Enphase's Q3 2025: Contradictions Emerge on Inventory Strategy, 25D Tax Credit Impact, and Battery Pricing

Date of Call: October 28, 2025

Financials Results

• Revenue: $410.4M, highest in 2 years; included $70.9M of safe-harbor revenue; company sell-through up 9% vs Q2
• EPS: Non-GAAP diluted EPS $0.90, up from $0.69 in Q2; GAAP diluted EPS $0.50, up from $0.28 in Q2
• Gross Margin: Non-GAAP 49.2% vs 48.6% in Q2; GAAP 47.8% vs 46.9% in Q2; non-GAAP excl. net IRA 38.9% vs 37.2% in Q2; included $42.5M net IRA benefit; reciprocal tariffs impacted Q3 by ~4.9%
• Operating Margin: Non-GAAP operating income 30% of revenue; non-GAAP income from operations $123.4M vs $98.6M in Q2; non-GAAP operating expense ~19% ($78.5M)

Guidance:

• Q4 revenue guidance $310M–$350M; company sell-through expected $350M–$400M (safe-harbor upside possible)
• IQ Batteries shipments expected 140–160 MWh in Q4
• Q4 GAAP gross margin expected 40%–43% (includes ~5pp reciprocal tariff); non-GAAP gross margin 42%–45%
• Q4 GAAP opex $130M–$134M; non-GAAP opex $77M–$81M
• Preliminary view: Q1'26 company revenue estimate $250M (larger-than-normal seasonal decline); expect recovery through 2026 H2

Business Commentary:

* Revenue Growth and Outlook: - Enphase Energy reported revenue of $410.4 million for Q3 2025, their highest revenue level in 2 years, with guidance for $310 million to $350 million for Q4. - Growth was driven by strong demand in the U.S. due to impending tax credit expiries, increased safe harbor revenue, and strategic product launches like the IQ Battery 10C.

• Operational Efficiency and Margin Expansion:
• Enphase achieved a non-GAAP gross margin of 49.2%, above expectations, with a guidance for 42% to 45% for Q4, including a 5% tariff impact.

• The company managed costs effectively, maintaining operating expenses within guidance and reducing share withholding for employee taxes.

• Regional Market Dynamics:

• U.S. revenue increased 29% in Q3, with 85% share compared to 15% for international markets, reflecting strong demand amidst tax credit expiration.

• International markets, particularly Europe, faced a 38% revenue decline due to seasonality and regulatory challenges, but partnerships like Essent in the Netherlands are expected to drive future growth.

• Product Innovation and Market Expansion:

• Enphase launched the IQ9N Commercial Microinverter, opening markets for 480-volt 3-phase commercial installations, and introduced the FlexPhase battery in Australia and New Zealand.
• These strategic launches, alongside strong partnerships, are aimed at capturing new market opportunities and expanding into emerging markets like Japan and Australia.

Sentiment Analysis:

Overall Tone: Neutral

• Management: "We had a good quarter" and reported record revenue and strong margins, but guided conservatively for Q4 ($310M–$350M) and flagged a larger-than-normal Q1'26 seasonal decline (~$250M prelim.). They emphasized product/market confidence and long-term drivers while acknowledging near-term headwinds from tariff impacts and the 25D expiration.

Q&A:

• Question from Colin Rusch (Oppenheimer & Co. Inc.): Are you still targeting ~8–10 weeks of channel inventory entering Q1 and how are you thinking about appropriate inventory levels?
  Response: Management: Rule of thumb remains 8–10 weeks; purposely reducing shipments to destock the channel (approx. $45M undershipment at midpoint of Q4 guide) to start 2026 with a healthy channel.

• Question from Colin Rusch (Oppenheimer & Co. Inc.): With the new (4th‑gen) battery, are you raising prices or using features to gain share?
  Response: Management: No price increases — using 4th‑gen battery to capture share; 4th‑gen was 40% of US battery shipments in Q3 and 5th‑gen will materially lower costs and improve margins.

• Question from Brian Lee (Goldman Sachs): Why is non‑U.S. revenue at its lowest since 2021 and what is the path to recovery in Europe?
  Response: Management: Europe weakness is policy-driven (Netherlands net‑metering sunset, reduced France export incentives); strategy is pivot to solar+storage, targeted partnerships (e.g., Essent) and product launches to drive battery retrofit and recovery in 2026.

• Question from Brian Lee (Goldman Sachs): Why does Q4 non‑GAAP gross margin midpoint (~43.5%) step down vs Q3's ~49% and what about Q1 downside?
  Response: Management: A ~5pp reciprocal tariff materially lowers margins (batteries most affected); without the tariff Q4 midpoint would be ~48.5%; margins should improve as non‑China sourcing ramps and 5th‑gen battery reduces costs, but Q1 specifics are not yet provided.

• Question from Philip Shen (ROTH Capital Partners): How are you supporting customers to satisfy the physical work test safe‑harbor and how does it affect revenue recognition?
  Response: Management: They provide custom components/products to meet the physical work test, which reduces customer cash outlay and yields linear (not lump‑sum) revenue — Enphase supports both the 5% and physical work test approaches.

• Question from Philip Shen (ROTH Capital Partners): Is Enphase participating in prepaid‑lease (PPL) models and will you support TPOs?
  Response: Management: Enphase will support TPO partners (O&M, Solargraf, safe harbor/tax equity support); views PPL+loan as promising for restoring loan‑style economics but partners will lead announcements.

• Question from Praneeth Satish (Wells Fargo): How did you size the preliminary Q1'26 $250M outlook — are you seeing demand change in real time?
  Response: Management: $250M is a preliminary, bottoms‑up estimate based on a rolling six‑quarter forecasting process with monthly sales input and customer conversations; it's an informed but not final view.

• Question from Praneeth Satish (Wells Fargo): Why do Q4 battery shipments show a ~50 MWh drop versus Q3 and how should batteries perform into 2026?
  Response: Management: Q4 reduction reflects deliberate channel destocking to start 2026 healthy; they expect batteries to be resilient in 2026 due to domestic content, CARB compliance and strong product positioning despite tariffs.

• Question from Christine Cho (Barclays): Is the $250M Q1 view expected to be sell‑through or will destocking continue into H1'26?
  Response: Management: Expect equilibrium or slightly higher sell‑through than $250M but it's early and uncertain.

• Question from Dylan Nassano (Wolfe Research): Will you take OpEx actions heading into Q1 and what OpEx posture for 2026?
  Response: Management: Run‑rate is ~$80M non‑GAAP per quarter; they will trim spending to track revenue but will not cut customer‑facing innovation or service capabilities.

• Question from Dylan Nassano (Wolfe Research): Will O&M from TPO/PPL be a material revenue stream and what are margins?
  Response: Management: Too early to quantify, but Enphase expects O&M and Solargraf integration to be valuable services partners want; specifics on margins and scale not provided.

• Question from Julien Dumoulin‑Smith (Jefferies): What gives you confidence that 2026 will recover in H2 and not see sustained weakness?
  Response: Management: Three external recovery drivers — rising power prices, declining interest rates, new financing (e.g., PPL) — plus Enphase‑specific levers (4th/5th‑gen batteries, IQ9 GaN, EV chargers, Netherlands partnerships) should support a H2'26 rebound.

• Question from Julien Dumoulin‑Smith (Jefferies): Can you quantify the Netherlands retrofit opportunity from 475k installed homes?
  Response: Management: Not providing a forecast, but illustrative math: 475k homes × ~7.5 kWh ≈ 3 GWh total addressable; a modest attach rate (e.g., 10%) would still be significant, and VPP programs with payments (e.g., EUR122/mo) can materially improve economics.

• Question from David Benjamin (Mizuho) for Maheep: Where does Japan stand and is it a strong opportunity?
  Response: Management: Japan is a slow, steady ramp — launched in April with partner ITOCHU, training installers and building local presence; revenue growth expected gradual, not a hockey stick.

• Question from David Benjamin (Mizuho) for Maheep: Status of Balcony Solar demand?
  Response: Management: Early hiccups resolved; variants and e‑commerce efforts underway with ramp planned through 2026.

• Question from Vikram Bagri (Citigroup): Does your channel destocking imply a 25%–30% install decline assumption and are you more conservative now?
  Response: Management: Industry expects a 20%–30% install decline due to 25D loss plus usual Q1 seasonality (~15%); Enphase's $250M preliminary Q1 view reflects caution but also potential upside from financing innovations like PPL.

Contradiction Point 1

Inventory Management and Demand Projections

It involves differences in how the company plans to manage inventory levels and demand expectations, which could impact operational strategies and financial results.

What are inventory levels for Q1 next year and the reduction strategy? - Colin Rusch(Oppenheimer & Co. Inc., Research Division)

2025Q3: We expect an overall sell-through for Q1 to be between $350 million to $400 million but will guide revenue between $310 million to $350 million to maintain a healthy channel inventory. We aim for 8 to 10 weeks of inventory, reflecting caution and strategic positioning for a strong 2026. - Badrinarayanan Kothandaraman(CEO)

What caused the increase in channel inventory levels, and what are current levels? - Philip Shen(ROTH Capital Partners, LLC, Research Division)

2025Q2: Our channel management is in good shape, with elevated levels currently slightly above 8% to 10%, which is normal. We aim to stay at or below these levels moving forward. - Badrinarayanan Kothandaraman(CEO)

Contradiction Point 2

25D Tax Credit Impact and Demand Pull

It involves differing expectations on the impact of the 25D tax credit expiration on demand and the timing of a potential demand pull, which are crucial for revenue forecasting and strategic planning.

How do you estimate the Q1 '26 revenue decline after 25D? - Praneeth Satish(Wells Fargo Securities, LLC, Research Division)

2025Q3: We anticipate a larger-than-normal seasonal decline, with a cycle trough in Q1, followed by recovery. The decline is primarily due to the loss of 25D tax credit, potentially offset by drivers like rising power prices and new financing solutions. - Badrinarayanan Kothandaraman(CEO)

Did you share the expected Safe Harbor revenue for Q3, and how do you foresee demand being pulled forward due to 25D? - Philip Shen(ROTH Capital Partners, LLC, Research Division)

2025Q2: We expect demand related to 25D to materialize in early Q4, as installers need time to ramp up operations and expand crews to manage the rush. We are confident that the demand pull will occur later in the year. - Badrinarayanan Kothandaraman(CEO)

Contradiction Point 3

Battery Pricing Strategy

It involves changes in pricing strategy for batteries, which could affect market competitiveness and revenue projections.

How are you addressing pricing strategies for new battery features and market share strategies? - Brian Lee (Goldman Sachs Group, Inc., Research Division)

2025Q3: We're not increasing battery prices, maintaining current levels despite tariffs. Our focus is on capturing market share with the fourth-generation battery, which offers higher energy density and lower installation costs. - Badrinarayanan Kothandaraman(CEO)

Given tariffs are impacting battery storage margins, can you discuss Q2 shipment volumes? - Brian Lee (Goldman Sachs Group, Inc., Research Division)

2025Q1: We are passing a small percentage increase to customers. We have other actions to improve gross margin, like working on raw materials. - Badrinarayanan Kothandaraman(CEO)

Contradiction Point 4

Impact of 25D Tax Credit Loss

It reflects differing views on the impact of the 25D tax credit loss on revenue and demand, which can influence investor expectations.

How large is the expected Q1 '26 revenue decline after 25D? - Praneeth Satish(Wells Fargo Securities, LLC, Research Division)

2025Q3: We anticipate a larger-than-normal seasonal decline, with a cycle trough in Q1, followed by recovery. The decline is primarily due to the loss of 25D tax credit, potentially offset by drivers like rising power prices and new financing solutions. - Badrinarayanan Kothandaraman(CEO)

Are you considering any demand decline in Q2 due to IRA uncertainty or adjustments to NOVA exposure? - Praneeth Satish(Wells Fargo)

2025Q1: The U.S. solar market is under pressure, but demand is expected to normalize with improved seasonal trends in Q2. Our value proposition, including new battery systems, should drive demand post-Q2. - Badrinarayanan Kothandaraman(CEO)

Contradiction Point 5

Inventory and Sales Strategy

It reflects differing approaches to inventory management and sales strategy, which are crucial for revenue projections and operational efficiency.

What are your inventory levels for Q1 next year and your strategy for reducing them? - Colin Rusch(Oppenheimer & Co. Inc., Research Division)

2025Q3: We expect an overall sell-through for Q1 to be between $350 million to $400 million but will guide revenue between $310 million to $350 million to maintain a healthy channel inventory. - Badrinarayanan Kothandaraman(CEO)

Was there any safe harbor revenue in Q4? What is the split between micros and batteries in the $95 million total safe harbor revenue? Who is the $95 million safe harbor revenue with? - Brian Lee(Goldman Sachs)

2024Q4: We are fully committed to maintaining inventory levels below the 10-week level for the entire year. - Badrinarayanan Kothandaraman(CEO)