Q3 2024 SolarEdge Technologies Inc Earnings Call
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Speaker Change: Please stand by, your program is about to begin, if you need assistance during your conference today, please press star zero.
Speaker Change: Hello and welcome to the SolarEdge conference call. For the third quarter ended September 30th, 2024.
Speaker Change: This call is being webcast live on the company's website at www.SolarEdge.com and the Investors section on the Events Calendar page.
Speaker Change: This call is self-property and copyright of SolarEdge. With all rights reserved, any recording, reproduction, or transmission of this call without the expressed written consent of SolarEdge is prohibited.
Speaker Change: 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 JB Lowe, Head of Investor Relations for SolarEdge. Please begin.
JB Lowe: Thank you, and good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2024, as well as the company's outlook for the fourth quarter of 2024.
JB Lowe: With me today are Ronen Faier, Interim Chief Executive Officer, and Ariel Peratt, Chief Financial Officer.
JB Lowe: Ronen will begin with a brief review of the results for the third quarter ended September 30th 2024
JB Lowe: Ariel will review the financial results for the third quarter followed by the company's outlook for the fourth quarter of 2024.
JB Lowe: We will then open the call for questions.
JB Lowe: 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.
JB Lowe: 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 and uncertainties.
JB Lowe: 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 US GAAP.
JB Lowe: The NOMGAP measures presented in this presentation because we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance.
JB Lowe: Reconciliation of these measures can be found in our earnings release, presentation, and SEC filings.
JB Lowe: 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.
JB Lowe: Listeners who do not have a copy of the quarter-ended September 30th, 2024 press release or the supplemental material may obtain a copy by visiting the investor relations section of the company's website.
Speaker Change: I will now turn the call over to Ronen.
Ronen Faier: Thank you, JB, and thank you for joining our call.
Ronen Faier: As you are well aware, SolarEdge is going through a transition.
JB Lowe: Eighteen months ago, the market and the company were on an accelerating growth trajectory driven by record demand and outlook.
JB Lowe: Market dynamics changed abruptly, leading to high inventory levels, both in the channels and at solar edge.
JB Lowe: and the recovery from this situation has been longer than we anticipated.
JB Lowe: His current situation is challenging and requires us to delve into every aspect of our business and change the trajectory that the company has been trending over the past five quarters.
JB Lowe: While going through the transition period, we do not lose sight of the many strengths that SolarEdge has to offer to the renewable energy market, nor of the opportunities that lay ahead of us.
JB Lowe: SolarEd strengths are many. Our technology, which includes cutting-edge homegrown software capabilities and cybersecurity, positions us well to lead the rapidly changing energy market.
JB Lowe: This leadership requires relentless innovation in highly sophisticated technologies in order to provide the most advanced, robust and cost-efficient solutions.
JB Lowe: In addition, our DC-optimized architecture is ideally suited for all segments of the solar market from residential to small-scale utility due to its scalability.
JB Lowe: Lastly, our last install base represents a significant opportunity for additional revenues from inverter upgrades to addition of storage EV chargers, integration with heat pumps, and software-based services.
JB Lowe: Enabling and powering all of these strengths is our people. We have an extremely dedicated and talented team of innovative thinkers that are passionate about shaping the renewable energy landscape through a proven track record of technological disruption.
JB Lowe: The PV market is still in its early stages, with relatively low rates of penetration in many areas.
JB Lowe: As demand for energy increases, more sophisticated technological products offering superior power management are needed.
JB Lowe: efficient storage solutions and state-of-the-art software for energy management are needed. Our technology excels in all of those applications.
JB Lowe: In addition, we expect that manufacturing credits that we generate under Section 45X will allow us to efficiently compete with the low-cost products at very attractive margins for us after we consume the existing inventory.
JB Lowe: We believe that this advantage will significantly improve our ability to regain share and continue to develop new technologies with lower cost structures.
JB Lowe: In order to capitalize on these strengths and address these opportunities, we have identified three major priorities to put us back on a profitable growth trajectory.
JB Lowe: The first priority is to achieve financial and organizational stability. Second, recapture market share. And third, refocus on our core businesses.
JB Lowe: From a financial stability perspective, our first and most important objective is free cash flow generation.
JB Lowe: In order to achieve this, we are taking steps to optimize working capital, reduce spending, and boost operational efficiency.
JB Lowe: Our initial steps have already started to positively impact our financial results.
JB Lowe: In the third quarter, our free cash use was approximately $75 million within our expected range and down significantly from the approximately $140 million used in the second quarter.
JB Lowe: This is despite of our continued investment in growing our U.S. manufacturing footprint, which we expect will be a significant driver of profitability in the years ahead.
JB Lowe: This quarter, we consumed approximately $95 million of finished goods inventory net.
JB Lowe: Inventory consumption will continue to be a source of cash in the next few quarters as the majority of the inventory needed for non-US market is already manufactured and paid for.
JB Lowe: Our intention is to return to an inventory level that is essentially representing 90 inventory days by the end of 2025.
JB Lowe: Also, as announced this week, we successfully sold our first 45x credits in the amount of approximately $40 million related to our U.S. production in the first half of 2024.
JB Lowe: We generated...
JB Lowe: A higher amount of 45x credits from our manufacturing in Q3 alone and we expect to sell them over the next few months.
JB Lowe: With the recently released treasury clarifications confirming our ability to claim the full 11 cents per watt on DC-optimized systems, we expect to generate higher volumes of credits in Q4 2024 and in 2025.
JB Lowe: We're also reiterating our timeline to return to positive cash generation by the first half of 2025 and expect a free cash use in the fourth quarter this year to be within minus 20 million dollars to neutral.
JB Lowe: Financial stabilization also includes relentless focus on operational efficiency to drive a return to consistent profitability.
JB Lowe: We've had to make tough decisions in the beginning of the third quarter, making additional headcount and expense reductions.
JB Lowe: Controlling operation expenses is an ongoing reality in this current environment. We will continue to take cost-saving measures by focusing on core projects
JB Lowe: concentrating our global footprint on profitable markets and exiting non-strategic market and product lines.
JB Lowe: We will continue renegotiating suppliers and logistic contracts and reducing corporate spending. At the same time, we will continue to invest in the development of new products and new technologies that we believe will drive the company's success in the years to come.
JB Lowe: Lastly on stability, our CEO selection process is ongoing and we expect to announce the board decision before the end of this year.
JB Lowe: Our second.
JB Lowe: key priority is recapturing market share.
JB Lowe: Our high inventory of European products, even after the write-downs and impairments that Ariel will discuss, are a result of a decrease in European demand and inventory build-up in the distribution channels.
JB Lowe: That said, this inventory has already been paid for and allowed us to launch aggressive share recapturing measures.
JB Lowe: Last week we rolled out price reductions and promotions in Europe and international markets which will allow us to better compete and reduce the pricing gap with our low-cost competitors.
JB Lowe: We believe that these price levels, in conjunction of the 45x manufacturing credits and the rollout of next-generation products, which will carry significantly improved cost structures, will enable us to return to our historic gross margin levels of over 30% once existing inventory is consumed.
JB Lowe: Thank you.
JB Lowe: These price actions are taking a toll in the short term by requiring us to take inventory write-down and also by generating lower revenues and gross margins for the next two quarters.
JB Lowe: We expect this period will be defined by continued inventory clearing from our distribution channels, lower seasonal installations, and lower shipments to our distributors due to their move towards a policy of higher inventory turns.
JB Lowe: As such, we believe that we will see pickup in the demand as a result of our price reductions and promotion campaigns starting in the second quarter and, more meaningfully, in the second half of 2025.
JB Lowe: Our share-taking effort is also important as we expect that our new products scheduled to be released in 2025 will enjoy lower cost structures and address the changing needs of the markets towards higher installations and higher storage attachers.
JB Lowe: This brings us to our third key priority which is refocus on our core solar and storage businesses.
JB Lowe: We are strategically evaluating our business units, product portfolio and geographical presence and intend to focus on areas where we see long-term potential for profitability and have a distinct competitive advantage.
JB Lowe: We've already taken some steps along these lines. First,
JB Lowe: Just last month we divested our automation machines business that was acquired as part of the SMR acquisition in 2019 and we will continue to evaluate both core and non-core assets for further rationalized costs and improved profitability.
JB Lowe: Second, we've already standardized our North American residential portfolio to a single SKU that will serve all system sizes, which has resulted in a more streamlined manufacturing process and improved efficiencies across supply chain, logistics, inventory management, and service.
JB Lowe: We intend to extend this Q-Simplification to our European and international businesses as we roll out our next generation products starting next year.
JB Lowe: Lastly, the suite of next-generation products that we intend to roll out within the next several years are keenly focused on our core competencies of solar, storage, and energy management solutions.
JB Lowe: This will be the first residential solar and storage product line extension that SolarEdge has undertaken in several years and will represent a further leap in our leading-edge PV and battery storage technology from both cost and reliability aspects.
JB Lowe: These next generation products and those that will follow them will all be designed to be manufactured on our proprietary automated assembly lines which will reduce labor costs and increased quality.
JB Lowe: We are extremely focused on the execution of these important activities and I'm confident that these priorities of financial stability, recapturing market share, and focus on the core will be the key drivers in SolarEdge recovery and return to profitability.
JB Lowe: I will now turn to review the results of our third quarter of 2024.
JB Lowe: We concluded the quarter with approximately $261 million in revenue. Revenues from our solar business were approximately $248 million, while revenues from our non-solar businesses were approximately $13 million.
JB Lowe: This quarter, we shipped 1.85 million power optimizers, 58,000 inverters, and 189 megawatt-hour batteries.
JB Lowe: Our sell-through for the quarter was approximately $450 million, down 13% from the second quarter, primarily a result of promotions implemented at the beginning of the second quarter. On a megawatt basis, sell-through of our products were similar to the second quarter.
JB Lowe: Moving on to the regions.
JB Lowe: Our U.S. business continued to strengthen as we saw in the second quarter.
JB Lowe: A sell-through in the U.S. residential space grew 8% quarter over quarter.
JB Lowe: In the U.S. commercial segment, sell-through was up 15%, underscoring the competitive advantages that we have in rooftop CNI through the scalability of our product, which we believe will only be enhanced once we begin shipping domestically produced commercial inverters in Q1 2025.
JB Lowe: As expected, inventory channels in the United States were largely normalized by the end of the third quarter.
JB Lowe: In Europe, the market continues to be weak, as we have been describing since the beginning of the year.
JB Lowe: Sell-through for our residential products on a dollar basis was down 34%, while commercial sell-through was down 26%, mainly a result of our promotion.
JB Lowe: Here, we are focused on continuing to clear the channel through price reductions and promotions as I discussed above.
JB Lowe: Moving to operations. In our Austin, Texas facility, we manufactured over 500 megawatt of single-phase inverters in the third quarter and expect to increase this space meaningfully in the fourth quarter given the substantial demand for domestic content products.
JB Lowe: Our Florida facility continues to ramp and is on track to reach production capacity of 2 million domestic optimizers per quarter in Q1 2025. We also intend to start producing commercial inverters and optimizers as well as domestic residential batteries in Q1 2025.
JB Lowe: To summarize my remarks.
JB Lowe: We are all well aware of the challenges the market and our situation have laid in front of us.
JB Lowe: However, we are confident that our continued efforts and focus on execution will allow us to get back on a trajectory of profitable growth and we will continue to update you on our progress in this direction.
JB Lowe: I will now hand the call over to Ariel. Ariel, please.
Ariel Peratt: Thank you very much, Ronen, and good afternoon, everyone.
Ariel Peratt: This quarter, my first as the CFO of SolarEdge, was characterized by a thorough analysis of the company's financial situation.
Ariel Peratt: and its assets and liabilities in relation to our business outlooks.
Ronen Faier: As Ronen mentioned, the first of our three priorities is financial stability.
Ronen Faier: Specifically, our top objective within this priority
Ronen Faier: is to work towards positive free cash flow generation and profitable growth.
Ronen Faier: I am extremely pleased that we were able to announce yesterday our first sale of 45X Advanced Manufacturing Production Tax Credits in consideration for approximately $40 million net of discounts and fees.
Ronen Faier: The liquidity provided by the sales of these credits will enhance our cash position, further strengthening our balance sheet.
Ronen Faier: On the side of expenses, we have, and will continue to focus on reducing costs.
Ronen Faier: and reach our non-GAAP OPEX target of $100 to $105 million per quarter by the beginning of 2025 and put ourselves on a path to continue to reduce expenses even further.
Ronen Faier: Before reviewing the results of the third quarter, I would like to address the impairment and write-downs of various assets that significantly impacted our financials this quarter.
Ronen Faier: This was the result of a thorough analysis of the current economic value of our assets as required by GAAP.
Ronen Faier: due to the significant difference between the book value of our assets and the company's market cap due to the sustained decline in our stock price.
Ronen Faier: The result of this review was an impairment and write-down in the amount of $1.03 billion, which impacted many line items of the company's P&L and balance sheet.
Ronen Faier: I will start with the inventory.
Ronen Faier: This quarter, we wrote down $612 million of inventory.
Ronen Faier: of which $536 million is related to our solar business.
Ronen Faier: and $76 million is related to our non-solar business.
Ronen Faier: This is a result of our assessment of the outlook for various markets, price reductions and promotions taken as part of the Market Share Recapture Initiative as well as other steps taken to focus on core markets and product lines.
Ronen Faier: These write-downs fall into the following categories.
Ronen Faier: First, excess inventory we no longer expect to sell due to lower demand in the European region which we continued to see in this quarter.
Ronen Faier: Second, the accelerated increase in demand for domestic content, which came sooner than anticipated, and has reduced demand for some products in our inventory.
Ronen Faier: Third, raw materials related to the
Ronen Faier: Fourth, partial write-downs of certain SKUs due to the pricing reductions and promotions that we implemented in Europe as we now anticipate selling below cost.
Ronen Faier: separately.
Ronen Faier: We also took a $47 million dollar charge related to non-cancellable raw material orders.
Ronen Faier: The next item is long-lived assets.
Ronen Faier: For the solar business, we took a ride down of $94 million, primarily due to the retirement of machinery, which is no longer in use following a reduction in manufacturing.
Ronen Faier: These machines are highly specialized so their salvage value is assumed to be zero or close to zero.
Ronen Faier: Next, on intangibles.
Ronen Faier: Since based on our assessments, the carrying value in our books was higher than the fair market value.
Ronen Faier: Lastly, on Deferred Tax Assets.
Ronen Faier: We believe there is uncertainty as to when we will be able to utilize certain of our net operating losses, credit carry-forwards, and other deferred tax assets.
Ronen Faier: Therefore, we have recorded a valuation allowance in the amount of $131 million against deferred tax assets, for which we have concluded it is more likely than not that they will not be realized.
Ronen Faier: Thank you.
Speaker Change: Now I will go into the quarterly results.
Speaker Change: Total revenues for the third quarter were $260.9 million dollars.
Speaker Change: Revenues from our solar segment, which include the sale of PV-attached residential and commercial batteries, were 247.5 million dollars.
Speaker Change: Dollar revenues from the US this quarter amounted to $128.7 million
Ronen Faier: representing 52% of our solar revenues.
Ronen Faier: Solar revenues from Europe amounted to 78.9 million dollars, representing 32% of our solar revenues.
Ronen Faier: International Market
Speaker Change: Solar revenues amounted to $39.9 million, representing 16% of our total solar revenues.
Ronen Faier: On a megawatt basis, we shipped 341 megawatts to the United States.
Ronen Faier: 191 megawatts to Europe and 318 megawatts to the international markets for approximately 850 megawatts of total shipments.
Ronen Faier: 67% of total megawatt shipments this quarter were commercial and utility products and the remaining 33% were residential.
Ronen Faier: In the third quarter, we shipped 189 MWh of batteries with a majority shipped to Europe and international markets.
Ronen Faier: As a result of the pricing decreases and promotions we implemented earlier this year, ASP per watts excluding battery revenues was $0.203.
Ronen Faier: ASP per watt, excluding battery revenues was 23 cents, a 5% decrease from 21 four since last quarter.
Ronen Faier: A 5% decrease from 21.4 cents last quarter.
Ronen Faier: Our blended ASP per kilowatt hour on all P V attached batteries was $317 this quarter.
Ronen Faier: Our blended ASP per kilowatt hour on all PV attached batteries was $317 this quarter.
Ronen Faier: Down from $371 in the previous quarter.
Ronen Faier: down from $371 in the previous quarter.
Ronen Faier: This decrease is largely due to additional price reductions and promotions as well as geography geographic mix shift.
Ronen Faier: This decrease is largely due to additional price reductions and promotions, as well as geographic mix shifts.
Ronen Faier: Revenues this quarter from our non solar business.
Ronen Faier: Revenues this quarter from our non-solar business, comprising our energy storage and all other segments, amounted to $13.1 million.
Ronen Faier: Comprising our energy storage and all other segments amounted to $13 1 million.
Ronen Faier: Consolidated GAAP gross margin for the quarter was a negative 269, 2% compared to negative four 1% in the previous quarter driven by the large impairment charge taken this quarter.
Ronen Faier: driven by the large impairment charge taken this quarter.
Ronen Faier: non-GAAP consolidated gross margin this quarter was negative 265, 4% compared to 0.2% in the previous quarter driven by large the large impairment charge taken this quarter.
Ronen Faier: Non-GAF consolidated gross margin this quarter was negative 265.4 percent.
Ronen Faier: compared to 0.2% in the previous quarter driven by the large impairment charge taken this quarter.
Ronen Faier: On a non-GAAP basis operating expenses for the third quarter were $116 $3 million.
Speaker Change: on a non-gap basis.
Speaker Change: Operating expenses for the third quarter were 116.3 million dollars compared to 114.8 million dollars in the previous quarter.
Speaker Change: Compared to $114 $8 million in the previous quarter.
Speaker Change: Quarter over quarter increase was largely related to bad debt expense recorded as part of our asset impairment analysis.
Speaker Change: The quarter over quarter increase was largely related to bad debt expense recorded as part of our asset impairment analysis.
Speaker Change: At a normalized level of bad debt accrual, our operating expenses would have been approximately $108 million.
Ronen Faier: At a normalized level of bad debt accrual, our operating expenses would have been approximately $108 million.
Ronen Faier: As I mentioned, Ireland, we will work to continue to push our expenditures down while still allowing significant resources for new product developments.
Speaker Change: As mentioned by Ronen, we will work to continue to push our expenditures down while still allowing significant resources for new product developments.
Speaker Change: GAAP operating loss for the quarter was.
Speaker Change: 110, $9 billion compared to an operating loss of $162 million in the previous quarter.
Speaker Change: Gap operating loss for the quarter was 1.09 billion dollars compared to an operating loss of 160.2 million dollars in the previous quarter.
Speaker Change: non-GAAP operating loss for the quarter was $801 $1 million compared to a non-GAAP operating loss of $114 3 million in.
Speaker Change: Non-GAAP operating loss for the quarter was $801.1 million compared to a non-GAAP operating loss of $114.3 million in the previous quarter.
Speaker Change: In the previous quarter.
Speaker Change: GAAP net loss was $1 $2 billion.
Speaker Change: Gap net loss was 1.2 billion dollars
Speaker Change: Or $117 million, excluding the impact.
Speaker Change: or $117 million excluding the impact of write-downs and impairments compared to a GAF net loss of $130.8 million in the previous quarter.
Speaker Change: Of write downs and impairments compared to a GAAP net loss of $138 million in the previous quarter.
Speaker Change: Our non-GAAP net loss was $874 three.
Speaker Change: Our non-GAAP net loss was $874.3 million, or $125 million, excluding the impact of write-downs and impairments, compared to a non-GAAP net loss of $101.2 million in the previous quarter.
Speaker Change: $3 million or $125 million, excluding the impact of write downs and impairments compared to a non-GAAP net loss of $101 2 million in the previous quarter.
Speaker Change: GAAP net loss per share was $21.13 for the third quarter compared to $2.31 in the previous quarter.
Speaker Change: Gap net loss per share was $21.13 for the third quarter, compared to $2.31 in the previous quarter.
Speaker Change: non-GAAP net loss net loss per share was $15 33 compared to $1 79 in the previous quarter.
Speaker Change: Non-GAAP net loss per share was $15.33 compared to $1.79 in the previous quarter.
Speaker Change: Turning now to the balance sheet.
Speaker Change: As of September 30th 2024.
Speaker Change: Turning now to the balance sheet.
Speaker Change: Cash cash equivalents bank deposits restricted bank deposits and investments were approximately $748 million net.
Speaker Change: As of September 30, 2024, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were approximately $740 million.
Speaker Change: Net of debt this amount was approximately $53 million.
Speaker Change: Net of debt, this amount was approximately 53 million dollars.
Speaker Change: This quarter cash used in operating activities was $64 million.
Speaker Change: This quarter, cash used in operating activities was $64 million.
Speaker Change: Free cash flow for the quarter was a use of $75 million.
Speaker Change: Free cash flow for the quarter was a use of 75 million dollars.
Speaker Change: Our net decreased this quarter to $239 $4 million compared to 290, $295 6 million last.
Speaker Change: ARNet decreased this quarter to $239.4 million compared to $295.6 million last quarter.
Speaker Change: Last quarter.
Speaker Change: As a result, we brought down Dsos for 153 days in the second quarter to 129 days in the third quarter.
Speaker Change: As a result, we brought down DSOs from 153 days in the second quarter to 129 days in the third quarter.
Speaker Change: Our inventory level net of reserves was at approximately $800 million compared to $1 5 billion in the previous quarter.
Speaker Change: This figure is of course inclusive of the $612 million in impairments, we took an inventory.
Speaker Change: This figure is, of course, inclusive of the $612 million in impairments we took in inventory.
Speaker Change: Turning to our guidance for the fourth quarter of 2024.
Speaker Change: Turning to our guidance for the fourth quarter of 2024.
Speaker Change: We are guiding revenues to be within the range of $180 million to $200 million.
Speaker Change: We are guiding revenues to be within the range of 180 to 200 million dollars.
Speaker Change: We expect non-GAAP gross margin to be within the range of negative 4% to zero percent, including approximately 1000 basis points of net benefit.
Speaker Change: We expect non-GAP gross margin to be within the range of negative 4% to 0%
Speaker Change: including approximately 1,000 basis points of net IRA benefit.
Speaker Change: We expect our non-GAAP operating expenses to be within the range of $103 million to $108 million.
Speaker Change: We expect our non-GAAP operating expenses to be within the range of $103 to $108 million.
Speaker Change: Revenues from the solar segment are expected to be within the range of $170 million to $190 million.
Speaker Change: Revenues from the solar segment are expected to be within the range of 170 to 190 million dollars.
Speaker Change: Gross margin from the solar segment is expected to be within the range of zero percent to 3%, including approximately 1050 basis points of net benefit.
Speaker Change: In the fourth quarter, we expect our free cash flow will be within the range of negative $20 million to neutral.
Speaker Change: I will now turn the call over to the operator to open it up for questions.
Speaker Change: Thank you.
Speaker Change: And at this time, if you would like to ask a question. Please press the star and one on your telephone keypad, you may remove yourself from the queue at any time by pressing star Kim.
Speaker Change: We will take our first question from Brian Lee with Goldman Sachs. Please go ahead.
Brian Lee: Hey, guys. Thanks for taking the questions I appreciate it.
Brian Lee: I had a couple I guess first off on the.
Brian Lee: The new price reductions and you know the the asset revaluation. It seems like that's a little bit more steep than than we had been anticipating so.
Brian Lee: Ronen you had talked about last quarter, you can exceed kind of I think it was $550 million in revenue when inventory normalizes by <unk> 25 that was that was the view last quarter I mean, given the pricing and just sort of the promotional activity sell through obviously is much lower than that right.
Brian Lee: Now can you speak to kind of what.
Brian Lee: The cadence is.
Brian Lee: Off this new level and whether that 550 is still in play for later 2025.
Speaker Change: Thank you Brian for the question. So I think that you know when especially today after our the results of the elections last night I think that we understand that we are leaving now and a little bit of a more of a volatile world.
Brian Lee: If you look at it in the U S. The U S. For US was a was good in Q2, sorry in Q3, we expected by the way to to continuing to be good but you know with the recent developments here in the United States, It's very hard to see and to understand what will be the market's looking looking like in the next year. So here if I would say that you know well we did.
Brian Lee: See an improvement I think that this has become a little bit unclear. When it comes to Europe Europe is definitely as we see today is continued to decline it is not actually strengthening and we believe that we may see this decline continuing into 2025 and as such for us to go.
Brian Lee: Amidst a number given the fact that you know volumes may change political stances are taking a very large I would call. It a impact on the market as it is going to look in the near term and the fact that as you mentioned, we did increase our prices, but also by the way launched some of the promotions that would.
Brian Lee: Did throughout the last quarter, I think that'll be very hard for us to commit to such a number and the timing of this amount at the same time, we do believe that you know the actions that we've taken will allow us to continuing especially as we said you know towards the second of the second quarter of 25 to increase the revenue.
Brian Lee: Again, because we are helping with those prices the channels to be clear, it's slightly it's slightly a quicker than even anticipated. We do believe and we also got feedback from the last half price reductions in promotions from our distributors that they believe that this is something that cadence improve sure but again to extend.
Brian Lee: And then timing I think today it is hard to predict.
Speaker Change: Okay Fair enough, maybe just a quick follow up and I'll pass it on so just based on your comments it sounds like Youre inferring that.
Brian Lee: Obviously, the Q4 guide is down for revenue.
Brian Lee: But it sounds like Q1 would be down again, and then Q2s when it starts to pick back up sequentially.
Brian Lee: If that's the right cadence to expect can you just kind of speak to you under shipped by about close to $200 million this quarter, what's the expectations over the next few quarters.
Speaker Change: And then on market share specifically it sounds like you're acknowledging there's some share loss here.
Brian Lee: How much of that is also playing into sort of the declines youre seeing over the next few quarters and are you expecting on that.
Brian Lee: <unk> pick up that that's when you start to see share gains is that kind of the base case view. Thank you.
Speaker Change: So so first of all Brian actually we do not expect Q1 to be necessarily lower than Q4, what we see in Q4 is first of all you know the impact of the fact that we have reduced our prices.
Brian Lee: While we will not see an immediate impact on on the quantities that are going to be sold you know you would like to assume that there is some kind of elasticity of demand through the pricing and usually the lower pricing should bring the demand up but you know Q4 is usually characterized with the first of all seasonality impact of going into winter.
Brian Lee: I also for many of our distributors. This is the time for there being a private company. This is the time that they are released their annual reports in Europe. These are repos that are made public even for private companies, sometimes and that means that they would like to reduce the inventories. So therefore, I would say that Q4 for us are I believe.
Brian Lee: He was mentioning Oh, sorry, it's symbolizing a little bit of a lower point, because we have taken the toll of the price decreases, but we don't see any of the impact I would also add to this by the way that we took a little bit of assumptions here about again, our what would be also the amount and composition of inventory.
Brian Lee: That some of the distributors, who would like to help to hold at the end of the year. So we believe that we should see stabilization if not even increasing Q1 simply because we believe that there will be some impact to the price reductions that we did in the past now moving forward to where we are on on share.
Brian Lee: While in the U S. It's relatively easy you know you have wood Mackenzie and you know we need to look at their charts and I think that we can see what's the result in Europe.
Brian Lee: And by the way in and it's not always accurate because you see also past data sometimes that change it but I think it's directionally right in Europe, it's very hard to measure. These so it's hard for us to say, whether it's a share loss issue rather than simply the fact that we hear from almost every market in which we are participating at participating but the size of the market.
Brian Lee: Itself actually goes down so here I do not know what to attribute it to but but I do believe that again. This is something that plays a major role in where we see our numbers.
Brian Lee: Going into Q2, we believe that the things that you will start to see it first of all again that the volumes will start to pick up because we believe that there is and we heard from our customers that they're easily staticity of demand to the prices. They believe that the prices as they are right now plus by the way the promotions that we gave that are more of a kind are over.
Brian Lee: At this time offers that we give on the purchase of new product has actually helped the channels cleared the inventory a little bit quicker. So while we under shipped the market. We know approximately what was the number in Q3 again, it's hard for US you know given all of these.
Brian Lee: Impacts of seasonality of inventory turns off of pricing to really estimate what will be under shipping in the next few quarters would we do expect to do by the way is that actually the pace of the channel clearing will increase because of the higher competitiveness of our products due to the lower prices. So here it simply I would.
Brian Lee: Say more than giving a direction would you basically say that there are a lot of moving parts in a market that is already a little bit a turbulent and therefore, it's hard for us to give numbers moving forward or try to be a little more more scientific I was saying the way that we're trying to to measure those markets.
Speaker Change: Okay Fair enough I appreciate all the color thanks, guys.
Speaker Change: Thank you and we will take our next question from Colin Rusch with Oppenheimer. Please go ahead.
Colin Rusch: Thanks, so much guys.
Colin Rusch: As you target getting back to breakeven on a cash flow basis can you give us some of the assumptions that you're working with from a megawatt basis Opex and gross margin.
Colin Rusch: Perspective, just to give us a sense of order of magnitude of how much business should be doing them and what that margin profile looks like.
Speaker Change: So while we cannot give you the actual you.
Colin Rusch: You know percentages because simply there are changing very much based on the amounts that were sitting in each and every market. The composition of each and every market product between those inventories that we haven't done and also by the way again, the gross margin is going to be determined from those ones. Because for example, if you sell batteries. This is much lower.
Colin Rusch: Margins in Inverters, it's not something that we do but I'll try to give you at least the direction around it.
Colin Rusch: Foreign for most of the most important thing is that when you look today and if you would say that roughly a 50% of our AR business is coming from from non U S manufacturing or non U S market that means that this is an inventory that already exists so by taking the sales that we have.
Colin Rusch: For revenue that we have every quarter in the non U S market just take the gross margin and assume that it comes from inventory and here you have the first source of our cash intake that's by the way in the last quarter. We said that we are approximately a consumed $95 million of inventory.
Brian Lee: So as you saw that since our operating expenses were lower this by itself is covering and if if you. So that you know or if you've seen our guidance that next quarter and margin will be approximately zero, even if it is zero margin, you're plus or minus covering the operating expenses.
Brian Lee: The other aspect that we're looking at and I think that we're very happy we're.
Brian Lee: We're happy to announce yesterday, the fact that we're able now to start selling our IRA credits. So we did sell sell already $40 million of IRA credits. These are credits that were accumulated until the first half as we mentioned on the call. This we have a similar or actually higher number if you'd take the 11 since number.
Brian Lee: For Q3, so now you know we're working to sell this one so I think that the cadence of starting to sell IRA credits, let's say a quarter or two quarters are after.
Brian Lee: After their being actually accumulated in the fact that at least half of our business will come from inventory that is already paid for and exists on our balance sheet is something that by itself should cover the operating expenses and will allow us to generate cash flow and lastly by the way because we talk about free cash flow and they'll just.
Brian Lee: Operating cash flow.
Brian Lee: We've I think are very much materialize most of our investments needed in the U S. In order to grow. So also capital expenditures are going to be low. So these three things almost zero capital expenditures.
Brian Lee: Expenditures sale of IRA credits and usage of inventory should get us there it related almost to the level of opex.
Speaker Change: Okay Super helpful. And then how quickly can you start bringing in the new.
Brian Lee: New products into the end of the portfolio and starting to sell them.
Speaker Change: So they are expected to be introduced during the I would say the course of next year, but the order that we're going to two to basically introduce them is that first of all we will introduce our 20 kilowatts inverter for the a three phase inverter for the German.
Brian Lee: And Austrian market that is growing very rapidly, but more importantly by the way it's growing most rapidly in the 15 to 30 kilowatt installation sizes, which is exactly where do you see inverter is Amy get the second one will be our second generation battery that will enjoy better cost structure.
Brian Lee: It's a modular battery that is designed to work with our new inverter is very much a simplifying the installation a very cost effective from the fact that it is based on the L. B a sales and therefore <unk>.
Brian Lee: This will be you know a month or two or three about a quarter. After the introduction of the first converter and then by the way our U S. A fourth generation inverter that will come.
Brian Lee: Towards the end of the year, so everything will come towards the during the next year.
Brian Lee: The pace of introduction is very much dependent on two things. One is how quickly we can ramp up the manufacturing for those products, we will usually starts to manufacture them.
Brian Lee: NPI units in our sell one factory, but then I expect them to our other factories worldwide and then there how quickly we're able to really ramp up the production using the impact that the fact that we're also going to use our automated assembly lines to make those products.
Brian Lee: And this is also a relatively new for us doing inverter main change a little bit, but I would assume that over the course of next year you will start to see first shipment of all of these products.
Brian Lee: I'd say that most of our statements related to next year's cash.
Brian Lee: Cash generation at least are not related to those new products. So basically were relatively conservative in our financial planning around and we don't take a lot of impact where expected impact from them, but I I can say that this is a great focus of ours to make sure that these products are coming out on time.
Brian Lee: Domestically are manufactured and and and I think that these are very good product and say you know for the markets as we see it developing.
Speaker Change: Thank you and we will take our next question from Mark Strouse with Jpmorgan. Please go ahead.
Mark Strouse: Great. Thank you very much for taking my questions.
Mark Strouse: A follow up to Collyns question. There on cash flow can you just kind of give us an update now that the converts as currencies how are you.
Mark Strouse: You're thinking about refinancing or repaying that alright.
Mark Strouse: Is the goal to kind of demonstrate your improvement in cash flow potentially wait as long as possible not to get better terms.
Mark Strouse: Anything youre looking at to tactically do sooner.
Speaker Change: And then just a real quick follow up on the 45 ex tax credit transfer are you able to talk about the net pricing.
Speaker Change: We've done that maybe just in general terms, if nothing else kind of low to mid Ninety's, maybe thank you.
Speaker Change: So.
Mark Strouse: So mark first of all.
Mark Strouse: Talking about the.
Mark Strouse: One second sorry.
Mark Strouse: Can you. Please just repeat that sorry, I lost my train of thought can you repeat that.
Mark Strouse: Part of the question.
Speaker Change: Yeah of course run in the first part was just now that the convertible debt is oh yeah.
Mark Strouse: Yeah, Okay, sorry, I lost my train of thought so so first of all from a convert return I'll take this scenario will take the Ah Ah Ah self.
Mark Strouse: Sale of credits are on the convert our intention is very simple we have the money.
Mark Strouse: Financed the old convert or at least part of it by new convert which means and we repurchased a large portion of or at least half of the old convert already so the way that we look at it right. Now is that we will wait until September when the converts are maturing we have the money we set it aside we're not going to use it or not intend to use it it is still.
Mark Strouse: Yielding a very nice results for us from a interest income. So our strategy here is simply use the money invest it until it needs to be repaid once it is going to be repaid we will do so and we don't see any issue with it is a real I would like to address that sure sure. Thanks, Hi, Mark.
Mark Strouse: Yeah basically we.
Mark Strouse: So we've got roughly $40 million net charges and we sold it for mid nineties.
Speaker Change: Take care.
Mark Strouse: Okay.
Speaker Change: Thank you and we will take our next question from Andrew <unk> with Morgan Stanley. Please go ahead.
Speaker Change: Alright. Thanks, so much guys. Thanks for taking the question I just wanted to come back to the pricing point for a second I.
Speaker Change: I guess in your prepared remarks, you discussed it a few different drivers here I heard some.
Mark Strouse: Promotion, if I heard that youre planning on selling below cost.
Mark Strouse: To kind of clear out some of this inventory in Europe, but then I also heard you are trying to regain some market share and compete with some of your low cost competitors and in the European region, and I guess I'm, just trying to get a sense for how much of this pricing reduction is one time just to clear the inventory and to get to a point, where your run rate and kind of where your sell through is.
Mark Strouse: And how much of it is kind of structural in nature, where you need to be more competitive on price to be able to sustain your market share in that region and if it's the latter what does that mean for go forward margins in the European market. If you get the structurally kind of take down your price to stay competitive.
Mark Strouse: Sure.
Speaker Change: So first of all let me explain what are the prices and what are the promotions because I think that that's a that's part of the answer itself during the actually since the end of 2019 actually our prices went down it went up sorry. They went up because of the fact that we started to see tariffs in the United States than King coffee with all of the Ah <unk>.
Speaker Change: <unk> expenses, and then came component shortages and actually we saw close to a 20% to 25% increase in our prices over a four years, while by the way the cost structure has not changed significantly I would call. It on a permanent basis because during the we did see that during the component shortages.
Speaker Change: Prices of components went up but they went down again and this will be very important for our margins in the future. So what we're basically doing is that price decreases that were doing are actually decreasing the long term prices on a more permanent basis, because we will need to go back to the levels of the I would say pre call.
Speaker Change: <unk> prices that we used to see in the market by the way a lot of our competitors, especially in Europe already deep. So hence a relatively large gap that was opened between our pricing and theirs and promotions will be usually a kind of a spot of discounts that we gave on the purchase of new products that are aimed at helping our.
Speaker Change: Our distributors to sell their inventory. So for example, we had the be wise optimize a discount or I would call a promotion on optimizer is because we knew that our distributors have a lot of inverters and they needed to buy optimizer, so by buying cheaper optimizer, it help them to be more competitive and clear so.
Speaker Change: When I look now at the pricing trajectory and where we are if I take the everything that we need and I am I'm talking Andrew on an overall basis I wouldn't break it a little bit between Europe, and the United States, but if I look at the combination of my pricing and promotion in 'twenty for over 23.
Speaker Change: We're talking about high single digits to low double digits or low teens.
Speaker Change: In the overall impact while I would say that in Europe, you see double digits in most cases and in the U S. You see either none or very small or low a single digit. So again, an average we're talking about high single digits to low teens when it comes to prices in 'twenty three.
Speaker Change: Oh 24 over 23 of this amount I would say that if you need to roughly understand I would say that the price decreases are within this and we say mid high range, a single digit and everything beyond this meaning to go to the high single digit or the low tier.
Speaker Change: <unk> our promotions. So if you take the permanent nature, it's still within the mid high single digit a number that we gave when we look into the future by the way we Couldnt. We expect this to continue so again, if we look into 'twenty five pricing over 24, our assumption that we'll see.
Speaker Change: See a mid to high single digits in overall price reductions without taking into account any promotions and this will be something that we will continue to see here again, Europe will be double digits, while U S. Actually may even go up a little bit because we're moving more towards domestic content.
Speaker Change: And we see the prices of domestic content are usually slightly higher than products made in the U S that there are no domestic content.
Speaker Change: Got it Okay. That's super helpful context, and then maybe to launch that into my next question, you mentioned kind of refocusing to our core market.
Speaker Change: And I know Theres, a lot of kind of added uncertainty here with the election now behind us, but I guess, how do you see or how do you view your core markets Europe, you've grown into Europe pretty pretty meaningfully over the last few years and it's become a majority of your market share of your revenue concentration.
Speaker Change: Do you see that shifting back to the U S. Just given I think the value that local installers have our domestic manufacturing and how that probably continues under under the new administration or are you are you still committed to the European markets still being a majority of your business.
Speaker Change: So I'll start by saying that you know both a European and U S markets are going to be very significant for us in the coming in the coming years and I would say that they are equally important even though I think that you will see a little bit of shifting between the two first of all you mentioned you know the new administration and we need.
Speaker Change: When we were preparing for this call and we talked about what can happen.
Speaker Change: After elections, we just remember that actually that was the the previous Trump administration was the best time for solar.
Speaker Change: In the United States, We did see that you know are the solar market grew and we saw very nice extension and even if I'm not mistaken. The ITC was extended under the Trump administration as well so I think that the dynamics that we see right now in the United States and if you combine it with the weakness that we see in Europe.
Speaker Change: Will increase at least in the short term dead weight that we put on the U S market given the fact that D. C is a at least now growing market.
Speaker Change: Coming more and more healthy market and I think that of course for the long term as we've mentioned in some of our meetings and and and and meetings with investors. We truly believe that investments in U S infrastructure will be needed in electricity prices will increase which means that it will be a good market in the in the long term when we.
Speaker Change: Look at Europe, we believe that what we see in Europe is a.
Speaker Change: I would say temporary I don't know for how long temporary but temporarily lower prices because we do see that because of gas prices because of some of the European governments trying to rearrange degrade after having so much sooner there is a little bit of a thinking process that is happening there, but even after.
Speaker Change: All of these changes we keep we cannot ignore the fact that when you look at Germany. When you look at our other European market, even by the way the Dutch markets that is suffering so much you look at I've anything between six to eight years of payback on an investment which would you still you know a very good investment so or.
Speaker Change: I'd call. It you know a reasonable investment to make so I would say that we are committed to both markets. We will put efforts in both of them in the law in the short term I see better U S market or more leaning towards the U S market and European but I'm not sure that this is going to be something that will prevail for many years to come.
Operator: Thank you and we will take our next question from Philip Shen with Roth Capital Partners. Please go ahead.
Philip Shen: Hey, guys. Thanks for taking my questions.
Philip Shen: Just wanted to follow up on some of the under shipment comments.
Philip Shen: Can you give us a sense for.
Philip Shen: What the under shipment was in Q3.
Philip Shen: What do you expect it to be in Q4, and then if you can share what it could be in 25, Oh that'd be great. Thanks.
Speaker Change: So I'll start from Q3 and as we mentioned on the prepared remarks, our you know since we so about $460 million of for $53 million of our point of sale data compared to about 240 a million.
Philip Shen: Millions of dollars that we ship you know the math is relatively clear moving forward. This is a little bit more complicated because again first of all are the.
Philip Shen: The price decreases that we're doing are not allowing us to really measure would be down to a shipping because how do you measure.
Philip Shen: Measured against the oil prices, the new prices and what is it in second and we do not yet know what will be the impact of the promotions and the price decreases that we did on the pace of clearing the channels, especially by the way again at the beginning of 'twenty five because again in 'twenty four we do believe that we will not see some.
Philip Shen: Potential increase in our purchasing from us or a sitting out because of the seasonality. So I would say that we still believe that we'll see by the second half of next year European channels being in a much healthier situation didn't they were but I'm not sure that we were able right now at least you know.
Philip Shen: To quantify it in a reliable manner.
Speaker Change: Okay. Thank you and then coming back to prices our checks over the past week suggests that the EU a list price.
Speaker Change: You guys selling to your customers or to your customers was reduced by 20% to 30% depending on the product.
Speaker Change: And and talking to some of your customers. It sounds like they don't necessarily think that that will increase demand.
Speaker Change: Much and so.
Speaker Change: The reason why is because there's still so much channel inventory.
Philip Shen: In Europe, where prices you can get that pricing today. So if you're an installer you can actually get that price.
Philip Shen: Or if you're a distributor you can also get that price because you can buy from another peer.
Speaker Change: And so I know you addressed this went on a bit on that in your remarks, you're not sure what kind of demands.
Speaker Change: So this might be.
Speaker Change: But just wanted to understand.
Speaker Change: If.
Philip Shen: If you are how much channel inventory is there remaining do you think in Europe.
Philip Shen: And then.
Philip Shen: If the demand stimulus is not that effective.
Speaker Change: Mike do you need to write down.
Speaker Change: Not right down, but rather lower your price instead.
Speaker Change: Into the European market again, and if so what kind of timing might that be.
Speaker Change: So no no problems so so far.
Speaker Change: The answer is it is a complex because it involves a lot of Ah I would say you know assumptions about about behaviors and and and also I would call. It.
Speaker Change: Trends that you may see within the distributors themselves and I'll try to elaborate a little bit on this so first of all on the price increases that we did I think that the numbers that you were having is actually including both price decreases and promotions that we did so some of them of a shorter term and some of them are going to be permanent.
Speaker Change: But as we said, yes. They are Ah, it's the double digits at least in Europe. So on that front, that's definitely definitely the case.
Speaker Change: I do not know what the channel check said, but you know since everything was done last week I I believe that you know whatever the channels are reporting.
Speaker Change: One week two already estimate one week in November to estimate the impact of the price increase may be a little low.
Speaker Change: But from what we at least I heard from those that we consulted with and these were the large players are prior to doing this they believe that this is something that will allow us to take the Sharon will simply need to see how it is going to work are moving forward.
Speaker Change: We believe that we all did we will see the actually the the channel clearing accelerating due to this price promotions and price increases and promotions because in some cases the promotions that we're doing are actually allowing the channels to take the excess inventory they have and actually cleared a little bit faster by averaging.
Speaker Change: Prices did they have already today with a product that they need to buy any way because of the fact that they missed either optimize or batteries or something else and therefore, reducing the overall cost of the systems that they have and at least again from the the first impressions.
Speaker Change: We're getting there shouldn't be any impact I do not know yet again, it's only a week since we did it.
Speaker Change: As I promised of course, we will report I would tend to believe that there is some kind of elasticity of demand to prices that we will see coming but.
Speaker Change: We'll simply have to wait and see and due to the later part of your question. If we see that for some reason a this is something that is not working we'll find a way to make it work in the end we are a significant player in this market. We are at least you know the technology provider that this market are required.
Speaker Change: Our our solutions and I believe that you know if you can always find the right price to be there again my feeling is that that that we are already at the right place.
Speaker Change: Thank you.
Speaker Change: And we will take our next question from Julien Dumoulin Smith with Jefferies. Please go ahead.
Speaker Change: Hey, good afternoon team. Thank you guys very much for the time I. Appreciate it maybe just a follow up on some of the commentary here and just ask it more explicitly how do you think about the decision tree given the cost cuts contemplated just stay in some of these markets I know you've been talking about some of the merits and paybacks, but can you elaborate specifically as you think about the potential for further cost cuts.
Speaker Change: Although that 100 million level is there a potential pullback in reinsurance entirely from certain geographies as you think about not just the sort of incremental value of selling an incremental unit here, but rather the fixed cost of being in a given country or whatnot sort of retrenching. If you will or what are other avenues of cost reduction beyond the $100 million do you think about you know.
Speaker Change: Run rating into 'twenty five.