Q2 2022 Solaredge Technologies Inc Earnings Call
You are currently on hold for full lot edge conference call for the second quarter ended June 30 of 2022 at a time assembling today's audience and plan to be underway. Shortly we appreciate your patience and please remain on July .
[music].
Welcome to the solar Etch conference call for the second quarter ended June 30 of 'twenty 'twenty. Two this call is being webcast live on the company's website at Www Dot Sola S dot com in the Investor.
I suppose section on the event Calandra page. This call is the sole property and copyright of solar at least all rights reserved and any recording reproduction or transmission of this call without expressed written consent of solar etch.
It's prohibited you may listen to a webcast replay of this call by visiting the event Kolenda page of the solar etch investors website.
All participants that would like to ask questions. We ask that you limit to one question and one follow up questions only I would now like to turn the call over to MS. Erica Mannion of Sapphire Investor Relations Investor Relations for solar H.
Thank you. Good afternoon. Thank you for joining us to discuss <unk> operating results for the second quarter ended June 32022, as well as the company's outlook for the third quarter of 2021.
With me today are Steven Lando, Chief Executive Officer, and Ron and fire Chief Financial Officer, who will begin with a review of the results for the second quarter ended June 32022, Ronen will review the financial results for the second quarter, followed by the company's outlook for the third 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 Armitage.
All material contained in the webcast is the sole property and copyright of solar edge technologies with all rights reserved. Please note. This presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U S. GAAP.
The non-GAAP measures are presented in this presentation as we believe they provide investors with 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 June 32022 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 Steve.
Thank you Erica.
Good afternoon, and thank you all for joining us on our conference call.
This quarter once again, we saw record revenues for the company led by record revenues from our solar business in the United States and Europe .
Our growth in the United States reflects record megawatt shipped of commercial Inverters.
Which is more than double from the previous quarter.
This is a result of the strong commercial and community solar momentum.
Where we are well positioned.
We expect this market to continue to grow, especially in light of the most recently proposed bill and its favorable terms for commercial and community solar projects.
Additionally, this quarter, we saw a 12% quarter over quarter increase in residential inverter megawatt shifts to the United States.
In Europe , we hit record megawatt shipments of both commercial and residential inverter.
The strength in Europe led by record revenues in 14 countries, most notably in Italy and in Germany.
Outside of Europe , and the United States, we are seeing particular living profit with momentum in Brazil, Australia, South Africa and India.
While our shipment rate continues to increase channel inventory remains low due to the very high rates of installations of our products.
During this quarter more than 160000, new sites were added to our monitoring platform.
Bringing us to a total of more than 2.8 million monitored sites around the world.
For clarification purposes, a single site can be anywhere from a residential home installation of 2.5 kilowatts to a 77 megawatt sites like the one we discussed last quarter in Taiwan that was recently commissioned.
The importance of this indicator ends up getting these sites installed sometimes at the cost of expedited shipments is that many of these sites are potential for follow on revenue in the future as we expand our portfolio and offering a commercial storage residential than commercial EV Chargers and other hardware and software.
Our product and services.
Yeah.
Overall this quarter, we shipped $5 2 million power optimizer and approximately 230000 inverters both below our original plan for the quarter.
The main cause for this was the extended lockdown in Shanghai.
In fact think of suppliers backend manufacturing facility or a set of components used in our inverters and optimizes.
The lockdown create the discontinuity in our manufacturing and when the facility. Finally opened we expedited shipments of the components to our manufacturing facilities and the finished goods to our customers.
Recently, the event impacted our opening inventory for the third quarter and as such we will need to expedite some shipments this quarter as well to enable our customer installations to take place as planned.
Our battery shipments grew this quarter in line with our plans and reached 251 megawatt hour more than doubling shipments from last quarter.
We're receiving positive feedback on our battery in particular relating to ease of installation and commissioning time.
This quarter, we released a new software version that focuses on these elements and we've heard from installers about installation times in the range of 10 to 15 minutes.
Note that our average installation time is currently around half an hour and we continue to rollout the new software and training to enable improved experience in installation times across the installer base.
At the core of the simplified installation processes, our solo rich home networks wireless technology that links the inverter the battery and all of the related components in a seamless way eliminating the need to physically connected various system elements with cables and connectors.
Also related to our battery offering at interest owner in Munich in May we highlighted our soda rich home residential portfolio, which includes a renewal he introduced three phase Stoneridge home battery designed for the German and other three phase European markets. We began shipments of this new battery this quarter.
It's a high attach rate for batteries in Germany, we anticipate healthy demand.
The three phase battery also includes the solar at home network wireless technology discussed before.
Yeah.
More on the product side in residential in addition to the battery focus that I discussed we are working on releasing higher power inverters to address the global trend. We are seeing for larger size installations in particular and self consumption driven markets.
In the U S. We are ramping the 11 four kilowatt converter released a couple of quarters ago and this quarter, we released a 10 kilowatt converter designated for the Australian markets.
We expect this segments of large residential.
System, where we are particularly strong due to the favorable favorable economics of our D. C architecture to continue to grow with the relatively high attach rate of batteries.
In commercial we began initial installations of our renewed S 1400 power optimizer, which enables connection of two high powered GE 12 modules to a single optimizer, thus significantly reducing system cost per watt.
While ensuring full harvest of the power generated by the modules.
Also in commercial where we recently commissioned a 13 megawatts floating system in Taiwan.
As we discussed at the analyst day, our strengths of our architecture is the adaptability to the different applications of the commercial market.
All of which is the growing floating solar application, where in many cases the practices to apply rapid shutdown safety protection, even in countries, where it is not a regulatory requirements.
Moving to our non solar business.
Our revenues from E mobility declined this quarter relative to last quarter due to reduced demand from our customer which is in line with the overall automotive industry supply chain related instability.
Considering the continued lack of visibility in this space. We believe that revenues for this project this year will be lower than originally expected.
Moving to critical power.
This quarter, we made and implemented a decision to discontinue our standalone UBS market related activities.
At the time of acquisition four years ago, we saw this market as an additional pillar for the growth of the company expecting a potential inflection point in the <unk> markets.
At this time, however, considering the rapid growth and magnitude of the opportunities we face in our core solar market and.
As we believe that parts of the U S market will eventually converge with the solar plus backup market.
We judge that as both a technology, we developed and the teams. We built are best utilized within our solar organization.
As such we are discontinuing the development of UBS specific product and commercial operations in the Standalone <unk> market.
And the already developed technologies will be integrated in solar products.
Uninterrupted power supply becomes required where relevant.
Okay.
In this and in recent earning calls we have discussed the increase in demand we are seeing globally triggered by elevated power prices and.
In general transition towards renewable energy by corporations businesses and individuals.
Notably over the last few weeks multiple governments around the world have implemented or announced their intent to implement new policies aimed to accelerate installations of PV as part of their energy independence and climate control initiatives.
This reiterates the exciting opportunities that lay ahead for us and for our industry as a whole.
And with this I hand, it over to Gordon, who will review our financial results.
Thank you <unk> and good afternoon, everyone.
This financial review includes our 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 the amortization.
<unk> purchased intensive intangible assets impairment of goodwill and intangible assets stock based compensation expenses and certain other items.
Total revenues for the second quarter of 2022 were a record $727 $8 million and 11% increase compared to 655 $1 million last quarter, and a 52% increase compared to $481 million for.
The same quarter last year.
Revenues from our solar segment, which included the sales of residential batteries.
687, $6 million, a 13% increase compared to <unk> 608 million in the last quarter, and a 59% increase compared to 431 $5 million in the same quarter last year.
Solar revenues from the United States. This quarter were a record $398 million, a 17% increase from the last quarter and represented 45% of our solar revenues.
Solar revenues from Europe were a record $324 $7 million, a 14% increase from the last quarter and represented 47% of our solar revenues.
Sales in Europe are typically denominated in euros, and therefore, the devaluation of the euro negatively impacted our U S dollar denominated revenues and gross margin.
Specifically the impact of the euro devaluation between last quarter and this one translated into a reduction of $18 million in revenues.
And 240 basis points of gross margin.
Rest of the World Solar revenues were $53 $1 million, a 7% decrease compared to the last quarter and represented 8% of our solar revenues.
On a megawatt basis, we shipped a record 936 megawatts to the United States a record one two gigawatts to Europe , and 357 megawatts to the rest of the world.
Passing for the first time, two five gigawatts of quarterly product shipments.
51% of the megawatt shipped this quarter, where commercial products and the remaining 49% were residential.
This quarter. We also continued to see an increase in revenues related to our batteries that are currently sold in 12 countries.
Of the batteries that we shipped this quarter, 75% were shipped to Europe , 21% to the United States and 4% to the rest of the world, where with first shipments and installations in South Africa.
ASP per watt, excluding battery revenues this quarter was 23 six cents.
A 12% decrease from 26 nine cents per watt last quarter.
This ASP per watt. The decrease is a result of a growing portion of commercial product in our mix.
The geographical mix that lean towards Europe , where.
Which was subject to currency rate erosion of the euro against the U S dollar.
This ASP erosion was partially offset by price increases implemented in Q2 that will be fully materialized in Q3.
This quarter, one U S customer accounted for more than 10% of our solar revenues.
Revenues from our non solar businesses.
$14 million.
Most of which came from our E mobility Division.
Consolidated GAAP gross margins for the quarter was 25, 1% compared to 27, 3% in the prior quarter and 32, 5% in the same quarter last year.
non-GAAP gross margin this quarter was 26, 7% compared to 28, 4% in the prior quarter and 33, 9% in the same quarter last year.
Gross margin for the solar segment was 28, 1% compared to 32% in the prior quarter.
The quarter over quarter decline in gross margin is the result of few factors more battery revenues in our overall product mix euro to dollar erosion as discussed above a higher portion of commercial sales and expedited shipments related mostly to the supply chain issues discussed by the <unk>.
<unk> margin was lower than the accumulated impact of all of these factors thanks to price increases implemented in prior quarters.
Heading into the third quarter, the current USD to euro rate exchange rate will offset the price increases that we have implemented in Europe .
Good subject to tariffs excluding batteries shipped to the United States from China accounted for 31% of our U S. Shipments. This quarter. This is a slight decrease compared to 32% in the last quarter and it was mainly a result of increased supply to the U S market from our manufacturing facilities.
In Mexico, where ramp up continues as planned.
Gross margin for our non solar segment was two 7% compared to five 6% in the previous quarter.
Mostly driven by high margins in the storage division and lower margin in the E mobility business, a result of lower volumes.
Yes.
Our GAAP gross margin included a write down of $4 $3 million. This quarter as a result of the discontinuation of critical critical power division related activities.
On a non-GAAP basis operating expenses for the second quarter were $109 $6 million or 15, 1% of revenues compared to $98 $9 million or 15, 1% of revenues in the prior quarter and $81 5 million or 17% of revenues for the.
The same quarter last year. The main reason for this increase compared to the previous quarter is the annual merit increase to our employees' salaries and its impact on vacation accruals as well as the pickup in marketing activities and trouble.
Our solar segment operating expenses as a percentage of solar revenues were 13, 7% compared to 13, 9% last quarter, representing an improved operating leverage as our revenues continue to expand.
Our GAAP operating expenses this quarter included a $4 million write down of goodwill and intangible assets related to the discontinuation of the critical power segment activities.
non-GAAP operating income for the quarter was $84 $7 million compared to $87 $2 million in the previous quarter and $81 3 million for the same period last year.
This quarter, the solar segment generated operating profit over $99 $2 million compared to an operating profit of $98 $7 million last quarter.
The non solar segment generated an operating loss of $14 $6 million compared to an operating loss of $11 $5 million in the previous quarter.
non-GAAP financial expense for the quarter was $29 million compared to a non-GAAP financial expense of $4 $9 million in the previous quarter. A result of the erosion of euro denominated cash balances and euro denominated accounts receivable balances.
Mounted to $239, seven euro and $354 3 million euros, respectively.
Our non-GAAP tax expense was $7 million this quarter compared to $13 5 million in the previous quarter and $10 $5 million for the same period last year.
GAAP net income for the second quarter was $15 $1 million compared to a GAAP net income of $33 $1 million in the previous quarter and $45 1 million for the same quarter last year. Our non-GAAP net income was $56 $7 million compared to a non-GAAP net.
Income of $68 8 million in the previous quarter and $72 5 million in the same quarter last year.
GAAP net diluted earnings per share was <unk> 26 for the second quarter compared to 60 in the previous quarter and 82 for the same quarter last year.
non-GAAP net diluted EPS was <unk> 95, compared to $1 20 in the previous quarter and $1 28 in the same quarter last year.
The unrealized financial expenses related to foreign exchange had negative impact of 25 cents on our non-GAAP EPS.
Turning now to the balance sheet.
As of June 32022, cash cash equivalents bank deposits restricted bank deposits and investments were $1 $6 billion.
Net of debt this amount is $973 $3 million.
During the second quarter of 2022, we generated $77 $4 million of cash in operating activities, representing a return to cash generation after the last quarter cash consumption.
Our net decreased this quarter to $669 $1 million compared to $676 $8 million last quarter.
As of June 32019 to 20.
'twenty two sorry, our inventory level net of reserve was at $473 million compared to $432 $5 million in the prior quarter.
This entire increase is related to increased level of raw materials battery cells and component inventory in the solar segment. While our finished goods inventory continued to decrease as a result of growing demand for our products.
Turning now to our guidance for the third quarter of 2022.
We're guiding revenues to be within the range of $810 million to $840 million.
We expect non-GAAP gross margin to be within the range of 26% to 29%.
We expect non-GAAP operating profit to be within the range of $90 million to $110 million.
Revenues from the solar segment are expected to be within the range of $765 million and $795 million.
Gross margins from the solar segment is expected to be within the range of 27% to 30% mostly impacted by the Euro dollar exchange rate and amplified by anticipated increase in European revenues within our overall mix.
I will now turn the call over to the operator to open it up for questions operator. Please.
Thank you, ladies and gentlemen, if you would like to ask a question. Please state now by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to all of you. Thank you.
To reach our equipment, we ask that you limit to one question and one follow up questions only well pause for just a moment to allow everyone an opportunity to signal for question.
We will now take our first question from Stephen Byrd from Morgan Stanley . Your line is open. Please go ahead.
Great. Thank you very much I wonder if you could just speak to your your thoughts on.
The draft legislation in the United States and just want to make sure just at a high level that we're thinking through all of the potential.
Elements that could benefit you what what you were I know theres a lot to digest in the language, but just as you look at the support that that could be coming in the U S. How do you think about the potential impacts.
Yes.
So obviously it is a positive even before discussing the content itself just for the fact that it gives us stability and visibility to the overall industry.
Then looking at the content itself.
Has has favorable.
Acts in.
Many of the segments that we serve as I mentioned.
Our focus on.
On commercial in general in community Solar in particular, which is a segment that we've been.
Having good progress in the last in the last 12 months or so as well as for obviously for residential and for storage. So we feel that it is has a potential positive impact across all of our business lines.
And and we are studying the other element is related to.
Potential benefit for local manufacturing and elements like this.
In my remarks.
On the heels.
Similar although in a very different type of.
<unk> and policy as announced in various countries recently in Germany.
There was a significant or meaningful update to the feed in tariff on top of the very aggressive.
Plans that were introduced a couple of months ago in Italy.
There were some very strong.
Our government commitments and incentives presented for growth in the.
Agricultural photovoltaics.
Segment, which is a subset of the commercial segment, where we have and we believe are good.
Offering so overall, it's very evident that there is a very strong dry globally and here in the U S.
The recent toward the intended bill.
It comes.
As the North American share in that.
That momentum.
And of course, we are we see as positives are excited about it.
Thank you and if possible I just wanted to.
A follow up on.
Mark you made about.
Pricing that you see the ability to increase price and help offset some of the some of the headwinds on margin and things like exchange rate the.
More broadly just given the magnitude of demand I guess, we're hearing some commentary from a number of companies that with you know kind of just what you just said that the demand is so strong in places like Europe , and the United States.
And also the clean energy look so much cheaper than.
Sort of conventional energy.
Do you see that sort of pricing power extending beyond just the next quarter or do you see some ability for margins to.
Do you expand given you know that clean energy does look so much more attractive and that demand is just so incredibly strong in other words how are you.
Helper system might your ability to extract better margins over time via pricing as a result of all these dynamics we've been talking about.
Okay.
Maybe try to divide the answer to do and Hernan will back me up with additional information.
Mhm approach has been to increase prices to compensate for the increase of costs related to raw materials.
And all other.
Standard elements of doing business in.
We have been implementing those price increases gradually over the last two or three quarters, we as a policy tend not to implemented on existing backlog for the most part and implemented on orders going forward. So that's why it takes a little bit longer to do.
To affect our our asp's and resulting bottom.
Bottom lines.
What we did not do and we don't intend to do is where there are one time or or what we call transitioned.
Transition aerie challenges like factories clothing, and then the need to expedite and things like that those type of.
Of course, we typically incur in.
Automatically move them on to.
Do the customers in terms of looking forward I think the opportunity is more than the fact that the systems are becoming larger.
More complex and include more elements like batteries and accessories.
All of which.
Give an opportunity to improve.
To improve our margin and that comes back to what I commented also about the larger inverters in the larger system.
And EV Chargers and such elements.
That is where we see good opportunities to do.
Improved margin and we are also seeing I would say our early signs of some improvement in the cost structure around some logistic costs that are beginning.
To go the other direction, some raw material costs that are showing signs of.
Our first signs of decline et cetera. So we think that there is definitely potential for.
Gradual margin improvement in the coming quarters.
Not necessarily from direct.
Price increases on existing products.
And if I may add one more thing and this is a little bit related to the international.
I would call it aspect of our business. If you take for example.
Europe .
The average exchange rate for example for US during Q1 was approximately one euro and nine.
Dollar cents per euro at one dollar and nine per euro during.
During Q2, the average was about.
One dollar and <unk> and by the way right now we see that every euro as well as $1 <unk> and that means that if you take the overall price increases that we did in Europe reflected in the specific markets you see that in Europe , our customers. So a real increase in a relatively.
The large increase in prices because they paid in euro and they make money in euro while in our case. This increase was not really translated into gross margins simply because of the erosion of the euro against the U S. Dollar so I think that here.
Time, it is working against us and in other places where the euro will move more favorably it can help us but.
Not not every price increase or price change is directly impacting our gross margin immediately in the same direction that we've actually implemented it.
Thank you very much.
Okay.
Yes.
We'll take the next question from Brian Lee from Goldman Sachs. Your line is open. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions.
I had two here first one was.
Can you provide a bit more color on the China backend issue, which components specifically are you referencing were impacted.
And do you have any mitigation strategies in place. Besides the expedited shipments any new suppliers are working with our inventory bill or just anything else planned there.
To kind of get you over the hump from that impact and then I had a follow up.
So without getting to be too specific it was about three or four.
Component and as I said also for Inverters and also for Optimizer and the Lockdown was extended we actually were able at least for some of them to qualify alternatives.
In a reasonable amount of time and starts to.
To replace and that that's why the hit was less than it could have potentially.
Potentially have been.
And that's an effort that's been going on across the board.
Making sure that we have alternatives available to to the critical components that we use.
Think the caveat there is that the rate that our.
Matter of fact, we're capacity and demand is growing it's not only about quantifying an alternative it's also sometimes a suppliers need to.
Add additional lines and capacity to meet our elevated demand so.
Right now for this specific event, we were it's behind us.
And then and then.
As I said it was less.
Impacted us but to a lesser extent good out thanks to two we're quantifying alternatives.
Bonus to the ones that we were short on in this guidance.
Okay Fair enough and just my follow up was.
With respect to the margin guidance, I guess I'm sort of surprised.
<unk> guide for the solar segment is down a bit for <unk> from QQ, maybe talk to some of the dynamics there I know you quantified.
E V and run and the dynamics for Q4 acts and expedited shipments, but I guess as we think about the <unk> guide here how much additional headwind from Forex are you embedding whats the expedite cost impact and then just any other puts and takes if you can quantify and to sort of a basis.
Gross margin impact you are seeing and then also maybe within the context of that prior 35% to 37% gross margin target on optimizer and Inverters, you've talked about the second half that sure if that's still intact, but maybe.
Sort of help US bridge the gap here that'd be helpful. Thank you.
Sure.
So first of all.
The main or I would say the only impact actually on Q3 margin is foreign exchange rate changes.
In general in the volumes that we see going through Europe into Q3 every.
Cent difference or every lower euro against dollar rates by one cent is impacting our margins by 50 basis points.
And in general what we see and what we have planned for this quarter at least is compared to approximately as I mentioned, if our average.
U S dollar too.
U S dollar to euro ratio in Q2 was $106 per Euro we're now looking at one one.
S dollar to Euro and of course, you know the time that you were making the shipment very much.
The changes that you know because.
If you do more shipments towards the end of the quarter, where we don't know what is the exchange rate. This may change a little bit so in essence if.
If you take only dis, we're talking about 250 basis points that we expect this quarter to be impacted only by a gross margin no. It's important to say that exchange rate story and it's important to say the other thing and this is debt.
When we discuss gross margin there are always those elements that are within our control we are continuing to increase the.
Manufacturing in Mexico, and this is something that is happening in line with our plans. This quarter already we sold that we shipped although the percentage was slightly lower but since day.
Revenues that we shipped to the U S where record revenues and record megawatt that means that higher portion of units came from Mexico. This is something that we do and we were able to do to enjoy.
From a logistics point of view, we do see a little bit of an easing.
What we.
We see in prices for contracts at least for the next few quarters here. The lockdown that Phebe mentioned in Shanghai, not only creates a situation, where we paid a little bit more in Q2. It actually took away three weeks of manufacturing during the quarter that we know needs to expedite it.
Through.
Q3, but still by the way.
Had it been for the regular exchange rate, we would see our gross margins going up so to summarize it everything that is within our control is happening exactly as planned and everything related to the underlying permanent costs that we see for our products is actually improving include.
<unk>.
Components price reductions that we are now already starting to hear from vendors for the next quarters. This is a pure game.
FX rates at least in this quarter. The fact that this quarter will be much more heavy.
Sales to Europe , and the overall mix makes it a little bit more tough in the sense and this is why when we're looking at and we know that currencies are moving in the cyclical.
I would call it trends, we still believe that you know had it's been for a you know a one.
One <unk>.
I'd say seven to $8.
Dollars per euro and not to talk about higher rates, the 35% to 37% an optimizer as in Inverters is definitely our rates that we see feasible because all of the underlying costs are actually allowing you to do it in the pricing environment is allowing us to do this.
Okay. Thanks, a lot I appreciate all the color.
We'll take the next question from Philip Shen from Roth Capital. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my questions.
Just as a follow up on the margin theme.
I know you Havent provided Q4 guidance, but in the past you've talked about them healthy margin expansion in the back half and now with Q3 margins flat quarter over quarter. I was wondering if you might be able to help us understand the trends in margins in Q4, and Q1, specifically and then also coming back to the topic of the long.
Term, 35% margin target.
You know as you see the commercial mix growing much more.
Is that.
As realistic or a target or because of the mix alone it may not be as.
Achievable.
Okay. So again I'll start and again of course, we do not guide for Q4, and Q1, but but we do see the direction.
And I would like to go back to what we have discussed in the previous calls.
When we discussed the margin expansion or return to levels that we were we said that there are several elements that can get us there. The first one is to increase the amount of products that we're manufacturing in Mexico that will allow us to reduce the tariffs and will allow us to reduce the.
Ocean freight costs and costs.
Of taking these products into supply associated supply chain from China to the United States. This remains intact for Q4 as well we continue to see the ramp we've said in the past that we expect Mexico to be 100% run rate at the end of Q4, if everything goes to residential use this is something that we still are.
Have on site.
And this is a claim that is still valid. The other issue. We discussed is related to prices of components and this is actually again happening we already start to see that material prices related to aluminum and copper are decreasing there are far from the levels that they used to be in the past.
They are decreasing and this is something that we continue to see the same applied by the way for some of the components because we do see and we do talk to our vendors and we see that.
Some I would call it capacity that they could.
Online is materializing, which will allow us not only of course too.
Get the products at a lower cost, but it will also be in a more constant manner. So this is something that we expect into Q4 as well. The next one is actually continue with yields of the supply.
And when do you have more capacity and when you have with your lines working at full pace without being halted for a few weeks or days because of lack of shipments you are not paying to your contract manufacturers, what we call unutilized capacity charges that are going as Chargers.
Gross margin and again you are missing the outputs there all of these impacts are happening exactly as we as we have planned and as we have.
I thought they will the biggest change here is the exchange rates because when we were standing.
In Carnegie Hall, just just about you know like I think it was four months ago.
Change rates was 119.
Dollars per one euro its debt level the 36 to this.
36, plus minus 1%, even including commercial is holding.
And if you remember we even discussed it in my part that since we see that we're.
Residential products at that rate is about a 40% gross margin then we said that whatever we do in commercial is basically taking the margin down to the 35% to 37% so in that sense.
And you.
You know we could have been.
Euro rate was one plus 130, you know we were standing here, saying, how smart we are simply because we did everything but the fact is that from all perspective. This is a foreign currency gain more than anything else and under.
I would call. It you know again normalize 110, or one O $9 to euros. This is definitely.
Our target that we see feasible.
Okay alright, thank you.
As it relates to.
But in strip to Saudi Arabia recently Xavier I think.
You guys may have been one of the beneficiaries of that many strip can you talk about your recent trip there and.
Sure some more details on the agreement.
Put in place thanks.
Yes, Thank you Phil.
Yeah, I'll answer briefly the topic of renewable energy and climate changes.
Has a lot of governments and leadership around the world busy and what's interesting is that it's also in countries that are strongly linked to fossil fuels like in the case, though.
Saudi Arabia.
Push from the leadership over there to implement.
Renewable energies and solar in particular, focusing on on this new <unk>.
A very modern city that they're building.
And in that is supposed to be net zero.
With that we've been in dialogue with a.
Local company and signed this.
Mou agreement to explore what are the opportunities related to the new city unrelated in generality.
To this side of the market in the.
The nice thing was that this agreement with culminated in time, that's part of the visit of President bite into.
Saudi Arabia. So it was a very exciting and inspiring event it is not going to translate into.
Any type of meaningful numbers anytime.
Anytime soon but I think.
What we see is.
As positive is that an indication to the spread of the.
Our industry globally and the interest in the topic all over the world.
Yes.
The interest and the fact that they reached out to us as an indicator too.
Position and reputation that we built in the market.
As a leader not only in inverters within the energy transition.
At home so.
That's the background and the story behind visit.
Great. Thanks, I'll pass it on.
We will now take the next question from Matt <unk> from JP Morgan. Your line is open. Please go ahead.
Yes, thanks, very much for taking our questions.
So completely understand there is a lot of focus on FX on this call.
Ronan I am curious, though if you can talk about kind of the European gross margins, excluding FX and how we should think about those compared to the U S market is that still kind of a three to 400 basis point differential or reason to think that that improves over time.
So the problem is that it's very hard to relate to European.
Margins without looking at the exchange rates because the basic fact is that we are selling in euros and we're manufacturing in U S dollars. So by definition the.
Fixed rate is embedded now the question of whether it is a two to three basis points below it very much depends to where you are.
<unk> to those margins.
Okay, Yeah that makes sense.
And by the way and just to add and.
And just to add one more thing and this is the fact that again. It also relates to the mix of the products within within this market. So for example, if you have battery usually will be a little bit of a lower one.
It will be a residential systems and margins are a little bit higher and sometimes you'll see a little bit differences there, but in general I would say that the FX is the most.
I would say determining factor.
Okay, and then just a quick follow up.
I apologize if I missed it but did you give a megawatt hour.
Shipments or.
Revenue recognition target for the <unk> guide and just kind of generally how we should think about that over the coming quarters and years, if that if that has changed at all.
So actually we didn't give it but but I will just.
<unk> back to what we said in the previous quarters that we expected to grow to about 250 megawatt hour at quarter and to stabilize their we have reached this goal during Q2 and therefore, we expect to continue to be to be at that level. This quarter, specifically in Q2 and.
When when the Q will be filed the first.
It'll be you'll be able to see we recognize that approximately.
$105 million of.
Our revenues, which is still lower than the number that of revenues that were shipped in from next quarter, it's going to be almost one to one what we shipped in what we recognize because we are going to be at the same sites or same volume of shipments.
Got it thank you very much.
Next up we have Julien Dumoulin Smith Bank of America. Your line is open. Please go ahead.
Yeah excellent. Thank you team appreciate the time and let me just a clean up here in a couple of questions first off just.
Our forward trajectory with respect to the EU here I understand the litany of different headwinds, including FX, but how do you think about growth beyond just the third quarter here.
Obviously, your peers really talking it up and yourself quarter over quarter, having more modest trajectory here for a second quarter.
If you could speak high level again, obviously cognizant of the dynamics in third quarter, maybe even speaking fourth quarter and beyond what the sort of normalized trajectory you would think for EU and your product.
So.
I'm not sure that we heard the question in full in terms of the general dynamic.
In Europe .
Yes.
As reported the market is.
He is very very strong driven from the high power prices and we're seeing this also in residential also in commercial.
And across practically every.
Every country in Europe , where we are.
We are our portfolio was very strong in Europe , we have close to 500 people.
In Europe , we added the more specific European battery this quarter end.
And we'll be continuing to we added the EV charges for the European market, a quarter or two ago, and we will continue to be adding solutions that are <unk>.
Customize where more specific for the.
For the European market.
And you talked to anybody no one is indicating any type of.
Of our expectation for electrical.
Electrical power price reductions that would that would lead to the market.
The market cooling down.
That's a lot of there are a lot of external factors that can impact that but.
For the foreseeable future and also based on announcements from various governments.
We see this market continuing to grow with a high rate and we are very.
I'm very confident in our position within this market that we've built over the past 10 years or something.
Got it fair enough, but not prepared to share kind of a specific percentage growth target or something like that.
Maybe related to that if I can just to talk about this I mean can you speak a little bit more of a manufacturing trends and just the thought process here on committing to further expansion here, obviously, Mexico underway et cetera, but what about beyond that I mean, you talked about low inventory levels, you talked about being constrained again admittedly, perhaps referencing the last question that.
Sectary in EU and U at how do you think about the continued ramp of the product again across your core business as well as scores.
Anthony.
Yes, so first of all we are definitely right now.
In a situation where we are.
Capacity limited compared to the magnitude of the <unk>.
The demand and.
This is not only related to.
Events like.
Like in Shanghai.
Just in general demand is progressing at a higher rate than we are able to add capacity at the same time, we are pushing on added capacity.
As much as we can and with the long term vision of having.
Significant manufacturing capability and all of the main continents that we serve and building out also the rest of the supply chain to be able to supply this manufacturing capacity.
The immediate.
<unk> expansion that we are dealing with right now are the expansion of the factory.
In.
In Mexico.
And also reaching targeted capacity levels in our Asia factories in Vietnam and in.
China.
In the European factory right now we are.
Increasing battery manufacturing capacity, but.
But inverter and optimize their capacity will be increased and in Europe in the second phase.
The long term plan is to have.
Significant volume manufacturing capability in each of the main continent being Asia Europe .
And north.
America.
And right now we are working hard to increase the capacity in the existing factories to meet the elevated elevated demand as we are seeing.
And similarly across the supply chain, because as I said before.
It's also about the <unk>.
Capability of the suppliers to meet the type of numbers that we need right now for transistors magnetics.
Other components.
These are these are very very high numbers that in some cases require.
Our suppliers to expand their factories and that's a work in progress as well.
We will take the next question from Lockheed Martin Malloy from Credit Suisse. Your line is open. Please go ahead.
Hey, Thanks for taking my question just switching away from FX, just some of the cash.
Cash side, you have more than $1 billion of net cash right now could you talk about like what are the plans at this stage.
Either on M&A or otherwise.
Yes, obviously you may have.
We're not.
<unk>.
We're not going to discuss anything specific.
Specific other than than a little bit about what we're looking to do in a little bit about how how we're doing it so.
Reiterated also in the analyst day that we are.
Looking.
In terms of our strategy.
Technologies that help our dealers and improved generation of renewable energy storage of renewable energy and smart consumption of renewable energy. So were and the software is that control all of these and we are looking at technologies and all of those elements.
Additional methods of generating clean power.
Additional technologies.
And innovation in.
Chemistry and packaging of batteries.
Batteries.
Expanding into additional.
Means of energy consumption with.
With EV Chargers were working on this EV charges and we're looking at the advanced technologies.
Areas.
And a big element is looking at various tax group software controls for energy management and all of the.
Segments that recover residential.
Commercial utility and and expanding into various ways that people.
Can benefit from these assets whether it's.
Energy management or trading or whatnot, and another element is and cyber so, especially as we go more into.
Large commercial sites in utilities, we have some inherent.
Australia for understandable reasons I think in cyber we think that cyber will be.
Important in the future for the growth of the industry and we have access to.
Two innovative technologies and we're looking at those.
Those as well.
And in terms of the how we've added a group of professionals with a history of.
Of.
M&A and.
In our industry.
We are very comfortable with our target.
Right now.
And expect to.
To take some actions in the coming in the coming future in these areas.
Got you and I look forward to dose.
One last one for me on grid forming into what does.
Your competitors are seeing some price premium any.
So for introducing that product I know last time, you said you have those products in Japan.
Any plans to introduce that in the U S markets.
And that was it.
Yeah.
If you're if you're referring to some various ways of.
Non storage based.
Backup.
As we said in the past, we see all over the world, but focus on.
Oncology proper backup.
At the.
The consistency and continuity needed then even as I mentioned in my reference to the UBS.
Backup combined with ensuring smooth and continuous electrical power, we see that as the.
The importance.
Technology for enabling this this transition and right now we don't see interest or demand.
To move out of Japan.
Local.
Non storage based backup capabilities.
Got it I appreciate the color. Thanks.
Next up we have Colin Rusch from Oppenheimer. Your line is open. Please go ahead.
Thanks, So much guys could you talk a little bit about the mix in Europe .
<unk> and <unk>.
Relative to residential commercial and utility scale, just to get a sense of how thats breaking down for us.
So utility as a small net.
<unk> part of.
What's going on in general and what we are doing in Europe .
Some announcements.
That theres going to be.
Sure.
Government effort in some countries to two towards large projects as well, which were less common in Europe for the last.
For the last three or four.
For the last three or four years.
The.
The demand is very strong in both actually what is affecting our mix right now is more related to.
Can you supply than it is to.
Then it is too.
The demand.
Yeah.
And our growth rates from from the last quarter.
This quarter has been pretty much the same.
In terms of.
Of residential.
<unk> commercial but again.
It's not.
It's not so much.
The demand necessarily being even I think that probably although residential is growing very fast.
It's probably going growing a bit faster for sure in megawatts.
Just because of the dynamics that we mentioned before.
Of companies.
Looking at filling out.
Tens of factories with.
With solar also too.
To compensate for the power for.
The increases in power prices and also for ESG need to so when you have these large type of commercial installations going on and covers a lot of megawatts.
And compared to the.
The very strong growth in residential as well, so I would say that.
That's probably the demand growth in commercial is a little bit higher than that in residential in Europe , but the difference is not dramatic.
And then our shipments also there hasnt been a significant change in pattern between between the two.
Okay. That's super helpful and then.
<unk> had pretty significant operating leverage off the sales and marketing as well as G&A.
But R&D is kind of scaling with revenue.
Curious about.
Go forward is there going to be some some optimizations around some of the efforts within that R&D spend.
In terms of some of the technology platforms and your ability to get a little bit of leverage out of that spending.
Yes.
So the answer is.
The answer is yes.
To be honest, it's not.
And we remain focused on remain focus as the opportunities that we have out there and.
And expanding the.
<unk> portfolio so.
And in that regard.
We are looking for more R&D resources.
And actually we are a bit optimistic.
Optimistic with some of the challenges that we're seeing in other industries around us.
Sure.
Seeing access to talent.
That may be a few months ago would be.
Would it be more difficult to bring on board. So we're focusing on efficiency and we are definitely leveraging for instance, our capabilities in storage in sales from residential to commercial to utility and similarly in other area, but really we want to do more and we.
Want to do more in an efficient way and are not focusing right now on trying to do.
To do this.
Next we have Jeff Osborne from Cowen and company. Your line is open. Please go ahead.
Hey, good evening, two quick ones I was wondering <unk>. If you can touch on lead times and backlog visibility that you have in both the U S and Europe , and then I had a follow up for Roger.
So.
From from lead time perspective, it is very much related to the product in.
Because in general I can tell you that our lead times for residential products is a little bit shorter than the one for commercials.
Results from from components availability in manufacturing capacity I would say that.
On the backlog that we're sitting today, it's a backlog that is good for two or three quarters at least that.
We already have.
And from.
From a lead time television.
A few weeks.
12 weeks.
<unk>.
Residential it's probably in.
In the 12% to 14 week range and in commercial it's a little bit longer.
It varies.
It varies a lot by.
By product.
Got it that's helpful and then run it just for you why not hedge at all.
Touch on your hedging philosophy.
So actually we are hedging, but our hedging philosophy is that we're hedging cash flows theyre not necessarily our balance sheet items. The main reason for this is that we have a very a fairly large.
Our balance sheet I would call it items, especially now.
With seeing the increase in Europe , and this can create a very large actual payments to the banks you know whenever you're closing a position in our view and we saw it by the way you know.
I saw it in 2015 I saw I think I saw it in 2018.
Fact that we sit on a very large amount of cash allows us to benefit from the fact that we can wait and go through those cycles than when the.
Gross margin when the FX is changing we're able to enjoy a converting those balances in essence I can tell you that.
We do not see any pressure in utilizing the euros.
And.
We simply feel that you're not seeing in this case you know if we would hedge the balance sheet, we would have to pay cash $20 million this quarter only for hedging.
We simply believe that waiting and not spending this cash flow makes it a little bit more sense in defense.
In this case <unk> got it. Thank you that's all I had.
I appreciate it.
Okay.
We'll take the next one is from Michael Blum from Wells Fargo. Your line is open. Please go ahead.
Thanks, Thanks for taking my questions.
My first question just want to talk about the battery.
Shipments you saw really big up nice.
Uptick in the second quarter Wonder if you could just talk about attach rates for that.
Where do you see that heading over the next.
A few years and then how do you manage the impact to the overall gross margin.
Okay.
So.
Discuss the attach rate.
We'll talk about.
The gross margin.
Attach rates are highest.
In Europe , right now and a combination of the places where self consumption is driving the attach rates and typically that's the strongest driver. So wherever the policy is more towards self consumption.
<unk>.
And power prices are increasing that's where the attach rate is the highest and thats why you see in Germany attach.
Attach rates of <unk>.
Today on our systems, we might be seeing it at 60%, but that's just as we're ramping.
A new battery for the German market, but generally speaking attach rates in Germany can reach 80%, 90% and then.
And similarly in Italy and.
And in some of the other European countries that are today on net metering as they gradually shift out of net metering like the Netherlands, and the U K you will start seeing in.
In the coming years high battery attach rates over there.
And that's part.
Part of what we see is a very big opportunity because of the magnitude that I mentioned of our installed base in these type of in these type of countries.
In the U S and Australia the attach rate.
Is significantly lower.
It can range in the 10%, 15% or so depending on period and depending on on.
An area and the increase in attach rate is is gradual it is not I don't think its going to reach 50% attach rate across all of the U S.
In.
In a matter of a year or so it's going to take longer but the attach rates are going to gradually increase also in the U S and also in <unk>.
In Australia, and all of this is residential and commercial storage it's probably.
Two steps behind with global attach rates today in the low single digit percentages, but they're definitely.
Trends towards.
A slow trend of increase and it will follow what is happening in residential and in the.
Years.
In the coming years as well.
And just to <unk>.
On the margin side the way that we look at it is that we prefer managing the operating profit margins rather than the gross margin and the reason is that batteries will always be product with a lower gross margin, but still this is a project that adds to that.
A product that it's very much to the overall profitability of the company of the EPS. So if I have let's say a very big demand for batteries lets say its 15% gross margin and the alternative is either not to sell them and not make 15% profit or to sell them and erode our gross margins.
We would prefer to erode gross margins then counts the 15% net profit in our EPS. So I think that we don't manage in this case at least gross margins worked or other operating profit margins and maybe adding onto that 0.1 quick point on the ratio of batteries for installation is also going up so so.
The amount of kilowatt hours per site is increasing together with the amount of kilowatts peak.
Per site and this is increasing consistently one quarter. After another we're averaging today I think somewhere between one one to one two batteries per site.
And that also improves the revenue and the economics because all of this is sitting on the same infrastructure.
Of sales service and in G&A.
Great Thanks for that.
I guess, another kind of just high level question for you.
We've got high interest rates inflation and potential recession and yet it doesn't seem like there's really been any slowdown in solar demand. So I'm wondering if that's from your perspective, an accurate assessment and if you have any view of why solar demand is seemingly not impacted by any of these.
Macro factors or is it just too early to say that thanks.
Okay.
I think.
Use Europe as an example.
Return on investment for solar.
Relation in Germany was cut.
I have more or less over the last 10 months.
So in a.
Inflationary and price increase environment.
It's already a very it's a financial investment in order not to to deal with the.
The very high power prices and I think that Thats also part of what's.
Driving the business here in the U S on top of the incentives is the expectation that over time.
There is a certain likelihood that power prices are going up so people view is right now as a combination of the financial investment and.
Resilience and.
And choosing again in the cases that they choose to spend their money in this in this way and it's the same for <unk>.
So evident at the <unk>.
At the commercial level.
So.
From from everyone I spoke to about this especially like I say in Europe .
It's where the thinking is.
This is a wise financial decision.
Non stable financial environment.
Okay.
Next we have Joseph Osha from Guggenheim. Your line is open. Please go ahead.
Hello, everyone I'm not going to ask about foreign exchange anymore I am curious.
Given all the opportunity you have in your core markets and I.
I think what we just learned about EPS and the fact that you are taking some gross margin dilution in some of your other businesses.
Not to put too fine a point on it why or why are we still on the E mobility business and why would it not make sense at this point to just kind of fold the tent there and focus on the many core opportunities that you have.
Okay.
So it's a valid question, but there are actually very few similarities between the mobility market and critical power and UBS and the way we are active within these two markets.
E mobility is a huge it's a rapidly growing market with.
A lot of paths in which is evolving and opportunities.
Beyond what's usually spoken about of passenger cars and trucks that are moving to the opportunities are in areas like construction agriculture, and others that are going through electrification and these are very very closely linked to the need for <unk>.
Distributed renewable energy on.
On this site.
Where the.
We are the electrical vehicle is.
Is charging so and we also said this in the analyst day, we're focused and interested in this high growth area. However, we are shifting our focus from where we started off as a tier one component supplier to mainstream Oems and are evaluating where we can.
Have a system architecture that gives benefit between between the and links the.
Generation from the solar system to the to the mobility system that requires need this this energy and we're seeing some good.
A good traction in that area and we think that in the long term it is.
Right.
Investments for the company.
But we are taking it in a slightly different path than the one that we originally intended to.
Okay.
Okay.
And just one addition by the way, which will be a little bit of a technical but you know as part of our accounting treatment of this.
Of this specific area.
We're reviewing every year.
Some accounting balances related to intangible assets.
To the extent this is something that we will view this year whatever we do here is more accounting or the checking is more of an accounting from a I would call it business perspective.
We're staying equally interested in and believe in this business.
Is that before I go away a diplomatic way of saying we might see you write down part of that investment.
No.
Saying that we will need to evaluate at the end of the year as we do with all of the other investments.
Okay, Alright, thank you Robyn.
Yeah.
Next up we have <unk> from Piper Sandler Your line is open. Please go ahead.
Good afternoon, and thanks for taking the questions.
So just one quick question rather than just looking at the operating profit guidance for <unk> I think it implies another.
A decent increase in operating expenses.
And I was wondering if you could just maybe speak to just speak some more about what's driving that increase and then how you think about.
The trajectory of operating expense leverage moving forward and then I have a follow up thank you.
So in this case I can already tell you that actually what you see there is not a result of the.
Of an increase that we planned in the expenses, but rather being a little bit more cautious on the FX side.
And its impact in general I can tell you that when we plan.
The.
Operating expenses for the remaining part of the year it is going to be a relatively.
Relatively small but.
The environment that we're now acting in.
We see so many movements in the base of the.
Expenses.
The nominated in many cases not in U S dollars, but for example, the Israeli shekels related to our <unk>.
Indeed people, we simply prefer it to be more cautious from a realistic point of view.
Level of increase again had we had FX fixed you will see a relatively small increase.
Okay. Okay, and then a quick clarification question on the component issue you had in China.
With the Mexico facility ramping up what does your risks go to zero from another locked down in China or would that potential risks still exist and if it does.
Maybe some thoughts on how you think about just general mitigation given that China's view on zero Covid and a high probability of another locked down over the next you know 2012 to 24 months.
So the answer is no and just to clarify the events in China was not locked down of our factory.
It was a backend facility of our components manufacturer and as a result of that we could not get components into our manufacturing aligns anywhere for that matter in China, or Mexico, and and as <unk> said it has a double impact or literally a triple impact we didn't produce as much as we wanted.
When we what we were able to produce and when we were able to resume.
Some of the lines, we had to expedite the shipments.
And and in some cases.
Our actual contract manufacturing sites, we have to participate with the contract manufacturer in some of the cost of the line spending I've been waiting for.
We're a component and so this event was in our supply chain math an hour.
<unk> manufacturing facility.
On the <unk> side, so the fact that Mexico ramps.
<unk> is very favorable.
Thats it for tariffs and four.
And for shipping time et cetera, but it doesn't compensate for the volumes that we produce.
In Asia on the contrary because of the very strong demand, we're ramping capacity everywhere. So if for whatever reason.
A factory of ours would be shutdown due to COVID-19. It would have a significant impact on us.
The output.
Our overall out within the company.
Thank you.
Next we have Vijay <unk> from Susquehanna. Your line is open. Please go ahead.
Hi, Thanks, Thanks for taking my question.
A quick follow up on the battery attach rates for.
For residential.
Are you still seeing some third party batteries being used.
Solid origin vendors or has it all switched over to.
Your batteries now and if you can quantify that that'll be great too.
Okay.
Yes, we are seeing a meaningful portion.
Use of third party batteries and attaching to our systems.
<unk>.
In particular in areas like in Europe , or three phase where until recently, we didn't have a battery of our own.
And in some cases also.
Also with us with.
With single phase for various reasons.
Also we don't always know because a lot of people are doing.
AC coupling.
Of the battery so our system, it's big advantage.
Architecture that fits our batteries the D C.
The DC coupling with you can still attached batteries and AC coupling.
Structure in.
And it doesn't necessarily we don't necessarily have visibility to it but we do see a lot of reports and pictures and images of people attaching different types of.
Of batteries and an AC coupled manner two hour to hour Inverters it would be hard for me to say.
The ratio.
On single Phase I would probably guess Thats right now that ratio within the range of $50 50 is still 50% with our battery and 50% with third party on asked me phase in Europe right now.
Its all third party just until recently, we began people began installing our battery as well.
Okay and then if you look at few quarters do you.
You have an expectation of where that is.
<unk> could move to.
Yes, we definitely think that the.
Ideal architecture is the one that is based on an hour battery in a DC coupling them with the seamless.
Integration.
And.
The trend is definitely in that direction.
Directions at a higher percentage will be will be attaching.
We'll be attaching our battery.
Next we have Amit <unk> from BMO capital markets. Your line is open. Please go ahead.
Good evening. Thanks for squeezing me in I, just wanted to ask I guess.
A couple of quick follow up questions on kind of on how the mix is kind of translating into what youre seeing in operating income margins since thats kind of I guess the metric the chair.
Kind of.
Kind of working working for.
So like the lead times are higher.
On the commercial side.
Versus the residential side it looks like the gross margins a little bit lower.
Are you guys, saying that you still haven't seen kind of any dilutive impact from kind of the I guess the four consecutive quarters.
Growth in commercial versus residential and operating income margins and then I guess the second question to that is.
How quickly can you pivot your contract manufacturing lines to produce more residential versus commercial.
Lead times or margins kind of diverge from you.
Expectations going forward for those two segments.
Yes, I'll start with the second relates to the production line.
Actually the differentiating factor is more single phase versus briefing.
So.
Because a lot of Europe residential is is three phase so we have flexibility to shift.
Our three phase production from.
Residential three phase two commercial III phase in.
Back and forth depending on the demand.
We have good flexibility in that regard right now demand is super Super strong for both of those.
And then the rest of the residential world in a single phase.
We don't have very good flexibility to move capacity from single faster three phase we have ability to move within.
These are these.
These specific lines and.
And.
<unk>.
If if there is a need to adjust from a demand perspective or if.
Order from a supply chain point of view, we have available more.
Our components and elements for one versus the other we can we can adjust production so I hope that answered.
The question in terms of the dilution effect.
Most margin of commercial I think that answered before but maybe you can clarify.
Here I think the on the heel of.
<unk> answer when it comes to the operating margin.
The difference is not very large between residential and commercial because on one hand the residential.
Let's see kilowatt basis enjoys the better gross margin, but requires a little bit more of a high touch sales or a high touch I would call it.
Usage of operating expenses, while at the same time when you are selling when you were making one sale of commercial system. The ASP per watts is smaller but in essence, the opex associated with it is also relatively small simply because it's a single deal. So we don't see a very big difference on the op.
Operating margin level between residential and commercial and right now and especially in the market situations that we see.
It's hard for me to say that we're even planning it or trying to optimize it we simply quite to manufacture and provide as much as possible for customers that are striving to get products and to install them rather than optimizing we do sometimes a little bit of I would call. It margin optimization because we are for example.
Sometimes deciding to prioritize areas or regions with higher gross margins of specific products.
Compared to regions that the same products will bear a little bit of a lower gross margin, which is of course lower operating margin, but I would say that right now we simply tried to manufacturing to sell as much as possible rather than to optimize mix.
Thank you.
It looks like there are no more questions at this time I would like to turn the call back to over Mr. Zeevi Lando for any Eddie should now all closing remarks.
Thank you very much we will end here and thank you all for joining us on our call today. Thank you.
Okay.
This concludes.
Thank you for your participation you may now disconnect.
Okay.
[music].