SolarEdge Technologies, Inc.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31st, 2021, as well as the company's outlook for the second 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 first quarter ended March 31st, 2021. Ronan will review the financial results for the first quarter, followed by the company's outlook for the second 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 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 US 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, or as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended March 31st, 2021 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 CZ.

Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. Starting with highlights of our first quarter results, we concluded the quarter with revenues of approximately $405 million, just above the top end of our guidance. Revenues from our solar business were $376 million, while revenue from our non-solar business were $29 million. This quarter, we shipped 3.7 million power optimizers and 182,000 inverters. Our solar business grew this quarter across all segments and geographies, including record quarterly revenues in Australia, Italy, and France. In North America, we saw 23% growth in revenues from Q4 to Q1, representing increased demand for both residential and commercial products. Business in Europe is continuing to grow, led by sales in the Netherlands, where we had a record quarter of residential revenues, as well as revenues from Germany, Italy, and Poland. Also noteworthy is our continued growth in France, where we had record quarter both in residential and commercial sales. In the region outside Europe and the US, which includes Australia, Asia Pacific, Japan, Brazil, Israel, and several other countries, we had our third consecutive quarter of growth and record shipments. Noteworthy among these countries is Australia, where we delivered close to 100 megawatts of products representing more than 50% of quarter-over-quarter growth. A big part of this momentum was due to the volume shipments of our new three-phase residential inverter optimized for the Australian market. When it comes to new market opportunities, we see Korea as a particularly interesting one. We recently completed certification of our three-phase commercial inverter for installation on commercial rooftops in Korea. As the CNI market in Korea is more than two gigawatts in size, and considering our strong local presence, we are optimistic about the growth potential there, and indeed already installed in the first quarter more than 10 megawatts of rooftops in a conditional certification setup. As we projected in recent calls, This quarter, we began to see meaningful signs of recovery in our commercial business across all regions. Our megawatt shipments of commercial products grew by 35% from last quarter. As we have anticipated and discussed in our last earning calls, the commercial sector has been slower to recover from the economic downturn during the pandemic, but inventory in our distribution channel is now back to healthier levels and we are seeing a pickup in commercial installations and opportunity pipeline. We expect revenues from the commercial segments to continue and grow back to the pre-pandemic levels in the second and third quarter of 2021. On the product side, demand for our battery-ready energy hub inverter continues to grow, and it is now more than 20% of our residential shipments to the US. At the same time, We see growing interest in our self-consumption devices, such as our EV charger and water heating product. Our plan to launch our residential battery remains on track. We have active test sites already in the U.S. and will begin initial shipments this quarter. These batteries will be shipped to the U.S., Europe, and later to Australia. The test period is aimed to validate the battery performance in the field and sharpen installation practices with the help of some of our select installers. Additionally, the goal is to confirm the system level battery plus energy hub inverter, self-consumption and backup scenarios. In a recent study of our global installed base of more than 30,000 systems of SolarEdge backup inverters installed with third-party inverter, we analyzed consumer behavior patterns and system performance through more than 75,000 blackout events lasting more than five minutes. We characterized in detail typical blackout frequencies, duration, the power and energy capacity needs, as well as practices to prevent depletion of batteries and extended blackout events. We will be incorporating these learnings into our system in conjunction with the maximization of self-consumption and financial decision-making algorithms in order to enable smart automated system decisions and provide a flexible, easy to manage system for the consumer. As we have said in the past, we don't plan for meaningful battery revenues until Q3 of this year. Given the growing demand for energy consumption and storage, which I referred to earlier, we are confident that our storage ready inverters fitted with our DC coupled battery represent a significant milestone in progressing our vision of a home system that is flexible to provide both maximization of self-consumption and economic value where relevant and backup capability where and when needed. In the commercial segment, we see good adoption of our 120-kilowatt synergy inverter, including a dedicated version for ground mount installations in the U.S. This new high-power inverter is designed to support bigger commercial fields and improve economics, as well as simplify installation and commissioning. Our customers can now set up and test the entire installation before even connecting to the AC grid. As the CNI market continues to improve, our new high-power inverter, combined with our recently released 1,100-watt optimizer, offer a means to reduce the cost per watt for installers, and increase adoption of our solution in larger ground mount and rooftop installations. I would like now to elaborate on our operational status. Cycles of component shortages are common in our industry, and we have experienced such cycles before. Based on our past experience, We have adopted a methodology to closely monitor the procurement of components by our contract manufacturers and at times manage the supply and demand of components directly from their suppliers. This allows us to identify relatively early cycles of shortages. We also typically hold high levels of safety stock and finished goods inventory that allow us to overcome temporary fluctuations of component availability. In addition, we have developed alternate sources for critical components. As a result, at this time, based on the current alignment and delivery schedules with our contract manufacturers and suppliers, we are comfortable in our ability to support the increased demand we are seeing and our projections for further demand increases later in the year. Though at times, this may come at a higher cost due to expedited shipments and cost increases, as is reflected in our gross margin guidance for the forthcoming quarter. On a related note, our Celawan factory in Israel is continuing to ramp. We are now employing over 480 workers and manufacturing inverters and optimizers from our own facility, which is on track to reach full capacity by end of this quarter. The fruits of this investment are already being born, As thanks to a joint project of our R&D and operational teams in Israel, we have been able to increase the output of our power optimizer automated assembly line and copied this improved process to our contract manufacturers in other locations. In our non-solar business, our e-mobility division began delivering full power train units and batteries for the Fiat e-Ducato in Europe. The ramp of the production line will be gradual, and several months will pass until we reach full capacity. In our energy storage division, the Cella II factory for lithium ion cells and batteries in Korea is now well underway with the groundbreaking work behind us and building establishment in process. The factory is expected to start pilot production in the first half of 2022 and will enable us to supply our own cells and reduce our dependency on third-party manufacturers. In summary, we are happy with the results of the first quarter, and with the progress our teams are making across our regions and business units. With this, I hand it over to Onen, who will review our financial results.

Thank you, Tivi, 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 first quarter were $405.5 million, a 13% increase compared to $358.1 million last quarter, and a 6% decrease compared to $431.2 million for the same quarter last year. Revenues from the sale of solar products were $376.4 million, a 15% increase compared to $327.1 million last quarter. U.S. solar revenues this quarter were $162.5 million and represented 43.2% of our solar revenues. Solar revenues from Europe were $158.4 million, or 42.1% of our revenues, and the rest of the world's solar revenues were $55.5 million, or 14.7% of our total revenues driven mostly by record revenues in Australia. Revenues this quarter represented strong demand for our product in both residential and commercial segments in Europe and the rest of the world, with revenues in the United States continuing to be driven by sales of residential products. On a megawatt basis, we shipped to the United States 573 megawatts, to Europe 721 megawatts, and to the rest of the world, 397 megawatts. 45% of the total amount were commercial products, and the remaining 55% are residential. Channel inventory remains healthy in all regions in anticipation for Q2 and Q3, which are typically characterized as stronger quarters for the solar industry in general. Point-of-sale data received from our distributors demonstrates strength in all regions. In the United States, where commercial sales were weaker over the last quarter, we see, as anticipated, strong point-of-sale data which lowers the inventory days within the channels and new project discussions with our customers are expected to yield an increase in our U.S. commercial sales in Q2 and the following quarters. This quarter, Our top 10 solar customers represented 62.2% of our solar revenues. One US distributor accounted for more than 10% of the solar revenues. Pricing level remained stable this quarter across all regions. Blended ASP per watt for our solar products decreased by approximately 8% compared to the last quarter, driven by customer and product mix. This quarter, revenues from our non-solar products were $29.1 million, led by sales of lithium-ion batteries to non-solar customers by COCAM, and increased sales from our e-mobility business that delivered first full power train kits to Stellantis. Gap gross margins for the quarter was 34.5%, compared to 30.8% in the prior quarter, and 32.5% in the same quarter last year. Non-GAAP gross margin this quarter was 36.5% compared to 32.5% in the prior quarter and 33.6% in the same quarter last year. Non-GAAP gross margin for the solar business was a record 39.7% compared to 36.2% in the last quarter and above our long-term solar gross margin target of 36% plus minus 1%. This increase in the non-gap solar margin is a result of several factors. Primarily, we saw a higher portion of residential products which are characterized by higher gross margins out of the total product mix, improved exchange rate on sales in Europe and Australia, a reduction in the portion of Chinese-made products shipped to the United States and that are subject to U.S. custom tariffs, as well as lower warranty charges as a percentage of revenues associated with the support of our products and economies of scale. 86% of the products shipped to the United States this quarter were not subject to the said tariffs as they were manufactured outside of China. As you can see from our Q2 gross margin guidance, we expect margins to be slightly lower in the coming quarter. Over the last quarters, we experienced substantial increase in ocean freight prices as a result of the effects of COVID-19 on trade and supply chains. Ocean freight prices have increased by more than 100% over the last months, and our pre-negotiated prices have gradually expired and exposed us to higher freight costs worldwide. Another element that affects our margin is increased cost of certain components and freight costs related to the expedited shipments of such components. As Sivi mentioned, We are managing these component shortages in a way that currently allows us to meet the annual operating plan, but such management requires us from time to time to pay higher price for a component or airship them to our contract manufacturer's facility as supply times also fluctuate. Lastly, the seasonal growth in revenues in Europe and increased sales of commercial products in the United States Both are characterized by lower gross margins products in our overall mix. Despite all these factors, our gross margin target and our expectation to meet it remain unchanged at the range of 36% plus minus 1%. Non-GAAP gross margin for our non-solar activities was minus 4.7% compared to minus 6.4% in the previous quarter. The improvement is mainly a result of the growing volumes of powertrain kits supply this quarter, although volumes are not yet stabilized at the anticipated level that will get us to the low single-digit target gross margin on this project. On a non-GAAP basis, operating expenses for the first quarter were $76.2 million or 18.8% of revenues compared to $72.9 million or 20.4% of revenues in the prior quarter and 66.3 million or 15.4% of revenues for the same quarter last year. This increase is a result of our recommenced investment in talent acquisition in our research and development department, as well as the expansion of sales infrastructure in all businesses. Our non-GAAP solar operating expenses as percentage of solar revenues were 17% compared to 18.9% last quarter. Non-GAAP operating income for the quarter was $71.9 million compared to $43.5 million in the previous quarter and $78.6 million for the same period last year. This quarter, non-GAAP solar activities resulted in an operating profit of $85.5 million compared to an operating profit of $56.5 million last quarter. This number represents 22.7% of our solar revenues and is at the higher end of our 20% to 23% long-term operating profit model. The non-solar activities resulted in non-GAAP operating loss of $13.6 million, relatively flat to an operating loss of $13 million in the previous quarter. Non-GAAP financial expense for the quarter was $6.3 million, compared to a non-GAAP financial income of $16.9 million last in the previous quarter. This expense is a result of mostly unrealized foreign currency fluctuations related to intercompany loans between the group companies. Our non-GAAP tax expense was $10.1 million compared to $4.6 million in the previous quarter and $12.5 million for the same period last year. GAAP net income for the first quarter was $30.1 million compared to a GAAP net income of $17.7 million in the previous quarter and $42.2 million in the same quarter last year. Our non-GAAP net income was $55.5 million flat compared to a non-GAAP net income of $55.7 million in the previous quarter. However, this net income this quarter is a result of a substantially higher operating profit. GapNet diluted earning per share was $0.55 for the first quarter compared to $0.33 in the previous quarter and $0.81 for the same quarter last year. Non-GapNet diluted EPS was $0.98, the same as in the previous quarter, and a slight increase compared to $0.95 in the same quarter last year. Turning now to the balance sheet. As of March 31, 2021, cash, cash equivalents, bank deposits, restricted cash deposits, and investments were $1.2 billion. Net of debt, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $515.2 million. During the first quarter of 2021, we generated $24.1 million in cash from operations. ARNet increased nominally this quarter to $271.7 million compared to $219.7 million last quarter. Death sales outstanding this quarter in the solar business was 73 days, a decrease from 75 days last quarter. As of March 31st, our inventory level, net of reserve, was at $340 million compared to $331.7 million in the prior quarter. This amount reflects slightly lower finished goods inventories and higher raw material inventory in both our solar and non-solar businesses as we are working through the component shortages and ramp up our e-mobility part-time production line. Moving now to the guidance for the second quarter of 2021. We expect revenues for the second quarter to be within the range of $445 billion. to $465 million. Revenues from the sale of solar products are expected to be within the range of $405 million and $420 million. We expect non-GAAP gross margin to be within the range of 32% to 34%. Non-GAAP gross margin for the sale of solar products 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.

Thank you. If you would like to ask a question, please press star 1 now on your telephone keypad. If you're using a speakerphone, please ensure your mute function is turned off to allow your signal to reach our equipment. If you would like to remove yourself from the queue, you may press star 2. Again, to ask a question, please press star 1 now. We'll take our first question from Steven Bird of Morgan Stanley.

Hey, thanks so much for taking my questions. maybe just first talking about the gross margin guidance. You described the cost impact of, for example, shipment costs, et cetera. And I was just curious, for the second quarter, are the sort of costs for those sorts of, I think it was inventory-related costs, is that fully reflected in 2Q, or could you see further margin impacts in subsequent quarters that could be a bit larger than what you're seeing in 2Q guidance?

So general, first of all, the margin is relatively, I would say, a mix of various items other than, of course, the logistic costs, which are also related to mix of products and mix of geographies and currencies. So therefore, you know, spotting one specific element is always a little bit more complicated. And, you know, one of them may move and actually overcast the others, such as exchange rate, for example. But from a perspective related to the logistic cost, basically our prices are usually pre-negotiated in advance, and we try to close them as much as possible in order to hedge prices against changes that are happening. And we were able actually to do it pretty well in the last few quarters. It's simply that, you know, over time the cost went up and our prices elapsed, and therefore we had to pay the higher prices. So right now, I think that we have a pretty clear visibility for the ocean freight prices, at least for the quarter where we guided. We do not see a lot of changes happening there. I think that for the quarters to come, we do not have yet numbers to see. We believe that the trend is going to be slightly downwards, but of course, as long as the traffic of boats continues in and out from the United States and to China and the other areas is somehow disturbed because of COVID and because of changes in the trade patterns, this may change. We do not expect major changes more than we saw this quarter, however, in the next few quarters.

That's really helpful. And then maybe just one follow-up. It's great to see the progress on your energy storage business. And you talked about the residential battery being on track for deliveries in the second quarter. Just in general, how are you feeling about the growth potential for that business? I mean, it strikes us that there should be, you know, tremendous demand for that product. But just curious, compared to your original expectations, how is that sort of process of development and how would you expect rollout? In other words, are you feeling more bullish because demand is very high? Are there sort of logistical issues that would go on the other side of the equation? How are you generally feeling about the growth of the storage business?

I think you hit the nail on the head. Demand is probably not the issue. So the demand is very strong. It's coming from multiple geographies all over the world, in general for storage and in particular for an integrated system as we provide. We will be ramping our production line. We'll make the introduction at the end of the day gradual because it is a new product and you want to be a bit cautious in how you roll it out to the field, how you train installers, how you get it installed. And logistics are a challenge, but they're not much more of a challenge than they are in other areas. So the outlook is very positive in this area, but it's not going to be a very sharp hockey stick of... tremendous growth from one quarter to the other. But we're very encouraged by the demand and by the way the product is shaping out. And we're excited to bring it out to the market in the next couple of quarters.

Very good. Thank you very much.

Thank you. And we will take our next question from Philip Sheehan of Roth Capital Partners.

Hi, everyone. Thanks for taking my questions. Just as a follow-up on the storage question, question, was wondering if you could talk about what you think meaningful demand could be in Q3. I think you mentioned that that would be the first quarter. And then perhaps put in context for us what kind of growth COCOM, the core business, could see in 2021 versus 2020. And if you can talk about pricing for the battery system, that would be fantastic as well. Thanks.

So I'll try to take them one by one, Phil. So, again, demand is very strong in terms of how much we will ship in Q3. We're not yet giving specific guidance as we iron out the plan. And as we said multiple times, we believe it will be already meaningful quantities and revenue, but the exact numbers will guide next year. next quarter. In terms of the pricing, we began to communicate the pricing to select customers in the market, and we're obviously aiming it to be competitive and reflect the value of the product. So we won't be on any major edge in terms of significantly higher or lower than market prices for batteries today. And the last question, Phil, I...

What kind of growth could we see with the Kokum business year-over-year?

So I think that here, Phil, the question is mostly related to the capacity they have. Today, the capacity they have in the older factory in Nansan is pretty much taken, and therefore we do expect to see a small growth year-over-year simply due to the fact that they are able to make improvements, but it's not going to be something that will move the needle into overall solar edge numbers for this year. The biggest growth will come starting next year because once Cell 2 will start producing cell, this will be first sample cells in the first quarter and go into full production within the year, then our expectation was around $300 million as we communicated in the past. However, we do see that this assumption that was based on relatively large ASP erosion in the cell industry is not really materializing, and therefore the effect could be higher. But at least for us, the way that we're planning is about $300 million of incremental revenues in 2022. Great.

Thank you both. As my follow-up question here, as it relates to litigation, I was wondering if you guys could provide an update on – any of the risks and opportunities as it relates to what's going on in the lawsuits in China or in Germany? What is the risk that you guys may be prevented from manufacturing in China? And if so, do you have any contingency plans around that?

So we discussed several times over the years that the litigation has been going on. These are typically very long processes and usually don't end in a dramatic fashion in one way or another. So all of this is still ongoing, as you mentioned, both in Europe and in China. Nonetheless, we obviously have set in motion contingency plans based on scenarios that might evolve. But so far, also as we indicated in our guidance, For the quarter and our message for the subsequent quarter, we are comfortable with our ability to deliver on the increased demand that we're seeing.

Okay. Thanks again. I'll pass it on.

Thank you. And we will take our next question from Colin of Oppenheimer.

Thanks so much, guys. Could you talk a little bit about what's going on with seasonality in Europe and sell-through in Europe, both in the commercial and the residential market and in comment on diversification of the geographic footprint where you guys are selling through.

Yeah, so Europe was an interesting winter in the fact that the first couple of months were a pretty tough winter and installation rates were kind of slow. And then sometime from mid-February and on, things opened up and and installation rate is gone up, sell-through is gone up, and most of our dialogues with our distributors across Europe, both for residential and commercial, are about pull-ins and expedites these days as the market woke up very aggressively and inventory levels are relatively low compared to the... to the pull from the installers. In terms of the general breakdown, if that's what you're referring to, so we are stabilizing more on a 40, 45% U.S., 40% roughly Europe, and 15% rest of world. The rest of the world is growing quite quickly, and that pattern might shift later on, and we are investing a lot into places like Korea that I mentioned, Taiwan that is a good growing market, Thailand is a good growing and interesting market, as well as the other places that we are present already in a strong way, like Australia and Brazil, and even in our home court in Israel. The growth rate in these regions of the markets are higher than that in the U.S. and in Europe, and we are making the investments in order to capitalize it. Still, nonetheless, for the foreseeable future, that mix of roughly or going, depending on the season, between 40% to 50% each between Europe and the U.S. and the rest coming from the rest of the world is probably going to be the pattern for the next 12 to 18 months continuously.

That's super helpful. And then just as a follow-up, could you give us a sense of how things are progressing on your effort to enter the utility-scale market and the evolution of that market as we start to see growth? you know, some evolution on the the balance of system for the electrical elements of these systems, but just love an update there.

So so we're continuing incremental penetration into the ground mount market, if you will, which wouldn't be classified as utility in terms of the we're not talking about the installation sizes of hundreds of megawatts, but we are more and more installing systems based on the larger inverters that we are introducing and the lower cost optimizers into more and more projects of the size of 5, 10, 15 megawatt ground mount installations all over the world. The next step is The improvement or the next step penetration from our side will be, as we discussed several times, towards the end of this year, beginning of next year, with the introduction of an above 300 kilowatt inverter, which will take us a next step in terms of suitability for larger ground mount installations, and will continue to evolve from there.

Great. Thanks so much, guys.

Thank you, and we will take our next question from Mark Straus of JP Morgan.

Yeah, thanks for taking our questions. Just wanted to go back to the component inventory to Steven's earlier point. Are you able to quantify that at all or maybe put it in terms of if the supply chain industry headwinds last for another two quarters or another two years, three years, whatever, At what point does it become even more of a material headwind to SolarEdge?

So two, three years is a tough question. We are in continuous dialogue, obviously, with the contract manufacturers and the supply base for components. And based on that dialogue in terms of the projections that we give them and the commitments that they give us, we don't see major issues, assuming everybody sticks to their plan, i.e. our growth is the growth that we are expecting, and we don't see major decommits. Now, this is based on alignment that is done recently and not based on live within the within the crisis and not commitments or alignment that was done prior to the crisis beginning. So what this translates to in our message is that we have a plan for the foreseeable future that is aligned with the supply base to the component level, not only the contract manufacturing, to which we can deliver on the optimistic growth expectations that we see. To extrapolate that two years out and what could happen in the component industry, that's a bit beyond our capability at this point, especially if you take into account that these type of cycles usually don't last that length of time in terms of the ability of component manufacturers to add capacity within those type of time cycles.

Yeah, sure. Makes sense. Okay. And then just lastly for me, not looking for you to name any specific customers, but as you look at your U.S. customers that are providers of leases or PPAs that have maybe safe harbored in the past, can you talk about any change in their buying behavior since the ITC was extended a few months ago?

Yeah, as you said, I will, again, get into a specific name based on a press release that we issued shortly after our previous earning call about an agreement that we reached in Sunrun for delivering the energy hub to them. And we're very happy in terms of how that renewed relationship is evolving. And part of that is obviously translating into our business now in our projections. I don't have full visibility to them and the other large installers in terms of how much safe harbor they still might have in their inventory and what type of product. Okay.

Thank you very much.

Thank you. And we will take our next question from Brian Lee of Goldman Sachs.

Hey, guys. Thanks for taking the questions. I had two, one on gross margins. I know you had talked about, Ronan, a couple moving pieces here that are, you know, kind of pressuring gross margins and the 2Q outlook. Can you help quantify a little bit just some of the logistical cost? What sort of basis point impact it's having? because obviously you put up a very good gross margin in Q1 on the solar products. It seems like there's a headwind you're seeing on the logistical costs from quarter to quarter. And then Mix helped you a lot in Q1. It sounds like Mix is still pretty good in Q2 because you're expecting growth in the U.S. to continue to be robust. But can you kind of level set us again? You said in the past sort of what your margin delta is between – different regions and then between resi and commercial? I know it converged a bit recently, but could you level set us again as to kind of what the margin delta you typically see is across some of your end markets and geos?

As you mentioned at the beginning, due to the fact that there are so many moving pieces, you know, to name and to give the effect of all of them, it's relatively tough. I would say that... In this quarter, first of all, as I've laid out, if you take the mid-range of our guidance, we're supposed to be at around 37% on the mid-range, which means about 200 basis points of reduction compared to this quarter. This actually encapsulates the vast majority of all of them because the ocean freight is usually... I would say several, I would say not more than 100 to 150 basis points in general, usually, but again, these kind of expenses almost doubled over the last quarter. But this is something that, again, that is changing based on the routes that you're shipping, whether you ship more from Europe, whether you ship more from China and Vietnam, and there are a lot of fluctuations there, and you see a relatively large number. Exchange rate differences, of course, are hard to predict. This quarter, they were above the usual rate, but at the end, they worked a little bit against us. So again, I think that if you take and you bundle all of the changes in the shipping prices plus the effect of the mix, plus the effect of the exchange rate, you get to these 2%, and this is the neighborhood, not dramatically over this one.

Okay, fair enough. That's helpful. And then just a second question on, you know, there's a lot of questions around the battery storage and the ramp here that you're contemplating here over the next several quarters. I thought in the past you had talked about kind of the ability or at least the confidence around $100 to maybe $150 million of battery storage revenue, RESI, as you ramp in 2021, obviously mostly in the second half, given the timeline of the ramp. But are you no longer of the view that you can get to that kind of triple-digit, you know, millions of dollars of revenue this year? And if that's the case, hello?

No, no, we still hold this view. Yes.

Okay, so you're $100 million plus in the second half of this year on the new Resi storage product. I just wanted to make sure that that's still your view.

Yes, and again, all according to the ability to ramp and no disturbance on the supply chain. But in general, there is no change. As Steve mentioned before, everything is on track and there are no changes to the plan.

Okay, fair enough. I'll pass it on. Thanks, guys. Thank you.

Thank you. And we will take our next question from Mahid Mandeli of Credit Suisse.

Hey, good evening. Thanks for taking the question. Could you maybe just talk about the split of commercial revenue and residential revenues in Q2 and how that should evolve in Q3, Q4? And I'm just trying to understand commercial should recover in Q2 and Q3. So just trying to see if they should expect higher commercial demand run rate in Q3 versus current levels going forward. Thanks.

So Mahiba, as I mentioned in the comments, our commercial volume in megawatts from Q4 to Q1 grew by about 35%. This was primarily growth in Europe and the rest of the world. Our commercial shipments also in the U.S. grew quarter over quarter, but to a lesser effect, and they grew quarter over quarter in the other two regions as we characterized them, Europe and Australia. At the same time, we began to see also in the U.S., higher installation rates and sales by hour distributors and reduction in inventory levels. So we do believe that the U.S. will begin to pick up as well following the pickup that we saw in Australia and the rest of the world, not necessarily at that growth rate. So we are, and we referred to this a few times in the past, we expected Barring the improvement from the economies related to the pandemic, we expected the beginning of pickup in the second quarter. And usually commercial installations are back-end heavy in the year. So it is a reasonable assumption that the commercial shipments will continue to improve globally and in particular in the U.S. as I mentioned.

Got it, got it. Thanks for that. And just on the freight cost and thanks for the colors on the gross margin impact for that, but I just wanted to understand if the higher freight cost or freight challenges is impacting your ability to supply in any of the markets right now or if, you know, or the way to ask is if demand is much higher than what you're seeing out there.

Yeah, demand... demand is strong and becoming stronger. Our logistics operations are complex and global. We manufacture at five sites in multiple locations around the world, and we deliver to many, many countries and optimize continuously based on various elements. And that's not a simple operation. And I can give you an example in the Suez crisis of a month ago, we had more than 100 containers of product that were stuck in this congestion, some of which were on the actual boat that was blocking the canal and some were at both sides of the canal. of the canal. Nonetheless, with all of that going on, our delivery dates were intact and our customer deliveries were not delayed because the complexity also gives us many options and a lot of levers to play with, and we were able, with some expedition and a lot of effort, to still satisfy the demand and meet our obligations. So I think we're pretty good at this, and with all the challenges ahead, we believe that we will be able to execute on the demand, both from a component availability and the logistics constraints that are out there today.

Got it. Thanks for taking our questions.

Thank you. And we will take our next question from Eric Lee of Bank of America.

Hey, good afternoon. Can you hear me?

Yes, we do.

Perfect. Thanks for the question. Maybe first on just in terms of the channel supply inventory levels versus target, can you talk quantitatively about how much the extent of the increase in resin solar demand was relative to the extent of the incremental supply you were able to secure? for both the A6 and the AC drivers here in terms of keeping the channel supply inventory weeks consistent here?

So in general, Eric, first of all, the level of inventory or the nominal level, I think, is sometimes not the only number or I would call it factor that is interesting. It's more actually the inventory days that they're having. holding, and that means for how long they can basically supply based on the inventory that they have. Now, in general, I can tell you that, first of all, as Steve mentioned, from a component and from logistic point of view, we did not face any trouble deliver a product, and therefore we were able to supply whatever demand came. When the vendors are looking at the inventory, each of them make their decisions based on what they see and project, and in general, what you see is that towards the end of the first quarter, the absolute number or the absolute value of inventory is growing in the channels because everyone is getting ready for Q2 and Q3. And also, of course, the more you hear about component shortages in the market, the more you hear about complexities of companies to provide at a time, you see those... I would call it distributors trying to optimize the level of inventory that they're holding, which is something that costs them money in working capital, with I would call it desire to get as much stability by simply holding the inventory. So in essence, what we see right now is that when we talk to our distributors, we're very well aligned with them on the lead times. As Tzivi mentioned, even if there are logistic hurdles, we're able to meet the delivery times and we're able to communicate them well to the distributors and we let them to understand and decide what is the level that they have. This also means, by the way, that we don't see a drag of orders coming or pulling forward simply to make sure that we have or they have more inventories in something that can affect them later. So it's a kind of a, I would call it circular process where The joint planning for us and them allows them to plan well the inventory. Our ability to deliver related to all the hurdles and the complexities on time is something that makes them comfortable, which in turn allows them to be more precise in the way that they are planning the inventory and the inventory levels. Right now at least we see a normal behavior for this time of the year. And again, we do not believe that there is any pull-ins or any deliveries that are done now simply in order to secure that they have inventories for the rest of the year.

Got it. And just as a follow-up question, on storage, as you wrote your product into the markets and 2Q, can you talk about how you're planning to prepare and preemptively address any potential bottlenecks with installers here? It's mainly around the lack of expertise and training to install your storage solution, given that this seems to be a pretty acute issue that's being faced by some of your peers out there. Thank you.

I'm not sure we understood all of the questions, but a big enhancement in the battery is the communication technology and ease of installation. So we invested a lot of attention in that, in the design of the battery, and in particular the way it integrates with our energy hub system. So that training is actually being initiated this week towards the installers, but I believe that due to the design and the way it was designed and the simplicity, that after some simple installation, Most of the installers, and we have many experienced installers, will be able to deal with this with relative ease.

Thank you. And we will take our next question from Jed Dorschmier of Canaccord. Jed, your line is live.

Hey, thanks, from Canaccord Genuity. I guess first question, if I look at the five times cost decline in solar in general over the past two decades from a rights law perspective, it seems like technology has kind of led the way. And that does leave the opening, or it leaves labor, at least from a balance of systems. And I'm just wondering how you're thinking about the reduction of labor cost as a function of either, as you talk about, three-phase sort of light commercial, if you will, in non-utility or resi side of things. Is that about lightening labor? you know, reducing the weight of your inverters? Or how are you thinking about that value proposition at this point?

Yeah, it's an interesting question and worth spending more time than in this type of short discussion. It is something that we are paying attention to at many levels. And generally, you know, over the years, it was considered important relative strength of ours our position with the large installation companies and some of that strength was coming from a lot of joint efforts to help their installation efficiency and our You know the importance we were putting in it and the willingness to to discuss these type of items and working together on how we as a help them in some cases in our small part, obviously the big issue is theirs, in terms of increase the amount of installations that can be done per day or reduce the amount of time per installation. And there are things that have been done over the years in terms of integration of elements that prior used to be installed separately and incorporating them into the inverter. and other elements of reducing time of commissioning and downloading software and things like that. So in all of those areas, we are investing a lot of R&D and doing that in cooperation with some of the large customers that we work with, both in residential and CNI. There are, as you suggest, also opportunities that are more related to the overall balance of system of... of installations and the direction that things are going, more in CNI. We are investing, again, R&D and looking at these type of opportunities, and it's an area that we have a team that is focused on. Again, it's not something to get into right now, but we concur that that this is an area of growing importance in terms of the growth of the industry and the adoption of these type of solutions around the world.

Got it. And then, you know, I guess maybe just a longer term. I mean, assuming you'll probably, you know, getting through this tightness, there'll be, you know, a decent amount of overcapacity in the marketplace that you'd benefit from. But as you think about the, you know, the... procurement of components, how are you thinking through the competition that's increasing around electrification? Because for the past decade or two, it's largely been competing against different solar technologies, and today it's now a competition amongst EV system design or transmission and distribution of non-solar-based technologies. So as you think through the hierarchy from your system solution perspective and multiple facets to that, how are you thinking about making sure that you have the capacity in a fabulous design?

So it's a bit of a high-level question. I'll answer with two elements. First is we, from the beginning, actually, our optimizers were based on our ASIC, and we've expanded that level of vertical integration at the component level to other elements of the system that are basically components that are designed for us and ordered by us, And obviously, yes, we are dependent on, in some cases, on the overall capacity scenario at the foundries or at other locations, but we're not competing for, in some cases, not in all cases, obviously, for the same components. And it's a trend that we plan to continue and exercise also in some of our other businesses. The broader topic of the question is indeed, and I think it's a good sign for our industry, is the entrance of big technology players that are seeing renewables and solar and PV in particular as growth opportunities and as significant opportunities that are here to stay. So we welcome that and I think it's good for all of us. I think we are pretty aware of our strengths and at the same time aware of our weaknesses. And now that we are in the e-mobility space, in some of the areas, it also allows us to compare ourselves to other companies from other industries and realize that if you take the specific topics of power electronics and high efficiency, high reliability power electronics and the ability to mass produce high quality, high efficiency, high efficiency, power electronics, that's what we know how to do. That is the core of the strength of the company. And we feel good about our capability and talent compared to most companies that we came across. And we came across some of the very well-known names around the world in this area. So that's our strength, and it's a strength that we believe can provide us a lot of opportunities in the future And we are focusing on maintaining that strength and finding the way to capitalize on it. And I hope that helps answer the question that you were aiming for.

Thank you. And we will take our next question from Jim Rishi of Needham & Company.

Thank you. A question I have relates to storage, given that you're reaffirming your storage revenue targets for this year. I'm wondering how we might think about this in terms of, does this skew the revenue mix more toward residential in the back half of the year? And presumably, um, and tell me if this is, if, if, uh, I'm not misinterpreting, but a higher mix in North America. And then I have also a followup on your installers.

So, so the, the, not necessarily the, the, um, especially since we began shipping the energy hub, there are many inverters out there that have not yet been coupled with a battery. So it does not mean that every battery that we will be shipping will be going automatically with an inverter at that time, and as a result, leading to that type of tilt, a more dramatic tilt towards Many will, but some will not. So I don't think that this will skew the balance between residential and commercial or between specific geographies as it relates to the solar installations. Yes, the majority of the batteries in the first phase will be coming to North America, and so the initial surge in revenue generation will come from North America and then spread to Europe and Australia and the rest of the world.

Thank you. And we will take our next question from Kashi Harrison of Simmons Energy.

Good evening, everyone, and thank you for taking my questions. So my first one surrounds supply chain. Thanks for all the commentary there. You mentioned you have enough supply to meet your anticipated demand in the second half of the year. Just curious, does this contemplate any excess demand that may materialize if your major competitor doesn't have enough supply to meet their demand for the latter part of the year?

We were projecting year over year growth based on different dynamics that we thought will come true through 2021. We don't know, I don't think we know how to quantify specifically if and what type of opportunity will arise out of that dynamic. So we know that and expect growth and we know that we and believe that we can deliver on that growth, and if there will be such a component within that opportunity, we should be able to deliver on it, but I have no way to confirm or to quantify something like that.

Thank you.

And we will take our next question from Tristan Richardson of Tourist Securities.

I appreciate it, guys. Thank you. Just a quick question on... new product launches. Just on the storage side, I think in the past you've said that from a margin perspective, 25% could be a general high-level expectation. Just curious if that still holds and maybe just the timeframe to get there in terms of what kind of scale you need to see first.

So, first of all, nice to talk for the first time. actually. So in general, the gross margins that we expected there was indeed in the range of 25%. And I think that there are two factors that we need to take into account here. The first one is that when we made this assumption, we believe that there's going to be a relatively sharp ASP erosion in the prices of batteries, which actually did not happen due to the relatively high demand that we see in the market. And therefore, there is an expectation that at least in the short-term, gross margin will be there. Now, it will not be there maybe much higher at the very beginning due to the fact that you still need to ramp up. There are economies of scale related to the way that you ramp up, but we definitely see a potential to be there. I think that the next layer of potential is actually once we have our Sella 2 factory, and this is something that will come at the later part of 2021. and 22 when batteries from Sela 2 will start arriving, because at that point, we will have our own factory with our own cost and with our own supply chain, meaning that we do not need to leave margin, maybe with the hands of a third party as well. So we feel that there is an achievable capabilities to get to a higher margin. And of course, over the long term, once there is a satisfied demand, we believe that we'll go back to this 25%.

Thank you. And we will be taking our last question from George O'Leary from TPH and Company.

Good afternoon, guys. Just kind of a big picture question for me related to e-mobility. I realize there's the Fiat E-Ducato that you guys already have in the bag, but just qualitatively, what is the pipeline for incremental auto OEMs that you guys see and how has that been affected by kind of the recent events that we've seen in the auto space? Is the pipeline still growing or have people kind of hit the pause button as they're dealing with their own supply chain issues? Just curious for any color you could share there.

I think we mentioned our investment in play in this segment is long-term and the growth is going to be gradual and long-term. So We don't have in our pipeline for the – and we said this in the last earning call in the next 12 or 18 months an equivalent in terms of scale and visibility like the Ducato. So we have a series of smaller, shorter-term opportunities and longer-term, bigger opportunities that we are working with and working on, and we will – we'll share them as they evolve and materialize. So one of the results of that is that we're not really dependent on these type of current events and constraints that are disrupting to some level the e-mobility industry, and we are more there to... execute and ride on the long-term path of this segment, which is showing where the potential is growing every day. So we don't have anything big other than the Ducato in the next year. So as a result of that, these events are not going to impact us positively or negatively in the next year to a year and a half.

Thank you. And I will now turn the conference back over to our speakers for closing remarks.

First of all, thank you everyone for joining. We are taking this call for the first time in the last year and a half from our California office, enabling us for the first time to travel out of Israel to here. And in recent weeks, we've been able to visit our factories in Italy and Korea. As well, so we're encouraged by the direction that that is going and wish everyone else in our industry and other industries health and success and to come back to normal as soon as possible. And thank you for joining.