Q1 2024 SolarEdge Technologies Inc Earnings Call
Your program is about to begin.
[music].
Speaker Change: Hello, and welcome to the solar Etch conference call for the first quarter ended March 31st 2024.
Speaker Change: This call is being webcast live on the company's website at Www Dot solar edge Dot com in the investors section on the event calendar page.
Speaker Change: This call is the sole property and copyright of solar edge with all rights reserved and any recording reproduction or transmission of this call without the expressed written consent of solar edge is prohibited.
Speaker Change: You may listen to a webcast replay of this call by visiting the event calendar page of the solar edge Investor website.
Speaker Change: I would now like to turn the call over to J B Lowe head of Investor Relations for solar edge. Please begin.
Speaker Change: Thank you Kelly and good afternoon, everyone. Thank you for joining us to discuss solar edges operating results for the first quarter ended March 31st 2024, as well as the Companys outlook for the second quarter of 2024.
Speaker Change: With me today R E D Lando, Chief Executive Officer, and Renee and fire Chief Financial Officer.
Speaker Change: <unk> will begin with a brief review of the results for the first quarter ended March 31, 2024, Ronen will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2024.
Speaker Change: We'll then open the call for questions.
Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.
We encourage you to review the Safe Harbor statements contained in our press release the slides posted on our website ahead of this call today.
Speaker Change: Our filings with the SEC for a more complete description of such risks and uncertainties.
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.
Speaker Change: The non-GAAP measures are presented in this presentation, because we believe that they provide investors with a means of inbound of evaluating and understanding how the company's management evaluates the company's operating performance.
Speaker Change: The Asian of these measures can be found in our earnings release presentation and SEC filings.
Speaker Change: 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.
Speaker Change: Listeners, who do not have a copy of the quarter ended March 31, 2024 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website and I will now turn the call over to Judy.
Judy: Thank you Jamie good afternoon, and thank you all for joining us on our conference call.
Judy: Starting with highlights of our first quarter results, we concluded the quarter with approximately $204 million in revenue.
Judy: Revenues from our solar business were approximately $190 million, while revenues from our non solar businesses were approximately $14 million.
Judy: This quarter, we shipped 1.1 million power Optimizer is 69000, Inverters and 128 megawatt hour of batteries.
Judy: As we have done on previous calls I will start with the market dynamics, we see in the various regions and end markets our underlying demand in these markets and the implications on sell through and inventory cleanup.
Judy: Starting with the U S residential segment.
Judy: As we commented last quarter, we did not expect significant changes in this market as long as the interest rates in electricity prices remain at recent levels.
Speaker Change: As a result that were first quarter results largely reflect reflect traditional seasonality within further and optimize our sell through down 19% quarter over quarter.
Speaker Change: However, we have seen continued strength in the uptake of our single phase battery product in the U S market and sell through of our battery product was up 26% quarter over quarter.
Speaker Change: This strength is coming from California, with the accelerating adoption of battery tide, NIM 3.0 systems, as well as Puerto Rico, where customers need food backup capability.
Speaker Change: Our D C. Coupled solution is particularly well suited for these applications given the incremental energy that is generated when compared with many alternative products.
Speaker Change: Moving to U S commercial.
Speaker Change: Sell through was down 22% from our record fourth quarter largely due to seasonality.
Speaker Change: We are encouraged by the trajectory of this market, which is expected to grow this year due among other reasons to the continued demand from large enterprise customers, who want to standardize their global portfolios on our product.
Speaker Change: On a year over year basis sell through of our commercial Inverters was up 42% in the U S.
Speaker Change: Moving to Europe.
Speaker Change: The market started the year slowly due to a slightly longer than usual winter and continued digestion of recent regulatory changes.
Speaker Change: In residential sell through in Europe, with seasonally down 19% quarter over quarter, with Inverters, and optimize theres down, 20% and batteries down 13%.
Speaker Change: In commercial it sell through was down 2%, reflecting the relative strength of this market and the good position. We have based on the same dynamics that I mentioned when discussing the U S commercial market.
Speaker Change: Touching on some of our major markets in Europe in Germany. The market started the year more slowly than anticipated as declining electricity prices have negatively impacted the economics of solar.
Speaker Change: There is however, an expectation that market dynamics will improve given the passing of solar package one by the German Parliament two weeks ago, which was simplify regulatory requirements on the new solar installations.
Speaker Change: Among other measures in the package are increased feed in tariffs for commercial installations and incremental support for Agri photovoltaic project, which we expect will increase demand for our product specifically given our strength in these segments.
Speaker Change: In the Netherlands consumer confidence is recovering slowly following the clarifications around net metering in the fourth quarter, while the market remains at relatively depressed levels compared to recent years, we expect the market to continue to recover slowly and we are focusing on developing solutions in particular.
Speaker Change: On the software side that didn't relate that will enable us to gain share in this market.
Speaker Change: I will expand on some of these initiatives in a moment.
Speaker Change: And the rest of world we have not.
Speaker Change: We have not seen significant changes in market dynamics outside of typical seasonality in our revenues continue to be largely derived from Thailand, Taiwan.
Speaker Change: South Africa, Australia and Israel.
Speaker Change: The aggregation of these trends and dynamics in particular, the slower pace of seasonal pick up in Germany translated into first quarter sell through of approximately $440 million, which was slightly below our expectations.
Speaker Change: The lower level of sell through and resulted in us under shipping demand by approximately $250 million at the lower end of the 250 to 300 million range, we anticipated and discussed in our call last quarter.
Speaker Change: Taking the first quarter into account and assuming the traditional seasonality patterns and market trends as we see them today would bring us at the end of the year to the lower end of the range of underlying business run rate level that we estimated in our previous call for that period.
Speaker Change: Our expectation for the second quarter is that sell through should be up 15% to 20% versus the first quarter, meaning we accept to under ship, we expect to under ship demand in the second quarter by approximately $250 million to $300 million.
Speaker Change: Moving to products last month, we announced the acquisition of Levo, which provides software solutions for CNI EV charging optimization management for corporate employee charging fleets charging and charging an apartment buildings.
Speaker Change: Do we have a solution has already been deployed in Europe Asia, and North America at approximately 1000 sites and more than 215000 charging sessions has been conducted to date on the Evo platform.
Speaker Change: We've worked together with heart the energy optimization platform for integrated load control and industrial Iot that we acquired in the second quarter of 2020 C. Arguing.
Speaker Change: Augment the solar edge CNI energy management platform and together form solar edge one for C&I.
Speaker Change: In all solar grade one for CNI is an energy management platform that enables PV and asset owners to manage all onsite electrical power and Optimizes PV production storage EV charging and loads.
Speaker Change: This is achieved by consolidating internal and external data to make hundreds of intelligent energy decisions on a real time basis.
Speaker Change: To help explain I'd like to give a real World example of how solar ridge one for C&I is being deployed by one real estate company in a way that enables them to benefit from the solar edge offering.
Speaker Change: This real estate company has a portfolio of roughly 150 assets ranging from supermarkets to logistics centers cold storage facilities and office buildings.
Speaker Change: This customer wanted a complete hardware and software solution that will enable them to generate clean and cheap electricity, where relevant and optimize energy management, including selling the generated power with your tenants and assisting the tenants with their own energy optimization needs.
Speaker Change: Given the diversity of the asset portfolio, the combined hardware and software configuration will be optimized per site and application on the basis of the flexibility of our portfolio.
Speaker Change: In the coming months, we will be deploying PV to approximately 20% of the sites and one for C&I to all sites on the basis of a paid subscription.
Speaker Change: We believe that the rollout of solar ridge, one for CNI and the additional features that we will deliver in the coming quarters creates differentiation for our solution that will enable us to capture market share and improve profitability.
Speaker Change: <unk> through the ability to sell software services that deliver recurring revenue.
Speaker Change: On our last earning call. We also announced the first shipments of our commercial outdoor battery solution.
Speaker Change: This new commercial battery will be a key piece of the hardware solution that is managed and optimized by one for C&I.
Speaker Change: Along with our CNI, Inverters, EV Chargers and energy meters.
Speaker Change: We recently began taking orders for our commercial battery in Italy, and we'll be rolling the product out to additional markets across Europe, and the rest of the world in the coming quarters.
Speaker Change: At inter solar next months.
Speaker Change: We will be showing an additional commercial D C. Coupled storage system optimized for indoor applications, which is a common application in some European markets with shipments planned for early next year.
Speaker Change: Continuing with CNI and additional angle to broadening our addressable market in this space is pushing into the multi dwelling unit or MDU market. The.
Speaker Change: The MDU space is a relatively untapped market that is gaining really your regulatory support in various countries and he's taking the first steps on its decarbonization journey.
Speaker Change: This market would require comprehensive portfolio level solutions that incorporate PV batteries, EV Chargers heat pumps and energy management capabilities.
Speaker Change: We aimed to be a leading provider of hardware and software solutions.
Speaker Change: That will bring the energy transition to.
Speaker Change: These type of buildings were roughly 50% of people in the OECD live.
Speaker Change: To broaden our exposure to this space, we recently made investments in.
Speaker Change: In science commercial partnerships with two software companies in the MDU space IV energy based in California, and Empiric based in Munich, Germany.
Speaker Change: Both IV and M peers provide software solutions to help large real estate owners design and implement plans to decarbonize their multi dwelling portfolios and harvest the benefits of smart renewable energy solutions.
Speaker Change: Energy management is also an important enabler in the residential space and we continue to rollout new features for stoneridge one for residential.
Speaker Change: Last month, we added a dynamic rate optimization feature and we have approximately 1500 users enrolled across the Netherlands and the U K.
Speaker Change: We will be rolling out this new capability with two additional countries, including Belgium, Sweden, Poland and Germany in the coming months.
Speaker Change: The dynamic rates capability joins the negative rate optimization tool, we added to solar edge one for residential last year in the Netherlands, We have 10000 sites enrolled in negative rate optimization as of today and have mitigated 162 negative rate defense since launching the product in the first quarter fourth quarter.
Speaker Change: Of 2023.
Speaker Change: We will continue to rollout additional features in the coming months that will help us maintain our technological lead your leadership and gain market share in the residential space.
Speaker Change: As the reliance on software increases and given the visit that residential and commercial PV systems are connected directly to the utility grade cyber security is of critical importance.
Speaker Change: Over the past few quarters, we have increased our investment and activity on cyber security capabilities that certification.
Speaker Change: And we will continue to ensure that we are at the forefront of this topic in our industry in particular as regulations are being drafted and implemented in multiple jurisdictions.
Speaker Change: Let's talk now about new residential products.
Speaker Change: At the inter solar in a few weeks, we will be displaying our next generation large capacity three phase inverters for the European residential market that is expected to be released early next year.
Speaker Change: This new 20 kilowatt inverter is optimized for the larger rooftops and system sizes that we are increasingly seeing in the German speaking countries, where the increased need for electricity and self consumption is leading consumers to utilize all roof surfaces and increased system sizes.
Speaker Change: Historically, our products have been optimized for larger PV plus storage residential systems. This solution will further enhance our differentiation in the segments.
Speaker Change: This new inverter is based on silicon carbide power switches to drive better efficiencies and will incorporate improved safety and it's still ability features as well.
Speaker Change: To complement this next generation inverter. We are also developing our next generation residential battery.
Speaker Change: This battery will be based on a single platform that will unite our single phase and three phase platforms into one.
Speaker Change: We will elaborate more on this and other new products in the pipeline for the residential North American market on our on our next earning call.
Speaker Change: These new products will help drive down cost per watt and deliver improved install ability to our customers saving them precious time on site.
Speaker Change: In parallel to the product above which are to be released in the coming quarters, we continue to ramp and see growing demand for the products. We released over the last few quarters.
Speaker Change: On our tracker product there are approximately 100 megawatts that have been installed or in the process or are in the process of installation.
Speaker Change: And confirm orders for approximately 60 additional megawatts that are scheduled to be installed this year.
Speaker Change: On our 330 kilowatt to Terramax inverter, we recently received an order and began installation.
Speaker Change: Of the 20 megawatt floating PV project.
Speaker Change: Moving to operations.
Speaker Change: In our Austin, Texas facility, we manufactured approximately 250 megawatt a single phase inverters in the first quarter and are on target to meet the 500 megawatt manufacturing run rate in the second quarter.
Speaker Change: Additionally, in the second quarter, we will begin shipment of Optimizes and commercial Inverters from our second U S contract manufacturing facility located in Florida.
Speaker Change: Also on the operational side in the North American market, we plan to consolidate our product portfolio around an 11.4 kilowatt made in the U S inverter and 650 want to optimize our platform.
Speaker Change: The initiative will reduce both the number of hardware platforms and the number of skus across our North American portfolio.
Speaker Change: This will result in a more streamlined manufacturing process and improve efficiencies across the supply chain logistics inventory management and services.
Speaker Change: Following the consolidation to a single platform all new Inverters will come free equipped with P. C S, which means customers can install them much more P V. While avoiding costly main power upgrades.
Speaker Change: In closing our first quarter results were aligned with our expectation of inventory clearing and typical seasonality as.
Speaker Change: As we enter spring went installations historically tend to rise, we expect channel inventory to continue to decline and revenues to improve in.
Speaker Change: In parallel we are focused on a suite of new products that we plan to release in the next several quarters to position ourselves for the next growth cycle in our industry.
Speaker Change: I will now hand, it over to you on it.
Speaker Change: Thank you <unk> good afternoon, everyone.
Speaker Change: Total revenues for the first quarter were $204.4 million.
Speaker Change: Revenues from our solar segment, which includes the sales of D V attached residential and commercial commercial batteries were $191 million.
Speaker Change: Total revenues from the United States this quarter were $65 $3 million, representing 34% of our solar revenues.
Speaker Change: Solar revenues from Europe were $85 $7 million, representing 45% of our solar revenues.
Speaker Change: The rest of the World solar revenues were $39 $1 million, representing 21% of total solar revenues on.
Speaker Change: On a megawatt basis, we shipped 226 megawatts to the United States 443 megawatts to Europe, and 276 megawatts to the rest of the world for just under 950 megawatts of total shipments.
Speaker Change: As in the fourth quarter of 2023. This quarter did you a graphical mix of our revenues is mainly a result of the inventory situation in the channels and he's not necessarily representing the installation rates competitive environment or a long term trend.
Speaker Change: 68% of the megawatt shipments this quarter, where commercial products and the remaining 32% where residential.
Speaker Change: In the first quarter, we shipped 128 megawatt hour of our residential batteries with the majority shipped to the United States, where we see steady growth in installation rates.
Speaker Change: Two last quarter, there was a large portion of shipments of single faith batteries that are manufactured using our inventory over the higher cost of sales that carry significantly lower gross margin.
Speaker Change: In the first quarter due to the continued inventory imbalances in the distribution channels, we shipped a higher ratio of in Richards to optimize those as a result average selling price per watt this quarter, excluding battery revenues was $17.02 a 27% decrease from 'twenty.
Speaker Change: Three six since last quarter, while the typical ratio of Inverters to optimize yours is one to 24, one in <unk> 'twenty for optimizer. The ratio this quarter was winning Burger to 16 optimizer.
Speaker Change: This quarter, we initiated some price decreases in targeted regions and products in order to help our distribution channel partners reached balanced levels of their inventory, which will be reflected in our financials starting next quarter.
Speaker Change: Our battery ASP per kilowatt hour with $383 this quarter down from $403 per kilowatt hour in the previous quarter. The decrease is largely due to the previously announced price decreases on our residential batteries offset by mix changes between our commercial and ready to.
Speaker Change: Batteries.
Speaker Change: Revenues this quarter from our non solar business comprising of our energy storage in the all other segment were $14 $1 million.
Speaker Change: Following the discontinuation of our LCD business. This revenue is mostly attributed to our energy storage division and he's following the seasonal pattern of this industry, which sees a higher revenues in the back end of the year.
Speaker Change: Consolidated GAAP gross margins for the quarter was a negative 12, 8% compared to negative 17, 9% in the prior quarter.
Speaker Change: Last quarter included higher charges from discontinued operations and restructuring activities.
Speaker Change: non-GAAP consolidated gross margins this quarter was negative six 5% compared to positive three 3% in the prior quarter. This amount includes 450 basis points of net IRA benefits.
Speaker Change: Gross margin for the solar segment was negative three 5% compared to positive 4% in the prior quarter.
Speaker Change: Similar to the last quarter I would like to give some additional color on the movement of our gross margin given the continued environment of depressed revenues.
Speaker Change: As a reminder.
Speaker Change: The first layer of our gross margin, which we define as direct gross margin is the difference between the price paid by our customers and our direct costs paid to our contract manufacturers.
Speaker Change: These margin layer is not dependent on revenue level, but only on product and geographical mix.
Speaker Change: In the first quarter gross margin was relatively similar to what we saw in the fourth quarter. We had initially initially anticipated a reversal of the negative impact of product mix of our Q4 2023 revenues. However, the continued adoption of our lower margin single.
Speaker Change: Saves battery in the United States significantly exceeded our expectations and continued to weigh on our direct gross margins in Q1 offsetting the margin benefits from less revenues derived from customers benefiting from volume pricing.
Speaker Change: As a reminder, the single phase batteries sold mainly in the United States utilize battery cells, we purchased at higher prices and once those sales are consumed our next battery generations will allowed to return to our target margin on the residential battery products.
Speaker Change: The second layer of expenses that make up our gross margin, which we define as other costs of goods sold or old Cogs are not directly related to product volumes sold and our large largely but not the entirety fixed costs.
Speaker Change: In the first quarter, we lowered our non-GAAP other cogs by roughly 21% on an absolute dollar basis, but they're relatively higher declining revenues led to dis economies of scale that had a negative impact of 750 basis points on our first quarter solar gross margins.
Speaker Change: On the positive side in all clubs, we continue to see steady improvement in our warranty costs and reduced accrual rates.
Speaker Change: Relation to the sale of new products. This is a result of our transition to use certain automotive grade components as well as other activities that improve our installed base resilience.
Speaker Change: We've also seen as a result of lower revenues significantly lower shipping costs.
Speaker Change: This quarter, we also increased our accruals for obsolete inventory by approximately $9 million.
Speaker Change: Our absolute inventory accrual policy applied to our unnaturally high inventory level requires us to continue and evaluate tweaks of inventory obsolescence and to take the needed actions. It is important to note that the accrual by itself doesn't mean that the inventories obsolete, but rather reflects a.
Speaker Change: Higher probability of such obsolescence.
Speaker Change: We are.
Speaker Change: Diligently working on reducing and utilizing our inventory level of both finished goods and raw materials.
Speaker Change: Gross margin for our non solar segment was negative 47, 2% down from negative two 2% last quarter, a result of seasonally lower sales in our non solar storage business and low utilization of sell it to factory.
Speaker Change: The first quarter typically marks the seasonally lowest quarter of our storage business and we expect improved revenues and margins in the coming quarters.
Speaker Change: On a non-GAAP basis operating expenses for the <unk>.
Speaker Change: First quarter were $192 million compared to $118 $3 million in the prior quarter or.
Speaker Change: Our opex was lower due to than our guided range largely due to one time items. We continue to anticipate operating expenses to stabilize at the range of 112 $317 million, including the impact of our workforce reduction we implemented in the first quarter and we will continue to push.
Speaker Change: For our expenditures to go down well, allowing significant resources for our technology and new product development.
Speaker Change: GAAP operating loss for the quarter was $173 $7 million compared to an operating loss of $237 $6 million in the previous quarter non-GAAP operating loss for the quarter was $122 $5 million compared to an operating loss of $107 8 million.
Speaker Change: In the previous quarter.
Speaker Change: Operating loss from disorder segment was $110 $4 million this quarter compared to an operating loss of $93 9 million in the previous quarter and operating loss from our non solar segment was $12 $1 million this quarter compared to an operating loss of $13 $9 million in the previous quarter.
Speaker Change: non-GAAP financial expense for the quarter was $4 $8 million compared to a non-GAAP financial income of $29 $8 million in the previous quarter.
Speaker Change: Our non-GAAP tax benefit was $18 $7 million this quarter compared to a non-GAAP tax benefit of $25 $5 million in the previous quarter.
Speaker Change: Our non-GAAP tax rate for the quarter was 15% and we expect it to climb back towards 20% as the business returns to profitability.
Speaker Change: GAAP net loss for the first quarter was $157 $3 million compared to a GAAP net loss of $162 $4 million in the previous quarter.
Speaker Change: Our non-GAAP net loss was $108 $6 million comp.
Speaker Change: Compared to a non-GAAP net loss of $52 $5 million in the previous quarter.
Speaker Change: GAAP net diluted loss per share was $2.75 for the first quarter compared to $2.85 in the previous quarter non-GAAP net diluted loss per share was $1.90 compared to <unk> 92.
Speaker Change: This quarter.
Speaker Change: Turning now to the balance sheet as of March 31, 2024, cash cash equivalents bank deposits restricted bank deposits and investments were approximately $950 million, which we expect to be the lowest cash point for this year net.
Speaker Change: Net of debt this amount is approximately $316 million.
Speaker Change: This quarter cash used in operation activities was $217 million. This cash utilization is a result of the inventory buildup and the associated vendor payments related to the manufacturer inventory manufacturing, we believe that in the first quarter, we completed the adjustments of our manufacturing commitments to the.
Speaker Change: Required level amid our current.
Speaker Change: Entry position.
Speaker Change: As of March 31, our inventory level net of reserve was at $155 billion compared to $1 $44 billion in the prior quarter. Our average inventory days increased from 386 days in the fourth quarter to 619 days in the first quarter.
Speaker Change: Sure.
Speaker Change: The cash flow used for manufacturing was partially offset by a significant reduction in accounts receivables as we continue to make collections from customers. Despite lengthened payment terms.
Speaker Change: Accounts receivable net decreased this quarter to $404 $4 million compared to $622 $4 million last quarter. As a result, we brought down DSO from 265 days in the fourth quarter to 220 days in the first quarter.
Speaker Change: As part of our $300 million share repurchase program authorized by our board of directors in the fourth quarter of 2023. This quarter, we repurchased 506000 shares of our common stock for an average gross purchase price of $65 $67 per share.
Speaker Change: Sure.
Speaker Change: For a total of approximately $33 million.
Speaker Change: British shares purchased has continued in April and we will continue to responsibly implemented the program based on our cash flow developments and expectations.
Speaker Change: Turning to guidance for the second quarter of 2024.
Speaker Change: We are guiding revenues to be within the range of $250 million to $280 million, we expect non-GAAP gross margins to be within the range of negative 4% to zero percent.
Speaker Change: Including approximately 350 basis points of net IRA benefit.
Speaker Change: We expect our non-GAAP operating expenses to be within the range of $116 million to $120 million.
Speaker Change: Revenues from the solar segment are expected to be within the range of $225 million to $255 million gross.
Speaker Change: Gross margin from our solar segment is expected to be within the range of negative 3% to positive, 1%, including approximately 420 basis points of net IRA benefit.
Speaker Change: I will now turn the call to the operator to open it up for question operator. Please.
Speaker Change: At this time, if you would like to ask a question. Please press the star.
Speaker Change: One on your telephone keypad.
Speaker Change: You may withdraw yourself from the queue at any time by pressing star two.
Speaker Change: And what's the point.
Speaker Change: Ed one for your questions.
Speaker Change: Also ask that you limit yourself to one question with one follow up to allow time for everyone to ask a question.
Speaker Change: And we'll move first to Andrew <unk> with Morgan Stanley.
Andrew: Your line is open.
Andrew: Great. Thanks, so much for taking the question I.
Andrew: I guess just to start out here on on margin guidance.
Andrew: Obviously, a lot to unpack, but if I just look at the first quarter. Your revenue actually was somewhat in line with your guidance, but margins missed in my understanding is it was mostly related to mix shift I guess, a lack of reversal and mix shifts that you were expecting.
Andrew: Following the fourth quarter. So can you just give us a sense for what you're expecting for the remainder of 2024 beyond just the second quarter.
Andrew: And whether or not you're comfortable in your prior guidance in terms of your ability to get back to.
Andrew: The 30% range by the end of the year. Thank you.
Sure Andrea: Sure Andrea and thank you for the question.
Speaker Change: So I'll start by saying that we're still are playing or the rule of small numbers relatively and just to explain that a little bit.
Andrew: In general.
Andrew: Batteries that we planned when we guided for our gross margin with a certain level that was exceeded by approximately $15 million of additional battery sales that we did not anticipate just given the fact that the demand for our battery single-phase batteries in the United States is better than we expected.
Andrew: And the entire result is actually related to the difference of the margin of having more batteries at a very low margin compared to where we planned. It I had it been a regular quarter. The regular business level. This would be very minimal effect, but at this revenue level. It's relatively large no in essence, it's a little bit of a zero sum game because all.
Andrew: These batteries are based on our battery cells that we've already acquired are already in our inventory and it's just a question of how quickly we consume it so by definition, if we sell a lot more of them right now we will sell less of them next year, when we're going to basically consume all of them. So it's just the shift of the margin in general.
Andrew: <unk>.
Andrew: What we are doing and this is already baked into the second quarter gross margin guidance, we are assuming a slightly higher our battery sales than we initially anticipated when we started the year so for us at the beginning it's already there and the second thing is of course that given the very small revenues that we have and we assumed that.
Andrew: They will grow towards the end of the year, we assume that any impact in that size. The difference in mix will be very very minimal. So no change in our I would call it stabilized margin projections.
Speaker Change: Understood. Okay. That's that's helpful, but I guess as a follow up to that.
Speaker Change: Can you maybe bridge that to cash flow expectations for the year, and maybe how youre thinking about liability management.
Speaker Change: Thank you have a debt maturity next year to think about so how are you thinking about that.
Speaker Change: As it relates to cash flow expectations this year and our liability management. Thank you sure.
Speaker Change: So of course, you know cashes are especially in these times of a very low revenues is one of the major items that we're keeping our eyes on and as I mentioned in my prepared remarks, we expect this quarter to be actually the lowest cash point for the year. The main reason for the position that we're in right. Now is the fact that while we did see that.
Speaker Change: Revenues declining already.
Speaker Change: When we guided for Q4, and then for Q1, you still have commitments for inventory procurement and also for manufacturing towards your contract manufacturers and that means that during the first quarter, we still manufactured more than we actually sold and this of course results in the fact that we are we had to pay for.
Speaker Change: Sure the inventory and we had to pay our vendors what happens in the second quarter is that this phenomena is actually reversing we are going to start selling more than our actual manufacturing and actually we're going to utilize the inventory does he is just $155 billion.
Speaker Change: Cash sitting in the form of product and what we're going to start to reversing those we expect to grow smart the the cash to start to be generated again. So we already expect to see our cash generation in Q2, and we're going to see intensified generation into Q3 and Q4, we're not no not <unk>.
Speaker Change: That we will have higher revenues, we will also have higher utilization of the inventory.
Speaker Change: Yeah.
Speaker Change: Thanks, so much.
Speaker Change: And in one on one.
Speaker Change: By the way just to just to complete on the convertible bond. Currently of course are these amounts we treat them is that they're out of the money. We treat them is that we take we work under the assumption that these are monies that will have to be refunded to the debt holders and as such are we simply make sure that you know all of our cash positions are not taking them into.
Speaker Change: The account is something that we can use.
Speaker Change: Yeah.
Speaker Change: We'll take our next question from Brian Lee with Goldman Sachs. Your line is open.
Brian Lee: Hey, guys. Good afternoon, thanks for taking the questions.
Brian Lee: I I I I jumped on the call late so I apologize if you already addressed this around in but.
Brian Lee: Can you update.
Brian Lee: Update us on sort of what you're seeing.
Brian Lee: And the pricing environment are you, taking any new actions in the U S. I know in the past you have been saying the U S pricing situations pretty stable and then.
Brian Lee: In Europe in the past, you've said mid to high single digit price declines or what you're planning to implement <unk>.
Brian Lee: Have you implemented those already.
Brian Lee: Do you see any more actions potentially being needed in terms of pricing in Europe, given the market dynamics out there and then I had to follow ups.
Speaker Change: Sure Ryan and thanks for the question. So so actually we have already started to implement a price reductions in various forums. This quarter I would invite them to the first one or a price reductions that we've implemented to our batteries and this is something that is done across the board and across the products. So this is simply means.
Brian Lee: That you know you buy today batteries at the lower price and used to Ah in.
Speaker Change: In other regions with we're trying to do is actually to make car a price reduction as a little bit more effective in the way that they help our customers because we need to remember that some of our customers are sitting on large amount of inventories and sometimes the fewer reducing prices those loyal customer of yours or channels that have a lot of inventory are in an inferior.
Brian Lee: We're positioned to someone that just entering the market there has less inventory and therefore are being a little bit damaged by decent. This is something that of course, we don't want to do so.
Brian Lee: What we are doing is that we're trying to match various price reductions or initiatives to help those for example in Europe today we.
Brian Lee: We see that we have lower ratio of optimizer into channels compared to inverters that means that our channels will have to buy more optimizer, which we basically did is that we have temporarily reduced the price of our optimizer is in.
Brian Lee: Those regions in order to make sure that when our distributors buying those optimizer. He basically gets there at the lower price. He can sell by the way the entire system at a lower price and this is where not just allowing them to get a better pricing. We also help them to get rid of some of the inventory that they have and by diesel.
Brian Lee: We are accelerating the inventory clearing so we definitely do these were very flexible in the way that we did we do it we put a lot of thought about how to not just use the have the reduction a month, but how to use it properly and yes, we're doing it in every region separately in the U S. I must say that we don't see a lot of these right now.
Brian Lee: Because as we mentioned before again the environment is relatively stable.
Speaker Change: Okay. That's helpful and then I know theres been a lot of focus.
Speaker Change: On the gross margins here.
Speaker Change: I I guess I'm, a little surprised that with the revenue pick up in Q Q. The gross margin guidance is an improving a bit more I know theres a lot of volume and fixed cost.
Speaker Change: Drivers are absorption drivers that ultimately are going to be a big part of the gross margin ramp back up so I.
Speaker Change: I guess two questions here at what what actions are you taking to kind of get back to that target of 25 to 27 ex IRA if thats still.
Speaker Change: The the appropriate target and is there anything that maybe you've been surprised by or is more challenging than you thought and aging isn't getting you maybe gross margin up.
Speaker Change: Uplift on better volumes here in the very near term. Thank you.
Speaker Change: Sure. So first of all no surprises here are from our side given the fact that we still expect to see gross margins, where we said all along there will be towards the end of the year. So we don't see changing the end target. The two main differences that you see right now compared to maybe a quarter ago is that one the rate of selling.
Speaker Change: Our residential batteries in the U S is a little bit quicker than we thought and again when you have relatively limited revenues you just diluted margins by very low margin products and that's the the results here by the way. It's again, it's a zero sum game because the quicker we are consuming them that means that margin will recover in 2005, when we can.
Speaker Change: Completely get rid of those batteries. So that's the easier part the second part is actually related to regular seasonal effect that we see every year, usually in the second and third quarter because of summer, we see a little bit of a higher spending on actual warranty expenses.
Speaker Change: See more first of all a replacement of units easier to go into roof too to replace units and sometimes you see a little bit of a higher failure rate during the summer. So he really it's a combination of faster battery sales and no surprises with the overall Oh Cogs again.
Speaker Change: Our target our long term target remains exactly the same.
Speaker Change: Alright, thanks, so much I'll pass it on.
Speaker Change: Yeah.
Speaker Change: And well go next to Philip Shen with Roth Capital Partners. Your line is open.
Philip Shen: Hey, guys. Thanks for taking the questions.
Philip Shen: The first one is a follow up on pricing.
Philip Shen: Alright, and our checks suggest you guys maybe.
Philip Shen: Launching our math launched recently, a new promotion and the European resi segments, which is to buy when you buy a kilowatt you get an optimizer free.
Speaker Change: So wondering if you could comment on the specifics.
Speaker Change: Specifics around that promotion our sense is it's all across Europe.
Speaker Change: It's it will last from me firsthand September 1st and so just curious if you can talk about the dynamics there and then from an inventory standpoint, it seems like there might be still a year left of inventory for.
Speaker Change: For the European Rajiv segments.
Speaker Change: This might slow things down.
Speaker Change: Channel clearing standpoint, because.
Speaker Change: The distributors will get a coupon to then.
Speaker Change: Have to buy more optimizer is or at least more products and so given that dynamic when do you think you.
Speaker Change: European Channel can clear.
Speaker Change: And if you agree that it might be a little bit slower now thanks.
Speaker Change: So first of all the initiatives that you mentioned Phil is exactly to my last answer a N series is exactly one of the tools that we're taking what we basically so here is that we see a higher ratio of Inverters to optimizer is within our channels in Europe.
Speaker Change: <unk> of the fact that you know at the very beginning of 'twenty. Three we had the problem to provide inverters everyone ordered so many and then you know the slowdown in the AR market came in and what we have identified is that weather.
Speaker Change: They like it or not.
Speaker Change: Lot of the distributors will have to buy a quite a lot of optimizer as this will be a necessity for them and how do we just decided to reduce prices across the board all of our product that means that they would not really benefit from this price decrease given the fact that would be neat is optimizer. So the initiative around the optimizer with very easy let's help.
Speaker Change: We're a distributor is exactly where they need it because they will have to buy and by allowing them to buy cheaper optimizer is because basically given one one on every kilowatt and if this is the under these initiatives means that you know they need I don't know like four instead of five but that basically means that now they can sell a full system what inning.
Speaker Change: Did they have a little bit quicker. So these kind of initiatives are simply helping to clear the inventory a little bit faster as of the time and in time to clear. This is very much difference between various distributors and actually also very much difference sometimes between a very.
Speaker Change: <unk> products are with those distributors I can tell you that our self the distributors for example that ordered a lot of commercial Inverters just given the fact that we didn't have enough in 'twenty three have many maybe too many of them and one other distributor that didnt.
Speaker Change: Order so much has a little bit of lack of those inverters in average what we do see we see a much lower sorry, our inventory levels that reflect one year and we believe that as the year will continue we will see gradual.
Speaker Change: Run off of some of the products from the shelves.
Speaker Change: And and not just you know that one day across the board all products will be finished so we will continue to see gradual increase in revenues gradual increase in shipment and gradual a clearing of the inventories, but again, we do not expect in most of the cases to see a year worth of inventory in total.
Speaker Change: The shelf in Europe.
Speaker Change: Okay. Thank you for all that color.
Speaker Change: Shifting over to a housekeeping question here.
Speaker Change: On the Q2 guide can you talk to us about what you expect the ratio of.
Speaker Change: Inverters and optimizer is to be in Q2.
Speaker Change: So we do not give it yet simply because of the fact that again, we haven't shifting and shifting those numbers you know every small differences.
Speaker Change: Or a ship and he is making a big difference in general we do expect to see a higher ratio of optimizer as to Inverters. This quarters this quarter and I would say even in the upcoming quarter. So I would say that we expect it to be higher than the normal 1% to 24, but again you know it's a very volatile.
Speaker Change: Environment. So our I mean would not be surprised that there was a little bit of a diversion here, but they <unk> more than 1% to 24.
Speaker Change: Or 24 to one.
Speaker Change: Thank you for NIM.
Speaker Change: Okay.
Speaker Change: Well move next to Mark Strouse with Jpmorgan. Your line is open.
Mark Wesley Strouse: Yes, thank you very much for taking our questions.
Mark Wesley Strouse: So outside of the pandemic like years.
Mark Wesley Strouse: Just kind of looking back over your history, we've kind of thought about your ability to bring down your cost per watt kind of in the mid to high single digits or so.
Mark Wesley Strouse: Looking forward to learning more about the new products, you have coming out, but just kind of curious if you can talk generally should we expect that.
Mark Wesley Strouse: The efficiency improvements the cost declines to kind of be in line with that.
Mark Wesley Strouse: Or is this kind of a.
Mark Wesley Strouse: That's a step function change that you can talk about.
Speaker Change: Yes, Mark Thanks for the question and I think you gave the answer yourself so.
Speaker Change: Typically in the over the life of a product.
Mark Wesley Strouse: Or a generation of a product we are able to reduce costs are roughly at the rate that our that our average prices decline in the market, so kind of a 10% per year.
Speaker Change: And then we're able to take a larger step.
Speaker Change: Our cost reductions when we move to a new generations.
Speaker Change: And especially when we're moving to higher capacity generations, because one of the advantages of our architecture.
Speaker Change: Is that on the on the module level electronics.
Speaker Change: Our cost per watt is kind of fixed with on the inverter side, we're able to reduce the cost per watt with larger inverters and when the market goes to larger systems that enables a cost reduction so.
Speaker Change: Generally speaking it at the very high level, if you look at.
Speaker Change: Our next generation.
Speaker Change: Mm three phase Inverters that I was discussing that that will enable a step function reduction in cost per watt.
Speaker Change: Compared to the current generation.
Speaker Change: <unk> for that size of an installation.
Speaker Change: In the range of 30% to 50% in.
Speaker Change: In the shift between generations compared to the annual rate if you will of about 10%.
Speaker Change: If that's clear enough workers.
Speaker Change: Yes, yes, that's very helpful look forward to seeing that.
Speaker Change: And then just as a quick follow ups, just going back to the low margin single state batteries or are you able to quantify what that inventory looks like.
Speaker Change: You said 2025 clearing a couple of times now and just.
Speaker Change: I mean with the Crystal ball you have now do you think that.
Speaker Change: <unk> for later in the years any color you have there would be great. Thank you.
Speaker Change: Thanks, Martin So first of all by the way you know looking at the industry performance in the last few quarters Crystal balls are are not easy here, but in general the way that we look at it it is.
Martin: This is basically a product that is based on around one gigawatt that we acquired from Samsung in here actually.
Martin: We expected it always you know two to be basically ending if remembering the history around the end of this year now of course that all in all the industries, a little bit slower than it used to be we believe that we will enter this market with this inventory into 2025.
Martin: And that will be the year that we believe that we'll see some replacement with our new products. Now. The question here is going to be a combination of two things. One is again to continue to see how the market adopts the product and second will be when do we expect the product to be ready in CV will talk about it in the next call but.
Martin: We'll make sure that we're basically continuing with this product as much as needed in order to make sure that we have more product up.
Martin: The one thing I would say is that right now it's not just the fact that we're setting these batteries a little bit faster than the others. It's also the fact that the three phase batteries that are enjoying much better margins in Europe right now the sales for them or relatively low given the situation in Europe. So when we look at the improvement of gross margins related to batteries into the end of <unk>.
Martin: This year and beginning of next year, it's not just how quickly we're clearing this which is of course.
Martin: Jordan factor, but it's also what portion of these batteries are within the overall residential batteries. We sell right. Now. These portion is very high so all in all middle of Oh 25, we believe that will be gone with this inventory.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: We'll take our next question from Colin Rusch.
Colin William Rusch: Rush from Oppenheimer. Your line is open.
Colin William Rusch: Thanks, So much guys with the product Redesigns and evolution can you just talk about how.
Colin William Rusch: How much cost do you feel like you could take out.
Colin William Rusch: And how important is that some of the margin trajectory that you guys were talking about came back to a normalized level.
Colin William Rusch: Hum.
Colin William Rusch: Yeah.
Speaker Change: Thanks for the question I think for the and more than one correct me the margin projections that when I was discussing before we're not dependent on the new.
Speaker Change: That we will be releasing because volume.
Speaker Change: When we're looking at the at the rest of this year the volumes of the new products will not be impacting dramatically the the financials.
Speaker Change: As I was alluding before it it varies from one AR from different products. You know you take a battery of battery that cost is.
Speaker Change: It's very strongly dominated by the cells. So when you move from our current generation through our next generation Youre dependent on sell prices you can become more efficient.
Speaker Change: Efficient on the on the mechanics, and the the power electronics, but your potential for cost reduction as is at the end of the day limited when you're when you're talking about the next generation of inverter, a new components and efficiencies the potential for a step function reduction in.
Speaker Change: Cost is much more significant so so.
Speaker Change: I was referring before too.
Speaker Change: The new three phase inverters, taking into account when looking at the at the.
Speaker Change: Asian size that we're targeting for that inverter. So the a segment of a large residential installation, we will be able to serve with a solution that is probably in the range of about 50%.
Speaker Change: Lower cost per watt of the inverter compared to serving that application with current generation Inverters.
Speaker Change: That that is not necessarily the cost reductions that will be achieved for every size of installation, but for the targets and that's how we do the design for a target size and application that we think is going to be the main driver in the market and for that.
Speaker Change: For that point, we optimize the.
Speaker Change: The cost and like I say on the power electronics and the generation of move we can Oh, we can be in the range of of reducing the cost per watt of three.
Speaker Change: 30% to 50%.
Speaker Change: That's helpful guys.
Speaker Change: With the emergence of virtual power plants, both of the residential level, but more importantly at the commercial level.
Speaker Change: Some of the software investments that you guys have made can you talk a little bit about your ability to monetize on how quickly the evolution of thought those offerings or are you know.
Speaker Change: What the cadence of that evolution is and your ability to really get embedded in with some of your customers pretty Atlanta commercial level.
Speaker Change: So I would I would separate indeed between the VP of virtual power plants is one application of grid services that today are more prevalent in residential than it is in and commercial.
Speaker Change: And we are able to monetize a.
Speaker Change: <unk>.
Speaker Change: Subscription as long as the PPP program is.
Speaker Change: Is active I don't remember off the top of my head the number of batteries or residential systems that we have today.
Speaker Change: Under some form of a PPP.
Speaker Change: Not huge otherwise we would've.
Speaker Change: Probably been able to report it that much better margin because of the Oh.
Speaker Change: 100% margin flow of cash, but but.
Speaker Change: <unk> is growing the growth rate is not.
Speaker Change: It is not huge and when it happens we can generate revenue from it the other software capabilities that we enable in residential for.
Speaker Change: For the most parts are not generating any type of revenue our commercial is a different story with what we're offering there is much much broader than virtual power plant.
Speaker Change: It provides.
Speaker Change: More value and it's a wide range of capabilities.
Speaker Change: From.
Speaker Change: Energy efficiency load management.
Speaker Change: Et cetera, and there we expect to be able to <unk> to have a higher ratio of or high relatively high ratio of.
Speaker Change: Our software services and and.
Speaker Change: Recurring revenue generation, but it will be a process, it's something that we'll be rolling out.
Speaker Change: Gradually and it will grow gradually so again I don't I don't see it having a big impact on our numbers in the next Oh.
Speaker Change: 24 months, but it is something that.
Speaker Change: That in the long run will be a source of high margin revenue.
Speaker Change: Thanks, so much.
Speaker Change: Okay.
Speaker Change: Well go next to Austin Muller with Canaccord. Your line is now open.
Austin Nathan Moeller: Hi, good afternoon.
Austin Nathan Moeller: My first question here do you see any potential changes to tariffs or legislation coming that could benefit U S made inverters and batteries. Some words the recent change for bifacial panels.
Speaker Change: Beyond the <unk>, if you can help clarify the question.
Speaker Change: Yeah.
Speaker Change: The reason change was was with was careful.
Speaker Change: Yeah, we're not aware of anything I think.
Speaker Change: That said the adoption of.
Speaker Change: An increased use of bi facial panels.
Speaker Change: Ah is a good thing for for module level power electronics providers because.
Speaker Change: Incrementally added harvest.
Speaker Change: By module level power electronics from our bifacial Pat.
Speaker Change: Panel is more significant than from a regular pattern, but that's completely a side note related to that I think.
Speaker Change: Thats regulation, we're not aware of anything cooking.
Speaker Change: The similar nature are in are in this space that we operate in.
Speaker Change: Okay.
Speaker Change: Just given the interest rates remain high what trends have you started to see in core U S markets like California around leasing arrangements for rooftop solar.
Speaker Change: So I think the general expectation for increase of of lease versus loan.
Speaker Change: As is evident in the market again it is not.
Speaker Change: Not a black and white in a complete switch, but we see the.
Speaker Change: We see that dynamic ourselves as well as well as the entrance of new lease providers.
Speaker Change: Because of that.
Speaker Change: That trend and because of the tendency or the benefits that the IRI.
Speaker Change: Creates for.
Speaker Change: For third party.
Speaker Change: For third party ownership so so.
Speaker Change: That is definitely evident and it is more evident in the battery markets like like California, and Puerto Rico.
Speaker Change: Excellent thanks for the details.
Speaker Change: Okay.
Speaker Change: We'll take our next question from Kashi Harrison with Piper Sandler Your line is open.
Kasope Oladipo Harrison: Alright, good evening and thanks for taking my question.
Kasope Oladipo Harrison: And apologies if this was covered.
Kasope Oladipo Harrison: Joined late but I was wondering if you could just share your thoughts on the forward trajectory of the non solar business. It looks like it lost roughly 12 mill in Q1, I believe or just under $50 million annualized cell manufacturing is becoming a little bit more competitive and so I'm. Just wondering how you think about the path to either getting towards <unk>.
Speaker Change: Even operating income or selling the business or shutting it down and just focusing on the core solar business sure.
Speaker Change: Kashi and thanks for the question so.
Kasope Oladipo Harrison: So in general.
Kashi: Start by maybe a little bit of dynamics, but then go into the heart of the question yourself from a dynamic point of view.
Kashi: Usually the storage market and especially the market in which our storage division is active it's very much been back of the year are loaded with revenues and that means that usually you see very low Q1 and relatively stronger Q.
Kashi: Q4, and in general we do expect to see growth in the revenues and the activity of these of these segments. So therefore at least directionally losses related to the storage Division should go down as we move forward towards the second half of the year not a lot in the first half but.
Kashi: Are more in the second half now Directionally about the segment itself I think that there are two areas of the segment that we need to look at the first one is having the segments that ease.
Kashi: Concentrated in making storage whether control collected to solar or not and this is something that we see very great advantage of having these kind of capabilities. Even if we're selling batteries that are not collected to PV. The knowledge the development and the technology that we're developing there is.
Kashi: Helpful for Us and we will continue to see multiple or multiple applications, where you see storage without sooner or by the way just as an anecdote we sell today sometimes.
Kashi: Dental batteries without the PV just for a backup so in general having this kind of an asset is something that we see a great value in and here we invest.
Kashi: It's basically a segment that is developing products and like every developing a product. It takes a while the second part of the segment is actually owning the cell manufacturing that we have in seller one.
Kashi: Mentioned sell it two story as we mentioned before our next generation of residential batteries will not use NMC cells are.
Kashi: Given the dynamics in our markets to have LSP Chinese are.
Kashi: Sales that are so cheap we cannot compete with those and therefore, we understand that.
Kashi: These sales will not be used in our residential batteries. However, there are niche applications that are.
Kashi: Very much suitable for NMC and these niche applications are first of all are large enough to cover a much more than what we have today and sell it to and Theyre actually very nicely.
Kashi: Profitable areas. So in general here again, we are developing the right products, we are moving towards selling more and more products into these niches that are related to frequency regulations, then and control a spinning control and.
Kashi: We will see over time, the overall I believe our profitability coming from this segment. It's just a matter of how quickly we're able to utilize sell it two and of course, how quickly we develop the products. So right now we see value of having a this.
Kashi: Segment, we see value in developing the technology and of course, you know like everything that we do in our business we have to evaluate it from time to time and we will continue to do this.
Speaker Change: I appreciate that Ron very helpful. And then just a quick follow up.
Speaker Change: Thank you mentioned $950 million of cash is the low point for the year.
Kashi: Can you just walk us through some of the drivers to increasing that cash balance for the rest of the year.
Kashi: Operating income should be negative so.
Speaker Change: Of course.
Speaker Change: The main reason for where we are today is the fact that it takes a while when you are a manufacturer at least large volumes. It takes a while to stop manufacturing and to adjust it to the levels of selling that youll see by the way as it is painfully are hard to grow the manufacturing.
Kashi: Abilities into where you want them to be and that means that over the fourth and the first quarter fourth quarter of 2003 and first quarter of 'twenty four we took.
Kashi: Took us a while to break these train of manufacturing and to basically adjust the manufacturing layers other than what happens in the U S. Because in the U S will manufacture as much as we can to the levels of inventory, but this is something that already ended so we manufactured more than we sold that means that we need to pay to RV.
Kashi: Anders for either components or for the manufacturing itself and this is something that continued into Q1 and by the way continue slightly into Q2, what happens in the meantime first of all we are collecting.
Kashi: On our customer balances and we did very good quarter for when it comes to collection. We will continue to do this in Q2 and now most of the new sales that we're doing outside of the United States are going to be revenues coming from inventories that we already have and already paid for and this is the thing that will start to turn the cash flow.
Kashi: To be positive.
Kashi: In Q2, we will still see some.
Kashi: Some payments related to the manufacturing in Q1, we will see cash generation that will be in Q2 lower than in Q3 and from Q3 Q4, we expect to be in a relatively strong our cash flow.
Kashi: Generation, both by the way on the operating but also much less spending on capex or anything else.
Speaker Change: I appreciate it thank you.
Speaker Change: Thank you.
Speaker Change: For your question.
Speaker Change: One.
Speaker Change: Next to Jordan Levy with <unk>. Your line is now open.
Jordan Alexander Levy: Hey, all coming on for Jordan here, Thanks for taking my question.
Speaker Change: Just to start can you just dig a little bit deeper into the some of the Pcs you can expect to see around the inventory reduction kind of over the next few quarters.
Speaker Change: Can you just I didn't hear it well.
Speaker Change: Sorry, yes.
Speaker Change: Can you can you hear me yes.
Speaker Change: Yes.
Speaker Change: Yes, just to start.
Speaker Change: Can you give a little more into some of the pacing we can expect around the inventory reduction over the next few quarters.
Speaker Change: Sure so.
Speaker Change: In general.
Speaker Change: And I think it also relates to how we see the.
Speaker Change: The inventory clearing overtime.
Speaker Change: It's actually noticed spacing is but it's also the a ratio of how much of the inventory we're using because right now first of all in the last two quarters, our sales into the United States were higher compared to the rates of sales into Europe over the last few quarters again because of the.
Speaker Change: Channel inventory there so that means that if we are manufacturing in the United States almost everything that we sell in the United States. The pacings of the inventory clearing because a little bit slower once we will start to see Europe growing again and because of the fact that most of the European inventories already manufactured the pace is going to grow when it can.
Speaker Change: Through the base itself.
Speaker Change: Finishing this kind of inventory.
Speaker Change: I would assume that of the finished goods inventory that we started the year with.
Speaker Change: Approximately two thirds will be cleared towards the end of the day of the year and of course here. The pace is going to be dependent on how quickly the market recovers, but of what we had at the end of the Earth finished goods about two thirds will be clearing this year and you can linearly take it you know from like Q2 towards the end of the year in order to get there because.
Speaker Change: This is the assumption that we take.
Speaker Change: Awesome. Thanks for that and then just a quick follow up for me outside of California, and Puerto Rico, which you. All had mentioned were there any other main U S regions at CIT helps you all from a demand perspective on the battery cell this quarter or has demand been relatively steady state and the rest of the country. Thank you.
Speaker Change: Yes, there wasn't.
Speaker Change:
Speaker Change: You know other than Hawaii, but who is a different story.
Speaker Change: Can't think of a state that has as high an attach rate as the two states that you mentioned, but there is definitely an increase.
Speaker Change: At some level of battery take up also in Arizona, and and and also to some extent in Texas probably.
Speaker Change: Okay.
Speaker Change: And we'll take our next question from Vikram <unk> with Citi. Your line is now open.
Vikram: Good evening, everyone I just wanted to follow up on the sell to a guidance that you gave for second quarter. I believe you said, 15% to 20% up into Q.
Vikram: When looking at the quarter I was wondering Mike if you can highlight some markets where youre seeing the strength.
Vikram: I imagine some markets are growing faster than that rate in some markets.
Vikram: Startup underperforming relative to that rate was again identified markets, where youre seeing that level of spend and some markets, where youre not seeing the impact of these promotions and price reductions that you've implemented.
Vikram: Yeah.
Vikram: Yeah.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: It's it's very multi.
Speaker Change: Multi dimension on it because we're talking about the split between geographies as well as between.
Speaker Change: Between the segments.
Speaker Change: No added on to that really.
Speaker Change: Sell through by our distributors is not online data. So so the fact that we're in into the quarter. It doesn't mean, we have that much information in front of us.
Speaker Change: It gets.
Speaker Change: Related.
Speaker Change: A bit later.
Speaker Change: I can tell you that there are some countries in Europe that are showing faster growth rates right now Italy.
Speaker Change: In Switzerland.
Speaker Change: As I mentioned before Germany was a bit slow the expectation is that it will begin to pick up because this legislation went through just a just.
Speaker Change: We could go up.
Speaker Change: And.
Speaker Change: Those are probably just from from.
Speaker Change: Specific data that I've seen I would say that Italy and Switzerland.
Speaker Change: Stand out a bit and probably also commercial is as is showing.
Speaker Change: In some cases faster growth.
Speaker Change: In and this data is a combination of of how we track the installation rate in.
Speaker Change: And sell through so.
Speaker Change: Although it's we're a little bit more than one month's ended the quarter I don't I don't think there is a lack of definitive information that we can give on this topic probably other than what I mentioned that is more evident as.
Speaker Change: Or are the countries that I referred to.
Speaker Change: Great.
Speaker Change: And on a related note so you <unk>.
Speaker Change: Mentioned, gaining market share to more innovation and more features and solar etch, one software, particularly in C&I side.
Speaker Change: Also on the residential side going forward.
Speaker Change: We only see that R&D line item, which is $300 million in annual basis could you talk about.
Speaker Change: How you plan on gaining market share going forward.
Speaker Change: In the U S and Europe is the strategy to be differentiated on the software side are there are there are more innovations on the hardware side, but our upcoming that we don't fully appreciate it. Thank you.
Speaker Change: Yeah. Thanks, Thanks for the question.
Speaker Change: And.
Speaker Change: Hardware has been our bread and butter for years in an.
Speaker Change: And our expertise or the expertise of our R&D team in power electronics is.
Speaker Change: Is a significant differentiator for the company. So it's definitely a core priority for us and as I mentioned I gave the example in my.
Speaker Change: Prepared remarks of the next generation.
Speaker Change: Three phase.
Speaker Change: Large inverter for the European market.
Speaker Change: Is targeting a growing segment and there we definitely.
Speaker Change: Plan are and are in route to the differentiation on the basis of hardware with the traditional factors in mind of efficiency.
Speaker Change: Cost and.
Speaker Change: And the all of the capabilities around.
Speaker Change: The interaction between the battery in.
Speaker Change: The inverters so so.
Speaker Change: That and a lot of the things that I didn't as referred to in this and this.
Speaker Change: This conversation around safety.
Speaker Change: That is coming from the optimizer is where we're constantly introducing more unique safety features and again completely on the basis of our hardware infrastructure and capability.
Speaker Change: That said and when you refer to the to the R&D investments definitely the ratio of software.
Speaker Change: Our software through hardware investment today is different than it was four or five years ago in software.
Speaker Change: It takes a bigger a bigger portion.
Speaker Change: Because it is much more.
Speaker Change: Important to the customers from a world that used to be based on feed in tariff where it mattered how much you electricity you deliver into the grid to a royal today that is much more complex and self consumption oriented which creates again another opportunity for differentiation.
Speaker Change: Which we are focused on so so we are definitely taking a balanced approach between between the two but in historical perspective. It means that we're doing more in software today than we did in the past because we were always a very heavily invested in on the on the hardware side.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Our next question from Christine Cho with Barclays. Your line is now open.
Christine Cho: Hi, Thank you for squeezing me and I just had one question last quarter with respect to gross margins you mentioned batteries for the final phase batteries for visa for the drag on gross margin similar to this quarter, but you had also mentioned that you had a higher percentage of customers with discounts on that you expected.
Christine Cho: You know for it to revert back you didn't mention anything about customer mix. This quarter. So just curious if you did see it revert back or was it pretty consistent with what you saw in one camp Alright, I'm, sorry last quarter.
Speaker Change: So actually Christine. Thank you for your question its actually mentioned in my prepared remarks, we did see that we so lower ratio of customers that are that enjoyed the volume discounts and this was actually offsetting this benefit was offset in golf.
Speaker Change: Additional batteries that we shipped above what we actually plan. So so definitely yes. This was the case the surprise here actually it was not the change in mix that we did not anticipate we anticipated. This one surprises actually simply selling more batteries, which I think was a little bit of a good thing.
Speaker Change: Commercially.
Speaker Change: Do you expect continued improvement on the percent that are.
Speaker Change: Customer mix or no. It's it's back to normal.
Christine Cho:
Christine Cho: Say that it's relatively normal the only thing I would say is again, it's a very a small numbers game and you know every everyone that will give us a surprising you know large customers that will come with the surprising orders simply because he need something may change it a little bit in those numbers, but in general we do expect that the ratio that we see right now is the more normal compared.
Christine Cho: What we saw before.
Christine Cho: Okay.
CBS: And it does appear there are no further questions at this time I would now like to turn it back to CBS for any closing remarks.
Christine Cho: Yeah.
CBS: Thank you operator, and thank you everyone for joining us on our call today I have or have a good evening. Thank you.
Speaker Change: This does conclude today's program. Thank you for your participation you may disconnect at any time and have a wonderful evening.
Speaker Change: [music].
Speaker Change: Mhm.
Speaker Change: Hum.