SolarEdge Technologies, Inc.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year, December 31st, 2020, as well as the company's outlook for the first quarter of 2021. With me today are C.V. Lando, Chief Executive Officer, and Ronan Fire, Chief Financial Officer. C.V. will begin with a brief review of the results for the fourth quarter and year-end of December 31, 2020. Rounding will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2021. 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 expectations. 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. We have 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.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating and understanding how the company's management team 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 in prepared accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended December 31, 2020 press release or the supplemental material may obtain a copy by visiting the investor section of the company's website. Now I will turn the call over to Susie.

Thank you, Erica.

Good afternoon and thank you all for joining us on our conference call. We are pleased to report that we have concluded the quarter with revenues of $358 million and the year with record revenues of $1.46 billion. Revenues for the fourth quarter in our solar business were approximately $327 million, also above last quarter's solar revenues. Our solar revenues this quarter reflect strength in the U.S. residential market, which we had anticipated in our earning call last quarter. In fact, the quarter over quarter growth in shipments from the residential segment in the U.S. was in excess of 50%. We expect this strong growth in our revenues from U.S. residential products to continue in the first quarter of 2021 as well. We have also experienced very healthy growth in our solar revenues from countries outside of the US and Europe with record quarterly revenues in Australia, where we finished 2020 with over 30% year-over-year growth. Our Europe solar revenues was down from Q3, as is the typical seasonal behavior of the European market. However, on an annual basis, we are closing the year with record solar revenue in Europe of $579 million, up from $522 million last year, led by the Netherlands, Germany, Italy, and Poland. We are very happy with these results, in particular, in a challenged COVID year. This quarter, we shipped over 1.36 gigawatts of AC main plate inverters, approximately 457 megawatts of which were shipped to North America. Shipments to Europe consisted of 594 megawatts. From a segmental point of view, we shipped this quarter 566 megawatts of commercial products and 798 megawatts of residential products. This split represents the strength in residential I discussed earlier and a noticeable reduction in commercial shipments in line with what we explained in our call last quarter regarding the slower recovery of commercial installations and the higher inventory of commercial products in the channel. In the fourth quarter, we believe commercial installations worldwide were still impacted by the economic slowdown. However, we did see an increase in the installation rate of our commercial products and a reduction in inventory levels this quarter, which we believe indicates that the recovery in the commercial segment is underway. Overall this quarter, we shipped 3.6 million power optimizers and approximately 166,000 inverters. As discussed in our last call, the ramp of production in our Sela One manufacturing facility in Israel continues. This, together with our manufacturing in Vietnam and Hungary, will enable us to supply approximately 85% of our U.S. products without tariffs by the end of the first quarter of 2021. On the product side, I want to spend a bit more time on our residential offering and in particular, our complete storage system. We continue to see good market acceptance and strong demand for our Energy Hub single-phase storage inverter. In the fourth quarter, we shipped to the US close to 15,000 Energy Hub inverters, up from approximately 6,500 in Q3. So far, we released the Energy Hub in power levels between 3.8 to 7.6 kilowatts. In the coming months, we will release the high power version with inverter offerings of 10 and 11.4 kilowatts. The high power versions are especially important as average installation sizes increase with consumers being more aware and interested in more power and more stored energy for backup and outage scenarios. Our energy hub supports today easy charger integration, multiple batteries for increased capacity, and multi-inverter configurations to our backup interface for increased power. In the coming months, we will add generator integration and high backup power models, allowing 7 kilowatts and 10 kilowatts of continuous power, critical for backup of a typical house load during power outages. The product is designed to handle consumption patterns that we have learned from our install base of tens of thousands of battery connected inverters. We see the energy hub as a differentiated storage system optimized for energy harvest and energy management in grid connected and backup scenarios. To complete the system, the energy hub is connected to a battery in a DC coupled configuration aim to enable harvesting of all the energy from the modules on the roof. To clarify, typically a system is oversized such that the total power of the modules on the roof or of the individual module is larger than the capacity of the inverter. As such, in an AC coupled configuration, the utilization of the energy generated from the roof will be limited by the size of the inverter. In our SolarEdge DC coupled configuration, all the energy generated by the modules will be harvested and either used to power the required house consumption or to charge the battery in parallel, thus extending backup time and increasing system utilization. The energy hub inverter can be coupled with a third party battery as we currently offer or our own battery. In that regard, we are on track with the schedule discussed last quarter of initial shipments of our own battery in Q2 and meaningful volumes in Q3. In the commercial segment, we are beginning these days shipments of the new and large synergy inverter with power rating of up to 120 kilowatts. In parallel, we began shipments of higher power commercial optimizers of up to 1100 watts for a two module configuration This in order to match the trend of high power modules that are becoming available around the world. The higher power modules and optimizers combined with a higher power inverter will reduce the cost per watt for our commercial installers and we expect will increase adoption similar to what we have seen in 2020 where our annual commercial megawatt shipments were up more than 25% compared to 2019. In addition, we are seeing growing adoption of our designer software workflow solution, which enables installers to easily design complex rooftops and seamlessly export the design for quick installation and monitoring setup after installation. On average, every month, approximately 70,000 designs are created on the platform by more than 12,000 installer accounts. Moving to our non-solar business. As announced earlier today, SolarEdge eMobility has been selected as the tier one supplier for full power trains and batteries for the Fiat eDucato. For those of you who are not familiar with this vehicle, the Fiat Ducato is recognized by many as the leading light commercial vehicle in Europe and has been produced since 1981. Recently, FCA presented the electric version of the Ducato, and we are proud that SolarEdge Immobility has been selected to supply the full powertrain and batteries for this vehicle in Europe. Our solution includes inverters, DC to DC converters, batteries, onboard chargers, vehicle control units, and software for electrical vehicles. As I have mentioned in past calls, We have already delivered prototypes for close to 100 EDUCATO vehicles that are accumulating mileage throughout Europe today. We believe the experience gained through this project, which has included adapting some of our production lines to automotive quality standards, will serve us in our solar and other businesses well beyond the already exciting news of being part of the e-mobility industry. The automotive industry plans its vehicles years before they hit the road. This nomination reflects a long-term investment and is in line with our growth plans beyond solar that we have laid out in our earning calls and that formed the basis for our acquisition. Subject to market acceptance, in 2021, we expect our e-mobility business to deliver between $100 to $120 million of revenue. In our energy storage division, COCOM's revenue grew by 25% this year. And for the first time in many years, COCOM is profitable. As a reminder, we completed the COCOM acquisition in October 2018. And this year, we have ramped the existing lithium ion cells and battery pack factory to full capacity. This quarter, we also welcomed SW Jong to our team as the general manager of COCOM. Mr. Jung is an industry veteran with more than two decades of experience in leadership positions in Samsung Electronics. We are excited to have him on board to lead our energy storage business out of Korea. This quarter, we also began construction of our Sella 2 factory in Korea. This factory, which is part of COCOM, represents another pillar of our growth strategy beyond solar, and once completed will manufacture two gigawatt hour of lithium ion cells per year. The factory spreads over 56,000 square meters just outside of Seoul, will be a state-of-the-art manufacturing facility, and is expected to start production in the first half of 2022. This capacity will enable us to supply cells for our own battery storage solutions and for other applications. We ended 2020 with record revenues of $1.46 billion, slightly above those of last year. Like most, when the pandemic hit, we adjusted both our expenditure and forecast to take into account the impact of the economic slowdown. And given the circumstances, we are pleased to have completed the year with revenues slightly above those of last year. No less important, we were able to deliver these results while continuing to invest and execute on our solar and non-solar growth strategies. And with this, I hand it over to Ronen, who will review our financial results.

Thank you, TV, and good afternoon, everyone. This financial review includes a gap and non-gap discussion. Full reconciliation of the pro forma to gap results discussed on this call is available on our website and in the press release issued today. Total revenues for the fourth quarter were $358.1 million, a 6% increase compared to $338.1 million last quarter, and a 14% decrease compared to $418.2 million for the same quarter last year. Revenues from the sale of solar products were $327.1 million, a 5% increase compared to $312.5 million last quarter. US solar revenues this quarter were $132.3 million and represented 40.4% of our solar revenues. Solar revenues from Europe were $146.7 million or 45% of our revenues. This quarter, our top 10 solar customers represented 64% of our solar revenues and included more European customers than last quarter. three customers accounted for more than 10% of our solar revenue. While pricing levels remained stable this quarter, blended ASP per watt for our solar products increased by approximately 12.5% compared to last quarter, a direct result of higher revenues from residential products offering and an increased portion of revenues derived from the United States. In line with what Sibi explained, inventory levels held by our distributors in the United States were healthy on the residential side and still higher than desired on the commercial segment. This is in line with our expectation, and this level will return to normal towards the second quarter of 2021. This quarter, revenues from our non-solar products were $31 million, led by sales of lithium-ion batteries by COCOM and increased sales by e-mobility. GAAP gross margin for the quarter was 30.8% compared to 32% in the prior quarter and 34.3% in the same quarter last year. Non-GAAP gross margin for the quarter was 32.5% compared to 33.5% in the prior quarter and 35.5% in the same quarter last year. Non-GAAP gross margin for the solar business was 36.2% compared to 34.8% in the last quarter, in line with our solar gross margin target of 36 plus minus 1%. This increase in the non-GAAP solar margin is a result of larger portion of U.S. revenues, increased portion of residential products out of the total revenues, improved exchange rates on sales in Europe, and cost reduction activities, including reduction in the portion of Chinese-made products that are subject to custom tariffs in the United States in our overall product mix. This quarter, approximately 60% of products shipped into the United States came from our non-tariff production. CELA1 production continued to ramp according to plan and is expected to reach full production capacity at the end of the second quarter of 2021. Until then, the ramp has a negative impact on our gross margin. Non-GAAP gross margin for our non-solar activity was minus 6.4% compared to positive 16.9% in the previous quarter. The decrease was mainly a result of an increase in e-mobility pre-production expenses related to the e-DUCATO project. The power train units sold in this project are highly complicated systems that include several components that are produced in part by contract manufacturers and assembled in our Italian manufacturing facilities. Over the last quarter, we have been building manufacturing capacity in Italy that includes an increase in the number of employees and associated expenses that are charged into the cost of goods sold. As a result of the relatively small number of units currently being produced, the complexity of manufacturing, and the fact that we have built production capacity that can suffice the projected manufacturing level starting in Q1 2021, our margins on these projects are currently negative. Once we stabilize the manufacturing at the higher output level, the margin will be at a single digit level based on current anticipated volumes. Moving to our operating expenses. In total, GAAP operating expenses for the fourth quarter were $95.9 million or 26.8% of revenues compared to $77.7 million or 23% of revenues in the prior quarter and to $92.7 million or 22.2% of revenues for the same quarter last year. A major part of the increase this quarter is a result of stock-based compensation. On a non-GAAP basis, operating expenses for the fourth quarter were $72.9 million or 20.4% of revenues compared to $63.2 million or 18.7% of revenues in the prior quarter and $63.1 million or 15.1% of revenues for the same quarter last year. Our non-GAAP solar operating expenses as percentage of solar revenues were 18.9% compared to 16.7% last quarter. Our GAAP operating income for the quarter was $14.4 million compared to $30.4 million in the previous quarter and $50.5 million for the same period last year. Non-GAAP operating income for the quarter was $43.5 million compared to 50 million in the previous quarter and $85.3 million for the same period last year. This quarter, non-GAAP solar activities resulted in operating profit of $56.5 million compared to an operating profit of $56.7 million last quarter. This number represents 17.3% of our solar revenues and is slightly lower than our 20 to 23% long-term operating profit model. The non-solar activity resulted in a non-GAAP operating loss of $13 million compared to an operating loss of $6.6 million in the previous quarter, mainly from our e-mobility division. Financial income for the quarter was $10.4 million compared to financial income of $15.8 million in the previous quarter and financial income of $11.1 million for the same period last year. This income is a result of foreign currency changes offset by increased finance expenses related to the accounting treatment of our convertible debt and leases. Tax expense was $7.2 million this quarter compared to a tax expense of $2.4 million in the prior quarter and $9.2 million for the same period last year. Our non-GAAP tax expense was $4.6 million compared to $1.6 million in the previous quarter and $10.4 million for the same period last year. Our tax rate is positively affected in the last quarters by higher deductible expenses for tax purposes resulting from exercise of employees' stock compensation. Gap net income for the fourth quarter was $17.7 million compared to a gap net income of $43.8 million in the previous quarter and $52.8 million for the same quarter last year. Non-gap net income was $55.7 million compared to a non-gap net income of $65.9 million in the previous quarter and $87.4 million for the same quarter last year. Gap net diluted earnings per share was $0.33 for the fourth quarter compared to $0.83 in the previous quarter and $1.03 for the same quarter last year. Non-gap net diluted earnings per share was $0.98 compared to $1.21 in the previous quarter and $1.65 in the same quarter last year. Turning now to the balance sheet. As of December 31st, 2020, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $1.2 billion. Net of debt, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $530.2 million. During the fourth quarter of 2020, we generated $27 million in cash from operations. ARNet increased nominally this quarter to $218.7 million compared to $183.1 million last quarter. DSO this quarter in the solar business was 75 days, an increase from 70 days last quarter. As of December 31st, 2020, our inventory level net of reserve was at $331.7 million compared to $297 million in the prior quarter. A substantial portion of this growth is attributed to an increase in raw material inventory in anticipation of startup production in our e-mobility division, and to a lesser extent, an increase in our finished goods in the solar business. Let's move now to summarize the full year of 2020. Revenues for the year were $1.46 billion a 2.4% increase from $1.43 billion in the calendar year 2019. Revenues related to our solar business were $1.36 billion, a 1.5% increase compared to 2019. GAAP gross margin was 31.6% compared to 33.6% in the prior year. Non-GAAP gross margin was 33% compared to 34.9% in the prior year. GAAP net income for 2020 was $140.3 million, a 4.2% decrease compared to $146.6 million in the prior year, and GAAP diluted EPS of $2.66 compared to $2.90 in the prior year. Non-GAAP net income for 2020 with $224.4 million, a 3.5% decrease compared to $233.2 million in 2019, and a non-GAAP diluted earnings per share of $4.11 compared to $4.44 in the prior year. Non-GAAP net income for our solar business was $264 million, a 4% increase compared to $254.1 million in 2019. This year, we generated $222.7 million in cash from operation. Moving now to guidance for the first quarter of 2021. We expect revenues in the first quarter to be within the range of $385 million to $405 million. Revenues from the sale of solar products are expected to be within the range of $360 million and $375 million. We expect non-GAAP gross margin to be within the range of 34% to 36%. Non-GAAP gross margin from solar activities is expected to be within the range of 36% to 38%. I will now turn the call over to the operator to open it up for questions. Operator, please.

Thank you. At this time, if you do have a question, that will be star one. We do ask that you please limit yourself to one question with one follow-up. Again, that will be star one for questions. We'll hear first today from Mark Strauss with JPMorgan.

Yeah, good evening. Thank you very much for taking our questions. Good to see the commercial channel inventory reducing. Curious if you can just quantify that, though. I think on the last call, you mentioned around 14, 15 weeks is kind of where that stands, maybe as of year end or as of today would be even better.

Thank you.

So the number is slightly lower this quarter, but not dramatically. And again, it depends on the difference between Europe and the United States, where in Europe we see the weeks of inventory is decreasing, while in the U.S., they are decreasing to a lower extent. I think that the more interesting part, though, is the fact that we do start to see more installations happening in the commercial segment, and therefore, we now expect that these kind of inventory levels will start dropping a little bit quicker. But in general, we see a small decrease.

Okay. Okay, thanks. And then just a quick follow-up. Hearing from some others in the industry talking about component supply issues, semiconductor supply issues, any impact on your supply chain and is that reflected in guidance?

So in general, Mark, it's something that we used to see in the past, these kind of component shortages. And we actually foresaw this coming in the last few months and got ready for this. As you can see reflected in our inventory levels, our inventory is a little bit higher than usual. First of all, due to the EDUCATO project, but also given the fact that we are holding a relatively large amount of components, of critical components of raw materials that we hold in anticipation for these kind of shortages. At least at this point of time, we feel that we can manage through the shortages. We do not see any impact on the production, and we're looking at it very closely. At the same time, we continue to have a very close relationship and discussions with our suppliers because in many cases, we became a major portion of those suppliers' customers. a capacity or sometimes a sales and therefore both them and us have a good interest in staying in a very close touch and making sure that we're well coordinated. So at least at this point we do not see a major effect.

Okay. I'll hop back in queue. Thank you very much.

Thank you.

We'll hear next from Steven Bird with Morgan Stanley.

Hi. Thanks for taking my questions. I wanted to first talk about the e-mobility business and just, you know, you've had a nice success here. Curious in terms of the opportunity more broadly, I know you've had dialogue and worked with a number of OEMs. What is your sense of the potential to replicate what you've done here to kind of extend your relationship with the additional OEMs? How do you kind of feel about the the opportunity beyond what you've just announced?

So obviously, it's a huge market with a lot of potential. At the same time, processes take a very long time in this industry, and we don't anticipate any quick wins. We're happy with this project. The experience that we gained in this project helped us improve the product, improve our production capability. gain a lot of experience from all of the mileage that was accumulated. And we hope to get future fruits out of this learning and investment. But we don't foresee any quick wins in the short while. But we're excited about this project and excited for having a foot in the door of this huge opportunity.

That's helpful. And you did provide some prepared comments on sort of the size of the opportunity here with Fiat. Would you mind just speaking a little bit further to that to the extent that the relationship continues to work well? Could you just speak a little bit more to sort of volumes? And you talked about the margin situation now. Could you just talk a little bit longer term in terms of your aspirations there?

So as mentioned in the comments, to a large extent, it depends on the acceptance of the vehicle. Now, we're optimistic because we know it's a very popular vehicle around here in Europe, and we see it frequently on the road here in Israel as well. The scale that we are, you know, it's represented in our numbers is a scale of... of thousands over the next few years. But again, it can go in either direction based on market acceptance.

We'll move next to Colin Rush with Oppenheimer.

Thanks so much, guys. Can you tell us a little bit more about, you know, the trend line on the OpEx side? How are you tracking that on a non-GAAP basis to trend over the next several quarters?

First of all, by the way, Colin, and you mentioned the non-GAAP, we need to understand that there is a big difference, as you can see, and it's growing between the GAAP and non-GAAP. A lot of it is related to the stock-based compensation, given the fact that stock price hiked so much, and therefore these expenses are representing a bigger portion. But in general, I would start by saying that the way that we would like to see gross margins in a way that allows us to be between 20% to 23% of operating profits on a non-GAAP basis. So that means that we're aiming at around 15%, 16% of non-GAAP operating expenses coming for the solar business. Now, I think that we need to differentiate here between the solar and the non-solar business. In the solar business, the revenues are relatively high, and as long as we're able to maintain growth rate the numbers of the revenues and the impact is going to be so large that you should see an operational lever where when the numbers are growing, operating expenses as percentage of revenues will go down. We continue to invest in R&D as much as we can. Today, it's hard to broaden much more or as quick as we would like the R&D simply given the fact that we already have a base of many people. So therefore, to get many people in a short time is an issue. On sales and marketing and GNA, there are economies of scale, and therefore, we should expect to see this operating leverage continue. The issue and the big question is usually around the newer businesses, because these are businesses that are in a, I would call it, investment mode. And naturally, we would like to invest there in R&D or market development. So, for example, in the e-mobility space, we definitely want to increase the a product selection and we want to go to newer generation. In general there, I would assume that you may see a situation where the growth in operating expenses is similar to the growth that you will see in the revenues. But when you tie everything together with the solar that is so much bigger than the others, again, you should see that in the overall picture as a percentage of revenues, non-GAAP operating expenses should decline over time.

Okay, that's all for this. And then in terms of the rollout on the energy storage product and, you know, qualification on that, could you just give us an update on the timing when you expect to start shipping, you know, significant volumes of that residential product? And then, you know, could you tell us a little bit about the incremental development expense to integrate the generator capability into that product?

So in terms of battery readiness, we are in the midst of the certification processes right now. And, and that, together with completing, building up the manufacturing line is what is leading us to the projection of initial shipments within the second quarter, and, and meaningful volumes in the third quarter, that's, that's the schedule that we communicated last quarter, and so far we are on track with that. In terms of, there's no special incremental R&D related to generator integration. Actually, the hardware is compatible already. It's a matter of the roadmap for software version releases that causes the fact that the feature will be fully operational a couple, a few months from now.

And from Roth Capital Partners, we'll hear next from Philip Shin.

Hey, guys. Thanks for taking my questions. As a follow-up on the storage question there, in the past, you guys have talked about targeting two gigawatt per, two gigawatt hour run rate for the storage business, Exane 21. so possibly in Q4. Is that reasonable at all to assume, or is that a little bit more likely in 2022 as a target or run rate?

Actually, Phil, here I think that there is a little bit of maybe a not good enough explanation on our side. In general, the two gigawatt factory that we're building will be end of construction, will happen at the end of 2021. At that point, we will have a factory with all the equipment and capacity needed to manufacture two gigawatt hour a year. But from that point of time, we will need a few months to start ramping up the activities and the facilities in the new factory. And this is something that takes a little bit more time. So while the capacity, the built capacity of two gigawatts will be there at the end of 2021, only in the first half of 2022, we will be able to ramp up the production with all the three shifts and all the processes to get to this kind of a run rate.

Okay, that's fantastic. So as a follow-up there, you guys talked about revenues from e-mobility of $100 to $120 million. What do you think storage can contribute this year? And perhaps a mixed-buy quarter would be helpful as well. Thanks.

So in general here, again, the main question is going to be, of course, timing, which currently looks on track. But as noted before, we believe that anything between $100 million to $150 million this year is a number that we're aiming for.

Okay, great. Thanks, Jermaine. I'll pass it on.

We'll hear next from Jed Dorsheimer with Canaccord Genuity.

Hi. Thanks for taking my question. Congrats on another solid quarter. Quick question. I guess just on the HD wave and on the solar products, the inverters specifically, where are you in the process in terms of the conversion from silicon to wideband gap?

And then I have a follow-up to that. So in the current

version as well as the any energy hub we are using still using standard silicon for these for these generations for newer generations we're looking at different alternatives obviously got it I mean I'm just looking at the analog device spec sheet here that lists you guys and you know talking about a 50 to 60 percent reduction of component component costs and so

I'm just curious, as you see a potential supply-demand rise in the commodity cycle here, it would seem like reduction of the passives, and in particular copper, would seem like a great hedge in terms of that shift. What's keeping you back from making that transition?

So obviously we'll not get into too much detail, but those type of considerations are part of our thought process for our next generation products, but it's not something that is feasible to be implemented in short cycles that align with the current shortages and to try to overcome them with that type of change. we're looking at these types of alternatives for our next generation products that are a year or two years away and looking to find the best combination from cost and performance, but to get over the current cycle of shortages, our actions, as Olen described, are more traditional in terms of building up component inventory, securing supply and building up a healthy level of finished goods inventory.

Got it. Thanks, guys. Thank you.

From Goldman Sachs, we'll hear next from Brian Lee.

Hey, guys. Thanks for taking the questions. I had two on margins, just maybe first on the solar margins. It looks like You mentioned the mix in resi, North American strength, they're helping margins in the near term. So I know in the past you've given us some high-level color around geo trends and the cadence. So in terms of solar margins, should we start to see a bit of normalization in 2Q, maybe gross margins leveling off, moving through the year? I'm just trying to get a sense of you know, if this is kind of the high-water mark for solar margins in Q1, given the robust outlook here, or if you think there's actually upside from those levels moving through the year.

So, as you mentioned, the margins are normalized or getting back to the levels that we used to talk about before, about 36%, give or take 1%. And this is basically a result of several things. The first one is the fact that we start to see the United States being back a more meaningful portion of our revenues, of the solar revenues. As we mentioned before, actually at the end of Q2, what we saw is that when the pandemic started and the U.S. market was hit, we were able to grow substantially in Europe in a way that on one hand did not impact the revenues maybe as much as it would hit unless we were so active in Europe, but at the same time, the higher competition and intensity in Europe prescribed much lower gross margins. And at that time, by the way, we have noted about 500 basis point difference between the US and Europe in this regard. Over time, two things happened. The first thing is that the euro got a little bit stronger compared to the US dollar. This is something that, of course, helped Helps our margins in the sense that we still manufacturing dollars and therefore we collect more dollars on every euro sale that we're doing. And the second one is that once we're starting to sell in the United States where the competition is a little bit lower on residential due to the rapid shutdown regulations, then we were able to charge a higher higher revenues and to increase the margin. And there's another issue that happened in the fourth quarter, and this is the fact that in general, commercial solar that is characterized with lower gross margins compared to residential was again lower compared to the previous quarter. So this is the main change that happened. Looking forward, as already described in our guidance, we expected the non gap gross margins to be at 36 to 38%. So the midpoint is already at the higher range of our long term target. And we expect this to continue to happen. We continue to do cost reduction all the time. The pricing environment is relatively stable, both in the United States and in Europe. And we are continuing all the time to shift more and more production to a non Chinese manufacturing, at least the production that comes to the United States, and compared to 60% of shipments of non-Chinese products in Q4, about 85% of these products that will come to the U.S. in Q1 will be already from non-tariff. So this is something that definitely drives us to the higher range and the higher levels that we guided. There is one phenomenon, though, that we need to mention, and this is actually for the later part of the year. While we assume that we will see the normalization in the solar margins in Q1 and Q2, actually in Q3 once batteries are starting to get bigger volumes and starting to have more effect on our margins, and here in the past we discussed approximately 25% expected margins on batteries, we expect that the overall portion of batteries in the revenues mix will drive this margin a little bit down. So in general, We are normalizing in solar without batteries. Once batteries will come, we will basically provide guidance and a little bit about how to model and how to expect gross margins to be related to the volume of batteries of the overall revenues.

Okay, I appreciate that, Culler, and maybe a good segue into the second question I had just on, you know, Ronan, you mentioned batteries, but e-mobility, if you do the $100 million of revenue this year, is that all back half-weighted in terms of time frame? And then on the margins, I know e-mobility has some upfront costs here. They're negative today, but what's the target for margins to go positive in e-mobility time frame-wise and ultimately Are you at the 25% or 30%, I think, target you've talked about in the past? Do you get there in the back half of this year if the revenue range you're talking about is achieved?

I'll start answering one by one. If I miss anything, please, Brian, let me know. In general, we expect volumes will initiate this quarter. And we believe that they will stabilize around Q2 or beginning of Q2 towards the end of the year. So I would assume that the majority of the revenues will come between Q2 to Q4. And that means that at that point in Q2, we already expect to see positive gross margin on this product. However, I think that we need to differentiate between the longer term margins that we expect on e-mobility and the margins on these projects. And the two key differentiators is, first of all, the fact that in e-mobility, unlike in solar, it's very hard to do cost reduction once the product is defined. Nevertheless, if it was launched or not, because in the e-mobility space, once you have defined a product and you basically validated the product with the manufacturer, you cannot change any component and that of course reduces dramatically your ability to either make changes in the product for cost reduction or even to negotiate with your suppliers because they know that they're already designed into the product. In the case of this Educato project, it's a project that we inherited from the acquisition of SMRE and therefore there is not a lot that we can do in this specific product to reduce cost and we expect to see single-digit margins starting in Q2, and they will not be very high. Once we will see two things happening. First of all, if indeed the market acceptance is going to be good for this product, then we will see higher volumes, and then we will be able to spread the fixed costs that we already have here over a larger amount of units, and this, of course, will increase the gross margins. And second, we will be able, maybe over time when we'll have more projects, to go and reduce costs of products if we're using them, or components if we use them in other products as well, because then we have more leverage with the suppliers. But in any case, I do not expect it to happen, not in 2021, and not in the volumes that we're discussing right now. Lastly, lastly, 30%, I do not believe that this is a number that can be achieved in the near future in e-mobility. If you look today at comparable companies in the e-mobility space, you see best margins being at about 18%, and these are very technological and very good companies. It will take us the time to get to that level of expertise. But at the same time, you usually see that the cost per unit is high enough that the overall contribution to profitability, even if the margin is lower, is very high because every unit is very expensive. So I hope that it answered all of the components.

If not, let me know what I missed. We'll move next to Mahit Mandlai with Credit Suisse.

Hey, thanks for taking the question. This is building upon Brian's question there on e-mobility. Could you just talk about the nature of this agreement with the Fiat group in terms of exclusivity and any trials or any pilots going on for the other electric products? And in addition to that, I just want to understand the operating margin for the business and Presumably, given its more B2B nature, the OPEX should be much lower percentage of sales compared to that for the solar industry. Some color on that also would be helpful. Thanks.

So, Maheep, I'll try to answer. And again, if I missed the second question, please clarify. So the dynamic in this industry is that you get a nomination letter for a project that solidifies the intent for you to supply the components for that project. We don't necessarily, no one commits that we are the sole supplier and we don't necessarily know, but typically in the industry, it's a supplier definitely for a product of this complexity per project. That's to the first question. To the second question, as I said earlier, we We've been commenting about this opportunity and the fact that it is coming close in the last couple of quarters, and we're confident enough to be more clear about it in this call. So at this point, we are not on the verge of any additional project, definitely not a project at this scale. within the next couple of quarters. So there won't be quick wins and quick ramps and multiple projects, at least not in 2021 here.

Got it. Thanks. I just wanted to understand the operating leverage in this business. Sorry, one sec.

Yeah, I just wanted to understand the operating leverage of how much how much operating expenses you expect as personal sales for this business, given a presumed it's more B2B in nature, right?

So as we described a bit, the content of what we are delivering and the theme is consistent with what we would discuss practically in every other product that we are delivering in other segments as well. Inverters... DC to AC inverters, DC to DC converters, batteries, lithium ion, etc. So there's definitely technology leverage that is going across the company in serving these applications from design through reliability testing and on the manufacturing and on the manufacturing line. So there is significant technology leverage and a fair amount of operational leverage that is using our expertise and infrastructure for these new businesses. It's not only e-mobility. It's also what we are doing in the area of critical power and UPSs. And, of course, lithium-ion and COCOM is a common thread, although the batteries that are being used today in our e-mobility project are not – coming from COCOM, as Ronen mentioned, those were inherited already in the design when we acquired SMRE into the frozen design of the solution for this first project.

We'll hear next from Moses Sutton with Barclays.

Hi, thanks for taking my questions. On the storage product launch, once you get certified, once that's complete, How much available capacity will you have in megawatt hours in 3Q, 4Q, and exiting the year?

The truth is that, unfortunately, we won't have the capacity for the demand that we are seeing. Practically, from all regions, there's very strong pull for our battery, also from North America. also in Europe and also in Australia. We are comfortable that we will have capacity to meet the numbers that Ronen mentioned earlier in the answer to Phil on the potential projected revenue in the second quarter and maybe some upside to go beyond that. But like I say, I wish we had capacity for all of the demand that will probably come in a better way in 2022 when we have our own factory.

That's helpful, and this may be a bit obtuse of me, but how are you gauging the demand to say that you don't have enough for it? Is it based on the inverter product? Because no one's had the product yet, so I'm just wondering how you're sort of getting the sense and expectation on what the demand will be for the product once available.

So it's a combination of, you know, we talk to many customers. They ask about the battery. They ask about the specifications of the battery, which we share for them. The preference to have a full system coming from the supplier, in this case us, is something that is messaged by many customers. And as I mentioned also in the prepared remarks, at the end of the day, we have a huge installed base of storage systems connected with all sorts of batteries, AC coupled, DC coupled, different sizes and different configurations. So we are very familiar with the installers that are installing the systems and with the preferences. and with the needs in terms of the consumer needs in the different modes of outages and maximizing self-consumption and time of use application. So we are anywhere between comfortable to confident that the battery and the system design are meeting the needs of our inverter installers and that they will... want to adopt our full solution once the battery is available.

We'll hear now from Marshall Carver with Heikkinen Energy Advisors.

Yes, and thank you for taking my question. I just have a quick one. You mentioned having some immobility sales this quarter, but that the majority would be 2Q and 3Q, 4Q. In your 385 to 405 million once you guidance. How much do you think could come from immobility? Just trying to get a feel for is that a million? Is that 10 million, 20 million? I mean, it seems like just any color you have there would be helpful.

So at this point, we bucket in the non-solar revenue into one number, which is 25 to 30 to $30 million, and we don't list out any individual components of the non-solar business. When the revenue from e-mobility is sizable enough to warrant it, we will be breaking it out separately.

Okay. And the $100 million plus this year from e-mobility would be incremental to the 100 to 150 non-solar.

Basically, the numbers that we have for the e-mobility are incremental to the battery storage numbers that we have today. There is no overlap.

Okay. Thank you. Thank you.

And at this time, I'd like to turn things back to management for any closing remarks.

Thank you.

In summary, we concluded the challenging yet positive year on all fronts. All of this while continuing to invest and laying the ground for future growth and expansion into adjacent markets, the fruits of which we are already beginning to see. We're looking forward to 2021, which we expect will be a year of growth, new product releases, and development of our solar and non-solar businesses. Thank you for joining us on our call today and stay safe.