Enphase Energy, Inc. (ENPH) CEO Badri Kothandaraman on Q2 2020 Results – Earnings Call Transcript

Start Time: 16:30 January 1, 0000 5:52 PM ET

Enphase Energy, Inc. (NASDAQ:ENPH)

Q2 2020 Earnings Conference Call

August 04, 2020, 16:30 PM ET

Company Participants

Badri Kothandaraman – CEO

Eric Branderiz – CFO

Raghu Belur – Co-founder, Chief Products Officer

Adam Hinckley – IR

Conference Call Participants

Brian Lee – Goldman Sachs

Mark Strouse – JPMorgan

Brad Meikle – Williams Trading

Colin Rusch – Oppenheimer

Eric Stine – Craig-Hallum

Maheep Mandloi – Credit Suisse

Philip Shen – ROTH Capital Partners

Mike Cikos – Needham & Co.

Jeffrey Campbell – Tuohy Brothers

Joseph Osha – JMP Securities

Amit Dayal – H.C. Wainwright

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Enphase Energy’s Second Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to your speaker, Mr. Adam Hinckley. Please go ahead, sir.

Adam Hinckley

Good afternoon and thank you for joining us on today’s conference call to discuss Enphase Energy’s second quarter 2020 results.

On today’s call are Badri Kothandaraman, Enphase’ President and Chief Executive Officer; Eric Branderiz, Chief Financial Officer; and Raghu Belur, Chief Products Officer.

After the market close today, Enphase issued a press release announcing the results for its second quarter ended June 30, 2020. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to Enphase Energy’s expected future financial performance; the capabilities, availability and market adoption of our current and future technology and products, our performance and the performance of our installation partners in sales and operations, and our expectations as to the impact of the COVID-19 pandemic. 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 annual report on Form 10-K for the year ended December 31, 2019, which is on file with the SEC, and quarterly report on Form 10-Q for the second quarter ended June 30, 2020, which will be filed during the third quarter of 2020.

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 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 a reconciliation of these non-GAAP financial measures to GAAP financial measures in its earnings release posted today, which can also be found in the Investor Relations section of its Web site.

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

Badri Kothandaraman

Good afternoon, and thanks for joining us today to discuss our second quarter 2020 financial results. I hope all of you are staying safe and healthy. Our team did a good job of navigating a difficult macro environment caused by COVID-19. We reported revenue of $125.5 million, shipped approximately 1.1 million microinverters while driving channel inventory back to healthy levels, achieved record non-GAAP gross margin of 39.6% and generated strong free cash flow of $21 million.

In addition, we began shipping our Encharge storage system featuring Ensemble energy management technology. This is an important product release for Enphase. More on this shortly. We exited the second quarter at approximately 40, 21, 19. This means 40% gross margin, 21% operating expenses and 19% operating income, all as a percentage of revenue on a non-GAAP basis. As a reminder, our baseline financial model is 35, 15, 20.

COVID-19 created a significant downward pressure on demand during the second quarter of 2020. With many countries implementing shelter-in-place restrictions, all aspects of daily life were impacted. Although solar installers were considered essential service providers in some locations, their business processes had to be reinvented.

For an industry that relies largely on in-person sales meetings with homeowners a few months ago, the speed with which installers have migrated to virtual selling has been impressive. Our employees have been remarkably resilient too, not skipping a beat during the pandemic.

Releasing Ensemble to the market with most of the engineers working from home was an amazing accomplishment. Our sales operations and finance teams did an incredible job navigating a tough quarter by working closely with customers, focusing on linearity and inventory management and ensuring tight cash management. I’m very proud of them.

Let’s now talk about how we are servicing customers. Our customer experienced personnel in all four worldwide locations; U.S., Europe, India and Australia are fully supporting installers and homeowners while working from home.

Our worldwide Q2 Net Promoter Score was 66% and our North America Net Promoter Score was 73%. The ability to show consistent results with employees working from home during the quarter was no easy feat and is a testament to the business processes we implemented.

Our average call wait time decreased slightly in Q2 to approximately 1 minute. We continue to enhance self-service and chat capabilities to reduce call volumes and lower our wait time. Specifically, we launched the online Enphase Community during Q2 which gives installers and homeowners the ability to communicate directly about Enphase products.

In addition to the Enphase online store we launched in the U.S. during Q4 ’19, we also added online stores in Europe and Australia during Q2 to better service our installers and homeowners with quick cycle times.

Let’s quickly cover manufacturing. Given the reduced demand situation in Q2, we worked very closely with our contract manufacturing partners to optimize overall inventory builds in both China and Mexico. Maintaining a tight lid on inventory is critical for us especially during these tough times.

We were pretty successful as we reduced inventory levels by nearly $3.4 million compared to Q1. Our factory in Mexico is very important for us and we feel confident we’ll be able to produce 1 million microinverters by Q4 ’20, if justified by product demand.

We currently manufacture in both China and Mexico with our existing contract manufacturing partner and we have an excellent relationship with them. On our previous earnings call, I have discussed qualifying a second contact manufacturing partner for microinverters. We are doing this to create further flexibility as we grow our business.

The contract manufacturer is Salcomp and that factory is in Chennai, India. We are setting up a fully automated line with them. The qualification is going well. We are very happy with the progress and we expect to start producing microinverters from the Salcomp Chennai factory in the fourth quarter of 2020.

In terms of battery storage, we have one qualified supplier for our cell pack and we are in the final stages of qualifying an additional supplier. This will bring up our capacity to a total of 480 megawatt hours here once the two supplier factories are fully ramped in the first half of 2021.

We also expect to qualify a third source next year so that we have fully flexible supply chain for batteries going forward, much like our microinverter supply chain. We are still using lithium iron phosphate batteries as they provide differentiation in terms of fire safety and terminal stability, which is very critical to homeowners.

Let’s now move to the regions. Our U.S. and international mix for Q2 was 80% and 20%, respectively. Europe stood out during the quarter demonstrating sequential revenue growth from Q1, despite COVID-19. The U.S. market was the hardest hit region due to COVID-19 with solar installation shutdown in the areas of California and several north eastern states, April witnessed a dramatic slowdown.

As installers become more proficient in closing online sales and as building departments accelerated online permits, we started to see activity picking up towards June. Our average weekly sell-through from distribution to installers was 26% higher in June versus April.

We worked very closely with our distributors and installers throughout Q2 to optimize channel inventory. Weeks on hand at the end of Q2 was above our typical level but still within a healthy range. In addition, our installer count increased sequentially in Q2, despite the low overall sell-through. This highlights our success at continuing to win new installers. We also announced a strategic partnership in Q2 with Q CELLS to develop AC Modules based on our seventh-generation IQ 7+ microinverters.

For the third quarter, we are seeing a nice pickup in sell-through during July. Our weekly sell-through in July was 14% better than in June. We expect to be at our target inventory range of 8 to 10 weeks at the end of Q2. In addition, we started shipping the Encharge storage systems in the U.S. We are ramping the battery supply chain and have more demand than what we can support in Q3.

As I have said, we are rapidly bringing on additional capacity with our second battery supplier for Q4. Another important subject is the Encharge training for installers. In early July, we pivoted to online training for installers through the Enphase University. Nearly 134 installers have completed the online courses to achieve provisional certification and another 531 installers are in the process of completing the training.

In summary, we are confident of resolving supply and training challenges and are targeting an 8% to 10% average storage attach rate for the U.S. in Q4, which is higher than what we said at our Analyst Day in December of 2019. As a reminder, the storage attach rates vary depending on geography and we expect attach rates to be significantly higher in California and Florida.

In Europe, we are expanding our sales force in all key regions even more than what we originally planned before. Our Q2 revenue in Europe increased sequentially by 8% from Q1. Installer attendance at sales webinars during Q2 more than doubled relative to in-person attendance in Q1. As a result, our installer count increased by more than 20% sequentially.

Distributor gains were made both in new markets, such as Germany, Poland and Spain as well as existing markets of Netherlands and Belgium. We expect to grow significantly in Europe during Q3, although our target of doubling revenue on an annual basis is unlikely due to COVID. We anticipate adding several new installers and distributors during Q3.

We recently announced a strategic partnership with SunPower to produce the new Enphase Energized Maxeon AC Module based on seventh-generation IQ microinverters. Overall, I’m very happy with our team’s performance in Europe.

Revenue from both Asia Pacific and Latin America decreased sequentially at a rate consistent with the U.S. when excluding safe harbor revenue from Q1. In Latin America, Puerto Rico witnessed the strong rebound activity during the second half of Q2 in anticipation of the hurricane season after being shutdown in the first half of the quarter. Storage attach rates in Puerto Rico were high, so this could be an interesting market as we ramp shipments of our Encharge storage systems.

In Australia, we’ve been focused on winning new distributor and installer partners and our installer count in Q2 reached a multiyear high. The Australian market suffers from an abundance of low-quality products. With our differentiation on safe AC, reliability and customer service are allowing us to gain share.

During Q3, we plan to introduce in Australia our highest power product, IQ 7A, which can pair with high power DC Modules up to 450 watts. This will help installers optimize their overall system cost and performance. In addition, we expect to ship microinverters for Maxeon AC Modules starting in Q4 ’20. We expect sequential revenue growth from these initiatives through 2020 and beyond.

Now that we covered the regions, let’s now talk about the overall bookings worldwide for the third quarter. At this point, we are 100% through the midpoint of Q3 revenue guidance. We cannot predict how COVID-19 is going to play out in August or September, so that’s always a risk. However, we feel very good about the progress we are making and the demand that we are seeing.

Let’s now turn to new products. The feedback that we have received on our Encharge storage system has been quite good. Installers like the modularity, ease of installations and the all-in-one energy system in addition to our trademark quality and service. Homeowners like the product’s functionality, in our safe chemistry, one company to call, transparency of internal workings and the ability to go operate through the mobile app.

Just to recap, I’d like to go through the features and benefits of the Encharge storage systems in detail. First, an all-in-one AC coupled system for distributed solar and storage; second, intelligent brownout built with Enphase power start technology which uses a software-based approach to mitigate initial demand spike from motor-driven appliances such as air conditioners and pumps.

Third, there’s modular architecture along with UL 9540A fire certification based upon very safe lithium iron phosphate chemistry along with air cooling. And fourth is no single point of failure due to redundant microinverters in every Encharge 3.3 kilowatt hour battery. Fifth one is the standard easy to install, performance of Enphase that all our long-tail installers are used to and come to expect now.

The next one is unprecedented insight into solar and storage performance with the ability to go off grid simply through the mobile app. The last one is plug in and play compatibility with existing and new Enphase solar systems with IQ microinverters. And one thing that is new is we are going to make the Encharge compatible with M-series TV systems, microinverter systems and we are going to introduce that in the fourth quarter of 2020. This is a big deal as it’s going to enable easier upgrades for 300,000 homeowners who have the M-series based solar system on their roofs.

Let me quickly elaborate a little bit about the Power Start technology which helps to start motor-driven appliances like AC and pumps. We all know that there is an initial surge in power demand when you start an AC or a pump and that can collapse the home’s microgrid. Our Power Start technology uses a software-based approach to flatten that demand spike without impacting the user experience.

I would like to provide a quick story to highlight this advantage. Our Chief Operating Officer recently installed Encharge on his home and his home runs the whole home pressure pump to supply well water. By the way, 13 million American homes rely on well water. Prior to joining Enphase, he was told by competition that he would need 40 kilowatt hours to start this pump. Enphase solved the challenge with only 23.3 kilowatt hours of Encharge battery.

Let me caution that this system size reduction is dependent on the load profile of each home, but it does demonstrate the power of Ensemble. Enphase can create a better user experience despite a smaller battery size and that’s one of our key advantages. Not every kilowatt hour is the same as we like to say.

Beyond Encharge, we have an exciting lineup of new products. We are making good progress on launching our IQ 8 PV, a good agnostic microinverter on the roof. With IQ 8, solar can power the home even when the grid is down without a battery. We are also moving quickly on our small commercial offering IQ 8D as well as the portable Ensemble in a box solution. Preliminary information on the IQ 8D is already on our Web site. Now that we have the base Ensemble platform in good shape, getting these products out will become more predictable.

Let me briefly touch upon digital transformation. I talked about it during the prior earnings call. Our approach here is pretty simple; provide a great experience for both installers and homeowners through a comprehensive digital platform. Once installers and homeowners get on the platform, they should never ever leave it.

In early July, we launched our Enphase Installer Network in the U.S., a network of trusted installers who deliver exceptional homeowner experiences using Enphase products. The Enphase Installer Network, or EIN as we like to call it, is the backbone of our digital platform.

We have on-boarded more than 300 installers who will benefit from access to our digital platform that delivers homeowner leads, an array of tools for design proposal, financing, scheduling and services such as permitting labor and incentive processing in order to improve their business efficiency.

We plan to deliver these tools and services to the installers over the next few quarters. By providing our installers with best-in-class tools and services and by continuously being connected to them and homeowners digitally, we hope to take customer experience to a new level worldwide.

In summary, we are pleased with the results for the second quarter considering the COVID-19 pandemic. The health and safety of our employees, customers and partners remain our top most priority. We are optimistic about the resurgence in market demand for the third quarter and excited about the ramp of our Encharge battery storage systems. We look forward to accelerating both our new products and digital transformation efforts over the next 18 months.

Before I turn the call over to Eric to discuss our financials, I would like to briefly address a baseless short report that came out in June. Like the report issued by the same entity in 2018, this report is blatantly false and misleading. We operate with the highest standards of ethics and integrity.

We run the company based upon our core values and will not compromise them come what may. We take great pride in the products that we create and operational excellence we have achieved till date. We will continue to focus on delivering the best customer experience, building great products with the highest quality standards and driving exceptional shareholder value.

With that, I will hand the call over to Eric for his review of our finances. Eric?

Eric Branderiz

Thanks, Badri. I will provide more details related to our second quarter of 2020 financial results as well as our business outlook for the third quarter of 2020. We have provided a reconciliation of this non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the Investor Relations section in our Web site.

Total revenue for the second quarter of 2020 was $125.5 million and did not include any revenue from safe harbor shipments during the quarter. Total revenue for the second quarter of 2020 decreased 39% sequentially and 6% year-over-year. Excluding the impact of $44.5 million of safe harbor revenue from the first quarter of 2020, second quarter revenue decreased 22% sequentially.

We worked with our distribution and installer partners to cancel and push out orders as the industry adjusted to the new realities of operating during COVID-19 pandemic. While this resulted in a two-year sequential decline in revenue, it was the correct action to bring channel inventory down to healthy levels and position Enphase well for the second half of 2020. We shipped approximately 355 megawatts DC in the second quarter of 2020.

Non-GAAP gross margin for the second quarter of 2020 was 39.6%, a record, compared to 39.5% in the first quarter of 2020. I am extremely proud of the entire team for setting a record for non-GAAP gross margin when revenue declined on a sequential basis.

Non-GAAP operating expenses were $26 million for the second quarter of 2020 compared to $28.5 million for the first quarter of 2020. The sequential decrease was primarily driven by lower bonuses, travel and entertainment expense and payroll taxes on vested equity.

GAAP operating expenses were $37.5 million for the second quarter of 2020 compared to $36 million for the first quarter of 2020. GAAP operating expenses for the second quarter of 2020 included $11 million of stock-based compensation expenses and $546,000 of amortization expenses for acquired intangible assets.

Stock-based compensation expenses for the second quarter were higher than forecast due to the timing difference of estimating the expense and receiving a third-party stock price forecast. We expect the stock-based compensation expenses to remain at this level for the next several quarters.

On a non-GAAP basis, income from operations was $23.7 million for the second quarter of 2020 compared to $52.8 million for the first quarter of 2020. On a GAAP basis, income from operations was $10.9 million for the second quarter of 2020.

On a non-GAAP basis, net income for the second quarter of 2020 was $23.5 million compared to $51.9 million for the first quarter of 2020. This resulted in diluted earnings per share of $0.17 for the second quarter of 2020 compared to $0.38 for the first quarter of 2020.

GAAP net loss for the second quarter of 2020 was $47.3 million compared to net income of $68.9 million for the first quarter of 2020. GAAP net loss in the second quarter of 2020 included a non-cash charge of $59.7 million for the change in fair value of derivatives partially offset by a $6.6 million income tax benefit. These non-cash charges relate to the convertible notes due 2025, were issued in March 2020 and the hedging transaction to increase the effective commercial premium.

At the time of issuance of the notes, we did not have enough authorized shares to sell the notes in anything but cash. As a result, the conversion option, convertible note hedge and warrant transactions which are referred to as derivative transactions require mark-to-market accounting. The mark-to-market loss of $59.7 million was mainly driven by our stock price doubling from $32 on March 31 to $64 on May 20 when our shareholders approved an increase in authorized common shares at our annual meeting.

The approved increase in authorized shares enable us to settle the derivative transactions in cash, shares of common stock or a combination of the two at our discretion. Accordingly, the derivatives were remeasured at fair value and reclassified to additional paid-in-capital on the balance sheet in the second quarter of 2020. We no longer expect to report a change in fair value of derivatives in the income statement going forward.

Let me also remind you that the GAAP net income in the first quarter of 2020 included a $15.3 million benefit from changes in fair value of derivatives related to the convertible notes due 2025 and $11.9 million income tax benefit. The non-cash benefit of $15.3 million from changes in fair values of derivatives was primarily due to the decline in our share price from $43 on March 9 when we closed our 2025 convertible notes to $32 on March 31 of this year.

GAAP diluted loss per share was $0.38 for the second quarter of 2020 compared to diluted earnings per share of $0.50 for the first quarter of 2020. GAAP diluted loss per share for the second quarter of 2020 included a $0.48 loss from the change in the fair value of derivatives and a $0.06 income tax benefit.

Now turning to the balance sheet. Inventory was $31.2 million at the end of Q2 2020 compared to $34.6 million at the end of Q1 2020. The operations team did a great job of reducing inventory levels, despite the build-up required for Encharge ramp.

Accounts receivable were $89.5 million at the end of Q2 2020 compared to $95.5 million at the end of Q1 ’20. The reduction was primarily due to lower shipment volume in Q2 ’20 and enhanced collections efforts, offset by weaker shipment linearity in the quarter.

Our finance team did an exceptional job managing customer credit risk and collections during the second quarter, resulting in a substantial improvement in accounts receivable quality compared to the prior quarters, despite the weaker economic, microeconomic environment.

We exited the second quarter of 2020 with a total cash balance of $607.3 million compared to $593.8 million in the first quarter of 2020. The cash balance in the quarter was reduced by $9.4 million for employee withholding taxes to net settle the stock compensation grant divested in the second quarter of 2020. This prevented the issuance of approximately 177,000 shares. We did not make any share repurchases against our $200 million share repurchase authorization.

We generated $25.4 million in cash flow from operations and $21 million in adjusted free cash flow for the second quarter of 2020. Capital expenditure was $4.4 million for Q2 ’20, mainly to increase our Encharge battery capacity manufacturing improvements and the launch of our second contract manufacturing partner.

As you know, the company has been paying Section 301 tariffs since late September 2018 on it microinverter products manufactured in China. As part of our tariff mitigation plans, we migrated a portion of our manufacturing to Mexico. We discovered that certain of our microinverter products met an exclusion to the Section 301 tariffs. This exclusion had a strict limit on an inverter’s dimension and weight.

Our relentless focus on driving down the component count on our microinverter through semiconductor integration enabled us to meet these limits. We, therefore, sought refunds from U.S. Customs and Border Protection for the tariffs we previously paid for these microinverters. We expect to have a positive material impact on our financial statements in all of the requested refunds if all of the reported refunds are approved in the future.

This totals approximately $39 million plus accrued interest. This has no material impact on our financial results for Q2 ’20. This tariff exclusion will expire on August 7, 2020 and the company has already filed a comment supporting an extension of the tariff exclusion with the U.S. trade representative. We continue to pay Section 301 tariffs on our storage and communication products as well as other accessories manufactured in China.

Now let’s discuss our outlook for the third quarter of 2020. We expect our revenue for the third quarter of 2020 to be within a range of $160 million to $175 million. Our revenue guidance does not include any safe harbor shipment.

Turning to margins, we expect GAAP gross margin to be within a range of 36% to 39% and for the non-GAAP gross margin to be within a range of 37% to 40%, which excludes stock-based compensation expense.

We expect our GAAP operating expenses to be within a range of $41 million to $43 million, including total of approximately $13 million estimated for stock-based compensation expenses and acquisition-related amortization.

We expect non-GAAP operating expenses to be within a range of $28 million to $30 million. Please note that the Q3 guidance does not include any benefit from the tariff refunds or other nonrecurring items.

With that, I will now open the line for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question will come from Brian Lee from Goldman Sachs. Please go ahead.

Brian Lee

Hi, guys. Thanks for taking the questions. Maybe just to start on the 3Q revenue guide. How much battery storage revenue is embedded in the outlook? And then separately, I have a follow up on the cash run rate for Q4.

Badri Kothandaraman

Right. So, Brian, at this point we are not breaking out exactly the battery storage revenue. But we already told you, we expect 8% to 10% average storage attach rate in Q4 of ’20. So you can calculate that number and do some extra provision for yourself. But it is a significant amount in Q3.

Brian Lee

Okay, fair enough. I guess, Badri, on the 8% to 10% attach rate for Q4, pretty basic question but can you remind you how you calculate that? I guess if you’re expecting lower shipments in Q4 versus what you had originally expected last year when you gave the 5% attach rate target at the Analyst Day prior to COVID, then is the 8% to 10% being driven by lower shipments or I guess how much of this is higher battery shipments versus just a lower denominator with microinverter shipments being lower as a result of COVID? So maybe if you can clarify that a bit?

Badri Kothandaraman

I’ll just tell you a general formula for calculating. Demand for microinverters is going to be the demand, whatever it is in the fourth quarter. At this time we have a general feeling that the market is picking up, so we expect that. So now you take with reference to the megawatts that we ship in the United States or North America, you take and you do an 8% to 10% attach of that. That gives you the rough number of megawatts attached storage. And that multiply by 2 hours will give you megawatt hours and that will give you a very reasonable number and that number is Q4 and you can interpolate what Q3 will be. And by the way, we are – like what I said, Q4 right now is demand limited – sorry, supply limited. We have – at this time, we are maxed out on our battery capacity in Q3 and we are bringing in capacities rapidly for Q4 and we are qualifying our second battery supplier in Q4. So we got a good story here on batteries.

Brian Lee

Okay. So just to be clear. I don’t want to put words in your mouth, but it sounds like it’s higher battery shipment volumes relative to your original targets, correct?

Badri Kothandaraman

Actually you’re right. Absolutely, yes.

Brian Lee

Okay. And then last one if I could squeeze it in and then I’ll pass it on is you mentioned 100% booked to the midpoint of the revenue guidance for Q3. Is that typical for this point in the quarter to be that fully booked or just kind of give us some context for that performance relative to what you’re historically used to seeing at this point in the quarter with respect to the visibility? Thanks, guys.

Badri Kothandaraman

Well, it depends. For example, in 2019 when we had the power set [ph] or capacity problem, at that time we were usually fully booked at the time of the earnings call. The last time when I told you, three months ago when I said, we are fully booked but we do expect cancellations due to COVID. This time, things look a little bit more upbeat. Obviously, I cannot predict what COVID will do August and September, but what we are seeing in terms of POS, we got a 26% improvement in North American POS weekly sell-through from June to April. We have 14% improvement from July to June in terms of the weekly POS. So we feel good in general. So we think 100% right now is a very healthy number.

Operator

Thank you. Our next question will come from Mark Strouse with JPMorgan. Please go ahead.

Mark Strouse

Yes. Good afternoon. Thank you very much for taking our questions. I was just hoping you could talk a little bit about how you plan around the upcoming election in the U.S. Regarding inventory levels and manufacturing just ahead of the election and then immediately after if there is a need to increase manufacturing, how quickly you could potentially do that?

Badri Kothandaraman

Right. We have flexible manufacturing capacity. Our entire strategy relies on the fact we have a scalable model and we have low CapEx by definition, because our contract manufacturing partners are able to do a great job for us. We were able to increase our microinverter capacity, for example, in 2019 to almost 2.5 million units per quarter. There is no reason why that cannot be stretched if there is a sudden increase in demand. Now for that reason, now I went and qualified in our second contract manufacturer in Salcomp, Chennai and we do have two factories with our first contract manufacturer, Flextronics, both in China as well as Mexico. That’s under microinverter side. On the storage side in terms of battery capacity, we do have one supplier right now. We’re not happy with the capacity that we have. We are scrambling in order to get another supplier up and running very, very soon by the beginning of the fourth quarter so we can start addressing that demand. And if it is required, we will not hesitate to get a third supplier very fast. And my plan right now is getting the third quarter in the middle of 2021. So in general, I think we are pretty well set in terms of manufacturing.

Mark Strouse

Okay. Thanks, Badri. And then just want to go back to your comments around the small commercial product. It sounds like it’s tracking expectations there, but I think previously you talked about a 4Q release stage for that. Is that still on track? Just wasn’t clear from the prepared remarks.

Badri Kothandaraman

The IQ 8D product, let me just quickly elaborate about that product. It’s a microinverter for servicing two panels. It’s a 640 watt AC microinverter, outstanding power density and it’s able to address the key need of rapid shutdown with the traditional high-quality and customer service trademark of Enphase. And the main reason for us launching it is because it’s a natural extension of the residential market serviced by the same long-tail installers and distributors. So what have we done? We are making very nice progress on it. The design is completely done. And now we are basically working on the system performance. We already released preliminary information on the Web site. We think we can have beta piloting by the end of the year. That’s an aggressive date right now, but I’m holding my team to that standard. We’ll give a better update in the next three months, in the next earnings call, but we feel optimistic there.

Mark Strouse

Okay. I’ll follow up. Thank you very much.

Badri Kothandaraman

Thank you.

Operator

Thank you. Our next question will come from Brad Meikle with Williams Trading. Please go ahead.

Brad Meikle

Thanks for taking my question. Could you add any more color on the recovery that you saw in May, June and July by region across the U.S. and internationally? Thanks.

Badri Kothandaraman

Right. First, let me actually come to Europe. Europe is a great story for us. Despite COVID, Q2 grew from Q1. We believe this is because we staffed the team really well. We basically had – we hired all the sales folks and we are actually expanding into more countries. And what they’re finding is in places like Netherlands, et cetera, simply because now we have more feet on the street, we are able to address more accounts, we are able to do more installer visits, we are able to win more distributors. So we are doing that well. And Netherlands and France are really – Netherlands, Belgium and France are really nice for us. In addition, we have started working Germany, we have started working Poland, we have started working Austria and that’s going pretty well. So I’m really happy with that team. And like what I said, in Q3 we expect much more significant growth compared to Q2. With reference to the U.S., we saw that California was a little bit down in April. We saw New York and New Jersey were also almost out in April. But we have seen healthy trends towards June. California is almost back. New York, New Jersey are back. Florida and Texas were quite strong in Q2. However, you guys all know that there is some minor setback or there is some setback in Florida due to increased COVID cases in July. It doesn’t seem to have affected the solar installations much, but you never know going forward. However, California, New York and New Jersey are still strong. So we are generally optimistic that demand is coming back. And like what I said, every week we see better point of sales, sell-through from our distributors to the installers versus the previous. Like what I said, July is 14% higher than June so that is what is happening in the U.S.

Brad Meikle

Thank you, Badri. Could you also add any color on – with the strong demand for storage, is that – how broad based is that regionally across the U.S.? Is it all California or how many states are you seeing participating in? I imagine a lot of it’s from North California where the outages are most severe. And then could you add any color on what the attachment rate might get to next year? Thank you.

Badri Kothandaraman

Next year is too early to predict, Brad, but you are right. Predominant demand is from California and Florida. That’s most of the demand. And we have started – like what I said, we shipped pilot systems in June. We shipped it to a bunch of installers and they have been very happy with the product. What they like about the product is it’s an all-in one AC coupled system for solar and storage. It is ideal for long-tail installers who really value quality and service. We have this amazing feature which is the Power Start technology which uses a software approach to mitigate demand spike, so that appliances like air conditioners and pumps can be easily started with Encharge versus other competitive solutions. We have this modular architecture where you don’t need to add in very high quantum of energy, you add only in steps of 3.3 kilowatt hours of energy and that’s important. Because if you see even in our executive team, I have a 16.6 kilowatt hour and Eric has got 20 kilowatt hour, Jeff McNeil has got 23.3 kilowatt hour. So it matters. We are able to fine-tune the storage to exactly what they want because that’s an important thing. The UL 9540 certification based on lithium iron phosphate chemistry, safe chemistry, basically no cobalt, air cooling versus other systems that use liquid cooling, redundant microinverters. I have multiple microinverters in one Encharge 3.3 kilowatt hours – I have four microinverters in a 3.3 kilowatt hour battery. If one of the four is not working, it’s not the end of the world. The charging and discharging rate is going to drop a little bit, but it’s not the end of the world. The system will continue to perform. One more cool feature is the ability to go off grid through the app. And that I particularly like because it helps – it is cool. With a click of a button you’re suddenly disconnected from the utility. And you know what, I do experiments all the time. I spent a weekend completely off grid. My wife doesn’t even know it. So more and more – we hope more and more people would use that feature. We also gave the customers unprecedented insight into solar and storage performance. Like for example, from the app you’ll be able to see what the microgrid voltage is, what the frequency is. Every microinverter in every Encharge 3.3 kilowatt hour whether that is working, how does the connectivity look like and how much is each microinverter discharging. We provided lot of insights, so the homeowners who really want to know the details, they know it and they have the comfort that there is technology in the back working all the time. So that’s a key. And then the last one is an important one. Obviously, I have plug and play with the IQ microinverters, but now a lot of folks came to us and they wanted Encharge to be compatible to the M-series. So I’ve had a team of people going and working on this. And we are happy to say that we can release that towards the end of Q4. And I think that will be a big deal, because it will help easier upgrades for 300,000 homeowners, so we are excited about it overall, Brad.

Brad Meikle

Thank you very much. My last question is, is there any update on the launch and the ramp of the rooftop IQ 8 which would enable a solar array without storage to operate during the day? What percentage of volume do you think that could be next year? Thank you.

Badri Kothandaraman

Right. Now that there’s Ensemble, I call this 1.0, this is now under control – storage is under control, the top most priority for the company is to work on 2.0, which is the IQ 8 PV, IQ 8 on the roof, which basically means a grid agnostic microinverter. And said another way, you have a free battery on your roof for 12 hours during the day. So basically, again, I expect a very similar timeline as IQ 8D. I expect in four months we will have pilot – we will start piloting towards the installers. And within a few weeks after that, we will be able to release that product.

Operator

Thank you. Our next question will come from Colin Rusch with Oppenheimer. Please go ahead.

Colin Rusch

Thanks so much, guys. Can you talk a little bit more about the channel dynamics, particularly in Europe for you? Is there still some sell-in into some new geographies that you’re benefitting from in the third quarter and is that something that may continue on for the balance of the year? I know you’re guiding for the fourth quarter.

Badri Kothandaraman

Look, Europe is actually doing extremely well and Europe, the amount of inventory in the channel is pretty less. The POS is nice. No concerns on the channel being full. In fact, the channel is lean right now.

Colin Rusch

All right. And then just about pricing for the storage product, certainly there’s a number of products that seem to be in the market in the next couple of quarters. How are you thinking about that dynamic? You’ve been pretty disciplined around the microinverters. But if there are multiple products in the market, are you going to have to be a bit more active on the pricing side in your expectations?

Badri Kothandaraman

Right. We agree with that concept. But the way we have done pricing is we say the next best alternative, we take that and we compare the value that we generate with respect to that. Our bread and butter are the long-tail installers. And these long-tail installers are really excited because they have for the first time an AC coupled all-in-one plug and play solar and storage system, ideal for them with the trademark quality and service. Quality and service matters. So I would say, like what I said in my annual report. The biggest reason for the growth of our company in 2019 was IQ 7, and IQ 7 was a fantastic product. But the key differentiator was highest quality [indiscernible] in our target. I’m not been shy to say our target is 500 dBm. 500 dBm means 0.05%. That’s our target. And IQ 7 helped us to come closer to that target and that helped us to get a huge market share. So very similar here. We got a great AC coupled system for both solar and storage, ideal for the long-tail. And then, like what I rattled, the intelligent brownout. That matters actually for homeowners when they want to run air conditioners and pumps seamlessly. The modular architecture means that the homeowner doesn’t waste more dollars than he needs to, at the same time modular architecture helps the installer really made the installer – install a breeze. The UL 9540 certification is important because that’s fire safety certification. That’s possible because the lithium iron phosphate gives you enhanced thermal stability compared to the other chemistry. Redundant microinverters, I already told. Air cooling is another big deal and installers like that because it is more reliable. You have air cooling versus a liquid cold system, right. The unprecedented insight into solar and storage performance and going upgrade through the app, we think the homeowners will love that transparency and that’s what they expect from Enphase. And the last one is, we have 1 million homes. Out of 1 million homes, there is probably a lot with IQ. There is 300,000 with M-series. By making it compatible seamlessly with those, we think we have a lot to gain there. So I hope I gave you some color there.

Colin Rusch

Yes, that’s helpful. Thank you so much.

Badri Kothandaraman

Thank you.

Operator

Thank you. Our next question will come from Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine

Hi, everyone. Thanks for taking the questions.

Badri Kothandaraman

Hi.

Eric Stine

Hello. So just curious, you were just touching on storage and the M-series compatibility. Just curious if you’re able to or willing to maybe what type of demand do you expect you may see for that, whether it’s on launch or in 2021? And then how should we view the microinverter upgrade program in that context? I know one of the reasons that you would upgrade would be so that you could have storage to upgrade to the IQ series.

Badri Kothandaraman

Right. It’s too early to talk about 2021, but I’ll tell you what. The whole point of the M-series – people with M-series microinverters is they don’t need to upgrade their microinverters and they can buy Encharge storage from us. So obviously if I turn on all the 300,000 homes, if I start advertising through them, I need to have the capacity to be able to do that. So we need to thread that carefully, work with the homeowner as well and get a lot more capacity. The other interesting thing that you said is there will be many of the micro – many of these M-series guys who say, I want IQ 8 on the roof. And the IQ 8 on the roof is going to come, like what I said, we are going to start piloting towards the end of the fourth quarter. And so that – some of those 300,000 homeowners with M-series are going to say, I want IQ 8. So it’s too early to tell at this point. Maybe I’ll add more color in three months. And the good news is, we are going to have a lot of demand. That’s the bottom line.

Eric Stine

Yes. So we should read it, it’s not that you’re necessarily deemphasizing the upgraded series to the IQ 8 or the IQ series, it’s more just getting options to the install base?

Badri Kothandaraman

That’s right.

Eric Stine

Okay. Got it.

Eric Branderiz

It’s Eric. One more thing. We have planned capacity of 480 megawatt hours for next year, right? So that’s the starting point. The other thing, remember this upgrade program is going really well right now with the M190 series, which is a real success. So now we are talking about incorporating all the Ms, we’re going to be able to – if they choose to do so, take a batter to work with Enphase product. That’s another thing. The third one is, the same people may say, I may as well use this as an opportunity. I changed my mind. If we get a good deal, I can maybe try IQ 7 or even IQ 8, right, like Badri mentioned. So that’s kind of the mindset.

Eric Stine

Yes. Okay. That’s great. And then maybe last one for me. I know part of your strategy over the last couple of years on the pricing side and you have recently refocused a little bit on Tier 1s and making inroads with Sunrun. So just curious, would the Sunrun-Vivint combination thoughts on the impact that might have on your business going forward?

Badri Kothandaraman

Yes. We have made it clear that we like long-tail installers a lot. We like Tier 1 installers as long as they recognize the value that we have and we have a strategic relationship. We have a very good relationship with Sunrun. It’s too early to tell what your strategy is going to be after the merger. We are doing well with them. And the most important thing is our quality and our customer service. If we maintain that, there is no reason why we cannot have continued good relationship.

Eric Branderiz

And with SunPower as well —

Badri Kothandaraman

Same with SunPower and also with Sunnova, the same thing.

Eric Stine

Got it. Okay. I’ll jump back in the line. Thanks.

Badri Kothandaraman

Thank you.

Operator

Thank you. Our next question will come from Maheep Mandloi with Credit Suisse. Please go ahead.

Maheep Mandloi

Hi. Thanks for taking the questions. Most of them have been asked, but one quick question just on the IQ 8D. Could you just clarify like on the timing for IQ 8 and IQ 8D, are those tools tied together because of the same architecture or does one come ahead of the other? Just trying to see if there are any milestones which we need to keep track of on those launches.

Badri Kothandaraman

They are not necessarily tied. However, they do have the base hardware architecture that was finalized a long time ago. They are two projects. Both of them average similar timelines. I do expect pilot runs, like what I said in December to installers. Based upon the feedback from them, a few weeks give or take from that time. So we expect a lot of revenue from those products in 2021.

Maheep Mandloi

Then, could you tell us – I think on the Analyst Day, you spoke about serviceable market of $1.5 billion for that small commercial. How much do you expect or when do you expect to reach most part of that market with –?

Badri Kothandaraman

Yes, we talked about the small commercial market as a nice extension of the residential market. We said the value proposition that we offer are basically rapid shutdown compliant, high quality, high customer experience. We also said there is no reason why we cannot get a fair share of this small commercial market, like the residential market. Obviously market share gains when you enter a new market take time, so there will be a linear ramp to it. But let’s say two years from the ramp – two or three years from the ramp, you should expect us to be at same market share on where we are at residential for small commercial.

Maheep Mandloi

Got it, that makes sense. And then just one last one on IQ 8D and a lot of them from me on that topic, but it does expand the power capacity of the inverters. Are you doing any inquiries on using IQ 8D for residential markets and price-sensitive international residential markets?

Badri Kothandaraman

It’s obviously – the question has come up. You’re not the first one. We haven’t finalized our strategy yet, but I think it’s a good concept on basically using it for us in order to bolster our market share in Asia Pacific, Australia, for example, and we are still thinking about it. But the nice thing is the technology is amazing. We are able to get 50% higher power density there, which is great. So we’ll keep you informed.

Maheep Mandloi

Got it. And just one last thing on modeling from my side. So operating expenses obviously regained control in Q2 and Q3, but how should we think about Q4 and going forward with respect to that target of operating margin for the business?

Badri Kothandaraman

We have an operating model. The operating model is 35, 15 and 20. That’s how you should model. The Q2 was a little bit of an anomaly due to COVID, but in general that’s the financial baseline.

Maheep Mandloi

Got it. Thanks for taking my questions.

Operator

Thank you. Our next question will come from Philip Shen with ROTH Capital Partners.

Philip Shen

Hi, everyone. Thanks for taking the questions. Can you provide a little bit more color on the visibility you have into Q4? How much is booked for the quarter and for your business? And what kind of discussions are you guys having as it relates to safe harbor? Have they started at all? Do you expect – I know the ITC and the potential for an extension there may impact things, but just curious if you’re having any discussions yet? And what kind of visibility you have in Q4?

Badri Kothandaraman

Phil, it’s too early for me to talk about Q4. I don’t have any visibility on safe harbor shipments. We have no safe harbor revenue assumed in Q3 guidance. We already told you and leaned in a little bit forward, talked about the 8% to 10% storage attach. That’s what I can give you right now.

Philip Shen

Okay. Thanks, Badri. As it relates to – you were talking about the pricing strategy earlier on the storage product. Can you talk through also the margins? Do you continue to expect storage to have similar margins through the corporate average? And how do you – as we get into ’21, how do you think that pricing in the margin profile could trend?

Badri Kothandaraman

Yes is the answer. It’s going to be aligned to our corporate margins. And then we like how we have an excellent cost reduction program on the microinverters. We are using the same principles to drive world-class cost on the batteries, the cell packs, the BMUs, the battery controller, the enclosure, a time for switch. We are addressing everything holistically and we are making a lot of progress there. We are confident we can maintain our gross margins even in 2021.

Philip Shen

Thanks. And then as it relates to the Mexico capacity and also your new contract manufacturer, when do you expect to be able to serve 100% of the U.S. demand from non-tariff locations? Are we looking at Q4? Could it be in Q1? And how much – I don’t know if you gave this, sorry if I missed it, but how much of Q2 was served by Mexico and how much of Q3 do you expect to be served from non-tariff locations?

Badri Kothandaraman

Right. So in general, what I said was Mexico can do up to 1 million microinverters per quarter, that’s required. Now we have Salcomp. Salcomp in Chennai is ramping in Q4, so it’s too early to talk about that. But there is no reason why that cannot be a nice number in the middle of 2021. So that will basically cover the U.S. demand. And if the 1 million units is not enough, it’s easy for us. Within a quarter we – or rather it takes us a quarter. Once we make a decision to increase that capacity from 1 to 1.5, all we need to do is to invest the capital and move forward in Mexico. That’s the advantage of working with somebody very strong, like Flex. It’s easy to do it. What was your other question, Phil?

Philip Shen

Thanks, Badri. How much volume was served from Mexico in Q2 and then expectations for Q3?

Badri Kothandaraman

We normally do not break it out, but in this case because of COVID, because of our demand situation was less, the fraction that was manufactured in Mexico wasn’t that high. I would say it was less than 50% of the overall shipments.

Philip Shen

Great. That was for Q2. Expectations for Q3?

Badri Kothandaraman

Expectations for Q3, we don’t really break it out, Phil. So I’ll ask Eric to talk about it or to give you the data. I don’t have it with me right now.

Philip Shen

Okay. Thanks. I’ll pass it on.

Operator

Thank you. Our next question comes from Mike Cikos with Needham & Co. Please go ahead.

Mike Cikos

Hi, guys. Thanks for taking the time on the call here. I just wanted to circle up on the training of the installers. If we’re talking about Encharge with the installers, how is that progressing versus your internal expectations? And also wanted to try and get a read as far as what would be involved or how involved the process would be for training installers on the IQ 8D smaller commercial microinverters?

Badri Kothandaraman

Right. In general, we are pivoting to online training. This is available right now or Enphase University is online. You can take – there are about eight courses on Ensemble that an installer has to take in order to achieve provisional certification. It takes several hours and you cannot go through that training without proper focus and understanding because there is quiz after each course. That’s going very successfully. About 130 for installer personnel have already completed that online training and in addition to those who completed face-to-face training at Enphase prior to COVID. In addition, we have 530 plus people basically taking the course as we speak and they usually have a cycle time of a couple of weeks in order to finish that course. The nice thing from that course is we have an NPS, Net Promoter Score, of 80%. That means everybody likes the course. They’re able to understand it. I have done the course myself; very intuitive, very nice. And we’ll adopt the same for IQ 8D. What we’ve realized from the Ensemble exercise is that it is a very complex system, got solar, storage, communication, transfer switch and so we have adopted the same approach on IQ 8D which is focusing on the end system and understanding the system performance versus thinking about it, like a micro, thinking about it holistically. We will make sure those aspects are included in the training for the installers and we’ll have the training online.

Mike Cikos

Thanks for that. Then one more, if I may. If we’re looking out to Q4 in this 8% to 10% attach rate that we’ve been talking about for the Encharge, does this consider at all I guess demand from your currently installed base or is this still primarily coming from new installs?

Badri Kothandaraman

The current install base is who we serve. We do business with almost 1,500 long-tail installers every year in the United States and this is our main – they are our customers. And they are serviced through distributors. They all have a nice storage demand, especially the long-tail installers in California and Florida. They have basically nice storage demand. And we already have them. They know us. They are very familiar with how to contact Enphase. They like our quality. They like our customer service. So they are the ones who are going to be ramping with us.

Mike Cikos

Okay. Thank you.

Operator

Thank you. Our next question will come from Jeffrey Campbell with Tuohy Brothers. Please go ahead.

Jeffrey Campbell

Good afternoon. Thanks for getting me on. Badri, how would you characterize Maxeon’s decision to produce the IQ 7 AC Module versus your prior relationship with SunPower? On the outside, this seems like a bigger commitment to the Enphase solutions?

Badri Kothandaraman

When I presented to you guys, the investor community on the SunPower transaction, at that time I said one of the possibilities from that I was excited about was in addition to the North American business which was a commitment, there was a possibility of getting the international business, especially Europe and Australia. That’s now coming to fruition and it’s obvious, right. SunPower has an enormous success with their Equinox AC Module. And there is no reason why that concept will not work elsewhere. So they have made the right decision, which is to work with the best microinverter maker in the world. And now both of us are going together with the best panel on the market plus the best microinverter in the market.

Jeffrey Campbell

Right. My second question was I was wondering if there were any digital innovations that you’ve made in response to CV-19 [ph], maybe such as Enphase University or others that you might want to point out, that you intend to maintain even after some return to normal life, there’s more under control.

Badri Kothandaraman

Right. We are only scratching the surface there. Obviously, the Enphase University is a nice thing. The Enphase Installer Network is something that we introduced and this one is a powerful one. We classified installers into Platinum, Gold and Silver. These are the installers who trust us and we trust them. That was the best step that we did. But I think we have a lot – bigger plans in terms of digital transformation. The name of the game is how we can provide those installers the right tools and services so that we can maximize their productivity that it is going to be a no-brainer for them to chose Enphase all the time, every time. And that’s something that we are working on. And we will share a lot more things there when we are ready.

Eric Branderiz

So the COVID-19 situation already prompted pretty much everybody to become much more digitalized. But at the same time we launched EIN, which is Enphase Installer Network, with a high reward on NPS and a lot of things in terms of the quality of the design, the training capabilities, the market share of the installer in terms of using our technology and so on. So I think that all these things are converging and with the easy of the tools, small installers really appreciate being part of our platform, right. They don’t have resources necessarily to deploy our digital tools, some of them pretty sophisticated, right? So they need to have a potpourri of a variety of tools that they need to achieve or get through the Web. Here, we bring it altogether nice with a complete platform, with a great customer service and with the reward of a classification at the installer level. So it’s a perfect timing to [indiscernible] consolidate, we did it.

Jeffrey Campbell

Right. Yes, that seems like a very smart investment in the installer tiers that are your strengths. My last question was, if I understood correctly, earlier in the remarks you mentioned some disappointment with your current battery supplier. I was just wondering, was this due to more demand than you expected or was it some sort of issue on the supplier side? Thanks.

Badri Kothandaraman

It’s all about ramp. When you have a new product, you always have teething [ph] issues in the ramp. But here it is a combination of heavy increased demand that we see for the fourth quarter and what we saw in the third quarter. So it’s about ramping our current supplier and getting on capacity with the new supplier, ramping that new supplier and getting to our 480 megawatt hours that we talked about.

Operator

Thank you. Our next question will come from Joseph Osha with JMP Securities. Please go ahead.

Joseph Osha

Hello, everyone. Thank you.

Badri Kothandaraman

Hi.

Joseph Osha

I have two questions first. Going back to 8D, I’m wondering if you might share with us what you think is sort of the practical upper limit might be in terms of your system size, a couple hundred kilowatts maybe? I know from an engineering standpoint it’s larger than that. But what might be from an economics standpoint a practical upper limit for system size?

Raghu Belur

Hi. This is Raghu. The IQ 8D has been designed specifically targeted towards the small commercial, so the 200 kilowatt limit is about where we are targeting because of the value that we bring in that segment. It’s rooftop, so there’s a regulatory requirement for rapid shutdown as an example. Our installer partners who do residential also do installs of that – typically of that size anywhere from 15 kilowatts to 100 kilowatts to 200 kilowatts. And they also really like the simplicity of it. In fact, I could argue that IQ 8D is yet again simpler to install because of it’s a two panel, one microinverter, the cabling, et cetera, makes the installation extremely simple. So it really plays very well to needing the requirements of our installer partners who are installing in that segment in the small commercial segment.

Joseph Osha

Okay. Thank you. That’s helpful. 200 kW. And then on the storage side, I’m curious as your own product ramps, what is the house position on third-party storage? Are you willing to do it? Will you actively discourage it? You not care in particular if some larger developers come back and start pushing you on working with third-party storage. What’s your position there?

Badri Kothandaraman

On third-party storage, we have not taken a position right now. We say that everyone must use us right now. But there are companies – currently the existing storage systems, some of the most popular ones do easily work automatically with the Enphase solar system. So it’s not that we need to do something. It is that they already work.

Raghu Belur

Yes, so a couple of comments there. This is the power of the AC coupled architecture. People can come in and interconnect into an existing microinverter system which we have there. However, the benefits that you get from having our old storage system, a complete all-in-one system, Badri alluded to earlier on, the user experience will be significantly better when you have a micro on the roof and you have Encharge and you have microgrid interconnect device or the ATS. You have one app, you have one phone call to make, one training, one procurement. Just the all-in-one solution is extremely powerful. And of course, our storage solution is also LFP-based, lithium iron phosphate based, so it comes with added benefit of additional safety and performance because of how it does thermally. So, in short, yes, third-party storage systems are connecting, AC coupled into our micro, but the benefits of having our solution is significantly higher.

Joseph Osha

But it is possible and you wouldn’t actively stop it if people continue to do that? Obviously, your own system is going to be better, but it’s something that you would allow people to continue to do?

Badri Kothandaraman

Yes, correct.

Joseph Osha

Thank you.

Operator

Thank you. Our next question will come from Dave Kang with B. Riley. Please go ahead.

Unidentified Analyst

Hi. This is Danny [ph] on for Dave. Thanks for taking the question. I was wondering if you could comment on the impact of COVID on revenues for the second quarter.

Badri Kothandaraman

The impact of COVID was that our revenue declined by 22% overall, excluding safe harbor. That was the impact for the second quarter.

Unidentified Analyst

Okay, great. Thank you. And I was wondering if you could comment on the current run rate in Mexico. We have 70,000 [ph] a week that you had in May. I was wondering if you have any current numbers on that.

Badri Kothandaraman

Right. We are no longer limited by the capacity in Mexico. And because of the reduced demand situation, overall, there was excess capacity and that’s a nice thing for us to work with the contract manufacturers, like Flex. So the Mexico factory was not loaded fully. And you saw our results that the inventory – we reduced the inventory in such a tough quarter. We dropped the inventory from $34 million to $31 million. That was excellent inventory management by the team. So Mexico is no longer a capacity problem. We do have all the capacity and we can – like what I said, we can make 1 million units per quarter – by Q4 ’20, that’s not an issue.

Operator

Thank you. And our next question will come from Amit Dayal with H.C. Wainwright. Please go ahead.

Amit Dayal

Hi, guys. Thank you for taking my questions. I’ll be quick. The 8% to 10% attach rate, Badri, for storage, is this based off of any bookings you are seeing or some other type of estimate you’re applying?

Badri Kothandaraman

It is obviously based upon the demand profile that we have, based upon the bookings we have, based upon preorders we originally had and conversation with the distributors which are real, so yes.

Amit Dayal

Understood. Okay. And on the deployment side for Encharge, can you just give us some color on how it works between when somebody places an order and when somebody can receive it and it’s all working for the customer?

Badri Kothandaraman

Right. So basically, look, our channel is distributors. Enphase ships product to distributors. Distributors ship product to installers. Installers install products at the homeowners, right. That’s how the supply chain looks. And when distributors place orders – obviously when we are not full, our cycle time is anywhere between six to eight weeks. When we are full, meaning when we are maxed out of capacity, that cycle time obviously will get extended. And typically now because the products are flying off distributor shelves, there that cycle time is truncated. And especially because of the fire season right now in Northern California and installs that are happening furiously right now. I’m giving you a long answer. It’s a – typical cycle time should be from when we ship to when homeowners get it installed in a typical time when I’m not constrained by capacity, it should be around a quarter.

Amit Dayal

Understood. So how does this potentially impact how you manage inventory going forward when this starts scaling up for you? Obviously you’d probably want to keep a little bit of inventory of this. Any color on that would be helpful?

Badri Kothandaraman

That’s where we need very strong contract manufacturing partners and we do have just in time inventory models. We work a lot of suppliers. This is what Flextronics does and we work really closely with them. And we are confident that we can ramp product at the same time, ensure that we don’t build excess inventory.

Eric Branderiz

As a matter of fact, these experiences that we have with flex [ph] and with the coronavirus, right, flexing the inventory levels and working with their inventory levels that the contract manufacturers, those were incredibly valuable because that is strengthening the connections from the business processes at very much lower levels, right, meaning we do know exactly how much inventory they have of every single component that they source for our systems. And they flex it pretty quickly, because they don’t want to have the inventory on their books and they can ramp it very, very quickly working with their suppliers. So I think we’re in good shape in terms of business processes there.

Badri Kothandaraman

And the product advantage as well, right. If you look within our Encharge, we have the microinverter within Encharge as well. So the same microinverter that’s on the roof is also within Encharge. So that helps in the inventory management side as well.

Amit Dayal

Understood. That’s all I have, guys. Thank you so much.

Badri Kothandaraman

Thank you.

Eric Branderiz

Thank you.

Operator

Ladies and gentlemen, that concludes our question-and-answer session for today. I would now like to turn the call back over to Mr. Badri Kothandaraman for any further remarks.

Badri Kothandaraman

Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again during the Q3 2020 earnings call. Goodbye.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect and have a wonderful day.

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