue guidance. We continue to believe Q1 marks the low point for underlying demand with improvement expected through 2026, particularly in the second half. Installer sentiment is also improving as higher utility rates strengthen the customer value proposition, including in several Northeast and Midwest markets that have seen double-digit residential electricity price increases over the last year. The feedback on prepaid lease offerings is also encouraging, giving installers yet another effective tool to drive solar and battery adoption this year.

Let's talk about financing. Enphase is well positioned to support all major TPOs today. In Q4, we announced two TPO orders totaling $123 million, including $55 million under the 5% safe harbor method and $68 million under the Physical Work Test method. We collaborate with CPOs on tax equity support, domestic content and FEOC compliant offerings, OEM services through Enphase Care, and an integrated workflow through Solargraf for design, proposal, and permit while also partnering on innovative financing structures. We continue to see prepaid leases as an attractive option which give homeowners a lower upfront cost today and the option to own the system after five years.

In this structure, the TPO owns the system initially and claims the 48E tax credit, then shares that value with the homeowner through a prepaid lease or low monthly payments when paired with a loan. The result is a lower effective cost for the homeowner and economics that look much closer to what customers were used to when the 30% Section 25D tax credit was available. We are supporting a TPO-led prepaid lease program that is being field tested with a loan partner as well as a distribution partner. The program which uses Enphase equipment is currently in pilot across four states with approximately 40 installers. We expect a broader rollout to happen upon completing the pilot successfully and validating the customer experience, installer execution, and financing performance at scale. We expect to share more as the program matures in the coming months.

Let's cover products starting with IQ batteries. Our fourth generation IQ Battery technology continues to ramp in the U.S., delivering a smaller footprint, higher energy density, and a simpler installation process enabled by the IQ Meter Collar. The collar is now approved by 52 U.S. utilities and growing, serving approximately 30 million customer accounts. We believe this represents the broadest utility approval footprint of any major battery providers today. In California, the Meter Collar is approved by all three major investor-owned utilities.

We also launched PowerMatch in Q4 as software-enabled technology that dynamically matches the IQ Battery output to real-time home demand, increasing usable energy, extending battery life, and improving performance by up to 40%. Unlike hybrid systems that push all power through a single large inverter, PowerMatch activates only the microinverters that are needed, reducing the losses at low power consumption so customers get more usable energy from the same battery capacity.

Let's now cover our fifth-generation battery. We are making significant progress on this battery. It is built from stackable 5 kWh modular blocks and will scale up to 20 kWh in the U.S. and up to 30 kWh in other regions. The design targets roughly 50% higher energy density than the fourth generation battery at about 40% lower cost. When paired with PowerMatch, we believe this platform will offer a compelling combination of performance, flexibility, and value for installers and homeowners. We expect to start pilots in the third quarter of 2026 and start shipping in the fourth quarter. We are making strong progress in partnering with retail energy providers and VPP operators across the globe that are seeking flexible distributed capacity. Through these programs, homeowners can earn attractive incentives from their energy provider for installing and enrolling Enphase batteries.

In Q4, we added several programs, the notable being a home battery leasing program with GMP in Vermont and eligibility under San Diego Community Power Solar Battery Savings Program. These partnerships can drive meaningful battery volumes, and we are targeting many more additional VPP partnerships this year. Let's come to microinverters. In December, we began shipping the IQ9 3P commercial microinverter built on our GaN-based power conversion architecture. IQ9 is a major step forward for Enphase, expanding us into 480-volt three-phase commercial systems in the U.S. for the first time and represents an approximately $400 million total addressable market. The demand is encouraging with more than 50,000 microinverters ordered for Q1, and early feedback confirms the market need for reliability, FEOC compliance, and domestic content that IQ9 delivers.

We expect to introduce IQ9 for the global residential markets in the first quarter of 2026 and the higher-powered 548 W version for both residential and commercial markets in the third quarter. More broadly, our IQ, our GaN-based microinverter platform gives us a step change in speed, efficiency, and controllability capabilities that matter as the grid and large electrified loads increasingly demand fast response times and load shaping. We are increasing our R&D investments in these areas to extend our core capabilities to address these demanding use cases. More to come here as we make progress. Let's cover EV charging. In December, we began shipping our new IQ EV Charger 2 to customers across the U.S. This charger supports a fast Level 2 charging up to 19.2 kW on 240-volt service and up to 22.1 kW where 277 volts is available.

It also works as a standalone charger or fully integrated with Enphase solar and battery systems. The charger is also available in Europe, Australia, New Zealand, and Canada with additional availability plans for 2026. Let me share an update on our IQ Bidirectional EV Charger built on our GaN power platform, engineered to work seamlessly with modern 800-volt DC EV architectures. It is a concrete example of our ability to move power efficiently between grid-facing AC and 800-volt DC backbone and to do so bidirectionally with tight control and protection. We continue to target initial availability in the fourth quarter of 2026, starting with limited deployments as we complete required certifications, utility coordination, and vehicle compatibility validation.

The product is compelling because it pairs simply with the IQ Meter Collar in the U.S. and a backup switch in Europe to enable a streamlined configuration for seamless home backup, which is V2H, and VPP participation, which is V2G. We are also in active discussions with multiple auto OEMs on partnerships and will share more as those discussions mature.

Let's cover Solargraf, our all-in-one design and proposal platform built for installers. We continue to deliver meaningful upgrades, including fully customizable proposals with inline editing, battery-only proposals, and racking integration to generate a complete bill of materials. We are also expanding AI capabilities, including one-touch design and automation, and Enlighten integration to help installers reduce operational overhead. Looking ahead, we are adding support for commercial system designs to align with our expanding commercial products. Solargraf remains a core installer enablement tool, especially as TPO integration accelerates. Let me conclude.

We are executing well through a challenging period, and our focus on innovation, quality, and customer service continues to support healthy margins and good market share in U.S. residential solar. We are now extending these strengths into commercial solar where we believe we can build a meaningful business. We expect the underlying demand to stabilize from current levels with improvements developing as several tailwinds build. Rising electricity costs are making energy affordability a priority for households. New financing options are expanding how consumers can buy solar, and easing interest rates can further improve affordability. In 2026, we are continuing to evolve from a single product and end-market company into a broader technology platform that can apply our power electronics and energy management strength to significantly larger markets.

The transition began five years ago with our entry into residential batteries and is now accelerating with our expansion into commercial solar and our planned entry into commercial batteries, bidirectional EV charging, and additional adjacencies in the year ahead. As the world's power needs grow, larger and more complex, we believe Enphase brings a differentiated, best-in-class power management foundation to meet them. We remain laser-focused on the near-term revenue levers that we can control. Number one, accelerating IQ Battery tendency growth. Number two, scaling IQ9 GaN microinverters to expand our 480-volt 3-phase commercial footprint. Number three, unlocking battery retrofits across Netherlands and France. Number four, ramping IQ EV Charger 2 while preparing for bidirectional EV charging later in 2026. Number five, launching our fifth generation residential battery along with IQ9 microinverters to materially lower system costs and strengthen solar economics.

With that, I will turn the call over to Mandy for her review of our financials. Mandy.

Mandy Yang (EVP and CFO)

Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2025 financial results as well as our business outlook for the first quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q4 was $343.3 million. We shipped approximately 682.6 MW DC of microinverters and 150.1 MWh of IQ batteries in the quarter. Q4 revenue included $20.3 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales made to customers who plan to install the inventory over more than a year.

Non-GAAP gross margin for Q4 was 46.1% compared to 49.2% in Q3. GAAP gross margin was 44.3% for Q4 compared to 47.8% in Q3. Reciprocal tariffs impacted our gross margins by 5.1% in Q4. Non-GAAP operating expenses were $78.8 million for Q4 compared to $78.5 million for Q3. GAAP operating expenses were $129.6 million for Q4 compared to $130.1 million for Q3. GAAP operating expenses for Q4 included $48.6 million of stock-based compensation expenses and $2.9 million of acquisition-related amortization, offset by $600,000 of restructuring and asset impairment benefit. On a non-GAAP basis, income from operations for Q4 was $79.4 million compared to $123.4 million for Q3.

On a GAAP basis, income from operations was $22.4 million for Q4 compared to $66.2 million for Q3. On a non-GAAP basis, net income for Q4 was $93.4 million compared to $117.3 million for Q3. This resulted in non-GAAP diluted earnings per share of $0.71 for Q4 compared to $0.90 for Q3. GAAP net income for Q4 was $38.7 million compared to $66.6 million for Q3. This resulted in GAAP diluted earnings per share of $0.29 for Q4 compared to $0.50 for Q3.

We exited Q4 with a total cash, cash equivalents, and marketable securities balance of $1.51 billion compared to $1.48 billion at the end of Q3. The five-year convertible notes we raised in 2021 are coming due on March 1st, 2026, and we expect to settle the principal amount of $632.5 million at maturity with our cash on hand. As of December 31st, 2025, we have approximately $337 million of production tax credit or PTC receivable on our balance sheet net of income taxes payable. $109 million is related to U.S.-made microinverters shipped to customers in 2024, and $228 million is for shipments made in 2025.

As we elected direct pay for 2024, the net PTC would be refunded by the IRS through our completed 2024 tax return. We have limited visibility to when we will receive 2024's $109 million refund from the IRS due to its extended processing timelines. We are evaluating our options to get paid sooner for our 2025 PTC. As part of our anti-dilution plan, we spend approximately $1.4 million by withholding shares to cover taxes for employee stock vesting in Q4 that reduced the diluted shares by 41,767 shares. We did not repurchase our common stock in the quarter because we are prioritizing the most disciplined use of our cash, including preparing for the $632.5 million of debt maturing next month and preserving flexibility for strategic investments and potential acquisition opportunities. We have approximately $269 million remaining under our share repurchase authorization, and we remain confident in our long-term business outlook.

In Q4, we generated $47.6 million in cash flow from operations and $37.8 million in free cash flow. Capital expenditure was $9.7 million for Q4 compared to $8 million for Q3. This increase was primarily due to continued investment in our U.S. manufacturing and R&D equipment. Now, let's discuss our outlook for the first quarter of 2026. We expect our revenue for Q1 to be within a range of $270-$300 million, which includes shipments of 120 MWh of IQ batteries. The revenue guidance includes approximately $35 million of safe harbor revenue. We expect GAAP gross margin to be within a range of 40%-43%, including approximately five percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within a range of 42%-45%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization.

We expect our GAAP operating expenses to be within a range of $137 million-$141 million, including approximately $60 million estimated for stock-based compensation expense, acquisition-related expenses and amortization, and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $77 million-$81 million. As part of our efforts to better align our workforce and cost structure with Enphase's business needs, strategic priorities, and ongoing commitment to profitable growth, we recently reduced headcount by around 6%. We expect to reduce our non-GAAP operating expenses to be in the range of $70 million-$75 million a quarter, starting from the third quarter of 2026.

In closing, we managed well with our financial discipline through a difficult global environment in 2025. We maintained profitability and strong gross margins. In addition, in 2025, we generated approximately $95.9 million of free cash flow and approximately $228 million of net PTC receivable. We exited the year with $1.51 billion in cash, cash equivalents, and marketable securities while repurchasing 2.3 million shares of our common stock for approximately $130 million. With that, I will open the line for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, you may rejoin the queue. At this time, we will pause momentarily to assemble our roster.

The first question will come from Phil Shen with Roth Capital Partners. Please go ahead.

Phil Shen (Managing Director and Senior Research Analyst)

Hi everyone. Thanks for taking my questions. First one is on the cadence for the year. I know you don't guide for other quarters, but was wondering if you could give us a little bit of color on what Q2 might look like. You talked about Q1 being the low point. And so should we expect Q2 to be flat or up or slightly down? And then from a margin standpoint, would you expect a little bit of expansion in Q2 or kind of similar levels to Q1? Thanks.

Badri Kothandaraman (President and CEO)

Right. We expect Q2 to be up, but it's too early for us to talk about it. And like what I said in the prepared remarks, there are a few things which we believe as tailwinds for us. And there are a few things that Enphase is specifically doing. So the tailwinds are, you can see the utility rates. So the utility rates are going up everywhere in the U.S. And we see a lot of increases in the Northeast, in the Midwest. So I think that is going to be a definite tailwind for us. New financing options such as the prepaid leases are starting to sprout up, not just the ones that we are involved in, but in general. So I think that would be an opportunity to essentially replace the loan demand, the loan TAM prior to the 25D expiration, the tax credit expiration.

And then the last one is, although the interest rates didn't come down in the recent announcement, I think we will see some easing interest rates through the year. I think that will further improve affordability. So those are three strong tailwinds that we see. They should get better as the year progresses. What are we doing? We are just not sitting and watching. We are doing a few things. Like what I listed, accelerating IQ Battery 10C. Now we are approved at all three IOUs in California. So there is no barrier for the IQ Meter Collar. We are approved at 52 utilities. We expect to add 50 more utilities in 2026 overall. So that's going quite well. Also, 70% of our U.S. battery shipments are now the IQ Battery 10C. We also expect the prepaid leases to help accelerate our battery volumes.

In addition, we expect FEOC and domestic content to be a good value proposition that Enphase can offer, which should also increase the volume sequentially through the year. So that's on the batteries. We are very excited about the IQ9 product, the IQ9N product. The IQ9 product addresses the 480 volts commercial market, which we have not played in before. We just started shipping the product in December. We already have a backlog of more than 50,000 microinverters for Q1. And I think there we expect to grow from strength to strength. It's a new market. Of course, there's going to be cycle of learning, but I think we bring some things unique like reliability, quality, and domestic content, FEOC compliance, all of those we bring. So that's very exciting. The third one, unlocking the battery retrofits across Netherlands and France, big deal.

We are doing something we have never done before. We are organizing homeowner events in Netherlands. We are organizing two homeowner events every week. And so we are talking about 100 homeowner events for the year. Every homeowner event will generate preorders. While it's too early for us to share those details, we believe it will meaningfully change our battery demand in Netherlands. So we are extremely excited about that one. Same deal in France. Although in France, it is not like in Netherlands, the energy contracts aren't fixed for a very long time. They change every one to three years. But in France, they are fixed. So the retrofit opportunity isn't as compelling as Netherlands, but still, people would like to own batteries for resilience and new installation. Certainly, self-consumption is required because the feed-in tariffs have dropped off a lot.

So we are very excited there as well, both the opportunity to sell to our install base as well as new installations, new business models. So that's number three. Number four is we just introduced our IQ latest and greatest IQ EV Charger into the U.S. It's a state-of-the-art one. It's a beautiful-looking product. It's doing quite well in Europe. We expect it to do very well in the U.S. But the real exciting thing there is the bidirectional charger. The bidirectional charger is a demonstration of how powerful the inverter architecture is. We interface to 800-volt DC on the car side and then to home AC using the same single-stage power conversion that Enphase is known for.

So just with our bidirectional charger, which has got the inverters in it, grid-forming inverters in it, plus the Meter Collar, that is enough to do both V2H and V2G. So we are excited about that one, which will come about in production in Q4. And the last one, we are already going to preparing ourselves to launch IQ9 residential microinverters in the first quarter in a few weeks from now, both U.S. as well as International. Then we expect to introduce our fifth-generation battery. Fifth-generation battery will have the energy density close to about 100 watt-hour per liter, which is best in class. The cost of that battery will be 40% down compared to the fourth-generation battery.

Therefore, it will allow us to basically reduce our end pricing for the consumer, which is necessary as battery adoption increases, and yet maintain our gross margins in line with the corporate gross margins. So those five levers are all entirely in our control, and we plan to make full use of them in addition to the three tailwinds I talked about.

Phil Shen (Managing Director and Senior Research Analyst)

Great, Badri. Thank you for all that detail. I had a quick follow-up on what you said Q2. I think you mentioned revenue would be up, but you don't know or can't quantify how much. Just want to understand if that's versus the $285 million from Q1 with safe harbor, or is it versus the $250 million without safe harbor?

Badri Kothandaraman (President and CEO)

We usually make the comments regarding with respect to the core revenue. But we also expect, although we can never forecast safe harbor, we also expect healthy safe harbor in the second quarter because it's natural. The reason is TPO partners are going to formulate plans for 2028, meaning 2028, 2029, 2030. So there is going to be some safe harbor activity happening in both Q2. And we'll have the time to ship it through Q3, I believe. So yep.

Phil Shen (Managing Director and Senior Research Analyst)

Great. And as for my follow-up here, in terms of the data center market and the 800-volt architecture and what you guys might be able to do for that, I know it's super early, but just insofar as you can kind of comment on how you could address that market, what the timing might be, that would be fantastic. But if you can't talk about it, I get it. Just wanted to see if we might be able to get some color. Thanks.

Badri Kothandaraman (President and CEO)

Sure. We are very aware of the industry's trend going towards 800-volt DC for the data center. Where that actually intersects our expertise is in front-end power conversion, specifically how medium voltage AC, and we are talking about 13.8 kV and 34.5 kV AC, can be efficiently converted, controlled, and managed into 800-volt DC before the power reaches the AI rack. So having said that, we are evaluating multiple next-generation power conversion architectures as part of our long-term R&D. But we are not in a position to discuss any specific products or timelines today.

Operator (participant)

The next question will come from Brian Lee with Goldman Sachs. Please go ahead.

Brian Lee (Chief Risk Officer)

Hey guys. Good afternoon. Thanks for taking my questions. First one I had was just on margins, maybe for Mandy, maybe for Badri. I think the 5% reciprocal tariff impact, it seems to be stabilizing and peaking here. I think last year you talked about fully offsetting it by 2Q of 2026. So any updates there on the ability to offset the tariff impact? Is that still a 2Q target? Maybe if you can kind of quantify magnitude and cadence for us off this 5% level that you're still guiding to for Q1, and then I had a follow-up.

Badri Kothandaraman (President and CEO)

Right. So Brian, if you remember the last time, what happened was the tariff, meaning approximately, let's say, three to four quarters ago, that was a tariff specifically with respect to China. And at that time, what we said is we are going to make plans to move into non-China manufacturing, which we are on track to do. And we would be able to avoid any significant tariffs by doing that. However, the situation now has changed. And every country now has got a tariff, including that is what is called as a reciprocal tariff. If I go to Malaysia, there is a tariff. If I go to Vietnam, there is a tariff. Everywhere, there is tariff. And for us, the 5% tariff, just to give you more color, is distributed across 2% of the impact is on microinverters, 2% is on batteries, 1% is on accessories. Why?

For example, on microinverters, we will have to bring in raw materials into the U.S. in order to make our microinverters in the U.S. So therefore, those get hit. So therefore, there is no safe place, which has got no tariff. For us, what we believe to answer your question because that's still a valid question, how are you going to offset that 5% reciprocal tariff? For us, the answer is in innovation. The answer is in IQ9. The answer is in the fifth-generation battery. Those are IQ9, for example, is despite the power going up by 10%, we are able to maintain a smaller form factor. And we expect to take advantage of that in terms of higher gross margins with IQ9. As you can imagine, higher power products that produce higher power get more production tax credit, $0.11 a watt.

So naturally, we expect to make higher gross margins there. Then in addition, on the batteries, that's where the big lever for us is. We are rapidly getting close to releasing our fifth-generation battery. The fifth-generation battery uses very compact cells. These are prismatic cells. And therefore, we essentially are able to reduce that entire form factor of the full battery by a very significant amount. And we are able to do a stackable battery. Ours will be unique. It will be an AC-coupled stackable battery. Energy density, like what I said, 50% higher than our current battery fourth generation. Cost structure will be 40% lower. This will enable us to make good gross margins and overcome that 5% reciprocal tariff.

Brian Lee (Chief Risk Officer)

Thanks. Appreciate it. And then just the follow-up would be on one of the specific products here. You talked a lot about the IQ9 commercial inverter, the $400 million TAM. If my math is right, it seems like the bookings activity, Badri, you mentioned, maybe you're tracking the $5 million-$10 million right out of the gate for that new product. One, is that right? And then two, kind of how do you see yourself scaling up this year against that $400 million TAM? Is this tens of millions of dollars of revenue by the second half of the year? Thank you, guys.

Badri Kothandaraman (President and CEO)

Yeah. You're approximately right. It is between $5 million and $10 million for the first quarter. You should think about it the following way. I think what we are this product is it offers a compelling value proposition in terms of quality, reliability, FEOC compliance, domestic content. Customers haven't had such a choice before. So we are getting a lot of good traction. What we have shown in the residential market is that over the long term, high quality, high serviceability wins. We therefore expect to demonstrate the same in this small commercial market. We expect over a three-year time frame to get into the similar market share as what we have on the residential.

Operator (participant)

The next question will come from Praneeth Satish with Wells Fargo. Please go ahead.

Praneeth Satish (Senior Equity Analyst)

Thanks. Good evening. I guess just maybe on the prepaid lease product, assuming the pilot performs well that you're doing, can you share any more details in terms of the timeline of when you would expand into additional states? And would it happen gradually or more of kind of a larger push? And can you get your coverage potentially nationwide by the end of 2026? And then just on prepaid leases in general, for the other prepaid lease offerings that are out there, how do you think about your market share with those programs, I guess, relative to your traditional cash and loan channels?

Badri Kothandaraman (President and CEO)

Yeah. I think those are good questions, but we are in very early stages. Right now, we are in pilots. Right now, we are, as I said, operational in four states. And we have over 40 installers. We are starting to get reasonable originations. But what we want to do is to test out the entire cycle. That's why it's called as a pilot. And when we test out the entire cycle, then the kinks will be obvious to us. And then we can either expand rapidly or take a measured step going forward. Our desire is to do it sooner rather than later. And let me actually leave it at that right now.

Praneeth Satish (Senior Equity Analyst)

That's fine. And maybe shifting gears, if you can give us an update in terms of IQ 10C Battery sales, how that's shaping into Q1. Looking at the market share data, it did seem like it kind of ticked up a little bit in December. Has that momentum kind of carried over into Q1? And then what's been the feedback from installers in California now that the Meter Collars approved with all of the utilities? Do you think you can get your I think your market share is roughly around 15%±. Do you think you can get that back up over 20% with the fourth-gen battery? Or do you think it's really the fifth-gen battery where you start to see a lot of market share recapture?

Badri Kothandaraman (President and CEO)

Yeah. I think the fourth-gen battery will do it a bit because it's got a very nice form factor. The Meter Collar is now approved in 52 utilities. California IOUs, all of them are now taking the Meter Collar. We had the last one come through in late part of Q4. So all of the barriers, essentially, are now removed. You asked me for installer feedback. We do roundtables with installers almost every week. Installers like the product. They like the installation. They like the commissioning times, which are under an hour. That's not to say that there are no problems at all. There are a few, which we are rapidly taking care of. There is a couple of things that we are doing. We are releasing third-party solar compatibility for IQ Battery 10C, which we expect that battery to be used with non-Enphase EV installations too.

So that will be a big deal. It's in very high demand by our installers. So we think that will increase our share more. In addition, like what I said, we'll start to see the effect of FEOC and domestic content. The December uptick was probably related to 25D. So I wouldn't read that much into it, although we'd like to take some credit for it. Yeah. And so we do expect progress with the fourth generation. On the fifth generation, yes, we do expect to definitely, definitely take a lot of share there too, in addition, simply because the battery will come with much more compelling economics. Even with all of the tariffs in place, I will be able to make good gross margins as well as offer excellent consumer pricing. So we're excited about the fifth-generation battery.

Praneeth Satish (Senior Equity Analyst)

Got it. Thank you.

Operator (participant)

The next question will come from Colin Rusch with Oppenheimer. Please go ahead.

Colin Rusch (Senior Research Analyst)

Thanks so much, guys. Can you talk about where battery inventories are right now in the channel, particularly in Europe, as you look at some of the demand that's growing in both Netherlands and France and even in Australia? I just want to get a sense of how lean the channel is and if there's some product that needs to move through before you start growing in the second quarter.

Badri Kothandaraman (President and CEO)

In general, I would say we are very happy where we ended the channel in both the U.S. as well as outside the U.S. In the past, I've told you what we considered normal is eight to 10 weeks. In the .US., the channel is actually much more leaner. That means it's better than eight to 10 weeks. While going forward, if you account for the demand reduction in 2026 versus 2025, I would say forward-looking weeks on hand is in the normal range. So there isn't anything bloated in the channel. We are doing a good job. Channel management is ingrained in our DNA right now. We don't expect that to be a problem.

Colin Rusch (Senior Research Analyst)

Thanks so much. And then just thinking about VPPs and some of the capabilities of your system, can you talk about some of your functionality around reactive power, voltage management, and your ability to serve some of those ancillary services markets that may be differentiated versus some of your peers?

Raghu Belur (SVP, Co-founder, and Chief Products Officer)

Yeah. Hi. This is Raghu. Yeah. I think we look at it very broadly. We look at not just the battery as being the only flexible resource that's available. You can think about, as we look at the EV charger today, that's a flex resource. As we think about bidirectional EV charging, that's, again, a flex resource. Solar itself also can be considered as a flex resource. Our view is much broader than just simply thinking about one element of it. So every product that we release, every new product that we release, we think about it in the context of its participation in VPP. So we make sure that we have best-in-class APIs available so people can then exercise all of those resources. And because they are value-generating resources, they can actually help with the homeowner's ROI.

So all of the grid services that you mentioned, which is reactive power, voltage support, or just capacity, resource adequacy, all of these functions are organically built into all of the products that we build because we expect they'll all be flexed as we see the VPP market evolving. And so far, while the focus has been around batteries, our VPP participation has been very strong with a number of partners. We mentioned two of them in our prepared remarks with the San Diego Community Power as well as Green Mountain Power. Those were the two examples that we provided. But it's much broader than that. So we are pretty excited about all the work that we have done with our VPP. It's a metric that we track very closely in terms of availability of our VPP APIs, how well our servers are working in order to service the demand.

This is U.S. Whereas what we are seeing is all of the VPP work that we are also doing in Europe with, particularly, in the Netherlands where we are providing capacity imbalance, dynamic tariffs, others where they're trading our batteries into the market, in some cases, as often as a few seconds. So we see this as a very critical evolution of the business in general because as you think about data center demand really overwhelming the grid, I think behind-the-meter resources will play a pretty big role in helping alleviate some of that pressure. And so aggregating all of these resources and participating in the market is very key. And we have seen that trend. And we are on top of it and really driving our products to make sure that it's best-in-class with regards to participation in the market.

Colin Rusch (Senior Research Analyst)

Thanks so much, guys.

Operator (participant)

The next question will come from Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine (Senior Research Analyst)

Hi, everyone. Just wondering if we can talk about safe harbor a little bit. So just to sort of confirm, $63 million in the order. And some of that coming in Q1, you've included that in your guide. So I guess a similar amount in Q2. You did mention that you think that you could recognize some revenue in Q3 for the out years. Being curious, is there a magnitude, any indications you're getting from your partners what those orders might look as you start to think about, as you called it, in 2028 and 2029 for safe harbor?

Badri Kothandaraman (President and CEO)

No. It's too early for us to forecast any safe harbor orders. We don't really know right now. Usually, based upon the deadline that we see, TPO partners have until approximately July 1st week to finalize their plans. So we do expect a lot of frenzy activity in Q2. What we announced, we announced basically two transactions that we announced. One was, I think, in the 50s and another was in the 60s. So one was Physical Work Test, and the other was a 5% safe harbor. We even expect some of those customers to do repeat safe harbor orders. But right now, it's too early for us to tell.

Eric Stine (Senior Research Analyst)

Yep. Nope. Understood. Appreciate that. And then I know you talked about share on the storage side, but just curious, as you think about the year, it seems that this would be a trough like you're thinking it is for the overall business. What type of linearity or what trends do you see in storage based on timing of some of the product introductions, etc.?

Badri Kothandaraman (President and CEO)

Yeah. In general, storage should be very positive because the tax credits are going to be valid for a much longer time. So batteries are in favor, I think, till 2030 or 2031. I forget. So storage market is going to definitely take off. You can see that almost every state, my prediction, and this is only my prediction, is in the next coming years, every state will start to adopt battery storage. Solar plus storage will become the norm because at some point, uncontrollable export of solar is not desired. So California is ahead. We all didn't like NEM 3.0 initially because of the way it was implemented. But the concept of NEM 3.0 is right. And in fact, California is a solar-plus-battery market with 100% attached now. It's got good economics, six to eight years of payback.

So my prediction is every state in the next 10 years will become solar plus storage. So storage is going to boom. It is going to actually batteries will pull solar. It's got to become the reverse. It is already like that in Europe. If you go look at Europe, you look at Germany, the attach rate is 80%. You look at Italy, the attach rate is also in the similar range. You look at Netherlands, that's now going to start moving that direction. You look at France, the feed-in tariffs have dropped a lot. So solar plus storage will become the norm. So controllability, VPPs, self-consumption, those are what they are going to drive the economics. And they're all in the direction of reducing the utility bill for the homeowner. So yeah. Is there something you want to share, Raghu, on that?

Raghu Belur (SVP, Co-founder, and Chief Products Officer)

No. I think you're seeing that even happening with NEM 3.0 where it's even beyond self-consumption. You're starting to see things where there's a pricing signal that you get. And based on the pricing signal, you charge or discharge your battery. You export to the grid because you get compensated for it. In Europe, they do that as day-ahead pricing. And I think you'll see that things such as VPP, day-ahead pricing, dynamic tariffs, etc., are really going to be very compelling economics for the homeowner to adopt battery. And that's how you saw California evolve in that direction. And I agree that it's going to happen even maybe faster than 10 years, that you'll see traditional NEM will slowly sunset.

Eric Stine (Senior Research Analyst)

Got it. Thank you.

Operator (participant)

The next question will come from Julian Dumoulin-Smith with Jefferies. Please go ahead.

Julien Dumoulin-Smith (Research Analyst)

Badri and Team, nicely done on the continued progress here. Just wanted to come back to a couple of things that were mentioned. First off, when do you think batteries go to the corporate average here? I mean, you gave us a little diatribe about the outlook here. How do you think about margins evolving there and normalizing upwards? And again, I get that can be by product here in the evolution. And then separately, can you talk back again about the market evolution here as it pertains to prepaid lease adoption? And ultimately, as you say, this is essentially offsetting the impacts of 25D going away. Can you talk about the cadence of that happening, both your own PPL piece of it and then separately your commentary about essentially offsetting 25D? Is that market-wide? And how do you think that playing out just timeline-wise?

Badri Kothandaraman (President and CEO)

Yeah. On the batteries and gross margins, especially with the tariffs now, the gross margins on batteries are slightly below corporate average. What we'd like to do is to bring it above. And that's what I extensively talked about. Today, I mean, we have 45% tariff on the cell packs that we get from China. And that is a tough number to work with in terms of margins. Plus, we have tariffs on other raw materials that are coming into the U.S. So we get hit many ways. We have recognized that. The best way for us to counter that is with innovation. So that's why I talked extensively about the fifth-generation battery. Our cost structure will be radically different. So even with these tariffs, I can comfortably make even above corporate gross margins on my batteries. We are not stopping there.

We are already thinking about our sixth-generation battery. So we'll share more as soon as the fifth-generation battery is out. So it's going to be a nice cadence for us. We are going to be, I mean, we're going to bring out approximately every generation of battery, every generation in 18 months. That's what we'd like to do. So next question on the PPL timeline. I mean, it's early for us to share any timelines given that we are in the process of pilots. But the dream is that. It is to replace the pre-25D loan TAM with prepaid lease. And there are still several things that have to be ironed out. That's what the pilots are doing: operational issues, ease of doing business, customer consumer confidence, installer performance, financing. All of those, we are trying to solve with the pilots. And we are running in four states.

So far, the installers' feedback is very positive. They like the extra. They like this prepaid lease as a tool that helps them counter the TAM loss due to loan. So we like what we see so far. I think in the next three to six months, we will know everything. We are confident that we'll be able to expand to a lot more states in that timeframe.

Julien Dumoulin-Smith (Research Analyst)

Your comment assumes you gain market share? Or is that more about just the market overall?

Badri Kothandaraman (President and CEO)

We do expect to gain market share. Yes.

Julien Dumoulin-Smith (Research Analyst)

Okay. Excellent. Thanks for clarifying everything. I appreciate it.

Operator (participant)

The next question will come from Moses Sutton with BNP Paribas. Please go ahead.

Moses Sutton (Managing Director and Equity Analyst)

Thanks for squeezing me in. Badri, how many well-capitalized prepaid lease competitor programs are you seeing out there? And by competitor, I mean that as a broader good thing as it would help stimulate the market, as Julian was noting. And then also on the IQ9 residential, do you expect a significantly slower uptake relative to the IQ7 to IQ8 considering its benefits rely on the larger panel format and the market is averaging still smaller panel sizes, and they have to sort of grow into the larger panels?

Badri Kothandaraman (President and CEO)

Good questions. On the prepaid lease, it is still early days. I don't know the details personally about the remaining players, but I've heard their names. I've heard that some of them do a good job, but time will tell. On IQ9, IQ9 addresses one more thing. It not only addresses higher power, 427 W, it also addresses panels that operate at 16 amperes. So if you look at it in Europe, Europe is already starting to operate at 16 amperes right now. So IQ8 had the capability to go up to 14 amperes. IQ9 will extend that capability to 16 and even 18 amperes. The IQ9S product that will be coming in the third quarter will extend it up to 18 amperes. So we believe Europe will be the first to ramp along with Australia and the international.

U.S. is a little behind in terms of panel tech there. So we expect in the U.S., IQ9 to ramp a little more slowly. However, in the commercial space, IQ9 is the only option. IQ9 480 volts, there, the panels are at 595 W-640 W. So there, IQ9 is the only option. And there, we are going not only the 427 W can service the 480-volt market, the 548 that we will be introducing in the second or third quarter, that will also help a lot, including safe harbor.

Moses Sutton (Managing Director and Equity Analyst)

Thank you. Very helpful. And maybe if I could squeeze one in on the Netherlands. Is there potential for actually material pre-demand ahead of the loss of the grandfather of the net metering? Basically, most assume that that story kicks off next year. But are you seeing that there's a significant amount of customers that don't want to see a gap in their solar system's value next year? So they want to self-consume early, and therefore, they'd have to move this year.

Badri Kothandaraman (President and CEO)

Yes. There is yes to that. And I'll tell you why. First of all, if they have batteries now, they won't have to pay a penalty, one. Also, there is a nuance to it. There are several customers whose energy contracts will be expiring right now because they all have limited one- to three-year contracts. So when they are going to sign a new contract for the next two years, they are going to know the full picture. The utility is going to give them the full picture of how the next two years are going to be. And in order for them to really get low rates, the only option they will have is to buy a battery. So I think the education is happening now. Just to elaborate a little more what we are doing and I'm not sure whether you heard my comments before.

We have not done this before at Enphase. We are holding homeowner events. Every homeowner event is attended by approximately 200 people-300 people. Let's say from a family, two people show up. So approximately 150 families. They basically get education. There is a lot of interest in ordering batteries. Pre-orders are usually quite high from such an event. Of course, 10 events is not representative of what is going to happen in the year. We plan to hold at least 100 events in 2026. We plan to basically quantify every event should generate an average, let's say, X kWh or let's say something like 0.5 MWh per event or 1 MWh per event. That's how we are thinking. We are thinking that the first step that we have to do is actually education.

In that process, we are helping our installers. We are starting to do that. It's getting fantastic reception. In fact, our partners are also coming to us. Distributors are now happy that we are doing an organic thing for lead generation instead of depending on only the installers. And then installers are happy because they are getting leads that they didn't plan on before. So yeah.

Operator (participant)

The next question will come from Vikram Bagri with Citi. Please go ahead.

Vikram Bagri (Senior Analyst)

Good evening, everyone. Badri, you mentioned TPO partners have until July 4th to safe harbor. Could you share what the lead time to safe harbor is that you've seen recently? I imagine a month or more to safe harbor, which would mean TPOs have less time to decide than the deadline. And then wondering, when should we expect the frenzy to begin based on that lead time? Related to that, based on what you've seen, is the safe harboring so far being done by the TPO partners? Is that being done expecting growth in forward years? Given all the drivers that you've mentioned, rates, electricity price increases, policies, etc., are the TPO partners conservatively just safe harboring current volumes for multiple years so far?

Badri Kothandaraman (President and CEO)

It's a question for the TPOs, which we cannot answer everything for them. But I'll just give you my opinion based on what we are seeing. For example, if they do the 5% method, let's say they got their order in December, let's say the last week of December 2025, we would have approximately 105 days from that date to ship that product. So that's how it works. And they still get all of the benefits because they place the order within the year, within the end of the year. And they have to prepay. They have to prepay us with the 5% method. With the Physical Work Test, it is similar, but there is a nuance in terms of a custom component, etc., which you already know.

The question on our consumers taking into account future demand increases, I don't know. It is hard for them to take that into account. No one really knows. So it's a real question for them. My thought right now is I don't think that is happening. But that's just my guess.

Vikram Bagri (Senior Analyst)

Thanks, Badri. As a follow-up, a quick housekeeping question on inventory. You mentioned healthy inventory exiting fourth quarter. Is that trailing 13 or 52 weeks? I ask because looking back, the inventory, the channel may be normal. But accounting for a drop in revenues in first quarter, it seems like the channel could be higher than 10 weeks of inventory that you typically sort of keep. Is the inventory comment made on first quarter revenues excluding safe harbor, or the inventory comment is backward-looking 13 or 52 weeks? Thank you.

Badri Kothandaraman (President and CEO)

Yeah. If you calculate the inventory in terms of backward-looking, then we are very, very lean. If you calculate the inventory based on forward-looking demand, we are normal. That's the way you should look at it.

Vikram Bagri (Senior Analyst)

All right. Thank you.

Operator (participant)

The next question will come from Christine Cho with Barclays. Please go ahead.

Christine Cho (Managing Director)

Thank you for squeezing me in. Last quarter, you kind of said that you anticipated sell-through in 4Q to be 350-400. Just curious if you can sort of confirm that you landed there and then if you would be able to give us the split between MIs and storage. Then also if you could give sort of that split for what you're expecting for 1Q ex of safe harbor revenue.

Badri Kothandaraman (President and CEO)

Yeah. We landed right at the midpoint there between 350 and 375, I mean, 350 and 400 sell-through. So that's good. And then just on the split-up, in fact, our sell-through on batteries was higher, was 27%. And the sell-through on microinverters was, I think, approximately around 20-ish%, basically.

Christine Cho (Managing Director)

I'm sorry. Those percentages are up quarter-over-quarter?

Badri Kothandaraman (President and CEO)

Yes. 27% up. The sell-through in Q4 in the U.S., 27% up on batteries with respect to Q3. Sell-through of microinverters in the U.S., up approximately 20% with respect to Q3.

Christine Cho (Managing Director)

And then the split for 1Q?

Badri Kothandaraman (President and CEO)

Split for 1Q, we do not know right now.

Christine Cho (Managing Director)

What about your sell-through expectations for 1Q, just given?

Badri Kothandaraman (President and CEO)

Yes. We are not going to break that out right now.

Christine Cho (Managing Director)

Okay. And just sort of on the prepaid leases, I guess when we do with the deadline for safe harbor coming up, are you getting a sense of, at least with your partners, if they're leaning towards 5% or Physical Work Tests? And I guess do you have any sense of why they wouldn't lean more towards Physical Work Tests, just given it's easier on the balance sheet?

Badri Kothandaraman (President and CEO)

That's right. I mean, I asked the same question too. But it depends upon how comfortable they are with respect to they and their tax partners are. So yes. I mean, the Physical Work Test, it gives them a legally good mechanism to take care of themselves for 2028, 2029, 2030. But what we are seeing is we are seeing a mix of both. In some cases, we are seeing some TPO partners adopt a mix. That is, they do a portion Physical Work Test. They do a portion 5% safe harbor. Some TPO partners only rely on Physical Work Test. It's a mix. There is no general trend. We are capable of providing either way. Whatever the TPO wants, we are here to provide that.

There was a misconception that Enphase cannot do Physical Work Tests. Not true. We do Physical Work Tests. We are engaged with multiple TPO providers on that.

Operator (participant)

Again, if you have a question, please press star, then one. The next question will come from Chris Dendrinos with RBC Capital Markets. Please go ahead.

Chris Dendrinos (VP of Equity Research)

Yeah. Good evening. I wanted to follow up on the commentary about trimmings and price in Europe in response to the competitive dynamic there. Can you maybe just comment on the demand impact from that? Are you seeing, I guess, any type of benefit there? Thanks.

Badri Kothandaraman (President and CEO)

We expect to see some benefit there. We reduced the list prices at distributors by approximately 20% on our microinverters.

Chris Dendrinos (VP of Equity Research)

Got it. And then maybe as you think about the U.S., I mean, is that a consideration in the U.S. to potentially cut prices? Well, and I apologize. I know this gets asked every quarter. Thanks.

Badri Kothandaraman (President and CEO)

Yeah. I mean, we are always looking at it. Right now is the best time for us to help our installers. We are always looking at it. We do install roundtables every week. We are carefully evaluating it. When we think it is appropriate, we will do that. We will inform you.

Chris Dendrinos (VP of Equity Research)

Thank you.

Operator (participant)

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

Maheep Mandloi (Director and Lead Analyst)

Hey. Thanks for squeezing me in as well. You talked about access to a non-China battery supplier. Could you just talk about the pricing environment you're seeing over there with more supply coming? Are we seeing costs come down over there, or it seems kind of stable for the next year or two there? Thanks.

Badri Kothandaraman (President and CEO)

Yeah. In general, I think the battery suppliers are having some pressure on their costs. So I would say we aren't seeing huge price decreases. They are kind of flat. When we move from China to non-China, we would expect anywhere about 20% increase in the cell pack pricing to us, 20%-25%. So for example, if there is a 45% tariff on product from China and there is 0% from a non-China country, it would make sense. So that's what we took into account. And we are working with a battery cell supplier that will enable us in the non-China market or in the non-China battery manufacturing. We expect to start ramping that in the second quarter.

Operator (participant)

Thank you. Once again, if you have a question, please press star, then one. The next question will come from Gus Richard with Northland. Please go ahead.

Gus Richard (Managing Director)

Yes. Thanks for taking the question. Inventory on the balance sheet was up $99 million, sequentially quite a bit. Days of inventory went up quite a bit. And I'm just wondering if you could walk me through why that happened.

Badri Kothandaraman (President and CEO)

Yeah. What we did was we basically in order to ensure FEOC compliance, we took ownership of the inventory from our contract manufacturer. And so everything was clean. And so we did that in the fourth quarter. That factory exists for us. We are managing the factory. And it was a little high, like what you said, $100 million more. But we expect to continuously bring that down. Our operations head and me, we are laser-focused on inventory. And we have clear plans to get that down.

Gus Richard (Managing Director)

Okay. Got it. And then on the fourth-generation battery, I understand that the tare loss is relatively high as it is with your competitors. And I'm just wondering if you're going to address that in the Gen 5 battery. And is that a concern with your customers?

Badri Kothandaraman (President and CEO)

It is a general concern with all batteries. Tare loss is something important just for the benefit of everybody. Tare loss is how much of power the circuitry inside the battery consumes, not what is supplied or not what is provided to the loads in the home. Tare loss is wasted energy, is what we call it, is unusable energy. We recognize that. We have introduced a new feature called as PowerMatch. PowerMatch is a software-enabled technology that dynamically matches the output of the battery to real-time home demand. What does that mean? Is only whatever microinverters are necessary to be on are on. The rest of the microinverters are switched off. Battery life improves. Usable energy improves. If you compare and contrast towards hybrid inverters or hybrid systems, hybrid systems have a single large inverter.

So especially when the customer is operating with very low consumption, that burns a lot of unnecessary power or wastes a lot of power. While in the case of an Enphase battery, PowerMatch basically activates only the microinverters that are necessary. For example, if the home is consuming 500 W, we are not going to burn a 10 kW inverter. We are only going to turn on, let's say, 1 kW worth of an inverter that we have. And the rest of the inverters are going to be off. Similarly, if there are multiple batteries which are not required to be on, they will all be off. So PowerMatch helps in reducing losses at low loads. And we have found approximately a 40% improvement compared to competition.

So we issued a press release, I think, late in Q4, a very nice video on PowerMatch that explains exactly how it works. PowerMatch is a big integral part of the fifth-generation battery as well. The microinverter architecture has got an intrinsic advantage here. If I may, the modularity is not just for right-sizing the battery to a home. You can now leverage the modularity to right-size how much power you're using in real time. It's an incredible advantage that a decentralized or a distributed architecture like what Enphase has brings to the table to make sure that your delivery of power is done very efficiently.

You're not wasting power because you have a core loss and a large inverter is just running all the time, even though the demand on the house may be a tenth of what the capacity of that large inverter is.

Gus Richard (Managing Director)

Got it. All right. Thank you so much.

Badri Kothandaraman (President and CEO)

Thank you.

Operator (participant)

Again, if you have a question, please press star, then one. Please stand by as we poll for questions. And we have one more question with Dimple Gosai with Bank of America. Please go ahead.

Dimple Gosai (Head of US Cleantech ang Sustainability Equity Research)

Hi, there. Good evening. Thanks for getting me in here. One question as it relates to the prepaid leases. What is the attach rate for batteries in your opinion? And how does that kind of compare to the cash and loan channels? And just as a follow-up, what kind of changes the attach rate most? Do you think it's more about payment structure or the system sizing or maybe even the utility tariff design? Any views on that?

Badri Kothandaraman (President and CEO)

Sorry. It's just too early for us to answer. But I mean, the obvious answer in California, we expect it to be 100% attached in California. We don't have enough representation or enough statistics from other states to tell you meaningfully. So hopefully, in another three months, we'll be able to share a lot more.

Dimple Gosai (Head of US Cleantech ang Sustainability Equity Research)

Thank you.

Operator (participant)

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

Badri Kothandaraman (President and CEO)

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

Operator (participant)

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