Q1 2023 SolarEdge Technologies Inc Earnings Call

Speaker 1: The's jo ST we J of.

Speaker 1: recordings

Speaker 2: This call is being webcast live on the company's website at www.solaredge.com 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 rights reserved.

Speaker 2: the Solar Edge Investor website.

Speaker 2: I would now like to turn the call over to Eric Emanian at Sapphire Investor Relations and Investor Relations for Solar Edge.

Speaker 2: Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31, 2023, as well as the company's outlook for the second quarter of 2023.

Speaker 2: With me today are CB Lando, Chief Executive Officer, and Running Fire Chief Financial Officer.

Speaker 2: C-VU will begin with a brief review of the results for the first quarter ending March 31, 2023. The running will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2020.

Speaker 3: We will then open the call for questions.

Speaker 3: Please note that this call will include four of these statements that involve recent uncertainties that could cause actual results to differ materially from management's current expectations.

Speaker 3: We encourage you to review the SAEPARVA statements contained in our press release and the slides published today for a more complete description. All material contained in the webcast is a sole property in copyright of solar edge technologies with all rights reserved.

Speaker 3: Please note, this presentation describes certain non- GAAP measures , including non-gap net income and non-gap net diluted earnings per share, which are not measures prepared in accordance with U.S. Gap.

Speaker 3: 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 companies operating performance.

Speaker 3: The non-doubt measures should not be considered in isolation from as substitutes for or superior to financial measures prepared in accordance with U.S. gap.

Speaker 3: Listeners who do not have a copy of the quarter and March 31, 2023 press release or the supplemental material may obtain a copy by visiting the Investor section of the company's website. Now I will turn the call over to Suvi.

Speaker 4: Thank you, Erica. Good afternoon and thank you all for joining us on our conference roll today.

Speaker 4: Starting with highlights of our first quarter result, we concluded the quarter with record revenues of approximately $944 million.

Speaker 4: Revenues from our solar business were at a record $909 million while revenues from our non-tholar business were $35 million.

Speaker 4: This quarter we shift 6.4 million power optimizers and 330,000 inverters. This quarter we also shift 221 megawatt hour of residential batteries, a slight increase from mass quarter.

Speaker 4: Our solar business revenue grew quarter over quarter by 9% and by 49% year over year, mostly driven by record revenues in Europe and rest of worlds.

Speaker 4: We still record revenues in many countries this quarter, including Germany, Austria, Switzerland, France, South Africa and Australia, and very strong revenues from the Netherlands and Italy.

Speaker 4: Considering that this was a record revenue quarter from our non-US, non-Europe region, I want to share a little more information about the geographic landscape which we define as ??? zum stick.

Speaker 4: Revenue this quarter from these regions were up 30% quarter over quarter and came from 24 countries across the Asia Pacific, Africa and South America.

Speaker 4: Noteworthy countries in size of markets and revenue include Australia, Israel, Taiwan, Thailand, Korea, Brazil, and South Africa.

Speaker 4: What I think is often overlooked is the extent of our geographic presence and the growth opportunities in these meetings.

Speaker 4: For example, in South Africa, we're due to a significant increase in power outage frequency and duration. We are seeing unprecedented demands for solar products, including our residential battery.

Speaker 4: Orange at Ben, where recent regulation of the Tokyo metropolitan authorities has created a special incentive for PC systems with module-level power electronics, for which we already have local certification.

Speaker 4: As we have said in the past and is evident this quarter, our global presence and infrastructure provides us with stability in our business and access to many growth opportunities.

Speaker 4: Moving back to the core regions and segments.

Speaker 4: The European residential market continues to be very strong for us this quarter. As we ramped shipments of three-stays residential inverters, in particular our new backup inverter, as well as the three-stays residential battery.

Speaker 4: We expect this to continue in the coming quarters as we are still increasing capacity of backup and verters to deliver on the significant backlog and the strong demand for this product. In the US revenues were down quarter over quarter driven by weakness in the residential segment related to the general effect of interest rates and lower battery sales.

Speaker 4: As we noted last quarter, residential origination in the fourth quarter were seasonally down more significantly than in prior years, but a regidation data has intruded in the first quarter to the level of the same time last year and even slightly higher.

Speaker 4: While we expect the uncertainties in the US or the potential market to continue at the short term, we believe that the long-term dynamics of NEM 3.0 and our advantages under this regulation, which I will discuss further in a few moments, as well as the expectation for TTO share growth.

Speaker 4: Cater will to our product offering and position in the market.

Speaker 4: product offering and position in the market. Moving to commercial.

Speaker 4: In the first quarter, we shift the record to 2.1 Gido off of inverters, representing 36% quarter of a quarter, and 108% growth year over year.

Speaker 4: This record is a result of the strong demands we have been discussing in recent quarters around corporate ESG initiatives and the multiple CNI applications, coupled with the ramp introduction that we have achieved.

Speaker 4: Momentum of the CMI market is global, and the inherent advantages and advantages of our solution in this market among the safety, scalability, and balance of system cost to efficiencies, position as well as the demand for our product is still the outspacing capacity.

Speaker 4: On top of the strong demand and market position of our commercial offering, parts of our growth strategy includes providing our customers with energy management applications and services.

Speaker 4: In this context, this quarter, we closed the previous and announced that position of heart systems.

Speaker 4: HercSAT products allow companies to get the granular level of energy transparency and then start acting on what they are seeing.

Speaker 4: It integrates with solar, storage, EV charging, HVAC, factory machinery, building management system, smart meters, and other aspects.

Speaker 4: Now that the acquisition has closed, we will use hard capabilities to augment our software offering for C&I customers by providing additional monitoring and connectivity capabilities as our customers move from solar-only installation.

Speaker 4: Systems with storage, EV charging, and other advanced energy needs.

Speaker 4: I want now to return to the topic of NEM 3.0, which became effective in California in April and the suitability of our product offering to address this regulation.

Speaker 4: The main impact of the NM3.0 regulation is significant reduction in the economic benefit of exporting power to the grid. And as such, it is to the system's owner's advantage to use their energy to stole the system produces during most times of the day. Other than specific instances when the utility pays.

Speaker 4: and exceptionally high rates for the power exported from the system.

Speaker 4: Our large installed base of solar plus batteries in time of use or self-consumption market predominantly in European countries.

Speaker 4: has enabled us to gain experience managing such use cases, as well as develop specific algorithms to maximize the import and export optimization.

Speaker 4: Our analysis shows that the best return on investment under NM3.0 is achieved with the solar plus battery combination. But exact feedback times can be affected by many different factors.

Speaker 4: Among the factors are system size, consumption patterns, over sizing ratio of DC panels to the inverter AC power, battery capacity and power, and the local utility provider's potency.

Speaker 4: In specific use cases, payback can be met within 67 years. More importantly, homeowners can offset their monthly electricity bill by up to 95% using solar plus battery when paying for the system and cash. While when using alone, monthly electricity bill can be reduced by approximately 30%. To achieve best economics of a solar plus battery solution.

Speaker 5: Down.

Speaker 4: To take full advantage of this high rate, the battery needs to have the right capacity and power.

Speaker 4: The Silver Ridge home battery was extended to the Watt hour capacity and five gear a lot of continuous power can discharge and full during this two hour duration contributing to maximum savings.

Speaker 4: In addition, with our DC-Coupled Battery, there is only one AC to DC conversion of the energy stored in the battery compared to three conversions with an AC-Coupled Battery.

Speaker 4: We estimate that approximately 5% to 7% of the energy is lost in every charge cycle of an AC battery.

Speaker 4: DC couple of batteries also makes maximum use of system over-sighting. Since the battery is connected directly to the inverter, and that's with the AC panel, the system can store all the excess energy generated from the panels above inverter AC capacity in the battery.

Speaker 4: generating as much as 3% more power during the peak summer months. Finally, in self-consumption mode, VC couple batteries are simple to install and commission, as they only require one VC connection to the inverter and do not require a main panel upgrade.

Speaker 4: Homeowners can choose to start with a more cross-deceptive self-confliction data rate, which we call rate-saver mode, and add a backup option when desired.

Speaker 4: In conclusion, we feel that our hardware plus software solution addresses the NMT.0 requirements in an optimal way, and we look forward to good adoption of our offering in this market.

Speaker 4: Before handing it over to one end, I would like to give a brief update on our operational stability in growth. Over the last few years, we have dealt with challenges around component availability, supply chain issues, and logistics constraints.

Speaker 4: The general improvement in the market combined with the actions that we have taken have allowed us to return to a more normal model operation.

Speaker 4: In most product areas, we are at a point where our manufacturing capacity is able to meet the man and we can use normal shipping routes, build inventory and reduce lead times.

Speaker 4: For other products and particular three-phase inverters for commercial and residential use, we are still ramping and expect to reach stability within the next couple of quarters.

Speaker 4: Our operational plan is to add manufacturing sites in the U.S. to increase capacity and benefit from the manufacturing credits of the IRA, where we are on track to have U.S. manufactured products in the third quarter of this year.

Speaker 4: With this, I hand it over to one end who will review our financial results.

Speaker 4: Thank you, TV, and good afternoon, everyone. This financial review includes a gap and non-gap discussion. Full reconciliation of the performance to gap results discussed in this call is available on our website and in the press release issue today.

Speaker 4: The second profit is comprised of gross profits for the segment, less operating expenses that do not include amortization of purchase intangible assets, interments of goodwill and intangible assets, stop based compensation expenses and certain other items.

Speaker 4: Total revenues for the first quarter were a record $943.9 million, the 6% increase compared to 890.7 million last quarter and a 44% increase compared to $655.1 million for the same quarter last year. Revenants from our solar segment.

Speaker 4: which include the sales of residential batteries, where a record $908.5 million, a 9% increase compared to $837 million last quarter, and a 49% increase compared to $608 million for the same quarter last year.

Speaker 4: Solar revenues from the United States is quarter, were $255.5 million, a 16% decrease from the last quarter and a 4% decrease from the same quarter last year, representing 28.1% of our solar revenues. Solar revenues from Europe were a record, 570%

Speaker 4: $100 million each and we achieved record revenue in several countries. In particular, we saw meaningful quarter over quarter growth in Germany with 17 percent Switzerland with 177 percent Austria with 253 percent.

Speaker 4: in front with 31% growth.

Speaker 4: Revenues from batteries who slightly is quarter in euros, limited by the fact that we are still renting three-phase inverter supply which is needed for battery coupled systems.

Speaker 4: The rest of the world solar revenues were a record $75.9 million, a 30% increase compared to the last quarter and a 32% increase from last year representing 8.4% of total solar revenues.

Speaker 4: On a megawatt basis, we shipped a record 975 megawatts of inverters to the United States, a record 2.1 gigawatts to Europe , and a record

Speaker 4: 493 megawatts to the rest of the world to a passing 3.6-year-lapse of record quarterly inverter shipments.

Speaker 4: 68% of the mega-obtifment's discordr were commercial products and the remaining 42% were residential and resulted higher European and rest of the world revenues in the total mix.

Speaker 4: In the first quarter, we shift to 211 MWh of our residential batteries, a slight increase from 217.6 glass quarter.

Speaker 4: The vast majority of our batteries continue to be shaped to Europe , driven by the strong adoption and the demand for our three phase solution.

Speaker 4: ASP-ERWATS Discoater, excluding battery revenue, was 22 cents a 7% decrease from 23.7 cents last quarter. This ASP-ERWATS decrease is predominantly a result of increased commercial products in our overall mix, partially offset by stronger euro. On a unit basis, our prices did not change this quarter.

Speaker 4: Our battery A-speed per kilowatt hour was $475, slightly up from $473 in the last quarter, mostly a result of stronger euro and customer mix changes.

Speaker 4: Revenue's Discoater from our non-solar business were $35.2 million. It decreased from $53.6 million in the last quarter a result of seasonality and a controversial?? business.

Speaker 4: Consolidated gap gross margin for the quarter was 31.8% compared to 29.3% in the prior quarter and 27.3% in the same quarter last year. Our non-gap gross margin this quarter was 32.8%.

Speaker 4: 1, sorry, 32.6% compared to 30.2% in the prior quarter and 28.4% in the same quarter last year.

Speaker 4: Growth margin for the solar segment was 35% compared to 32.4% in the prior quarter and 30.2% in the same quarter last year.

Speaker 4: Before diving into the gross margin details, I would like to note that this quarter we have exceeded our financial targets as presented in our analyst day in March 2022.

Speaker 4: And the solar division are inverter and optimizer margins have exceeded 37 percent. Our residential inverter and optimizer products margin exceeded 40 percent and our battery margins exceeded 25 percent. We continue to improve our growth margins through cost reduction activities and higher efficiency within our supply chain.

Speaker 4: and we expect that future growth marketing trends will be mostly driven by products, customer and geographic mix.

Speaker 4: This quarter, our growth margin results were primarily driven by an improved exchange rate between the Euro and the US dollar, further improvement in our shipping and logistical costs, a result of stabilized component availability and manufacturing, which also resulted in lower charges from our contract manufacturers.

Speaker 4: Offsetting or gross margin improvement was a higher portion of commercial sales that are characterized by lower gross margins and adjustment made to our warranty obligations. Good subject to tariffs, excluding batteries, shifts into the United States from China accounted for 12% of our US shipments this quarter, the levels that we expect to slightly decrease

Speaker 4: On a non-GAAP basis, operating expenses for the first quarter were $123.6 million or 13.1% of revenue.

Speaker 4: compared to $119 million or 13.4% of revenue in the prior quarter and $98.9 million or 15.1% of revenue for the same quarter last year.

Speaker 4: We expect to continue to see our operational leverage expanding during 2023 as the revenues continue to grow faster than our operating expenses. However, in the second quarter of 2023, we will see relatively flat percentage of operating expenses to revenue as a result of our annual employee merit process that takes place in the second quarter of each year.

Speaker 4: Our solar segment operating expenses is percentage of solar revenues, which 12.3% compared to 13% last quarter.

Speaker 4: Noonggap operating income for the quarter was a record $183.8 million compared to $149.6 million in the previous quarter and $87.2 million for the same period last year.

Speaker 4: dollars compared to an operating profit of $162.2 million last quarter. The non-solar segment generated an operating loss of $22.9 million compared to an operating loss of $12.5 million in the previous quarter.

Speaker 4: Non- GAAP financial income for the quarter was $24 million compared to a non- GAAP financial income of $59.4 million in the previous quarter, a result of the appreciation of our Euro-denominated cash and customer balances.

Speaker 4: At the preventing exchange rates, we will gradually decrease our balance sheet exposure to the Euro by converting some of our cash balances from Euro to US$ at the higher frequency.

Our non-gap tech expense was 33.2 million dollars compared to 37.5 million dollars in the previous quarter and 13.5 million dollars for the same period last year.

Gaffnet income for the first quarter was a record 138.4 million dollars compared to a Gaffnet income of 20.8 million dollars in the previous quarter and 33.1 million dollars in the same quarter last year. Our non-Gaffnet income was a record 174.58 million dollars.

compared to a non-GapNet income of $171.5 million in the previous quarter and $68.8 million in the same quarter last year. GapNet's latest earnings for share was a record $2.35 for the first quarter compared to 36 cents in the previous quarter and $60.00.

for the same quarter last year. Non-GAF-ness diluted earnings per share was a record $2.90 compared to $2.86 in the previous quarter and $1.20 in the same quarter last year.

Turning now to the balance sheet. As of March 31, 2023, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $1.6 billion. Net of death, this amount is $1 billion.

A Council receivable net increases quarter to $969.5 million compared to $905.1 million last quarter, a reflection of our increased revenue.

As of March 31, our inventory level, Necess Reserve, was at a level of $874.2 million compared to $729.2 million in the prior quarter. It's important to note that our inventory levels this quarter include higher level of finished good products.

a result of stream-light manufacturing.

These finished good inventories in the various regions will allow us to further improve our customer delivery time and reduce shipping and logistic expenses.

Starting to our guidance for the second quarter of 2020-23.

We're guiding revenues to be within the range of $970 million to $1.01 billion.

We expect non-gap growth margins to be within the range of 32 to 35 percent. We expect our non-gap operating profit to be within the range of $195 to $215 million.

Revenues from the solar segment are expected to be within the range of 930 to 980 million dollars. What margins from the solar segment is expected to be within the range of 34 to 37 percent.

I will now turn the call over to the operator to open it up for a question.

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

At this time, if you would like to ask a question, please press the star and one on your touch tone phone. You may withdraw your question any time by pressing the pound key. And once more, that is star and one.

We'll move first to Brian Lee with Goldman Sachs. Your line is open. Hey guys, good afternoon. Thanks for taking the questions. I just had two. First one, Kudos on the Ghost Market Execution here. Clearly, the outlook for 2Q as you acknowledge droning is ahead of the long-term model. So just...

Thank you, Brian . So currently we're not adjusting our numbers compared to what we've got it before, although indeed the gross margin that we presented for the next quarter are above what we've got it. In many senses, we've improved the margin drivers, especially related to the...

the just a cost and of course all the pricing differences related to the fact that the euro was a little bit better and we did affect some increases of prices at the beginning of the first quarter and this is very much impacting the growth margins favorably.

At the same time, we do know that we expect to see some changes to the mix of our product offering and sales over the next few quarters, especially with a higher amount of batteries that will be shipped. And these are characterized with a little bit of a lower gross margin. So on one hand, we do know that we expect to see some changes to the mix of our product offering and sales over the next few quarters.

We still have opportunities to continue and grow margins after a long time that we dealt with component changes. We are doing cost reduction activities within our R&D organizations. There are still places to improve the shipment cost and the higher inventory that we have in the channel, certainly in our warehouse, at least certainly helped this one. But since we do expect it, we will see some changes, at least right now.

We are guiding for a higher level, we'll remain for a few quarters, you know, looking at what are the market trends that we see and what is the adaption rate of each of our products, and then we will decide what do we need to change our intent.

Okay, make sense, sir. And then just again, Kudos on executing well in Europe here. There's been more and more chatter. I feel like to start the year around a potential slowdown in that region. And then also some concerns around maybe pricing getting tougher there. So.

And maybe, you know, Ronan, ZB walk us through, you know, how much visibility one you have in Europe for the second half. Seems like that's a region that has more visibility. And historically, we have had more visibility the way ordering happens there versus the US. But maybe if you could walk us through that. And then also on pricing, you know, what you're doing there, commercial, ready. And then also what you're seeing from competition on the pricing front. Thanks, guys.

Yeah, right. In regards to market dynamics, we don't see right now, which changes in the pattern of demand in the market in here. Power prices have reduced.

to a certain extent, but they're still quite significantly higher than in the past and the return on the investment is good for both consumers and businesses. And we don't see until now any change in the dynamic in the market continues to be strong.

On the competitive side, many companies have availability of product has increased in the market to become more competitive in that regard. And more similar to market dynamics of the past, where we are competing less on the basis of availability and more on the basis of value and the premium capabilities of our solution.

And the other advantages and service and presence, so we say dynamic, you know, we've lived with for more than 10 years and are quite comfortable with our ability to obtain premium pricing for our products and solutions.

All right, we'll pick our next question from Colin Rush with Oppenheimer. Your line is open. Thanks so much guys. Can you talk a little bit about the R&D staff returning to product evolution and cost of programs rather than just qualifying the components and where it might start to see it's an incremental improvement.

and dealing with finding alternatives components in order to maintain and keep manufacturing products. That number is declined significantly and on top of, and we've been able to redirect the R&D resources to focus on first of all on the development of new products.

and cost reduction in parallel to adding more R&D resources globally. I don't want to give the exact ratio just because I don't remember it right now in terms of quantities and ratios, but there's definitely been a change in that regard.

Typically cycles for cross reduction are a few quarters long until the implemented changes and then put out initial units for qualification. So usually that type of effort translates to actual cross reduction in the production line, probably in the range of two to three quarters.

after we actually put the R&D resources, resources and money. That's a bad question. Yep, it is sure to us. Thank you so much. And then we can have the battery production. You know, obviously there's been a lot of them hanging around raw materials. Can you talk a little bit about what your supply chain looks like in terms of pricing and how that's trending here in actual quarters and how much?

and the other one with the second layer that we cannot disclose. In both cases, as is the case by doing in all major battery supplies, there is a dynamic where the cost of the battery cell is following the ability or actually the price.

And here in general, the bigger the amounts are and the bigger the volumes are, you see economies of scale getting a little bit more of a buying power when buying those. The other element that we need to take into account is the fact that we are of course a revenue seller too and once we will have our own battery manufacturing, then the cost of our product will be tied again to the actual cost related to the material manufacturers, not the sell manufacturers anymore, but actually the materials manufacturers in here. The agreement that we have are following again a price in this in general, what we see right now.

Hey, Boen, thanks for taking my questions. Congrats on the strong results. The first question here is on pricing as a follow-up. Our checks with a bunch of your customers in the U.S. Suggest the Home Hub in Verr pricing. Me have been lowered by 10% effective May 1st in the U.S.

Can you talk about that at all? Is it true? How do you expect price in the US trend? You're still out of your guiding, really strong margins in spite of this, if true. And also, we were in touch with a European distributor recently and they're seeing more and more availability of inverters. And I think, you're just talking about, you're not competing less on the availability of inverters. But curious to see if you can talk about pricing as well in Europe , because they're expecting and looking for a price reduction on that continent as well. So thanks for the additional questions I'm pricing here. Thanks.

Yes, I'm starting from the US. So, in the US, we did some refricing of the single-phase offering in order to encourage usage in what the market needs of the energy health that leads to the easier attachment of batteries later on. I'm starting from the US.

It is, in effect, it's more expensive than the normal inverter and on some of the models it's right over than it was. It was probably the overall effect is actually a price increase and we think it will improve or for sure not.

In terms of the dynamic in Europe , as I mentioned, it's back or in a mode of competitive environment. As you know, in Europe , some of the elements that I discussed before in terms of the importance of software solutions and energy management.

Component is becoming a very critical differentiating factor between technologies and alternatives. So it continues to be driven by the application. And that's among other reasons why at this point at least we don't have a plan for any type of road based.

Do you expect a matter of fee stocking at some point, just talk us through what you're seeing with a channel? So, Jarosel, I think that your, the notion here is right. We do see a higher level of inventory in the channels when it comes to what we call weeks or days of inventory in hand compared to Europe , where I would say that US, I would say, is relatively okay when it comes to levels of inventory, but because of the fact that, you know, some of the sell-out a little bit lower, then you see that the weeks of inventory in hand are a little bit higher.

And in Europe , we actually see low inventory days on hand. This is, by the way, the dynamic that we said related to the higher inventories in US are actually more related to our single-saving order because wherever we're looking at our three-saving vector inventory in the channel, this is a place that we see almost across the board and CNI that we see relatively lower levels of inventory. But in that regard, that's something that I think is more important to mention and this is that when we are looking at Europe , for example,

Strauss with J-2's dorkin for?h MS Bridering.

Yes, good afternoon. Thanks for taking our questions. One of the talk about the C&I business. We talked about this on the last call, the amount of backlog that you have, giving you visibility for the rest of this year. I'm just at a high level though, curious. Some of the weakness that we're hearing about, kind of on a macro perspective, front.

or CNNI is very strong for the remaining of the year. And as I mentioned in the remarks, we are still behind in terms of being able to increase capacity to meet it. And this is true globally. There might be here in the Harrison markets.

that are slowing down a little bit, but other markets that are accelerating. So overall, as with it also when you look at the reports that I've seen regarding the expectation for the year over year growth in C&I and the US market is expected to be higher than that of the residential. And this is a phenomenal, just a bit of our knowledge.

their facilities, where houses, manufacturing sites, etc. for use, deep purposes. So as far as we see that the CNI market is robust and our backlog is very strong.

Very clear, thanks. And then wanted to come back to the comments about US manufacturing and 3Q. Are you able to provide more color there as far as where you are in that process as far as you know building up tooling whatever it might be and then is there any initial color you can give us as far as

divided between first starting with a contract manufacturer in order to be very fast to the market and to be able to capture the manufacturing as soon as possible. So since we are already, of course, engaged with the contract manufacturers, we already have teamed.

that were trained on how to make our products. One of the bigger benefits that we have by having Cellar1 is that when we have a new factory that's supposed to ramp up, we can bring people from that factory to Cellar1 to learn how to make our products, how to build them, and how to basically configure the line. This is something that was already done, and I can tell you that we are in process of getting equipment to start manufacturing in Q3, starting to build...

training the employees around it. In Q3 still we're going to see relatively small amounts. And we believe that within three to four quarters the contract manufacturer capacity will be built. One of the reasons for this process is because we want to make sure that the quality of the update.

We're already in advanced negotiations related to the location of this place. And here I've mentioned since it will require a little bit more innovation, it is something that will take us, I believe, at least a year to start having products coming out from the end of Q3 this year. So I believe it's going to be in the second half.

of next year. In general, we intend to have all products coming to the United States to be manufactured in the United States. So here, I think it's more related to the pool from the market rather than our capabilities. We will make sure that our access, that we will have access capacity or enough capacity.

to cover any demand that comes from the US once we have these two factories ramped up. Very helpful. Thank you. And we'll move next to Michael Bloom with Wells Fargo. Your line is open. Thanks. Good afternoon.

Once go back to batteries per minute, it looks like shipments are still not quite taking off and just one of you talk about where.

Attach rates are trending both in the U.S. and the rest of the world. And, you know, should we expect batteries to be somewhat constrained until the three phase inverter supply catches up at the man? Thanks. Yeah, so in the U.S. the attestory are...

We're going very slowly. We expected the shift to the NAC 3.0 and as people begin to understand how to sell it and for the reasons that I mentioned during the comments before we expect the attach rates to a gradually increase.

In regards to Europe , this is as Onen referenced in his comments, we're seeing very strong demand for the batteries and actually the constraint is the availability of our inverters. So we're trying to ramp inverter systems as much as possible because without an inverter, people don't have what to do with the inverter. So we're seeing really strong demand for the batteries and actually the constraint is the availability of our inverter systems. This is as Onen referenced in the comment section. We're seeing very strong demand for the batteries and actually the constraint is the availability of our inverter systems.

So as we continue to increase capacity on the inverters, we believe that the volumes of batteries will increase as well. So generally speaking, we are expecting, and we want to also refer to that in the comments about the model and the impact on the margin, that the ratio of the inverters will be much

opportunities, mainly the countries outside of Europe . Those markets primarily residential, you also see a strong demand for C&I, and really any company you can provide there will be really helpful.

So most of those markets are actually much more tilted to CNI than to residential. Among the markets that I mentioned, the strongest residential markets are Australia and Israel as a good residential market and South Africa is evolving as a reasonable market.

residential market as well as Brazil but the CNI portion and almost all of these markets and in particular in the Asian markets like Taiwan and Thailand and places like that are heavily tilted towards CNI but they are they are sizable.

I don't remember right now for each of these markets, but they're in the hundreds of megawatts, if not gigawatts scale for many of these countries in terms of the size of the market overall and like I say, CMI tilted in many cases. If you look at the history of this market, this is a very large market, and it's in the hundreds of megawatts scale for many of these countries in terms of the size of the market overall and like I say, CMI tilted in many cases in terms of the size of the market overall and like I say, CMI tilted in many cases in terms of the size of the market overall and

I don't remember right now for each of these markets, but they're in the hundreds of megawatts. It's not GigaWat scale for many of these countries in terms of the size of the market overall. And like I said, CMI took in many cases. Thank you. Thank you.

And we'll move next to Corinne Blanchard with Deutsche Bank. Your line is open. Great. Thank you for taking my question. The first question, I want to go back on the European market and trying to get a sense on expectation in 2.2 and 3.2 versus the first quarter.

We see continuous trains in the European market for both applications of residential and commercial. And in both cases most of the European residential market, not all of it, but a lot of it is facing base. And obviously all of the CNI market is facing base. So there our growth is...

is less dependent on demand, it's more dependent on our ramp of manufacturing, which I mentioned will take us another couple of quarters until we're at the full scale of matching the supply to the demand. But right now, we continue to see the European market strong and we're sitting on a robust...

robust backlog that we intend to deliver between now and the end of the year. Okay, and then my follow-up is a similar question with more from the residential versus commercial megawatt hour shift. What should rad TikTok Twitch ads apply to a big, big market?

I believe that you are the 7% also decreased quarter of a quarter for the raise event share one. Do you, how should we think about it going forward? And I believe the slowdown is mostly driven by the UI. Should we expect like flat, flat number? Do you expect further decrease now? Again, I separate for a minute between the...

for likely growth. And the US is dynamic is more market related. And as I mentioned in the remarks, we think that it like, let's happen by the way in many markets where there's a significant change in regulation or in the financial atmosphere. It takes the market some time to adjust.

and to learn how to sell under this environment and how to install under this environment. So it's true for M3.0 in California and it's true for the rest of the market and the interest rate. So how long it will take for the market to adjust and is this the bottom level and is it going to begin to increase or is it going to remain flat? I don't think we have a good...

Thank you.

And we'll move next to Julian DeMoulin-Smith with Bank of America. Your line is open. Hi, this is Morgan Reid for Julian. Can you walk through the moving pieces to get to the gross margin improvement quarter over quarter? What's coming from cost declines and price increases, FX benefits, shift and mix, things like that.

I'm just curious to try to understand what's driving that. Sure, so first of all, again, without going into the numbers themselves, because the amount of moving parts is growing, I would say that we divided to basically, I would say two main areas. The first area is the difference between the price of the product that we are many...

per euro were almost on par in margins when it comes to the United States and therefore, of course, stronger euro is helping there. At the same time, we did see and I think that you see it in our numbers, our commercial products within the mix that are characterized with lower gross margin with substantially higher.

not related to pricing or manufacturing costs and these are all of the other costs related to the supply chain. So by definition, the more streamlined manufacturing we had, the shipment costs that used to be elevated went down not yet to levels that they were before so there is still a little bit of room to grow there and I think that it's evident in our margin for the next quarter. Are we also so because of the fact that we have a very streamlined...

close to where we see ourselves in our model from the various costs. From now on, we expect that most of the changes will be related to the mix of the product. Definitely more batteries will reduce the growth margin, even though, again, on operating profit margins, we are talking about an increase because of the operational leverage that they create. Today, meeting with myself, is going to be even more challenging than anything we've

We still see some tailwinds that can help us in shipping and other manufacturing costs. And of course, the current sea is always a mystery because the local health project is at least right now it seems to be either stable or possibly favorable, but again this is something that very much changes. Let's take a look at the downstream toss!

In all aspects, I think that we're getting closer to where we want to be on the model, and I think that right now the mix of the products will be the thing that will take most of the driver of driving forces when it comes to our gross margin.

That's really helpful. Thank you. And I got you alluded to it earlier than you're in the operating margin kind of throughout the year. I know previously you had given this sort of guidance of maybe a 20 to 22% operating margin towards the end of this year as we exit. I'm just curious how that's fair and given sort of the stronger growth margin. And maybe we had expected mid year here. So just curious if you're operating margin expectations or changing it a lot at all.

In that sense, we're already at 19.5% of operating profit margins on a consolidated level. And on a consolidated level, we said it will be between 19 to 20 on solar. We did say that it will be 20 to 22. And again, we're very close to this number. And again, we feel very comfortable as we got it before, as we'll exit the year.

with operating margins to be at the level that we've guided before and that relates to our financial model. Thank you. We'll take the rest off by. Thank you. And once again, for your questions that is star and one.

We'll move next to Cashy Harrison with Piper Sandler. Your line is open. Good afternoon. Good afternoon and thank you for taking the questions. So as your result of the, you know, operating performance was very robust in Q1. You know, while we're seeing a significant amount of operating income in Q1 and Q2, we're seeing a lot of operating performance in Q1.

to guide working capital was another big use of cash this quarter. Can you provide some context on how you are thinking about working capital and maybe some of that conversion from income to operating cash throughout the year, and then maybe even just at a high level structurally how you think about that conversion on a multi-year basis? And then I have a follow-up.

Okay, sure. So first of all, usually the three elements that are impacting dramatically the working capital is, of course, you know, is sales outstanding when it comes to a collection from our customers. Actually, this quarter, our DSO decreased a little bit, which means that we did not see any major change.

When it comes to customer to vendor payments, again, our terms have not changed significantly. The thing that changed significantly this quarter is actually related to our inventory that grew by about $150 million, and this is actually almost the missing cash from the formula that I will give you in a second.

And this is related to the fact that based on our agreement with Tamsung, we needed to buy battery cells up until the end of Q1 and pay for them while the batteries that are coming from these cells that are the single phase batteries, mostly going to the United States, are simply being sold a little bit slower given all of the aspects that Steve mentioned before it

clearing them out and therefore we will reverse these phenomena. We expect to see on an annual basis that approximately 80% of our operating profit is turning into cash within the same period. And this is simply a result of the fact that we do see that our...

First of all, we're growing, which of course means that usually we are paying quicker than we collect. And secondly is the fact that we do see that in general our sales are more inclined towards the end of the quarter. And the result of this is that we believe that about 80% of operational profit will turn into cash on an annual basis. I think that...

You know, for my second question, I was wondering if you just maybe give us a bit more of a detailed update on this Celitu RAM process. When do you expect Celitu to achieve your target at a desired output level? When do you expect to start selling Celitu residential batteries? Is there a possibility that they simply end up selling the cells of battery demand? And where do you like it to be? Just any sort of detailed update on Celitu would be great.

Sure, gladly. So first of all, and I apologize for maybe a little bit of education on both of the beating, but you know, when you're renting a battery manufacturing factory, there's that process or a stage within the rent of the cold process implementation. You basically adjust various elements within the manufacturing process itself, like temperature. ...

like concentration of materials in the air, level of suction within vacuum chambers, and even the flow of goods on the production floor to the process that you're using. And this is exactly where we were in Q1. That means that at that time, we are consuming a little bit more materials because we're making a lot of tests.

and we're stabilizing the process. Not all of the materials can basically be used and therefore the yield of the factory is not yet there. This is a process that's supposed to end sometimes within Q1, Q2, or actually Q1 and Q2 this year. And at that time we simply start to grow over time the manufacturing capacity by ramping and increasing the speed of movements of components within the manufacturing stations themselves.

And this is what we expect to happen in the second half of this year. In general, the manufacturing capacity of Stella 2 is supposed to be 1.7 ? it's 2 gigawatt hour. At the beginning, because of yield, we expect it to be around 1.7 gigawatts. And we expect to get to this level either by the end of the year or beginning of next year simply because of the fact that you need to rent. So, that's what

What are going to be the usages? First of all, we need to remember that there is a business that is actually growing very nicely for us of the storage division itself. We are selling today within the storage division to outside customers, both battery sales, their sales that they're later on using to make their own battery or battery packs. And we also sell ESS products that are going to applications that are not necessarily tied to solar. And these are spinning reserve.

and other storage containers that you see in various places. We sell in Australia, we sell in Asia. So first of all, there is a demand that is already fulfilled and that is already manufactured from Sela 2 for these products and actually to date, or at least until Sela 2 existed, we had limitation on our supply and also the demand for...

advanced stages of developing this product, and we expect to have first manufacturing batches coming towards the end of this year. So all in all, we believe that throughout 2024, we will consume the majority, if not all, of the sellout to self-production capability. And we'll take our next question.

US. So at this point we're focused on getting inverters and optimizers manufactured in the United States starting with the residential and moving on to commercial. We're also waiting to understand certifications around some of the regulations for...

question. But right now we're focusing on inverters and optimizers and once we understand the regulations on batteries we'll decide if and how to assemble them to you.

Okay, our next question from Joseph Oshah with Guggenheim Partners. Your line is open.

term financial model, how quickly is OpEx likely to grow relative to the top line? How should we think about that in the out years? I'm not sure that I have a very good answer for it because I'll try to give you what moves this ratio because it's a little bit tricky. First of all, it's revenue growth.

grow even faster than what we think this year, as long as the demand is there, and we're able to cope and get the components needed to make sure that the capacity to make sure that we meet it. So potentially it's high growth. The second part of the first is how quickly we can rent the expenses than above.

where you already have more than 5,200 employees working for you. In R&D, this is in particular hard simply because of the fact that you need very skilled people. And actually, where we do R&D today, we've already attracted a lot of the talent. So you're actually going into a pool that is getting a little bit more shallow. So here, I will tell you that we would like to grow as much as we can. I think we do not believe that we can grow at 30 operating...

So these are the moving parts. We believe that, yes, we can over time go beyond this 22% of operating margins. But then again, we need to remember that we need to see also what's going to be the impact of batteries on the growth margin, because this is the other part. So we're still confident that we can increase the operational level. We're still confident that we can increase the operational level.

I think that we gave you what's moving and we'll have to see again, Ethan, when we need to adjust the overall breaking margin target. You know, thank you. That's very helpful. And then, you know, my follow-up, I guess I feel like we've kind of been cat-dancing around this, so let me just ask directly how long is it going to take until you have all of your...

You mentioned in the trends in the US that one of them was the shift to TPO and I'm curious how much did you see that actually happening in Q1 versus expecting it to happen the rest of 23, 24? It's definitely more of an expectation based on what you read and see in the market. It's not something that I can say that we've seen a clear indication in the first quarter. What is generally discussed and related to the IRA advantages that go to the TPOs and this has been a market segment.

that historically we have been strong in and made some announcements recently and continue to strengthen and build those relationships further. Okay, and then just on the CNI growth, maybe just could you just talk to more trends of how quickly that's growing relative to residential and just is it something that any trends that you're seeing in the CNI particular relative to just.

Overall, economics of solar. Yeah. Thank you. Yes, actually, just related to some of the previous questions about the CNI market in Europe so while we were discussing the other questions, they both have some data. So an interesting data point will be that our point to sell data from our distribution channels in Europe .

grew from the fourth quarter to the first quarter by 40%, and from the third quarter to the fourth quarter of 22 by 25%, almost. So these are the types of accelerating factors we're seeing for the growth of the CNI market.

In Europe , again, this is a data point related to how much our distributors are selling to installers and EPCs in the CNI market in Europe . So the dynamic is positive and strong over there. Also, again, in the US, we didn't grow significantly quarter over quarter and megawatt should.

in CNI, but the general assessment in the market is that the expectation is for a stronger year-over-year growth in CNI in the US market compared to residential. So when we look at the three...

geographies that we typically consider of U.S., Europe and the rest of the world, we are seeing a momentum of accelerated growth for CNI and it relates to everything that we discussed in terms of corporates as well as the broad adoptions and push. Up divisions in cracks in how we dice up wisdom and who plays a good role and what we value.

past the legislation

and that regulation is being adopted by other European countries. So you also see a range of government legislations in different countries encouraging growth of the CMI market. So when we collect all of these indicators together, that's where we conclude that this market has good momentum and is going to grow at a relative.

be fast right thank you and it does appear that there are no further questions at this time I would now like to turn it over to arsonists

Thank you. So in summary, we are pleased with our results this quarter, which demonstrate the advantages of our strong position across diverse markets and applications. And so I want to thank you for joining us on our call today and have a good evening. This does conclude today's program.

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