Q4 2023 SolarEdge Technologies Inc Earnings Call
Operator: www. Solaredge.com Hello and welcome to the Solaredge conference call for the fourth quarter and year ended December 31st, 2023. This call is being webcast live on the company's website at www.solaredge.com in the investors section on the events calendar page. This call is the sole property and copyright of Solaredge, with all rights reserved, and any recording, reproduction, or transmission of this call without the express written consent of Solaredge is prohibited.
Yeah.
Uh huh.
Speaker Change: Hello, and welcome to the solar Edge conference call for the fourth quarter and year ended December 31st 2023. This call is being webcast live on the company's website at Www Dot solar H dot com in the investors section on the events calendar page.
Speaker Change: 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 etch Investor website, I would now like to turn the call.
Operator: You may listen to a webcast replay of this call by visiting the event calendar page of the Solaredge Investor website. I would now like to turn the call over to J.B. Love, Head of Investor Relations for Solaredge. Please begin.
Speaker Change: Over to J P loves head of Investor Relations for solar Etch. Please begin.
J.B. Love: Thank you and good afternoon. Thank you for joining us to discuss Solaredge's operating results for the fourth quarter and full year ended December, as well as the company's outlook for the first quarter of. With me today are Zvi Lando, Chief Executive Officer, and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the fourth quarter and full year ended December. Ronen will then review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of the year. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from man-made phenomena. I encourage you to review the Safe Harbor Statements contained in our press release.
J P: Thank you and good afternoon.
J P: Thank you for joining us to discuss oriented operating results for the fourth quarter and full year ended December 31, 2023, as well as the company's outlook for the first quarter of 2024 with me today are TD, Lando, Chief Executive Officer, and Renee and fire Chief Financial Officer.
D. G: D. G will begin with a brief review of the results for the fourth quarter and full year ended December 31, 2023, Ronan will then review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2024, we will then open the call for questions.
D. G: 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 the slides posted on our website ahead of this call today and our filings with the SEC for a more complete description of such risks.
Jonathan Allan Kees: Please see the slides posted on our website ahead of this call today and our filings with the SEC for a more complete description of what we're doing. 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 NOMGAAP measures are presented in this presentation because we believe that they provide investors with a means of evaluating and understanding how the company's management. For more information, visit www.
D. G: Certainties.
D. G: 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.
D. G: non-GAAP measures are presented in this presentation, because we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance.
Jonathan Allan Kees: FEMA.gov, Reconciliation of these measures can be found in our earnings release, presentation, and SEC. These NOMGAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with NOMGAP. Listeners who do not have a copy of the quarter-ended December 31st, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section. And now, I'll turn the call over to you.
A reconciliation of these measures can be found in our earnings release presentation and SEC filings.
D. G: 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.
D. G: Listeners, who do not have a copy of the quarter ended December 31, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website.
D. G: Now I'll turn the call over to David.
Thank you Jamie good afternoon, and thank you all for joining us on our conference call today.
Zvi Lando: Thank you, JB. Good afternoon, and thank you all for joining us on our conference call today. Starting with highlights of our fourth-quarter results, we concluded the quarter with approximately $316 million in revenue.
David: Starting with highlights of our fourth quarter results.
David: We concluded the quarter with approximately $316 million in revenue.
Zvi Lando: Revenues from our solar business were approximately $282 million, while revenues from our non-solar businesses were approximately $33 million. This quarter, we shipped 2.2 million power optimizers and 74,000 inverters. This quarter, we also shipped 133 megawatt hours of battery. As reflected in our fourth quarter results and in the first quarter guidance released today, we continue to face challenges from general market dynamics, as well as the inventory levels of our products in the channels due to the abrupt slowdown in demand in the second half of 2023. That said, we undershipped end market demand by approximately $200 million during the fourth quarter. As we did on our last earnings call, we will share details of fourth quarter sell-through data in several of our major regions and markets and provide an update on our outlook for the normalization of inventory levels and return to revenue growth. Starting in Europe,
David: Revenues from our solar business were approximately $282 million, while revenues from our non solar businesses were approximately $33 million.
This quarter, we shipped $2 2 million power Optimizer and 74000 Inverters. This quarter. We also shipped 133 megawatt hours of batteries.
David: As reflected in our fourth quarter results and in the first quarter guidance released today, we continue to face challenges from general market dynamics as well as the inventory levels of our products and the channels due to the abrupt slowdown in demand in the second half of 'twenty or 'twenty three.
David: That said, we under shipped to end market demand by approximately $200 million during the fourth quarter.
David: As we did on our last earnings call, we will share details of fourth quarter sell through data in several of our major regions and end markets and provide an update on our outlook for the normalization of inventory levels and return to revenue growth.
David: Starting in Europe.
Zvi Lando: Following the unprecedented surge in demand for solar and storage products seen in 2022 and early 2023, the recent combination of increased product availability and an unforeseen tapering of demand has led to elevated inventory levels across Europe. As it relates to demand across our residential products, so through on a dollar basis in Europe in the fourth quarter was down approximately 35% quarter over quarter. Sell-through of our residential inverters and optimizers was down 39%, while sell-through of our residential batteries was down 16%. This decline from the third quarter to the fourth quarter is more pronounced than the 10 to 15 percent seasonal decline we typically see in Europe in the fourth quarter, largely due to the early onset of winter, combined with the market dynamics in Europe associated with high interest rates and regulatory issues and uncertainties in some countries. Looking past the winter season, we expect a more positive environment in the European residential market. In Germany, regulatory policy remains quite favorable despite the recent headline news about renewable subsidy cuts which do not impact residential solar.
David: Following the unprecedented surge in demand for solar and storage product C. N in 2022 in early 'twenty two 'twenty three.
David: The recent combination of increased product availability and an unforeseen tapering of demand has led to elevated inventory levels across Europe.
David: As it relates to demand across our residential products sell through on a dollar basis in Europe in the fourth quarter was down approximately 35% quarter over quarter.
David: South we're about residential and burgers and Optimizes was down 39%, while sell through of our residential batteries was down 16%.
David: This decline from the third quarter to the fourth quarter is more pronounced than the 10% to 15% seasonal decline, we typically see in Europe in the fourth quarter largely due to early onset of winter combined with the market dynamics in Europe associated with high interest rates and regulatory issues and uncertainty.
David: In some countries.
David: Looking past the winter season, we expect a more positive environment in the European residential market in.
David: In Germany regulatory policy remains quite favorable despite the recent headline news about renewable subsidy cuts, which do not impact residential solar.
Zvi Lando: In fact, a portion of the subsidies that were eliminated were caps on electricity prices that were put in place to protect consumers from soaring energy costs seen in 2022. The elimination of these caps is expected to result in higher electricity prices for the German consumer in 2024, improving the return on investment for solar installations. In Austria, the fourth quarter was abnormally weak as the market paused in anticipation of the elimination of the solar VAT tax, which came into effect on January 1st of this year. We expect this market to accelerate in the coming quarters now that customers can benefit from lower-cost solar. Moving to the Netherlands?
David: In fact, a portion of the subsidies that were eliminated where capstone electricity prices that were put in place to protect the consumer is from soaring energy costs being in 'twenty to 'twenty two.
The elimination of these caps is expected to result in higher electricity prices for the German consumer in 'twenty 'twenty four improving the return on investment for solar installation.
David: In Austria in the fourth quarter was abnormally weak as the market paused in anticipation of the elimination of the solar V. A T tax which came into effect on January 1st of this year.
David: We expect this market to accelerate in the coming quarters now that customers can benefit from lower cost solar.
David: Moving to the Netherlands.
Zvi Lando: Following a first half of 2023 that saw installation rates nearly 50% above 2022 levels, the market, by the fourth quarter, fell more than 50% from peak levels due to uncertainty around the Dutch election and potential policy changes regarding net meters. While the recent decision by the Dutch Senate to keep net metering in place for the foreseeable future relieves some of the uncertainty in the market, questions remain as to the eventual policy around net metering. Therefore, while we believe the markets will likely react positively, it remains to be seen if it will return to the 2022 level. This decision, however, will slow down the transition of the Netherlands to a battery market.
David: Following a first half of 'twenty to 'twenty, three that's doing installation rates nearly 50% above 2022 levels the market by the fourth quarter fell more than 50% from peak levels due to uncertainty around the Dutch election.
David: And potential policy changes in net metering.
David: The recent decision by the Dutch Senate to keep net metering in place for the foreseeable future relieves some of the uncertainty in the market.
David: <unk> remain as to the eventual policy around net metering.
David: Therefore, while we believe the markets will likely react positively it remains to be seen if it will return to 2022 levels.
This decision, however will slow down the transition of the Netherlands to a battery market we.
Zvi Lando: We are well positioned for a solar-only Netherlands market, as well as for the transition to battery and self-consumption that will take place in a few years' time. I will have more to say on the specific product that we have introduced to capitalize on our market-leading position in the Netherlands in a moment. Considering these country-specific dynamics and typical seasonal patterns, we think European residential installations will bottom in the first quarter and improve thereafter. Moving on, to our European commercial business.
David: We are well positioned for our solar only Netherlands market as well as for the transition to battery and self consumption that will take place in a few years' time.
David: I will have more to say on this specific product that we have introduced to capitalize on our market leading position in the Netherlands in a moment.
David: Considering these country specific dynamics and typical seasonal patterns, we think European residential installations will bottom in the first quarter and improve thereafter.
David: Moving to our European commercial business.
Zvi Lando: Sell-through in the fourth quarter was down approximately 40% quarter over quarter. The European commercial market was down in the second half of 2023 for similar reasons as the market as a whole. We are more optimistic about the potential growth of the commercial market due to seasonality, the expected rise in electricity prices, as well as regulatory support for both agri-PV, renewable energy communities, and solar on multi-dwelling units, or MDUs, in certain countries on the continent. Moving to the U.S. residential market, Dynamics here are relatively unchanged from what we witnessed in the second half of 2020, namely a significant slowdown in installations in California due to the rollover of NEM 2.0 and continued slow growth in the uptake of NEM 3.0 and in the rest of the country, slowness in markets with lower electricity prices.
David: Sell through in the fourth quarter was down approximately 40% quarter over quarter.
David: European.
David: Commercial market was down in the second half of 2023 for similar reasons as the market as a whole.
David: We are more optimistic about the potential growth of the commercial market due to seasonality the expected rising electricity prices.
David: Whether it's the regulatory support for both I agree PV renewable energy communities and solar on multi dwelling units or M. D use in certain countries on the continent.
Moving to the U S residential market.
David: Dynamics here are relatively unchanged from what we witness witnessed in the second half of 'twenty twenty-three, namely a significant slowdown in installations in California due to the rollover of NIM 2.0.
David: And continued slow growth in the uptake of NIM of 3.0 and in the rest of the country slowness in markets with lower electricity prices.
Zvi Lando: Sell-through of our residential products in the U.S. in the fourth quarter was down 8%, with Inverter and Optimizer sell-through still down 12%, and battery sell-through up 43% as more customers realize the benefit of our DC-coupled storage architecture. We do not expect significant changes in residential market dynamics in the U.S. until such time as interest rates decline. In addition, the market should improve as installers are able to benefit from the various incentives offered by the IRS.
David: Sell through of our residential product in the U S. In the fourth quarter was down 8% with inverter and optimize their sell through down 12% and battery cells through up 43% as more customers realize the benefit of our D C coupled storage architecture.
David: We do not expect significant changes in the residential market dynamics in the U S until such time as interest rates decline in.
David: In addition, the market should improve as installers are able to benefit from the various incentives offered by the I R E.
David: The commercial market in the U S continues to be the most positive segment from a growth perspective in fact commercial sell through in the U S was up 22% quarter over quarter to hit a record high.
Zvi Lando: The commercial market in the U.S. continues to be the most positive segment from a growth perspective. In fact, commercial sell-through in the US was up 22% quarter over quarter to hit a record high. Given the continued drive towards net-zero carbon emissions by enterprises, our new product introductions which serve broader portions of this market, and the expected benefits from the availability of our IRA-eligible products, we expect a positive 2024 for the U.S. C&I market as a whole, and for us as a leader in this market. Moving to the rest of the world, we do not see dramatic shifts in overall revenue over the next several We continue to see good potential in Australia, Taiwan, and Thailand, where a rapid shutdown requirement for commercial rooftops was recently put in place.
David: Given the continued drive towards net zero carbon emissions by enterprises, our new product introductions, which serve broader portions of this market and the expected benefits from the availability of our I R. A eligible products. We expect the positive 'twenty 'twenty four for the U S C&I market as a whole.
David: For us as a leader in this market.
Moving to the rest of the World, we do not see dramatic shift in overall revenue over the next several quarters outside of typical seasonality. We continue to see good potential in Australia, Taiwan, and Thailand, where rapid shutdown requirements for commercial rooftops was recently put in place.
David: Moving now to our current expectation for the inventory clearing face.
Zvi Lando: Moving now to our current expectation for the inventory clearing phase. In the fourth quarter, sell-through from our distributor customers was slightly below $500 million, indicating that we undership demand by approximately $200 million. Considering the market dynamics that we have discussed, as well as the normal seasonality pattern, we expect to reach an underlying business run rate of $600 to $650 million in the second half of the year. Our expectation for the first quarter is that sell-through should be flat to slightly down versus the fourth quarter, meaning we expect to undership demand in the first quarter by approximately $250 to $300 million. Looking ahead, we expect underlying demand to improve in the second and third quarters, given typical seasonal improvements and market dynamics discussed earlier.
In the fourth quarter sell through from our distributor customers with slightly below $500 million.
David: Indicating that we under shipped demand by approximately $200 million.
David: Considering the market dynamics that we have discussed as well as normal seasonality pattern, we expect to reach an underlying business run rate of $600 million to $650 million in the second half of the year.
David: Our expectation for the first quarter is that sell through should be flat to slightly down versus the fourth corner, meaning we expect to under ship demand in the first quarter by approximately $250 million to $300 million.
David: Looking ahead, we expect underlying demand to improve in the second and third third corner, given typical seasonal improvements and market dynamics discussed earlier, therefore, we expect to.
Zvi Lando: Therefore, we expect to undership less in each successive quarter after Q1 until inventory in the channels has normalized by year end. With our expectations for reduced revenue levels over the course of 2024, we have made and continue to implement several measures to align our cost structure with a projected business outlook, including a 16% reduction in our workforce that we announced last month, closure or capacity reductions across our manufacturing base, and exiting from certain lines of business. Through these actions, we made sure not to impact our R&D activities in the development of future products that will enable us to maintain our strong position in this market, which we remain optimistic about in the mid and long term. Ronen will discuss the financial impacts of these measures in his remarks.
David: To under ship less in each successive quarter after Q1 until inventory in the channel have normalized by year end.
David: Yeah.
David: With our expectations on reduced revenue levels over the course of 'twenty 'twenty four we have made and continue to implement several measures to align our cost structure with the projected business outlook, including a 16% reduction in our workforce that we announced last month.
David: Closure or capacity reductions across our manufacturing base.
David: And exiting from certain lines of business.
David: Through these actions, we made sure not to impact our R&D activities and the development of future products that will enable us to maintain our strong position in this market, which we remain optimistic about over the mid and long term.
David: Well, then we'll discuss the financial impact of these measures in his remarks.
Zvi Lando: Moving on to operations, we have reduced our manufacturing footprint globally. At the same time, we continue to ramp manufacturing at our U.S. facility, where we shipped over 90 megawatts of energy hub inverters in the fourth quarter. We expect to manufacture over 200 megawatts in the first quarter and to hit the quarterly manufacturing run rate of 500 megawatts in the second quarter. Additionally
David: Moving on to operations.
David: We have reduced our manufacturing footprint globally at the same time, we continue to ramp manufacturing at our U S facility, where we shipped over 90 megawatts of energy hub Inverters in the fourth quarter, we expect to manufacture over 200 megawatts in the first quarter and to hit the quarterly manufacturing run rate.
500 megawatts in the second quarter.
David: Additionally.
Zvi Lando: We are on target to begin producing optimizers and commercial inverters at the second contract manufacturing location, with small quantities expected in the second quarter and significant volumes in the third quarter. Moving on to product. We have recently begun commercial shipments of three new products that address market segments that we did not previously serve and that we expect will positively contribute to our business in 2024 and beyond. Starting with the recent announcement of the commissioning of the first U.S. installation of our 330-kilowatt inverter at a 1-megawatt ground-mount project in California, following initial installations in Europe and Asia. This inverter is coupled with our new H1300 221 power optimizer. This is our first optimizer equipped with high frequency DC power line communication technology, which allows communication with a large number of optimizers for ground mount applications, as well as improved remote software upgrade capability.
David: We are on target to begin using the optimizer and commercial inverters at the second contract manufacturing location with small quantity is expected in the second corner and significant volumes in the third quarter.
David: Moving on to products.
David: We have recently began commercial shipments of three new products that address market segments that we did not previously serve and that we expect will positively contribute to our business in 'twenty 'twenty four and beyond.
David: Starting with the recent announcement of the commissioning of the first U S installation of our 330 kilowatt inverter at the one megawatt ground Mount project in California. Following initial installations in Europe and Asia.
David: This inverter is coupled with our new age 1300, two to one power optimizer. This.
David: This is our first optimizer equipped with high frequency D. C power line communication technology, which allows communication with large number of optimizes for ground Mount applications as well as improved remote software upgrade capabilities.
Zvi Lando: We are excited about this product and its application in the community solar and agri PV markets, and we'll continue to ramp production for further deliveries in 2024 to the US, Europe, and Asia. Second, in the fourth quarter, we delivered to customers in South Africa the first shipment of our 102-kilowatt-hour commercial backup battery. This represents an entirely new business opportunity for rooftop and ground-mount solar with applications across many geographies and customers. We intend to roll out the product to multiple European countries in the coming quarters as we certify the product in various regions. Third,
David: We are excited about this product and its application in the community solar and Agri PV markets and will continue to ramp production for further deliveries in 'twenty 'twenty four to U S Europe and Asia.
David: Second.
David: In the fourth quarter, we delivered to customers in South Africa. The first shipment of our 102 kilowatts hour commercial backup battery.
David: This represents an entirely new business opportunity for rooftop and ground Mount solar with applications across many geographies and customers.
David: We intend to rollout the product in multiple European countries in the coming quarters as we certify the products in various regions.
David: Third.
Zvi Lando: Our tracker product continues to gain momentum. To date, we have installed approximately 37 megawatts and have already confirmed orders for approximately 110 additional megawatts that are scheduled to be installed this year. This tracker is optimized for installations on constrained and sloped terrains, eliminating the need for costly grading and construction, and as such, is well-suited for community solar and agri-PV.
David: Our tracker product continues to gain momentum to date, we have installed approximately 37 megawatts and have already confirmed orders for approximately 110 additional megawatts that are scheduled to be installed this year.
David: This tracker is optimized for installations unconstrained and sloped to range.
David: Eliminating the need for costly grading in construction and as such is well suited for community solar and Agri PV.
David: The trackers come with advanced software that is designed to optimize production predict weather changes maximize bifacial gains and respond to remote commands.
Zvi Lando: The trackers come with advanced software that is designed to optimize production, predict weather changes, maximize bifacial gains, and respond to remote commands. Each of these three products, by themselves and in combination, allows us to provide our customers with an optimized solution for multiple special outdoor applications like floating solar, community solar, carports, agri-pv, and others.
David: Each of these three products by themselves and then combination allow us to provide our customers with an optimized solution for multiple special outdoor applications like floating solar community solar Carports I agree P V and others.
Speaker Change: Let's talk about software.
Speaker Change: We have been talking about solar age one for residential since its launch at the inter solar last year and have been consistently releasing new features into the markets.
Zvi Lando: We have been talking about SolarEdge One for Residential since its launch at InterSolo last year and have been consistently releasing new features into the market. One very timely example of Solaredge 1's benefit is currently taking place in the Netherlands. In the last year, many utilities in the Netherlands have adopted negative rate policies, in which at certain times, consumers who export power into the grid are penalized for the power they are exporting. To alleviate this, we introduced the negative rate optimization feature that, through integration into the energy markets, knows when export rates turn negative, and automatically stops export of energy and maximizes consumption from the grid, providing customers with incremental savings. Beyond the Netherlands, this capability has already been rolled out to Belgium, Sweden, and Poland and will be rolled out to additional countries on an as-needed basis.
Speaker Change: One very topical example of stoneridge ones benefit is currently taking place in the Netherlands.
Speaker Change: In the last year, many utilities in the Netherlands have adopted negative rate policy policies in which at certain times consumers, who exports power into the grid are penalized for the power they are exporting.
Speaker Change: To alleviate this.
Speaker Change: We introduced the negative rate optimization feature that through integrations to the energy markets knows when exports rates during negative and automatically stopped stopped exports of energy and maximizes consumption from the grid.
Speaker Change: Providing customers with incremental savings.
Beyond this the Netherlands. This capability has already been rolled out to Belgium, Sweden, and Poland and will be rolled out to additional countries on an as needed basis.
As it's a cloud enabled solution.
Speaker Change: This feature conserve our entire they get see fleet as well as new installations of residential and C&I systems.
Zvi Lando: As it's a cloud-enabled solution, this feature can serve our entire legacy fleet as well as new installations of residential and CNI systems. Since launching the feature late in 2023, over 9000 customers have registered for it, and there have been more than 70 events in the last three months where customers have saved money using the feature. Another important software feature that we are in the process of field testing is dynamic rate optimization. Dynamic rates are complex energy trading methods where utilities publish the electricity import and export rates every day for the next 24 hours, which change dynamically throughout the day. The SolaredgeOne Energy Optimization Algorithm imports the rates from the utility company and optimizes PV production, energy storage, and energy consumption to maximize homeowner savings through the strength of the algorithm team that we have built in our R&D group. We aim to provide a best-in-class energy management software suite in order to generate maximum savings for our customers through our simple and user-friendly interface. I will now hand it over to him.
Speaker Change: Since launching the feature late in 2023 over 9000 customers have registered for it and there has been more than 70 events in the last three months, where customers have saved money using the feature.
Another important software feature that we are in the process of field testing is dynamic right optimization.
Speaker Change: Dynamic rates are complex energy trading methods, where utilities publish the electricity imports and import and export rates every day for the next 24 hours, which changed dynamically throughout the day.
Speaker Change: The solar edge, one energy optimization algorithm imports the rates from the utility company and Optimizes P V production energy storage and energy consumption to maximize homeowners savings.
Speaker Change: Through the strength of the algorithm team that we have built in our R&D group. We aim to provide a best in class Energy management software suite in order to generate maximum savings for our customers through a simple and user friendly interface.
Now hand, it over to him.
Speaker Change: And get television and good afternoon, everyone.
Speaker Change: The market situation, which resulted in lower revenue levels in the fourth quarter and in the next quarter creates various anomalies in our financials, which I would address today.
Speaker Change: For a full comparison between our financial results for the quarter and the same quarter last year. Please refer to the press release issued today and to the supplemental materials posted in our Investor Relations section on our website.
Ronen Faier: Thank you, TV, and good afternoon, everyone. The market situation, which resulted in lower revenue levels in the fourth quarter and in the next quarter, created various anomalies in our financials, which I will address today. For a full comparison between our financial results for the quarter and the same quarter last year, please refer to the press release issued today and to the supplemental materials posted in our Investor Relations section on our website. Total revenues for the fourth quarter were $316 million. Revenues from our solar segment, which includes the sales of batteries, were $282.4 million. Solar revenues from the United States this quarter were $112.8 million, representing 40% of our solar revenues. Solar revenues from Europe were $120.5 million, representing 43% of our solar revenue. From the rest of the world, solar revenues were $49.1 million, representing 17% of our total solar revenues. On a megawatt basis, we shipped 283 megawatts to the United States, 335 megawatts to Europe, and 283 megawatts to the rest of the world for just over 900 megawatts of total shipping.
Speaker Change: Total revenues for the fourth quarter were $316 million revenues from our solar segment, which include the sales of batteries were $282 $4 million.
Speaker Change: Solar revenues from the United States this quarter were $112.8 million, representing 40% of our solar revenues.
Solar revenues from Europe were $125 million, representing 43% of our solar revenues.
Speaker Change: Rest of the World Solar revenues were $49 $1 million, representing 17% of our total solar revenues.
Speaker Change: On a megawatt basis with shipped 283 megawatts to the United States 335 megawatts to Europe, and 283 megawatts to the rest of the world for just over 900 megawatts of total shipments.
Speaker Change: 61% of the megawatt shipments this quarter or commercial products with the remaining 39%, whereas it actual.
Speaker Change: In the fourth quarter, we shipped 133 megawatt hour of our residential and commercial batteries with the majority shipped to Europe.
Speaker Change: From a product perspective, and as a result of the high three phase channel inventory.
Speaker Change: In the German speaking countries.
Speaker Change: This quarter, our shipment was heavily skewed to single phase batteries that are manufactured using the Samsung sells and that carry significant lower margins.
Ronen Faier: 61% of the megawatt shipments this quarter were commercial products, with the remaining 39% residential. In the fourth quarter, we shipped 133 megawatt hours of our residential and commercial batteries, with the majority shipped to Europe. From a product perspective and as a result of the high three-phase channel inventory in the German-speaking countries, this quarter, our shipment was heavily skewed to single-phase batteries that are manufactured using Samsung cells and that carry significantly lower margins. In the fourth quarter, due to inventory imbalances in the distribution channels, we shifted a higher portion of optimizers to inverters. As a result, ASP per watt this quarter, excluding battery revenues, was $0.236, a 44% increase from $0.164 in the last quarter. Additionally, while the typical ratio of inverters to optimizers is 1 to 24, the ratio this quarter was 1 to 30. In general, our unit prices were largely unchanged this quarter. Our battery ASP per kilowatt hour was $403 this quarter, down from $475 per kilowatt hour in the previous quarter.
Speaker Change: In the fourth quarter due to inventory imbalances in the distribution channels, we shipped higher portion of optimizer to Inverters as a result, ASP per watt this quarter. Excluding battery revenues was 23 six cents, a 44% increase from $16.04 in the last quarter.
Speaker Change: Well the typical ratio of Inverters to optimizer is 1% to 24 the ratio this quarter was one 230.
Speaker Change: In general our unit prices were largely unchanged this quarter.
Speaker Change: Our battery ASP per kilowatt hour was $403 this quarter down from 475 per kilowatt hour in the previous quarter. The decrease is largely due to an inclusion of our first shipments of our commercial battery, which carry a lower ASP per kilowatt hour as well as the previously announced price.
Decreases on our residential batteries.
Speaker Change: Revenues this quarter from our non solar businesses comprising of energy storage and all other segments were $33 $5 million. Following the discontinuation of our LCD business. This revenue is mostly attributed to our energy storage Division.
Speaker Change: Consolidated GAAP gross margin for the quarter was a negative 17, 9% compared to positive 19, 7% in the private prior quarter, largely due to our discontinued operations and restructuring activities.
Speaker Change: non-GAAP consolidated gross margin this quarter was three 3% compared to 28% in the prior quarter.
Ronen Faier: The decrease is largely due to the inclusion of our first shipment of our commercial battery, which carries a lower ASP per kilowatt hour, as well as the previously announced price decreases on our residential battery. Revenues this quarter from our non-solar businesses, comprising energy storage and all other segments, were $33.5 million. Following the discontinuation of our LCV business, this revenue is mostly attributed to our energy storage division. Consolidated gap gross margin for the quarter was a negative 17.9% compared to a positive 19.7% in the prior quarter, largely due to our discontinued operations and restructuring activities.
Speaker Change: Gross margin for the solar segment was 4% compared to 24% in the prior quarter. This amount includes 210 basis points of IRA benefits.
Speaker Change: Given that the low revenue environment creates various anomalies in our margin structure I would like to spend a few minutes addressing the main drivers of our gross margins and the impact on the current and next quarter's margin level.
Speaker Change: This breakdown, we will provide more detail than we typically disclose.
Speaker Change: And we will provide additional color on our quarterly earnings calls as long as the current situation persists.
Speaker Change: The first layer of gross margin is what we defined as direct gross margins, which is the difference between the price paid by our customers and our direct cost paid to our contract manufacturers.
Ronen Faier: Non-GAAP consolidated gross margin for this quarter was 3.3% compared to 20.8% in the prior quarter. Gross margin for the solar segment was 4% compared to 24% in the prior quarter. This amount includes 210 basis points of IRA benefits.
Speaker Change: This part of the gross margin is affected by the prices in which we sell our products.
Speaker Change: Customer the product and the geographic mix and the cost of components and other manufacturing costs.
Speaker Change: This margin there is not dependent on revenue level, but he's only dependent on price cost and mix.
Ronen Faier: Given that the low-revenue environment creates various anomalies in our margin structure, I would like to spend a few minutes addressing the main drivers of our gross margins and the impact on the current and next quarter's margin levels. This breakdown will provide more detail than we typically disclose, and we will provide this additional color on our quarterly earnings calls as long as the current situation persists. The first layer of gross margin is what we define as direct gross margin, which is the difference between the price paid by our customers and our direct costs paid to our contract manufacturers.
Speaker Change: In the fourth quarter direct margin was 970 basis points lower than the third quarter. A direct result of an atypically high portion of large customers with within our mixed it enjoy volume discounts and a very high portion of our single phase batteries that are based on <unk>.
Speaker Change: Samsung sells purchased under prices that prevailed in the battery cell market in 2022.
Speaker Change: These were offset by higher incentives on products, we made in the United States.
Speaker Change: We expect to recover most of this gross margin in Q1 due to product and customer mix changes.
Ronen Faier: This part of the gross margin is affected by the prices at which we sell our products, the customer, the product, and the geographic mix, and the cost of components and other manufacturing costs. This margin layer is not dependent on revenue levels, but it's only dependent on price, costs, and mix. In the fourth quarter, direct margin was 970 basis points lower than the third quarter, a direct result of a typically high portion of large customers within our mix that enjoy volume discounts and a very high portion of our single phase batteries that are based on Samsung cells purchased under prices that prevailed in the battery cell market in 2022. However, these were offset by IRA incentives on products we made in the United States. We expect to recover most of this gross margin in Q1 due to product and customer mix changes. Total gross margin is achieved by adding additional costs of goods sold or other COGs to the direct costs. OCOGs are not directly related to the product volumes sold in this quarter.
Speaker Change: Total gross margins are achieved by adding additional costs of goods sold or other cogs to the direct costs.
Speaker Change: Cogs are not directly related to the product volumes sold.
Speaker Change: It's sold in this quarter some O cogs are variable such as shipment costs and tariffs and warranty accrual on a newly sold products and some are not variable such as warranty expenses on our existing fleet manufacturing and support departments and contract manufacturers charges.
Speaker Change: Well in the fourth quarter, we lowered our old Cogs by approximately 50% on an absolute dollar basis the.
Speaker Change: The greater decline in revenue on an absolute basis led us to these economies of scale that had negative impact of 930 basis points on our fourth quarter solar gross margins by means of example, we lowered our production and support the department's costs by 12% on an absolute.
Speaker Change: Basis in Q4, and yet these costs accounted for 670 basis points negative impact compared to the third quarter on gross margin due to lower revenue.
Ronen Faier: Some OCOGs are variable, such as shipment costs and tariffs, and warranty accrual on newly sold products. And some are not, such as warranty expenses on our existing fleet, manufacturing and support departments, and contract manufacturers' charges. Well, in the fourth quarter, we lowered our OCOGs by approximately 50% on an absolute dollar basis. The greater decline in revenue on an absolute basis led us to these economies of scale that had a negative impact of 930 basis points on our fourth quarter solar gross market. By means of example, we lowered our production and support department's costs by 12% on an absolute basis in Q4, and yet these costs accounted for 670 basis points of negative impact compared to the third quarter on gross margin due to lower revenue.
Speaker Change: Another example is warranty expenses and accrual.
Speaker Change: Which were 14, 9% lower on an absolute dollar basis and two in Q4, and yet accounted for 200 basis points negative impact on gross margins due to the lower revenue.
Speaker Change: Although we further expect a reduction in the absolute dollar value spending in the first quarter of 2024, the lower guided revenues will continue to negatively impact our gross margins. This phenomena is expected to reverse throughout the year as channel inventories clear out.
Speaker Change: Gross margin for our non solar segment was negative two 2% an improvement from negative 23, 9% last quarter, a result of higher revenues.
Speaker Change: From our energy storage division and better utilization of Sel two factory.
Ronen Faier: Another example is warranty expenses and accruals, which were 49% lower on an absolute dollar basis in Q4 and yet accounted for 200 basis points of negative impact on gross margins due to the lower revenue. Although we further expect a reduction in the absolute dollar value of spending in the first quarter of 2024, the lower guided revenues will continue to negatively impact our gross margin. This phenomenon is expected to reverse throughout the year as channel inventories clear out. Gross margin for our non-solar segment was negative 2.2 percent, an improvement from negative 23.9 percent last quarter, a result of higher revenues from our Energy Storage Division and better utilization of CELA2 factors. On a non-GAAP basis, operating expenses for the fourth quarter were $118.3 million compared to $128 million in the prior quarter. This reduction is predominantly related to reimbursements of salaries of Israeli employees that entered reserve service, as well as lower accruals for doubtful accounts and additional savings.
On a non-GAAP basis operating expenses for the fourth quarter were $118 $3 million compared to $128 million in the prior quarter. This reduction is predominantly related to reimbursements of salaries of Israeli employees that entered the reserve surface as well as Laura.
Speaker Change: For doubtful accounts.
Speaker Change: And additional savings.
Speaker Change: As announced in the beginning of the year during the fourth quarter of 2023 in the first quarter of 2024, we took significant cost reduction measures, including a reduction of 16% over our workforce.
Speaker Change: We expect our non-GAAP operating expenses to stabilize in the second quarter of 2024 and once the full impact of those cost savings is realized we would expect operating expenses to range between approximately $112 million to $117 million a quarter, while we can.
Speaker Change: Tina to seek further efficiencies in all of our operations.
Speaker Change: This quarter, we also incurred significant discontinuation and restructuring costs in our GAAP results.
Speaker Change: As mentioned in the previous called upon the termination of our agreement with still antiques, we have exited the light commercial vehicle business.
Ronen Faier: As announced at the beginning of the year, during the fourth quarter of 2023 and the first quarter of 2024, we took significant cost reduction measures, including a reduction of 16% of our work force. We expect our non-GAAP operating expenses to stabilize in the second quarter of 2024. And once the full impact of those cost savings is realized, we would expect operating expenses to range between approximately $112 to $117 million a quarter, while we continue to seek further efficiencies in all of our operations. This quarter, we also incurred significant discontinuation and restructuring costs in our GAAP results. As mentioned in the previous call, upon the termination of our agreement with Stellantis, we have exited the light commercial vehicle business. The Stellantis contract termination generated an inventory write-off of $36.2 million and additional discontinuation costs of $0.8 million.
Speaker Change: Just the Atlantis contract termination generated an inventory write off of $36 $2 million and additional discontinuation costs of zero point $8 million and.
Speaker Change: In addition, as previously reported.
Speaker Change: We discontinued our manufacturing in Mexico, and reduced our manufacturing levels in China, Our GAAP results for the fourth quarter include $23 $2 million of restructuring expenses, the majority of which relates to contract manufacturer of Chargers and equipment retirement costs.
Speaker Change: GAAP operating loss for the quarter was $237 $6 million compared to an operating loss of $16 $7 million in the previous quarter.
Speaker Change: non-GAAP operating loss for the quarter was $107 million to $8 million compared to an operating profit of $23 $1 million in the previous quarter.
Speaker Change: non-GAAP financial income for the quarter was $30 million.
Speaker Change: Compared to a non-GAAP financial loss of $7 $4 million in the previous quarter.
Speaker Change: Our non-GAAP tax benefit was $25 $5 million compared to a non-GAAP tax expense of $46 $6 million in the previous quarter.
Ronen Faier: In addition, as previously reported, we discontinued our manufacturing in Mexico and reduced our manufacturing levels in China. Our GAAP results for the fourth quarter include $23.2 million of restructuring expenses, the majority of which relates to contract manufacturer charges and equipment retirement costs. Gap operating loss for the quarter was $237.6 million compared to an operating loss of $16.7 million in the previous quarter. Non-GAAP operating loss for the quarter was $107.8 million compared to an operating profit of $23.1 million in the previous quarter. Non-GAAP financial income for the quarter was $30 million, compared to a non-GAAP financial loss of $7.4 million in the previous quarter.
Speaker Change: Our non-GAAP tax rate for the year was 27% and we expect it to decline over the next several years.
Speaker Change: GAAP net loss for the first fourth quarter was $162 $4 million compared to a GAAP net loss of $61 $2 million in the previous quarter.
Our non-GAAP net loss was $52 $5 million compared to a non-GAAP net loss of $31 million in the previous quarter.
Speaker Change: GAAP net diluted loss per share was $2.85 for the fourth quarter compared to $1.08 in the previous quarter.
non-GAAP net diluted loss per share was 92 compared to 55 in the previous quarter.
Speaker Change: It's even discussed we expect to reach an underlying business run rate of $600 million to $650 million in the second half of the year and we expect the process of inventory normalization to last until the end of this year.
Ronen Faier: Our non-GAAP tax benefit was $25.5 million compared to a non-GAAP tax expense of $46.6 million in the previous quarter. Our non-GAAP tax rate for the year was 27%, and we expect it to decline over the next several years. Gap net loss for the fourth quarter was $162.4 million compared to a gap net loss of $61.2 million in the previous quarter.
Speaker Change: We continue to expect that at a revenue level of $6 million to $650 million a quarter consolidated non-GAAP gross margins would return to 30% to 32%.
Speaker Change: Including approximately 500 basis points of benefit from IRA manufacturing tax credits and operating profit margins would return to 11% to 14% after implementing cost reduction activities.
Speaker Change: Turning now to our balance sheet.
Ronen Faier: Our non-GAAP net loss was $52.5 million compared to a non-GAAP net loss of $30.1 million in the previous quarter. GapNet diluted loss per share was $2.85 for the fourth quarter compared to $1.08 in the previous quarter. Non-GapNet diluted loss per share was $0.92 compared to $0.55 in the previous quarter.
Speaker Change: As of December 30.
Speaker Change: 31st 2023 cash cash equivalents bank deposits restricted bank deposits and investments were $1 $3 billion net of debt. This amount was $634 $7 million.
Speaker Change: This quarter cash used in operating activities was $140 million.
Speaker Change: This cash utilization is a direct result of two main factors first we have extended payment terms to certain customers. As a result, our DSO increased from 149 days in the third quarter to 265 days in the fourth quarter.
Ronen Faier: As discussed, we expect to reach an underlying business run rate of $600 to $650 million in the second half of the year, and we expect the process of inventory normalization to last until the end of December. We continue to expect that at a revenue level of $6 to $650 million a quarter, consolidated non-GAAP gross margins would return to 30 to 32 percent, including approximately 500 basis points of benefit from IRA manufacturing tax credits, and operating profit margins would return to 11 to 14 percent after implementing cost reduction. Turning now to our balance sheet. As of December 31st, 2021. Cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $1.3 billion. Net of debt, this amount was $634.7 million. This quarter, cash used in operating activities was $140 million.
Second our inventory level increased significantly to the abrupt slowdown in demand or inventory days increased from 169 days in the third quarter to 386 days in the fourth quarter.
Speaker Change: We expect to see a slight increase in inventory levels in the first quarter as we ramp our U S manufacturing.
Speaker Change: Which along with the Lord guided revenues will result in higher inventory days.
Speaker Change: This trend of increased inventory days is expected to begin to reverse in the second quarter of 2024, once revenues returned to growth and as we manufacture less products.
Speaker Change: We did not buy back share in this fourth quarter, and we expect to start executing our $300 million stock repurchase program in the first quarter of 2024.
Speaker Change: Accounts receivable net decreased this quarter to $622 $4 million compared to $939 $5 million last quarter.
Speaker Change: As of December 31st our inventory level net of reserve was at $1 $4 billion compared to $1 $2 billion in the prior quarter.
Speaker Change: The increase is solely attributed to higher finished goods inventory as a result of the abrupt slowdown in shipments offset by a decrease in raw material inventory.
Ronen Faier: This cash utilization is a direct result of two main factors. First, we have extended payment terms to certain customers. As a result, our DSO increased from 149 days in the third quarter to 265 days in the fourth quarter. Second, our inventory level increased significantly due to the abrupt slowdown in demand.
Speaker Change: Turning to our guidance as discussed.
Speaker Change: In our earnings release for the first quarter of 2024.
Speaker Change: We are guiding revenues to be within the range of $175 million to $215 million, we expect non-GAAP gross margins to be within the range of negative 3% to positive, 1%, including 850 basis points of IRA benefits.
Ronen Faier: Our inventory days increased from 169 days in the third quarter to 386 days in the fourth quarter. We expect to see a slight increase in inventory levels in the first quarter as we ramp up our U.S. manufacturing, which along with the lower guided revenues will result in higher inventory data. This trend of increased inventory days is expected to begin to reverse in the second quarter of 2024 once revenues return to growth and as we manufacture fewer products. We did not buy back shares in this fourth quarter, and we expect to start executing our $300 million stock repurchase program in the first quarter of 2025. Accounts receivable net decreased this quarter to $622.4 million compared to $939.5 million last quarter.
Speaker Change: We expect our non-GAAP operating expenses to be within the range of $120 million to $230 million.
Speaker Change: Revenues from the solar segment are expected to be within the range of $160 million to $200 million gross margins from the solar segment is expected to be within the range of 1% to 5%, including 900 basis points of IRA benefits I will now turn the call to the operator to open it up for.
Speaker Change: Questions.
Speaker Change: To ask a question press star one on your phone keypad and to remove yourself from the queue Press Star two again that is star one if you would like to ask a question.
Operator: Our first question comes from Andrew <unk> with Morgan Stanley.
Andrew: Great. Thanks, so much for taking my question and good evening guys.
Ronen Faier: As of December 31st, our inventory level, net of reserve, was at $1.4 billion compared to $1.2 billion in the prior quarter. The increase is solely attributed to higher finished goods inventories, a result of the abrupt slowdown in shipments offset by a decrease in raw material inventories. Turning to our guidance, as discussed in our earnings release for the first quarter of 2024, we are guiding revenues to be within the range of $175 to $215 million. We expect non-GAAP gross margins to be within the range of negative 3% to positive 1%, including 850 basis points of IRA benefits. We expect our non-GAAP operating expenses to be within the range of $122 to $130 million. Revenues from the solar segment are expected to be within the range of $160 to $200 million.
Andrew: Just kind of starting out on the margins here apologies if I missed all the all the numbers, but I think you mentioned about 970 basis points or so of impact from volume driven price discounts and some battery mix shift.
Speaker Change: Can you, maybe just kind of reiterate or or go over those numbers again in terms of how much you expect to come back in the first quarter and then maybe the cadence beyond the first quarter in terms of the back half of the year, where you expect to get and how you got there. Thank you.
Speaker Change: Sure and thanks for the question. So first of all to explain a little bit again that the that deter him off the direct gross margins and then what are the impacts in general Theres a price that we charge our customers in these price has not changed dramatically in the first quarter as we mentioned before other.
Speaker Change: Then batteries, where we started to increase costs as previously mentioned.
Speaker Change: The second part of course is the cost that we pay to our contract manufacturers and this is also by the way something that's relatively fixed.
Operator: Gross margins from the solar segment are expected to be within the range of 1 to 5%, including 900 basis points of IRA benefits. I will now turn the call over to the operator to open it up for questions. To ask a question, press star 1 on your phone keypad, and to remove yourself from the queue, press star 2.
Speaker Change: Given the you know cost of bill of material and manufacturing costs with our contract manufacturers. So when we look at the first level of these direct gross margin. The only difference that we have win when you have a certain level of revenues is what is the amount of customers that have or at the size of the customers that have deep.
Andrew Perroco: Again, that is Star 1 if you would like to ask a question. Our first question comes from Andrew Perroco with Morgan Stanley. Great. Thanks so much for taking my question. And good evening, guys.
Speaker Change: Volume discounts that number one and number two which was actually a little bit more important and influential this quarter is a what is the mix of our products. So the first thing I would say that with these are 970 basis points loss of gross margin compared to the previous quarter.
Ronen Faier: So, maybe just kind of starting out on the margins here; apologies if I missed all the numbers, but I think you mentioned about 970 basis points or so of impact from volume-driven price discounts and some battery makeshift. Can you maybe just kind of reiterate or go over those numbers again in terms of how much you expect to come back in the first quarter and then maybe the cadence beyond the first quarter in terms of the back half of the year where you expect to get to and how you get there? Thank you. Sure.
Speaker Change: A lot of it is actually related to the fact that our portion of single phase batteries.
Speaker Change: It was much higher than in the previous quarters, no. We need to remember that these are batteries that we manufacturer based on cells that we acquired from Samsung.
Speaker Change: It's an agreement that we signed at the very end of 2021.
Speaker Change: <unk> time by the way NMC battery prices skyrocketed, and as a result of decent since this was related also to the.
Ronen Faier: And thanks for the question. So, first of all, to explain a little bit again the term direct gross margins and then what are the impacts. In general, there is a price that we charge our customers, and this price has not changed dramatically in the first quarter, as we mentioned before, other than batteries, where we started to increase costs, as previously mentioned. The second part, of course, is the cost that we pay to our contract manufacturers. And this is also, by the way, something that's relatively fixed given the cost of the bill of materials and manufacturing costs with our contract manufacturers. So when we look at the first level of this direct gross margin, the only difference that we have when we have a certain level of revenues is what is the amount of customers that have, or the size of the customers that have different volume discounts. That's number one.
Speaker Change: Raw materials index during the war in Ukraine in 2022, those prices went up dramatically and that means that today. When we're selling batteries single phase batteries are made on the Samsung sales. Our gross margins are very very low the second thing that happened is it actually in this.
Speaker Change: Hi environment.
Speaker Change: Some of the customers that manage dwell their inventories and we're able to either grow and actually need our products to our maintained their growth where large customers with a very strong buying power and therefore in general you know if these will be customers that usually will be I would say you know less than 20% of the overall.
Speaker Change: Our revenues this quarter they were like 60 or 70 per cent sometimes of a the overall revenues again. These are just a numbers by means of example, so that was the second part, but I would still say that the biggest difference was the first of all coming from the batteries and then from the customers. So I hope it helped them on that side.
Ronen Faier: And number two, which was actually a little bit more important and influential this quarter, was what was the mix of our products. So the first thing I would say is that of these 970 basis points of gross margin loss compared to the previous quarter, a lot of it is actually related to the fact that our portion of single-phase batteries was much higher than in the previous quarters. Now, we need to remember that these are batteries that we manufacture based on sales that we acquired from Samsung.
Speaker Change: What happens next quarter. So next quarter I do things are happening. The first thing is that Ah across the mix of products that we expect to see and customers. We will see a little bit less of these very large customers with a lower gross margins simply because of the fact that again they have right now would they need.
Ronen Faier: It's an agreement that we signed at the very end of 2021. At that time, by the way, NMC battery prices skyrocketed, and as a result of this, and since this was also related to the raw materials index during the war in Ukraine in 2022, those prices went up dramatically. And that means that today, when we're selling batteries, single-phase batteries made on these Samsung cells, our gross margins are very, very low. The second thing that happened is that, in this oversupply environment, some of the customers that managed their inventories well and were able to either grow and actually need products to maintain their growth were large customers with very strong buying power. And therefore, in general, these will be customers that usually will be, I would say, less than 20% of the overall revenue. This quarter, they were like 60% or 70%, sometimes, of the overall revenue. Again, these are just numbers by means of an example.
Speaker Change: And the second thing is that the overall portion of the a single phase batteries will most likely be slightly lower compared to what we saw this quarter and that means that we expect the majority of this 970 basis points to come back not all of them, but the majority I will add up.
Speaker Change: One one in printing and win and I think that it would maybe be a thing that that we will discuss over these called.
Speaker Change: The situation that we see today as mentioned by T V's debt.
Speaker Change: The channels are a very much a filled with inventories because of all of the dynamics that you've mentioned and what we do see is that today customers are not buying a typical order from solar age as they used to do before of X Inverters and ex optimizer is in some cases these customers.
Speaker Change: Our stopped buying and they buy only those things that you see and this is why you sometimes see a little bit of an abnormal situation, where a customer is buying only our inverters because they have too much optimizes. This quarter actually it was the other way around you know we saw a lot of customers buying more and where it is and optimize there's sometimes with Oh sorry.
Ronen Faier: So that was the second part. But I would still say that the biggest difference was first of all coming from the batteries and then from the customers. So I hope it helped on that side.
Speaker Change: <unk> optimizer than usual at the ratio of our Inverters, We may see as we mentioned this quarter that the three phase batteries in the German countries are relatively heavy on the channel inventory, but you know once they start to to be clear then we will see.
Ronen Faier: What happens next quarter? So next quarter, two things are happening. The first thing is that across the mix of products that we expect to see and customers, we will see a little bit less of these very large customers with lower gross margins simply because of the fact that, again, they have right now what they need. And the second thing is that the overall portion of the single-phase batteries will most likely be slightly lower compared to what we saw this quarter. And that means that we expect the majority of these 970 basis points to come back, not all of them, but the majority. I will end up with one important thing, Andrew, and I think that it will maybe be a theme that we will discuss on this call.
Speaker Change: Higher purchases of these products that enjoy very nice gross margins. So I would say that the cadence of coming back to the levels that we saw before is mostly related to the stabilization of the inventory situations in the channel, which again, we expect to see in the second half of the year. Because then we will start to see back that that Oh.
Speaker Change: Level of inventories is normalized and you'll see a little bit more I would call it a reasonable or natural our ratios of products.
Speaker Change: Great. That's Super helpful. And then maybe just one follow up question on on demand.
Ronen Faier: The situation that we see today, as mentioned by CV, is that the channels are very much filled with inventories because of all of the dynamics that Shiv has mentioned. And what we do see is that today, customers are not buying a typical order from Solaredge as they used to do before, with X inverters and X optimizers. In some cases, these customers have stopped buying, and they buy only those things that you see. And this is why I sometimes see a little bit of an abnormal situation where a customer is buying only inverters because they have too many optimizers. This quarter, actually, it was the other way around.
Speaker Change: It sounds like you're still bullish on a European demand acceleration beyond the first quarter, both for residential and commercial but still somewhat more muted and negative on the U S outlook for.
Speaker Change: For 2024 can you maybe just help US bridge the gap there what's driving the demand in Europe is it just purely power price driven as an energy security driven.
Speaker Change: Because it seems like the macro environment is somewhat similar in both geographies and I'm. Just curious what gives you more confidence in the medium term outlook in Europe. Thank you.
Speaker Change: Yeah, I think we tried specifically actually to break it down to four.
Ronen Faier: You know, we saw a lot of customers buying more inverters than optimizers and sometimes, sorry, more optimizers than usual in the ratio of inverters. We may see, as we mentioned this quarter, that the three-phase batteries in the German countries are relatively heavy on the channel inventory. But, you know, once they start to be clear, then we will see higher purchases of these products that enjoy very nice gross margins. So I would say that the cadence of coming back to the level that we saw before is mostly related to the stabilization of the inventory situations in the channel, which, again, we expect to see in the second half of the year because then we will start to see that the level of inventory is normalized, and you see a little bit more of what I would call reasonable or natural ratios of products. Great, that's super helpful.
Speaker Change: Segments, if you will.
Speaker Change: Residential in Europe.
Speaker Change: <unk> commercial in Europe in residential in the U S. In commercial in the U S. So in Europe I don't know if the word is bullish but but we believed that there would be growth from the rates that we were in the fourth quarter and in the first quarter.
Speaker Change: Primarily based on seasonality.
Speaker Change: And and historical breakdown of our of our installations and revenue are in Europe between the various corridors and that combined with our some of the regulatory clarifications that are that we mentioned both of these elements together.
And in our mind translate to the fact that from the first quarter and all of them there will be a gradual improvement in our installation rates and clearing of inventory and eventually our revenue our revenue in Europe and.
Speaker Change: This is true for both both segments residential and commercial overall the expectation is for for stronger growth in commercial.
Speaker Change: And then in residential are related to to market dynamics and some of the enterprise push for Oh, four de carbonization, that's relates to Europe and in our in the U S. We see a very different pattern between residential and in commercial and in that we've been seeing already so as I mentioned commercial for me installation rate and sell through.
Zvi Lando: And then maybe this is one follow-up question on demand. Sounds like you're still bullish on European demand acceleration beyond the first quarter, both for residential and commercial, but still somewhat more muted and negative on the US outlook for 2024. Can you maybe just help us bridge the gap there? What's driving the demand in Europe? Is it just purely power price driven? Or is it energy security driven? Because it seems like the macro environment is somewhat similar in both geographies.
Speaker Change: Point of view is continuing to grow it grew significantly in the fourth quarter compared to the to the third quarter and we are at record historical level from that perspective in terms of sell through by our distributors.
Speaker Change: There's still time until the inventory clears and that begins to translate.
Speaker Change: Into revenue for us, but we are I'm relatively optimistic about continued growth in the commercial market in the U S. Again, a lot of it is driven by enterprise module prices.
Zvi Lando: I'm just curious, what gives you more confidence in the medium-term outlook in Europe? Thank you. Yeah, thanks.
Speaker Change: And and it end at some point after availability of I R a product.
Zvi Lando: We actually tried to break it down to four segments, if you will, residential in Europe, commercial in Europe, and residential in the US and commercial in the US. So in Europe, I don't know if the word is bullish, but we believe that there will be growth from the rates that we were in the fourth quarter and in the first quarter, primarily based on seasonality and the historical breakdown of installations and revenue in Europe between the various quarters. And that, combined with some of the regulatory clarifications that we mentioned, both of these elements together in our mind translate to the fact that, from the first quarter onwards, there will be a gradual improvement in installation rates and clearing of inventory, and eventually, revenue in Europe. And this is true for both segments, residential and commercial. Overall, the expectation is for stronger growth in commercial than in residential, related to market dynamics and some of the enterprise push for decarbonization. That relates to Europe.
Speaker Change: And we will begin to begin to deliver in Q2 and delivering in volumes in Q3. So that is the source of why we expect a positive trajectory on on CNI in the U S and residential in the U S. As he is the segment, where we are less optimistic about.
Speaker Change: Growth at least in the short term and expect the market to continue to be a bit slow with gradual trends of people realizing how to sell and operate within a 3.0 environment in California, and we see this as a slow.
Speaker Change: Growth trajectory in that in that regard.
Speaker Change: And availability of I R. A product later in the year, and and especially our installers and PPO learning how to construct there their business such that they can benefit from the I R. A and that should help to push the market for it a bit in the later part of the year, but but this segment out of the three.
Speaker Change: Is the one that we see as more stagnant are in Europe, we see a gradual growth in resident in commercial and in our in the U S. We expect continued growth on the on commercial all of this again from the perspective of our installation rates and point of sale.
Zvi Lando: In the US, we see a very different pattern between residential and commercial, and that's what we've been seeing already. So, as I mentioned, commercial, from an installation rate and sell-through point of view, is continuing to grow. It grew significantly in the fourth quarter compared to the third quarter, and we are at record historical levels from that perspective in terms of sell-through by our distributors. There's still time until the inventory clears, and that begins to translate into revenue for us. But we are relatively optimistic about continued growth in the commercial market in the U.S. Again, a lot of it is driven by enterprise, module prices, and, at some point, availability of IRA products that I mentioned we will begin to deliver in Q2 and deliver in volumes in Q3.
Speaker Change: That's what eventually clear the inventory and result in our revenues as well as our expectation.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change:
Speaker Change: Thank you. Our next question comes from Philip Shen with Roth M Cam.
Philip Shen: Everyone. Thanks for taking my questions wanted to explore your capital plan a bit more you guys were talking about the potential for a buyback.
Philip Shen: And I think your cash and a debt is roughly 600 plus million. It seems like you may have burned 200 ish million in Q4, you know if the macro remains challenged through the first half.
Philip Shen: Here could you guys be in a situation, where you need to raise capital can you talk about your plan to manage.
Philip Shen: The liquidity dynamics in general and how much cash you would like to maintain on balance sheet.
Philip Shen: Sure.
Speaker Change: So in general Cashman for operation. Our this quarter was as mentioned about $140 million and it's usually you know you you also have a little bit of capital expenditures. When we look into the next year, let's first of all try to understand the cash dynamics and then I'll discuss the capital allocations.
Zvi Lando: So that is the source of why we expect a positive trajectory on CNI in the U.S. And residential in the U.S. is the segment where we are less optimistic about growth, at least in the short term, and expect the market to continue to be a bit slow, with gradual trends of people realizing how to sell and operate within an M3.0 environment in California, and we see this slow growth trajectory in that regard, and availability of IRA products later in the year, and especially installers and TPOs learning how to construct their business such that they can benefit from the IRA, and that should help push the market forward a bit in the later part of the year. But this segment out of the three is the one that we see as more stagnant.
Speaker Change: We basically are going into a few quarters, where quarterly revenues will be lower than our the cashback sorry, the AR balance that we have right now which is approximately a $700 million of ore balances, which we will collect them, we collect them slower than we were.
Speaker Change: And given the fact that against some of our customers are seeing difficulties.
Speaker Change: But we're confident in our ability to collect those are the second thing that will happen is of course, the fact that since were sitting on such a large inventory levels.
Philip Shen: In Europe, we see gradual growth in residential and commercial, and in the U.S., we expect continued growth in commercial. All of this, again, from the perspective of installation rates and point of sale, that will eventually clear the inventory and result in our revenues as well as our expectations. Thank you. Thank you. Our next question comes from Philip Shen with Roth MKM. Everyone, thanks for taking my questions.
Speaker Change: These are products of course that are they are not expected to be replaced over the very near future. For example, you know in our optimizer as we've just started our fourth generation selling of these a product. This year. These are products that usually do not have shelf life and therefore, we expect to see.
Speaker Change: Is that a lot of our revenues in 2024 will be continued to be a sold from the in the inventory that we currently carry where the manufacturing that we will do will come mostly in the U S. You know for IRA purposes, we want of course to capitalize on these benefit and second these are.
Ronen Faier: I wanted to explore your capital plan a bit more. I think you guys were talking about the potential for a buyback, and I think your cash-in-debt is roughly 600 million.
Ronen Faier: Seems like you may have burned 200-ish million in Q4. If the macro remains challenged through the first half of this year, could you guys be in a situation where you need to raise capital? Can you talk about your plan to manage the liquidity dynamics in general and how much cash you would like to maintain on the balance sheet? Sure.
Speaker Change: In other places because we want to maintain our manufacturing capability for the next year, but these are the results should be is that a 2024 is going to be most likely a year in which we're going to generate a substantial amount of cash at least I would say from the second quarter. Once all of these are.
Ronen Faier: So, in general, cash flow for operations this quarter was, as mentioned, about $140 million, and, as usual, you also have a little bit of capital expenditures. When we look into the next year, let's first of all try to understand the cash dynamics, and then I'll discuss capital allocation. We're basically going into a few quarters where quarterly revenues will be lower than the AR balance that we have right now, which is approximately $700 million of AR balances that we will collect. And we will collect them slower than we want, given the fact that, again, some of our customers are seeing difficulties. But we're confident in our ability to collect those data.
Speaker Change: Trends will start to reverse.
Speaker Change: So in that sense, we do expect that our cash flow will raise again and it will be unfortunately, when you're not growing so rapidly the I would say working capital needs are usually less pronounced.
The second part is when it comes to the capital allocation is the fact that we will not execute the plan as long as we do not feel very comfortable with the cash position that we have we feel very comfortable today that are acquiring a solar age of shares by the company is a good use of time.
Speaker Change: Our cash of the company, we will do it in a very I would call it measured way to make sure that we're matching the pace of our purchasing of stock to the pace of our our cash generation in order to make sure that we're not running a if something goes bad into a problem and in any case of course.
Ronen Faier: And the second thing that will happen is, of course, the fact that, since we're sitting on such large inventory levels, these are products, of course, that are not expected to be replaced in the very near future. For example, in our optimizers, we've just started our fourth generation selling of a product this year. These are products that usually do not have a shelf life.
Speaker Change: We are going to.
Speaker Change: Be very I would say a concise on how we're going to continue and generate the cash flow from the inventory and our customers. So I think that right now we do not see that we will need to raise capital I believe that we will actually generate the law.
Ronen Faier: And therefore, we expect to see that a lot of our revenues in 2024 will continue to be sold from the inventory that we currently carry, where the manufacturing that we will do will come mostly in the U.S. for IRA purposes. We want, of course, to capitalize on these benefits and second these in other places because we want to maintain our manufacturing capability for the next year. The result should be that 2024 is going to be most likely a year in which we are going to generate a substantial amount of cash, at least, I would say, from the second quarter once all of these trends start to revert. So in that sense, we do expect that cash flow will increase again, and it will be, unfortunately, when you're not growing so rapidly, I would say working capital needs are usually less pronounced. The second part, when it comes to capital allocation, is the fact that we will not execute the plan as long as we do not feel very comfortable with the cash position that we have. We feel very comfortable today that acquiring Solaredge shares by the company is a good use of the company's cash.
Bit more capital and we believe that buying stock Oh shares is the right solution I will just end with one more thing and this is the capex spending the general trend is that Oh since we're reducing manufacturing footprint of course, we will invest much less the capital expenditures relate.
Speaker Change: <unk> to our manufacturing capacity increases we did in the past. So for example, some of the activities that we're ramping right now in the United States can be supported by equipment that we have already purchased by by testing equipment that was already built and it's now being mobilized from other factories. So all in all.
Speaker Change: We see low usage of cash high generation of cash in a very measured and responsible a purchase of shares which we still believe that at this time is a good use of our money.
Speaker Change: Alright, and thanks for all that color shrinking over to.
[noise] band outlook demand outlook in Q4, yeah. It was Q, sorry, 500 million Q4, and now you're saying back half 600, and 650 million can you talk about the year over year gross you know it shouldn't really be seasonal because we're really comparing Q4 'twenty four to Q3.
Ronen Faier: We will do it in a very, I would call it, measured way to make sure that we are matching the pace of our purchasing of stock to the pace of our cash generation in order to make sure that we're not running if something goes bad. And in any case, of course, we are going to be very, I would say, concise on how we're going to continue and generate cash flow from the inventory and customers. So I think that right now we do not see that we will need to raise capital.
Speaker Change: And then also when you get to that.
Speaker Change: Level of revenue again, what do you expect the new gross margin outlook to be on that $625 million of pinpoint excluding our a and also with IRI.
Ronen Faier: I believe that we will actually generate a little bit more capital, and we believe that buying stock or shares is the right solution. I will just end with one more thing, and that is the cap expanding. The general trend is that since we're reducing our manufacturing footprint, we will invest much less in capital expenditures related to our manufacturing capacity increase as we did in the past. So, for example, some of the activities that we're ramping right now in the United States can be supported by equipment that we have already purchased, by testing equipment that was already built and is now being mobilized from other factories. So, all in all, we see low usage of cash, high generation of cash, and a very measured and responsible purchase of shares, which we still believe at this time is a good use of our capital. Ronen, thanks for all that color.
Speaker Change: First of all I'll start from I'll start from from describing the I would call. It revenue environment between the two Q4s and then I'll answer the margin as I mentioned in the prepared remarks.
Speaker Change: We saw that the.
Speaker Change: Q4, sellout from or a sell through from our channels being approximately $500 million, which by the way based on our estimates was actually even below the installation rates that happened a throat 24.
Speaker Change: We do understand that Oh, sorry, Q4 'twenty three.
Speaker Change: We do understand the two things are happening and especially when we look into the beginning of the year. The first thing is that we saw a decline in the installation rates in the fourth quarter of 'twenty three are towards the end of the year, which is something that is usually happening happening because of the overall holiday season in effect.
Ronen Faier: Shifting over to the demand outlook for Q4, it was $500 million in Q4, and now you're saying back at $600 and $650 million. Can you talk about the year-over-year growth? It shouldn't really be seasonal because we're really comparing Q4'24 to Q4'23. And then also, when you get to that level of revenue again, what do you expect the new gross margin outlook to be on that $625 million at midpoint, excluding IRA and also including IRA? So first of all, I'll start by describing the, I would call it, revenue environment between the two Q4s, and then I'll answer the margins. As we mentioned in the previous remarks, we saw that Q4 sell-through from our channels was approximately $500 million, which, by the way, based on our estimates, was actually even below the installation rates that happened throughout the 24th.
Speaker Change: That's actually a winter in Europe started relatively early this year and was relatively strong and therefore, our belief is that throughout the year first of all the fact that you will see seasonality in Europe going back at least in the second and third quarter.
Speaker Change: It's something that we expect to increase the underlying demand that we saw compared to Q4 and since we are under shipping through the channel at this point of view of time, we will simply have to eventually adjust into these I would call. It installation levels that we see and this is why if we sold 500.
Speaker Change: Millions of dollars of sell through and are hiring installation when we look at the markets. One by one we believe that we'll see at least if not higher installation rates at the end of our 24 and by the way. This is not including new products that Steve you mentioned that are not baked into our plans such as the commercial batteries such.
Speaker Change: The trackers are such of the a 330 kilowatt inverters. So we feel very much confident on this when when we're looking at market by market.
Ronen Faier: We do understand that two things are happening, especially when we look into the beginning of the year. The first thing is that we saw a decline in installation rates in the fourth quarter of 2023 towards the end of the year, which is something that is usually happening because of the overall holiday season and the fact that winter in Europe actually started relatively early this year and was relatively strong. And therefore, our belief is that throughout the year, first of all, the fact that you will see seasonality in Europe going back at least in the second and third quarters is something that we expect to increase the underlying demand that we saw compared to Q4. And since we are undershipping to the channel at this point in time, we will simply have to eventually adjust to these, I would call it, installation levels that we see.
Speaker Change: Once we are.
Speaker Change: Going to go through this year, what will happen is that we expect that we will eat the majority of the inventory or excess inventory that is in the channel, which we by the way at least at the Q4 estimate that about a quarter and a half worth of inventory excess inventory sitting in the channel.
Speaker Change: And what we will see is that you know as the installation rates are continuing are under shipping will go down quarter by quarter until again, we believe that at the end of the fourth quarter, they will be relatively minimal.
Speaker Change: So that's that's how we view the trends that we see and again. These are based on discussions that we had with our customers analysis of historical trends that we saw seasonality and end markets by markets also from a political and and other a regulatory environment gross margins in <unk>.
Situation. So when it comes to the gross margin as I mentioned in the prepared remarks, we expect that once we're back to $6 million to $650 million of revenues a quarter, we should be at 30% to 32% gross margins.
Ronen Faier: This is why if we saw $500 million of sell-through and higher installation rates, when we look at the markets one by one, we believe that we will see at least, if not higher, installation rates at the end of 2024. And by the way, this is not including new products that Zvi mentioned that are not baked into our plan, such as the commercial batteries, such as the trackers, such as the 330-kilowatt inverter. So we feel very confident about this when we're looking at market by market.
Speaker Change: Which already include 500 basis points of IRA benefit.
Speaker Change: And the way to get there is actually a twofold. Once of course is a regular product gross margin that will not change significantly from a cost point of view because of the high inventories and we actually baking a a small ASB erosion.
Ronen Faier: Once we get through this year, what will happen is that we expect to eat the majority of the inventory or excess inventory that is in the channel, which we, by the way, estimated about a quarter and a half worth of inventory, excess inventory, sitting in the channel. And what we will see is that, as the installation rates continue, our undershipping will go down quarter by quarter until, again, we believe that at the end of the fourth quarter, it will be relatively minimal. So that's how we view the trends that we see. And again, these are based on discussions that we had with our customers, analysis of historical trends that we saw, seasonality, and market-by-market, also from political and other regulatory environments.
Speaker Change: And throughout the year.
Speaker Change: So we expect actually hear that the cost will be relatively flat, but at prices going a little bit down, but we will see a much more normalized distribution between geographies and between customers and therefore, our product margins will go back a little bit. The second thing is this all cost or Cogs part that we discussed in the past in here.
First of all the combination of our cost saving measures taken in Q1 with when it comes to reduction in force the closure of Mexico and reduction of China, coupled with a lot of work that we did in the quality of products front starting from changing.
Speaker Change: Components in our products to automotive grade components that already shows a lower of course failure rates and therefore requires lower a cost of service of warranty and also lower our warranty accruals and also a little bit of a fix it that we need to our existing.
Ronen Faier: Gross margins in this situation. So when it comes to gross margin, as I mentioned in the prepared remarks, we expect that once we're back to $6 to $650 million in revenues a quarter, we should be at 30 to 32% gross margin, which already includes 500 basis points of IRA benefits. And the way to get there is actually twofold. First, of course, is our regular product gross margin that will not change significantly from a cost point of view because of the high inventories. And we actually bake in a small ASP erosion throughout the year.
Speaker Change: <unk> fleet when it comes to software that also reduces this amount. So we expect to see even compared to the last time that we were at $600 million a little bit of a lower fixed costs or old caused as we saw before so this will be the drivers that we currently see when we aim again being at 30% to 32% at 606.
Speaker Change: <unk> hundred $50 million of revenues.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Brian Lee with Saks.
Speaker Change: Yeah.
Brian Lee: Hello, Mr. Lee Your line is open.
Brian Lee: Hey, guys, sorry, I was I mean, thanks for taking the questions.
Ronen Faier: So we expect actually here that the costs will be relatively flat, but a price is going a little bit down, but we will see a much more normalized distribution between geographies and between customers, and therefore product margins will go back a little bit. The second thing is this OCOGS part that we discussed in the past, and here, first of all, the combination of our cost-saving measures taken in Q1 when it comes to reduction in force, the closure of Mexico and reduction of China, coupled with a lot of work that we did in the quality of product front, starting from changing components in our products to automotive-grade components that already shows a lower, of course, failure rate and therefore requires lower costs of service, of warranty, and also lower warranty accruals, and also a little bit of fixes that we did to our existing fleet when it comes to software that also reduces this amount.
Brian Lee: Ronan I I apologize I'm going to kind of beat the dead horse a little bit here, but.
Brian Lee: A follow up to Phil's question, So if we bridge.
Speaker Change: You gave a lot more gross margin clarity than you typically do and it sounds like you'll do that for the next couple of quarters, but it sounds like there is a 900 plus basis points direct 900 basis points plus.
Speaker Change: You know some of the other Cogs, so given where you're guiding to for Q1.
Speaker Change: Typically like flattish gross margin you've got like 1800 basis points, you've spoken to what is the remaining bridge to get to 30% to 32, I guess, that's what I'm struggling with because there's you've identified about 20 percentage points.
Speaker Change:
Speaker Change: Where does the other.
Speaker Change: 10 basis points come from and then just a follow up to that would be you know previously you talked about 500 basis points included fire or a credit that was before the 45 X clarity on optimizer as being applicable for 11. Since you know that came out in December so.
Ronen Faier: So we expect to see, even compared to the last time that we were at $600 million, a little bit of a lower fixed cost or OCOGS as we saw before. So these will be the drivers that we currently see when we aim again at being at 30 to 32 percent at $600 to $650 million of revenue. Thank you.
Speaker Change: Has your view changed there did you always embed 11 sense as your base case, you're just trying to understand all the puts and takes but definitely the heritage to the final 30 to 32.
Speaker Change: Okay I'll try at least Brian So I'll start from the second part which is easy as.
Brian Lee: Our next question comes from Brian Lee, www.microsoft.com.ca. Hello, Mr. Lee, your line is open. Hey, guys. Sorry I was on mute. Thanks for taking the questions. You know, Ronen, I apologize.
Speaker Change: As we said all along our assumption was that we will get to the 11 a sense when it comes to optimize ours and therefore are a 500 basis points. He's already are assuming that we will reach the capacity of inverters that we want to reach which is a 500 megawatts a quarter.
Ronen Faier: I'm going to kind of beat the dead horse a little bit here, but this is a follow-up to Phil's question. So if we bridge, I know you gave a lot more gross margin clarity than you typically do, and it sounds like you'll do that for the next couple quarters, but it sounds like there are 900-plus basis points direct, 900 basis points plus some of the other COGs. So given where you're guiding to for Q1, basically like a flattish gross margin, you've got like 1800 basis points you've spoken to What is the remaining bridge to get to 30 to 32?
Speaker Change: And a certain level of optimizer, which is by the way approximately a media optimizer is a quarter that we expect to have these run rates by the end of Q3. So this is something that was already baked in the in the same and at the same projections that we gave now actually when it comes to the.
Speaker Change: A bridge to the 30% to 32%.
Speaker Change: The two things that you will see is as we believe he is the first of all on the product gross margin you will see very modest increased after Q1 again Q1 is already going to recover a lot of these are 900, and a 30 basis points that we lost and this is because of the more balanced mix of products that.
Ronen Faier: I guess that's where I'm struggling with because there are, you know, you've identified about 20 percentage points. Where does the other... 1,000 basis points come from? And then, you know, just a follow-up to that would be, you know, previously you talked about 500 basis points included for IRA credits. That was before the 45x clarity on optimizers being applicable for 11 cents, you know, came out in December. So, has your view changed there, or did you always embed 11 cents as your base case? Are you just trying to understand all the puts and takes, but definitely the bridge to the final 30 to 32? Thanks. Okay, I'll try, at least.
Speaker Change: You will see so actually on the direct gross margin you do not expect a lot. The thing that you should expect the law is actually Oh, Cogs part and I will do it very simple you know if I'm assuming that this number will be just by means of example, $100 million in Q1 device.
Speaker Change: It by $200 million of revenues. This is 50% gross margin impact just imagine that now we're moving into a.
Speaker Change: $600 million revenue you need to take at least 50% of divided by three and here comes approximately a 33 million% to 33% of gross margins that are just added. So that's that's the whole story and to make it even more I think easy to explain that.
Ronen Faier: So I'll start with the second part, which is easy. As we said all along, our assumption was that we would get the 11 cents when it comes to optimizers, and therefore, our 500 basis points are already assuming that we will reach the capacity of inverters that we want to reach, which is 500 megawatts a quarter, and a certain level of optimizers, which is, by the way, approximately a million optimizers a quarter that we expect to have this run rate by the end of Q3. So this is something that was already baked into the same projection that we gave. Now, actually, when it comes to the bridge to the 30 to 32 percent, the two things that you will see, as we believe, are that first of all, on the product gross margin, you will see a very modest increase after Q1.
Speaker Change: We've built our cost structure.
Speaker Change: Support the company that is relatively diverse from a segment point of view product point of view, serving complicated segments such as C&I for example, and that means that we have a relatively heavier costs associated with this with this with this kind of a company that was.
Speaker Change: Built.
Speaker Change: Once you reducing revenues, even if you are reducing some of these costs unless you reduce them exactly by the same level that you reduce the revenues you see the P&L impact and when you're working in such a small revenue basis as you see right now the impact of gross margin is it simply huge so again most of the bridge economy.
Ronen Faier: Again, Q1 is already going to recover a lot of these 930 basis points that we lost. And this is because of the more balanced mix of products that you will see. So actually, on the direct gross margin, you do not expect a lot. The thing that you should expect a lot is actually the all-cooks part. And I will do it very simple.
Speaker Change: The scale, even without changing costs on our fixed cost most of the breach going to 30 32 will come simply economies of scale.
Speaker Change: I appreciate that Okay makes sense, one more for me and I'll pass it on and then this one is maybe a little bit nitpicking.
Speaker Change: But I think last quarter you said.
Ronen Faier: Assuming that this number will be, just by means of example, $100 million in Q1 divided by $200 million of revenues, this is a 50% gross margin impact. Just imagine that now we're moving into $600 million of revenue. You need to take this 50% and divide it by 3. And here comes approximately 33% of gross margins that are just added. So that's the whole story.
Speaker Change: You were talking about like a six to 700 million dollar revenue quarterly view.
The end of this year kind of when you normalize now youre, saying six to 650.
Speaker Change: Is there something embedded in your updated view here in three months, you know share loss pricing. It just seems like something downtick to bid on a number in a range that may or may not have the most precision to begin with so just trying to understand one if something changes to how much I guess confidence or visibility on the six to six.
Ronen Faier: And to make it even more easy to explain, we've built our cost structure to support a company that is relatively diverse from a segment point of view and a product point of view, serving complicated segments such as CNI, for example, and that means that we have a relatively heavier cost associated with this kind of a company that we've built. Once you reduce revenues, even if you are reducing some of these costs, unless you reduce them exactly by the same level that you reduce revenues, you see the P&L impact. And when you're working on such a small revenue basis as you see right now, the impact of gross margin is simply huge. So again, most of the bridge, economies of scale, even without changing costs, on our fixed cost, most of the bridge going to 30, 32 will come simply because of economies of scale. I appreciate that. Okay, that makes sense. One more from me, and I'll pass it on.
Speaker Change: Not maybe changing again going forward.
Speaker Change: Okay. You know so so I think that when we said it's a 600 to 700. This is if you remember our based on sell through to a level that we saw in Q3 and we assume that this would be this is the level of throw this quarter. We did a lot of work you know going deeper into our channels to understand what's happening there looking at installation rates dissecting almost every.
Speaker Change: Country by the various trends that we see there and talking by the way to a lot of the installers to actually understand exactly what they see as well, which was one of the things that we did a little bit less prior to this period.
Speaker Change: And we simply we're able to get this seems a little bit more accurate.
Speaker Change: Understood all right I'll pass it on thanks, guys. Thank you.
Speaker Change: Okay.
Okay.
Speaker Change: Thank you. Our next call next question comes from Kashi Harrison with Piper Sandler.
Ronen Faier: And this one's maybe a little bit nitpicking, but I think last quarter you said you were talking about $600 million to $700 million revenue per quarter, you know, at the end of this year, kind of when you normalize. Now you're saying $600 million to $650 million. Is there something embedded in your updated view here in three months, you know, share loss, or pricing? It just seems like something's down ticked a bit on the number in a range that, you know, may not have the most precision to begin with.
Kashi Harrison: Hi, good afternoon, everyone and thanks for taking the questions.
So just first one for me can you provide us with a maybe a detailed walk on how we get from $500 million of sell through and <unk> 23 to 600 to 650, though you're talking about by the middle of the year and then can you also give us a sense of what the total dollar products.
Kashi Harrison: You're attempting to destock from the channel is.
Brian Lee: So just trying to understand, one, has something changed? And two, how much, I guess, confidence visibility on the $600 to $650 is not maybe changing again going forward? Okay, so when we said it was 600 to 700, this was, if you remember, based on the sell-through level that we saw in Q3, and we assumed that this was the level. Throughout this quarter, we did a lot of work going deeper into our channels to understand what's happening there, looking at installation rates, dissecting almost every country by the various trends that we see there, and talking, by the way, to a lot of And we simply were able to get things a little bit more accurate. All right, I'll pass it on.
Speaker Change: As much detail as you can if possible and I have a follow up.
Kashi Harrison: Yeah.
Speaker Change: So first of all the they moved from a 500 650 towards the second half of the year is mostly related to seasonality impacts that we see and again in some cases, a little bit of a analysis of the market. So.
Speaker Change: You know, we've we've went through and looked at how seasonality looks in Europe by the way prior to coffee and the worry in Ukraine, you wouldn't be leaving but they were a little bit of a normal years and when we looked at normal years, we usually so an increase of about 17, 20% are.
Speaker Change: From Q1 to Q2 and about 15% from two Q2 to Q3 and by Dis you simply see how the market is behaving. So that's the first thing that we did then we looked into the level that we see right now in Q4 and a little bit into January what's happening in the Netherlands, where we know that there was a little bit of shift in the market. So we see.
Ronen Faier: Thanks, guys. Thank you. Thank you. Thank you. Our next call or next question comes from Cashi Harrison with Piper Sandler. Good afternoon, everyone.
Cashi Harrison: Thanks for taking the questions. So just first one for me, can you provide us with maybe a detailed walk on how we get from $500 million to sell through in full Q23 to the $600 to $650 that you're talking about by the middle of the year? And then can you also give us a sense of what the total dollar amount of product that you're attempting to destock from the channel is, with as much detail as you can, if possible? And I have a follow-up.
Simply went one by one and we looked at the United States and what are the levels that we see here how the sell through behaved and we simply did it one by one we added to this information coming from other sources, we have a a software called designer that allows our installers to design systems with our homegrown.
Speaker Change: <unk>, we've looked at how many new designs were made in the past how many of them were turned into <unk> installations and what is the level that we see right. Now. So we took this into account. So we actually consolidated various are sources of data historical and current in order to get a to get to this point I forgot the second.
Ronen Faier: So, Yashi, first of all, the move from 500, 600, and 50 towards the second half of the year is mostly related to seasonality impacts that we see. And again, in some cases, a little bit of analysis of the market. So we went through and looked at how seasonality looked in Europe, by the way, prior to COVID and the war in Ukraine. You wouldn't believe it, but there were a little bit of normal years.
Speaker Change: Part of your question. So please a dollar of inventory that are we expect to clear so in that sense as we mentioned before when we see the sell through of about $500 million in the fourth quarter. As we mentioned based on this we assume that there is about Oh.
Ronen Faier: And when we looked at normal years, we usually saw an increase of about 17, 20 percent from Q1 to Q2 and about 15 percent from Q2 to Q3. And by this, you simply see how the market is behaving. So that's the first thing that we did.
Speaker Change: Quarter, and a half worth of in excess inventory sitting in the channel. We believe that will clear as mentioned by T V $2 million to $250 million in the first quarter and from them, it's going to be gradually declining towards the end of the year, it's not going to be exactly linear, but it's going to decline.
Ronen Faier: Then we looked into the level that we see right now in Q4 and a little bit into January, what's happening in the Netherlands, where we know that there was a little bit of a shift in the market. We simply went one by one, and we looked at the United States and what the levels are that we see here, and how the sell-through behaves. And we simply did it one by one. We added to this information coming from other sources. We have a software called Designer that allows installers to design systems with our homegrown products.
Speaker Change: Towards their beer, we will still see a small amount in Q4, so that's basically our assumption.
Speaker Change: Thank you for all that detail really appreciate it and then Mike My follow up question.
Speaker Change: So opex post the tough restructurings.
Ronen Faier: We've looked at how many new designs have been made in the past, how many of them have been turned into real installations, and what the level is that we see right now. So we took this into account. So we actually consolidated various sources of data, historical and current, in order to get to this point. I forgot the second part of your question, so please. A dollar of inventory that we expect to clear. So in that sense, as we mentioned before, when we see the sell-through of about $500 million in the fourth quarter, as we mentioned, based on this, we assume that there is about a quarter and a half worth of excess inventory sitting in the channel. We believe that we'll clear, as mentioned by CV, $250 million in the first quarter.
Mike: It's declining to I think you said $115 million at the midpoint and that's down from 12% down about 12% I think for Q1 30, but if we look at the change in revenues, though you're saying sell through up 600 to 650, which is down maybe 34% from the salary peak at 990.
Mike: So I guess my question is what's what's behind the relaunch.
Mike: The reluctance to more aggressively.
Mike: Attack are the the operating cost structure.
Mike: I think it's we use the the six to 650 as a.
Mike: Indicator of the trajectory.
Mike: But we believe it's a trend transition on point and we are developing products and end and when I mentioned as well that even in that number of the 600 to 650, we are not including products that we already released and we will be generating revenue during 'twenty 'twenty four, albeit not the not.
Ronen Faier: And from then on, it's going to be gradually declining towards the end of the year. It's not going to be exactly linear, but it's going to decline towards the end of the year, where we'll still see a small amount in Q4. So that's basically our assumption. Thank you for all that detail. I really appreciate it, and then my follow-up question...
Mike: With the dramatic impact on the overall number of of 'twenty 'twenty four so this.
Cashi Harrison: So, you know, OPEX, post the, you know, the tough restructurings, you know, it's declining to, I think you said $115 million at the midpoint. And that's down from 12%, that's down about 12%, I think from $3.2 at $130. But you know, if we look at the change in revenues, though, you're saying sell through up $600 to $650, which is down maybe 34% from the selling peak at $990. And so, you know, I guess my question is, what's behind the reluctance to more aggressively attack the operating cost? I think it's because we use the 6 to 650 as an indicator of the trajectory.
Mike: This is a transition every point to which we sized the company for and are taking a lot of actions in order to be able to grow past that in the are in the mid term basis based on how we see the industry evolving and how we see our portfolio are evolving in order to do that.
Mike: Yeah.
Speaker Change: Fair enough. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Mark Strouse with JP Morgan.
Mark Strouse: Yes. Good afternoon, thanks, very much for taking my questions. So a lot of focus on on near term and I. Appreciate all the numbers I wanted to go back to the risk though.
Mark Strouse: So I think on the last call you had talked about kind of.
Mark Strouse: Trying to protect your ability to you know if the market rebounds quickly. You know you you wanted to be in a position to meet that demand and not air ship and you know some of the other things that we've dealt with over the last several years. The the reduction enforce though I mean does that signal any kind of structural changes that youre looking out kind of over the <unk>.
Ronen Faier: But we believe it's a transitional point, and we are developing products, and Ronen mentioned as well that even in that number of 600 to 650, we are not including products that we have already released and will be generating revenue during 2024, albeit not with a dramatic impact on the overall number of 2024. So this is a transitionary point which we size the company for and are taking a lot of actions in order to be able to grow past that in the midterm based on how we see the industry evolving and how we see our portfolio evolving in order to do that. Fair enough; thank you.
Mark Strouse: Medium term.
Mark Strouse: And then also kind of as a follow up.
Mark Strouse: Is there any detail that you can provide as far as the reduction in force the impact on revenue versus C&I U S versus Europe, you know kind of by market by geography anything you can provide on the reduction in force. Thank you.
Mark Strouse: Yeah.
Mark Strouse: It correlates also to my answer to the previous question is of course the reduction in force was not uniform across the the departments in the operations of the company. So.
Mark Strouse: Thank you. Thank you. Our next question comes from Mark Strouse with J.P. Morgan. Yes, good afternoon.
Mark Strouse: We were.
Hum very determined not to impact our significantly our our R&D capability to maintain a strong presence in the regions and in terms of being close to the customers and being able to service them properly and a manufacturing infrastructure that we believe can meet.
Zvi Lando: Thanks very much for taking our questions. A lot of focus on the near term, and I appreciate all the numbers. I wanted to go back to the RIF, though.
Mark Strouse: The needs are.
Mark Strouse: In the near future and be flexible to grow.
Zvi Lando: I think on the last call, you had talked about kind of trying to protect your ability to, you know, if the market rebounds quickly, you want to be in a position to meet that demand and not, you know, airship and, you know, some of the other things that we've dealt with over the last several years. The reduction in force, though, does that signal any kind of structural changes that you're looking out for kind of over the medium term? And then, kind of as a follow-up, is there any detail that you can provide as far as the reduction in force, the impact on, you know, Resi versus CNI, US versus Europe, you know, kind of by markets, by geography, anything you can provide on the reduction in force? Thank you. Yeah, I think it also correlates with my answer to the previous question. Of course, the reduction of force was not uniform across departments and the operations of the company.
Mark Strouse: To grow beyond that so so all of that was was a part of of the <unk>.
Mark Strouse: Sentiment in the methodology that we that we implemented and.
Mark Strouse: And I would say even on even a more positive note that on a net number more R&D people are working today on new product development and did a year ago when a big part of them were working on component replacements.
Mark Strouse: And addressing other things related to supply chain.
Mark Strouse: Constrained so in that regard is actually I think we're a we're in a better situation today, we did as mentioned discontinued some projects in the area of E mobility, we discontinued some other periphery old projects in and.
Mark Strouse: In the broader solar and energy market in a very very concentrated on our residential and commercial and having an offering of a complete solution from everything that has to do with Oh generation storage and consumption everything from our Inverters batteries.
Zvi Lando: So we were, I'm very determined not to significantly impact our R&D capability to maintain a strong presence in the regions and in terms of being close to the customers and being able to service them properly in a manufacturing infrastructure that we believe can meet the needs of the near future and be flexible to grow beyond that. So all of that was part of the assessment and the methodology that we implemented. And I would even say, on a more positive note, on a net number, more R&D people are working today on new product development than a year ago, when a big part of them were working on component replacements and addressing other things related to supply chain constraints. So in that regard, actually, I think we're in a better situation today. We did, as mentioned, discontinue some projects in the area of e-mobility.
Mark Strouse: EV Chargers water heaters et cetera. So so that we believe is where we see the future and where we're investing.
Mark Strouse: The resources.
Okay I'll take the rest offline. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Colin Rusch with Oppenheimer.
Colin Rusch: Thanks, so much for us.
Colin Rusch: The change in volumes.
Colin Rusch: Looking at components sourcing can you talk a little bit about any adjustments that we should be thinking about in terms of actual component costs and volume.
Colin Rusch: <unk> gone the other way on you guys as you take volumes down and how that might reverse as you go through the balance of this year and into next year.
Colin Rusch: So first of all is Colin and I'll start by the fact that given the inventory levels that we see right now.
A lot of the cost will not change this year, because if if you take the AR inventory levels and an expected revenues, you'll see that we're pretty much covered for this year and of course, we will continue to manufacture in the U S to enjoy IRA and maintain other areas. So I don't expect a short term situation.
Zvi Lando: We discontinued some other peripheral projects in the broader solar and energy market and are very, very concentrated on residential and commercial and having an offering of a complete solution from everything that has to do with generation, storage, and consumption, everything from inverters, batteries, EV chargers, water heaters, etc. So that, we believe, is where we see the future and where we're investing our resources. Okay, I'll take the rest offline.
Colin Rusch: Here when it comes to the components themselves first of all you know we have some strategic components and strategic component manufacturers with whom we have agreements with all of them with this cost are the terms of the agreement and how to move forward I think that most of the discussion. He is morally more on timing of consumption of volumes rather.
Zvi Lando: Thank you. Thank you. Our next question comes from Colin Rush with Oppenheimer. Thanks so much, guys.
Colin Rusch: Other than pricing right now because we saw it also win.
Colin Rusch: Component prices have spiked during COVID-19, usually these would be more related to overall I would say a global trends rather than you know the volumes that we're consuming yes or no. So I do not expect to see a lot of changes there. There is always by the way a little bit of a change to the cost per unit of <unk>.
Ronen Faier: You know, with the change in volumes, you know, and looking at your component sourcing, can you talk a little bit about any adjustments that we should be thinking about in terms of actual component costs and volume breaks going the other way on you guys as you take volumes down, and how that might reverse as you get through the balance. First of all, Colin, I'll start by saying that given the inventory levels that we see right now, a lot of the costs will not change this year because if you take the inventory levels and expected revenues, you'll see that we're pretty much covered for this year, and, of course, we will continue to manufacture in the U.S. to enjoy IRA and maintain other areas. So I don't expect a short-term situation here. When it comes to the components themselves, first of all, we have some strategic components and strategic component manufacturers with whom we have agreements. With all of them, we discussed the terms of the agreement and how to move forward.
Colin Rusch: Manufacturing because the more units you mean in fact, usually that goes down but at least when it comes to the level that we see what we tried to do is to reduce manufacturing locations. Instead of you know maintaining many locations and reduce the volumes in each one of them. So this is something that is relatively also going to be stay staying flat.
Speaker Change: So no major changes that are expected in the very near future.
Speaker Change: Excellent and then what's your sales team.
Speaker Change: And suppressed levels of sales you know obviously you guys have.
Speaker Change: Effective sales team historically.
Speaker Change: Can you talk about any sort of retention metrics that you are having to engage in or are.
Speaker Change: Are you, giving folks a little bit bigger geographies to work with you know how is the team.
Ronen Faier: I think that most of the discussion is more on the timing of consumption of volumes rather than pricing right now because we saw that also when component prices spiked during COVID. So actually, this will be more related to overall, I would say, global trends rather than the volumes that we're consuming, yes or no. So I do not expect to see a lot of changes there. There is always, by the way, a little bit of a change in the cost per unit in manufacturing because the more units you manufacture, usually that goes down, but at least when it comes to the level that we see, what we try to do is to reduce manufacturing locations instead of maintaining many locations and reducing the volumes in each one of them.
Speaker Change: <unk> change in shape.
Colin.
Colin Rusch: So it's kind of and also in one of the previous questions. Our our global sales force was less impacted by by the reduction enforced because we wanted to keep the strong sales force that we have and the strong links to the customers that we have and I think that that.
Colin Rusch: By itself.
Colin Rusch: Guys are some level of royalty and motivation.
Colin Rusch:
Colin Rusch: Our sales force to a large extent has been with us for a long time and it is a very experienced in the industry and very experienced with the company.
Colin Rusch: Understand the cycles take place and and have optimism about the continuation of the cycle to the other side of it and together with that we are you know, making sure that that that they are properly incentivized for for the work that is maybe a bit more difficult now than in a and <unk>.
Ronen Faier: So this is something that is relatively also going to be staying flat. So no major changes are expected in the very near future. And then, you know, with your sales team, you know, given suppressed levels of sales, you know, obviously, you guys have had a really effective sales team historically, can you talk about any sort of retention metrics that you're having to engage in? Or are you giving folks a little bit bigger geographies to work with? You know, how is that team changing its shape and incentives? Also, in one of the previous questions, our global sales force was less impacted by the reduction in force because we wanted to keep the strong sales force that we have and the strong links to the customers that we have. And I think that that, by itself, buys some level of loyalty and motivation.
Colin Rusch: Bullish bullish market, but I think where we're at.
Colin Rusch: We're happy with the level of engagement and motivation and optimism that we see across the sales force and are in the various geographies.
Colin Rusch: Yeah.
Colin Rusch: Thank you. Our next question comes from Christine Cho with Barclays.
Christine Cho: Hi, Thank you for squeezing me My first question, how do you determine how to under ship every quarter. I think you mentioned that youre going to continue to I'm just shocked around year end just less in the subsequent quarters, but why not just frontload that M. Not undershot and then with the forecast that.
Zvi Lando: Our sales force, to a large extent, has been with us for a long time and is very experienced in the industry and very familiar with the company. They understand that cycles take place and have optimism about the continuation of the cycle to the other side of it. And together with that, we are making sure that they are properly incentivized for the work, which is maybe a bit more difficult now than in a bullish market. But I think we're happy with the level of engagement, motivation, and optimism that we see across Salesforce in the various geographies. Thank you. Thank you. Thank you. Our next question comes from Christine Cho with Barclays. Hi, thank you for squeezing me in.
Christine Cho: In discussing our trajectory right.
Christine Cho: Revenue improvement, how do you factor in potential market share losses or gains on any price increases that you might like to do I think most of the year.
Christine Cho: Yeah. So the first part of the question is that it's actually it's more of the customers determined that then we determined that and then I mentioned because of the breadth of our of our products.
Christine Cho: Even though we talk about a lot of inventory in the channel. There are various products are that are still.
Christine Cho: Either in high demand or in some way short and a lot of times. The revenue was driven from from those so.
Christine Cho: We're not.
Trying to push onto the customers product that are that they haven't don't need we're responding to their.
Ronen Faier: My first question is, how do you determine how much to undership every quarter? I think you mentioned that you're going to continue to undership through year-end, just less in the subsequent quarters, but why not just front load that and not undership? And then with the forecast that you discussed in your trajectory and revenue improvement, how do you factor in potential market share losses or gains and any pricing decreases that you might want to do as we move through the year? Yeah, so the first part of the question is, actually, it's more the customers determine that than we determine that. And Ronen mentioned, because of the breadth of our product, even though we talk about a lot of inventory in the channel, there are various products that are still either in high demand or in some way short, and a lot of the revenue is driven from those. So we're not trying to push on to the customer's products that they have and don't need.
Christine Cho: To their needs either in anticipation of a of a something that's going to happen in the market or as their their inventories declined for specific for specific product lines in.
Christine Cho: In our modeling and plans, we obviously have a lot of focus on on share and and believe that we're taking actions that will enable us to to gain share we did not factor or anything dramatic in that regard into our assumptions when looking at our at the.
Christine Cho: <unk> projected our sell through numbers that we gave.
Speaker Change: Thank you. Our next question comes from Julien Dumoulin Smith with Bank of America.
Speaker Change: Hey, This is Cameron lochridge on for Julien can you guys hear me okay.
Speaker Change: Yes.
Cameron Lochridge: Awesome. Thank you. So I just wanted to come back actually to that last question on pricing kind of how you see that evolving.
Cameron Lochridge: And in Europe.
Cameron Lochridge: With the inventory challenges, that's taking place over there.
Ronen Faier: We're responding to their needs, either in anticipation of something that's going to happen in the market or as their inventories decline for specific product lines. In our modeling and plans, we obviously have a lot of focus on share and believe that we're taking actions that will enable us to gain share. However, we did not factor anything dramatic in that regard into our assumptions when looking at the projected sell-through numbers that we gained.
Cameron Lochridge: Either from a competitive standpoint, how are you seeing competitors behave and how does the pricing strategy Volcker, you guys kind of as the year progresses in Europe.
Cameron Lochridge: So.
Cameron Lochridge: Start from from what we see and then what it means for US first of all we do see an intense are intensifying I would say pricing environment are in Europe right. Now are the fact is that as mentioned you know everyone is trying to push their volumes are to try to grab to grab some.
Ronen Faier: Thank you. Our next question comes from Julian Duvalin-Smith with Bank of America. Hi there. Hey, this is Cameron Lockridge on for Julian. Can you guys hear me okay?
Speaker Change: Sure and we do see that across the board at least when it comes to Chinese string Inverters are prices are going down sometimes a little bit more than we used to see in the past now the channels are starting you know two to clear inventories than our prices can play a little bit of a part when it comes to us.
Ronen Faier: Yes, we do. It's awesome. Thank you. So I just wanted to come back, actually, to that last question on pricing, kind of how you see that evolving, particularly in Europe, with the inventory challenges that are taking place over there. You know, either from a competitive standpoint, how are you seeing competitors behave? And how does the pricing strategy evolve for you guys, kind of as the year progresses in Europe? So I'll start from what we see and then explain what it means.
Speaker Change: We will need to adjust prices along this year and as we've mentioned, we expect to see prices going down across the board and I would say mid to high single digit this year not all of it is going to be in the same continent or not on the same product, but in general but the other side.
Ronen Faier: First of all, we do see an intensifying, I would say, pricing environment in Europe right now. The fact is that, as mentioned, everyone is trying to push their volumes to try to grab some share, and we do see that across the board, at least when it comes to Chinese string inverters, prices are going down sometimes a little bit more than we used to see in the past. Now that channels are starting to clear inventories, then prices can play a little bit of a part. When it comes to us, we will need to adjust prices along this year, and as we've mentioned, we expect to see prices going down across the board in the mid to high single digits this year. Not all of it is going to be on the same continent or on the same product, but in general, the other side that still plays a very important part is actually the fact that what is the offering that is provided.
Speaker Change: It still plays a very important part is actually the fact that what is the offering that he's provided because.
Speaker Change: Today the offerings that we provide is considered to be a premium product comes from the software capabilities from the abilities to respond to dynamic charges. The fact that we can make a lot of changes to our software over the air overtime and change the product capabilities.
Speaker Change: In relation to what we see in the market our D C capital batteries and therefore, we have certain benefits that allows us.
Speaker Change: To continue and maintain our premium position. So we're not completely immune to price reductions that will happen in this market at the same time at least what we see right now is not something that necessitates a very big change in our pricing strategy.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Corrine Blanchard with Deutsche Bank.
Ronen Faier: Today, the offering that we provide is considered to be a premium product, and that comes from the software capabilities, the ability to respond to dynamic charges, the fact that we can make a lot of changes to our software over the year, over time, and change the product capabilities in relation to what we see in the market, our DC capital batteries, and therefore, we have certain benefits that allow us to continue and maintain our premium position. So we're not completely immune to price Thank you. Our next question comes from Corinne Blanchard of Deutsche Bank. Hey, good afternoon.
Speaker Change: Yeah.
Hey, good afternoon. Thank you for taking my question.
Corrine Blanchard: Most of it has been already talk about it but maybe if you can try to talk about more about the competition, especially in the U S. Well definitely have held over the last six months.
Corrine Blanchard: Well increased competition coming from Tesla I saw Raphael P. Yeah, I was glad that I have some contracting styrene. So that could give you on the rest of my vantage. So maybe if you can talk a bit about the dinner and he came from a convention and the like.
Speaker Change: Yeah, it's it's a competitive environment.
Speaker Change: And always has been we don't sense a.
Speaker Change: A big shift in the competitive environment and in in the U S.
Ronen Faier: Thank you for taking my question. Most of it I've already talked about, but maybe if you could try to talk a little bit more about the competition, especially in the US. We definitely have heard increased competition coming from Tesla. There are some of your peers as well that have some contract experience, so that could give you, as well, some advantage.
Speaker Change: At least not not are not right now.
We know that that the new products are coming in.
Speaker Change: And I'm sure there are good they're good products coming we there they're a good string inverters are available already in the market today.
Speaker Change: Today, the North American market had had for <unk>.
Speaker Change: For for many years now understanding and tendency towards a module level electronics and all of the benefits.
Ronen Faier: So maybe if you could talk a little bit about the dynamic here in terms of competition in the US. Yeah, it's a competitive environment, you know, and always has been. We don't sense a...big shift in the competitive environment in the US, at least not right now. We know that new products are coming in. And I'm sure there are good products coming; there are good string inverters available already in the market.
Speaker Change: All of that and and and in terms of of energy harvest safety etcetera. So so we expect that that will still be the main philosophy and the.
Speaker Change: The North American market and so far we don't.
Speaker Change: We don't see a strong shift in another.
Speaker Change: Another direction, but that said in Europe.
Ronen Faier: Today, the North American market has had, for many years now, an understanding and tendency towards module-level electronics and all of the benefits of that in terms of energy harvest, safety, etc. So we expect that that will still be the main philosophy in the North American market, and so far, we don't see a strong shift in another direction. But that said, in Europe, there is a good offering of string inverters, and Ronen elaborated before on the competitive environment over there.
Speaker Change: There is there is a good offering of of string Inverters and and then elaborated before around the competitive environment.
Environment over there. So so more competition is coming in and it's becoming more challenging, but we're very where we're very comfortable with our with the quality of our offering and its differentiation.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Joseph Osha with Guggenheim Partners.
Joe Osha: Oh, Hi, there guys two questions first you've talked a lot about what you expect to happen in the U S relative to Europe, you're progressing as you think about.
Ronen Faier: So more competition is coming in, and it's becoming more challenging, but we're very comfortable with the quality of our offering and its differentiation. Thank you. Our next question comes from Joseph Osha with Guggenheim Partners. Hi there, guys.
Joe Osha: 600, and $650 million run rate I'm wondering how we should think about that breaking down.
Joe Osha: Europe versus the U S and also perhaps commercial versus residential thank you.
Speaker Change: Joe can you please repeat the question.
Ronen Faier: Two questions. First, you've talked a lot about what you expect to happen in the U.S. relative to Europe as the year progresses. So as you think about the $600 and $650 million run rate, I'm wondering how we should think about that breaking down Europe versus the U.S. and also perhaps commercial versus residential. Thank you. Joe, can you please repeat the question?
Joe Osha: Let's as we think about Q4, and the $600 million to $650 million you've talked about how.
Joe Osha: How much of that do you think might be in Europe versus the U S. Today, and how do you think that breakdown might look in terms of residential versus commercial market.
Ronen Faier: Let's, you know, as we think about Q4 and the $600 to $650 million you've talked about, how much of that do you think might be in Europe versus the U.S., say, and how does your breakdown might look in terms of residential versus commercial markets? Yeah, I think we in resi versus commercial. As we explain, we anticipate commercial to grow at a higher rate than residential. So we've typically been, on a megawatt basis, in recent quarters, roughly 50-50 between the two. We expect that looking at the trajectory into 2024, that the ratio on a megawatt basis, which is very different, of course, on a revenue basis, will lean a bit more towards commercial. In terms of the ratio of U.S. to Europe, so as I mentioned, we expect mild growth in the two segments in Europe of residential and commercial.
Joe Osha: Yeah I think.
Joe Osha: We.
Joe Osha: It rarely versus commercial.
Joe Osha: As a way of saying, we anticipate a commercial to grow at a higher rate.
Joe Osha: Then than residential.
Joe Osha: We've typically been on a megawatt basis in recent quarters, roughly a 50 50 between between the two we expect that that's looking at the trajectory into 'twenty 'twenty four that the ratio on a megawatt basis, which is very different of course than the revenue basis.
Joe Osha: Basis will lean.
Joe Osha: I'm a bit more towards a commercial in terms of the ratio of U S to Europe. So it is as I mentioned, we expect.
Joe Osha: Mild growth in in are the two segments in Europe and for residential and commercial.
And we expect.
Joe Osha: Stronger growth in our North American commercial and some level of stagnation in in North America residential. So so overall I think relative to Q4, we do expect Europe to be a bigger portion of our of our sell through and eventually revenue are going.
Ronen Faier: And we expect stronger growth in North American commercial and some level of stagnation in North American residential. So, overall, I think, relative to Q4, we do expect Europe to be a bigger portion of our sell-through and eventually revenue going into 2024 and closer to how it was in the majority of 2023, where Europe was a much higher portion than North America. So, Q4 was a bit different.
Joe Osha: Into 224.
Joe Osha: And closer to how it was in the majority majority of Quant twenty-three where Europe.
Joe Osha: Or is it much higher portion than North America. So so Q4 was a bit a bit different and we think that are going into continuation of the year. The ratio of Europe will increase relative to the ratio of our of the U S and the ratio of commercial will increase slightly compared to residential.
Ronen Faier: We think that going into the rest of the year, the ratio of Europe will increase relative to the ratio of the U.S., and the ratio of commercial will increase slightly compared to residential. Thank you. Thank you. Hey, good evening, guys. Appreciate all the commentary.
Joe Osha: Okay.
Thank you. Our next question comes from Tristan Richardson with Scotiabank.
Joe Osha: Yeah.
Tristan Richardson: Hey, good evening guys. Appreciate all the commentary lots been asked and answered, but maybe just curious dialing into Europe, a little bit.
Ronen Faier: Lots of questions have been asked and answered, but maybe just curious, dialing into Europe a little bit. Can you talk about maybe where the Netherlands has been historically, particularly as we are sort of in limbo in terms of what happens long term from a policy perspective? Yeah, the Netherlands is I think it's well known that it was a very strong market for us historically, actually, just as a reference point, I think we have an installed base of more than 800,000, more than 800,000 residential homes in the Netherlands that have a SolarEdge system on them. And we believe that someday, and maybe that day after the ruling of last week is a bit further out there than we thought originally. Many of these 800,000 homes will have a SolarEdge battery added to the SolarEdge solar system that already exists.
Tristan Richardson: Can you talk about maybe where the Netherlands has been for you historically.
Tristan Richardson: Sure.
Tristan Richardson: As a component of Europe, and then where you see that going in the 600 to 650.
Tristan Richardson: Particularly as we are sort of in limbo in terms of what happens long term from a policy perspective.
Tristan Richardson: Yeah.
Tristan Richardson: And as I.
Tristan Richardson: I think it's well known that it was a very strong market for us historically I actually just as a reference point I think we have an installed base of more than 800000 and more than 800000 residential homes.
Tristan Richardson: In our in the Netherlands that have a solar system on them in and we believe that some day and maybe that day. After the after the ruling of last week is a bit further out there than we thought originally many of these 800000 homes, where they have a solar edge battery added to this already.
Tristan Richardson: Solar system that already exists for the Netherlands is a very significant stronghold for us and and has been a.
Zvi Lando: So the Netherlands is a very significant stronghold for us and has been a good market for us in a kind of on par with Germany in terms of the size of business for us, although very different in scale and size of the market. We mentioned I mentioned in the prepared remarks that compared to the baseline that existed in 2022, during the surge in demand, the Netherlands increased installation rates by about 50% in the early part of 2023 and then declined from there, 50%, to be about, I think, 20% or 30% below the 2022 run rate, which is the installation run rate in the Netherlands right now. And as I said earlier, we believe that the ruling, which does not overturn net metering right now, is overall positive, but it doesn't really give very strong long-term clarity to the market.
Tristan Richardson: A good market for us.
Tristan Richardson: Kind of on par to Germany in terms of are of the size of business for us, although very different and it's got scale and size of of the market.
Tristan Richardson: We mentioned I mentioned in the prepared remarks.
Tristan Richardson: The compared to the baseline that existed in 2022 during the surge in demand are the Netherlands.
Tristan Richardson: For us increased installation rates by about 50%.
Tristan Richardson: In the early part of 2023, and then declined from there are 50% to be about I think 20 or 30% below the 2022 run rate.
Tristan Richardson: Is is the installation run rate in the Netherlands.
Tristan Richardson: In the Netherlands, right now and it's.
Tristan Richardson: It is as I said earlier, we believe that the the ruling which was not to overturn net metering right now.
Tristan Richardson: Is is overall positive, but it doesn't really give very strong long term clarity to the market. So.
Zvi Lando: So I think people will go from saying, I don't want solar, or I maybe don't need solar, because I'm not going to get net metering, to saying, okay, I'll have net metering in the near future, it maybe makes sense to put solar, but it's hard to say if this really is going to drive a surge in the market. We think it's going to improve, but maybe not quickly to the levels of 2022 and definitely not to the level of 2023.
Tristan Richardson: I think people will go from fear from saying I don't want solar or maybe you don't need solar because I'm not going to get to net metering to saying, Okay. I'll have net metering for the near future. It maybe it makes sense to to put solar but it's hard to say if this really is going to drive a surge in the market, we think it's going to.
Tristan Richardson: Improve but but but may be not a quickly to the levels of 2022 and definitely not to the level of 2023. So it's still a strong and good market and we also see already an uptick in our in battery.
Zvi Lando: So it's still a strong and good market, and we also see an uptick in battery adoption, but it is lower than what it used to be in 2022 for us and definitely at the peak of 2023. Thank you. Our next question comes from Amit Thakkar with BMO Capital Markets. Hi, good evening. Just one question for me.
Tristan Richardson: Adoption, but it is it is lower than what it used to be in 2022 for us and and definitely at the peak of 2023.
Tristan Richardson: Yeah.
Okay.
Tristan Richardson: Thank you. Our next question comes from Amit <unk> with BMO capital markets.
Amit: Hi, Good evening, just one one question for me I just wanted to come back to I guess the comments earlier on the call.
Ronen Faier: I just wanted to come back to, I guess, the comments earlier on the kind of expectation of free cash flow for entering 2024. I think the expectation was that 4Q was going to be positive free cash flow, and I was just kind of wondering if you could kind of maybe pick apart, like, was it an unexpected increase in finished goods inventory or changes in payment terms on the AR balance that caused you guys to kind of deviate from that and kind of push that out a little bit further in 2024 with respect to free cash flow generation? Sure. So I think it's a combination of the two.
Amit: Expectation of.
Amit: Free cash flow for entering.
Amit: Entering 2024, I think the expectation was that <unk> was going to be positive free cash flow and I was just kind of wondering if you could kind of maybe take a part like was it an unexpected increase in finished goods inventory or <unk>.
Amit: Changes in payment terms on AAR balance that caused you guys to kind of deviate from that and kind of push that out a little bit further in 2024.
Speaker Change: Back to free cash flow generation. Thanks, sure. So I think it's the combination of the two I'll start by the fact that we.
Ronen Faier: I'll start by saying that we needed to extend payment terms. Sometimes we wanted to, sometimes we had to extend payment terms to our customers. We do understand that some of our customers do experience a lot of, I would call it, cash difficulties right now because of the fact that if sell-through is lower, they also collect a little bit less. The fact that we work, by the way, with large customers gives us a little bit more confidence in the ability to collect. But I would say that sometimes we wanted to, sometimes we were forced to collect a little bit slower.
Speaker Change: We needed to extend payment terms, sometimes we want that sometimes we had to extend payment terms to our customers. We do understand that some of our customers are do experience a lot of I would call. It cash difficulties right now because of the fact that you know if sell through is lower they also collect a little bit lower the face.
Speaker Change: We work by the way with large customers give us a little bit more confidence in the ability to collected those but I would say that sometimes we wanted sometimes we were forced to collect a little bit slower.
Ronen Faier: One interesting phenomenon was that some customers, it's the end of the year; they need to present their financials. They simply chose to pay instead of the 30th of December. On the 3rd of January, we have those as well.
Speaker Change: One interesting phenomena was that some customers you know at the end of the year are they need to presents their financials. They simply chose to pay instead of the 30th of December on the third of January we have we have those as well. So that was the first part the second part was again the inventory buildup, we had about $200 million.
Ronen Faier: So that was the first part. The second part was, again, the inventory build-up. We had about $200 million of inventory build-up that happened. In addition, of course, to the inventory build-up that we saw in Q4, we usually pay our vendors on average within 60 days. So not only did we pay for the inventory build-up that happened in Q4, but we paid quite a lot for some of the build-up that happened in Q3 into the sales of Q4 that did not materialize. So the combination of the two was the end result of what we saw.
Speaker Change: Of inventory buildup that that happened.
Speaker Change: We in addition of course to the inventory buildup that we saw in Q.
Speaker Change: In Q4, we usually pay to our vendors in average within 60 days, so not only that we paid for the inventory buildup that happened in Q4, we paid quite a lot for some of the buildup that happened in Q3 into the sales of Q4. They did not materialize. Eventually so the combination of the two was was the end result of what we saw.
Speaker Change: And I think that it's mostly the very abrupt stop of of revenues Oh, sorry reduction in revenues, coupled with our the customers I would call it inability to pay when needed.
Ronen Faier: And I think that it's mostly the very abrupt reduction in revenues coupled with the customers; I would call it the inability to pay when needed. Thank you. Our next question comes from Austin Mahler with Canaccord. Hi, good evening.
Speaker Change: Okay.
Speaker Change: Thank you. Our next question comes from Austin Muller with Canaccord.
Speaker Change: Sure.
Austin Muller: Hi, Good evening My first question here.
Zvi Lando: My first question here is, what is the attach rate that you're currently seeing for home batteries with inverters in the US versus in Europe? So it obviously varies significantly by country. So, you know, Germany's attach rates remain in the 80 to 90% range, while in Italy. I'm working off of memory here.
Austin Muller: What is the attach rate you're currently seeing for home batteries with Inverters in the U S versus in Europe.
Austin Muller: Yeah.
Yeah.
Speaker Change: And so for them it obviously varies significantly by country. So.
Speaker Change: Germany attach rates remain in the 80% to 90%.
Speaker Change: Well in the in.
Speaker Change: Italy.
Speaker Change: And.
Speaker Change: Working off of memory here, so, but it's in the range of 40 to 50.
Zvi Lando: So, but it's in the range of 40 to 50%, and then, as I said before, in the Netherlands, it's up 10%. If we take these as representative markets of in the US, in Europe, excuse me, in the US, it also varies, of course, by market. So in California, Overall, attached rates right now are about 40 to 50 percent, but that splits, of course, between some of the remaining NEM 2.0 installations that won't necessarily take a battery and the NEM 3.0 that do take a battery. We mentioned that the sell-through of batteries in the U.S. was up 40-something percent in the fourth quarter, so you can assume that the majority of this is going to California and the attached rate is In other states, in the U.S., it's fairly low.
Speaker Change: 50% and then there's as I said before in the Netherlands. It's up then 10% if we take these as representative markets of.
Speaker Change: In.
Speaker Change: In the U S and in Europe, excuse me in the U S. It also varies of course by market So in California.
Speaker Change: Overall attach rates right now is about 40% to 50%, but that splits of course between some of the remaining 2.0 installations that won't necessarily take a battery and then three zero that do take a batteries, we mentioned that the sell through of of batteries in the U S.
Speaker Change: It's up 40 something percent in the fourth quarter. So so you can assume that the majority of this is going to take.
Speaker Change: California and.
Speaker Change: The attach rate is gradually increasing in the other states in the U S. It's a it's it's fairly low I would again off of memory, it's probably in the range of between 10 to 15.
Zvi Lando: I would, again, off memory, say it's probably in the range of between 10 to 15 percent....
Zvi Lando: Thank you. Our next question comes from Vikram Bhattacharya with Citi. Good afternoon, everyone.
Speaker Change: Per cent or so.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you. Our next question comes from Vikram backing.
Vikram: <unk> with Citi.
Vikram: Good afternoon, everyone I apologize, but I wanted to ask one more question about the long term revenue outlook.
Zvi Lando: I apologize, but I wanted to ask one more question about the long-term revenue outlook. Zvi, I think you mentioned the outlook assumes some market share gains. I was wondering if you could highlight the markets where you see market share gain opportunity and what the strategy will be to capture that market share. And it doesn't sound like the second half assumes any inventory restocking, but I wanted to clarify that the fourth quarter sort of the outlook, 6 to 6.50, does not assume any inventory restocking in any way. And then I have a follow-up question.
Vikram: I think you mentioned the outlook assumed some market share gains I was wondering if you can highlight the markets, where you see market share gain.
Vikram: <unk> opportunity and what the strategy will be to capture that market share.
Vikram: And it doesn't sound like your second half assumes any inventory restocking, but I wanted to clarify so this quarter or sort of the outlook six to 650, <unk> does not assume any inventory restocking in anyway, and then I have a follow up.
Vikram: Yeah.
Zvi Lando: And the first question, I think, and I discussed this with them, is the topic of new segments that we have entered that we previously didn't serve at all. And obviously, there, every shipment is a market share gain for the ground mount, when now that we're shipping 300 kilowatt inverters, we're gaining market share, and the same is true for trackers, and the same is true elsewhere. From a revenue perspective, the scale is not huge, and we also didn't include it in the assumptions. In the core markets, share gains are obviously much more incremental.
Vikram: The first question I think and I discussed there is the topic of <unk>.
Vikram: New segments that we have entered that we previously didn't serve at all and obviously theyre every shipment as a market share gain in the ground. Mount went now that were shipping 300 kilowatt inverters.
Vikram: We're gaining market share in the same as in trackers.
Vikram: Same answer from a revenue perspective, the scale is not huge and we also didn't include it in the <unk> and the assumptions in the core markets.
Vikram: Share gains are obviously much more incremental we we didn't we don't give specific numbers or expectations or market. We have plans, we didn't bake them into the assumptions on I'm on the sell through trajectory a leading on into.
Zvi Lando: We don't give specific numbers or expectations or markets. We have plans. But we didn't bake them into the assumptions on the sell-through trajectory, leading on into the revenue trajectory.
Vikram: Into our revenue trajectory.
Zvi Lando: Vikram, can you clarify the second question again just to make sure that we understand it correctly? I was asking whether the outlook for the fourth quarter, 6 to 6.50, does not assume any inventory restocking in any way. I believe it does not, but I wanted to clarify. It assumes that the distribution channel will be by then at the balance inventory level that they typically want to maintain that, historically, is somewhere in the range of 60 to 90 days of inventory. Our experience is that most distributors and channels want to hold. So that is kind of what we modeled, again, a bit of variation on countries and regions and in products if that is what helps with the question.
Vikram: Vikram can you clarify again the second question just to make sure that we understand it correctly.
Vikram: I was asking.
Vikram: The outlook for fourth quarter six to 650 does not assume any inventory destocking in any way I I believe it does not but I wanted to clarify.
Vikram: It assumes that the.
Vikram: The distribution center.
We'll be back then at the balanced inventory level that they typically want to maintain that historically is somewhere in the range of 60 to 90 days is.
Vikram: Inventory is what.
Vikram: Our experience is that most of the distributors and channels are want to want to hold so that is that is kind of what we modeled again a bit variations on countries and regions and and product if that is what the.
Speaker Change: If that helps.
Zvi Lando: Thank you. We have no further questions at this time. I now return control of the conference back to the presenters. I just wanted to thank everyone for joining us on the call today and have a good evening. Thank you. This concludes today's teleconference. You may now disconnect your lines.
Speaker Change: With a question.
Speaker Change: Okay.
Speaker Change: Thank you we have no further questions at this time and I'll return control of the conference back over to the presenters.
Speaker Change: Okay.
Speaker Change: Just wanted to thank everyone for joining us on the call today and have a good evening. Thank you.
Speaker Change: This concludes today's teleconference. You may now disconnect your lines. Thank you for participating.
Operator: Thank you for participating, www.microsoft.com, www.solaredge.com BF-WATCH TV 2021,...... The Bulletproof Executive 2013, https://www.patreon.com
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change:
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change: Hum.
Speaker Change: Uh huh.
Speaker Change: Uh huh.
Speaker Change: [music].
Speaker Change: Uh huh.
Speaker Change: Hum.
Speaker Change: [music].