Q1 2021 Solaredge Technologies Inc Earnings Call
Welcome to the salary of its conference call for the first quarter ended March 31st 2021. This call is being webcast live on the company's website at Www Dot solar etch dot com in the investors section on the event calendar page.
Colin cells of priority and copyright of selling of solar edge with all rights reserved and any recording reproduction or transmission of this call without express express written consent of coal solar edge is prohibited you may listen to a webcast replay of this call by what the.
Visiting the event calendar page of the solar edge Investor website, I would now like to turn the conference ever to Erica Mannion.
At Sapphire, Investor Relations and Sapphire Investor.
And relations of <unk>.
All of it.
Good afternoon. Thank you for joining us to discuss seller interest the operating results for the first quarter ended March 31, 2021, as well as the Companys outlook for the second quarter of 2021 with me today on your C V Lando, Chief Executive Officer, and running fire Chief Financial Officer.
If you will begin with a brief review of the results for the first quarter ended March 31st 2021.
Revenue will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2021.
We will then 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.
Courage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description.
On material in the webcast is the sole property and copyright of Stoller edge technologies with all rights 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 of presented in this presentation as we believe that they provide investors with the means of evaluating and understanding of the company's management evaluates the company's operating performance.
These non-GAAP measures should not be considered in isolation from or as substitute for or superior to financial measures prepared in accordance with U S. GAAP.
<unk>, who do not have a copy of the quarter ended March 31, 2021 press release or the supplemental material may obtain a copy by visiting the investors section of the company's website.
Now I will turn the call of a C D.
Okay.
Thank you Erika and good afternoon, and thank you all for joining us on our conference call.
Starting with highlights of our first quarter results.
We concluded the quarter with revenues of approximately $405 million just above the top end of our guidance revenues from our solar business were $376 million well revenue from our non solar business was $29 million.
This quarter, we shipped 3.7 million power optimizer and 182000 of Inverters.
Our solar Bruce business grew this quarter across all segments and geographies, including record quarterly revenues in Australia, Italy and France.
In North America, we saw a 23% growth in revenue was from Q4 at the Q1, we're representing increased demand for both residential and commercial products.
The business in Europe is continuing to grow led by sales in the Netherlands, where we had a record quarter of residential revenues as well as revenues from Germany, Italy and Poland.
Also noteworthy is our continued growth in France, where we had record quarter, both in residential and commercial sales.
In the region outside Europe, and the U S, which includes Australia Asia Pacific, Japan, Brazil, Israel and several other countries, we had our third consecutive quarter of growth and record shipments.
Noteworthy among these countries as Australia, where we delivered close to 100 megawatts of product representing more than 50% of quarter over quarter growth.
A big part of this momentum was due to the volume shipments of our new three phase of residential and further optimize for the Australian market.
When it comes to new market opportunities, we see Korea, as a particularly interesting one we recently.
The completed certification of our three phased commercial inverter for installation on commercial rooftops in Korea.
As the C&I market in Korea is more than two gigawatt in size and considering our strong local presence we are optimistic about the growth potential there and indeed, the already installed in the first quarter more than 10 megawatts of rooftops and a conditional certification setup.
As we projected in recent calls this quarter, we began to see meaningful signs of recovery in our commercial business across all regions.
Our megawatt shipments of commercial products grew by 30% 35 per cent from last quarter as.
As we had anticipated and discussed in our last earning calls the commercial sector has been slower to recover from the economic downturn during the pandemic, but the inventory on our distribution channel is now back to healthier levels and we are seeing a pickup in commercial installations and opportunity pipeline.
We expect revenues from the commercial segment to continue on grow back to the pre pandemic levels in the second and third quarter of 2021.
On the product side demand for our battery ready energy hub and Burger continues to grow.
And it is now more than 20% of our residential shipments to the U S.
At the same time, we see growing interest in our self consumption devices, such as our EV charger and water heating product.
Our plan to launch our residential battery remains on track we have active test sites already in the U S and will begin initial shipments this quarter the.
These batteries will be shipped to the U S Europe and later to Australia.
The test period. These aims to validate the battery performance in the field and sharpen installation practices with the health of some of our select installers of.
Additionally, the goal is to confirm the system level battery plus energy hub inverter self consumption and backup scenarios.
In a recent study of our global installed base of more than 30000 systems of solo edge backup Inverters installed with third party inverter.
We analyzed the consumer behavior patterns and system performance through more than 75000 blackout defense lasting more than five minutes.
We characterized in detail typical blackout frequencies duration, the power and energy capacity needs as well as practices to prevent the depletion of batteries and extended blackout the events.
We will be incorporating the learnings into our system in conjunction with the maximization of self consumption and financial decision, making of algorithms in order to enable smart automated system decisions and provide a flexible easy to manage system for the consumer.
As we have said in the past, we don't plan for meaningful battery revenues until Q3 of this year.
Given the growing demand for energy consumption and storage, which I referred to earlier, we are confident that our storage ready inverters fitted with our D. C. Coupled battery represent a significant milestone and progressing our vision of the home system that is flexible to provide both the maximization of.
Self consumption, and economic value, where relevant and backup capability, where and when needed.
In the commercial segment, we see good adoption of our 120 kilowatt synergy and burner, including a dedicated version for ground Mount installations in the U S.
This new high power inverter is designed to support the bigger commercial fields.
And the improved economics, as well as simplify installation and commissioning.
Our customers can now set up and test the entire installation before even connecting to the AC grid.
As the C&I market continues to improve our new high power inverter combined with our recently released 1100 walk the optimizer.
Offer of means to reduce the cost per watt for installers and increase the adoption of our solution in larger ground Mount and rooftop installation.
I would like now to elaborate on our operational status.
Cycles of component shortages are common in our industry and we have experienced such cycles before base.
Based on our past experience, we have adopted the methodology to closely monitor the procurement of components by our contract manufacturers and the times manage the supply and demand of components directly from their suppliers.
This allows us to identify relatively early cycles of shortages.
We also typically hold high levels of safety stock and finished goods inventory that allow us to overcome temporary fluctuations of component availability.
In addition, we have developed alternate sources for critical components.
As a result at this time based on the current alignment and delivery schedules with our contract manufacturers and suppliers we.
We are comfortable in our ability to support the increased demand we are seeing in our projections for further demand increases later in the year.
The last time this may come at the higher cost due to expedited shipments and cost increase as is reflected in our gross margin guidance for the forthcoming quarter.
On a related note our selling one factory in Israel is continuing to ramp.
We are now employing over 480 workers and manufacturing Inverters and Optimizes from our own facility, which is on track to reach full capacity by end of this quarter.
The fruits of this investment are already being born as thanks to a joint project of our R&D and operational teams in Israel, we have been able to increase the output of our power Optimizer automated Assembly line and copied this improved process to our contract manufacturers in the other location.
In our non solar business, our E mobility Division began delivering full powertrain units and batteries for the Fiat the EU catheter in Europe.
The ramp of the production line will be gradual and several months will pass until we reach full capacity.
In our energy storage division the sell of two factory for lithium ion cells and batteries in Korea is now well underway with the groundbreaking work behind us and building establishment in process.
The factory is expected to start pilot production in the first half of 'twenty 'twenty, two and will enable us to supply our own sales and reduce our dependency on third party manufacturers.
In summary, we are happy with the results of the first quarter and with the progress our teams are making across our regions and business units with this I hand, it over to on an who will review our financial results.
Thank you Phebe and good afternoon, everyone.
These financial review includes a GAAP.
And non-GAAP discussion.
Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today.
Total revenues for the first quarter were $405.5 million, a 13% increase compared to $358 $1 million last quarter and a six per cent decrease compared to $431 2 million for the same quarter last year.
Revenues from the sale of solar products were $376 $4 million of 15% increase compared to $327.1 million last quarter.
U S solar revenue this quarter were $162.5 million and represented 43, 2% of our solar revenues.
Solar revenues from Europe, where hundreds of $58 $4 million or $42 one per cent of our revenue in the rest of the world Solar revenues were $55 $5 million or 14, 7% of.
Our total revenues driven mostly by a record revenues in Australia.
Revenue this quarter represented strong demand for our products in both residential and commercial segments in Europe, and the rest of the world with revenues in the United States continuing to be driven by sales of residential products on.
On a wake of about the basis, we shipped to the United States 573 megawatts to Europe, 721 megawatt and to the rest of the world 397 megawatts.
<unk> 45 per cent of the total amount where of commercial products and the remaining 55% of residential.
Channel inventory remains healthy in all regions in anticipation for Q2, and Q3, which are typically characterized as stronger quarters for the solar and the industry in general.
The point of data sales point of sale of data received from our distributors demonstrates strength in all regions.
In the United States, where commercial sales were weaker over the last quarter, we see as anticipated strong point of sales data, which lowers the inventory days within the channels and new project discussions with our customers are expected to yield an increase in our U S. Commercial sales in Q2 and the following quarters.
This quarter, our top 10 solar customers represented 62, 2% of our solar revenues one U S distributor accounted for more than 10 per cent of the solar revenues.
Pricing level remained stable this quarter across all regions blended ASP per watt for our solar products decreased by approximately 8% compared to the last quarter driven by customer and product mix.
This quarter revenue.
From our non solar products were $29 $1 million led by sales of lithium ion batteries to non solar customers by coking and increased sales from our E mobility business. The deliberate the first full parkman kits to still entities.
GAAP gross margins for the quarter was 34 five per cent compared to 38% in the prior quarter and 32, 5% in the same quarter last year.
Non-GAAP gross margin this quarter was 36.5 per cent compared to 32 five per cent in the prior quarter and 33, 6% in the same quarter last year.
Non-GAAP gross margin for the solar business was a record 39, 7% compared to 36, 2% in the last quarter and above our long term solar gross margin target of 36% plus or minus 1%.
This increase in the non-GAAP sooner margin is the result of several factors, primarily we saw a higher portion of residential products, which are characterized by higher gross margins out of the total product mix improve the exchange rate on the sales in Europe, and Australia of reduction in the portion of Chinese made products shipped to the United.
The states and that are subject to U S custom tariff as well as lower warranty charges as a percentage of revenues associated with the support of our products and economies of scale.
86% of the product shipped to the United States. This quarter were not subject the set tariffs as they were manufactured outside of China.
As you can see from our Q2 gross margin guidance, we expect margins to be slightly lower in the coming quarter.
Over the last quarters, we experienced substantial increase in ocean freight prices as a result of the effects of COVID-19 on trade and supply chains.
The <unk> freight prices have increased by more than 100% over the last months and are renegotiated prices have gradually expired and expose us to higher freight cost worldwide.
Another element that affect our margin increased cost of certain components and freight costs related to the expedited shipments of such components Inc.
<unk> mentioned, we are managing these component shortages in a way that currently allows us to meet the annual operating plan, but such management requires us from time to time to be to pay higher price for a component.
Or air ship them to our contract manufacturers facility of supply time always also fluctuate.
Lastly, the seasonal growth in revenues in Europe, and increased sales of commercial products in the United States. Both are characterized by lower gross margin product in our overall mix.
Despite all of these factors, our gross margin target and our expectation to meet it remained unchanged at the range of 36% plus or minus 1%.
Non-GAAP gross margin for our non solar activities was minus four 7% compared to minus six 4% in the previous quarter. The improvement is mainly a result of the growing volumes of powertrain kids supply this quarter, although volumes are not yet stabilized it's the anticipated level.
That will get us to the low single digit target gross margin on this project.
On the non-GAAP basis operating expenses for the first quarter were $76 $2 million or 18, 8% of revenues compared to $70 million to $90 million or 24 per cent of revenues in the prior quarter.
And $66 3 million or 14 15, 4% of revenues for the same quarter last year.
This increase is a result of our recommenced investment in talent acquisition in our research and development Department as well as the expansion of sales infrastructure in all businesses.
Our non-GAAP solar operating expenses as a percentage of solar revenues were 17% compared to 18, 9% last quarter.
Non-GAAP operating income for the quarter was $71 $9 million compared to $43 $5 million in the previous quarter and $78 6 million for the same period last year.
This quarter non-GAAP solar activities resulted in an operating profit of $85 $5 million compared to an operating profit of $56 5 million last quarter the.
This number represents 22, 7% of our solar revenue and is at the higher end of our 20% to 23% long term operating profit model.
The non solar activities resulted in non-GAAP operating loss of $13 $6 million relatively flat to an operating loss of $13 million in the previous quarter.
Non-GAAP financial expense for the quarter was $6 $3 million compared to a non-GAAP financial income of $16 $9 million in the previous quarter. This expense is the result of mostly unrealized foreign currency fluctuations related to intercompany loans between the.
Group companies.
Our non-GAAP tax expense was $10 $1 million compared to $4.6 million in the previous quarter and $12 5 million for the same period last year.
GAAP net income for the first quarter was $31 million compared to a GAAP net income of $17 7 million in the previous quarter and $42 2 million in the same quarter last year.
Our non-GAAP net income was $55 $5 million flit compare to two of non-GAAP net income of $55 $7 million in the previous quarter. However, this net income this quarter is a result of a substantially higher operating profit.
GAAP net diluted earnings per share was 55 cents for the first quarter compared to 33 cents in the previous quarter and 81 cents for the same quarter last year.
Non-GAAP net diluted EPS was <unk> 98, since the same as in the previous quarter and the slight increase compared to 95 cents in the same quarter last year.
Turning now to the balance sheet.
As of March 31, 2021, cash cash equivalents bank deposits restricted cash deposits and investments were $1 $2 billion net of debt cash cash equivalents bank deposits restricted bank deposits and investments were $515 $2 million.
During the first quarter of 2021, we generated $24 $1 million in cash from operations.
A R. Net increased nominally this quarter to 271 $7 million compared to $218 7 million last quarter.
Day sales outstanding this quarter in the solar business was 73 days a decrease from 75 days last quarter.
As of March 31st our inventory level net of reserve was.
Is it the $314 million compared to 331 7 million in the prior quarter.
This amount reflects slightly lower finished good inventories and higher raw material inventory in both our solar and non sort of businesses. As we are working through the component shortages and ramp up our E mobility powertrain production line.
Moving now to the guidance for the second quarter of 2021.
We expect revenues for the second quarter to be within the range of 445 million to $465 million.
Revenue from the sale of solar products are expected to be within the range of $405 million and $420 million we.
We expect non-GAAP gross margin to be within the range of 32% to 34% non-GAAP gross margin for the sale of solar products. He is expected to be within the range of 36% to 38%.
I will now turn the call over to the operator to open it up for questions.
Thank you.
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We will take our first question from Stephen Byrd of Morgan Stanley.
Hey, thanks, so much for taking my questions.
Maybe just first talking about the the gross margin guidance you described the cost impact of.
For example on.
Shipment costs et cetera.
And I was just curious for the second quarter are the sort of cost for those sorts of.
I think of is inventory related costs is that fully reflected into Q or could you see further margin impacts in subsequent quarters that could be a bit larger than what youre seeing in <unk> guidance.
So general first of all of the margin is relatively I.
I would say of mix of various items.
The other than of course, the logistic costs, which are also related to mix of products and mix of geographies and currencies. So therefore, you know spotting one specific element is always a little bit more complicated than you know one of the may move and actually overcome the others such as exchange rate for example, but from a.
The perspective related to the logistical basically our prices are usually pre negotiated in advance.
And we try to close them as much as possible in order to hedge prices against the changes that are happening and we were able actually to do it pretty well in the last few quarters. It simply debt you know overtime. The wood cost went up and our prices are elapsed and therefore, we had to pay the higher prices. So right now I think that we have a pretty clear visibility.
For the Ocean freight prices at least for a day a quarter, where we guided we do not see a lot of changes happening there.
I think that for the quarters to come we.
We do not have yet our numbers to see we believe that the trend is going to be slightly downwards, but of course, you know as long as the of traffic of both in and out from the United States into China, and the other areas ease of somehow disturbed because of COVID-19 and because of changes in the trade patterns. This may change, we do not expect.
The major changes.
More than than we sold this quarter of however in the next few quarters.
Really helpful. And then maybe just one follow up.
It's great to see the progress on your energy storage business and you talked about the residential battery being on track for deliveries.
The deliveries in the second quarter just in general how are you feeling about the growth potential for that business I mean, it strikes us that there should be you know a tremendous demand for that product, but just curious compared to your original expectations. How is that sort of process of development and how would you expect roll out in other words are you feeling more bullish because demand is fair.
Hi are there sort of logistical issues that would go on the other side of the equation. How are you generally feeling about the growth of the of the storage business.
I think you hit the nail on the head demand is probably not the issue so the.
The demand is very strong it's coming from multiple geographies all over the world.
In general for storage and in particular for a an integrated system.
We provide them.
We will be ramping our production line will make the introduction at the end of the day of gradual because it is the new product that you want to be a bit cautious in how you rolled it out to the field. How you train installers, how you get it installed and logistics are are a challenge, but they're not much more of a of times and they are in the other areas. So some of the the.
The outlook is very positive in this area, but it's not going to be a very sharp hockey stick of of Oh of tremendous growth from one quarter to the other but we're very encouraged by Oh by the demand and by the way the product is shaping out and were excited as to what to bring it out of the market in the next couple of quarters.
Very good thank you very much.
Thank you and we'll take our next question from Philip Shen of Roth Capital Partners.
Hi, everyone. Thanks for taking my questions just as a follow up on the storage question was wondering if you could talk about what you think meaning.
Meaningful demand could be in Q3, I think you mentioned that that would be the first quarter.
And then perhaps put in context for us what.
Of growth Coke on the core biz.
Business could see in 2021 versus 'twenty 'twenty.
And if you could talk about pricing.
For the battery system that would be Oh.
Fantastic. Thanks.
Yeah.
So I'll try to take them one by one film.
Again, the demand is very strong in terms of how much we will ship in Q3, where we're not yet.
Giving a specific guidance as we iron out the plan.
And as we said multiple times, we believe it will be already a meaningful quantities and and revenue, but the exact number that will guide. The next the next quarter in terms of the pricing we began to communicate the pricing to select customers in the market and we're obviously aiming.
Aiming at the to be competitive and reflect the value of our.
Some of the product so we won't be on the on any major agent in terms of a significantly higher or lower than the mid market prices for for batteries are today and the the last question Phil I don't.
I don't recall the bulk of the AR.
So what kind of growth could we see what the coking business year over year.
So I think the tear film the question is mostly related to the capacity. They have today the capacity they have in the older of factoring the incentive is pretty much taken and therefore, we do expect to see a a small growth year over year simply due to the fact that they are able to make improvements, but it's not going to be some.
That will move the needle in the overall solar edge numbers for this year the the biggest our growth will come.
<unk> next year, because one sale of tool will start producing sale of this will be our first the simple sales into first quarter and go into full production within the within the year then our expectation was around the $300 million as we come in and communicated in the path of or however, we do see.
Debt. This assumption that was based on relatively large ASP erosion in the a cell cell industry is not really materializing and therefore, the the the effect could be higher but at least for US you know the way that we're planning is about a $300 million of incremental revenues in 2022.
Great. Thank you both as my follow up question here as it relates to litigation was wondering if you guys could provide an update on.
Any of the risks and opportunities as it relates to what's going on in the lawsuits in China or in Germany.
What is the risk that you guys may be prevented from manufacturing in China.
And if so do you have any contingency plans around that.
So so.
As we discussed several times over the years that the litigation that's been going on these are typically very long processes and usually the.
And and of dramatic fashion in one way or.
We're not there. So so all of this is still ongoing as you mentioned both in our in Europe and the <unk>.
And in China Nonetheless.
We obviously have set in motion contingency plans based on scenarios that are that might evolve, but so far also as we indicated in our guidance for.
For the quarter and our message for the subsequent quarter, we are comfortable with our ability to deliver on the increased demand that we're seeing.
Okay. Thanks, Ken I'll pass it on.
Thank you and we will take our next question from Colin of Oppenheimer.
Thanks, So much cuts could you talk a little bit about what's going on with seasonality in Europe and sell through in Europe, both in the commercial in the residential market and.
Comment on diversification of the geographic footprint, where you guys are selling true.
Yeah, So Europe wasn't interesting winter and the fact that the first couple of months, where were pretty tough winter and installation rates were kind of slow and then sometime from mid February on on things.
Things opened up and.
And our installation rate is is is.
He is gone up sell through.
Is has gone up and.
Most of our dialogues with our.
Distributors across Europe, both for residential and commercial are about pull ins and expedite these days is the.
The market the woke up.
The very aggressively in the inventory levels are relatively low compared to the after the poll from the AR from the installers.
In terms of the the the general breakdown, if if that's what you're referring to so so we are stabilizing more on a $40 45 per cent.
Our U S, a 40% roughly Europe and 15% our rest of world.
The rest of world is growing.
Quite quickly and that pattern might shift later on and we are investing of life into places like Korea that I mentioned, Taiwan that is the AR is a good growing market, Thailand is a good growing an interesting market. It's one of the other places that we are present already like and are in a strong way like Australia and.
In Brazil, and and even in our home court in Israel. So the the growth rate in in these regions of the markets are higher than that in the U S and in Europe, and we are making the investments in order to capitalize it still nonetheless, you know for the foreseeable future.
That mix of rough.
Roughly or growing depending on the season between a 40% to a 50% each between Europe and the U S and the rest coming from the rest of the world is probably going to be the pattern for the next 12 to 18 months is continuously.
That's super helpful. And then just just as a follow up you know could you give us a sense of how things are progressing on your efforts center of the the utility scale market and the.
The evolution of that market as we start to see.
You know some evolution on the balance of system for the electrical elements of the systems, but just love an update there.
So so.
We're continuing.
Incremental penetration.
Into the ground Mount market, if you will which wouldn't be classifieds.
As utility in terms of the we're not talking about the installation sizes of hundreds of megawatts, but are we are.
More and more installing the systems based on the larger inverters that we are introducing and the lower cost the optimizer is into a.
More and more projects of the size of the 510 15 megawatt ground Mount installations, all over the world. The next step.
Improvement over the next step penetration from our side will be as as we discussed several times towards the end of this year beginning of next year with the introduction of a above 300 kilowatt inverter, which will take US a next step in terms of the suitability for larger Ah.
Ground Mount installations, and will continue to evolve from there.
Great. Thanks, so much guys.
Thank you and we will take our next question from Mark Strouse of Jpmorgan.
Yes, thanks for taking our questions just wanted to go back to the the.
The component inventory.
Stephen's earlier point.
Are you able to quantify that at all or maybe put it in terms of.
If the supplier.
The industry headwind the last for another two quarters or another two years three years whatever.
At what point does it become even more of the material headwind to solar.
So it's only two or three years as it is the tough question. We are in continuous dialogue, obviously with the contract manufacturers in the supply base.
For the four components and.
On the based on that dialogue in terms of the projections that we give them and the commitments that they give us.
We don't see and we don't see major issues, assuming everybody 60 of their plan I E. Our growth is the growth that we are expecting and.
We don't see.
Our first major Decommit now. These are this is based on alignment that is done recently and not the based on.
Within the within the crisis and that the commitments are alignment that was done prior to the crisis beginning so what this translates to an hour.
Messages that we have a plan for the first the abuse foreseeable future that is aligned with the supply base to the component level not the only the contract manufacturing.
The two which we can deliver on the optimistic growth expectations that we see.
Two to extrapolate that the.
Two years out and what could happen in the component industry. The that's a bit beyond the.
Beyond our capability at a at this point.
And especially if you take into account. The these type of cycles, usually don't last of ethylene sort of.
Of time in terms of of the ability of component manufacturers.
Add capacity within that the those type of time cycle.
Yeah sure makes sense, Okay, and then just lastly for me.
Not looking for you to the name any specific customers, but it but as you look at your your U S customers that are providers of leases or ppas.
That of maybe safe harbored in the past can you talk about any change in there.
They're buying behavior since the ITC was extended the months ago.
Yeah, and as you said.
Hey.
Well I can't get into specific name based on the press release that we issued shortly after our previous earning call about the.
An agreement that we reached in Sunrun.
We're delivering on the energy hub.
To them and we were very happy in terms of how that renewed relationship.
Is evolving.
And and part of that is obviously translating into our into.
Into our business now in our.
And our projections.
I don't have full visibility to our to the them on the other large installers in terms of how much the safe harbor, they still might have inherent in their inventory and what type of product.
Okay. Thank you very much.
Thank you and we will take our next question from Brian Lee of Goldman Sachs.
Yes.
Hey, guys. Thanks for taking the questions I had two one on gross margins.
I know you had talked about rolling in a couple of moving pieces here that are.
Kind of pressuring gross margins in the two Q outlook can you help quantify a little bit just some of the logistical cost what sort of basis point impact its having the.
Obviously, you put up a very good gross margin in Q1 on the solar products. It seems like there's a headwind you're seeing on the logistical costs from quarter to quarter and then mix helped you a lot in Q1. It sounds like mix is still pretty good in Q2, because you're expecting growth.
In the U S to continue to be robust.
Can you.
The kind of level set US again, you said in the past sort of what's your margin Delta is between different regions and then between resi and commercial I know of converged a bit recently, but could you level set us again as the kind of what the margin Delta that you typically see is across some of the year end markets and Geos.
As he mentioned at the beginning due to the fate of that there are so many moving pieces to name and to give the effect of all of them, it's relatively tough I would say that.
In this quarter first of all of it as I've laid out our if you take the mid range of our guidance were supposed to be at around a 37% on the mid range, which means about the two hundreds of basis points of.
With reduction compared to two this quarter. This actually encapsulates the vast majority of all of them because the ocean freight ease of usually.
Would see several.
I would say look more than the 100 250 basis points in general usually but again. These guys. These are kind of expensive almost doubled over the last quarter, but this is something of that again that is changing based on the routes that you're shipping with the sheep more from Europe, whether you ship more from China, and Vietnam and there are a lot of fluctuations there.
And you'll see a relatively large number of the.
The exchange rate differences of course are hard to predict this quarter they were up.
Above the usual rate, but at the end day, they worked a little bit against us. So again I think that if you take of new bundle all of the changes in the shipping.
Rice is plus.
The effect of the mix plus the effect of the exchange rate to get to the 2% and this is the the neighborhood not dramatically over this one.
Okay Fair enough. That's helpful. And then just the second question on.
Theres a lot of questions around the battery storage.
And the ramp here that you're contemplating here over the next several quarters.
I thought in the past you had talked about kind of of.
The ability or at least the.
The confidence around 100, maybe $150 million of batteries.
Battery storage revenue ROTC as you ramp in 2021, obviously, mostly in the second half given the timeline of the ramp but.
Are you are you no longer.
Of the view that you can get to that kind of triple digit.
The dollars of revenue this year and it's one of them that's the case.
Hello.
We still hold true we still hold this view.
Okay. So your ear of 100 million plus in the second half of this year on the new ready storage product that just just wanted to make sure that that's still your view.
Yes, and again the based on of course, all according to the you know.
The ability to ramp and you know no disturbance on the supply chain, but in general there is no change and Steve you mentioned before everything is on track and there are no changes to the plan.
Okay Fair enough I'll pass it on thanks, guys.
Thank you again, and we will take our next question from the Heathman Deli of credit Suisse.
Okay.
Yeah.
Hey.
Good evening.
Question.
So maybe just talk about the.
The split of commercial revenue.
The rest of national revenues in Q2, and how that sort of all of in Q3 Q4, and then just trying to understand.
Got it.
The commercial should recover in Q2 and Q3, so I'm just trying to see if.
They should expect higher commercial demand.
The Q3.
What's the current levels.
Going forward. Thanks.
So as I mentioned in the comments of our commercial volume in megawatts from Q4 to Q1.
Grew by about 35%.
This was primarily.
The growth.
In the Europe and rest of the World our commercial shipments also in the U S grew quarter over quarter book to a lesser effect and they grew quarter over quarter.
And the other two regions as re characterize them Europe and and Australia.
At the same time, we began to see also in the U S.
Higher installation rates in the sales by our distributors and reduction in inventory levels. So we do believe that the U S will begin to pick up as well following the pickup that we saw in in Australia, and and rest of world not necessarily at that.
Hum at that the growth rate. So we are and we referred to this a few times in the past we expected.
Barring the improvement from the economies on related to the pandemic, we expected the beginning of a pick up in the second quarter and usually commercial installations are back and.
Heavy in the year. So it is a reasonable assumption that the that the the the Ah.
Commercial shipments will continue to improve our globally and in particular in the U S. As I mentioned.
Got it got it thanks for that.
Just on the freight cost.
Thanks of the colors on the gross margin impact.
But I just wanted to understand of the higher freight cost of trade challenges is impacting your of leaders of supply in any of the markets right now.
If you don't.
On the way to ask because of demand is much higher than what you're seeing out there.
Yes, the man.
Demand is.
Is strong and and becoming stronger.
The logistics operations are complex and global we manufacture at five sites in multiple locations around the world and we deliver to many many countries and optimize continuously are based on various elements and the and that's not the simple operation and I can give you an example of.
On the Suez crisis of a month ago.
We had more than 100 containers of products that were stuck in a in this congestion some of which were on the actual the boat that that was blocking the canal and somewhere at the both sides of the <unk>.
Of the canal Nonetheless, with all of that going on we our delivery dates were intact and our customer.
Deliveries were not delayed because the the complexity also gives us many options and the lot of a lot of levers to play with and we were able with some expedition and a lot of effort to still satisfy the demand and meet our obligations.
So we I think we're pretty good at this and we.
With all of the challenges ahead, we believe that we will be able to to execute on the demand both from a component availability and the logistics constraints that are out there today.
Got it.
Thanks for taking the questions.
Thank you and we will take our next question from Eric Li of Bank of America.
Hey, good afternoon can you hear me.
Yes, we do on there.
Okay.
Did Easter.
First on just in terms of Japan.
Inventory levels.
Can you talk quantitatively.
Okay.
The increase.
So the demand was relative to <unk>.
And of the incremental supply youre able to secure.
Yes.
Sure.
In terms of keeping guy.
Channel supply of inventory.
Yes.
All of that division.
So in general the Eric it's.
First of all of the level of inventory or the nominal level I think is sometimes not the only number or I would call. It factored that is interesting it's more actually the inventory days at the holding and that means for how long. They can basically supply based on the inventory that they have no in general I can tell you that.
First of all as Steve you mentioned from a component and from logistics point of view, we did not face any trouble deliver our products and therefore, we will not we were able to supply whatever demand Kim.
When the vendors are looking at the inventory each of them make their decisions based on what they see in project and in general what do you see the towards the end of the first quarter, the absolute number or the absolute value of inventory is growing in the channels because everyone is getting ready for a Q2 and Q3 and all.
So of course, the more you hear about component shortages in the market. The more you hear about complexities of companies to provide and it's time you see those I would call. It distributors trying to optimize the level of inventory that they're holding which is something that cause of the money in working capital with.
The I would call the desire to get as much stability by simply holding the inventory. So in essence, what we see right now is debt.
When we talk to our distributors were very well aligned with them on the lead times as Phebe mentioned, even if they're on logistic hurdles, we're able to meet the delivery times, and we're able to communicate them well to the distributors and we let them to understand and decide what is the level that the head. This also mean.
By the way that we don't see a drag of orders coming or pulling forward simply to make sure that we have or a day have a more inventories debt in something that can affect them. Later, so it's the kind of a I would call. It the circle of process, where the joint planning for us and them allows them.
Two plane will the inventory our ability to deliver a related to all of the hurdles and the complexities on time is something that makes them comfortable which in turn allows them to be more precise in the way the there.
Planning the inventory on the inventory levels right now at least.
We see of normal behavior for this time of the year and again, we do not believe that there is any pull ins or any deliveries that are done now simply in order to secure that the heavy inventories for the rest of the year.
Got it.
That's true.
Thank you.
Perfect.
Can you talk about how you are planning to.
Great.
And the potential.
Okay.
Sure.
Okay great.
Good day.
Given the.
Pretty true.
Great.
Okay. Thank you.
So I'm not sure we understood the all of the questions, but but.
A big.
Enhancement in the battery is the.
Communication technology and the ease of installation. So we invested a lot of attention on that and the design of the battery and in particular the way it integrates with our energy have a system. So that that the training is actually being initiated this week.
Towards the the installers, but I believe the due to the design and the way it was designed.
And the simplicity that debt after some some simple installation of most of the installers and we have many experienced installers will be able to deal with this with relative ease.
Thank you and we will take our next question from Jed.
Schmear of.
Okay.
Jackie your line of sight.
Hey, thanks.
From Canaccord Genuity.
I guess the first question if we look at.
If I look at the five times.
Cost.
Decline.
In solar in general over the past.
The two decades from of right floor perspective.
It seems like technologies kind of.
Led the way and and that does leave the opening in terms of where it leaves the labor is.
From a balance of the systems and I'm, just wondering how you're thinking about.
The reduction of labor cost as a function of.
Either as you talk about.
The three phase sort of light commercial if you will.
And non utility or rather the side of things is that about lightning.
Uh huh.
Reducing the weight of your Inverters or how are you thinking about that value proposition at this point.
Yeah.
It's an interesting question and worth spending more time than this type of short discussion. It is something that we are paying.
Paying attention to it.
At many levels in and generally you know over the years it was.
Was considered.
A relative strength of ours.
Our position with the large installation companies and some of that strength was coming from of lots of joint effort too.
I hope there are installation efficiency and our.
The the importance we were putting in it and the willingness to discuss these type of items and working together on how we help them in some cases an hour of small parts. Obviously the the big issue is there in terms of increased the amount of installations that can be done per day or reduce the amount of time.
The per installation in and there are things that have been done over the years in terms of integration of.
Elements the prior used to be our installed separately and incorporating them into the inverter.
And the other elements of reducing the time of commissioning and downloading software and things like that so so on and all of those areas. We are investing a lot of R&D and doing that in cooperation with the some of the large customers definitely work with both of them in residential and C&I there are.
As you suggest also opportunities that are more of.
Related to the overall.
Balance of system of of installations in the direction that things are going more in the in the CNI, we are investing again R&D and.
And looking at these type of opportunities and the and it's an area that we have a team that is focused on again, it's not something to get into.
Right now, but but.
We concur.
This is an area of growing importance in terms of the growth of the industry in the adoption of of these type of solutions around the world.
Got it and then.
Yes, maybe just a longer term I mean, assuming.
You'll probably getting through this tightness there'll be.
You know a decent amount of overcapacity in the marketplace to the <unk>.
Benefit from.
But as you think about the.
Yes.
The.
Procurement of.
Of components.
How are you thinking through the competition the increasing around electrification because.
For the past decade or two.
It's largely been.
On a competing against different solar technologies and today it is now.
Yeah.
The competition amongst.
E V C.
System design or transmission and distribution.
Of non solar based technologies. So if you think through the hierarchy from.
From your system solution perspective in multiple facets of that how are you thinking about.
Making sure that you have the capacity.
In the Fabless design.
So so it's again of a bit of of a high level question on I'll answer with with two two element.
First as we from the beginning actually our optimizer is where based on our ASIC.
And we've expanded that level of vertical integration.
At the component level two other elements of the system that are basically components that are designed for us and ordered by us and and obviously, yes. We are dependent on a in some cases on the overall capacity a scenario of it at.
At the foundries or the other locations, but it's not we're not competing for.
In some cases not in all cases, obviously for the same for the same components and it's a trend that we.
We plan to.
We plan to continue and the exercise also on some of our other businesses to the the broader.
Topic of the question is indeed, and I think the good sign for our industry.
Is the entrance of a big.
The technology players that are seeing a renewables and solar in PV in particular as the growth opportunities on all of a significant opportunities that are here to stay. So we welcome that and I think it's good for all of US I think we are pretty aware of our strengths and at the same time.
Aware of our weaknesses and the and now that we are in the E mobility space and some of the areas. It also allows us to compare ourselves.
Two other companies from other industries and realize that if you take the specific topics of the power electronics and high efficiency high reliability power electronics on the ability to mass produce high quality of high efficient high efficient.
The power electronics, that's what we know how to do that is the core of the strength of our of.
The company and the and we feel good about our.
The capability and talent and compare it to our two most the companies that we came across and we came across some of the very well known names around the world in this area. So that's that's our strain finished the strength that we believe can provide us a lot of opportunities in the future and we are focusing on on maintaining the.
The strength in finding the way to capitalize on it.
I hope that helps answer the question that you were aiming for.
Yeah.
Thank you and we'll take our next question from Jim Ritchie of Needham and company.
Thank you.
Question I have as it relates to storage given the your you're reaffirming your storage revenue targets for this year I'm wondering how we might think about this in terms of does the skew the revenue mix more toward residential on the back half of the year of presumably.
And tell me if this is it.
Yeah, I'm not misinterpreting.
But a higher mix in North America, and then also a follow up on your installers.
So the not necessarily the the especially since we began shipping the energy hub.
There are many our inverters out there that have not yet been coupled with the battery.
So.
It does not mean that every battery that will we will be shipping will be going go to magically within inverter at that time and as a result are leading to that type of tilt.
The more dramatic tilt towards our residential many will but some of some will not so I don't think that this will.
Well the skew the on the balance between the residential than commercial.
Between the specific geographies as it relates to to the solar installations, yes. The majority of the batteries and the first phase will be coming to North America.
And we'll look for the initial surge in revenue generation will come from North America, and then spread to Europe, and Australia on the rest of the world.
Yeah.
Thank you and we will take our next question from Kashi Harrison of Simmons energy.
Good evening, everyone in the thank you for taking my questions.
So some of my first one.
Surround supply chain.
Thanks for all of the commentary there you mentioned you have enough supply to meet your anticipated demand in the second half of the year.
Just curious does this contemplate any excess demand that may materialize, if you're on your major competitor doesn't have enough supply to meet their demand for the latter part of the year.
We were projecting a year over year of growth.
Based on the different dynamics that we thought will come true.
Through 2021.
We don't know I don't think we know how to quantify specifically, if and what type of opportunity will arise out of that the dynamics, though so we know that the and expect growth and we know that we believe that we can deliver.
On that growth and if there will be such a component within that the opportunity we should be able to deliver on it but I have no way to confirm or to quantify something like that.
Thank you and we will take our next question from Tristan Richardson of curious securities.
I appreciate it guys. Thank you just quick question on on.
The new product launches just on the the storage side I think in the past you've said that.
From a margin perspective, 25% could be general high level of expectation I'm. Just curious if that still holds and maybe just the timeframe to get there in terms of what kind of scale you need to see first.
So first of all the nice nice to talk for the first time.
So in general the gross margins that debt. We expected there was indeed in the range of 25 per cent and I think the there are two factors that we need to take into account here of the first one is debt. When we made this assumption we believe that there's going to be a relatively sharp ESP erosion in the price of.
Of batteries, which actually did not happen due to the relatively high demand that we see in the market and therefore, the return expectation debt at least in the short term gross margin will be there no. It will not be there may be a much higher you know at the very beginning due to the fact that you still need to ramp up of their economies of scale related to the way that you are.
Ramp up, but we definitely see of potential to be there I think the the next layer of potential is actually once we have our sell of two factory and this is something that will come at the later part of 2000.
In 'twenty two when batteries from sale of two will start arriving because of that point, we will have our own factory with our own costs and with our own supply chain, meaning that we do not need to leave the margin maybe with the hands of E. On.
The third party as well so we feel that its a there isn't achievable ah capabilities to get to a higher margin and of course over the long term. Once there is of satisfy demand. We believe that will go back to the 25 per cent.
Thank you and we will be taking our last question from Georgia, The theory T P H and company.
Good afternoon guys.
Just kind of a big picture.
Just kind of a big picture question for me related to E mobility I realize there's the Fiat eat Ocado that you guys already have in the bag, but just qualitatively what is the pipeline for incremental auto Oems that you guys see and how has that been.
On affected by kind of the recent events that we've seen in the auto space is that the.
The pipeline still growing or if people kind of hit the pause button as they're dealing with their own supply chain issues. Just curious for any color you could share there.
Okay.
I think we mentioned the hour.
Investments in play in this segment is long term and the.
The growth is going to be gradual and long term. So we don't have in our pipeline for the and we said this on the last.
The last earning call in the next 12 or 18 months and equivalent in terms of scale and the visibility like like the do cut off so we have of theories of of.
Of smaller shorter term opportunities and longer term bigger opportunities that we are working with and working on and we will we'll share them as they evolve and materialize though.
One of the result is that of that is that we're not really dependent on on these type of.
Current events and constraints that are disrupting excuse me the disrupting to some level of the the.
The E mobility industry, and we are more of their two to execute on right on the long term path of this segment, which is a.
Which is you know.
Showing or aware of the potential is growing every day so.
We don't we don't have anything big go to the than the Doctor in the next year or so as the result of that are these events are not.
Going to impact us positively or negatively in the next year.
A year or two a year and a half of them.
Thank you and I will now turn the conference back over to our speakers for closing remarks.
So.
First of all thank you everyone for joining.
We are taking this call for the first time on the last year and a half from our California office.
Enabling us for the first time to travel out of Israel to here and in recent weeks, we've been able to visit our factories in Italy and <unk>.
Korea.
As well so.
We're encouraged by the direction that that is going in and wish everyone else in our industry and other industries.
Our health and success and to come back to normal as soon as possible and thank you for joining.
Yeah.
Thank you, ladies and gentlemen for your participation in todays teleconference. You may now disconnect.
Okay.
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