Q3 2022 Solaredge Technologies Inc Earnings Call
Welcome to the solar edge conference call for the third quarter ended September 30th 2022.
This call is being webcast live on the company's website at Www Dot solar edge dotcom and the investors section on the event calendar page.
This call is the sole property and copyright of solar edge with all rights reserved and any recording reproduction or transmission of this call without the express written consent of solar edge is prohibited.
You may listen to a webcast replay of this call by visiting the event calendar page of the solar edge Investor website.
I would now like to turn the call over to Eric Companion at Sapphire, Investor Relations Investor Relations for solar edge.
Yeah.
Good afternoon. Thank you for joining us to discuss so we're just operating results for the third quarter ended September 32022, as well as the Companys outlook for the fourth quarter of 2022.
With me today are C D Lando, Chief Executive Officer, and Ronen fire, Chief Financial Officer, who will begin with a brief review of the results for the third quarter ended September 32022.
<unk> will review the financial results for the third quarter, followed by the company's outlook for the fourth 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.
Material contained webcast is the sole property and copyright of solar etch 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.
These non-GAAP measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U S. GAAP.
Listeners, who do not have a copy of the quarter ended September 32022 press release or the supplemental materials may obtain a copy by visiting the investors section of the company's website.
Now I'll turn the call over to T D.
Okay.
Thank you Erika and good afternoon, and thank you all for joining us on our conference call today.
This quarter, we saw record revenues for the company led by record revenues from our global solar business driven from significant growth in Europe .
Aggregate, we shipped this quarter a record 2.7 gigawatts of our D. C optimized inverter solution and 321 megawatt hour of residential batteries.
This quarter, we shipped 6.1 million optimizer, and 265000, inverters representing quarter over quarter growth of 16%.
We're happy with this increase the output from our factories following the Covid related challenges, we experienced in the first half of the year in Vietnam and China.
However, the demand for our products still outpaces, our production and supply chain capacity, we are working hard to close this gap through the further ramp of production at our new Mexico facility.
Capacity increases in other locations.
On this note in light of the recent I already legislation and the increased demand from the U S market, we are aiming to establish manufacturing capability in the United States within 2023.
We are in active planning and site selection process.
Our revenue growth. This quarter is mostly driven by strong momentum in Europe , where revenues grew by 42% from last quarter and by 90% compared to the same quarter last year.
In particular growth was strong in the largest European market, Germany, where revenue grew by 125% quarter over quarter.
In the Netherlands, France, and the U K, all with record quarterly revenues.
We expect the strong momentum in Europe to continue into 'twenty 23, and are seeing an elevated level of new orders coming from our channels to prepare and support this continued growth.
In the third quarter, we prioritized shipments to Europe in light of the challenging winter expected there.
This quarter revenues in the U S were lower than the previous quarter.
Given the constrained capacity environment, we prioritized to supply to the European residential market as mentioned earlier.
In the U S. Commercial segments. However, this was a record quarter of inverter and optimize their shipments.
With an increase of 10% from the last quarter.
This is the fourth consecutive quarter of double digit growth in our commercial megawatt shipments to the U S.
Selecting the market momentum and our position in this market.
We expect this growth dynamic in the United States commercial market to continue into 2023.
Outside of Europe , and the United States. We also had record quarterly shipments in Taiwan, and South Africa.
And good momentum in core quarter over quarter growth in Australia.
From a segment perspective, this was a record quarter for megawatt shift in both residential and commercial as well as the megawatt hours of battery shipments.
In the commercial segment, which grew 12% quarter over quarter in megawatts shipped we are seeing growth of installations in an increasing number of diverse applications such as floating P V where we commissioned this quarter several large projects in Israel in Taiwan, and the agro or agricultural PV apt.
Vacation aimed at dual use of land for solar generation and growth of crops.
We are engaged in several such projects in Europe , and Asia and see this as a potential high growth application for the future.
Overall, our demand globally continues to be strong.
Point of sale data from our distribution channels are at record levels and growing month over month, and our focus is to increase factory output to meet the demand efficiently and with less need for expedited shipments in order to continue the margin improvement we have seen this quarter.
Shifting to products.
Our battery shipments grew this quarter in line with our plans and reached a record 321 megawatt hours.
Driven primarily by our shipment of the three phase battery that we announced last quarter.
This demand is coming primarily from Germany, and other three phase European countries.
Spurred by the increase in energy prices and the growing demand for backup and independent from the grid.
For our single Phase battery, we are seeing good demand from Australia, South Africa, and the U K.
Countering slower than projected growth of battery attach rates this quarter in the United States.
That said in this quarter the amount of our single phase batteries in the United States that were installed and connected to our monitoring portal was double that of the previous quarter.
On the Optimizer side, we recently announced the release of a renewed sense connect technology that detects temperature increase at the connector level to prevent potential electric arcs.
By detecting and reacting to abnormal connector overheating that may happen due to faulty installations of our connectors.
Our sense connect technology stops power flow before an arch can occur.
With module level sides visibility operation and maintenance providers are informed of the pinpointed locations of the connector. So repairs can be conducted swiftly and easily.
This helps maximize system safety uptime and reduces operational costs.
The sense connect technology is in addition to a wide range of safety features among them the safety seat technology and rapid shutdown.
Additionally, this quarter, we announced the release of our solar age home loads controller.
This is a wireless device that is designed to optimize the energy consumption by controlling heavy load home appliances.
The load controller is easy to install enabling remote and automatic control of home appliances, such as heat pumps, EV Chargers pooling, well pumps HVAC and others.
This technology enables homeowners to increase their self consumption by using excess energy that would otherwise be lost and extend their battery backup time during grid outages.
Once installed the load controllers seamlessly integrates with our my solo Ridge Act.
Willing homeowners to control those directly from their smartphone.
For homeowners. This means that they can now schedule and track their solar energy production battery storage level grid services, if they have connectivity and solar self consumption.
The solar edge home operating system calculates energy usage and savings according to personal preferences, while considering external factors such as weather events and utility rates.
Also this quarter and grid services, we joined the Rocky Mountain power, What's smart program, making us one of the two battery suppliers selected that thus far for this program.
The program provides customers in Utah, and Idaho, who enrolled with a solar edge home battery.
A significant enrollment incentive and an additional monthly incentives.
We are already seeing positive interest among existing solar edge battery owners and new potential installations.
Together with this program, we have to date more than 20000 systems under various grid services and data programs globally.
In this context, our financial results this quarter reflect the capital gain from the sale of shares from an investment we made about 18 months ago in a grid services company that's materialized.
Moving to our non solar business.
South Korea, the ramp of our seller to factory is on schedule and we began mass production and our shipping sales to customers in small quantities. This corridor.
Our E mobility revenues are at a steady but reduced rate much in line with the overall automotive industry supply chain related instability.
And with this I hand, it over to Alain who will review our financial results.
Thank you Phebe and good afternoon, everyone.
These financial review includes a GAAP and non-GAAP discussion we'll.
A 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 that do not include amortization.
Purchased intangible assets impairments of goodwill and intangible assets stock based compensation expenses and certain other items.
Total revenues for the third quarter were a record $836 $7 million, a 15% increase compared to $727.8 million last quarter, and a 15, 9% increase compared to $526 $4 million.
For the same quarter last year.
Revenues from our solar segment, which include the sales of residential batteries were a record $788 $6 million.
15% increase compared to 687 $6 million last quarter, and 65% increase compared to $476.8 million for the same quarter last year.
This quarter, our shipment well up significantly from the last quarter are still constrained mind manufacturing capacity and not by demand and as noted by T. V. We channeled more residential products to Europe in advance of the energy challenges expected there this winter.
Such the geographical mix presented does not necessarily represent the level of demand we see in each region.
As we continue to ramp in Mexico, we expect to close the supply gap to the United States.
Solar revenues from the United States. This quarter were $251 $6 million, a 19% decrease from the last quarter and represented 32% of our solar revenues.
Solar revenues from Europe were a record $475 $7 million or 46% increase from the last quarter and represented 60% 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 revenues and gross margin.
Specifically.
The impact of the Euro devaluation in comparison to the average exchange rate of the last quarter is translated into a reduction of $31 $7 million in revenues and 360 basis points of gross margins.
Over the last quarter, we increased our prices in Europe , and we continue to adjust the prices to the devaluated Euro however, the impact of price increases typically lags by one or two quarters.
Rest of the World Solar revenues were $61 $3 million, a 15% increase compared to the last quarter and represented 8% of our total solar revenues.
Automaker what basis, we shipped 859 megawatts to the United States a record one four gigawatt to Europe , and 470 megawatts to the rest of the world slightly surpassing two seven gigawatt of quarterly product shipment.
52% of the megawatt shipment this quarter, where our commercial products and the remaining 48%, whereas essential.
In the third quarter, we continued to see an increase in revenues related to our batteries.
The 321 megawatt hour batteries, we shipped this quarter the majority of our ship to Europe , driven by the strong adoption and the demand for our three phase batteries.
Every selling price per watt this quarter, excluding battery revenues was 23 three cents a 1% decrease from 23 six cents last quarter.
This ASP per Watt decrease is amazing mainly a result of a weaker euro and an increased portion of commercial products in the mix.
We expect to see an increase in ASP per watt over the next quarter, resulting from our price increases in Europe , and the United States.
This quarter two customers accounted for more than 10% of our solar revenues. One of these customers is a European distributor in general over the last quarter, we have seen a more even distribution among our top 10 customers.
Revenues this quarter from our non solar business were $48 million.
Okay.
Consolidated GAAP gross margin for the quarter was 26, 5% compared to 25, 1% in the prior quarter and 32, 8% in the same quarter last year.
non-GAAP gross margin this quarter was 27, 3% compared to $26 seven in the prior quarter and 34% in the same quarter of last year.
Gross margin for the segment for the solar segment was 28, 3% compared to 28, 1% in the prior quarter.
Despite the 360 basis points negative impact of the euro devaluation compared to the last quarter and the increased portion of batteries within our overall mix this quarter over quarter increase in gross margin as a result of the price increases we have implemented globally and all of our disciplined execution.
On the operational activities, whereas the increasing manufacturing capacity coupled with reduction in shipping prices contributed 140 basis points of reduced shipping cost to our gross margin.
In addition, this quarter, we sold component and commodity prices, starting to decrease which positively impacted our payments to contract manufacturers and vendors and lastly, as our revenues continue to grow we see efficiencies in our operation and support organizations due to economies of scale.
We expect these phenomena to continue into the next quarters.
Good subject to tariffs excluding batteries shipped into the United States from China accounted for 24% of our U S. Shipments. This quarter. This is a decrease compared to 31% in the last quarter and is mainly attributed to the ramp of our manufacturing in Mexico.
Gross margin of our non solar segment was 11, 2% compared to two 7% in the previous quarter.
On a non-GAAP basis operating expenses for the third quarter were $108 $3 million or 12, 9% of revenues compared to $196 million or 15, 1% of revenues in the prior quarter and $83 8 million or 15 nine.
Percentage of revenues for the same quarter last year.
The main reason for this quarter over quarter decrease is the discontinuation of the critical power Division operations.
Increased efficiencies in our E mobility division and the favorable effect of the new Israeli shekel and other currencies against the U S dollar, which reduced our operating expenses as part of our expenses are paid in these currencies.
Right.
Our solar segment operating expense as a percentage of solar revenues were 12, 2% compared to 13, 7% last quarter, we expect to see increased efficiency in this ratio as our revenues continue to grow faster than our expense base.
non-GAAP operating income for the quarter was a record $122 million compared to $84 $7 million in the previous quarter and $95 $2 million for the same period last year.
This quarter the solar segment generated a record operating profit of $126 $7 million compared to an operating profit of $99 $2 million last quarter.
The non solar segment generated an operating loss of $6 $5 million compared to an operating loss of $14 $6 million in the previous quarter.
non-GAAP financial expense for the quarter was $31 $6 million compared to a non-GAAP financial expense of $29 million in the previous quarter.
$35 $4 million are a result of foreign currency devaluation against the U S dollars, the majority of which are noncash and nonrecurring expenses.
As a reference.
Euro cash balances and euro denominated accounts receivable balances amounted to this quarter to approximately 300 and $500 million euros, respectively.
This amount was partially offset.
By interest income derived from our investments.
Our non-GAAP tax expense was $34 $5 million compared to 7 million in the previous quarter and $10 1 million for the same period last year.
I would like to focus a little on our tax expenses and provide guidance on this for the coming quarters.
Our corporate structure is such that the parent company of the group is in the United as the United States Corporation, while the majority of our research and development activities are performed outside of the United States.
Based on U S tax regulations, which recently went into effect R&D expenses.
Performed outside of the United States or to be capitalized for tax purposes and recognized over a period of 15 years as opposed to over one one year period today and a five year period, beginning next year if expenses are in the United States.
The result is that all of our $69 $7 million of quarterly R&D expenses, approximately 64 million are not treated as an expense for U S tax purposes. This year and will be amortized in expense over a 15 years period.
This change in tax treatment creates a tax burden on our financials and will diminish year over year as a greater portion of our R&D expenses will be amortized for tax purposes.
In addition, the impact of our lower stock price on our taxable income was lower this quarter is vested employee stock awards generated lower tax expenses.
Under the current stock price, we expect the effective tax rate for the next quarter to be slightly lower and this rate is expected to reduce year over year as our overall income increases and a higher portion of our research and development expenses are recognized for tax.
GAAP net income for the third quarter was $24 $7 million compared to a GAAP net income of $15 $1 million in the previous quarter and $53 million in the same quarter last year.
Our non-GAAP net income was $54 $1 million compared to a non-GAAP net income of $56 7 million in the previous quarter and $82 1 million in the same quarter last year.
GAAP net diluted earnings per share was <unk> 43 cents for the third quarter compared to 26 cents in the previous quarter and 96 cents for the same quarter last year.
non-GAAP net diluted earnings per share was at 91 cents compared to <unk> 95 in the previous quarter and $1.45 in the same quarter last year.
The financial expenses related to foreign exchange had a negative impact of approximately 37 cents on our non-GAAP EPS.
Turning now to the balance sheet.
As of September 32022, cash cash equivalents bank deposits.
Restricted bank deposits and investments were $1 $6 billion net of debt. This amount is $937 6 million.
Accounts receivable net increased this quarter to $785 $3 million compared to $669 $1 million last quarter.
As of September 30, our inventory level net of reserve was at.
561, $4 million compared to $473 million in the prior quarter, mainly a result of higher raw material level.
Some of which are related to the ramp of our seller to factory.
Turning now to they got to the our guidance for the fourth quarter of 2022.
We're guiding revenues to be within the range of $855 million to $885 million.
We expect non-GAAP gross margins to be within the range of 27% to 30%.
We expect our non-GAAP operating profit to be within the range of $115 million to $135 million.
Revenues from our solar segment are expected to be within the range of 810 and $840 million.
Gross margins for the solar segments are expected to be within the range of 28% to 31%.
I will now turn the call over to the operator to open it up for questions operator. Please.
Absolutely at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone he might would try yourself from the queue at any time by pressing the pound key once again that is star one to join the queue. We do ask that you.
Limit yourself to one question and one follow up to ensure we get to everyone's question.
And we'll move first to Brian Lee with Goldman Sachs. Please go ahead.
Hey, guys. Good evening, thanks for taking the questions I'm going to start off with margin since that's been such a focus I'm here for a while it.
It seems like margins gross margins have trough two would you agree with that assessment and then yeah.
Maybe walk us through ronen break down a little bit of a 140 basis point benefit you talked about and then as you think about for Q guidance.
Clearly, there's some slight improvement here.
Alluding to here, just maybe walk us through that a bit and what the drivers are and then what else is on tap whether incremental from the four key drivers or new drivers that.
Or that you think can kick in even after this quarter.
Okay, Brian . Thank you very much for the question.
So generally yes, we do believe that are moving forward. Our gross margins are expected to continue and improve.
And this is mostly driven by the fact that the.
Reduction in gross margins other than the euro related income that we have in Europe and as you can see Europe is becoming a very large portion of our revenues.
Other than this a lot of our gross margin reduction was coming from increased shipment cost that are a result of the disruptions that we had both in Q3 last year in Vietnam, and one of our vendors and Q2 in China that actually stopped our operations in.
Our factories and the last one in Q2 lasted almost a six weeks and that means that it's three weeks sorry and that means that we are so very strong demand that we could only fulfilled by shipping rapidly to our customers using expedited shipments that are very expensive and also of course are additional.
Payments that we needed to pay to our contract manufacturers due to underutilization.
What we saw in Q3 was a combination of first of all a very disciplined operational work that we did in all of our factories, including their ramp that we do in Mexico that worked as planned. The result was that we were able to manufacture approximately and cheap approximately 16% more products and.
This in turn first of all reduce the Underutilization prices that you had to pay to our contract manufacturers. In addition to this we do see on one hand that prices of shipping costs are are shipping are going down.
Mostly on the regular shipments not necessarily on expedited shipments, but lately. We also started to see that airfreight.
<unk> are also going down the combination of these prices that are going down with more production that we see from our factories that allowed us to reduce a little bit the expedited shipment, we still send a mini product in an expedited manner, but we did see a reduction allowed us to reduce the shipping.
Cost by approximately 140 basis points, we do expect that we will see an improvement there. The first thing is that we continue to increase the capacity in our factories in Mexico continue to ramp and as we mentioned in previous quarter, we do expect that of the residential product.
The majority if not all of the products will be at the rates that they can be shipped from Mexico by the end of the fourth quarter. These fees are reducing substantially the times that it takes product to get to the United States and therefore reduces the need and expedited shipments. In addition to this of course learn shipments are at least in this environment.
They're not as expected as it used to be overseas shipments before.
The second thing is the fact that we are seeing also increasing the other factories, which in turn allows us to use less expedited shipments.
On this I would like to add a more more elements that are coming one is also economies.
The scale and efficiencies that we do see.
We are able to grow our operations and our support organizations at a slower pace than the growth in revenues and that in turn also creates a lower gross margin so to make the very long story short combination of increased capacity.
Reduced shipments and our ability to to reduce the payments that we pay to our vendors are impacting this and now I will add the last element in D. C is referring to a question about what will go into the next quarters and this is actually our price increases over the last three <unk>.
Quarters, and especially in the last two are we have increased our prices to to cope with the devaluation euro usually we see a lagging effect of about one to two quarters.
The price increases simply because of the fact that most of these are done on shipments that are relatively a.
Newer or a new orders and that means that we believe that by Q Q1, most of the increases that we implemented in the third quarter and those that we implemented early fourth quarter will mature. So in general I think that the motive is that we expect to be by.
At the end of the second quarter of <unk> 23 in the very neighborhoods that we guided to during the analyst day last March.
Super I appreciate all that and all that color.
Second question was going to be around the battery shipments.
I thought last quarter, you know ronen D V. It sounded like you were implying more of a flattish sequential trends over 300 megawatt hours and volume seems quite good here.
Maybe talk to some of the near term demand trends, you're seeing for the batteries segment and then.
That transition what that's looking like from your crane supplier to sell it to maybe the timeline and then you know what.
What do you think it means for volumes and margins off of off of these levels. Thanks guys.
Okay.
Hum.
I think as we alluded Brian during the conversation we introduced the three phase battery a quarter ago.
Aimed for the European market in particular, Germany, but not on the as well as some of the other.
The other European three phase our markets and the demand. There is is obviously going up dramatically.
And the batteries are typically going with inverters, either inverters that already shipped and installed and we're waiting for batteries or a new inverters that chip this quarter. So are.
With our ability also to increase the output of Inverters that pulled with it additional volumes of our of our batteries are beyond those that we're targeting.
For inherited that were installed previously so.
This double effect led to a to very strong demand, which which we were able to meet.
And that's the result of the increase that are.
That you saw and as we commented on the single phase.
Our rate of shipment with the main market over there is the United States and the United States the rate of shipment was slightly down.
But but that was partially covered by the fact that we introduced the single Phase battery also in some rest of the world countries. The U K.
South Africa, and Australia, and we're seeing good acceptance there so between those phenomenons into two types are the two families of batteries that were offering we saw the the increase to this 320 megawatt hour.
None of these batteries today are using a seller to sell as we're just beginning the ramp right now and beginning to ship sellers to some of our sell.
Correctly, so customers not yet.
Still going into the early phases of qualification at the battery level and we're still a probably a few quarters away from a big portion of our battery shipments being based on hour or sell it to our seller to sellers.
But obviously our long term intent is we are we've communicated all along is to.
Maximize usage of our own cells, while continuing to maintain a certain portion inactive relationships with other cell providers to give us the flexibility and the volumes and technology that we're aiming for.
Yes.
Alright, Thanks, a lot guys I'll pass it on.
Okay. Thank you thanks, Brian .
And well take our next question from.
Mark Strouse with Jpmorgan. Please go ahead.
Great. Thanks, very much for taking our questions.
Just wanted to go back to the excuse me the commentary you made about potentially setting up U S manufacturing.
Understand plans are still being finalized there, but just any more color. How we should think about that would that be for solar product or potentially storage as well and kind of is that something that you're waiting on the specific guidelines from treasury or could we potentially see in announcements being made sooner than that.
So I'm not sure that we can get into much detail other than then.
Suggesting that we're doing both things in parallel so obviously to to select a location to a to define the processes et cetera. It takes time and we're doing it based on the preliminary assumptions as to the final.
Or the preliminary version of the regulations, but but since we understand that there is a good chance that there will be some even significant changes in the regulations, we probably won't close anything on from a production site and production plan point of view until that is.
That is clear so so we're running both both elements are in are in parallel with a lot of focus incentive urgency.
And as things become clear from both sides will be able to to give a better a better picture, but for now I think it's just a where we're focused on it we're tracking the regulations.
And and where.
We're we're going through the process of planning and site selection is the assumption is based on the current regulation that it is likely we'll be focused on uninvited and optimizer.
At least in the first phase phase and not related to batteries.
Okay. Thanks, Amy and then Ronen just real quick I'm, sorry, if I missed this the <unk> guidance did you say what are what level of euro you're baking in there.
Oh.
Level of your.
The level of Euro.
<unk>.
Looking at about a 98 since per per euro.
Okay. That's it for us thank you.
Thank you.
And we'll take our next question from Colin Rusch with Oppenheimer. Please go ahead.
Thanks, So much guys could you talk a little bit about the volume of energy storage products in the channel and how much of what you shipped during the quarter was able to sell through during the quarter.
Yeah. So so.
Unlike on the inverter and optimizer.
The channels are very empty and and days on hand are very low on batteries.
Particularly on the single failures.
Channel is more robust with and and not not on the edge.
And that's.
And that's part of the reason, especially on the single phase that there werent that many shipment this quarter compared to the to the three phases battery shipments where the channel is not is.
I'm half loaded.
Okay. That's helpful. And then in terms of the tax rate and how we should think about that going forward. You know you talked about the cadence of some step downs, but you had pretty compelling tax rates historically could you talk a little bit about how we should be thinking about a step down in tax expense, particularly as you have a little bit more robust operation in the U S. Here.
Are you able to offset some of that that's fun and as U S. Ah R&D in any capacity you started lowering that tax rate.
Okay sure. So so first of all again I'll just to explain a little bit the vast majority of the impact that we saw this quarter is a although it started in the last quarter and it was already baked in and in a sense, but is the fact that under new regulations that are indeed that is performed outside of the United States is.
Amortized over 15 years and not recognized immediately.
This is something that was actually legislated in the under the previous a regime, but and was supposed to go away as part of the build back better plan.
Together with the planned disappeared today's this cancellation and therefore, what we see today is that the vast majority of R&D that we're doing today are simply not the taxable income. This year, we're talking about approximately $240 million of R&D expenses that are happening.
Mostly outside of the United States. So you can see the impact.
What we also saw this quarter.
Usually we have a very strong expense related to the vesting of employee stock options as a result of the stock price and now in the stock price is about.
30, something percent less than it was just a quarter ago. We also a see a little bit of lower other income and that of course creates I'm sorry.
Lower tax expense and this create a relatively high taxable income.
The rates that we're going to see forward is going to be dependent on three major items. First one is how quickly we will grow our operating income and we need to remember that this quarter. The rate was inflated also due to the fact that we had very high.
Interest expenses or a currency exchange expenses and this is something that of course created also very large.
Tax rate I would say compared to what we saw before so the first thing that is going to be impacted is how quickly. Our operating profits are going to grow. We expect these to continue to happen second is the fact that every year more percentage of our R&D expenses will be allowed for taxes.
And lastly, the stock price that we cannot project I would say that if we see north of 40% tax rate in third quarter next quarter should be I would say between 30% to 35% again dependent on the stock price and from that point is supposed to go down.
We move forward operations in the U S will not help it a lot we need to remember that under the IRA and again regulations are no doubt so I'm not sure how does tax benefits from our manufacturing will look like especially given the fact that at least right now we see that some of them can be granted as a cash payment instead of.
Just the tax credit and therefore, I do not know how to project. This in general within the next few years, we should go back to the normal but it is going to take you know at least I would say six to seven years to around 20%. The one thing I would say is is a little bit.
When you look at the American corporations next year.
R&D in the U S is going to be also amortized for five five years. So in general what we will see for operations done.
If the United States than inside the U S. The results will be a little bit more similar than they are today.
That's incredibly helpful and I appreciate the detail. Thank you.
Okay.
And well move next to Philip Shen with Roth Capital Partners. Please go ahead.
Guys. Thanks for taking my questions. The first one's a follow up on the U S manufacturing.
I know you can't make any final decisions until we get clarity from the Treasury Department, but can you help us understand how.
How much in terms of Gigawatts for the Inverters, you might be contemplating or we're talking about maybe two to four gigawatts of U S manufacturing and then what's your latest view on the difference between the micro inverter Andy.
Rajiv murder.
Credits, you know 11 cents versus the six and a half cents per watt now.
What's the probability that you think you guys might be able to secure that 11 cents per watt. Thanks.
Oh.
So maybe I'll start with the first one in CV will answer the second one.
And in general.
The capacity that we plan is to fulfill the U S demand from the United States. This is something that I I would just mentioned that you know and we discussed in the past we believe that over time.
Since our products are a large volumetric and end relatively heavy especially when you talk about batteries, we would like to have a manufacturing site in most of our biggest continents or if possible the biggest the countries in which we operate so in a sense.
Factoring in the U S for the U S makes sense operationally better than anything else the thing that stopped us from doing it right now it was the fact that economically this was risks less relevant once the Iran is there and assuming again that the overall.
Regulations will will will be sufficient to justify manufacturing in the U S. It is our intention.
To make the production in the U S of everything that goes to the U S. If it's going to be inverters. It will be inverters. If it's going to be also optimizer as it may be also optimizer is but that's the most.
Favorable thing in CV, maybe you'll comment about the micro inverters and yeah. So yeah.
The act was passed through Congress quickly and it's it's it's no secret that there are a lot of clarifications that are needed in and actually even the technical definitions.
As they are written right now are not clear cut in terms of their applicability to one technology versus the other so so together with many other companies, where we're involved in reviewing and working with the relevant regulators for appropriate clarifications and we are quite confident that it.
We'll end up being a clear and consistent across the various technologies.
In terms of the the way the regulations are applied.
Great. Thanks to you both on that and then a couple of housekeeping questions.
First one's on battery in megawatt hours recognized in revenue can you share what it was for Q3 and then what might be expected for Q4 and then also.
In the quarter Q3, you guys had some.
Higher finance expenses can you give a little more color on that and then also how should we think about how that line item.
And some in Q4 and beyond thanks.
So we'll go one by one first of all in the Q that will be filed over the next day or two and you'll see the recognized revenues were which were approximately $167 million.
From batteries and of course, they're all there, but that's the number.
From a tax point of view from.
Interest expenses and finance expense point of view again, its a matter of how does the euro behave against the U S. Dollar we saw a move that was very strong at the beginning of the last quarter, where the euro devaluated sharply against the U S. Dollar actually over the last I would say almost two and a half months, we see relative.
Lee stability relative stability in this rate as long as the euro is staying within the range of 98 cents, a plus or minus the impact on finance income or expense should be very very small of course once the euro is getting stronger again.
The U S dollars, we're benefiting because as I mentioned in the prepared remarks, we have today over 800 million euros.
Or euro denominated balances on our own or our AR balance.
Balance sheet, and therefore simply taken on 800 million and take the difference in a quarter and youll see exactly what's going to be the impact.
And if the Euro goes down then of course, we are hurt by this impact.
It seems at least to US right now I'm looking at interest rates, both declarations from deferred in the central European banking is that.
It seems to be a little bit more stable and as such we should see.
When neutralize any FX impact actually interest income due to the fact that we do generate several millions of dollars or quarterly on our investments.
Great. Thanks for the color on that and Oh, that's right.
Thanks, Phil.
And well take our next question from Michael Bluhm with Wells Fargo. Please go ahead.
Thanks.
Hey, guys.
I wanted to go back to the cadence of gross margins over the next few quarters just to make sure I understand and it sounds just throw all my questions into one.
Do you expect to still have it hanging expedited shipping costs in Q4, and if so when do you think you'll no longer be paying those expedited shipping costs and then on the batteries.
I know I think last quarter, you said that gross margins were somewhere around 15%. So wondering where that stands right now and when would you expect to get to that 25% target. Thank you.
Thanks for the question, Michael and I'll go one by one.
In general expedited shipments are mainly a result of limitation of supply compared to the demand that we see and we do expect them to diminish and be reduced towards the second quarter end of the second quarter of 2023, where the biggest issue there is actually the ramp up of.
Our Mexican facilities that will require less overseas shipments going into the United States and would also free up the capacity that we have today in China, Vietnam Israeli in Europe for shipments in Europe itself.
So in general.
We do expect those to reduce I'm not sure that they will ever disappear completely because we need to understand that expedite the treatments are sometimes even related to the needs of our customers at that point for example at this point of time as Cedric mentioned everyone everybody.
And he wants to talk about the.
Expected winter in Europe , and when we see customers that are striving for products.
We tried to expedite shipments to them and also make sure that they're meeting the installation cycles that are very much reduced during the winter. There. So I think that expedited shipments will always be there for sure not to the extent that they are today and therefore.
I believe that the relief will be gradual but ever growing towards the second quarter of 2023, I'll just remind.
In one of the previous questions.
We expect that their time to be within our gross margins that we guided during the analyst day being.
28% to 30% on the corporate level and 30% to 32% on the solar level and we keep a feeling comfortable around this so that's on an expedited shipment and please remind me the second one.
Margin of batteries gross margin of batteries gross margin of batteries, yeah, Thanksgiving so gross margins of batteries.
We're aiming at 25% last quarter as you mentioned it was 15% with.
With the growing volumes and especially three phase batteries that are going to Europe , where.
We believe today that the pricing gets a little bit more reflecting is a little bit better margins.
We're not yet there at 25, but this is certainly on the way to get there. So in general we do see an improvement there 25% gross margin is still the target there.
I would like also by the way.
To mention one more thing Michael and everyone related to the previous question about.
About expedited shipment and of course my answer is given the assumption that corvid is no longer with US. However, as you know it's still in China Instilling, China coffee is still very much presence and also very restrictive measurements taken against Covid recently, we heard of a little.
Of eruptions in China, not yet or not impacting us but of course everything that I say is contingent with China continuing to operate normally.
Yeah.
Yeah.
And we'll take our next question from.
Kashi Harrison with Piper Sandler. Please go ahead.
Good afternoon, and thanks for taking the questions. So first one for me how much capacity do you currently have on a megawatt basis and how does that number change once the Mexico facility is fully online and then I had a follow up question.
So kashi. Thanks for the question, we don't we don't give exact number on that but to be clear the limitation is less.
Less capacity related and more supply chain related so to be able to ramp some of our suppliers and.
In particular on some of the components, where we are competing with a with electrical vehicles in in most cases, that's where our limitations are and that is where we are working to to quantify alternatives into to get a larger allocations in that.
The reflected in the growth that we saw this quarter and the growth that we're targeting.
Targeting four for next quarter and beyond it also involves increasing our capacity and production lines in and are testing equipment, but first approximation. The limitation is around a component and component supply.
Okay.
That's very helpful. Thank you and as my follow up I wanted to ask about cash flow from ops working capital has been a big use of cash year to date and it looks like your cash conversion cycles are I think a bit higher than they were back in 2019 in a pre COVID-19 environment and so just wondering rodin as you look at this business moving forward how are you.
About cash conversion cycle.
Yes, so and so forth.
Okay sure. So so first of all you are correct. This year, we see a little bit of a slower cash conversion of the two reasons for this are one is the fact that we do see it.
Increasing our inventories as you will see we had several million tens of millions of dollars of inventory just increasing this quarter. Both the result of our I would call it fashion to avoid what we call. The Golden screw you know the ones crude that you don't have that eliminate you from making a whole product and that means.
We're simply building inventories to make sure that we have stabilized as possible.
Manufacturing capacity and also by the way this quarter, we start we saw approximately 40% and $40 million more inventory just related of materials coming into sell it too in light of the production that we see there. This is the main usage of cash and I add to this the Samsung.
So that we're buying on.
On top of this we also see that as.
Some of our customers are experiencing longer time of shipment.
From our factories to dares, our or in some cases, we see lengthening times of inventory spent on ship simply because the shipping time from China to the U S extended in some cases to 12 weeks from seven. This is also extending very much the cash cycle.
We expect this to reverse in 2023. The first issue is given the fact that we do see some relief on the components front as we mentioned in the first area and also due to the fact that we are.
Stabilizing our manufacturing over time, we will be able to build inventories in the various locations and then.
We're going to have less working capital.
Used and also again in Mexico, where instead of spending close to sometimes 90 days on a boat you see product simply spending 10 days on a truck the <unk>.
Combination of all of this should return I would say by the later part of 2023 to a situation where our cash.
Cash generation is very similar to the non-GAAP profit.
Thank you.
Yeah.
And we'll take our next question from Julien Dumoulin Smith with Bank of America. Please go ahead.
Hey, guys its Alex variable on for Julien.
And just one more if I may just a sort of like follow on or sort of close out this margin discussion around it I think in the past you've been really open about sort of characterizing what the headwinds are today as far as logistics and expedited shipping base and kind of how you see those things rolling off so with.
That in mind, I mean, looking at what you mentioned as far as your tariff volumes. It looks like Mexico is pretty early in the ramp stage you're still targeting.
Full volume or full Reggie volume from that facility by year end. So I'm wondering if looking at the next quarter in terms of the one after that I mean can you break that down again for us as far as 301 roll off.
<unk> expense.
And then ability optimize around that as well as potential carry drag from the component space. Thanks.
So I'll try as much as they can with one correction and this is the fact that Mexico has noted the very early stages. This is actually the.
Third quarter in a row that we are shipping products from Mexico in an increasing volumes and by the way as a result.
I mentioned in our prepared remarks, only 24% of the products that we brought to the U S. We're bearing Chinese tariffs I would just.
Mind, everyone that it was a close to 80% at the beginning of the year. So in that sense, Mexico is happening it's on track and this is definitely our aim.
To provide resi product at 100 per cent from Mexico by the end of this year.
And I think that we're on track by the way there is always certain flavors that you need to bring from other places because you know we have many flavors of inverters. So on that front actually Mexico is going as planned.
From from shipping costs and end and headwinds we used to see in the past as we mentioned in the last quarter approximately burden of a 600 basis points compared to about a year ago that was at the end of Q2 as we mentioned this quarter about 100.
40 basis points of this burden were taken away.
And we believe that we can take until the end of the second quarter of 'twenty three.
I wouldn't say all but a substantial part of the remaining are the remaining amount and this is a pure result of the fact that we do have more capacity and we're able to basically have a more predictable.
Manufacturing that allows us to better plan the capacity with our customers. So so on that front, we definitely see a an improvement.
As it comes to the 301 tariffs we mentioned before that that's about 100 basis points load now it is growing and diminishing and it will not go to zero because today some of our at least commercial products are manufactured outside of the <unk>.
Knighted states.
But they wouldn't move also over time to other locations that are not bearing tariffs and this will happen during 2023.
And.
I also mentioned in the past that there are two areas that we cannot control. One of course is the issue of foreign exchange rates, we do increase prices in order to overcome it but sometimes we see that there is a little bit of a lag here and we cannot always control the mix of our products given the demand that we see.
Again reiterating my my previous answers, we feel comfortable with the fact that we can get closer or to be at the analyst day guided margin by the end of the second quarter of 'twenty three.
Got it Super helpful and thanks for the clarification. There just one follow on I mean, if you make I mean can you expand a little bit more on the demand trends youre seeing between single phase III phase I think you'd really the third and in the U S market to announce and sort of flag, whether directly or indirectly somewhat weaker demand trends.
But I'm curious if you can expand on that what you're seeing and where you think that trends from here. Thanks.
Yeah. So so.
Let's start with a with a bit of a geographical spread so our residential a single things markets. The largest one is the U S are the second largest one is probably the Netherlands, Italy is the single phase residential market as is most of Australia, South Africa, and a few a few countries like that.
So it's not strictly only the U S. And then three phase the large residential markets are our Germany and associated markets around it like Austria.
And Switzerland, so clearly that the countries that are.
It's not related to them being a three phase, but but the countries that are a three phase residential markets like Germany, Austria, Switzerland, and a couple of smaller European markets demand. There is very very strong.
The need is.
Essentials and our market share position is good and we believe that the offering and you always have to look at the combined offering it's not strictly the battery. It's the combination of the battery and the inverter is is well differentiated so we feel we see the strong demand in.
We feel comfortable about the expected growth in our ability to.
Fulfill it and attach rates over there are very very high so almost every.
Solar installation in these countries is going in with a battery.
So that's what's driving the the high demand and attach rates.
And the single phase.
Markets as I mentioned, the markets like Australia, South Africa, the U K, Italy are strong markets as well and the a the demand there for single phase batteries as strong nonetheless, there still smaller markets compared to the United.
States in the Netherlands, if you take those are very big single phase residential markets. The Netherlands is still not that big a battery market.
Is still with net metering and know as a result of that no strong incentive for self consumption.
At the same time, we our installed base over there is a is very very big and as we mentioned earlier, we had a record quarter this quarter as well eventually as what happens in other markets. There is a good chance that in this market as well there will be a need for.
For batteries and then there is a huge potential to retrofit the existing installed base, but that is not something that is expected in the next in the short period ahead.
If you look at the United States, which is obviously, a big single phase residential market.
Attach rates of batteries are increasing but they are increasing at a slower rate than I think a lot of people in the market projected them.
And and I mentioned that our installation rates have increased our two fold from one quarter to a to the other but still the projections were for faster growth rate of attach rates of our batteries and as a result of that also as I mentioned two in answering one of the previous questions.
We have a little bit more inventory in the channel on the single phase.
Batteries and are in the United States.
Two we think that this is a.
As of the market learning how to sell how to install prices are stabilizing and that the the battery attach rate will continue to grow in the United States and possibly even accelerate obviously some of the acceleration might come from the.
From the NIM.
Three changes if they occur and if they occur in a way that encourages our self consumption. So attach rates in the U S are slower than projected there still are there still growing a relatively fast and they have the potential to further accelerate going into the beginning of next year.
Oh.
Got it. Thank you so much I appreciate the color there.
I'll pass it on.
Yeah.
And we'll take our next question from Jeff Osborne with Cowen and company. Please go ahead.
Hey, good afternoon. Thanks for squeezing me in a couple of questions on my end I was wondering if he can go over what the lead times are for both resi and commercial products in the U S and Europe that'd be helpful to understand just as the capacity is ramping up whats going on there.
Yeah. So so.
It is.
And your question it varies a little bit by our by product probably on.
An optimizer than single phase Inverters its in the range of 12.
12, 15, a week or so.
And on a three phased commercial products it is a little bit longer than that probably.
18 to 20 weeks roughly.
In our in the AR and the commercial a three phase inverters.
Got it that's helpful and last question I had is just what do you attribute the share gains in the U S and the commercial side to you I think you have it.
Is it four quarters of double digit growth.
I think we've discussed this in the past. So so first of all the market I think a lot of people have been waiting for a long time for the <unk>.
U S a rooftop market too.
To wake up in a in a way, it's a huge untapped market and and I'm not sure that this is the you know it's it's it's completely released but we're definitely seeing growth in and I think our forecasts are for further growth next year and part of the drivers that are that we see are our corporation.
Investing in solar.
Or a combination of ESG purposes, as well as because of the high electricity rates and are there.
I think that we are in a good position as they are cost effective.
Commercial solution with all of the safety a requirement that these type of corporations might might have so.
That type of trend works in our in our favor and additionally in the last few quarters we've introduced.
Versions of the products that are more optimized for small ground Mount community solar projects and we're seeing growth of share in that segment, which is which.
Which is a growth segment as well so.
So between the.
The growth of the rooftop market.
And and I believe we are.
We're in a position of gaining share in that market and the growth of the community solar and clear day over there.
We know we're gaining share because that were shared previously was zero an hour shipping stuff to this segment I think that's the that's where we are capitalizing on the opportunities.
Great. Thank you.
And we'll take our next question from Joseph Osha with Guggenheim. Please go ahead.
Hello, Hello, everybody just to return to Europe . Obviously, there is a significant disconnect between the megawatt growth and revenue growth, which I assume is mostly storage I just wanted to check if that's correct or whether there's any ASP math going on on the inverter side.
And then just looking forward wondering if we could continue to see that kind of disconnect in terms of.
<unk> towards driving growth in Europe , well beyond what the megawatt volume on the Inverters might suggest.
Yeah.
Yeah.
Yeah, So that is part of the.
What makes it more difficult to to strictly compare revenue to.
Two megawatts of shipments is the.
Is batteries, but not the only because Europe is is also a very strong market. Both in residential and then in commercial and and also there there can be a a a big variation from one quarter to the other and also that has an impact on us.
Uh huh.
But probably that's a secondary effect to the battery effect that you are that you recognized which are which is going to be part of the mix.
Part of the mix going forward, yes.
Okay.
So alright.
And then looking at the U S market.
Yes.
Single phase towards Theres been.
Some finger pointing about commissioning delays and whatnot do you.
You all feel like there are some deliverables from your side in terms of additional software tools to help that installation process or how how are you working with your customers on that in the U S.
So.
Actually on that front and we reported this in the past in the past, we're actually seeing good commissioning times and and we've invested a lot.
And training and and we see that as a as an advantage.
And not as a limiting limiter to to adoption.
I said.
Answering one of the previous questions from my conversations with customers a lot of the adjustment or the progress will be coming from from the whole China learning how to to sell.
To sell batteries to explain the benefits to the.
We are to the consumers.
And then also obviously through installation and.
And simplicity, but I believe where we are today with our with our.
A decent installation times, but we're still working on all of those elements to to reduce it to improve to improve training into to make the process even more things.
Okay. Thank you very much.
Thank you.
Okay.
And once again for your questions that is star.
One.
And that's next to Amit <unk> with BMO capital markets. Please go ahead.
Hi, Thanks for squeezing me in just one quick one for me.
You guys mentioned a couple of times that you kind of expect to get back to that gross margins you laid out at the analyst day by the second quarter of.
'twenty three I was just kind of wondering in terms of the trajectory for the operating profit margins you laid out.
What's the trajectory for that it looks like your <unk> guidance implies that that's going to be kind of flat I guess, the third quarter, despite a little bit better outlook on gross margins.
So in general I mean, I will start by the general trend and then go to the fourth quarter. The general trend is that while we will see as.
As we mentioned again towards the end of the second quarter of 'twenty three.
Return to the guided margins, we believe at least to the Guy whose margins are of the analyst day. This is usually on the heels of the fact that revenues are expected to grow and margins to improve and expenses will usually not grow at the same pace as revenue and diesel.
Or do you expect it to grow the overall operating our operating margin for Q4, specifically.
The reason for the guidance as it is right now is because.
The Q3 operating expenses were impacted by the fact that we have closed some of our activities in a day UBS Division and also a critical part of vision and our E mobility and also we had a little bit of a tailwind coming from <unk>.
<unk>, which we were not sure if it will continue into the fourth quarter. This resulted in actually lower operating expenses.
Compared to the second quarter. Despite of the fact that we continue to increase in head count.
This will reverse in Q4 and Q4 are we will go back to a growth trajectory and here of course, the main question and especially in the way that we're guiding is that okay.
Peripheral margins of errors to any currency movements that made changes.
Sorry change a little bit the results and we're of course not in control, but in general the trend is that the more we are going into the higher margin regime again, we also go to lower.
Regime of operating expenses as revenues and therefore higher operating margin.
Great. Thank you.
And this does conclude the Q&A portion of the call I would now like to turn it back to <unk> for any closing remarks.
Thank you. So so in summary, we are pleased with the progress we made this quarter on all our operational matrix and are looking forward to next quarter and thank you all for joining us today have a great day.
Okay.
This does conclude today's program. Thank you for your participation you may disconnect at anytime and have a wonderful evening.
Okay.
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