Christina Carrabino - IR Paul Nahi - President and CEO Bert Garcia - CFO.

Kristen Owen - Oppenheimer & Co. Jeffrey Osborne - Cowen and Company Tyler - Deutsche Bank Research Michael Morosi - Avondale Partners Philip Shen - ROTH Capital Brad Meikle - Craig-Hallum Capital Group Edwin Mok - Needham & Company Krish Sankar - Bank of America Merrill Lynch.

Presentation:.

Good day, ladies and gentlemen, and welcome to the Enphase Energy's Fourth Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

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

Good afternoon and thank you for joining us on today's conference call to discuss Enphase Energy's fourth quarter and year ended 2016 results. On today's call are Paul Nahi, Enphase Energy's President and Chief Executive Officer, and Bert Garcia, Chief Financial Officer.

After the market closed today, Enphase issued a press release announcing the results for its fourth quarter and fiscal year ended December 31, 2016.

During the course of this conference call, Enphase management will make forward-looking statements including, but not limited to, statements related to Enphase Energy's financial performance, market demands for its current and future products, advantages of its technology, and market trends.

These forward-looking statements involve significant risks and uncertainties and Enphase Energy's actual results and the timing of events could differ materially from these expectations.

For a more complete discussion of the risks and uncertainties, please see the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2016, which is on file with the SEC, and the annual report on Form 10-K for the year ended December 31, 2016 which will be filed with the SEC in the first quarter of 2017.

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, unless otherwise noted, 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 release posted today, which also can be found in the Investor Relations section of its Web-site. 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 full year 2016 financial results. We reported revenue of $90.6 million for the fourth quarter of 2016. We shipped approximately 194 megawatts AC or 815,000 microinverters, an increase in megawatts of 50% compared to the fourth quarter of 2015.

GAAP gross margin was 17.9% and non-GAAP gross margin was 18.2%. We have currently more than 580,000 Enphase systems deployed in over 100 countries. Since inception, we have shipped over 13 million microinverters, representing more than 3 gigawatts of installed generating capacity.

Enphase systems have produced approximately 8 terawatt hours of clean, renewable energy. For the full-year 2016, we reported revenue of $322.6 million and shipped a record 726 megawatts AC or 3.1 million microinverters. GAAP gross margin was 18% and non-GAAP gross margin was 18.4%.

Enphase has been executing on a business strategy detailed in late 2015. We are gaining market share by offering competitive pricing, enabled by aggressive cost reductions and providing a richer more comprehensive energy solution for our customers.

In addition, we are committed to reduce our cost structure with a goal of enabling consistent profitability. Our lower pricing strategy put pressure on revenue and gross margin during 2016.

As a result, we took several actions in the second half of 2016 and in the first quarter of 2017 to reduce our operating expenses in order to create a faster path to sustained profitability. Bert will go into more detail about these actions and our financial results later in the call..

We saw the effectiveness of our lower pricing strategy with new customer wins and an increasing share with existing customers. During the second half of 2016, we had significant market share growth in almost every geography in which we participate.

Based on third-party estimates as well as our own data, we believe our market share in the United States increased from approximately 20% in Q1 to over 30% in Q4.

In addition, we believe we are the residential market share leader in Mexico, Puerto Rico, France and New Zealand, and have gained significant share in the Netherlands, Switzerland and Australia. Our success in these regions has given us further confidence that our strategy is working.

An important element of our strategy was to target approximately 50% product cost reduction over two years from the fourth quarter of 2015 to early 2018. During 2015, we continued to aggressively drive down the overall cost of our microinverter systems.

As part of our commitment to deliver new products and technologies that provide additional functionality, reduce cost and enhance the simplicity for installers, we'll be launching our Enphase Home Energy Solution with IQ, our next generation integrated solar, storage and energy management solution, in the U.S.

We're excited to have already received the purchase orders and expect the deliveries starting in March, on time and under budget. The Enphase Home Energy Solution with IQ features our sixth-generation Enphase Microinverter System, which supports just about every 60 and 72-cell solar module and continues to simplify design and installation process.

Our cost reduction activity is underway for 2017 and we are well on track to meet our targets.

The introduction of our seventh-generation microinverter, the IQ 7, is on track for the first quarter of 2018, thus further reducing our product cost while still offering our customers with quality, features and functionality they have come to expect from an Enphase product. We have been relentlessly focused on pulling in profitability.

This required us to make some very hard decisions, but we understand the importance of creating a strong financial foundation and delivering consistent profitability to our shareholders.

We feel that the actions we have taken should result in Q2 non-GAAP operating expense of approximately $18 million and will enable us to accelerate our path to profitability. In addition to our focus on cost reduction, our product roadmap is more exciting than ever.

We along with our partners have developed a new generation of integrated AC solar modules for the worldwide market. The AC module is defined as a microinverter integrated directly on the solar panel and represents the ultimate integration of the inverter and the solar panel. We firmly believe AC module is the future of rooftop solar.

There is a significant increase in demand from large solar distributors, installers and fleet owners for a reliable, cost-effective and high-performance AC module. Our sixth generation microinverters will be included in the AC modules from LG, SolarWorld and Jinko Solar.

By integrating our sixth-generation microinverters onto modules directly, we are creating an even simpler, more consolidated solution. The AC module will reduce working capital requirements, simplify inventory management, reduce installation time and enable easier operations and maintenance.

In addition, the AC module also enables a simpler warranty process, one-stop technical support, and other asset management advantages such as remote monitoring for both the microinverter system and the module. We expect these modules to be available in the U.S. during the second quarter of 2017.

We began shipping our AC Battery storage solution to some U.S. markets during the fourth quarter and we are pleased with the initial reception and the feedback from our customers. We believe the simplicity, ease in installation, modularity and performance of our AC Battery is unique in the industry.

We increased our presence in Europe during the fourth quarter by expanding existing partnerships and developing new ones, and revenue was up 34% sequentially. We introduced our AC Battery in Europe during the quarter and are pleased with its reception.

In the APAC region, we continue to be pleased with our progress in Australia and New Zealand, where revenue in the fourth quarter was up 146% sequentially. The response to our AC Battery storage solution in Australia and New Zealand has been extremely positive and all of its advantages are clearly resonating with customers.

Turning to our other markets, we continued to see growth in both the residential and commercial markets in Latin America during the fourth quarter, particularly in Mexico and Puerto Rico. We estimate our current market share to be over 30% in Mexico and over 75% in Puerto Rico.

In fact, we just unveiled the world's largest microinverter-powered small utility-scale solar plant in Panama at 2.44 megawatts. We remain optimistic about our opportunities in Latin America during 2017 and are expanding our customer base and geographies we sell in into that region. The gains we have seen in our inverter market share in the U.S.

and the global residential market, along with the positive reception of the Enphase Storage System in Australia, the U.S. and Europe, and the upcoming introduction of our AC module product, validate Enphase's vision to realize the global potential of solar energy through our technology innovation.

I'll close my comments by noting we are excited about our opportunities in 2017 and are encouraged by our market share gains worldwide. We are working diligently on creating what we believe is a path to sustained profitability.

I'd like to thank the entire Enphase team for their ongoing hard work, passion and dedication as we work together on developing new technologies by making energy more intelligent, more connected and more cost-effective than ever before. Now, I'll turn over to Bert for his review of our financial results..

Thanks, Paul. I'll provide more details related to our fourth quarter and fiscal year 2016 financial results as well as our current financial status and business outlook for the first quarter. As a reminder, the financial measures that I'm going to provide are on a non-GAAP basis, unless otherwise noted.

Total revenue for the fourth quarter of 2016 was $90.6 million, an increase of 2% sequentially and an increase of 38% compared to the fourth quarter of 2015. Total revenue for 2016 was $322.6 million, down approximately 10% from fiscal 2015.

We shipped approximately 194 megawatts AC or 225 megawatts DC in the fourth quarter of 2016, a decrease in megawatts of 5% sequentially and an increase in megawatts of 50% compared to the fourth quarter of 2015. The megawatt shipped represented 815,000 microinverters. All of them were our fourth and fifth-generation microinverter systems.

Non-inverter revenue increased 22% sequentially, driven by increased penetration of our AC Battery storage solution. In 2016, we shipped a record 3.1 million microinverters, representing 726 megawatts AC or approximately 845 megawatts DC, a 3% year-over-year increase. GAAP gross margin for the fourth quarter of 2016 was 17.9%.

Non-GAAP gross margin was 18.2%, sequentially flat from Q3. Non-GAAP gross margin excludes approximately $281,000 of stock-based compensation expense. For the full year of 2016, GAAP gross margin was 18% and non-GAAP gross margin was 18.4%.

As discussed in our last call, at the end of Q3 we made the difficult decision to reduce our global workforce by approximately 11% and eliminate certain non-core projects, resulting in approximately $20 million of annualized non-GAAP expense savings, starting in the fourth quarter of 2016.

This restructuring initiative was materially complete in the fourth quarter. As a result, non-GAAP operating expense was $23.4 million for the fourth quarter compared to $28.6 million for the third quarter.

Non-GAAP operating expense for the fourth quarter excludes $1.1 million of additional restructuring charges related to the consolidation of corporate headquarter facilities and related asset impairments as well as the gain on the divestiture of our Services business and $1.8 million of stock-based compensation expense.

Non-GAAP operating expense for 2016 was $107.6 million compared to $115.7 million in 2015. In the fourth quarter, R&D expense was $10.5 million, sales and marketing expense was $7.2 million, and G&A expense was $5.7 million.

For fiscal 2016, our R&D expense was $46.8 million, sales and marketing expense was $36.5 million and G&A expense was $24.3 million. For the fourth quarter, our GAAP operating loss was $10.1 million and our net loss was $13.2 million, resulting in a loss of $0.21 per share.

On a non-GAAP basis, our operating loss was $6.9 million and the net loss was $9.3 million, resulting in a loss of $0.15 per share. GAAP operating loss for the full year of 2016 was $62.7 million and net loss was $67.5 million, or a loss of $1.34 per share.

On a non-GAAP basis, operating loss was $48.4 million and net loss was $52.4 million, or $1.04 per share. Before we move on, I want to take a moment to discuss the additional restructuring action that we announced on January 30th.

As disclosed, this action impacted approximately 18% of our global workforce and will result in further non-GAAP OpEx reductions totaling approximately $18 million on an annualized basis, bringing our non-GAAP operating expense rate to approximately $18 million per quarter, starting in Q2.

As difficult as the recent restructuring decisions have been, we believe these actions significantly improve our overall financial footing and advance us towards achieving near-term profitability. Now, coming to the balance sheet, we decreased inventory levels by over $7 million from the third quarter, ending the year with $32 million.

We exited the fourth quarter with a total cash balance of $17.8 million. At the end of the fourth quarter, we had $10.1 million drawn on our credit facility and a $23.8 million balance on our term loan which is net of deferred financing costs.

Based on our liquidity position at December 31, 2016 as well as our history of operating losses, we acknowledge there is substantial doubt about our ability to continue as a going concern. In light of the challenges that we faced in 2016, these concerns are understandable.

However, it's important to note that we have taken a number of meaningful actions that we believe will directly address many of these concerns, and taken together will significantly improve our financial condition in 2017.

On the financing front, these actions have included the secondary offering of our common stock in 2016, resulting in net proceeds of approximately $16.2 million as well as an At The Market Issuance ATM Sales Agreement that we entered into in December 2016, providing for up to an additional $17 million in gross proceeds from the sale of common stock.

As of December 31, we had not sold any shares under the ATM. However, during the first quarter of 2017, we have realized net proceeds to date of approximately $11.3 million of common stock sold under the ATM. In addition, in January we announced a strategic investment from John Doerr and T.J. Rodgers.

We believe this investment underscores the value of and confidence in our technology and vision. Finally, on February 16th we announced the extension and refinancing of our term loan facility from $25 million to $50 million.

In connection with this refinancing, we consolidated our lender relationships by repaying the $10.4 million of principal and interest outstanding under our existing line of credit facility with Wells Fargo and closed that facility.

On the restructuring front, as previously mentioned, the combined impact of the actions that we took in Q3 and more recently in January resulted in a $38 million reduction in operating expenses on an annualized basis.

These actions have helped create an operating structure that more closely aligns with the scope of our business today and positions us well to achieve maximum operational leverage as the business continues to grow. Most importantly, we believe these actions significantly accelerate our timeline towards sustained profitability and positive cash flow.

Finally, on the product front, we have made considerable investments to significantly drive down the costs of our sixth and seventh-generation microinverters, known as our IQ series. We delivered the cost reductions on the sixth-generation microinverter as promised and we're excited to begin shipping that product next week.

I'm also extremely encouraged by the progress that we have made on our seventh-generation product, which will deliver even deeper cost reductions when it's released in Q1 of 2018, further driving margin improvement. In addition to the investments we have made in cost reduction, our focus on new product development has also begun to bear fruit.

We launched our AC Battery storage solution in Australia during Q3 and in Europe and the U.S. in Q4. We believe our AC module, which is scheduled for initial shipments in late Q2, will fundamentally change the installation landscape.

In summary, the steps that we have taken on the financing, restructuring, product development fronts, speak directly to our commitment to our customers, vendors, employees and shareholders. All of them continue to express their confidence in us. Now, let's discuss our outlook for the first quarter of 2017.

We expect our revenue for the first quarter of 2017 to be within the range of $60 million to $65 million. While our first quarter results are typically impacted by normal seasonality, the extraordinarily wet winter in California, where we have a strong presence, has negatively impacted our first quarter revenues.

We estimate that the residential PV market in California will be off by as much as 50% in Q1. However, we believe that the California market will recover in Q2 and return to normal growth rates. Turning to margins, we expect GAAP and non-GAAP gross margin in Q1 to be within a range of 16% to 20%.

Non-GAAP gross margin excludes approximately $250,000 of stock-based compensation expense.

We expect GAAP operating expense for the first quarter to be within a range of $27.5 million to $29.5 million, and non-GAAP operating expense to be within a range of $19 million to $21 million, excluding an estimated $1.5 million of stock-based compensation expense and approximately $7 million of additional restructuring expense.

Now, I'll open up the line for questions..

[Operator Instructions] Our first question comes from Colin Rusch with Oppenheimer. Your question please..

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Our next question comes from Jeff Osborne with Cowen and Company. Your question please..

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Our next question comes from Vishal Shah with Deutsche Bank. Your question please..

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Our next question comes from Michael Morosi with Avondale Partners. Your question please..

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Our next question comes from Philip Shen with ROTH Capital. Your question please..

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Our next question comes from Brad Meikle of Craig-Hallum Capital. Your question please..

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[Operator Instructions] Our next question comes from Krish Sankar with BOA Merrill Lynch. Your question please..

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Our next question comes from Philip Shen with ROTH Capital. Your question please..

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[Operator Instructions] I show no further questions at this time. I would like to turn the call back over to Mr. Nahi for closing remarks..

Thank you for joining us today. We look forward to speaking with you again next quarter..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day..