Q1 2022 Solaredge Technologies Inc Earnings Call
[music].
Good day, ladies and gentlemen, welcome to the solar Edge conference call for the first quarter ended March 31, 2022. This call is being webcast live on the company's website at www Dot solar edge Dot com in the investors section of the event calendar page. This.
Call is the sole property and copyright of filler edge with all rights reserved and any recording reproduction or transmission of this call without express written consent of seller edge is prohibited.
You may listen to a webcast replay of this call by visiting with you the calendar page of the solar edge Investor website.
I would now like to turn the call over to Mike Funari with Sapphire Investor Relations Investor Relations for Silver edge. Please go ahead.
Good afternoon. Thank you for joining us to discuss so we're just operating results for the first quarter ended March 31, 2022, as well as the company's outlook for the second quarter of 2022.
With me today are T V Lando, Chief Executive Officer, and Rodin Fire Chief Financial Officer.
<unk> will begin with a brief review of the results for the first quarter ended March 31 2022.
Ronen will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2022.
Then open the call for questions. Please.
Please note. 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.
Encourage you to review the Safe Harbor statement contained in our press release.
Slides published today for a more complete description.
All material contained in the webcast into sole property and copyright of storage technologies with all rights reserved.
Please note. This presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U S. GAAP.
The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating understanding how the company's management evaluates the company's operating performance.
These non-GAAP measures should not be considered in isolation from as a substitute for or superior to financial measures prepared in accordance with U S. GAAP.
Listeners, who do not have a copy of the third quarter ended March 31, 2022 press release or the supplemental material may obtain a copy by visiting the investors section of the company's website.
Now I'll turn the call over to theory.
Thank you Mike.
Good afternoon, and thank you all for joining us on our conference call today.
Starting with highlights of our first quarter results.
We concluded the quarter with record revenues of approximately $655 million more than $100 million over our previous record revenues achieved last quarter.
Revenues from our solar business, we were at a record high of $608 million, while revenues from our non solar business were $47 million.
This quarter, we shipped $5 7 million power Optimizer, and 211000 Inverters, an increase of 600014 thousand units respectively from last quarter.
Our solar business grew quarter over quarter by 21% driven by growth in all segments and geographies, including record quarterly revenues in the United States and 14 European countries, including the Netherlands, Italy, Poland, Spain, Switzerland, and the U K.
There's a lot of attention recently to what is happening in Europe , and I would like to add some color on this topic since it is a large source of our revenues.
Traditionally the first quarter in Europe is seasonally lower than other quarters with significant pick up in the second quarter of each year.
This year, we have seen significant increase in demand already in the first quarter and the growth in our megawatt shipments from Q4 2021 to Q1, 2022 where it's 40% in the residential segment and 52% in the commercial segment.
On top of this when we examined the sell out data from our distributors in Europe . It is at an all time high and inventory days on hand at the distributors are exceptionally low.
Considering the current dynamics in Europe have elevated electricity prices supported government supportive government initiatives and our historically strong position in this region and taking into account our current portfolio and new products. We plan to release in the coming quarters, we expect our strong growth momentum in Europe to continue.
Yeah.
In order to meet the high demand in Europe . This quarter, we did have to ship additional product by air which in combination with the euro to dollar decline puts pressure on our gross margin.
Then he will elaborate on this in a few moments.
In the U S. As well this was a record revenue quarter.
In particular, we saw a high quarter over quarter growth in the commercial segment, where our megawatt shipment grew by over 40%.
This correlates with the global strong commercial momentum that we described in the analyst day that is associated with corporate ESG focus anti electricity prices.
We continue to grow also in regions outside Europe , and the U S with record revenues.
Noteworthy among these countries is Taiwan, where we ship this quarter more than 50 megawatts of products and in Japan, where we are ramping sales and installations of our newly certified residential offering.
On the product side, we shipped this quarter approximately 100 megawatt hours of our solar edge home residential battery.
We are seeing good market acceptance and strong demand for multiple countries for this product most recently with the successful launch in Australia.
Customer feedback continues to be positive in particular regarding ease of installation multiple battery flexibility and the overall advantages of a D C coupled system.
We are on track in ramping our manufacturing facility and plan to ship over 200 megawatt hours of batteries in the second quarter.
We are also experiencing strong demand for all of our other solar edge home products, including water heaters meters and.
And most notably our Standalone and inverter integrated EV Chargers of which we shipped approximately 8000 units worldwide in the first quarter.
In the commercial and industrial segment. This quarter, we released the <unk> 1200, a high wattage power Optimizer based on our fourth generation AC that supports the recently available high power and bifacial modules.
We also continue to test our 330 kilowatt hours large scale and further insights in Israel and in Europe and are on track for a ramp later this year further strengthening our offer for ground Mount installations.
I would like now to elaborate on the operational challenges, we are facing while ramping production of Inverters optimizer and batteries to meet the continuously increasing demand we are seeing.
We are facing three main areas of challenge while building our capacity to meet this demand.
First is electronic component availability in particular at the elevated volumes we require.
The second is unpredictable unpredictable COVID-19 related disruptions such as the recent one in Shanghai.
Affecting some of our raw material and component suppliers.
And third are the longer logistic routes affecting both incoming supply to manufacturing sites and finished good shipments.
In order to overcome these challenges and to continue to supply our customers with the products, they need when and where they need them now and in the future.
We are on the one hand, investing and growing our contract manufacturing facilities by adding space people and equipment and on the other hand, managing the component supply chain with expedited shipments paying in some cases high logistics costs to get components to our factories and to get product to our customers.
Well, we have raised prices to cover increased component and material costs.
We are not placing all of the infrastructure infrastructure development and expedited shipment costs on our customers.
We expect that some of these costs will be mitigated as we grow manufacturing capabilities such as in Mexico, where this quarter, we began to ship inverters and optimize those into the U S. And we are on track to supply our entire residential inverter and optimizer U S offering from the Mexico factory by year end.
While we do not have clear visibility on when the shortage of components will stabilize and our elevated demand will be met and a more predictable manner. We are optimistic that the work we are doing to quantify additional component suppliers.
And two aligns short and long term forecast with top management of our key suppliers will ease the constraints towards the end of the year.
In our non solar business our E mobility Division continued delivering full powertrain units and batteries for the Fiat <unk> catheter in Europe , doubling our deliveries from the prior quarter and.
And we are expecting to grow another 30% in the coming quarter.
In our energy storage division to setup two factory for lithium ion cells and batteries in Korea is now fully constructed and has received permits required to initiate test runs for full to sell qualification.
In summary, this is an exciting period, where we are capitalizing on our long term investment in our broad portfolio and global presence and are significantly growing our infrastructure and our business globally.
Albeit in a challenging operational environment.
With this I hand, it over to women, who will review our financial results.
Thank you T V and good afternoon, everyone.
This financial review includes GAAP and non-GAAP discussion full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and the press release issued today.
Segment profit is comprised of gross profit for the segment less operating expenses and do not include amortization stock based compensation expenses and <unk>.
Certain other items.
Total revenues for the first quarter were a record $655 $1 million, a 19% increase compared to $551 $9 million last quarter, and a 62% increase compared to $405 $5 million for the same quarter last year <unk>.
<unk> from our solar segment, which include the sale of residential batteries were a record 608 million, a 21% increase compared to the $502 $7 million last quarter, and a 62% increase compared to $376 4 million for the same quarter last year.
<unk>.
U S. Solar revenues this quarter were a record $265 $2 million, a 3% increase from the last quarter and represented 43, 6% of our solar revenues.
Solar revenues from Europe were a record $285 $4 million, a 48% increase from the last quarter and represented 47% over our solar revenues rest.
The rest of the World Solar revenues were a record 57 $4 million, a 10% increase compared to the last quarter and represented nine 4%.
Our total solar revenues with a very strong quarter in Israel, Australia, and Japan, and a record quarter in Taiwan.
To make it work basis, we shipped 721 megawatt to the United States, One one gigawatt to Europe , and 309 megawatts to the rest of the world.
47% of the megawatt shipments were commercial products and the remaining 53% where residential.
ASP per watt, excluding battery revenues this quarter was $26.09 a six 2% increase from $25 three since last quarter, a result of our geographic and product sales mix as well as well as a price increase implemented in several regions. These price increases.
It will fully materialize in Q3.
This quarter, one U S customer accounted for more than 10% of our solar revenues.
Revenues from our non solar business were $46 $9 million.
<unk> portion of these revenues came from our E mobility Division, where the volume of powertrain units delivered to still and it's continued to grow.
Consolidated GAAP gross margins for the quarter was 27, 3% compared to 29, 1% in the prior quarter and 34, 5% in the same quarter last year.
non-GAAP gross margin this quarter was 28, 4% compared to 33% in the prior quarter and 36, 5% in the same quarter last year.
Gross margin for the solar segment with 32% compared to 32, 8% in the prior quarter.
In our solar segment gross margin have gradually eroded over the last few quarters I would like to spend some time, explaining the main drivers compared to the last quarter in order to provide a broader perspective.
There were four primary factors, which impacted our gross margins this quarter versus last the first was increased shipping expenses. Both on finished goods and raw materials for the reasons previously detailed debate CV.
This had a strong impact on our margin and at the current level. It is 480 basis points above where we were in the first quarter of 2021, we expect this to continue in the second quarter and gradually ease from the third quarter onward, as we ramp Mexico.
And decrease the portion of Chinese made products for the U S market.
The second is related to costs paid to our contract manufacturers in order to continue manufacturing during the Chinese new year period and are onetime in nature and for ramp up expenses in Mexico, China, and Vietnam that will continue through the end of this year.
The third element is.
The increase in revenues from batteries out of our total product mix, which have lower gross margins.
Fourth relates to the devaluation of the euro against the U S dollar, which impacted us significantly due to the high volume of sales in Europe .
We expect this last factor to continue and negatively impact our gross margins into the second quarter as reflected in our guidance.
Good subject to tariffs shipped into the United States from China accounted for 32% of our U S shipments this quarter.
Gross margin for the non solar segment was five 6% compared to four 2% in the previous quarter, mostly driven by higher margin on the storage product and improve margins in the E mobility business.
On a non-GAAP basis operating expenses for the first quarter were $98 $9 million or 15, 1% of revenues compared to $94 1 million or 17, 1% of revenues in the prior quarter and $76 $2 million or 18, 8% of <unk>.
Revenue for the same quarter last year.
For the solar segment operating expenses as a percentage of solar revenues were 13, 9% compared to 15, 8% last quarter, representing an improved operating leverage as our revenues continue to rapidly expand.
non-GAAP operating income for the quarter was $87 $2 million compared to $72 9 million in the previous quarter and $71 9 million for the same period last year.
This quarter, the solar segment generated operating profit of $98 $7 million compared to an operating profit of $85 $3 million last quarter.
The non solar segment generated an operating loss of 11 $5 million compared to an operating loss of $12 4 million in the previous quarter.
non-GAAP financial expense for the quarter was $4 $9 million compared to a non-GAAP financial expense of $2 2 million in the previous quarter.
Our non-GAAP tax expense was $13 $5 million compared to $7 nine.
Millions of dollars in the previous quarter and $10 1 million for the same period last year.
It is worth mentioning that due to the way that the tax provision related to guilty income is calculated the company's effective tax rate is not linear throughout the year and is generally higher in the first half of the year and it will decrease in the second half of 2022.
This non linear calculation reduced our EPS this quarter by approximately five cents, which is expected to be recovered in the second half of the year.
GAAP net income for the first quarter was $33 $1 million compared to a GAAP net income of $41 million in the previous quarter and $30 1 million for the same quarter last year.
Our non-GAAP net income was $68 8 million compared to a non-GAAP net income of $62 8 million in the previous quarter and $55 $5 million in the same quarter last year.
GAAP net diluted earnings per share was <unk> 60 for the first quarter compared to 74 cents in the previous quarter and 55 cents in the same quarter last year.
non-GAAP net diluted EPS was $1 20.
Compared to $1.10 in the previous quarter and 98 for the same quarter last year, turning now to the balance sheet.
As of March 31st 2022, cash cash equivalents bank deposits restricted bank deposits and investments were $1 $6 billion net of debt. This amount was $979 million.
During the first quarter of 2022, we used $163 million of cash for operating activities Hi.
<unk> cash consumption is not necessarily unusual for a rapidly growing business in this case, the non typical kiss cash.
Sumption in the first quarter is a result of the extended shipping times for both finished goods and components high volume.
Purchases of battery cells from Samsung for our batteries to be manufactured and delivered in the second quarter and the consumption of working capital, while increasing our revenues rapidly.
We expect this trend to be reversed in the next quarter.
Accounts receivable net increased this quarter to 676 $8 million compared to $456 3 million in the last quarter as a result of our growing revenues.
As of March 31, 2022, our inventory level net of reserve was at $432 $5 million compared to $380 1 million in the prior quarter.
Most of this increase is related to an increased level of raw materials battery cells and component inventory in the solar segment. While our finished good inventory continued to decrease as a result of the growing demand for our products.
Our non solar inventory levels slightly decreased compared to the previous quarter.
Turning to our guidance for the second quarter of 2022.
We are guiding revenues to be within the range of $710 million to $714 million.
Revenues.
The solar segment are expected to be within the range of $660 million and $690 million, we expect non-GAAP gross margins to be within the range of 26% to 29%.
Gross margin from the solar segment is expected to be within the range of 28% to 31% mostly impacted by the Euro dollar exchange rate and an increased level of European revenues.
I'll now turn the call over to the operator to open it up for questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
Using a speaker phone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
We ask that you. Please limit yourself to one question and one follow up question per person you May then reenter the queue by pressing star one.
Again, Please press star one to ask a question will give everyone a pause a moment to give everyone an opportunity to signal for questions.
We'll take our first question from Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. Thanks for taking the questions I appreciate all the updates here in some of the moving parts on margins I appreciate them.
You guys walk us through that maybe on that topic first thrown in for you I know you had talked about.
In the past couple of quarters as well as on the recent analyst day that your target margins for the Inverters and Optimizer, specifically was 35, you know getting back to kind of that 35% to 30% level in the second half of 2022.
Given all that you're facing real time is that still the target for the back half of the year do you have visibility into that and maybe what are the one or two big pieces that get you from.
Kind of backing into kind of a low 30% gross margin for those particular products right. Now so there's maybe a four or 500 basis point pickup you need if you're still targeting that what where would you get that from over the next couple of quarters. Thanks.
Okay. So first of all thank you very much for the question, Brian . So first of all yes. The target is still as we mentioned in the analyst day to go back on the Inverters that all came out or optimizer is 235% to 37% gross margins and I think that when we are analyzing this and what should happen I think that we need to differentiate between items that are within our control.
Those that are beyond them in.
And the items that are within our control. The first thing that happens is that actually the fact that we are ramping Mexico very nicely next quarter alone.
The Mexico factory is supposed to provide about 20% of the products going into the United States and this.
But obviously it reduces the cost of shipment and the need for expedited shipment. The second issue that we do see as well is the fact that we continue to get components or expect to start getting components into more regular way that will reduce the necessity to air ship product in <unk>.
<unk> airship a components to their manufacturing sites and this is of course going to to impact as well and the third issue are the price increases that we have affected starting Q1 and will materialize into Q3 that are compensating for some of these elevated costs in some of the costs associated with.
Increased price of our components all of those items are within our expectation and we simply execute on them one after one quarter after the other.
Within the items that are not within our expectation is first of all the situation that we see on global supply chain, especially around what happens right now in the Shanghai and airports some of our components manufacturers Uh huh.
Have a logistic hubs there and this is something that may affect a little bit their supply of their components and some of the parts that we need into our factories is something that may necessitate more expedited shipments and of course. We also believe that this is something that may create a little bit more pressure on ports once this.
Traffic jams in Shanghai is going to be released the last issue that is beyond our control is actually the euro versus the dollar currency our sales in Europe are growing.
Bye bye absolute value and also sometimes as a percentage of the revenues and when we see dollar to euro that if im looking sticking right now the rate is at the lowest part since 2002. This is something that has impacted us when we of course are can affect some price increases.
But they do not have an immediate effect so with all those items within our control. This is the target and we believe that we can achieve.
And we hope that you know things will set a little bit in Shanghai and our debt.
That currencies will not work very much against us.
Alright fair enough that that all helps so it sounds like if I summarize here, you're sort of looking at margins dropping here in Q2 and depending on some of those factors you don't control even with.
The shift to Mexico manufacturing lower freight expenses, you should see a meaningful margin pickup into Q3, and then even into Q4, that's the fair way to summarize that.
That's correct yes.
And then second question on batteries and I'll pass it on.
I appreciate you've given us the E. S. P on the inverter side, so when we kind of back into the 100 megawatt hours of shipments here this quarter.
It implies somewhere in the 350 to $400 per kw age range is the implied ASP for the residential battery.
First is that kind of the right ballpark to be in and second are there pricing increases on that product to either being.
Contemplated or having already been implemented that'll push that number higher as we move through the year. Thank you.
So Brian Thanks.
The the number is not fully accurate because of the difference between shipment and revenue. So so while we shipped a 100 megawatt hour. This this quarter, we did not recognize revenue on 100 megawatt hour this quarter and Thats part of where the the.
The misalignment is coming.
And but the second part of the question is yeah. So theres been a we've implemented.
<unk> implemented a price increase on the batteries we typically.
Try not to increased pricing retroactively on on orders that customers gave us a significant time in advance. So that's why it takes a little bit longer to materialize and that's what our when I mentioned that some of the price increases that will materialize in the second and more.
Significantly in the third quarter are on the battery as well.
Okay. Thanks, a lot guys I'll pass it on.
Hey, Thanks Rodney.
We'll take our next question from Mark Strouse with Jpmorgan. Please go ahead.
Yes, thank you very much for taking our questions.
You talked about strong demand in U S, but obviously getting a lot of questions on the anti circumvention case or just wanted to specifically asked what what you were hearing from your customers in that region.
And kind of what you're expecting and what you are baking into your guidance into Q.
So first obviously like like anybody else in the industry. This are these type of unpredictable disruptions are not healthy.
For the business for the market and and especially for the current dynamic where we're this energy transformation is critical to our to all of US. So it's not a good situation for anybody.
That said taking into account that a big portion of our business is outside of the U S and and while some people predict it as a result of that module prices might decrease outside of the U S and there might be a an additional cause for momentum we're not seeing that outside of the U S and the business is.
Strong in module prices are stable and modules are module availability is good in terms of within.
The U S. We have other.
Other than hearing concern, we haven't seen any type of a push out delay or or changes to any of our backlog in business for sure not in residential and also not in and CNI and we don't expect it to have a short term.
Impact definitely not in Q2, and probably not in Q3 as well if it continues.
The backlog is a is very strong and.
And and just the amount of calls that we're getting for expedite expediting us and is an indication of a of a the situation that that said, our new project development for larger scale projects.
Into the end of the year and the beginning of next year could be impacted in particular in our large C&I are where we are active in and and utility, but but that said again the U S commercial.
<unk> is an important business to us it's not a very high percentage of our total business.
Right. Okay, and then just as a follow up I was just hoping you could give a bit more color on the component constraints that you're talking about just maybe a bit more color on what those are and then kind of the time that's needed to not only qualify an additional supplier, but for that supplier to ramp up with you.
I think.
We can separate it to our tactical and strategic and.
On a tactical level.
You mentioned some of our.
You know large U S a.
Component suppliers have distribution hubs in the Shanghai area, where they are.
Where they where from where they distribute their components after their.
Packaging processes and in Asia. So so there's a lot of tactical tackling going on in terms of getting stuff in and out of Shanghai or some of the other affected locations in in China.
You know, we're like everybody else, we're waiting for the situation to ease I think indications are that it's improving but obviously that's going to be a process because with the congestion at the port is coming in and out even if as things begin to relax.
It's going to take some time for the for stuff to flow through a freely.
On a more strategic level when we look at the ramp in our business and especially project into 2023.
We're already talking of volumes of components that require a call it attention.
And and real high volume long term agreements with some of the the component suppliers and that's something that we've been active in the last three months is really going between them meeting sharing our forecasts aligning with many of them that are placing a renewable energy higher.
Here on their priority list and making sure that as part of their expansion plans for the next.
12 to 24 months, they're building and the type of capacity that we expect to need.
Looking at the momentum.
Of our of our business and this is across the board it's a it's.
It's transistors, it's <unk>, it's asics from the foundries.
With each one of these key suppliers are we are aligning the.
Midterm, our forecasts and building the relationship to to ensure the supply.
We need so the short term.
We hope that as a challenge is he's in so high in particular and in Asia in general the flow will resume and it will make our next couple of quarters or especially from Q3, a bit easier looking into 'twenty two 'twenty three it's really.
You're already about the increasing significantly the capacity at some of our suppliers in a more strategic relationships with some of these are a key component manufacturers.
Okay very helpful. Thank you.
We will take our next question from Laura Sanchez with Morgan Stanley . Please go ahead.
Hi, Thank you for lines. Thank you for taking my question I think if I can go back to the DMC investigation.
I'm wondering do you think installers have sufficient inventory to supply demand for the rest of the year or is it that you.
Can pause, but higher cost to customers in case, they start importing from China.
So I think it's probably a little bit of both and obviously it starts with the distributors and and I and I believe in particular for residential the.
The distributors, probably have some level of inventory and the the distributors and installers still have some room.
To modified pricing without impacting demand.
At a certain point.
At a certain point, obviously, that's that's the.
The increasing pricing is going to begin to impact our <unk>.
To impact the demand so I think the duration of this.
Unstable environment is going to be critical to understand if it's a if it's a bump that just because the whole industry is driving so fast we're going to pass over without a major impact or if it's a a longer and higher bump. It will begin to have some impact.
Towards the end of the year and beginning of next year, starting from a utility obviously, which has already impacted than then shifting over to two C&I and maybe eventually reaching.
Our residential but probably it will take longer for that to happen and and hopefully this whole crisis will be resolved.
Fast enough not to see this type of dynamic.
Understood.
A quick follow up do you think.
Let's see that supply.
For south eastern country.
Do you think it's possible that they can start supplying the strong demand in Europe in which case you highlighted this for a lot of your revenue.
The question comes from Europe , So I'm trying to say.
RSV is there could be if we see it now.
And in fact in the U S from the DLT investigation is that could be potentially offset by stronger demand in Europe , especially is.
There is a manufacturing constrained that now those four south eastern countries could supply.
I think and again I'm not not necessarily that they have exact data, but naturally that makes a lot of sense and there has been some.
Messaging about our module companies that are diverting our capacity module capacity that was intended for the U S to Europe and and the rest of the rest of the World and then in theory that could lead to a you know definitely to robust supply maybe to oversee.
Supply in some price decreasing and ER and even further.
Momentum in in Europe , which.
Which we potentially could capitalize on but to be to be Frank the momentum right now in Europe .
<unk> is so strong that it doesn't need another push.
And the the bottlenecks for the rate of installations in Europe is beginning to reach the point, where their labor is a is in shortage and and some other other elements. So the momentum is so strong that not necessarily will it become much stronger even when modules.
Intended for the U S are diverted.
To Europe , but but that could happen and definitely in some countries that are more price sensitive for instance in Asia.
The availability of of modules could boost project development rates in countries like.
Thailand, Taiwan.
Philippines, and other places, Japan, and and create a momentum over there, which which again, we would we would benefit from but but.
Again.
There is potential for this to happen I think it's still early on to say that this is really the dynamic that is happening and really how quickly the situation is.
Addressed by the administration and resolved here in the U S is going to determine if a if that dynamic evolves or if we're back to some form of of business as usual if you will.
Yeah. That's very helpful. Thank you so much and I think you touched on the labor restriction.
Last question here could you comment on the sales channel and your ability to continue to get my question in Europe , because that does seem to be an area of concerns that we're hearing about.
No.
If I understand correctly separating the question into two the Europe .
Installation rate of solar in general is Ah is growing significantly and we see this in Italy, we see this in Germany, a lot of the items that we share the tooling by our European General manager at the Analyst day in terms of of what's happening in in in Europe that is a market.
NAMIC, it's not related to us and that market dynamic in some countries is.
He is approaching the constraint of availability of installation.
Crews are some of the countries in Europe , we're relying on a lot of installation crews coming from the Ukraine and and that is is obviously.
Issue, so so Europe could probably grow faster than our than what we're seeing right now, but it's a little bit but labor availability is is.
<unk> is a bit of a constraint for the for the momentum of growth being even stronger than what it is today.
Now how does that impact us obviously, we're very strong in Europe , where our presence in all of them are present in all of the countries that are growing.
Growing we're present in the segments that are growing which are residential and commercial so so we are.
Benefiting from that and we're very focused on not being the limit there by supplying our product to our to all of these installations that are that require them. So also in our judgment there is.
Optimism about the current and momentum in Europe , and the fact that it's likely to become even even stronger.
And this is even unrelated to the whole dynamic in the U S. I hope that's not too much detail, but it kind of gives you the picture, which is obviously a complex one right now that's very helpful. Thank you so much.
Yeah.
We'll take our next question from Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, good afternoon, thanks for the time and the opportunity I just wanted to go back to the gross margin conversation that we were starting with earlier and just try to understand a little bit more in the back half of the year, specifically on Asps and pricing increases you talk about that are really kicking in and talk about you know third quarter.
Didn't define the magnitude quite yet, but can you talk a little bit I mean, obviously ASP is here in the first quarter.
Up a nice amount on the core solar side can you talk a little bit more.
About the order of magnitude, we should be expecting here and basically just did you hear you a lot about this as as both the shipping and logistics considerations ease themselves up with Mexico and as Asps improve.
How meaningful of a gross margin improvement can we see it is about reversing your trends, whereas about.
Better than that if you will.
So thanks for the question Julien first of all.
From price increases that Mr. <unk> that we're using is the fact that we usually do not increase prices on the orders that we already have and in some cases, we have orders that were given to us, let's say in the first quarter that wind and extended into the second to the third quarter. When we increased prices we are not increase.
And on those orders that we have already received confirmed and confirmed pricing as much as we can do that so in that case. The reason that things will materialize towards Q3 is mostly related to the timing and to the shipment times and and delivery times that we have come in.
In general I can tell you that we have commissioned our price increases of high single digits moving across our regions and across product because in some cases like in the commercial product, we see sometimes higher competition in Europe coming from some players agent.
Here that are not really increasing prices and have relatively good availability of product that means that our ability to raise prices is not very large in some cases, we could be a little bit more are free to to increase the prices. So in general.
We have increased we are trying to increase the prices only on those areas that are related to the fact that we see inflation in the cost that are associated with our manufacturing and shipping we're trying not to pass to customers all of those I would call. It expenses that are created due to the <unk>.
Fact that we're catching up very big demand that we see with building the our supply for this one.
But in general this is how we treat these cost increases when we talk about the magnitude.
As I mentioned in my.
Our prepared remarks, when we looked at Q1 compared to Q1 last year, which by the way prices in Q1 last year were already elevated we so about 480 additional basis points on the cost or actually a loss of about four.
480 basis points, just compared to last year, we believe that going back to Mexico from logistical only and we expect that going back to Mexico and starting to manufacture from there we will take the lion part of it we're not sure that it will take everything away because we do here and we do know that you know.
Gas prices are going up and in and therefore also a logistics from Mexico into the U S is more expensive, but at least you don't need to do the expedited shipments and you do not need to do this this kind of ocean freight where you pay about $20000, sometimes for a container to go from China or Vietnam.
To the United States. So in general I would say that the potential from logistic alone is is this about a 480 basis points. Other than this there are other potentials that we see and again there are more related to the ability to source components and prices are that we can.
Some cost that we can decrease once we have stabilized our R&D organization doing cost reduction and not just a qualifying new suppliers.
No.
Again, we feel comfortable with the ability to go back to this 35% to 37% on the Inverters and Optimizer is we believe that everything that is related to US has the potential to go to these numbers from where we are today, maybe slightly better but again, we do see phenomena that are now pushing on the other.
Direction like currencies.
And the result is that we feel comfortable with everything that we shared in the analyst day.
Got it excellent and just to clarify that on pricing a little bit more you said pricing high single digits, you were up 6% here in the quarter at least on the core ASP per watt metric you disclosed so kind of a 3% increase in the back half of the year I know, it's apples and oranges, because you didn't quite frame. It the same way I just wanted to.
The order of magnitude that's still left in that ASP increase again I get that it's comparable.
Okay. So it's not necessarily because part of the 6% is also related to mix changes between our U S and Europe . So I would say that I would believe it that about roughly half of it is still a is still there to to utilize.
Excellent. Thank you so much.
Okay. Thanks.
We'll take our next question from Philip Shen with Roth Capital Partners. Please go ahead.
Everyone. Thanks for taking my questions. The first one's on accounts receivables are the number was up $220 million or so in.
In Q1, our Rona and I think you've talked about.
Revenue being up but when you look at it from a days outstanding perspective, I think it went up from call. It 70 or 65, historically to 93 or so in Q1 can you talk through a little bit more what's going on there. Thanks.
Sure of course.
So I think that the phenomena is mostly related to first of all as you mentioned you know.
The absolute value is related to the fact that we have higher revenues.
Actually the phenomenon that you see is also related to the pattern of when we are shipping to our customers and our Q1 in particular is a complicated quarter because of Chinese new year during Chinese new year in some cases, you're not manufacturing at all.
And ports in China are mostly closed in our case during Q1, we actually paid to our contract manufacturers to maintain operations almost as usual, but still ports were not open so that means that a lot of our shipments at least related to Q1, where a more back end loaded simply because.
Of this our closure of the Chinese new year and this of course is increasing if you look at I would say and by the way. This is a phenomena that we also saw in Q4, given the fact that we needed to pick up from our shutdown in Vietnam and again, China needed to grow relatively quickly and then Vietnam.
It was open so again it was a little bit of a back end loaded in general I can tell you that our payment terms to customers are not changing our they're ranging between a usually a 30 to 60 days in general and and this is not.
Changing at least as far as we see right now and most of the phenomena that you see is simply related to the patterns of shipments within the quarter again, we hope that once we will have.
The more our capacity in Mexico, the more we are regulated and being able to really produce an irregular manner throughout the quarter. Then we will see the DSO going back to the levels that we used to see before.
Great that makes a lot of sense. Thanks, and then on in terms of the battery megawatt hours recognized in revenue.
Can you share what was recognized in Q1 and then how many megawatt hours do you expect to recognize in Q2 and three I know you give the shipment.
Expectations, but in terms of revenue recognition that would be great. Thanks.
So in general feel it's usually between seven we usually recognize as long as we're growing by the way because you know once once it stabilizes the manufacturing everything that you do not recognized in one quarter you recognize in the next so you're very much stabilized I think that's right now in the pace of growth and as you can see we grew about 100%.
From Q4 to Q1, and we expect to grow above 100% from Q1 into Q2, we recognized I would say roughly around 70% to 80% of the revenues from batteries in the same quarter and the remaining part is simply delayed to the other one. This is also by the way very much.
Dependent on how much you're shipping into Europe , because we're manufacturing in Europe . So the more matter of fact shipping we see in Europe . The quicker we recognized this quarter, we had a little bit of a higher shipments into the United States. So this also affected so short number is about 70% and reasons where a detailed.
Great.
Thanks for taking the question so I'll pass it on thanks.
Thanks.
We'll take our next question from the heap.
<unk> with credit Suisse. Please go ahead.
Hey, good evening and thanks for taking the questions.
Just on Europe , just going back to it could you just talk more about which countries do you see more demand from in Q1 and Q2.
And just stepping back like how should we see European share grow in Q2 in the second half splits us.
Q1 thanks.
Thanks Manny.
As we detailed it it was a very broad.
Hmm.
Wave or momentum in Europe , covering also the large countries like Netherlands, where we had a record quarter in Germany, where it was maybe not a record quarter, but still it was a very.
Very strong quarter, and Italy are at which because there's some.
Local government incentives is a very dynamic.
Dynamic markets right now, but what was interesting is that also smaller countries or markets like Austria, Switzerland.
In Poland for sure are becoming a sizable market and they drive a for it to increase installation rate is happening all of these because they are all affected by by higher electricity.
Electricity prices and if you assume that those electricity prices or not.
I'm going to go down anytime soon.
Then then the expectation is for this momentum to continue we are definitely in our projections for Q2, there is a nice growth.
In Europe , and and again, we assume that continues.
And in parallel also our battery shipments in battery attach rates.
The increase in these markets, Germany is a very battery heavy a country, but are the other markets like the.
The U K, Netherlands, and Italy until a couple of quarters ago, we're not so heavy on batteries and right now our <unk>.
<unk> with a lot of battery installation. So it's kind of an exponential effect. We're also where solar installation rate is going up and the revenue per installation, if you will or cost per installation is going up.
Go up as well so we are projecting a continued a strong momentum.
In our in our numbers coming from from Europe .
And then.
These sites are already at the 200 megawatt run rate closer to that one gigawatt capacity from Samsung.
So can you talk about like the sources of new supply come Q3, like we will sell it to be able to contribute to that or do you expect to expand your relationship with Samsung here. Thanks.
I'm sorry.
No.
We still have a fair runway on the AR on the Samsung sells.
And and sell it to will not will not be supplying cells for a battery assembly in Q3, we still have the whole qualification process to.
We go through and then and then and with battery cells, there's a longer period between when it's when it's.
Manufactured until it's a it's actually when the seller is manufactured until it ends up in a installed battery.
So.
This year will be completely dominated by Samsung and then next year at the beginning of the year it will be a mix.
And and by then we will need to decide at what rates.
To augment our own supply with supply from from from others or particularly from Samsung.
Uh huh.
Dynamic that is a that is very open to us. So so at some point, we'll look at the projections and see how quickly sell it too is ramping to the volumes that we need and if we need more we're pretty positive that we'll be able to extend the Samsung.
Contract and volumes.
Thanks for taking the questions.
Thanks, Mike Thank you.
We will take our next question from Colin Rusch with Oppenheimer <unk> Company. Please go ahead.
Thanks, So much guys could you talk about the availability of.
The capital come in for the battery ramp up are you guys seeing donegal enough on that front any changes in personnel.
Now that that ramp and the build out.
No that's pretty much done.
<unk> is all in the factory. It's all running we are very close to completing the <unk> unit process qualification and now are beginning the integrated factory level a quantification. So so in that regard, it's it's a it's behind us.
<unk> for the.
Two two and a half gigawatt hour that we wanted to start with from an equipment point of view as all are all there and all installed.
When we come to.
Two are ramping phase two that's when we'll start looking again of where capital equipment is a is going to be but but we don't expect issues and it's not an issue right now for us.
Okay. That's super helpful. And then just in terms of source of material for the ramp up could.
Could you talk a little bit about how those contracts are structured and how much variability you have 10 months from an input.
What cost perspective.
Sure. So so first of all you know when you design a battery of once you've locked the chemistry or very much locked with the with the vendors that you have so in general.
The the materials that you are going to use our determined and usually go into supply agreements with your manufacturers.
The most important will be the cathode materials electrolyte and added materials and in general we have those in places. So the work once you have the agreement in place is the fact that you give a kind of a rolling forecast and you are need we basically need to make sure.
The rolling forecast is is matching what you're supposed to make right now our relationship with all of the vendors related to the sale that we will manufacture and sell it to our established the quantities.
And expected quantities were provided to them and at least right now we do not see any issues with ramping as we plan.
Excellent. Thanks, so much guys.
Okay.
Ladies and gentlemen, as a reminder, if you'd like to ask a question or have a comment you may do so by pressing star one on your Touchtone telephone star one for questions.
We'll take our next question from.
Kashi Harrison with Piper Sandler. Please go ahead.
Good evening and thanks for taking the questions.
Maybe first one for me.
Rona and you highlighted improving operating leverage in your prepared remarks I was wondering if you could maybe walk us through how we should be thinking about operating expenses entering Q2. Since this is becoming a since operating leverage is becoming more of an important piece of the story and then I was wondering if you could also share how much working capital you expect to spend this year.
And then finally, the rest of the world our volumes were down year over year. If you could just walk us through that that would be great. Thank you.
Okay. So let's go.
Let's actually start one by one.
So and if there are.
I lost my train of thought so if you start with the first one.
I do not operating leverage right caching yet.
Yes.
Okay, so for operating leverage.
Leverage there are two phenomena that we've seen in Q2. The first one by the way is the fact that we see revenues continue to increase and as you saw in our guidance, we're guiding for a $710 million to $740 million. This is approximately.
You know close to 10 or even more than 10% increase we do not expect to see.
Expenses growing usually in the second quarter of the year, we have one phenomena, where our salary merit increases are taking place. So you see a little bit of acceleration in the operating expenses in this quarter that is then.
Going down to a little bit during the.
Second sorry into the third and fourth quarters. So I think that you know when we shared the model of the analyst day, showing that that we should end up at approximately 20% of operating profit and having that that implies.
I would say, 10% to 11% of operating margin or operating expenses out of their revenues. This is the number we're still aiming this is what we see we get a little bit of help here now by the way from exchange rate because whatever we are losing on the revenue line in Europe , we're actually euro where.
Saving on the expenses.
Expenses size on the shekel, the Israeli shekel weakening and the Euro and again, we believe that this is on track. So you may see in Q2 at least on the expense side youre going to see a little bit of a hike up that will be slowing down in Q3, and you will see the jump in revenue.
That we saw when and this will lead us.
Into that stage second question was what working capital.
Working travels already Kashi and thank you very much for remaining so actually we expect to see the usage of working capital reversing already in Q2, and we expect for the year to be generating a substantial amount of cash flow from operations. So in that sense. The working capital needs that we saw in Q1.
We view it as relatively unique and not something that will correct or is the the expectation or it did I would call. It the remaining of the year.
Okay.
Yes.
Yes, it's more of an internal prioritization Q4, we delivered a lot to to rest of world and particularly to our to Asia, and and we balance that out in Q1.
Using what we have.
Sure.
We are a supply constrained not demand constrained and we probably could have delivered.
<unk> delivered a record a revenue to to rest of world as well this quarter.
From from a megawatt perspective.
But but with the capacity that we had and what we delivered in Q4. This quarter was indeed, a lower quarter in the hour W. Compared to what we wanted to ship to Europe and the U S.
Excellent. Thank you very much.
Thank you.
At this time, we have no further questions in the queue I would like to turn the conference back to survive lando for any additional or closing remarks.
Thank you Keith Keith I'm, just wanted to thank everyone for joining us today take care and stay safe and see you in another quarter. Thanks.
Thank you ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
Okay.
Hum.
Okay.
Hum.
Uh huh.
Okay.