SolarEdge Technologies Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 14 speakers on the call.

Operator

Welcome to the SolarEdge Conference Call for the 2nd Quarter Ended June 30, 2023. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Events Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved and any recording, reproduction or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the event calendar page of the SolarEdge Investor website. I would now like to turn the call over to J.

Operator

B. Lowe, Head of Investor Relations for SolarEdge.

Speaker 1

B. Lowe:] Thank you, David, and good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the Q2 ended June 30, 2023, as well as the company's outlook for the Q3 of 2023. With me today are Zvi Landau, Chief Executive Officer and Ronan Feier, Chief Financial Officer. Zvi will begin with a brief review of the results for the Q2 ended June 30, 2023.

Speaker 1

Ronen will then review the financial results for the Q2, followed by the company's outlook for the Q3 of 2023. We will then open the call for questions. Please note that this call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current We encourage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies with all rights reserved. Please note this presentation describes certain non GAAP measures, including non GAAP net income and non GAAP net diluted earnings per share, which are not measures prepared in accordance with U.

Speaker 1

S. GAAP. The non GAAP measures are presented in this presentation as we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U. S.

Speaker 1

GAAP. Listeners who do not have a copy of the quarter ended June 30, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now, I will turn the call over to Zvi.

Speaker 2

Thank you, Jamie. Good afternoon and thank you all for joining us on our conference call today. Starting with highlights of our 2nd quarter results. We concluded the quarter with record revenues of approximately $991,000,000 Revenues from our solar business We're at a record $947,000,000 while revenues from our non solar businesses were $44,000,000 This quarter, we shipped 5,500,000 power optimizers and 335,000 inverters. This quarter, we also shipped 2 69 Megawatt hours of residential batteries, a 22% increase from last quarter.

Speaker 2

Our solar business revenue grew quarter over quarter by 4% and by 38% year over year, mostly driven by record revenues in Europe, offset by a decrease in revenue in the United States and Rest of World. We saw record revenues in many countries this quarter, including Germany, the United Kingdom, Switzerland, South Africa and Thailand. Particularly noteworthy is the growth we have been discussing for several quarters in the commercial segment, which has seen megawatts shift go from 1.5 gigawatts in the Q4 of 2022 to 2.1 gigawatts in the Q1 of this year to 2.6 gigawatts of shipments this quarter. The solar market is going through a transition Emerging from the recent period of component shortages, high energy prices and rapid growth to 1 now impacted by higher interest rates and excess inventory. Given this shift, I would like to review the major trends that we are seeing in the various regions and how it affects our company.

Speaker 2

In Europe, installation rates continue to be high in both residential and commercial. However, the strength in the market is somewhat more moderate than what was anticipated heading into 2023, largely due to a milder winter, reduced concerns over energy resilience and lower electricity prices. With that in mind, our growth in Europe in the second quarter was very strong. Overall, our megawatt shipments to Europe grew by 52% quarter over quarter, including 57% in residential and 50% quarter over quarter growth in commercial. Additionally, sell through by our distributors in the 2nd quarter was up 49% year over year in residential and up 115% year over year in commercial.

Speaker 2

On the supply side, the distribution channels in Europe are experiencing higher than optimal inventory levels, especially as it relates During the recent period of shortages and expectations for high growth, distributors placed large orders for modules and inverters in order to ensure stability of supply to support the growing demand. As growth in demand has tapered off, Distributors are taking a more cautious approach in order to better manage their cash flow. In addition to taking actions to reduce inventory levels, Distributors are also reducing the number of suppliers in their portfolio, which had expanded during the period of shortages. This is a dynamic seen before in the industry during a shift from a period of extreme shortage and accelerated growth to a period of more gradual growth and undistributed undistributed product availability. We expect this inventory adjustment period to continue for the next two quarters, especially when also taking into account the typical 4th quarter seasonality effect in We see this environment as an opportunity to grow market share based on our offering that is very suitable to the growing complexity of the European grid, where dynamic tariffs and negative rates are becoming more common.

Speaker 2

To deal with this Growing complexity, our customers require advanced energy management hardware and software of the sort we recently announced at intersolar and about which I will elaborate in a few moments. Moving to the U. S. Residential market. The combination of higher interest rates and the new net metering 3.0 regime in California has led to a decrease in demand compared to the second half As a result, inventories of our product in various channels are higher than normal as they were built in anticipation of substantial market growth that did not materialize.

Speaker 2

As a result, our shipments to the U. S. Residential markets were down 29% this quarter from the last quarter. Sell through of our products by our distributors, however, actually rose by over 10% during the same period. We expect the process of inventory normalization to last at least through the end of

Speaker 3

the year.

Speaker 2

Looking into 2024, there are 2 market trends that we view as positive for our business. First, the expected increase of 3rd party ownership installations driven by the shift to lease versus loan financing, a sub segment where our market share has traditionally been higher. And second is the expected increase in storage installations, In particular, the evolving NEM 3.0 battery market, where our DC coupled system can offer up to 10% more energy on an annual basis when compared with a non DC optimized module lever electronics solution. In the U. S.

Speaker 2

Commercial market, we continue to see stable demand, which we expect to gradually grow as a result of lower module prices and as projects that were on hold begin to move forward. This is expected that some developers We had halted project in anticipation of IRA clarifications related to the 10% ITC domestic manufacturing adder, Move forward with the project execution after realizing that IRA clarity will likely take longer than anticipated. In rest of world, we see a mixed picture, where some countries are experiencing headwinds due to a higher interest rate, while others such as South Africa and Thailand are growing rapidly due to grid instability and favorable regulatory environments. Moving to products, and I want to spend a few moments discussing the increased investments we are making across our digital solution platform, which is focused on 3 main pillars. First, our energy management software known as SolarEdge 1, which we recently introduced at inter solar in Munich.

Speaker 2

SolarEdge 1 helps home and business owners optimize their energy production, consumption and storage. With the proliferation of time of use and dynamic tariffs and growing attach rate of batteries, we believe this will become an increased Area of differentiation for our PV plus storage solutions. 2nd is our installer toolkit, which is a set of Tools aimed at helping our customers design, sell, install and commission PV and storage systems in a fast and efficient manner. At RE Plus in September, in addition to demonstrating improvements to our already Short installations and commissioning times, we will be launching our new installer proposal tool, a sophisticated step by step Software platform to help installers be more effective when selling a PV plus battery system at the kitchen table. And 3rd, digital infrastructure, which includes grid services and other advanced applications.

Speaker 2

In the field of grid services, our total number of enrolled sites grew by 70% in the 2nd quarter to over 13,000 sites. In the United States, 16% of our battery installations are now enrolled in grid services programs. In the Netherlands, we launched through 2 electricity aggregators, our first commercial grid services program aimed at grid balancing and already enrolled dozens of commercial sites into the program. We have a high number of additional enrollment requests and are looking at integrating with additional aggregators in the coming months. Another part of our digital offering is based on our acquisition earlier this year of HARC Systems, which offers commercial customers Significant monitoring and connectivity capabilities across increasingly complex energy systems.

Speaker 2

While still not significant in absolute numbers and likely won't be significant for several quarters, our broad digital offering augments and solidifies our leadership in the residential and particularly in the commercial markets. More importantly, as electrical grids become more constrained and penetration of distributed solar and other renewables increases, Optimized interaction with the grid as well as optimized energy management at the home and in the business will be critical to the positive functionality and economics of the solar installation. We see this as an opportunity for differentiation for Technology companies like SolarEdge and a key reason why we don't believe that the inverter markets will become commoditized. More on the product side, we are seeing good progress with our tracker offering as we now have more than 30 megawatts of trackers either installed or in the process of installation. This new product, which is both lightweight and has a small footprint, provides access for us to new market opportunities and will initially enable us to offer a full solution to the growing agri PV segment, which is lately receiving significant regulatory support.

Speaker 2

On the electrical vehicle charging front, We continue to supply our ACEV chargers, both the inverter integrated and standalone versions and to date have shipped over 45,000 units globally. As we unveiled at inter solar next year, we plan to release our bidirectional DC EV charger that will be DC coupled enabling greater charging efficiency through fewer AC to DC conversions. Moving to operations. We are making strides towards building out our U. S.

Speaker 2

Manufacturing footprint. In the Q3, we expect to ship several 1,000 inverters from our contract manufacturing partner site. With this number growing to above 30 1,000 inverters that we expect to ship from this site in the Q1. More broadly, we mentioned earlier The fact that inventory levels are high for some products. However, on certain products such as 3 phase inverters in the European market, Even though we increased output significantly in the Q2, we are still delivering below demand and thus air shipments have been required.

Speaker 2

Part of the relief in this area will be via the long term purchase agreement we announced last week with Infineon that will help give us assurance and the availability of critical power semiconductor components in the years ahead. In our non solar business, our Cella II battery factory continues to ramp and is on track to reach its full capacity by the end of this year. Additionally, we have initiated manufacturing of the type of cells that will be used in our portfolio of next generation batteries, starting with the release of a new residential battery planned for the first half of next year. In closing, while we discuss the inventory corrections taking place, the actual PV market is continuing to grow in many places around the world. For example, Germany, one of the largest solar markets is expected to grow from 7.5 gigawatt installed in 2022 to 10 gigawatts Installed in 2023 with further growth anticipated in 2024.

Speaker 2

I believe that our portfolio and positioning within diverse markets and will benefit us as markets continue to grow in some areas and we begin to recover in others.

Speaker 3

I will now hand it over to Onan. Onan? Thank you, Tivi, and good afternoon, everyone. This financial review includes a GAAP and non GAAP discussion. Full reconciliation of the pro form a to GAAP results discussed on this call is available on our website and in the press release issued today.

Speaker 3

Segment profit is comprised of gross profit for the segment, less operating expenses that do not include amortization of purchased intangible assets, impairments of goodwill and intangible assets, stock based compensation expenses and other certain items. Total revenues for quarter and 36% increase compared to $727,800,000 for the same quarter last year. Revenues from our solar segment, which include the sales of residential batteries and trackers were a record $947,400,000 a 4% increase compared to $908,500,000 last quarter and a 38% increase compared to $687,600,000 for the same quarter last year. Solar revenues from the United States this quarter were $195,600,000 a 23% decrease from the last quarter and a 37% decrease from the same quarter last year, representing 21% of our solar revenues. Solar revenues from Europe were a record $688,500,000 19% increase from the last quarter and 112% increase from the same quarter last year, representing 73% of our solar revenues.

Speaker 3

In Europe, we continue to see meaningful quarter over quarter Revenue growth in general and noticeable record in Germany with 64% growth reaching close to $300,000,000 of quarterly revenues. Sweden with 106% growth, United Kingdom with 50% quarter over quarter growth and Slovenia with 54% growth. Revenues from batteries grew slightly this quarter in Europe, limited by the fact that we are still constrained by 3 phase inverter supply, which is needed for battery coupled systems. We do identify some excess battery inventory in the European channels, which will lead to lower battery shipments in the second half of the year. This inventory buildup will be alleviated as the ramp up in deliveries of our new 3 phase residential backup inverter catches up with our battery manufacturing and delivering pace.

Speaker 3

We intend to use air shipments in the 3rd and 4th quarters In order to resolve this imbalance and fulfill the demand for our products in this segment as a single inverter is typically installed with 2 to 3 batteries. Rest of the world solar revenues were $63,300,000 a 17% decrease compared to the last quarter and the 19% increase from the last year and representing close to 7% of our solar revenues. This quarter, we saw record revenues in South Africa and Thailand. On a megawatt basis, we shipped 6 66 megawatts of inverters to the United States, a record 3.3 gigawatt to Europe and 397 Megawatt to the rest of the world surpassing 4.3 gigawatt of record quarterly Invero shipments. 60% of our megawatt shipped this quarter were commercial products and the remaining 40% were residential, a result of strong European adoptions of our products and higher European revenues in the total mix.

Speaker 3

In the Q2, we shipped 269 Megawatt Hour of our residential batteries, an increase from 2 21 Megawatt Hour last quarter. The vast majority of our batteries continue to be shipped to Europe. ASP per watt this quarter excluding battery revenues was $0.188 a 14% decrease from $0.22 last quarter. This ASP per watt decrease is predominantly a result of increased commercial inverters in the overall mix, partially offset by a stronger euro. In general, our prices did not change this quarter.

Speaker 3

Our battery ASP per kilowatt hour was $4.79 slightly up from $4.75 last quarter, mostly a result of a stronger euro. Revenues this quarter from our non solar segment were $43,700,000 an increase from $35,200,000 last quarter, a result of higher storage division revenues. Consolidated GAAP gross margin for the quarter was 32%, a slight increase compared to 31.8% in the prior quarter and 25.1% in the same quarter last year. Non GAAP gross margin this quarter was 32.7 percent compared to 32.6 percent in the prior quarter and 26.7% in the same quarter last year. Gross margin for the solar segment was 34.7% compared to 35% in the prior quarter and 28.1% In the same quarter last year, the quarterly solar margin change was mostly a result of product mix changes.

Speaker 3

This quarter in our solar division, our inverter and optimizer gross margins were approximately 37%, Our residential inverter and optimizer product margin continued to exceed 40% and Our battery margins were slightly below 25% due to a higher portion of single phase batteries within the mix. Good subject to tariff excluding batteries shipped into the United States from China accounted for 6% of our U. S. Shipments this quarter, the lowest on record as a result of the ramp up in our Mexico manufacturing facility, which is at the level that we expect to maintain in the next quarters. Gross margin for our non solar segment was minus 9.6% compared to minus 31.3 percent in the previous quarter.

Speaker 3

Our CELA-two ramp up continues as planned and the increased revenues from our storage division are contributing to the margin improvement in this division. This quarter, we also include for the first time results of our newly acquired HARC systems In our financial results, while still very small portion of our revenues, HARC software sales are characterized with very high gross margins. On a non GAAP basis, operating expenses for the 2nd quarter were $133,300,000 or 13.4 percent of revenues compared to $123,600,000 or 13.1 percent of revenues in the prior quarter and $109,600,000 or 15.1 of revenues for the same quarter last year. Our operating expenses as a percentage of revenue increased as a result of our annual employee merit process that takes place in the 2nd quarter. Our solar segment operating expenses as a percentage of solar revenues were 12.8% compared to 12.3% last quarter resulting from the same reasons.

Speaker 3

Non GAAP operating income for the quarter was a record $191,000,000 compared to $183,800,000 in the previous quarter and $84,700,000 for the same period last year. The solar segment generated a record operating income of $207,000,000 this quarter, slightly up from $206,700,000 last quarter. The non solar segment generated an operating loss of $16,100,000 compared to an operating loss $22,900,000 in the previous quarter. Non GAAP financial income for the quarter was $4,400,000 compared to a non GAAP financial income of $24,000,000 in the previous quarter. As the euro to U.

Speaker 3

S. Dollar Rate is above $1.1 per euro, we continue to reduce our exposure to the euro by higher frequency of currency conversions to the U. S. Dollars. Our non GAAP tax expense was $38,000,000 this quarter compared to $33,200,000 In the previous quarter $7,000,000 for the same period last year and we expect to maintain approximately 20% tax rate on both GAAP and non GAAP basis for the rest of the year.

Speaker 3

GAAP net income for the 2nd quarter was $119,500,000 compared to GAAP net income of $138,400,000 in the previous quarter and $15,100,000 for the same quarter last year. Our non GAAP net income was 157 $400,000 compared to a non GAAP net income of $174,500,000 in the previous quarter $56,700,000 in the same quarter last year. GAAP net diluted earnings per share was $2.03 for the 2nd quarter compared to $2.35 in the previous quarter $0.26 for the same period last year. Non GAAP net diluted EPS was $2.62 compared to $2.90 in the previous quarter and $0.95 in the same quarter last year. Turning now to the balance sheet.

Speaker 3

As of June 30, 2023, Cash, cash equivalents, bank deposits, restricted cash restricted bank deposits and investments were $1,500,000,000 Net of debt, this amount is $853,500,000 This quarter, cash used in operation was $88,700,000 mostly related to inventory buildup. As we believe that we have seen the bottom of our cash use, We expect substantial cash build up in the next quarters starting in Q3. Accounts receivable net increased this quarter to 1,000,000,000 point 15 compared to $969,500,000 last quarter, representing Sending, a reflection of our increased revenues that were skewed towards the end of the quarter and in certain cases Extension of credit terms to our customers mainly in the United States. As of June 30, our inventory level net of reserve was $984,200,000 compared to $874,200,000 in the prior quarter. As a result of the slowdown in the shipments to the United States, slower growth rates in Europe and more streamlined manufacturing, Our finished goods inventory increased substantially this quarter.

Speaker 3

At the same time, we are slowly reducing Our component safety stocks and battery sales as a component availability becomes less of an issue. Turning to our guidance for the Q3 of 2023. We are guiding revenues to be within the range of 880,000,000 to $920,000,000 We expect non GAAP gross margin to be within the range of 28% to 31%. We expect non GAAP operating income to be within the range of $115,000,000 to $135,000,000 Revenues from the solar segment are expected to be within the range of $850,000,000 to $880,000,000 Gross margins from the solar segment is expected to be within the range of 30% to 33%. I will now turn the call over to the operator to open it up for questions.

Speaker 3

Operator, please.

Operator

And we will take our first question from Mark Strouse with JPMorgan. Please go ahead.

Speaker 4

Great. Thanks for taking our questions. I wanted to start with the 3Q revenue guide. When we look at the $80,000,000 $90,000,000 dip quarter over quarter. Can you break down how much of that is driven by Europe, U.

Speaker 4

S, Rest of world. It sounds like the inventory issue is fairly broad based. I'm just curious if we should think about that kind of If Europe is 70% of your revenue and U. S. 20%, is that similar kind of mix for the change quarter over quarter?

Speaker 3

Hi, Mark. Thank you very much for the question. So actually when we look at the guidance for the next quarter, we need to look a little bit region by region because we see a little bit of a different dynamics. I would say that most of the reduction that we See is coming first of all from less revenues of batteries mostly in Europe. As we mentioned in the prepared remarks, We find a solution we found a situation that our battery shipments were a little bit faster than our ability to ramp up the inverters that come with them, Mostly 3 phase inverters.

Speaker 3

And as a result, there is a built inventory within the channels there that needs to be cleared in order to continue and grow. And this will be cleared mostly through the adoption or getting more inverters from us During the 3rd Q4 and this is why by the way we're also increasing our air shipments. So the first of all comes this decrease. The second one comes actually from optimizers. Again, in Europe, it's also happening in the United States, but a little bit more in Europe Because Europe is more characterized with commercial systems.

Speaker 3

Because of the fact that inverter shipments were a little bit slower to ramp compared to the Other products, again, because of the 3 phase products that we needed to get more components, what we usually see is that installers and especially Commercial installers who are installing the modules faster than they do the inverter, actually they installed the inverter only at the very last moment, Used to take a little bit more optimizers in order to make sure that they can basically complete the installations of the modules in there either on the roof or in the overall installation. And then once the inverter comes, they simply install it and commission it. So since the majority of the revenues came The majority of the down this quarter is also coming from Europe because of these two phenomena. At the same time, when we go to the United States, As Sibi mentioned, we believe that we have basically seen a lower amount that we do not expect to go much lower In the next quarter, because of the fact that on one hand indeed the inventories are high, but still some of the products that are needed are still missing there and we're going to ship them.

Speaker 3

And when it comes to rest of the world, again, it's a relatively shift, mixed situation where again we Expect to see, I would say, something that will be relatively flattish. So the majority will come from Europe. The majority will come from Batteries and inverters that were first of all delivered

Speaker 5

and

Speaker 3

optimizers, sorry, that were first of all delivered and rest will be relatively flattish To maybe slightly down.

Speaker 4

Okay. That's extremely helpful. Thank you. Your comments were interesting Regarding the European distributors and kind of managing the number of suppliers, just Curious if you can give us a fairly high level update on what you're seeing with the overall competitive environment?

Speaker 2

Yes. So Mark, the phenomena that I described and it is indeed for those that have been active in Europe for years, it's something that we've seen through the cycle. I could give you an example that some of our distributors in Poland are carrying today 10 Brands of inverters, 6 or 7 of them are new that they didn't have before That during the period of shortage, they just took whatever they could get a hold on because that's what the installer needed. And now as things stabilize, they are pairing down the number of brands that they're carrying into a more classical combination of call it the high end, the base and the economic solution If you will, and this is a dynamic that has repeated itself multiple times and it's more pronounced in the module And if you've seen some of the reports and from our discussions in with distributors, They also emphasized that the inventory levels on modules are abnormally high and a lot of that inventory is by now The module pricing in the market is significantly lower than the prices at which those modules were purchased. So there are a lot of distributors are in some form of financial challenge.

Speaker 2

And with that, they are resolving that by going to a On the overall offering to low levels of inventory that are maybe lower than those that they would normally carry, in this type of a period, Especially because the overall demand is still high, but just in order to control their financials. So the market is very active, installations are up, and demand for equipment It's strong. There's an adjustment on the channel side to limit their portfolio, drain The volumes that they've accumulated during the closing months of the shortage period And get back to a more sustainable growth type of module model, excuse me.

Speaker 4

Okay. I'll take the rest offline. Thank you very much.

Speaker 3

Thank you.

Operator

We'll take our next question from Brian Lee with Goldman Sachs. Please go ahead. Your line is open.

Speaker 6

Hey guys, thanks for taking the questions. I had a couple here. I guess First off, maybe for you Ronen, appreciate some of the color around the different dynamics in Europe, rest of world, U. S. That played into the weaker, maybe than expected 3Q guidance here.

Speaker 6

It sounds like some of that's persisting though Beyond just this quarter, so can you give us sort of an early read into what you're expecting as you think about the timing of inventory rebalance, Battery shipments and weakness in U. S. As well as seasonality you called out like is there a path for 4Q to be flat up down, just kind of give us the puts and takes around how we should be exiting the year on the top line. And then I might have missed this, but did you give a Specific battery shipment guidance as well.

Speaker 3

So I'll start from the second. No, we didn't give a specific guidance for batteries, but they are going to be down Substantially next quarter compared to this one, given the dynamics that we see, especially in Europe, more batteries in the channels Then I would say normally the distributors would like to have because they're still missing the inverters. So on batteries, it's definitely going to be Substantially lower next quarter. Now when it comes to the dynamics in the quarters, then unfortunately life is very complex in this area and I will try to give A little bit of the puts and takes there. I'll start from Europe again being the center of our sales today.

Speaker 3

In Europe today, what we see is that the inventory levels on one hand are relatively high, but when you look at the Days outstanding, which is a result of the sales through from the channel, they're not high at all. They're actually at a normal level. And when we are looking at the point of sale data of how much is being sold from the channels, we see record levels Over the last two quarters that to our understanding are continuing, which means That in that case, the demand is there, the demand is fairly strong, not maybe as strong as people believed from the very beginning of the year, It's still very strong. And therefore, you would say that the levels of inventory that the distributors have and maybe a little bit of change in patterns in making orders A little bit shorter time from the time that they needed because there is enough supply in the market creates a situation where basically Some of them even say that it will be 1 or 2 quarters, but not more than this until the inventory levels are adjusted because you don't see a big gap. The problem in Europe is that you go into the Q4 and going back to the normal days of solar, usually the Q4 is Seasonally low in Europe compared to the Q3, first of all, because of the fact that this is start of the winter and nobody wants to enter Or the winter with too much inventory a second because of the holidays themselves, there are less days to install during the quarter.

Speaker 3

So here we see A mixed phenomena where we believe that the market dynamics are very healthy and will require faster recovery of the inventory levels and faster increase in volumes and the impact of winter is not known. And let's forget that there is still a war in Europe. So I'm not sure what where is going to be the concerns about electricity there. In the United States, I think that we see a different phenomenon. In the U.

Speaker 3

S, we do see that the inventory levels are Higher much higher than the supply than the distributors would like to see. We do see that as C. V. Mentioned point of sale for our products at least improved in the last quarter, but it is still at a relatively lower level. And therefore, we believe there that overall, it's going to be more than 1 or 2 quarters until the situation is being Change.

Speaker 3

So if I try to summarize everything, I would say that we're cautiously optimistic to see Q4 being Flat to up, rather the opposite. But again, it is a quarter with many different Phenomena that are sometimes contradicting that are happening at the same time.

Speaker 6

That's super helpful. I appreciate that. And maybe just to follow-up on You didn't mention batteries. Is the battery adjustment happening all in 3Q? Do you think It goes back up in 4Q and then I'll just squeeze in my last one.

Speaker 6

On gross margins, you're kind of surprised By how much gross margins are being guided down relative to the strong performance at the beginning part of the year here? Is the entire 300 basis points at the midpoint coming from the air freight and does that go away after 3Q or Are there other impacts embedded in there? Just trying to understand the 35% solar gross margin going 32 in 3 months and then what the sort of forward would be in terms of Recapturing some of that, what the levers are there? Thank you.

Speaker 3

Okay. So first of all, I think that the question that was sneaked will be higher answer than the first one. So I'll start from the first one. In general, we expect the batteries in Q4 and again we do not guide yet, but we expect them to be Similar and maybe slightly up compared to the Q3. And here the reason is again it's end of the year.

Speaker 3

Nobody would like to enter to exit the year with too much Inventory. So we assume that this is more related to less market dynamics and more of inventory management dynamics. And especially by the way, understanding Brian that this is a product that is relatively expensive. And once you have availability in the market And the distributors know that the suppliers do have availability and the availability is relatively close to them. They know that they can get sometimes batteries within They tried to shift a little bit below the end of the year because of their financials and the way that they look To the vendors or to the manufacturers themselves.

Speaker 3

I would say that at least from a if I would take not 1 or 2 quarters, but let's say Like 2 or 3 quarters ahead, the phenomena is going to be of a growth inventory Pattern rather than declining or stabilizing one, it's just that again there is a little bit of play where end of the year is determining factor. On the margins, actually here it's again, it's a little bit of a different situation. The first thing is that we are going to ship much more Sure. Inverters during Q3 and Q4, this is the product that is mostly missing in Europe and this is the Product that is usually carrying the lowest gross margins of our inverters compared to any other products Except for batteries, by the way. And the second thing is that when you couple the because of the characteristics The installations when you usually do 2 modules per 1 optimizer, actually, when you look at the gross margin of the entire Solution, the optimizer is also contributing to a better gross margin on the entire solution than the inverter.

Speaker 3

The fact that now we're Shipping not only more commercial inverters, but actually more inverters and optimizers in the overall mix. This has a bigger impact Of this imbalance on the gross margin, this is something that we expect to see into Q3, maybe into Q4 because Q4 we already see very large amount of commercial inverters that we're going to ship in. So I would say that actually major part of it will be More of the inverter rather than the air shipment. The air shipment, of course, is very expensive and is also substantial. And this is something that again we expect to go away during Q4.

Speaker 3

So I would say that these are the 2 major factors and both of them are Supposed to go away after Q4.

Speaker 6

Okay. Thanks so much. I'll pass it on.

Operator

We'll take our next question from Philip Shen with ROTH MKM. Please go ahead. Your line is open. And Philip Shen, your line is now open. We will next move on to Colin Rusch with Oppenheimer and Company.

Operator

Please go ahead.

Speaker 4

Thanks so much, guys. Can you talk a little bit about the R and D spend and how you're thinking about The relationship with Infineon, anything that we should be attending to from a prepayment perspective, How that might streamline some of your R and D spending, anything else in around that agreement?

Speaker 2

Yes, Collyn. I think the R and D spending pattern is not changed significantly. We're continuing to invest with mild growth as we're expanding into new Areas, new products and continuing to develop next generation products for the existing markets That we serve. The cooperation with Infineon has two elements to it. The first is assurance of supply To the components that we use in mass in our current product.

Speaker 2

So this is semiconductors and most Significantly, IGBTs that are used in every inverter that we do, that's the first layer of the cooperation with them. And That does not impact R and D, obviously. It's more about that's an operational view. The second element is working together on next generation Power semiconductors like silicon carbide and gallium nitride, and that is a long term cooperation That is again, it's not a big swing on R and D investment one way or another. It's preparing The future of our power semiconductors by working with one of the leading companies in this area as well as other companies that we work with.

Speaker 2

So it's a strategic Partnership for us, obviously, it's not something that has a direct impact on our R and D spend, but more on our Our roadmaps and assurance of supply.

Speaker 4

Thanks so much. And then from a pricing perspective, obviously, we've gone through multiple rationalizations The solar demand profile over the years and you've adjusted pricing in various ways. I guess, what Would you need to see to start taking some price action in the market at some point to continue to take market share? And then how do you think about the importance of market share in terms of long term growth of the business?

Speaker 2

Yes. I think exactly as you described, There is a business as usual mode for the market and for being a technology and high end supplier Within the market, where we focus on differentiation and constantly make sure that our pricing It is justified by the value and differentiation relative to our competitors. If you look historically In the market, there is a dynamic where on an annual basis, there's cost improvements that suppliers make. We invest a lot in cost reduction. There is There is volumes increase and that supports our cost reduction and that in turn also enables Some price reductions and making sure again that the gap relative to our competitors is justified By our value.

Speaker 2

So, the last couple of years have been very disruptive or very different in terms of the dynamics. I do think that it's likely that next year, following some of the dynamics that we described over here, The market will be back in more of its normal type of situation where things are stable. And then there is more activity on the area of cost reduction and as well as more activity on the area of reasonable price reduction. So I don't rule out that happening sometime next year. Right now, we're still not in that type of environment and we don't see the need to reduce prices and our

Operator

And we'll go back to the line of Philip Shen with ROTH MKM. Please go ahead, sir.

Speaker 7

Hey, guys. Sorry about that. Thank you. You talked about how pricing is stable. That said, are you open to price reductions in early 2024?

Speaker 7

And perhaps you can talk through by geography and by end market. And also can you talk through how many weeks of inventory maybe in the channel by end market and also by geography? Thanks.

Speaker 2

Yes. So starting with the second part. At high level, it's probably in Europe, the inventory levels are still, I would say below a quarter, probably in the range of 2 months. For some products like the 3 phase inverters, it's less than a month. For some products like single phase inverters, it's probably more than 2 months.

Speaker 2

And historically, These are very reasonable inventory levels for the European market. What's happening is What we described and I described before is a dynamic where they're sitting on very, very large inventories of modules and trying to financials and in a way maybe call it taking a risk or being on the edge in terms of the overall inventory levels that we're that they're holding, but I think that the inventory levels in Europe are in that range and considered reasonable, maybe on the high end of reasonable. But considering the very high sell through and installation rates, it's not the major bubble, if you will. The U. S.

Speaker 2

Probably the inventory levels are higher. They're closer to 2 quarter level. And as Onen described, although we're seeing gradual uptick in installation rates and sell through To work through that type of inventory will probably take a bit longer Unless there's a significant more significant uptick on installation rate as maybe as an M3.0 becomes more clear, we are seeing Much more activity in terms of understanding the value of our DC coupled architecture for California. And I discussed what we had the anticipation that we have that commercial will also begin to pick up. But If there isn't a major pickup in installation rates in the U.

Speaker 2

S, it will take a bit longer to work through that inventory. In regards to the first question on pricing, going back to the answer to the previous Question. During 2024, I think that this topic will be a relevant Topic is we have a better view on our cost management structure and the market is in a more stable Conditions. So I can't say that we rule it out. At this point, it's just not something that is in discussion for the coming few months.

Speaker 7

Great. Thank you. Shifting over to C and I for a bit, I was wondering if you could update us on What the backlog is there? And then in terms of your financial targets, if the implied lower EBIT margin for Q3 is just operating deleverage, just curious about that or if you think there's something more structural, Can you address whether or not the 2023 exit rate targets of 20% to 22% EBIT margins are still achievable? Thanks.

Speaker 3

So, first of all, when we look at the operating margins levels, we don't see anything Structural in the way that our financials and our business is working at that point of time. So I would say that the majority of the Less of the leverage that we're going to see in Q3 and again Q4 we're not yet guiding, but this will be exactly the same Phenomena is actually related to the level of revenues rather than related to the level of Anything that is happening on the margins or on the pricing level. Now in general, I can say that we're relatively restrictive on Growing operating expenses in general, we've been and we've seen through various Stages of the solar market, we do not see this stage as was the case in Germany, let's say, in or Europe in 2013, When market disappeared again, we see it more of a correction rather than a crisis that's going around the Overall, I would call it situation related to financing and a little bit of availability that exists there. So the Operating margin improvement model is exactly the same. It will resume exactly to be the same operating leverage once revenues are up.

Speaker 3

And I would say that the 4th quarter target will be achievable based on the revenues forecast that we will provide at that point of time. And if whether it will be this or not, it's only a revenue issue rather than anything else. And then Phil, I apologize, but I lost the train of thoughts on your first part of the question.

Speaker 7

No problem. It's on C and I backlog. Can you give us an update?

Operator

Yes, sure.

Speaker 5

Yes, sure.

Speaker 7

Yes, thanks.

Speaker 3

So on C and I backlog, I want to talk about, 1st of all, volumes and

Speaker 5

then on the backlog. From volume point

Speaker 3

of view, from the very beginning of From volume point of view, from the very beginning of the year, we have already delivered the volume that is very close to the entire last year. And the backlog that we have is more than what we have already delivered for this first half. So when Last quarter, we said that we had something which with a very simple math you could see about 11 gigawatt this year. This is still a number That we see happening for this year and again based on our availability, if we'll have more products, it can even be bigger. From backlog Build up on the other hand, this is something that is changing because as long as the distributors knew and the installers knew that There is a lead time of sometimes 12 months for a product.

Speaker 3

They saw very good reasoning to put an order into place binding orders As soon as possible to make sure that they get product and sometimes by the way they did it simply because they knew that there is going to be a little bit of allocation, so they wanted to ensure their places. Once we're moving into product availability in the field and also if you look at our inventory levels and finished Goods inventory levels that are building by the way in a healthy way to reduce shipment costs in the various regions. There is no reason for any particular Distributors to put now a backlog into a year from now. So I can tell you that we have a solid backlog for Q3, of course, Q4 and even Q1 from Q2 where we still take orders sometimes by the way, we see smaller backlog and I would estimate that over the next Few quarters, we will see backlogs being shorter in nature compared to where they were a year ago. This is not necessarily indicative Of the actual volumes, it simply means that we will turn more orders into revenues in the same quarter than maybe compared to the spoiled situation that we were Few quarters ago where we knew before we started already that everything that we can manufacture, we can sell.

Speaker 7

Great. Thanks guys.

Operator

We'll take our next question from Andrew Percoco with Morgan Stanley. Please go ahead.

Speaker 8

Great. Thanks so much for the time. I just had another follow-up question on the commercial segment. The percentage of total megawatt Sales continues to drive go higher quarter over quarter. It sounds like that's going to be a driver of lower margins in the 3rd quarter.

Speaker 8

Have you disclosed what the margin level on some of those commercial customers look like on maybe on an average basis? Just trying to think through If commercial continues to grind higher in 4Q and into 2024, what we should think about for a potential floor on gross margins? Thanks.

Speaker 3

Sure. So I'll start by, first of all, a little bit of the numbers. We used to say that usually Commercial margins were 500 to 700 basis points lower than residential margins. And this is by the way still the case Dependent on the size of the installation, where usually when we have a the bigger the installation is, The lower the margin is on the product. So from that point of view, I think that it gives an answer.

Speaker 3

We also, by the way, need to remember that not all 3 phase inverters that we're shipping are commercial because Europe and especially Germany, Austria, Switzerland are markets that are 3 phase markets where we sell 3 phase inverters. And again, most of our shortages today are in 3 phase, both in commercial and residential. I would like to add one more thing and this is that, yes, of course, the more Commercial, you see the lower the gross margins, but at the same time, usually because of the fact that these are installations that are bigger, Their contribution to the operating margin is close to similar to what you see in residential simply because they draw with them much less operating expenses. So while you do see usually lower gross margin, you can see almost Similar operating profit when it comes to these products specifically.

Speaker 8

Got it. That's helpful context. And Maybe just to follow-up and apologies if I missed the answer to this, but have you broken down what your expectation is in the Q3 on your solar revenue specifically between Europe and the U. S. In terms of quarter over quarter trends?

Speaker 3

No, we usually don't break it on a forward looking basis.

Speaker 8

Okay. Thank you.

Speaker 3

Thank you.

Operator

We'll take our next question from Jordan Levy with Truist Securities. Please go ahead. Your line is open.

Speaker 5

Good afternoon. All I think most of my questions were answered, but maybe I'll just ask sort of thinking on the progression on the battery side. First kind of on the performance of the current battery state as you ship them and volumes ramp and then maybe looking out into next year as you roll out some of the new initiatives

Speaker 2

Yes. Sorry, we didn't hear you that great. But if I understand correctly, the question is about Performance of batteries. So specifically, batteries are not yet challenged in terms of lifetime I'm in cycle. So it's hard to give a clear answer on those.

Speaker 2

It will take a few more years. From the the two parameters that I would consider Critical at point at this time is the first is ease of installation and commissioning time and the second is reliability and failure rates. I think we are far from perfect, but I think we're doing good and we're getting positive feedback from the On both, we've introduced continuous improvements on installation times, Commissioning software wizard that guides the installers through the installation process and Are getting very good feedback for the market on that topic and on reliability as well. Our failure rates Has been low and performance has been robust. So we're pretty satisfied in that area.

Speaker 2

And again, that said, on lifetime and cycles, there's still It will take some time until that picture is clear.

Speaker 5

Absolutely. Appreciate you taking my question.

Speaker 3

Thank you.

Operator

We'll take our next question from Corinne Blanchard with Deutsche Bank. Please go ahead. Your line is open.

Speaker 9

Hey, good afternoon and thank you for taking my question. Maybe as a follow-up, so you mentioned as being probably still 2 quarter to clean the channel in the U. S. But I think at the beginning of the call, you mentioned that the sales growth of your product This increased by 10% this quarter. So I just wanted to clarify this and then I would have a follow-up on the battery side after.

Speaker 2

Yes. I think, again, it's a bit about magnitude. We are seeing A positive indicator, I would say, of sell through by our distributors that has increased In the U. S. By 10% quarter over quarter.

Speaker 2

But as I described, I think the inventory levels are still such That this is not a sufficient enough increase to drain the inventories quickly. So either it will take a bit longer For the inventories to decline unless this is an indicator that will continue to improve and And sell through and installation rates will go much higher. But at the current rate, it will take at least a couple of quarters to get through the inventory.

Speaker 9

Okay. Makes sense. And then the follow-up on the battery. Can you just maybe I missed it, so I apologize if I did. But Can you just give a quick update maybe on Stella 2 and where you trend and where do you see the pricing on battery going over the next 12 months or so?

Speaker 2

Yes. So remember, Stella-two is or our current residential battery offerings are not yet using Sales from Sele2. So Sele2 is ramping and as we described in the prepared remarks, we'll reach its Full capacity by the end of the year, and is in parallel selling cells and batteries for other applications. Meanwhile, they are also beginning to produce the type of cells that we intend to use in our next generation batteries that will be reduced that will be introduced Beginning to be introduced in the first half of next year. So gradually the capacity of Stella 2 will move more to our own batteries and that will give us flexibility also in terms of assurance of supply, also in terms of pricing And also in terms of technology of making sure that really the cells are optimized for the application and the system Of our own batteries and inverters.

Speaker 2

So that's the picture regarding Selah 2. Regarding Battery pricing, again, we're not seeing major trends. We did reduce slightly Battery prices in on our single phase batteries. But generally, we don't see Additional major shifts on battery pricing in the coming couple of quarters.

Speaker 9

Thank you.

Operator

We'll take our next question from Julien Dumoulin Smith with Bank of America. Please go ahead.

Speaker 10

Hey, excellent. Thanks team. Appreciate it. Just following up on a few different comments here. Actually, first off, I can 45x, just would love to get an update here on that front.

Speaker 10

What percent of the overall production as you think ramping into 2024 do you think could ultimately Qualify, to what extent could you ultimately leverage even European volume, to take advantage of 45x? I just wanted to make sure We double back to that as we get some final clarity here on that front first off and then I got a follow-up on the margin conversation.

Speaker 2

So as I described, we're starting off with inverter manufacturing That will be already we will be delivering inverters that qualify for 45x in the current quarter, From a financial point of view and in the Q4, we will be delivering more than 30,000 Inverters, that's when it will begin to have an impact. We intend to continue to ramp, of course, into 2024 Add optimizer manufacturing to the mix and ramp initially of course By the U. S. Demand, after we reach that milestone and We'll continue to add capacity for other purposes, assuming it can we can benefit from the same incentives for other regions, but that's Those are going to take time and by then I think a lot of the IRA regulations We'll be more clear in terms of what is possible and what is not.

Speaker 10

Got it. So it sounds somewhat dynamic looking to scale off the 30,000 4Q, but the plan, especially if

Speaker 3

you think about the C

Speaker 10

and I compliance is still in flux, it seems like. But if I can actually jump back The margin question and the conversation on that front real quickly. Just to clarify earlier, right, you talked about this inventory issue persisting on the residential side for some quarters here, obviously, the C and I looks much healthier. How do you think about that target margin going back to the earlier 20% to 22% as you see or at least as you seem to imply that 2024 is going to see materially higher C and I contributions as a percent of the Total MAX, but again, I don't want to read too far into that.

Speaker 3

So, again, yes to see 2024 because we're also surprised a little bit by the second half of twenty twenty three. But I would say that the dynamic should be as follows. What we see right now, especially in Q3 and Q4 is the fact that the U. S. Market that is correcting right now, which is usually characterized with high resi and higher margins, by the way, compared to other regions is slowing down very much, which of course impact negatively the margin.

Speaker 3

And at the same time, Europe is growing, and the commercial side is also growing. And this is also something that takes us a little bit down because the portion Of commercial, compared to residential in our overall mix, at least in Q3, Q4 is higher than we anticipated or anticipate to see. If you combine these 2, yes, the expectation should be that in 2024 where we believe that first of all Europe will come back to Of course, much quicker than the United States. And we will also see, of course, again there an increase in residential. Plus the fact that the U.

Speaker 3

S. Market that contributes to margin very nicely is also going to go up within, I don't know, 2, 3, Well, 4 quarters, but this is still within 24. Yes, we do expect that 24 margins should come back to levels that we've seen at least in the last quarters. With that said, again, the major ace is going to be here batteries because we do see that battery prices continue to go down at least right now. And as we've mentioned before, batteries target gross margin should be around 25%.

Speaker 3

So even if today or in some quarters it's higher than this, I'm not sure that this will persist. So I would cautiously say that 2024 should be, of course, first of all, back in the model, by the way, which we also Believe that this may be the case even this year as well, for the next 2 quarters. And second is that, yes, there are some drivers That suggests the 24 can be on the upside part of it rather than on the downside part of it.

Speaker 10

Fair enough. I'll leave it there. Thank you guys. And actually 45x, any expectations there just to go back to that fire?

Speaker 3

So I'm not sure where the expectations are, but at least from a As we said, we believe that the $0.65 is something that we have already in our pocket. So everything that we'll manufacture this year will be at least the $0.65 We believe that we will retain at least 50% of this to our margins given the fact That manufacturing in the U. S. Is a little bit more expensive. Thank you.

Operator

We'll take our next question from Kashy Harrison with Piper Sandler. Please go ahead. Your line is open.

Speaker 11

Good afternoon. Thanks for taking my one question. So maybe just at a higher level, Just given the increasing availability of equipment supply, do you think that the distributors definition of normal Is going to structurally decline or do you think just given some of these cash flow dynamics or do you think this is more of a Temporary thing where if they thought to your point 2 months was normal before by the time you get back to 2024, that's what they Define as normal or does that 2 months become a month or half a month? Just want to get some sense of how you think about Distributor, file process and cash flow dynamics, etcetera.

Speaker 2

So what I'm saying is based on experience and the conversations that we had with distributors Recently and but it could be different. But our judgment would be that at some point, it goes back to the type of dynamics that we've seen in the past. If you look today, following the period of shortages, 1st of all, also installers are holding inventory today, which is The phenomena that usually installers don't want to hold inventory. So And then on top of that and the picture of how much inventory installers are actually holding is not clear. On top of that, the distributors, They're carrying 7, 8, 9 types of inverters, a similar number of module Suppliers for each one, they're holding inventory, many part numbers.

Speaker 2

It's really in their interest and their classical behavior to bring it down and to have Much smaller line card and much more control. So and then so in that type of environment where Installers don't hold inventory anymore. Distributors hold a limited portfolio of products, Even though the suppliers and the equipment manufacturers will have availability, it still I believe will go back to the classical model of holding In the range of a quarter worth of inventory within the distribution channel, give or take, depending on the type of product and And dynamics. But I think that that's likely going to be the steady state that the channels will return to Following this adjustment and the amount of time it takes.

Speaker 7

Thank you.

Operator

And we'll take our next question from Joseph Osha with Guggenheim Partners. Please go ahead. Your line is open.

Speaker 2

Thanks very much. We spent a bunch of

Speaker 4

time talking about what the inventory drawdown might look like in particular in Europe. But As we enter next year, it does seem that we have a few policy headwinds, in particular in Southern Europe. So I'm just wondering, Yes, I know it's really if you can opine what you see the demand picture looking like early next year as we come out of this inventory correction? Thank you.

Speaker 2

Yes. Thanks for the question. Actually, Our installation rates and take Italy, for example, right now are higher than they were a year ago, Despite the fact that some of the programs have changed and some of the installations are less lucrative For the homeowners, so we're not seeing the policy changes having in the countries where there are, what you would consider maybe Negative policy changes having an impact. And I think it's an opportunity also to explain a little bit more What Europe is. So you have the large markets like the German market where I mentioned that in 2022, it was 7.5 gigawatts.

Speaker 2

And this year is going expected to be somewhere between 10 to 12 gigawatts of installations and to continue to increase into 2024. And in parallel to that, you have all kinds of different sized markets with different type of environment. And Just as an example, in the prepared remarks, Ronen mentioned Slovenia. We our revenue in Slovenia in 22 was €25,000,000 In 2023, our revenue in a country like Slovenia is expected to be in the range of €70,000,000 to €80,000,000 annually. So these small markets that are evolving, They're not so small and there are not many, but there are multiple such markets.

Speaker 2

So all in all, Again, things can change, but looking at the European landscape, at least for us and considering our position in many of these Large, small and midsize markets is a we're very optimistic still about the dynamics in the European market going into 2024.

Speaker 4

Okay. Thank you.

Operator

We'll take our next question from Vikram Bagri with Citi. Please go ahead. Your line is open.

Speaker 12

Good evening, everyone. Ron, first off, you mentioned substantial cash buildup or generation in next few quarters. Can you talk about capital allocation and particularly about share repurchases if that's in the budget?

Speaker 3

So in general, we do not have plans for this right now. We do experience right now because of the phenomenon that I replaced that explained a little bit later, a longer cash creation cycle, and this is something that will start to play out in Q3, Simply given the fact that we are starting to reduce inventories and collection is going to be a little bit faster. With that said, We still believe and this is why we also raised capital last year is that there are opportunities out there to present faster growth and to Present a much more comprehensive growth. We do not believe that we have exhausted these opportunities. We're still reviewing them.

Speaker 3

Some of them Are being due diligence these days as well. And at least at this point, we believe that there is much better creation of value to investors by acquiring companies, building the business and building a portfolio rather than just returning it to the investors. Once by the way, we feel that this will not be the case. We will shortly consider this, but we don't have any religion against it. But I believe that opportunities Are going to be created, I believe in the near term to use this cash.

Speaker 12

Thank you. And my follow-up is on Inventory again, the 100th question on the same topic. I apologize if this has been answered. Can you provide the magnitude or at least cadence of rebalancing in 3rd Q4? Ronny, you mentioned in your prepared remarks, U.

Speaker 12

S, the shipments were down 29%, but the sell through rose more than 10%. So Inventories in the U. S, it seems like are already down more than 30% and are still manageable. Your comments on Europe, it sounds like the inventory rebalancing required is not the magnitude is not that big. So it seems like most of the rebalancing happens in Q3.

Speaker 12

So the balancing in Q4 is more dependent on your projected demand and Sort of born out of caution and it might not happen. So if you can comment on the magnitude, if you can characterize what The impact on revenue is and the cadence, how much of the rebalancing happens in Q4 and Q3? Thanks.

Speaker 3

I'm not sure that I can cover all of it because again, we see multiple segments, multiple regions and multiple Phenomenal such as the, again, Q4 seasonality in Europe, which is usually a big drawback compared to the fact that as you've mentioned and rightfully so, That we believe that the inventory corrections at least in Europe are going to be a little bit quicker. In general, I would go again 1 by 1. I'd say that in Europe, I think that, yes, the correction within the distributors should be relatively quick, Given the fact that the inventories levels that Stevie mentioned before are not so high When it reflects inventory days, while we still see very high record high point of sale data. And The bigger question there is going to be how will Q4 look like and what is going to be from a cash perspective the appetite of the Larger installers to continue and maintain sorry, distributors continue and maintain inventories. That's I think the biggest question.

Speaker 3

Again, I would say that we're cautiously optimistic there, but I'm not sure that I have a good answer. In the U. S, your analysis is almost correct Other than the fact that we start from a relatively high level of inventory, so even though we decreased the shipment, When we look at the exiting point of the quarter, this is the time where Tivi mentioned that sometimes we've seen some distributors close to Two quarters of inventory. This is actually in the quarter and this is why we think that this is something that would take a little bit more time. In general, we believe that since Europe is very strong for us, since rest of the world, by the way, continues to be very strong, This will be the thing that will and this is by the way together today close to 80% of our business.

Speaker 3

This will be the area that will be moving quicker From this kind of correction into more normalized patterns of orders We think that the U. S. Will lag, I would say by, I don't know, maybe 2 or 3 quarters after Europe in this sense.

Operator

And we will take our next question from Jonathan Kees with Daiwa. Please go ahead. Your line is open.

Speaker 13

Great. Thanks for squeezing me in. I'll just ask one in the interest of time here. Just want to double click You're seeing one of the trends for 2024, the 3rd party ownership. I mean, when do you can you Price, more color, is that something that's as obviously a shift undertaking now?

Speaker 13

Do you see that being I guess you're anticipating that to be quite material in 2024, more of the first half, second half, and that should have a big Offset for the higher interest rates. If you could just provide us more color about that, that'd be great. Thanks.

Speaker 2

Yes. This is it's a trend that a lot of people in the market anticipate for the reasons that You mentioned there are some benefits in the IRA for 3rd party ownership and as well as the impact of interest rates on loans. Some of the large installers that we speak to are beginning to see this shift, although not in a dramatic Manner, yes. So I think it will take some time to build up. And then, of course, that refers to the origination.

Speaker 2

So that's at the time that the Consumer closed the contract for that to move through to purchases and installations Takes a little bit longer. So we're not seeing anything rapid happening in this regard, but there is a trend in that direction that is Expected by the people, we don't have any special visibility in this. So it's more what we read and hear in the market is expected to be a Meaningful shift from loan to 3rd party ownership to lease.

Speaker 13

All right, great. Thank you.

Operator

And there are no further questions on the line at this time. So I'll turn the program To SolarEdge's CEO, GB Landau, for closing comments.

Speaker 2

Thank you. So in summary, we're pleased with our results this quarter, which demonstrate the advantages of our position across diverse markets and applications. So thank you all for joining us today and have a good evening.

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Earnings Conference Call
SolarEdge Technologies Q2 2023
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