Q4 2021 Solaredge Technologies Inc Earnings Call

February 15, 2022

[music].

Welcome to the solar each conference call for the fourth quarter and full year ended December 31, 'twenty 'twenty. One this call is being webcast live on the company's website at Www Dot solar H Dot com in Investor section on the event calendar page just call. It the sole property and copyright of solar H with.

All rights reserved and any recording reproduction or transmission of this call without express written consent of solid H is probably beat that you may listen to a webcast replay of this call by visiting the event calendar page of the sort of itchy investor Web site.

I would now like to turn the call over to MS. Erica Mannion of Sapphire Investor Relations Investor Relations for Solar H. Please go ahead ma'am.

Good afternoon. Thank you for joining us to discuss <unk> operating results for the fourth quarter and full year ended December 31, 2021, as well as the Companys outlook for the first quarter of 2022 with me today are C V Lando, Chief Executive Officer, and Ronnie Fire Chief Financial Officer.

Steve.

Begin with a brief review of the results for the fourth quarter and full year ended December 31 2021.

Ronen will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2022.

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.

We encourage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description.

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.

The non-GAAP measures are presented in this presentation as we believe that they provide investors the means of evaluating and 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 December 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 over to CV.

Thank you Erica and good afternoon, and thank you all for joining us on our conference call today.

We are pleased to report that we have concluded the quarter with record revenues of $552 million and record revenues for the year 2021.

Below $2 billion.

During 2020, we released and began to ramp several new products.

Our energy bank residential battery and higher power optimizer, and Inverters in our residential and commercial offering.

In recent months, we are experiencing a surge in demand for these products, which we attribute to the positive reception and the technology in parallel to market growth spurred by electrical power prices, increasing globally and the increased government and corporate focus on sustainability and use of renewable energy.

We are excited about this rapidly growing opportunity and are intending to do everything needed to capitalize on it however in the current challenging operational and supply chain environment.

The expanding infrastructure and ramping production to meet these higher demand level.

He's putting temporary pressure on our gross margins in the call today, we will provide detail on all of these factors.

I would like to start with a summary of 2021 and the main themes, which shaped the year and how we expect them to impact our business moving forward.

Total revenues in 2021 grew 35% over the previous year and 32% in the solar business.

Growth in the solar business was across all segments and regions and practically in every country in which we operate.

The larger year over year growth of significant size markets was in Italy, Germany, Taiwan, France, Poland and Israel.

Well, we usually focus our comments on North America, and Europe , which grew substantially this year, 29% and 36% respectively.

I want to shed some light on the long term growth opportunities in southeast Asia, and the Middle East.

In these markets, we grew in 2021 by more than 40% representing not only market share gains, but also the high growth rate of these markets, which is expect which is expected to continue.

In these countries. The market consists primarily of commercial installations and our momentum here is indicative of our overall momentum in commercial which I'll be discussing later.

Okay.

Other noteworthy dynamics of 2021 includes significant increase of battery attach rates in residential installations.

Which increased by more than 50% most of which were third party batteries sold by our partners DC coupled to our Inverters.

Our residential battery ramp was slower than we originally planned.

Also in residential we are seeing growth of the average installation size and momentum in our sales of self consumption devices, such as EV Chargers and smart water heaters as consumers seek to optimize their home energy consumption and reduce their dependency on higher priced energy coming from the grid.

In the area of grid services, we are now active in programs in 13 states across the United States in all states in Australia and in some European countries.

Also in 2021, we saw a 70% increase in use of our designer software, which enables full system design, including advanced features such as shade analysis battery usage and consumption optimization bill of materials generation financial analysis and automated creation of the <unk>.

Offers to the end customer.

More than $1 1 million unique site designs were performed by installers on this platform last year.

Overall, we are pleased with the growth we have seen in 2021 and the progress made with our strategic initiatives.

Now turning to the fourth quarter results.

As mentioned revenues for the fourth quarter were a record $552 million driven by North America, where revenue grew quarter over quarter by 37% due to higher battery sales increased residential inverter sales in particular of the higher priced energy had been Burger.

And the growth of sales to the commercial segments.

Moving to our global residential business, where we continue to see strong demand.

Healthy inventory in our channels, increasing sell out by our distributors and a strong backlog of orders in.

In fact, we already have firm orders for delivery in 2022 of our megawatt volume that represents 60% of our megawatts residential shipments in the entire year of 2021, not including batteries.

In commercial we are seeing a real shift in market momentum driven by a few factors.

The rising electricity prices across Europe and other regions.

As well as the trend of corporations wishing to progress their ESG programs and offset their carbon emissions.

Together with the stable and favorable regulatory environment in many countries, such as Germany, where the new government has announced aggressive growth plans for PV.

The ground for an increase of demand in markets, where solar which already has a solid local presence and strong brand awareness.

At the same time, we are seeing increased acceptance of our commercial product offering released lift last year, which includes the synergy 120 kilowatt converter and high power Optimizer is supporting the high power bi facial modules now commonly used in commercial installations.

Combined these market and product dynamics are driving the record demand for our commercial solutions.

Our current megawatts firm order for delivery in 2022 or 143% of all commercial megawatts, we shipped in 2021.

While the increased backlog is partially related to longer lead times the amount of planned projects and the increase in design wins, including for ground Mount project demonstrates what we believe to be a true inflection point in the commercial market.

Ramping production to meet this demand in the current supply chain and logistic environment is having an impact on our top and bottom line as we prioritize exited expedited shipments.

In order to meet customer schedules at times at the expense of our gross margin.

We expect this situation to last until the middle of the year as we adjust our infrastructure and ramp manufacturing capacity to this new level of demand.

Moving to product updates.

In the residential segment, we released last quarter, the 10, and 11, six kilowatts of energy hub and Burger with 10 kilowatts backup power.

And a new three phase EV charger joined the single Phase Charger, we have been shipping for a couple of years, where street seeing strong demand for the EV charging portfolio driven by the growing adoption of electric vehicles in particular in Europe .

Our energy bankers <unk> battery has now been installed in 11 countries.

We are receiving positive customer feedback in particular related to the ease of installation with a new energy net wireless communication technology incorporated in our residential offering.

Our battery manufacturing ramp has been slower than anticipated due to delayed supply of several components used in our DC to DC and BMS boards.

For most of these components, we have already qualified additional sources and we are working closely with suppliers to assure timely and consistent supply for the remainder of the year.

In the fourth quarter, we shipped 42, five megawatt hour of batteries versus the 70 megawatt hour plans.

We plan to close this gap already in Q1 of 2022, reaching a production run rate.

300 energy bank batteries per day by end of the quarter as we discussed in the last quarter's call.

In Q1, we plan to ship between 100 to 120 megawatt hour of residential batteries.

In the commercial and industrial segment, we continue to test our third 330 kilowatt large scale inverter in sites in Israel and Europe . We are on track for ramp later this year further strengthening our offering for ground Mount installations.

We will provide more details on our ground Mount offering as well as other new products and services in our analyst day scheduled for March 29.

Okay.

Moving to operational infrastructure and progress in that area.

In Q1, we will begin to ship residential inverters and Optimizes from the North America for the North American market from our new contract manufacturing facility in Mexico.

We expect to be able to deliver practically all of the U S residential demand from the Mexico, Mexico factory by the end of the year.

This will have a favorable effect on shipping costs tariffs working capital management and timely meeting the U S demand and lead times.

The commercial product manufacturing capacity will be expanded in two phases to meet the new growing level of demand, which I detailed earlier.

We are increasing manufacturing capabilities in Vietnam for delivery of products to all regions and that will be followed by additional manufacturing growth in Mexico to supply commercial products to the U S market.

The surge in demand is creating manufacturing capacity challenges and pressure across the supply chain, where we need our suppliers to allocate component quantities well above those suppliers in previous years.

We are working closely with our key suppliers, who are supporting us in our mutual growth as they too see the value in this long term opportunity.

Moving to our non solar businesses.

2021 was a record revenue year for our non solar businesses totaling a $176 million coming mostly from our energy storage and E mobility Division.

Our energy storage Division concluded the year with record revenues and it was profitable for a second year in a row.

They'll have to construction for the manufacturing of our own lithium ion cells continues per plan and is expected to begin production ramp in the second quarter of 2022.

In the E mobility Division, we experienced some slowdown early in Q4 of 2021 due to our customers' temporary halt in production, which resumed to normal levels by the end of the fourth quarter.

We expect normal levels of delivery in the first quarter and through the year.

In our critical power Division, we started first shipments of our three phase Ups's offering which was design and product ties in house since the acquisition.

We will elaborate more about these segments in our analyst meeting in March.

To summarize.

We are facing an accelerated growth opportunity in a challenging operational environment as we have proven in the past I am confident that our global team with excellent execution in <unk>.

During our customers have the benefit of our technology, when and where they need it.

And with this I will turn the call over to you on that.

Thank you Phebe and good afternoon, everyone.

These financial review includes the 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.

Segment profit is comprised of gross profit for the segment less operating expenses do not include amortization stock based compensation expenses and certain other items.

Total revenues for the fourth quarter were a record $551 9 million, a 5% increase compared to $526 4 million last quarter, and 54% increase compared to $358 1 million for the same quarter last.

Last year.

Revenues from our solar segment were a record $502 7 million.

A 5% increase compares to $476 8 million last quarter, and a 54% increase compared to 300 to $27 1 million for the same quarter last year.

Overall this quarter, we shipped approximately $5 1 million power Optimizer is approximately 197000, inverters and 4250 batteries, representing 42 five megawatt hour.

U S. Solar revenues this quarter were a record $257 4 million or 36, 6% increase from the last quarter and represented 51, 2% of our solar revenues.

Solar revenues from Europe were 190.

$3 $2 million or 38, 4% of our solar revenues, representing strong revenues in Germany, Netherlands, Italy and Poland.

The rest of the World Solar revenues were $52 1 million or 10, 4% of our total solar revenues and included a record revenue quarter in Taiwan.

On a megawatt basis, we shipped 751 megawatts to the United States seven.

752 megawatts to Europe , and 419 megawatts to the rest of the world.

45% of shipments where commercial products and the remaining 55%, whereas essentials.

ASP per watt, excluding battery revenues this quarter was 25 three.

A 0.8% decrease from $25 five last quarter, a result of a high volume of residential product shipments to North America offset by an increased portion of larger customers that benefit from larger volume discount within the overall mix and the <unk>.

Current euro, which reduced our ASP on products sold in Europe .

This quarter to U S customers accounted for more than 10% of our solar revenues.

In light of the increased cost associated with the manufacturing of our products and the accelerated ramp up cost associated with meeting the surge in demand for our products. We have initiated price increases in the fourth quarter of 2021 that will continue into the first half of 2022. These.

Price increases vary among product lines and geographies, depending on the competitive environment demand level and specific cost increases related to specific products. The.

The price increases are aimed at covering part of the component and manufacturing cost increases and are not focused on a more temporary logistic expenses, which relate to timely meeting increased customer demand. We expect the full impact of these price increases to materialize in the third quarter.

2022.

This quarter revenues from our non solar businesses were $49 $1 million.

Revenues of our energy storage Division achieved a record quarterly revenue, while our E mobility division revenues reflected lower delivery of powertrain unit to the final customer is explained by exceeding.

Consolidated GAAP gross margin for the quarter was 29, 1% compared to 32, 8% in the prior quarter and 38% in the same quarter last year non.

non-GAAP gross margin this quarter was 33% compared to 34% in the prior quarter and 32, 5% in the same quarter last year.

Gross margin for the solar segment was 32, 8% compared to 36, 6% in the prior quarter.

Okay.

Gross margin within the solar segment is affected by various factors. The combination of the following factors contributed to this result.

From a customer geography and product mix perspective.

Volumes were shipped this quarter two large customers in the United States that benefit from volume discounts and this contributed to the lower margin.

This was coupled with the weaker euro which eroded our margins on sales in Europe . Since revenues are euro denominated when manufacturing expenses are stated in U S. Dollars lastly, the growing share of battery shipments that are characterized with lower gross margins further contributed to this margin.

Decrease.

From an operator operational and supply chain perspective, our accelerated growth combined with the known industry challenges of component shortages limited manufacturing output and constrained.

And expensive shipment environment continued to adversely affect our margin this quarter, while we are still recovering from the forced shutdown of our Vietnam facilities that returned to normal operation in mid November .

In supply.

Shortly each period component manufacturers tend to allocate goods among their customers based on past quantities.

Given our current accelerated growth rate some of our suppliers are having difficulties supplying sufficient components quantities in a timely manner.

This is a result in a need for expedited shipping goods shipments.

To meet the customer delivery times and in certain cases payment of unutilized capacity to our contract manufacturers.

As <unk> mentioned, our battery manufacturing suffered this quarter from delayed the arrival of components, resulting in lower shipment volumes at the higher cost.

Good subject to tariffs shifting to the United States from China accounted for 66% of our U S shipments in Q4.

To summarize the solar segment margin discussion, we view the impact on Inverters, an optimizer as margin as transitory and expect to return to a normal level in the second half of 2022.

Gross margin for our non solar segment was four 2% compared to eight 7% in the previous quarter, mostly related to reduction in E mobility revenues and margins.

On a non-GAAP basis operating expenses for the fourth quarter were $94 1 million or 17, 1% of revenues compared to $83 8 million or 15, 9% of revenues in the prior quarter and $72 $9 million or 24% of revenue.

<unk> for the same quarter last year.

This increase is mainly related to the fact that we've reduced our hiring in the third quarter of 2021.

<unk> increased our headcount again in Q4, mainly in our R&D and sales and marketing groups worldwide.

This quarter, we also experienced a gradual increase in sales and marketing activities as travel restrictions due to the pandemic are starting to ease and tradeshow activity as well as customer visits.

To return to normal.

Our solar segment operating expenses as a percentage of solar revenues were.

Were 15, 8% compared to 14, 6% last quarter.

non-GAAP operating income for the quarter was $72 9 million compared to $95 2 million in the previous quarter and $43 5 million for the same period last year.

This quarter the solar segment generated operating profit of $85 3 million <unk>.

Compared to an operating profit of $104 9 million last quarter.

The non solar segment generated an operating loss of $12 4 million.

Compared to an operating loss of $9 7 million in the previous quarter.

non-GAAP financial expense for the quarter was $2 2 million compared to a non-GAAP financial expense of $3 million.

In the previous quarter, our non-GAAP tax expense was $7 9 million compared to $10 1 million in.

In the previous quarter and $4 6 million for the same period last year.

GAAP net income for the fourth quarter was $41 million compared to a GAAP net income of $53 million in the previous quarter and $17 7 million in the same quarter last year.

Our non-GAAP net income was $62 8 million.

Compared to a non-GAAP net income was $82 1 million in the previous quarter.

$55 7 million in the same quarter last year.

GAAP net diluted earnings per share was <unk> 74 for the fourth quarter compared to <unk> 96 in the previous quarter and 33.

For the same quarter last year.

non-GAAP net diluted earnings per share was $1 10.

Compared to a $1 45 in.

In the previous quarter and 98.

In the same quarter last year.

Turning now to the balance sheet as.

As of December 31, 2021, cash cash equivalents bank deposits restricted bank deposits and investments were $1 2 billion.

Net of debt cash cash equivalents bank deposits restricted bank deposits and investments were $548 million.

During the fourth quarter of 2021, we generated $89 $6 million in cash from operations.

Accounts receivable net increased this quarter to $456 3 million compared.

Compared to $416 $2 million last quarter.

As of December 31, 2021, our inventory level net of reserve was at $381 million compared to $304 7 million in the prior quarter.

Most of this increase is related to increased raw materials battery sales and component inventory in our solar segment. While our finished good inventory continued to decrease as a result of the growing demand and limited capacity.

Our non solar inventory levels remained practically similar to the previous quarter.

Let's move now to summarize the full year of 2021.

Revenues for the year was 196 billion, a 34, 6% increase from $1 $46 billion in calendar 2020.

Revenues related to the solar segment were $1 79 billion or 32% increase compared to 2020.

GAAP gross margin was 32% compared to 31, 6% in the prior year.

non-GAAP gross margin was 33, 5% compared to 33% in the prior year.

GAAP net income for 2021 was $169 2 million.

A 21% increase compared to $140 3 million in the previous year and GAAP diluted EPS of $3 <unk> compared to $2 66 in the prior year.

non-GAAP net income for 2021 was $272 $9 million or 22% increase compared to $224 4 million in 2020, and GAAP net diluted earnings per share of $4 81.

Compared to $4 11.

In the prior year.

This year, we generated $214 $1 million of.

Cash from operations.

Turning to the guidance for the first quarter of 2022.

The combination of strong demand for our products and the operational adjustments and efforts in fulfilling this growth within an environment of component constraints fast manufacturing capacity expansion, which require higher investments logistic constraints and high shipment charges as well as the expanded rapid growth.

Of our battery shipments that are characterized with lower gross margin will have a positive effect on our revenues growth rate for the entire year and we will continue to put pressure on our gross margin in the first half of 2022.

We expect this impact to be temporary and will be mitigated upon full ramp of our Mexico manufacturing, which is expected to be concluded by the end of the year.

On an annual basis, we expect that revenue growth as well as the operational expense leverage will offset the temporary margin impact and will increase our overall expected profit levels.

As such for the first quarter of 2022, we are guiding revenues to be within the range of $615 million to $645 million.

Revenues of the solar segment are expected to be within the range of $575 million and $595 million.

We expect non-GAAP gross margin to be within the range of 28% to 30%.

Gross margin of the solar segment is expected to be within the range of 30% to 32%.

I will now turn the call over to the operator to open it up to questions operator. Please.

Thank you Mr Speaker.

If you would like to ask a question. Please press star one on your phone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment voice.

A voice from the phone line will indicate when your line is open.

Again breast I wanted to ask a question.

We will take the first question from Mr. Mark Strouse from Jpmorgan. Your line is open. Please go ahead.

Yes, thanks, very much for taking our questions.

I just wanted to go back to your comments about.

Potentially seeing an inflection point in the commercial market.

Do you think.

Just kind of looking out beyond your guidance, but a bit but do you think 2022 becomes a year, where we start to see the C&I business become the majority of your shipments and then.

I'm trying to remember if you've ever disclosed the exact details, but can you just remind us kind of the difference in margins between the resi and the C&I business.

Hey, Mark I'll take the first part then I'll hand, it to O&M for the second the second part I think the answer is from a megawatt perspective.

Is likely.

The.

The demand.

As such.

The rate of increase is such that it is likely that from a megawatt shipment. This year, we will ship more commercial and I think also the word commercial is becoming limiting because.

A significant part of this is already ground Mount installations in particular in the U S.

So generally these larger installations with them.

We'll be a larger portion of our megawatt shipments in 2020 to estimate at this point.

Mark with regards to the gross margins I will start with a qualitative and then I will move to the quantitative.

Margin assumption in general you, usually see that the gross margin for residential I would say 200 to 500 basis points higher than what you see in commercial and this is depending on first of all what is the residential offering for example is it an energy hub or is it a regular inverter and also related.

Whether we're talking about large commercial or smaller commercial installations. So by definition here. This scenario very much changes and this is before talking about geographical mix. So 200 to 500 basis points will be the qualitative and quantitative answer or the qualitative answer I think that what we need to understand is what is going to be.

The margin profile on our solar Inverters.

<unk> is an optimizer in here actually we expect that to towards the second half of the year, we will be back to a regular 35% to 37% gross margin for Inverters and optimizer and here you actually see a little bit of this polarization on one hand, we see residential where the margin is.

Expanding on the unit and sale at the same time, we see the increasing volume of commercial installations and products sold that are correct horizons with lower margin, but all in all they are stabilizing to this 35% to 37% margin range. So.

This is basically a <unk>.

Mix issue, but the important thing is that in general we continue to see the general model that we use to describe in the past.

Okay. That's very helpful. Thank you and then if I can just squeeze in one more you mentioned pricing increases in <unk> and continuing in the first half kind of based on the competitive dynamics in certain markets.

Any more color there, where you think you have the kind of the most pricing power lease pricing power across products or geographies whatever it might be.

I think it's.

The variation is by segment and generally speaking the commercial market.

<unk>.

It's split to a large extent between.

Lower cost string inverters.

Our MLP.

Solution.

And with the introduction of the larger inverters in the larger optimizer as we are able to bring the cost per watt.

On our MLP configuration.

Down a bit and then it gives the people that still have the interest and motivation towards safety module level optimization and monitoring.

The return on investment in order to.

In order to.

Prefer our solution over a string inverters. So so there the opportunities are relatively tight.

In terms of.

The.

<unk> ability to increase prices because it's a very.

<unk> driven analysis, and we are managing a defined gap and we are now at a point, where we are able to on large scale justify that gap and thats what it.

Is increasing the demand.

Generally in residential.

Opportunity is a bit.

Bigger in that regard.

And and even more in batteries under the current circumstances.

The shortages in the market and.

The favorable feedback that we're getting for our battery.

Okay very helpful. Thank you.

We will take the next question from Brian Lee from Goldman Sachs. Your line is open. Please go ahead Sir.

Yeah.

Yeah, Hey, guys. Good afternoon. Thanks for taking the questions maybe maybe first of all to follow up on the gross margins.

Just wondering.

You wrote and Youre talking about.

Getting back to 35% to 37% gross margin target for solar.

Is that in the second half is that starting in Q3, and maybe if I could just clarify that and then there is a roughly 500 basis point bridge between what you guided here for Q1 versus getting back to those targets can you.

Kind of drill into some of the pieces that deal it sounds like freight it sounds like some of the supply chain issues that maybe give us the big pieces that.

Bridge, the 500 basis points between this quarter and a couple from from now and I have a follow up thanks.

Yes of course, and I would like to clarify the question or my answer before I.

<unk>.

What we discussed is returning to normal on the 35% to 37 is the inverter is an optimizer as another batteries because if you remember we discuss it batteries will be approximately 25%. So let me first of all talk about.

Overall.

I would call it breach to get back to the 35% to 37% on the optimizer and Inverters and I will then try to connect everything to the battery. Okay. So in general we see.

I would say five to six elements that will enable us to bridge from where we are today into Q3 and Q4. The first one the first one is the fact that once we are increasing our manufacturing capacity and this means that we're adding Mexico and expanding Vietnam as <unk> mentioned before we have much more capacity.

That can be placed on boats and ships and sent to the target without the need for expedited shipments we are which are today extremely expensive.

Especially in the price environment that we see right now so increased capacity means lower expedited shipments and much more regular shipments. This by itself contributes a few hundreds of basis points.

The margin. The second one is Mexico is a site by itself because not only contributes for the additional capacity. It also means that now we can eliminate first of all increased areas that we pay to date as we said on the prepared commentary a 66% of the product that we brought to the U S.

Q4, we're subject to tariffs and this amount will.

Be reduced as we are as Vietnam is back, but most likely when Mexico is down. So this will dramatically reduce the expenses.

The fact that we will not be meeting the.

Ocean freight, which is today again very expensive compared to lend.

<unk>. The next thing will be the price increases that we have that we have implemented we usually implement price increases on new orders and that means that.

Most of the price increases that were implementing because of the lengthening.

Period or.

Lead time period is taking time until they kick into the system and we expect to see all of them materializing in Q3.

We also have a few more issues that will help in general the first one is that today on the batteries and this is already now related to the solar segment not necessarily on the Inverters and optimizer, we're using the Samsung energy sales from our one gigawatt deal once we have set out to towards the end of the year.

Sales that will be manufactured by our Korean part of the storage division will allow us to reduce these costs.

Scale because of the very high revenue that we will see our revenue growth that we will see the scale of our fixed cost will become lower and eventually eventually we will see of course, a continued increase in the other non solar segments that will actually push us again through the better margins again this is not related disorders.

So in the analyst day, we will basically a layer all of these and we will provide how everything is impacting but to summarize yes, we will see solar Inverters and optimizer is go to $35 37 batteries stay at about 25% and now the portion of batteries to solar.

Inverters and optimize those will very much determine the end result of the solar segment and all of the other factors will increase.

Margins in general for solar and non solar I hope that answered your question Brian .

Yes.

For a detailed and helpful context, I guess related to that last piece of solar and storage ratio.

I need a battery ramp sounds like it's a little bit behind schedule, but there is a big acceleration here implied in Q1 can you give us a sense of kind of what we should expect going forward in terms of the battery ramp have you got the SDI volume, but then you also have started to come in online.

In Q2, and I would expect that add some volume in the back half of the year. So just any thoughts on the battery ramp we should expect off the Q1 acceleration.

And then in terms of the mix for batteries.

Versus non U S.

Are you shipping at all into the channel or are you seeing.

Direct Q1 demand just any sense of kind of where youre seeing that 100 to 120.

For for Q1, thank you.

Okay. So first of all <unk>.

First of all from from.

The revenues and the growth of the battery.

We need to remember that 2021, we first of all utilize the Samsung deal that we have and this means that at least in the first quarter as we mentioned we already guided for <unk>.

Hundreds to 120 megawatts and by the end of this quarter, we will be at approximately 180 megawatt run rate.

Per quarter, we will continue to ramp this manny.

Manufacturing capabilities in Q2, we're at the end of Q2, we would reach 250 megawatt hour per quarter and this is actually the run rate of sales that we have from Samsung and we expect to run in this rate for Q3 and Q4 it.

The sales from Qualcomm and the ramp up of the manufacturing based on this one will be dependent on two major items. The first one is demand again that we will see in the market and assuming that of course it can consummate all of the 250.

And here the second element will be really.

<unk> will just start to ramp as we said with test runs in the second half in the second quarter and in the second half we will start to ramp up the manufacturing and here I would say that the manufacturing pace will very much determine what will be the additional volume that we should bring so played safe I would say about 250 Meg.

From Q3 and forward and there is an upside coming from the additional sale of <unk> and this will get of course, as we will move and we will have much more certainty on sell it to I'll move to <unk> for the second geographic mix today, we're kind of shipping probably 50, 50% through North America and to Europe .

Prioritizing.

Customers that we believe have the potential for.

Consistent large volumes over time and while there is a huge opportunity also for retrofit of batteries on existing systems, we're making sure that the batteries that were shipping today are such that they bring a full solar installation with them and as capacity grows we'll start making batteries.

Available also for retrofit an existing system.

Alright, Thanks, guys I'll pass it on.

Okay. Thank you. Thank you.

We will take the next question from Mr. Stephen Byrd from Morgan Stanley . Your line is open. Please go ahead Sir.

Hey, thanks, so much for taking my questions.

My question is on the results have been addressed I was thinking more about.

Evolution of your technology and thinking about.

The developments around the integrated home Inn, and Smart energy management are there technology developments that we should be.

Thinking about in the future for you are there areas, where you feel like you need to.

Acquire capabilities outside of sort of organic capabilities here I'm. Just curious if you could just speak a little bit more to the evolution on the technology side.

Specialty sort of the idea around the integrated home and just.

Continued evolution there.

Yes, it's a good question and obviously would require a long answer which is wishes.

We intend to at least try and give it in the analyst day at the end of the end of March but but.

That said and maybe as a as an appetizer. We are focused on really expanding our technologies and capabilities that everything that has to do with generation storage and consumption.

<unk>.

Electrical power generated from renewable sources so.

With that being the overriding.

<unk> vision from a technology point of view.

To deliver on that there are technology areas.

Are not our core strength today that we are gradually building gradually building capability.

<unk> as well, but again hopefully in much more detail at the analyst day, we can we can share more on this topic.

Yes, very fair its a big topic that is better suited for the investor event.

I guess stepping this is another big picture I guess question, but just thinking about demand for storage, it's very clear storage demand is skyrocketing globally in and you're well positioned there you've talked a lot about expansion and just I guess longer term as we think about that potential how do you think about the best.

<unk> approach to.

To growing your capacity, whether it's in terms of geographic mix, whether its contracted capacity versus in house manufacturing just it feels like this is there's a long runway ahead, a lot of growth, but that also means a lot of planning in terms of how you approach having the capacity and this is all as you described in an environment of a pretty severe.

Supply chain dynamics. So how do you think about kind of longer term growth strategy to meet this rapidly growing demand for storage.

Again.

The question, maybe two comments first of all I think.

What we are learning and experiencing in the residential environment.

That while people talk a lot about the batteries and compare one to each other.

It is really the system integration and the assistant performance that is determining the actual value for the in this case of residential the consumer.

And we expect that storage.

If tax rates will increase also in commercial and we are seeing already signs for that in Europe and in North America, and we believe that there too the issue will be yes, the battery parameters.

And the comparison of costs in cycles and <unk>.

And the typical parameters in which people compare of batteries to each other but really what will determine the value for the user whether its residential or commercial is the way. The system is integrated and operates and serves the need that they have whether it's backup power self consumption or a combination.

Or a combination of both so.

That is where we are focused on and that is at the core of our motivation to have access to from the cell.

The technology at the level of the cell to the full the full system solution, but that doesn't necessarily mean that we will have in house capacity to deliver on all of the demand. It just means that we will be able to.

<unk> optimized.

Our complete solution from.

From cell to two system and have flexibility to meet.

Some or most of the capacity the capacity of our on our own and maybe supplement that from from others.

So thats kind of at high level the way, we're looking at it I hope that.

<unk> helps.

Helps explain it.

That's helpful. Thank you very much.

Okay.

Yeah.

The next question is from Julien Dumoulin Smith from Bank of America. Your line is open. Please go ahead.

Hey, good afternoon, thanks for the opportunity just going to pick up where receivables stopped here can you talk specifically about storage supply ramp going into 2023 here as best I understand the Samsung deal transient how do you think about not just <unk>.

Complementing, but supplementing and expanding that availability into 'twenty three.

Talk about the $2 50 run rate here, what could that 23 number looked like and how are you thinking about providing data points to ramp into that here.

So first of all I will divide.

The ability to grow in 'twenty three into two the first one is everything that we get from seller to sell it to capacity initial capacity is designed for two gigawatt hour annually and of course, we can we can take this entire amount and directed if needed for storage in 2023, but actually weaken substantially.

Essentially increase the capacity of seller tool within a matter of several months not even a year.

To almost double this amount so that means that once we will see the Samsung SDI a capacity being are consumed and we will understand what are the I would call. It stabilized level of demand, we will decide whether to make the investment and sell it to actually in advance of 2023 in order.

Two opened the year with a higher capacity. So this is one thing the second thing is the fact that.

Our strategy has been from the very beginning lot will be dependent necessarily only on one on one battery and therefore, we can always try.

Tried to team or get more.

Capacity from Samsung should we see that the demand is so big that higher capacities needed of course, we will always try to take whatever we can first of all from sale of two both from pricing and of course because of economies of scale, but in general with a little bit of preparation, we believe that 500 megawatt.

Our per quarter is relatively easy.

I would say almost double this amount with some work is not very complicated and going to Samsung and get more is something that is feasible.

Got it so 500 it is not the commitment on 23, but that sounds like it would be.

And outlined where you can go.

Yes.

Yeah, Okay, Great and then just related to the component shortage can you elaborate a little bit more on the strategy. Here. Obviously, you had some very specific acute shortages in <unk>.

Yeah.

Strategy to address it broadly if you can <unk>, specifically and onwards I know you addressed this I wanted to follow call comments.

Yes, I think if you recall.

Especially at the beginning of the.

Susan of shortages, we were.

We were relatively in a very good position because we were prepared also with inventories and also with alternatives on most of the.

The critical components that we were using and that enabled us to.

To execute.

With less constrained for the first three or four quarters of the period.

Now facing more constraints and a bigger challenge.

Yes.

Primarily just because of the elevated volumes in people.

They tell us.

Youre getting.

Your allocation as what it was a $1 five X. What it was you should be happy, but that doesn't make us happy because we need to.

Two or three <unk> of volumes that we can.

Consumed in.

In the past.

That's the challenging side the positive side is that we are becoming a much bigger portion of our suppliers' business and we did.

And we are.

Consolidated.

Into some specific larger component suppliers such that.

We're more dependent on them on the other hand, they are dependent or our business is more critical to them.

And they are.

And they are bigger and more reliable suppliers. So we're in the process of doing that and in cooperation with some of these big supplier.

And that is giving us.

Reasonable visibility, but not complete visibility and there could be still hiccups, along the way and those hiccups usually translate into some type of expedited.

Shipments in one in one form or another but generally we are consolidating into larger suppliers and being a bigger part of their business.

And and gradually especially on the new products also building the alternatives.

Not to be dependent on any specific component.

In any of our products, but this is this is a process again.

We'll likely have some hiccups along the way.

Hence your comments were back half liter to normalize does that does that align with the timing that you're thinking about there.

Again, hence thing.

The back half of the year for margins to normalize that assumes that they'll pick up to get to move past that if you will and to ramp with the larger suppliers.

Yes, that's part of it and for sure the big suppliers that we're working with we have their capacity plans and.

And no when there are new Fabs are coming online and thats aligned with that but at the same time, we still have a lot of components coming from from other manufacturers and.

It's not that I'm, saying with full confidence that in the second half of the year.

Don't be experiencing challenges and hiccups.

In these areas. It is just that the bigger portion of the of our component supply will be more secure in the second half of the year.

Thank you guys.

Thank you.

The next question is from Mr. Philip Shen from Roth Capital Partners. Your line is open. Please go ahead.

Hi, everyone and thanks for taking my questions.

Follow up on the storage.

Megawatts megawatt hours I think.

You talked about 42 megawatt hours recognized in Q4.

Or at least shifts can you talk to us about how many megawatt hours was recognized in revenue in Q4, and then of the 100 to 120.

<unk>.

In Q1 chip.

How much do you think you could recognizing revenue in Q1.

We generally do not.

Do not give this data simply due to the fact that you know.

The ship to revenue may sometimes change simply based on the destination of where you're shipping I would say that you should assume that generally at this point of time.

The majority of what you shipped becomes revenue relatively quickly due to the fact that you either ship.

To Europe or you are trying to time the shipping in a way that shipping to the U S will go out from Europe .

Factoring at the beginning of the quarter. So I would say that here there is almost a similarity although of course the shipment is always layer larger than revenue in the future and then in Q1, we specifically cannot tell simply because of the fact that we do not know what will get to the customers that at what point of time. So it will it will be down it will not be.

It will be lower revenue than shipments but.

I think that Thats, the most where we can say right now.

Okay. Thanks for that.

As it relates to.

The battery supply chain dynamics.

You ramp up to much larger numbers in the back half of the year do you see any bottlenecks as it relates to lithium or any other raw materials and if so how are you addressing that.

Let's divide between battery cells and other electronics around it on battery sales, we feel very much secure at Samsung is very organized then.

And precise on there.

Our supply of battery sales. So here, we don't see a major issue I think this is Steve you mentioned on the electronic components.

Here, we believe that we resolved at least for the near future. The problem that we saw before and we are in very good contact with the suppliers here, but again sometimes seem.

Simply this.

Kind of delays are not in our hands and we cannot actually.

Our forecast and hence.

The missing disc in <unk> had we known that we would not even guide for the number that we had so I think that we are in good alignment with our vendors, but as TJ mentioned there are surprised that are happening from time to time, sometimes the suppliers themselves do not control all of it.

Okay.

The next question is from Mr. Mohit <unk> from Credit Suisse. Please go ahead, Sir your line is open.

Hey.

Thanks for taking my questions here.

In terms of sellout two expansion can you just talk about how much of raw material supply visibility do you have for that and specifically just looking at that.

Lithium carbonate prices kind of mix.

Increasing here versus last year. So just wanted to understand your sourcing strategy for that.

How do you think about like expansion beyond 'twenty two for Celesio.

So in general first of all you know.

The raw materials for our battery battery manufacturing gives us a little bit more predictable than electronic components simply given the fact that once we have developed the battery cell and the underlying cathode anode material and be.

Electrolyte Youre basically basically locked so in a sense you do not even completed the development of a sale before you have a.

Viable source and known source for all of this product and this is the case of sell through I would say that in <unk>, we do not expect to see issues related to the quantities, which are they're actually most of the issues is related to pricing because the price of all of these materials is related to the London.

Materials indexes and here. This is the place where you can see a little bit of variation so as long as we see and as in continuation to the answers to Julien.

Approximately 500 Meg.

Megawatt hour per quarter heading into 2023, but this is something that we can cover with raw materials. We believe that we can also cover the expansion that we can say that we said can be almost doubled within a period of time, because you still need to invest a little bit in the factory itself.

Okay.

Next question from Colin Rusch from Oppenheimer. Please go ahead, Sir your line is open.

Thank you. So much guys can you talk a little bit about the Cal inventories and where you are at and how you see the decade refills over the course of the year.

In terms of order of magnitude and cadence.

Okay.

So.

We heard the first part so generally inventory levels.

I would separate between.

Residential and commercial and a bit between regions.

Inventory levels for residential products are relatively high.

Healthy in most places in the channel, maybe a little bit lower than distributors typically like to have especially on the newly released larger single phase Inverters that 10, and 11 kilowatt and further.

It's probably.

Below <unk>.

Normal inventory levels of distributors desire, but still I don't think there is we're not experiencing shortages at this time on residential products either in Europe or in the U S.

Commercial.

Products I think inventory levels in the U S inventory levels on commercial products are tight everywhere for the reasons that we described.

Before the demand is super strong.

And our capacity is not yet there too.

To fulfill it fully.

With inventory levels on top of the project demand so we.

Accelerate shipments an airship.

These are large volume.

Product.

That's where the costs are coming from so on C&I inventory levels are low and they are probably in the <unk>.

Lower in Europe and.

Asia, Australia compared to the U S, where they are a bit better.

That's helpful and then second part.

It was just around the cadence of.

How the channel and the targets refills.

So if you could miss a couple of comments on that and then I have a follow up.

So.

Fortunately.

We're still in a bit of a.

Non smooth flow that started off with the Vietnam.

Shutdown and expanded into Chinese new year.

For the last few weeks.

That obviously affects not only China manufacturing, but also Vietnam manufacturing. So so the last few months have been more of a pulse supply and less of a continuous flow.

Now we hope that.

<unk> factories are back to normal operation with the conclusion of Chinese new year that we don't have any more post events.

And the next few months and then then flow is going to be much more smooth and.

And more simple to forecast and manage inventory.

We'll take the next question from J B Lowe from Citi. Please go ahead. Your line is open.

Hey afternoon, Zeevi, you Ronen Erica.

Are you doing well my first question is a little bit more detail just on the Mexico contract manufacturing facility.

Mentioned that it would be online by the end of the year. I think you had initially said that you would be able to ship some of the first products out of there in the first half. So I'm just wondering if that's not the case anymore and then my second part of it was.

Given how much you've already booked on the commercial side for 2022, I think you said it was over 130% of your 2021 shipments booked already how much and how much more time do you have.

How much how many how much more can you book this year or what timeframe could you book commercial product and still have it delivered before the end of 2022.

Thanks.

Okay.

So just to clarify on the first part is what we said was we are beginning to deliver product from Mexico to the U S. In this quarter already.

In Q1, what we said by the end of the year is to reach a point, where all of the residential product.

Almost all of the residential product.

Consumed by the U S market will be coming from Mexico. So this is a process that is starting now and will end by the end of the year, but already in the first quarter there will be.

Meaningful shipments of Inverters and Optimizes for Mexico to the U S market.

That's the first.

The first part of the question. The second part of the question. The dynamics first of all we are taking orders today in commercial.

Four.

July August and on pretty much.

The dynamic in C&I is a little bit different.

The design phase is longer.

And.

Thats part of the reason we are now we are expediting shipments because customers of.

Trusted hour.

Offering and designed in our portfolio a few months ago and now they need the equipment to execute those those projects and in many cases that is the first time that they are using our products. After they've been we've been able to buy into the technology and that's why it's so critical for us too.

To support them, even at the expense of the expedited.

Shipments so that that timeframe is typically it can range anywhere from 3455 months between design in and when the product is actually needed.

So.

The lead times that we're giving right now and we're still taking orders for July August is a bit longer than the design cycle, but still reasonable to give customers. The confidence that they can continue to design us in at the rate that they.

They have been recently.

We'll take the next question from Kashi Harrison from Piper Sandler. Your line is open. Please go ahead.

Good afternoon, and thank you for taking my questions.

So my questions are all on sell it to so with respect to the second half of the year if for whatever reason theres not enough demand on the residential side for <unk> or for a battery powered by solid too.

How easy is it and is there enough demand for you to redirect that capacity to nonresidential segments and then.

I was just wondering if you could just help us think about the difference in returns associated with building capacity like you did with <unk> versus buying capacity like you did.

Samsung SDI using whatever preferred metric you want to use thank you.

Okay.

I'll start with the capacity.

So first of all.

Our storage division has sales of storage products that are independent of the solar residential battery of course, so by definition, we can take and by the way we plan to take capacity from <unk> into this area as well, we simply of course prioritize the solar related business rather.

Non related business, but we believe that the capacity is there and it's enough. So yes, if we do not see that there is enough capacity coming from sale of two first of all we need or for sale or do we need to consume the amount from Samsung because this is a contractual obligation and we will direct the.

Excess capacity to the other sources and here, we can actually either sell them as battery sales.

As packed products and our storage division have both sell in fact deliveries we of course prefer to sell everything as it back rather than in a sale because in this case, we have better margins and of course, we have the better.

ASP per watt hours. So in general we can take this and we can divert not may be 100% of this <unk>.

Capacity, but still enough to make sale of two operating an ability and able to grow when it comes to the return on the investment. This is a little bit more tricky because first of all again. The question is what are you are you using the.

Factory for and whether you use it for more packs or more sales that you are selling in general I would say that the way the matrix that we have used is returns on capital investment and I can tell you that our.

Return on investment on sale at two compared to the buy option and this is before taking the fact that you get certainty on the number of sales that you can get and the capacity that you can get was a multiple I would say single digit.

Low single digit of the years for return on the investment of <unk>, two compared to buying from other sources. So we view it as an extremely attractive ROI.

Roy Morgan.

Okay.

We will take the next question from visual parish area from Susquehanna. Your line is open. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

Maybe one more question on the long term battery demand as you sort of see the.

Third in commercial.

<unk> four four burners.

What is the range you get from those customers for their appetite for storage products.

And Avenue for.

The additional capacity from sell it to.

So.

I will separate the answer to it.

Adjusted a bit.

A bit earlier, we see the.

Commercial storage dynamic.

Repeating in a way the residential storage dynamic just just a few years later and maybe a slightly slower.

Evolution, but we definitely expect it to to come and there are already early signs of it.

Today and for the same.

<unk> and reasons, whether it is continuing to have power supply in areas of grid instability.

Sure.

Controlling demand charges or increasing self consumption.

In order to save.

To save on the pricing coming from the grid.

We have a large solar installation on sale of one factory here in Israel, and we will put.

A large installation and sell it to them in both cases for economic.

Economic reasons when will we add.

Storage, its probably depending on the region probably.

A couple of years out still before attach rates to begin to be double digit on us on commercial on commercial installation and and by that time capacity from from seller to ore.

Then from a.

Additional.

Expansions that we will do is definitely what we have in mind and where we are aiming to go.

The next question is from Mr. Michael Blum from Wells Fargo. Your line is open. Please go ahead.

Alright, Thanks for taking my question.

At a high level question I guess I know NIM three pointed out in California is not finalized yet.

But wanted to get your views on how this similar changes in other states here could impact demand in the U S market.

How does that impact long term thinking on sales trends to the U S versus Europe and rest of the world.

Yes, I think the latter part of your question is very valid to the to the first part.

We are.

We are in we have been operating in in Europe , and other places in the world for a very long time, and if you look at some of the <unk>.

Countries in Europe their regulatory environment.

Is very.

It is very similar but it has some similar characteristics to it was intended.

In.

The original name three proposal in.

And then it turns into a self consumption market with much much higher battery attach rate as you see today in Germany battery attach rates are 70% to 80% and in a much more much.

Much stronger demand for.

Self consumption enhancing components like.

<unk> solar driven water heaters, EV Chargers smart switches.

And and other elements. So so this is already the environment we live in.

In in Germany, and some of the other European countries and if.

That is the direction that.

That eventually, California. It takes we believe the market will be similar.

Maybe maybe bigger may be smaller.

But at the same time installations will be.

It will be much more.

Call it complex expensive technological because of the.

The potential return through.

Through self self consumption. So overall, it's it will change the characteristics of the market, but we don't think it will.

<unk>.

Will erase the market and we think actually ourselves that we're pretty.

Ready ready and familiar with that type of.

Of environment.

If and when it.

It comes to the U S.

The next questions from Mr. Amit <unk> from BMO capital markets. Please go ahead, Sir your line is open.

Alright, Thank you for taking my questions.

Just wanted to follow up on the prior question real quick can.

Can you give us a sense for kind of the percentage of your 'twenty, one revenues that were from California residential markets.

I don't have the exact numbers in front of me it is.

U S was typically is around.

40%, 50% of our revenue and then in the U S.

Made of residential and commercial and then residential is split across.

Many states with California being.

Being the larger ones. So so I would venture to say that it's a significant number.

The double digit range, but probably in the lower double digits as a result of the fact that it's a.

It's a part of part of our.

Global business, both geographically and pigmented.

Okay.

It appears there are no further questions at this time I'd like to turn the conference back to Michelle <unk> for any additional or closing remarks. Please go ahead Sir.

Yes. Thank you. So in summary, we concluded an operationally challenging yet positive year on all fronts with record revenue all of this while continuing to invest in laying the groundwork for future growth and expansion into adjacent markets.

First of which we are already beginning to see today. Thank.

Thank you all for joining our call today and have a good rest of the week.

This concludes today's call. Thank you for your participation you may now disconnect.

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Welcome to the solar each conference call for the fourth quarter and full year ended December 31, 2021. This call is being webcast live on the company's website at Www Dot solar H Dot com in Investor section on the event calendar Beach disclosing the sole property and copyright of solar H with all rights reserved and.

The recordings reproduction or transmission of this call without the express written consent of solid H is prohibited.

Listen to a webcast replay of this call by visiting the event calendar page of the sort of itchy.

Right.

I would now like to turn the call over to MS. Erica Mannion of Sapphire Investor Relations Investor Relations for Solar age. Please go ahead ma'am.

Good afternoon. Thank you for joining us to discuss <unk> operating results for the fourth quarter and full year ended December 31, 2021, as well as the Companys outlook for the first quarter of 2022 with me today are CV Lando, Chief Executive Officer, and Ronnie <unk>, Our Chief Financial Officer.

Steve will begin with a brief review of the results for the fourth quarter and full year ended December 31 2021.

Rounding will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2022.

We'll then open the call for questions. Please.

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 more complete description.

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 December 31, 2021 press release or the supplemental materials may obtain a copy by visiting the investors section of the company's website.

Now I will turn the call over to CV.

Thank you Erika good afternoon, and thank you all for joining us on our conference call today.

We are pleased to report that we have concluded the quarter with record revenues of $552 million and record revenues for the year 2021 of just below $2 billion.

During 2020, we released and began to ramp several new products like our energy bank residential battery.

And higher power optimizer, and Inverters in our residential and commercial offerings.

We are excited about this rapidly growing opportunity and are intending to do everything needed to capitalize on it.

In the current challenging operational and supply chain environment.

Spending infrastructure and ramping production to meet these higher demand level.

He's putting temporary pressure on our gross margins in the call today, we will provide detail on all of these factors.

I would like to start with a summary of 2021 and the main themes, which shaped the year and how we expect them to impact our business moving forward.

Total revenues in 2021 grew 35% over the previous year and 32% in the solar business.

Growth in the solar business was across all segments and regions and practically in every country in which we operate.

The larger year over year growth of significant size markets was in Italy, Germany, Taiwan, France, Poland and Israel.

While we usually focus our comments on North America, and Europe , which grew substantially this year, 29% and 36% respectively.

I want to shed some light on the long term growth opportunities in southeast Asia, and the Middle East.

In these markets, we grew in 2021 by more than 40% representing not only market share gains, but also the high growth rate of these markets, which is expect which is expected to continue.

In these countries. The market consists primarily of commercial installations and our momentum here is indicative of our overall momentum in commercial which I'll be discussing later.

Okay.

Other noteworthy dynamics of 2021 include significant increase of battery attach rates in residential installations.

Which increased by more than 50% most of which were third party batteries sold by our partners DC coupled to our Inverters.

Our residential battery ramp was slower than we originally planned.

In the area of grid services, we are now active in programs in 13 states across the United States in all states in Australia and in some European countries.

Offers to the end customer.

More than $1 1 million unique site designs were performed by installers on this platform last year.

Overall, we are pleased with the growth we have seen in 2021 and the progress made with our strategic initiatives.

Now turning to the fourth quarter results.

And the growth of sales to the commercial segments.

Moving to our global residential business, where we continue to see strong demand.

Healthy inventory in our channels, increasing sell out by our distributors and a strong backlog of orders.

In fact.

We already have firm orders for delivery in 2022 of our megawatt volume that represents 60% of our megawatts residential shipments in the entire year of 2021, not including batteries.

In commercial we are seeing a real shift in market momentum driven by a few factors.

The rising electricity prices across Europe and other regions.

As well as the trend of corporations wishing to progress their ESG programs and offset their carbon emissions.

Together with our stable and favorable regulatory environment in many countries, such as Germany, where the new government has announced aggressive growth plans for PV.

The ground for an increase of demand in markets, where solar is already has a solid local presence and strong brand awareness.

Combined these market and product dynamics are driving the record demand for our commercial solutions.

Our current megawatts firm order for delivery in 2022 or 143% of all commercial megawatts, we shipped in 2021.

While the increased backlog is partially related to longer lead times.

The amount of planned projects and the increase in design wins, including for ground Mount project demonstrates what we believe to be a true inflection point in the commercial market.

Ramping production to meet this demand in the current supply chain and logistic environment is having an impact on our top and bottom line as we prioritize exited expedited shipments in order to meet customer schedules at times at the expense of our gross margin.

We expect this situation to last until the middle of the year as we adjust our infrastructure and ramp manufacturing capacity to this new level of demand.

Moving to product updates.

In the residential segment, we released last quarter, the 10, and 11, six kilowatts of energy hub and Burger with 10 kilowatts backup power and a new three phase EV charger to join the single Phase Charger, we have been shipping for a couple of years.

We are seeing strong demand for the EV charging portfolio driven by the growing adoption of electric vehicles in particular in Europe .

Our energy Bank residential battery has now been installed in 11 countries.

We are receiving positive customer feedback in particular related to the ease of installation with a new energy net wireless communication technology incorporated in our residential offering.

Our battery manufacturing ramp has been slower than anticipated due to delayed supply of several components used in our DC to DC and BMS boards.

For most of these components, we have already qualified additional sources and we are working closely with suppliers to ensure timely and consistent supply for the remainder of the year.

In the fourth quarter, we shipped 42, five megawatt hour of batteries versus the 70 megawatt to our plans.

We plan to close this gap already in Q1 of 2022, reaching a production run rate of 300 energy Bank batteries per day by end of the quarter as we discussed in the last quarter's call.

In Q1, we plan to ship between 100 to 120 megawatt hour of residential batteries.

In the commercial and industrial segment, we continue to test our third 330 kilowatt large scale inverter in sites in Israel and Europe .

We are on track for a ramp later this year further strengthening our offering for ground Mount installations we.

We will provide more details on our ground Mount offering as well as other new products and services in our analyst day scheduled for March 29.

Moving to operational infrastructure and progress in that area.

In Q1, we will begin to shift residential inverters and Optimizes from the North America for the North American market from our new contract manufacturing facility in Mexico.

We expect to be able to deliver practically all of the U S residential demand from the Mexico, Mexico factory by the end of the year.

This will have a favorable effect on shipping costs tariffs working capital management and timely meeting the U S demand and lead times.

The commercial product manufacturing capacity will be expanded in two phases to meet the new growing level of demand, which I detailed earlier.

We are working closely with our key suppliers, who are supporting us in our mutual growth as they too see the value in this long term opportunity.

Moving to our non solar businesses.

2021 was a record revenue year for our non solar businesses totaling $176 million coming mostly from our energy storage and E mobility Division.

Our energy storage Division concluded the year with record revenues and was profitable for a second year in a row.

<unk> construction for the manufacturing of our own lithium ion sales continuous per plan and is expected to begin production ramp in the second quarter of 2022.

In the E mobility Division, we experienced some slowdown early in Q4 of 2021 due to our customers' temporary halt in production, which resumed to normal levels by the end of the fourth quarter.

We expect normal levels of delivery in the first quarter and through the year.

Yeah.

In our critical power Division, we started first shipments of our three phase Ups's offering which was design and product ties in house since the acquisition.

We will elaborate more about these segments in our analyst meeting in March.

To summarize.

We are facing an accelerated growth opportunity in a challenging operational environment as we have proven in the past I am confident that our global team with excellent execution.

During our customers have the benefit of our technology, when and where they need it.

And with this I will turn the call over to you on that.

Yes.

Thank you Phebe and good afternoon, everyone.

Segment profit is comprised of gross profit for the segment less operating expenses do not include amortization stock based compensation expenses and certain other items.

Total revenues for the fourth quarter were a record $551 9 million.

A 5% increase compared to $526 4 million last quarter, and 54% increase compared to $358 1 million for the same quarter last year.

Revenues from our solar segment were a record five.

$502 7 million.

A 5% increase compared to $476 8 million last quarter, and a 54% increase compared to 300 $227 1 million for the same quarter last year.

Overall this quarter, we shipped approximately $5 1 million par optimizer.

Proximately 119, 7000, Inverters and 4250 batteries, representing 42 five megawatt hour.

U S. Solar revenues this quarter were a record $257 4 million or 36, 6% increase from the last quarter and represented 51, 2% of our solar revenues.

Solar revenues from Europe were 190.

$3 2 million or 38, 4% of our solar revenues, representing strong revenues in Germany, Netherlands, Italy and Poland.

The rest of the World Solar revenues were $52 1 million or 10, 4% of our total solar revenues and included a record revenue quarter in Taiwan.

On a megawatt basis, we shipped 751 megawatts to the United States.

752 megawatts to Europe , and 419 megawatts to the rest of the world.

45% of shipments where commercial products and the remaining 55%, whereas essentials.

ASP per watt, excluding battery revenues this quarter was 25 three.

A 0.8% decrease from $25 five last quarter, a result of the high volume of residential product shipments to North America offset by an increased portion of large U S customers that benefit from larger volume discount within the overall mix and the <unk>.

Current euro, which reduced our ASP on products sold in Europe .

This quarter to U S customers accounted for more than 10% of our solar revenues.

Price increases vary among product lines and geographies, depending on the competitive environment demand level and specific cost increases related to specific products. The price increases are aimed at covering part of the component and manufacturing cost increases and are not focused on them.

More temporary logistic expenses, which relates to timely meeting increased customer demand. We expect the full impact of these price increases to materialize in the third quarter of 2020 02.

This quarter revenues from our non solar businesses were $49 1 million.

Consolidated GAAP gross margin for the quarter was 29, 1% compared to 32, 8% in the prior quarter and 38% in the same quarter last year.

non-GAAP gross margin this quarter was 33%.

Compared to 34% in the prior quarter and 32, 5% in the same quarter last year.

Gross margin for the solar segment was 32, 8% compared with 36, 6% in the prior quarter.

Gross margin within the solar segment is affected by various factors. The combination of the following factors contributed to this result.

From a customer geography and product mix perspective.

High volumes were shipped this quarter two large customers in the United States that benefit from volume discounts and this contributed to the lower margin. This was coupled with the weaker euro which eroded our margins on sales in Europe . Since revenues are euro denominated well manufacturing expenses are stated in U.

Lastly, the growing share of battery shipments that are characterized with lower gross margins further contributed to this margin decrease.

From an operator operational and supply chain perspective, our accelerated growth combined with the known industry challenges of component shortages limited manufacturing output and constrained.

In supply.

Shortage period component manufacturers tend to allocate goods among their customers based on past quantities.

Given our current accelerated growth rate some of our suppliers are having difficulties supplying sufficient components quantities in a timely manner. This is a result in a need for expedited shipping goods shipments.

To meet the customer delivery times and in certain cases payment of unutilized capacity through our contract manufacturers.

As <unk> mentioned, our battery manufacturing suffered this quarter from delayed arrival of components, resulting in lower shipment volumes at the higher cost.

Good subject to tariffs shipped into the United States from China accounted for 66% of our U S shipments in Q4.

To summarize the solar segment margin discussion, we view the impact on Inverters, an optimizer as margin as transitory and expect to return to our normal level in the second half of 2022.

Gross margin for our non solar segment was four 2% compared to eight 7% in the previous quarter, mostly related to reduction in the E mobility revenues and margins.

For the same quarter last year.

This increase is mainly related to the fact that we've reduced our hiring in the third quarter of 2021.

<unk> increased our head count again in Q4, mainly in our R&D and sales and marketing groups worldwide.

Begin to return to normal.

Our solar segment operating expenses as percentage of solar revenues were 15, 8% compared to 14, 6% last quarter.

non-GAAP operating income for the quarter was $72 9 million compared to $95 2 million in the previous quarter and $43 5 million for the same period last year.

This quarter the solar segment generated operating profit of $85 3 million.

Compared to an operating profit of $104 9 million last quarter.

The non solar segment generated an operating loss of $12 4 million compared.

Compared to an operating loss of $9 7 million in the previous quarter.

non-GAAP financial expense for the quarter was $2 2 million compared to a non-GAAP financial expense of $3 million.

In the previous quarter, our non-GAAP tax expense was $7 9 million compared to $10 1 million in the previous quarter and $4 6 million for the same period last year.

Yes.

GAAP net income for the fourth quarter was $41 million compared to a GAAP net income of $53 million in the previous quarter and $17 7 million in the same quarter last year.

Our non-GAAP net income was $62 $8 million.

Compared to a non-GAAP net income was $82 1 million in the previous quarter and $55 7 million in.

In the same quarter last year.

GAAP net diluted earnings per share was <unk> 74 for the fourth quarter compared to <unk> 96 in the previous quarter and 33.

For the same quarter last year.

non-GAAP net diluted earnings per share was $1 10.

Compared to $1 45 in.

In the previous quarter and 98.

In the same quarter last year.

Turning now to the balance sheet as.

As of December 31, 2021, cash cash equivalents bank deposits restricted bank deposits and investments were $1 2 billion net.

Net of debt cash cash equivalents bank deposits restricted bank deposits and the investments were $548 million.

Okay.

During the fourth quarter of 2021, we generated $89 $6 million in cash from operations.

Accounts receivable net increased this quarter to $456 3 million compared.

Compared to $416 $2 million last quarter.

As of December 31, 2021, our inventory level net of reserve was at $381 million.

Compared to $304 7 million in the prior quarter. Most of this increase is related to increased raw materials battery sales and component inventory in our solar segment. While our finished good inventory continued to decrease as a result of the growing demand and limited capacity.

Our non solar inventory levels remained practically similar to the previous quarter.

Let's move now to summarize the full year of 2021 Rep.

Revenues for the year was one.

96 billion, a 34, 6% increase from $1 $46 billion in calendar 2020.

Revenues related to the solar segment were $1 79 billion or 32% increase compared to 2020.

GAAP gross margin was 32% compared to 31, 6% in the prior year.

non-GAAP gross margin was 33, 5% compared to 33% in the prior year.

GAAP net income for 2021 was $169 2 million.

A 21% increase compared to $140 3 million in the previous year and GAAP diluted EPS of $3 <unk> compared to $2 66 in the prior year.

non-GAAP net income for 2021 was $272 $9 million or 22% increase compared to $224 4 million in 2020, and GAAP net diluted earnings per share of $4 81.

Compared to $4 11 in.

In the prior year.

This year, we generated $214 $1 million of cash from operations.

Turning to the guidance for the first quarter of 2022.

The combination of strong demand for our products and the operational adjustments and efforts in fulfilling this growth within an environment of component constraints fast manufacturing capacity expansion, which require higher investment logistic constraints and high shipment charges as well as the expanded rapid growth.

Our battery shipments that are characterized with lower gross margin will have a positive effect on our revenue growth rate for the entire year and we will continue to put pressure on our gross margin in the first half of 2022.

We expect this impact to be temporary and will be mitigated upon full ramp of our Mexico manufacturing, which is expected to be concluded by the end of the year.

On an annual basis, we expect the revenue growth as well as the operational expense leverage will offset the temporary margin impact and will increase our overall expected profit levels.

As such for the first quarter of 2022, we are guiding revenues to be within the range of $615 million to $645 million.

Revenues of the solar segment are expected to be within the range of $575 million and $595 million.

We expect non-GAAP gross margin to be within the range of 28% to 30%.

Gross margin of the solar segment is expected to be within the range of 30% to 32%.

I will now turn the call over to the operator to open it up to questions operator. Please.

Thank you Mr Speaker.

You would like to ask a question by pressing star one on your phone keypad, if youre using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Weiss from under 49 will indicate when your line is open.

First I wanted to ask a question.

We will take the first question from Mr. Mark Strouse from Jpmorgan. Your line is open. Please go ahead.

Yes, thanks, very much for taking our questions.

I just wanted to go back to your comments about.

Potentially seeing an inflection point in the commercial market.

Do you think.

Just kind of looking out beyond your guidance, but a bit but do you think 2022 becomes a year, where we start to see the C&I business become the majority of your shipments and then.

I'm trying to remember if you've ever disclosed the exact details, but can you just remind us kind of the difference in margins between the resi and the C&I business.

Hey, Mark I'll take the first part then I'll hand, it to O&M for the second the second part I think the answer is from a megawatt perspective.

Is likely.

On the.

The demand.

As such and the rate of increase is such that it is likely that from a megawatt shipment. This year, we will ship more commercial and I think also the word commercial is becoming limiting because.

A significant part of this is already ground Mount installations in particular in the U S.

So generally these larger installations with them.

We'll be a larger portion of our megawatt shipments in 2020 to estimate at this point.

Mark with regards to the gross margins I will start with a qualitative and then I will move to the quantitative.

What is going to be the margin profile on our solar inverters.

<unk> is an optimizer and here actually we expect that to towards the second half of the year, we will be back to a regular 35% to 37% gross margin for Inverters and optimizer and here you actually see a little bit of this polarization on one hand, we see residential where the margin is.

Expanding on the unit and sales at the same time, we see the increasing volume of commercial installations and product sold that are correct arises with lower margin, but all in all they are stabilizing to this 35% to 37% margin range. So.

This is basically a <unk>.

Mix issue, but the important thing is that in general we continue to see the general model that we use to describe in the past.

Any more color there, where you think you have the kind of the most pricing power lease pricing power across products or geographies whatever it might be.

I think it.

The variation is by segment and generally speaking the commercial market.

<unk>.

It's split to a large extent between.

Lower cost string inverters.

And our MLP.

Solution.

And with the introduction of the larger inverters in the larger optimizer as we are able to bring the cost per watt.

On our MLP configuration.

Down a bit and then it gives the people that still have the interest and motivation towards safety module level optimization and monitoring.

The return on investment in order to.

In order to.

Prefer our solution over a string inverters. So so there the opportunities are relatively tight.

In terms of.

The.

Ability to increase prices because it's a very.

Cost driven analysis, and we are managing a defined gap and we are now at a point, where we are able to on large scale justify that gap and thats what it.

Is increasing the demand.

Generally in residential.

Opportunity is a bit.

A bit bigger in that regard.

And and even more in batteries under the current circumstances.

The shortages in the market and.

The favorable feedback that we're getting for our battery.

Okay very helpful. Thank you.

We will take the next question from Brian Lee from Goldman Sachs. Your line is open. Please go ahead Sir.

Okay.

Yeah, Hey, guys. Good afternoon. Thanks for taking the questions maybe maybe first of all a follow up on the gross margin.

Just wondering.

And you're talking about.

Getting back to 35% to 37% gross margin target for solar.

Kind of drill into some of the pieces that deal it sounds like freight it sounds like some of the supply chain issues that maybe give us the big pieces that.

<unk>, the 500 basis points between this quarter and a couple from from now and I have a follow up thanks.

Yes of course, and I would like to clarify the question or my answer before I detail.

Overall.

I would call it breach to get back to the 35% to 37% on the optimizer and Inverters and I will then try to connect everything to the battery. Okay. So in general we see.

I would say five to six elements that.

Will enable us to bridge from where we are today into Q3 and Q4. The first the first one is the fact that once we are increasing our manufacturing capacity and this means that we are adding Mexico and expanding Vietnam as <unk> mentioned before we have much more capacity that can be placed on boats and.

Shifts and sent to the target without the need for expedited shipments, we are which are today extremely expensive.

Especially at the price environment that we see right now so increased capacity means lower expedited shipments and much more regular shipments. This by itself contributes a few hundreds of basis points.

The margin. The second one is Mexico is a site by itself because not only contributes for the additional capacity. It also means that now we can eliminate first of all increase the areas that we pay to date as we said on the prepared commentary a 66% of the product that we brought to the U S.

In Q4 were subject to tariffs and this amount will.

Be reduced as we are as Vietnam is back, but most likely when Mexico is down. So this will dramatically reduce the expenses plus the fact that we will not be meeting.

Ocean freight, which is today again very expensive compared to lend.

<unk>.

The next thing will be the price increases that we have that we have implemented we usually implement price increases on new orders and that means that.

Most of the price increases that were implementing because of the lengthening.

Period or <unk>.

Our lead time period is taking time until they kick into the system and we expect to see all of them materializing in Q3.

Sales that will be manufactured by our Korean part of the storage division will allow us to reduce these costs.

Our scale because of the very high revenue that we will see our revenue growth that we will see the scale of our fixed cost will become lower and eventually eventually we will see of course, a continued increase in the other non solar segments that will actually push us again to the better margins again this is not related disorders.

So in the analyst day, we will basically.

All of these and we will provide how everything is impacting but to summarize yes, we will see solar Inverters and optimizer is go to $35 37 batteries stay at about 25% and now the portion of batteries to solar Inverters and optimize those will very much determine the end result of the solar cell.

And all of the other factors will increase.

Margins in general for solar and non solar I hope that it answers your question Brian .

Yes.

For a detailed and helpful context, I guess related to that last piece of solar and storage ratio.

The high volume, but then you also have sell it to come in online.

In Q2, it I would expect that add some volume in the back half of the year. So just any thoughts on the battery ramp we should expect off the Q1 acceleration.

Then in terms of the mix for batteries U S versus non U S.

Are you shipping at all into the channel or are you seeing.

Correct Q1 demand just any sense of kind of where youre seeing that 100 to 120.

For for Q1, thank you.

Okay. So first of all.

First of all from from.

The revenues and the growth of the battery, we need to remember that 2021, we first of all utilize the Samsung deal that we have and this means that at least in the first quarter as we mentioned we already guided for.

100 to 120 megawatts and by the end of this quarter, we will be at approximately 180 megawatt run rate.

Per quarter, we will continue to ramp this manny.

And here the second element will be really.

<unk> will just start to ramp as we said with test runs in the second half in the second quarter and in the second half we will start to ramp up the manufacturing and here I would say that even though the manufacturing pace will very much determine what will be the additional volume that we should bring so played safe I would say about 250 Meg.

Prioritizing.

Customers that we believe have a potential for.

Available also for retrofit an existing system.

Alright, Thanks, guys I'll pass it on.

Okay. Thank you. Thank you.

We will take the next question from Mr. Stephen Byrd from Morgan Stanley . Your line is open. Please go ahead Sir.

Hey, thanks, so much for taking my questions.

My question is on the results have been addressed I was thinking more about.

Evolution of your technology and thinking about.

The developments around the integrated home Inn, and Smart energy management are there technology developments that we should be.

Thinking about in the future for you are there areas, where you feel like you you need to.

Acquire capabilities outside of sort of organic capabilities here I'm. Just curious if you could just speak a little bit more to the evolution on the technology side.

Specialty sort of around the integrated home and just.

Continued evolution there.

Yes, it's a good question and obviously would require a long answer which is wishes.

We intend to at least try and give it in the analyst day at the end of the end of March but but.

That said and maybe as a as an appetizer. We are focused on really expanding our technologies and capabilities that everything that has to do with generation storage and consumption.

<unk>.

Electrical power generated from renewable sources so.

With that being the overriding.

<unk> vision from a technology point of view.

To deliver on that there are technology areas.

Are not our core strength today that we are gradually building gradually building capability.

As well, but again hopefully in much more detail at the analyst day, we can we can share more on this topic.

Yes, very fair its a big topic that is better suited for the investor event.

I guess stepping this is another big picture question, but just thinking about demand for storage, it's very clear storage demand is skyrocketing globally in and you're well positioned there you've talked a lot about expansion and just I guess longer term as we think about that potential how do you think about the best.

<unk> approach to.

Supply chain dynamics. So how do you think about kind of longer term growth strategy to meet this rapidly growing demand for storage.

Again.

The question, maybe two comments first of all I think.

What we are learning and experiencing in the residential environment.

That while people talk a lot about the batteries and compare one to each other.

It is really the system integration and the assistant performance that is determining the actual value for the in this case of residential the consumer.

And we expect that storage.

If tax rates will increase also in commercial and we are seeing already signs for that in Europe and in North America, and we believe that there are two <unk>.

Issue will be yes, the battery parameters.

And the comparison of cost in cycles and <unk>.

Self consumption or a combination.

Or a combination of both so that is where we are focused on and that is at the core of our motivation to have access to from the cell.

Optimize.

Our complete solution from.

From cell to the system and have flexibility to meet.

Some or most of the capacity the capacity of our on our own and may be supplement that from from others. So.

So that's kind of at high level the way, we're looking at it I hope that.

Yes.

It helps explain it.

That's helpful. Thank you very much.

Okay.

The next question is from Julien Dumoulin Smith from Bank of America. Your line is open. Please go ahead.

Hey, good afternoon, and thanks for the opportunity just going to pick up where receivables dropped here can you talk specifically about storage supply ramp going into 2023 here as best I understand as the Samsung deal transient how do you think about not just <unk>.

Complementing, but supplementing and expanding that availability into 'twenty three.

Talking about the $2 50 run rate here, what could that 23 number looked like and how are you thinking about providing data points to ramp into that here.

So.

First of all I will divide the the ability to grow in 'twenty three into two the first one is everything that we get from seller to sell it to capacity initial capacity is designed for two gigawatt hour annually and of course, we can we can take this entire amount and directed if needed for storage in 2012.

<unk> three but actually we can substantially increase the capacity of sell a tool within a matter of several months not even a year.

To almost double this amount so that means that once we will see the Samsung SDI capacity being.

Our consumed and we will understand what are the I would call. It stabilized level of demand, we will decide whether to make the investment and sell it to actually in advance of 2023 in order to open the year with a higher capacity. So this is one thing the second thing is the fact that.

Our strategy has been from the very beginning not to be dependent necessarily on the on one on one battery and therefore, we can always.

Try to team or get more capacity.

Capacity from Samsung should we see that the demand is so big that higher capacities needed of course, we will always try to take whatever we can first of all from seller to both from pricing and of course because of economies of scale, but in general with a little bit of preparation.

We believe that 500 megawatt hour per quarter is relatively easy.

I would say almost double this amount with some work is not very complicated and going to Samsung and get more is something that is feasible.

Got it so 500 it is not the commitment on 'twenty, three but that sounds like a.

At least in outlining where you can go.

Yes.

Yeah, Okay, Great and then just related to the component shortage can you elaborate a little bit more on the strategy here.

You had some very specific acute shortages in <unk>.

Yeah.

Strategy to address it broadly if you can <unk>, specifically and onwards, I know you addressed it somewhat as the phone call comments.

Yes, I think if you recall.

Especially at the beginning of the.

Susan of shortages, we were.

We were relatively in a very good position because we were prepared also with inventories and also with alternatives on most of the.

The critical components that we were using and that enabled us to.

To execute.

With less constrained for the first three or four quarters of the period, we're now facing more constraint and a bigger challenge.

Yes.

Primarily just because of the elevated volumes in peoples.

They tell us.

Youre getting.

Your allocation as what it was or one five X. What it was you should be happy, but that doesn't make us happy because we need.

Two or three <unk> of the volume that we.

Consumed.

In the past.

That's the challenging side the positive side is that we are becoming a much bigger portion of our suppliers' business and we did.

We are consolidating.

Into some specific larger.

Ponant suppliers such that.

One is we're more dependent on them on the other hand, they are dependent or our business is more critical to them and they are.

And they are bigger and more reliable suppliers. So so we're in the process of doing that and in cooperation with some of these big suppliers and.

That's giving us.

Reasonable visibility, but not complete visibility and there could be still hiccups, along the way and those hiccups usually translate into some type of expedited.

Shipments in one.

In one form or another but generally we are consolidating into larger suppliers and being a bigger part of their business.

And and gradually.

Especially on the new products also building the alternatives.

In order not to be dependent on any.

Specific component in any of our products, but this is this is a process again.

We'll likely have some hiccups along the way.

Hence your comments for back half of the year to normalize does that does that align with the timing that you're thinking about there.

Again, hence thing.

The back half of the year for margins to normalize that assumes that they'll pick up to get more.

Past that if you will and to ramp with the largest supplier.

Yes, that's part of it and for sure the big suppliers that we're working with we have their capacity plans and.

No. When there are new Fabs are coming online and thats aligned with that but at the same time, we still have a lot of components coming from from other manufacturers and.

It's not that I'm, saying with full confidence that in the second half of the year.

Don't be experiencing challenges and hiccups.

And these areas. It's just that the bigger portion of the of our component supply will be more secure in the second half of the year.

Yeah.

Thank you guys.

Thank you.

The next question is from Mr. Philip Shen from Roth Capital Partners. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking my questions.

Follow up on the storage.

Megawatts megawatt hours.

<unk>.

You talked about 42 megawatt hours recognized in Q4.

Or at least shifts can you talk to us about how many megawatt hours was recognized in revenue in Q4, and then of the 100 to 120.

Megawatt hours.

In Q1 chip.

How much do you think you could recognize in revenue in Q1.

We generally do not.

We do not give this data simply due to the fact that you know.

The ships to revenue may sometimes change simply based on that explanation of where you're shipping I would say that you should assume that generally at this point of time.

The majority of what you shipped becomes revenue relatively quickly due to the fact that you either ship.

To Europe or you are trying to time the shipping in a way that shipping to the U S will go out from Europe .

Factoring in the beginning of the quarter. So I would say that here there is almost a similarity although of course the shipment is always layer larger than revenue in the future and then in Q1, we specifically cannot tell simply because of the fact that we do not know what will get to the customers that at what point of time. So it will it will be down it will not be.

It will be lower revenue than shipments but.

I think that Thats, the most where we can say right now.

Okay. Thanks for that.

As it relates to.

The battery supply chain dynamics as you ramp up to much larger numbers in the back half of the year do you see any bottlenecks as it relates to lithium or any other raw materials and if so how are you addressing that.

Let's divide between battery cells and other electronics around it on battery sales, we feel very much secure at Samsung is very organized then.

And precise on there.

Our supply of battery cells. So here, we don't see a major issue.

This is Steve you mentioned on the electronic components here, we believe that we resolved at least for the near future. The problem that we saw before and we are in very good contact with the suppliers here, but again, sometimes <unk>.

Simply these kind of delays are not in our hands and we cannot actually.

Our forecast and hence.

The missing disc in <unk> had we known that we would not even guide for the number that we had so I think that we are in good alignment with our vendors, but as Stephen mentioned there are surprised that are happening.

From time to time, sometimes the suppliers themselves do not.

Control all of it.

Okay.

The next question is from Mr. Mohit <unk> from Credit Suisse. Please go ahead, Sir your line is open.

Hey.

Thanks for taking my questions here.

In terms of sellout two expansion could you just talk about how much of raw material supply visibility do you have for that and specifically just looking at.

Lithium carbonate nickel prices kind of mix.

Increasing here versus last year. So just wanted to understand your sourcing strategy for that.

How do you think about like expansion beyond 'twenty two for Celesio.

So in general are first of all you know.

The raw materials for our battery battery manufacturing is a little bit more predictable than electronic components simply given the fact that once we have developed the battery cell and the underlying cathode anode material and be.

Electrolyte your basic basically locked so in a sense you do not even completed the development of a sale before you have a.

Viable source, a known source for all of this product and this is the case of sell through I would say that instead of two we do not expect to see issues related to the quantities, which are they're actually most of the issues is related to pricing because the price of all of these materials is related to the London.

Materials indexes and here. This is the place where you can see a little bit of variation so as long as we see and as in continuation to the answers to Julien.

Approximately 500 Meg.

Okay.

Next question from Colin Rusch from Oppenheimer. Please go ahead, Sir your line is open.

Thank you. So much guys can you talk a little bit about the.

Channel inventories and where you are at and how you see the decade refills over the course of the year.

In terms of order of magnitude and cadence.

Okay.

So we.

We heard the first part so generally inventory levels.

I would separate between.

Residential and commercial and a bit between regions.

Inventory levels for residential products are relatively.

It's probably.

Below <unk>.

Normal inventory levels of distributors desire, but still I don't think there is we're not experiencing shortages at this time on residential products either in Europe or in the U S.

Commercial.

Products I think inventory levels in the U S inventory levels on commercial products are tight everywhere for the reasons that we described.

Before the demand is super strong.

And our capacity is not yet there too.

To fulfill it fully.

With inventory levels on top of the project demand so we.

Accelerate shipments an airship.

These are large volume.

Product.

Where the costs are coming from so on C&I inventory levels are low and they are probably in a lower in Europe and.

Asia, Australia compared to the U S, where they are a bit better.

That's helpful and then second part.

It was just around the cadence of.

Of how the channel and the targets refills.

So you could Miss a couple of comments on that and then I have a follow up.

So unfortunately, we're still in a bit of a.

Non smooth flow that started off with the Vietnam.

Shutdown and expanded into Chinese new year.

For the last few weeks.

That obviously affects not only China manufacturing, but also Vietnam manufacturing. So so the last few months have been more of a pulse supply and less of a continuous flow.

Now we hope that.

After factories are back to normal operation with the conclusion of Chinese new year that we don't have any more post events.

And the next few months and then then flow is going to be much more smooth.

And more simple to forecast and manage inventories.

We'll take the next question from J B Lowe from Citi. Please go ahead. Your line is open.

Hey afternoon, Zeevi run Erica.

Doing well my first question is a little bit more detail just on the Mexico contract manufacturing facility.

And that would be online by the end of the year. I think you had initially said that you would be able to shift some of the first products out of there in the first half. So I'm just wondering if that's not the case anymore and then my second part of it was.

Given how much you've already booked on the commercial side for 2022, I think you said it was over a 130% of your 2021 shipments booked already how much and how much more time do you have.

How much how many how much more can you book this year or what timeframe can you book commercial product and still have it delivered before the end.

2022.

Yes.

Okay, Yeah. So just.

Just to clarify on the first part is what we said was we are beginning to deliver product from Mexico to the U S. In this quarter already.

In Q1, what we said by the end of the year is to reach a point, where all of the residential product.

Our almost all of the residential product.

Consumed by the U S markets will be coming from Mexico. So this is a process that is starting now and will end by the end of the year, but it's already in the first quarter there will be.

Meaningful shipments of Inverters and Optimizes from Mexico to the U S market.

So that's the first.

The first part of the question. The second part of the question. The dynamics first of all we are taking orders today in commercial.

For July .

July August and on pretty much.

The dynamic in in C&I is a little bit different.

The design phase is longer.

And.

And that's part of the reason we are now we are expediting shipments because customers of.

Trusted hour.

<unk> been able to be buy into the technology and that's why it's so critical for us too.

To support them, even at the expense of the expedited.

Shipments so that timeframe is typically it can range anywhere from 3455 months between design in and when the product is actually needed.

So.

The lead times that we're giving right now and we're still taking orders for July August is a bit longer than the design cycle, but still reasonable to give customers the confidence that they can continue to design us in at the rate.

<unk>.

They have been recently.

We'll take the next question from Kashi Harrison from Piper Sandler. Your line is open. Please go ahead.

Good afternoon, and thank you for taking my questions.

So my questions are all on and sell it to so with respect to the second half of the year if for whatever reason theres not enough demand on the residential side for <unk>.

Our for our batteries powered by solar too.

How easy is it and is there enough demand for you to redirect that capacity to nonresidential segments and then I was just wondering if you could just help us think about the difference in returns associated with building capacity like you did with fellow two versus buying capacity like you did.

With Samsung SDI using whatever.

Third metric you want to use thank you.

Okay.

I'll start with the capacity.

So first of all.

Our storage division has sales of storage products that are independent of the solar.

<unk> battery of course, so by definition, we can take and by the way we plan to take capacity from <unk> into this area as well, we simply of course prioritize the solar related business rather than non related business, but we believe that the capacity is there and it's enough. So yes, if we do not see that there is enough.

<unk> coming from sale of two first of all we need or for sale of two we need to consume the amount from Samsung because this is a contractual obligation and we will direct the.

Excess capacity to the other sources and here, we can actually either sell them as battery sales.

Or as packed products and our storage division have both sell in fact deliveries we of course prefer to sell everything as a package rather than in a sale because in this case, we have better margins and of course, we have the better.

ASP per watt hours. So in general we can take this and we can divert not may be 100% of this <unk>.

Capacity, but still enough to make sale of two operating in and able to grow when it comes to the return on the investment. This is a little bit more tricky because first of all again. The question is what are you are you using the.

Factory for and whether you use it for more tax or more sales that you are selling in general I would say that the way the matrix that we have used is returns on capital investment and I can tell you that our.

Low single digit over the years for return on the investment of <unk> compared to buying from other sources. So we view it as an extremely attractive ROI.

Roy Morgan.

Okay.

We will take our next question from visual parish area from Susquehanna. Your line is open. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

Maybe one more question on that.

Long term battery demand as you sort of see.

The surgeon.

Actual demand for four corners.

What is the range you get from those customers for.

Appetite for our storage products.

And Avenue for <unk>.

The additional capacity from <unk>.

So.

I will separate the answer to it.

Adjusted for a bit.

A bit earlier, we see the.

Commercial storage dynamic.

Repeating in a way the residential storage dynamic just.

A few years later and maybe a slightly slower.

Evolution, but we definitely expect it to to come and Theyre already early signs of that.

But today and for the same.

Motivations and reasons, whether it is continuing to have power supply in areas of grid instability.

Sure.

Controlling demand charges or increasing self consumption.

In order to save.

To save on the pricing coming from the grid.

We have a large solar installation on sale of one factory here in Israel, and we will put.

A large installation and sell it to and in both cases for economic.

Economic reasons.

When will we add.

Storage, its probably depending on the region probably.

A couple of years out still before attach rates to begin to be double digit on us on commercial on commercial installations and and by that time capacity from from seller to ore.

Then from a.

Additional.

Expansions that we will do is definitely what we have in mind and where we are aiming to go.

The next question is from Mr. Michael Blum from Wells Fargo. Your line is open. Please go ahead.

Thanks for taking my question.

At a high level question I guess I know NIM three pointed out in California is not finalized yet.

But wanted to get your views on this and similar changes in other states here could impact demand in the U S market.

How does that impact long term thinking on sales trends.

The U S versus Europe and rest of the world.

Yes, I think the latter part of your question is very valid to the to the first part.

We are.

We are in we have been operating in in Europe , and other places in the world for a very long time, and if you look at the some of the.

Countries in Europe their regulatory environment.

Very good.

It's very similar but it has some similar characteristics to it was intended.

In the.

The original name three proposal in.

And then it turns into a self consumption market with much much higher battery attach rate as you see today in Germany battery attach rates are 70% to 80% and in a much more much.

Much stronger demand for.

So consumption enhancing components like.

<unk> solar driven water heaters, EV Chargers smart switches.

And and other elements. So so this is already the environment we live in.

In Germany, and some of the other European countries and if.

That is the direction that.

That eventually, California. It takes we believe the market will.

It will be similar.

Maybe maybe bigger may be smaller.

But at the same time installations will be.

It will be much more.

Call it complex expensive technological because of the.

The potential return through.

Through self self consumption. So overall, it's it will change the characteristics of the market, but we don't think it will.

<unk>.

Will erase the market and we think actually ourselves that we're pretty.

Ready ready and familiar with that type of.

Of environment.

If and when it.

It comes to the U S.

The next question from Mr. Amit <unk> from BMO capital markets. Please go ahead, Sir your line is open.

Alright, Thank you for taking my questions.

Just wanted to follow up on the prior question real quick can.

Can you give us a sense for kind of the percentage of your 'twenty, one revenues that were from California residential markets.

I don't have the exact numbers in front of me it is.

U S was typically is around.

40%, 50% of our revenue and then in the U S.

Made of residential and commercial and then residential is split across.

Many states with California being.

Being the larger ones. So so I would venture to say that it's a significant number and in the double digit range, but probably in the lower double digit.

As a result of the fact that it's a.

It's a part of part of our.

Global business, both geographically and segmental.

Okay.

It appears there are no further questions at this time I would like to turn the conference back to Mr. <unk> for any additional or closing remarks. Please go ahead Sir.

Yes. Thank you. So in summary, we concluded an operationally challenging yet positive year on all fronts with record revenue.

All of this while continuing to invest in laying the groundwork for future growth and expansion into adjacent markets.

The first of which we are already beginning to see today.

Thank you all for joining our call today and have a good rest of the week.

This concludes today's call. Thank you for your participation you may now disconnect.

Q4 2021 Solaredge Technologies Inc Earnings Call

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