Q3 2019 Earnings Call
2019. This call is being webcast live on the company's website at Www Dot solar edge Dot com and the investors section on the events calendar page. This call is being sold property in copyright of solar edge with all rights reserved and any recording reproduction or transmission of this call without the.
Expressed written consent of Solaredge is prohibited.
Hey, listen to a webcast replay of this call by visiting the events calendar page of the solar edge Investor Web sites I wouldn't want to turn the call over to Erica Mannion at Sapphire Investor Relations Investor Relations for solar edge. Please go ahead ma'am.
Good afternoon. Thank you for joining us discuss storage is operating results for the third quarter ended September 32019, I suppose the company's outlook for the fourth quarter of 2018 with me today, our TV window, acting CEO and VP global sales and run entire Chief Financial Officer, He will begin with.
A brief review of the results for the third quarter.
September 32019.
Ronan will review the financial results third quarter, followed by the company's outlooks for the fourth quarter of 2019, then we will open the call for questions.
Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.
We encourage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description.
Material containing the webcast is sold property and copyright and storage technology with all arranged reserved. Please note. This presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U.S. GAAP.
non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating internet understanding how the company's management evaluates the company's operating performance.
non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP.
Listeners, who do not have a copy of the quarter ended September 32019 press release want a presentation maintain a copy by visiting the investor section of the company's website.
Now I will turn the call overstated.
Thank you Erica good afternoon, and thank you all for joining us on our conference call.
Before I begin I want to address the unfortunate circumstances that has led me to this position.
I was fortunate to work with our founder Chairman and CEO Guy Sella from 2000 in Miami and until his passing two months ago.
I think everyone, who knew Guy was confirmed that he was not your typical CEO and that his vision leadership and dedication that led to leverage to become a world leader in PV Smart energy technology will be greatly missed.
Those of us that sort of religious not only his leadership, but the guy I remember menzer travel companions to <unk> technology Guru and true friends.
So its executive management team most of whom have been working together now for many years.
Dedicated to continuing guys legacy forward through the continued success just aldrich.
And now for our results.
I'm happy to report that once again, we concluded our recorder with record revenues of $411 million, representing strong growth led by record revenues in the U.S., where we often see upswing in business in the second half the year.
And record revenues in Europe , we're typically the third quarter is not as strong due to summer holiday season. Similarly, Similarly, we saw strength and growth in most other region in which we operate.
These revenues were based on record quarter in our solar business of approximately $388 million.
He is record revenue we have surpassed for the first time the milestone of $1 billion revenues in the financial year and this has been achieved through just the first three quarters of 2019.
This revenue growth coupled with our gross margin levels at the upper end of our guidance and increased operational leverage has enabled us to generate record non-GAAP net income and a record net diluted non-GAAP earnings per share of one dollar and 21 cents.
In the third quarter, we shipped one and a half gigawatts of AC nameplate in burgers, approximately 598 megawatts, which ships to North America up from 430 megawatts shipped to North America in the previous quarter shipments to Europe consisted of 712 megawatts up from 600.
58 megawatts shipped in the previous quarter.
This quarter, we shipped 543 megawatts of commercial products compared to 591 megawatts into previous quarter.
This reduction is mainly a result at the higher demands in the U.S. for residential products.
And prioritization of the manufacturing mix on our production line accordingly.
This quarter, we shipped approximately 4.6 million power Optimizers and approximately 188000 inverters.
All in all we have now shipped more than 45.4 million Optimizers and 1.9 million inverters since launching shipment of products in January 2010.
On the noteworthy side effective September 1st we welcome to our management team or certainly the coal as our Chief operating officer.
He brings to sold her age over 20 years of operational senior management experience, serving in both senior Vice President and President and General management level was actually Astronics internationally.
And his last position.
He served as senior Vice President Global operations, Europe , and the Americas of Flextronics, where he oversaw more than 40 manufacturing sites and was responsible for revenues of more than $10 billion.
Well, we have been a friend of storage since we began manufacturing in 2010.
He was the general manager of fixed Tronics, Israel, where we've reduced our first products and he knows our operations team well. So his integration has been seamless.
As our operational needs grow and diversify globally. This is a much needed addition to our executive management team and we are grateful to have him onboard.
In order to address the increasing demand level for our products, we are adding manufacturing lines in China ramping up manufacturing in Vietnam, and increasing the number of automated lines for power optimizer manufacturing in Hungary.
This quarter, we shipped the first significant volumes of Optimizes from the Vietnam facility.
And in further manufacturing will be initiated by year end.
The ramp up manufacturing is continuing guys plans.
And we are expecting that a major portion of the product supply to the U.S. well then we'll be manufactured in Vietnam in Hungary by the first quarter of 2020.
We continue to increase the number of how often they didnt manufacturing lines for Optimizers and we now produce the artist third about were Optimizers and automated line.
We have already ordered additional lines such that by the end of 2020, we expected the vast majority of our optimize is gonna be manufactured by fully automated machinery.
We already see the resulting improvements in quality on these production line and in this field.
At the same time in recent months.
We experienced an increased number of single phase inverter failures and heightened gold sensor activity. This was due to a combination of two reasons first releasing new products and capability is typically characterized by an initial period of stabilization and still manufacturing processes are fully mature.
Second during this period due to our growth in marketshare and increased shipments there was a significant increase of newens daughters and accounts using our technology for the first time and there is a short learning curve for them as well.
And the last month of the border, we and our customers have seen significant improvements on this front.
[noise], our strong growth in the last quarters and especially in this quarter's comes with a price the increased demand for our product in our desire to meet this demand in a timely manner, coupled with that we need to increase manufacturing capacity much quicker than we plan resulted in significant the air shipments this call.
Order, which negatively impacted our gross margin.
In line with the plan and expectations communicated by Guy in the last call a quarter ago. We expect we expect this increased level of air shipments to continue and intensify in Q4 was capacity additions are expected to enable us to gradually decrease air shipments into first quarter of 2020.
Having said that we were able to keep our non-GAAP gross margins of the solar business, that's a healthy and steady rate of 35.4% largely due to cost reductions in operation operational efficiencies.
On the product side, we started shipping into this me phase residential storage inverter Guy discussed last quarter.
We already have a healthy backlog for this product, which gives us access to a large segment of the German Austria, and Switzerland essential markets for which we did not have an optimal offering until now.
And the next few months, we wouldn't be releasing a series of new products for both the residential and commercial segments, including the integrated single phase HD wave inverter, combining storage and smart energy capabilities and larger power inverter and power optimizers targeting to commercial round Mount segments.
A few comments regarding safe Harbor.
We expect roughly $10 million of revenues in Q4 will be related to safe Harbor with is the finishing of safe harbor being products delivered today in order to be used in 2020 above the normal level of demand typically supplied in Q4 for use in Q1.
We have orders and are working with customers on additional safe Harbor volumes, which will be delivered in Q1 in Q2 for use in 2020 and beyond.
These customers.
Our votes for residential.
Commercial products.
On the new business side, we still modest growth in revenues this quarter and for the first time, we're break even from an operational standpoint, mostly related to higher gross margins on sales of go from.
And with this thing and the speaker over two and then who will review our financial results [noise].
Thank you TV and good afternoon, everyone.
After reporting 18 quarters as a public company alongside die I want to begin by saying that working with him was an honor the daily challenge of every assumption in fact and ongoing process of continuous improvement I mean, all of that it was truly fun. He is greatly missed.
Before starting to review of our financial results for the third quarter of 2019, I would like to remind listeners. That's why the overview will be on a GAAP basis in certain cases, I will be discussing non-GAAP numbers in measures, which exclude stock based compensation onetime asset disposal.
Changing deferred taxes onetime acquisition related expenses amortization and depreciation of acquired assets and cost of product adjustments related to acquisitions of Esa Marie Cook <unk> and do you have to division expenses related to the impact on financing expenses or the revenue recognition standard India adoption.
Of the newly enacted leasing accounting standard nonrecurring expenses as well as non-GAAP , earning per share.
I will conclude this introduction by noting that the effect of the new acquisitions closed in the past 15 months on the GAAP results, it's meaningful as a result of amortization of accounting elements identified in the preliminary purchase price allocation studies that we have recently performed.
A reconciliation of the pro forma two GAAP results discussed on these calls he is available on our website and in the press release issued today.
For the third quarter of 2019 total revenues were 410.6, we didn't daughters, and 26% increase compared to a $325 million last quarter and to 74% increase compared to 236.6 million in the same quarter last year.
Revenues from the sale of solar products were 387.8, we didn't daughters and were driven by strong growth in all regions inline with the normal seasonality in this industry, which is correct right by increased revenues in the United States in Q3, U.S. sooner revenues grew this quarter.
Just $197.6 million and represented 51% of our solar revenues.
These revenues did not include any safe Harbor revenues.
Revenues from Europe were $155.7 million or 40% of solar revenues.
The rest of the World Solar revenues were 9% of our solar revenues.
Similar geographic location is expected to continue into fourth quarter of 2019.
This quarter the top 10 sooner customers represented 68% of our quarterly solar revenues, an increase from the last quarter and two customer continues to account for more than 10% of revenues both of whom our distributors.
Blended ASP for a while increased this quarter, mainly due to price increases in the United States, which were implementing to implement it to mitigate the negative impact of the increasing tariffs on Chinese made products from 10% to 25% the overall pricing environment for our products remained stable this quarter.
This quarter revenues from our non solar products were $22.8 million, mostly driven by increased sales of lithium ion batteries and energy storage products.
Revenues from automated machinery products from SMB and from U.P.S. product, we're not much different from the last quarter.
As the sales of these known sooner activities are correct rise with positive seasonal effects towards yearend. We expect these revenues to continuing growth in the coming quarter.
GAAP gross margins for the quarter was 33.9% compared to 34.1% into prior quarter and 33% in the same quarter last year.
non-GAAP gross margin this quarter was 35.1 per cent compared to 35.7% ended prior quarter and 33.6% in the same quarter last year.
non-GAAP gross margins for the solar activity was 35.4 per cent compared to 36.9% in the last quarter.
There's substantial growth in revenues over an already significant revenue base require us to quickly expand our manufacturing capacity and capabilities.
It's usually mentioned well this is well underway in our contract manufacturer site in China, Hungary in Vietnam, we're not able to meet the types of delivery schedule without substantial air shipments.
Air shipments this quarter decreased our gross margins by 254 basis points compared to the last quarter in which we already air shift substantial amount of products and.
Another negative impact on our gross margin is related to the increase in the U.S. carry on Chinese made products, which increased in June from 10% to 25%.
Although these parents increases were absorbed by our customers the net leverage metric effect of the U.S. custom terrorists negatively impacted margins this quarter by additional 80 basis points compared to the last quarter.
Those elements were partially offset by continued cost reduction as well as economies of scale. So the overall result was 150 basis points to decrease in our non-GAAP margins compared to the last quarter.
non-GAAP gross margin for our Nonsolar activities was 28.5 per cent compared to.
14.9% in the previous quarter. Most of these increase is related to the sale of higher margin products income.
Looking at gross margin for the next quarters, we continue facing strong demand for our products well. Our finished goods inventory levels are very low. In addition, what our capacity building in Vietnam and Europe continues as planned the Chinese new year, which significantly slows down production you celebrate.
The DC or very early adding to the capacity planning complexity.
In addition, the increased fortune of U.S. revenues over a total Q4 2019 mix will further increase the negative already semantic effect on our gross margin reflected related to tariffs.
Our Q4 2019 margins are expected to be negatively affected by an additional 100 basis points over the air shipments all on top of our Q3 margins.
Moving to operating expenses in total operating expenses for the third quarter were $73.3 million or 17.9% of revenues compared to $65.3 million or 20.1% of revenues in the prior quarter into Fourq is $3.9 million were 80.
When 6% of revenues for the same quarter last year.
non-GAAP basis operating expenses for the third quarter were $54.8 million or 13.3% of revenues flat compared to 54.9% or 16.9% of revenue into prior quarter, and 37 billion or 15.6% of revenues.
For the same quarter last year.
Our non-GAAP sooner Ics operating expenses as percentage of sort of revenues were 12.3% compared to 15.3% last quarter, representing the continued operational lever.
We achieved and our sooner revenues grow much faster than our operating expenses.
This quarter GAAP operating expenses included non recurring expenses of 8.3 million daughters related to the acceleration of equity awards and other payments related to the untimely death of Guy Sella.
Our GAAP operating income for the quarter was $66 million compared to $45.4 million into previous quarter and $34 million into same quarter last year.
non-GAAP operating income for the quarter was $89.2 million compared to $61 billion in the previous quarter and $42.5 million for the same period last year.
This quarter are known sorter activities resulted in modest non-GAAP operating loss of zero point $3 million compared to net loss of $5.2 million into previous quarter, mostly related to increased revenues and better margin income.
Financial expense for the quarter were $17 million compared to financial income of zero point $8 billion into previous quarter, and a financial expense of zero point $7 billion for the same period last year.
The increase in financial expense in this quarter was solely attributed to unrealized exchange rates differences on euro balances such as cash in accounts receivable as a result of our large sales in Europe and on intercompany loans related to the acquisition if somebody.
They fix expense for the quarter was $7.3 billion compared to $17.2 million in the prior quarter and a tax benefit of $12.3 million for the same period last year.
Our non-GAAP tax expenses were $10.2 million compared to $14.2 million in the previous quarter and a tax benefit of zero point $2 million for the same period last year.
GAAP net income for the third quarter was $41.6 million compared to a GAAP net income of 33.1 million dollar in the previous quarter and $45.6 million for the same quarter last year.
Our non-GAAP net income was a record $63.6 million compared to a non-GAAP net income of $49.3 million into previous quarter and $42.7 million for the same quarter last year.
GAAP net diluted earning per share was 81 cents for the third quarter compared to 66 cents in previous quarter and 95 cents for the same quarter last year.
non-GAAP net diluted EPS was a record one dollar and 21 cents compared to 94 cents into previous quarter and 86 cents in the same quarter last year.
Our non solar.
Business generated a five cents non-GAAP diluted earning per share loss attributed mostly to financing expensive differences compared to 13 cents loss per share in the last quarter.
Turning now to the balance sheet.
As of Sept at September 32019, cash cash equivalents, then deposits restricted back deposits and investments were $432.9 million compared to $373.6 million on June 32019.
Our net cash position to date is similar to the position we held prior to the initiation of our initiation of our M&A activities 15 months ago. During this quarter, we generated $68.7 billion in cash from operations.
In addition, our balance sheet include net debt of $21 million related to loans taken by could come in and summary prior to our acquisition.
What do you paid some of its am I reading this quarter and they're expecting to continuing to do so in the upcoming quarters.
In relation to the Coke come debt as we previously previously mentioned our current plans are to maintain this debt until we finalize our capital needs for cocom related to be increasing in filling manufacturing capacity.
Our net increase this quarter, reaching $292.2 million compared to $237.8 million last quarter.
So this quarter in disorder business was 75 days, a slight increase from 74 days last quarter and mostly affected by higher portion of sales, which were delivered in the later part of the quarter.
As of September 32019, our inventory levels metal freezers was $134.3 million compared to $148.9 billion in the prior quarter.
The majority of these inventory for the solar business is raw materials.
Well our finished goods inventory levels are extremely low and only represent inventory in transit.
Additionally, approximately $44 million of our inventory amount relates to non sooner inventory the majority of which he's raw materials held by <unk> [noise].
Moving onto the guidance for the fourth quarter of 2019.
We expect expect revenues to be within the range of 410 million to $420 million.
Revenues from the sale of solar products are expected to be within the range of 30 388 million daughters and $398 million.
We expect gross margins to be within a range of 30 due to sports, 34% gross margins from sort of activities are expected to be within the range of 33% to 35%.
We'll now turn the call over to the operator to open it up for questions. Operator. Please. Thank you ladies and gentlemen, if you would like to ask your question. Please take note by pressing star one on your telephone keypad now if you are using a speakerphone. Please make sure. Your mute function is turned off two out of your signaled to reach our equipment. He is also limit your question.
One question and one follow up before reviewing we'll try to take all follow ups. If time allows again press star one to ask a question.
Our first question comes from Philip Shen with Roth Capital Partners.
Hi, everyone. Thanks for the questions.
First one is on 2020 I know you don't have official guidance for.
The year, but can you comment in general about the growth perhaps qualitatively.
<unk> do you see mid teens type growth for.
Megawatts or revenue.
And then can you also comment on.
What regions you might be seeing some strength as well as some weakness in <unk> for example, Netherlands historically has been a big part of your business.
And that country has grown substantially.
Is there do you see any risk for that country to slow down at all as the grid and gets congested there. Thank you.
So first of all thank you for the question Phil.
In relation to the 2020 guidance as he mentioned we did not to have provided guidance yet, but as we guided for the last few years. We continued to see as we said all the time low double digit growth that is usually translated for us there between the you know 15% to 25%. This was wasn't said before we have no reason to believe.
That we cannot maintain decent disorder business for a 2022 years to come and I will let CV answer more about the markets themselves.
Yeah, I don't think there's any particular markets, where we are seeing weakness or expect a negative should the trajectory. The there's a lot of potential growth. Obviously, a in Australia. There are some new markets evolving where we are investing to allow us to specifically any.
Erica.
Brazil, and you also see lots of opportunities in India on top of that we see a positive trend and all of the regular March is that we serve obviously there are few markets, where our market share is at the very high level and that is always a challenge to ER to continue to grow and then.
And would represent one of those at the same time to commercial markets in the Netherlands is expected to grow.
Dramatically in seismic fear and we are in a very good position in that segment of the market. So we do see.
And anticipate growth in that market does well together with all of the others that I mentioned before.
Okay, great. Thanks, as it relates to pricing trends I was wondering if you could comment.
By geography, as well as by segments.
For what you see for pricing, so specifically or what's the outlook for U.S.
Reggie pricing, especially as you guys ramp up Vietnam and hungry.
In Q1.
Do you expect.
Only reduced pricing because the tariff won't be a factor and then how do you expect to the outlook for U.S. commercial pricing trend, that's most international Ramsey.
Fourth with international commercial thanks.
So so filled with with regards to the pricing trend I think it other than any U.S.
Where we did increase the pricing in June to overcome the Terry we do not see major changes I think that all in all the pricing environment is a relatively stable and we do not see any change outside the.
The United States, we also see across all geographies and I think across all segments.
Very stable pricing environment.
You know the most of the changes that we see our mostly related to fluctuations in foreign currencies rather than in the price of the products themselves and therefore, we didn't see any major changes there.
Again, we don't see any dynamic that should change it or going into a a 2020 as you mentioned before and in general we are ramping Vietnam. We do expect that that's a certain point of time, we'll have more non Terry for products that are not subject with Terry and we said all along that our intention is to.
Eventually pass these along to our customers as just you know we were able to pass the terrorists alone to then we will do it in a gradual mentor at that will.
Reflect both the ramp up the pricing that was stable in Vietnam and also the ratio of the Vietnamese made products in the overall mix all of our product coming into the United States.
Thank you. Our next question comes from my Heap Mandloi with credit Suisse.
Hey, Thanks for taking my question I know just some Phillips first question.
On the could you just talk over the cadence of.
The shipments for next year.
Do you see a similar seasonality I was just so in a 2019.
And just on the Netherlands market, we did see some news flow around the congested good trend down there. So have you seen any concerns on that front or <unk>.
Oh, so I'll start with the second part no we don't see any slowdown of the of the market in the Netherlands, or it's a strong market for us and we see strong strong demand.
In regards to the first part of the question I think as.
It was discussed also in the previous call as well as an hour comments from today, we expect that in Q2 of next year or we will be at the point, where we have a large enough a gap between our manufacturing capability end demand and a much more stable environment.
In terms of supply and air shipments until that point, we will still be challenged with.
Higher shipment expenses and some lumpiness lumpiness in deliveries.
Got done.
Second question I forget just talk about the a Q4 guidance. So what are the drug to treat <unk> or you. Just so that makes for a internationally was U.S. <unk> commotion in Q4, how you see that shaping up.
And then I just a follow up on the Oh, the in which a failure has run rates would just spoke about and how should we think about its impact on either new customer orders or Ah.
Good deep warranty costs going forward, a embedded into cost structure. Thanks.
Yeah I'll take the first part of the question and hand, it through and then for the latter in the fourth quarter, we expect a euros to be a seasonally down and the U.S. to be a seasonally very strong.
We also expect the fourth quarter to be stronger on commercial and two resumed growth in that area or from the for third quarter. So I think that answers. The question I left woman deal with the second part so maybe if you can just.
Repeat so I'll be able to answer correctly.
Right.
Yes.
Oh.
<unk>.
If your line is open please repeat your question.
Hi, Thanks opening the line.
With regard to then watch a failure just wanted to understand.
How should we think about different run rates Oh in Q4, and when do you.
Expected return to normalized run rate and and how have you seen any customer deflection sorry.
Because of the a and went to finishes.
So in general we see a decreasing trend in our in our failure rates. It starts you know first of all from the more stabilized product that you know.
That was feed their did the optimizers. The three phase Inverters that are I would call. It's more mature product in general we sold would decrease over time. We continue to see these are also a in or single phasing visitors or we see decreases we believed that will continue in Q4 when it comes due to expenses we need to have.
Horse remember that the expense is not just related to the amount of failures, but rather to the cost of each and every failure treatment, meaning for example, do you use expedited shipments were not to do you use a new products versus their refurbished products or do you use a film products compared to a a single.
In general we expect the actual expenses to go down into Q4 due to the improvement in did a number of failures that we see and I would call. It relatively controlled costs. So we do not see any major.
Changes there in Q4.
And in general.
I think a basic answered everything.
Thank you. Our next question comes from Mark Strouse with JP Morgan.
Hey, good afternoon. Thank you very much for taking my questions I'm just wanted to see if you could give an update on.
On demand that you're seeing for storage a you know if you've seen any any uptick or your change in conversations with customers from events such as show that the fires in northern California.
And then also you just what's still kind of early but do you initial feedback that you've gotten from some of your your new storage solutions you unveiled at FBR.
I've a follow up please.
Yeah. So to the first part of the question, Yes, we didn't see increased demand as a result of a singular events and this this is then the dynamic in storage for the last for the last few years and we definitely see it in the last a in the last few weeks in terms the.
And that comes in parallel to a steady.
Or increase in a in in storage adoption, but that's not a dramatic increased it is more of a steady small no percentage rate a rate increase so we see both of these phenomenon than we expected to ship into fourth quarter in in the first quarter more storage systems.
And then the third quarter.
But it does not yet reached the point that that's the adoption rates of storage globally is a is really a spiking and increasing significantly.
Okay. That's helpful. Thank you.
And then just if you can update on the competitive environment, you know if you're a conversations with customers have changed at all since SPR high and in some of the a the competitive offerings that were.
Unveiled at that show thank you.
I'm not nothing really I think you know customers know I'm no the difference.
Between.
Products that are out there and tested to a product that are seem attractive but are in a prototype phase most our conversations are.
$16 and better installers in large volumes and are related to to our products and our issues, whether its availability or others. So we don't spend and we didn't see a much discussions about the other alternatives and we don't see any real impact on the conversation or the demand.
[laughter].
Thank you. Our next question comes from Brian Lee with Goldman Sachs.
Hey, guys. Thanks for taking the questions I had two of them <unk>, maybe to start off a follow up to one of the questions around pricing you wrote in it sounds like you you are and you said that for a couple of quarters, you effectively going to cut pricing in the U.S. in 2020.
I understand it's gonna be gradual but can you give us a little bit more just you know from a modeling cadence perspective it'd be helpful what quarter.
Does that start and then how many quarters will that flow through and then once complete assuming all else equal mix et cetera would blended pricing be back to the low to mid 20 cents per watt range, where it was last year before you know terrace started to drive the pricing increases and then I had a follow up.
So I wish you know that I can give you already a they're the right I think that we can do it but I think that unfortunately, the they in basis, if he's going to be very much related on the cadence of our ramp up of Vietnam and also the demand as we see hearing the United States. Because you know those two elements are going to very much determined what he's going to be the.
Overall mix pricing that we see here between Terry and loan carries products.
General again, they did you mean that we would like our customers to get back the a price increase in order to overcome the carrier we wouldn't do it I don't know we will be immediately in Q1, I would expect it to take a little bit of time, because even products that are produced in Q1 and ship.
It takes time until they reach the United States and and to be honest once will have a much better view on d., we wouldn't be happy to share. So you can and modeling or in general whatever we too.
There are two overcome these tariffs issue, we would like to return to our customers eventually.
Okay No. That's that's a that's where it makes sense.
Then second question, just maybe a little bit on the competitive landscape as we head into 2020, clearly you had good growth here and hung on to market share gain if not expanded that through most of the year I think what are your peers and phase and for that they had one business that a new customer you know two one installer in the U.S., that's historically been an important cuts.
Summer for you. So just wondering can you update us provide some more color on the competitive landscape in the U.S. as we head into 2020, and then you know how you're thinking about potentially mitigating some of that.
You know potential share loss here to two up here and then just on the Safe Harbor, maybe if I could squeeze one last housekeeping one in the $10 million.
That you're guiding to for Q4 is that all ordered and shippable product before December 31st how do you define the $10 million. Thank you.
Okay. So thats on the $10 million, which is quicker basically all of these are products that are all going to be shipped before the end of the quarter and these are basically the way that we look at it simply product that without that safe harbor might have been ordered and delivered 18.
Sorry and of course as you know safe Harbor takes many faces informed but these specifically it relates to products that are to be provided this year, and especially and expected to be consume next year I'm no in relation to the competitive environment and here in United States or.
Specific competitors in general.
And I do the CP also alluded to de <unk> in one of his answers we already have countries in which we have very high market share. The U.S. of course is this one according to GTM were approximately 60% of the U.S. residential market. The Netherlands is one and when it comes to these marketshare southeast market.
Sure we know at least in the United States was it was you attributed to the affected some of our competitors could not actually she brought us and therefore naturally some customers came to us I believe that you know those customers that came to us because those affected they couldn't get product. So I wouldn't stay with US on me go back and I also believe.
You know as we're growing in becoming so a strong and dominant some of the other players would like to take second sources, which is something that again, it's very natural we also in our production price will take a second sources in any case.
The other thing in general we do expect that you know, we can continue and maintain our sales level in the United States and continuing to increase then we believed that is one customer or for whatever the numbers will be will reduce the share using gas we have the ability to grow share with others and in general we believe that we would not see any.
A major effect on our business due to these Ah Ah specific issue, which simply you know.
Got it natural market dynamic, where you have such a big markets.
Thank you. Our next question comes from Jeff Osborne with Cowen and company.
Hey, good afternoon, just two questions on my end run and I was wondering if you could just touch on the manufacturing capacity challenges and what the current lead times are you know was there any revenue that a in particular and commercial without being down sequentially in the prioritization towards U.S. residential was is there anyway to quantify what.
The forgone revenue was or what the demand was that that you were unable to fulfill.
[laughter].
I think we.
Starting on the capacity area, we increased capacity in the current corridor.
Bye bye about 15, or 15% or so compared to the prior quarter and we will.
Increase capacity into higher level in the close to 40% going into Q into Q4.
At the current level, we are roughly matched between supply and demand and that's why we're air shipping so I wouldn't put they wouldn't be able to put the specific number.
No.
Revenue number that was missed at these.
At this dynamic, but but there could have been a project here and there that are someone needed product urgently, especially commercial product, though because maybe a different inverter that they designed for it wasn't available and but that's opportunity with mr. due to.
Insufficient product in the channel, but generally speaking.
At the current levels, a supply and demand are matched and we are aiming to a as I mentioned before to reach a point in Q1, where there's a small gap between the two in favor of capacity and in Q2 already to have a a large cap it will allow us to have inventories and ER and no one.
Having to go elsewhere when he wants our product.
Got it that's that's helpful and just to sort of housekeeping questions is there way that you can elaborate on the field failures you alluded to some new customers.
It doesn't sound like it was off spec components I think that's what you had highlighted in the past.
Is this a communication module or or something in the manufacturing processes. The optimizer. The inverter that had an issue I was just wondering if you can elaborate on what specifically was the root cause of the problem at the started the quarter that you feel more comfortable with exiting the quarter and then maybe for Ronan on a housekeeping side my understanding is with safe Harbor.
You folks need to receive the cash by year end. So you talked about 10 million of revenue for this quarter do you have any sense of what the revenue would be.
Through April of next year, and that cash that would need to be paid and in your hands, but ended the year.
[laughter] I'll start with the first I was the first part of the question. So has also mentioned that didn't know the focus is on the single phase inverter is actually on a three phase inverters and Optimizers, we're seeing a stable and low.
Failure and replacement rates and ER and they continue to trend to trend down under seem to say, even further as mentioned to it.
A couple of phenomena. The first our stabilization of the production line matched with any specific issue, but ER learning prophecies on handling on some manufacturing processes that Oh, that's were causing were causing some failures and has the.
Corrective actions were taken the failure rates a decline this combined with what what was mentioned that we track very closely.
The new installer.
Our registering on our monitoring for the first time and doing their first ever Solaredge installation and we've seen an increase in that number and there's a we train them, but there is definitely a learning curve over there or do you know how to install that were product quickly and robustly and that was.
Second caused the third was we introduced towards the end of the winter. These screen like single phase investors that have a new method of commissioning a that.
Some of that were in photos and including veterans in theaters had challenges to adopted that methodology in the initial phase and that.
Wasn't necessarily a caused the failure, but definitely a clauses.
Congestion and our phone lines, which I referred to as well so those three dynamics.
That's me so pretty much between.
May and ER and end of August and beginning of September and and we're tracking all the relevant indices and are seeing or a gradual decline since mid September until now.
Definitely when related to the safe Harbor so.
Safe Harbor basically has you know two phases for whatever you did ever before year end or you do not need to get the cash a and advance or it's a guess together before year end you can get it based on their regular permits payment terms that you have and the second for me is where you get the firm commitment last cash before the end of the.
Here.
For a products that are going to be delivered into a march in a little bit of April I continues as we already have several of these transactions that were closed both nonresidential any commercial by the way and we also have number of these kind of discussions with number of our customers.
Some of them are large some of them are smaller where we believe that they would mature and of course will see money before the end of the year is those are not yet and it's certainly closed or we do not feel comfortable to give a number now but I can't tell you that in any case, it's something that is being.
Negotiated and we'll see it towards year end didn't lose simply.
Provide data then.
Thank you again, if you'd like to ask a question of please press Star One. Our next question comes from Colin Rusch with Oppenheimer.
Thanks, So much could you guys talk about your Ah your capacity to deliver storage at this point, both from internal and third party suppliers and how we can expect from a ramp Kansas would go for it.
[laughter] currently we deliver storage compatible inverters, but we are not delivering batteries and all of those are being delivered by third party.
Third parties and and our roadmap has us delivering batteries of our own towards the middle of next year.
Okay, and I'll take some clarification dolphin and then as you look at your R&D spend you know as a percentage of revenue.
Certainly seems like some capacity to increase some spend you know what areas are you expecting to focus on over the next next period of time, that's called for next 12 to 18 months.
So first of all calling you are very much right about the the fact that there's a percentage of revenues. The R&D spending is going down. This is basically most <unk>, mostly due to the fact that we are increasing revenue silverlink rapidly that it's very hard to match it with a finding recruiting training and bringing good R&D people.
More than a and therefore, it's certainly we will see continued growth in the R&D I would say that R&D did you see today you need to divide between the solar and Denom sooner businesses. Both of them are reported in our R&D line into operating expenses on the sooner side it would be a combination of.
Three major activities. The first one will be to bring the larger inverters as we shared the road map to have our larger commercial and towards utilities. There actors by the end of 2020, a second one of course is always to continue and increase our product or a portfolio in order to meet second.
Instead, we're already operating but going into new markets and developing new flavors for the relevant markets such as the product that CV mentioned before a the German market storage and lastly cost reduction in our industry cost reduction mostly come due to the better engineering and display.
Leasing all of the components and not necessarily just from from volume. So I think it. These are in three areas that we put the look of emphasis into solar on Didnt Nonsolar business of course are each company has its own so one could come it wouldn't be a the work or mutual work on our battery I, if future battery as well as.
It's difficult companies already selling a in their markets in a again a chronic disease of course, the next generations off the you'd be as a product that are going to embed storage technology and knowledge and also better manufacturability that will ultimately.
He was the cost and when it comes to us and Murray an idea. This is more of a I would call. It start up kind of R&D, but these are related to develop future products, where and that's really the time of those products is a little bit a a longer in the life or in the expectation of revenues.
Great. Thanks, so much guys.
Thank you that concludes our time for question and answer I'd now like to turn it back to save a London for closing comments.
[laughter]. Thank you.
In summary, we are happy with our third quarter results that show continued successful execution of our business strategy with record revenues, an increase profitability, we're well positioned to continue expanding our businesses with new product offerings, and the new territories and by leveraging our acquisitions, we look forward to continuing this.
Momentum I'd like to thank all of your for joining us on todays call.
Thank you, ladies and gentlemen that concludes the Solaredge conference call for the third quarter. You may now disconnect your phone lines and thank you for joining us this afternoon.