SolarEdge Technologies, Inc.

Welcome to the SolarEdge conference call for the third quarter ended September 30th, 2021. This call is being webcast live on the company's website at www.solaredge.com in the investors section on the event calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved in any recording, reproduction, or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the event calendar page on the SolarEdge Investor website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Ma'am, please begin.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2021, as well as the company's outlook for the fourth quarter of 2021. With me today is C.V. Landau, Chief Executive Officer, and Ronan Fire, Chief Financial Officer. C.V. will begin with a brief review of the results for the third quarter ended September 30, 2021. Ronan will review the financial results for the third quarter, followed by the company's outlook for the fourth 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 State of Harper statements contained in our press release and the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies, with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with the 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 evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended September 30, 2021 press release or the supplemental materials may obtain a copy by visiting the investor section of the company's website. Now, I will turn the call over to Steve.

Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. We are happy to be announcing a record revenue quarter of $526 million. We are seeing growing demands for our existing products across all segments and regions, and strong interest in our pipeline of new products In fact, we have already secured orders for delivery in Q4 and in Q1 of more than four gigawatts of AC nameplate inverters compared to 1.9 gigawatts that we shipped in this quarter. And we are still receiving additional orders for this period. In today's call, I will address the temporary headwinds that we are facing on the operational side, which will clarify our next quarter guidance which does not fully reflect the high demand for our products and our anticipated continued growth. In the last earnings release, we updated that production in our factory in Vietnam had been partially suspended due to a government-enforced COVID-related lockdown. We explained that assuming the interruption would be short, as we were expecting at the time, we would compensate for it by increasing capacity in our other factories, and this is indeed what we did. However, the shutdown ended up being longer and more extensive than expected, practically putting to a halt our manufacturing capacity in Vietnam for 12 weeks. Prior to this event, the Vietnam factory was providing between 20% and 25% of our capacity and the vast majority of our non-tariff shipments to the U.S. market. So while we increased capacity in the other sites to partially compensate for it, This shutdown created a gap in supply of products for the fourth quarter that will take some time to replenish and which will come at a higher cost due to the need for expedited shipments and due to tariffs from shipping more China-made products to the U.S. We are therefore guiding moderate revenue growth for the fourth quarter at a reduced gross margin. The production in the Viet Nam factory resumed October 1st and is gradually ramping back to full capacity, which is expected in mid-November. Unrelated to these events in Vietnam, we have been working for some time to build redundancy and expand our manufacturing footprint with a new contract manufacturing site in Mexico. We expect first products to ship from the facility in the first half of 2022, and once ramped, this site will significantly increase our capacity and give us further flexibility to manage growing demand from the U.S. market. As is indicated in our record revenue results in the third quarter, we experienced healthy demand for our products and ended the quarter with record backlog. While this is not a data point we usually provide and do not plan to do in the future, it is reflective of the commitments of our customers and their strong demand for our products. To that end, Other than in some unique cases of extreme logistical costs where we will share some of those costs with our customers, on a broader level, we do not currently plan to increase prices on deliveries this year. Our customers have trusted us with their early orders and we value their loyalty. To sum up this topic, we are happy with the record third quarter results and are focused on quickly closing the capacity gap created from the temporary factory closure in Vietnam, while ensuring we are meeting the needs of our customers. I'd like to share now some new product news, which is a big part of the demand increase we are seeing. The first is our energy bank residential battery. Production of the batteries is ramping at a good pace, and we have installations already in the US, Italy, Germany, England, Belgium, and first deliveries in Australia. This quarter, we manufactured and shipped approximately 20 megawatt hour of energy bank batteries, a bit below what we had anticipated. In Q4, we expect to ship approximately 70 megawatt hour, compensating for the delays from this quarter. By the end of the first quarter of 2022, we expect to reach production output of 300 energy bank batteries per day, or 180 megawatt hours per quarter. In parallel to ramping battery shipments, we continue to see strong demand for our energy hub inverter, where shipments were up from 21,000 units in the second quarter to 37,000 units in the third quarter. We also began shipments of the high-power version of the energy hub inverter with up to 11.4 kilowatt AC nameplate capacity and industry-leading 10.3 kilowatt continuous backup power per inverter. Considering the current trends of increased electrification and need for resilience, we expect average system size and the required power consumption in case of backup to increase as well. And as such, increased adoption of this configuration due to its capacity and power level. The availability of this inverter will also provide cost saving for our customers who until today, in many cases, have used multiple inverters to achieve these capacities and power levels. As battery attach rates and the interest in resilience intensifies, we are seeing strong interest globally in the combined energy hub energy bank solution, which offers a DC-coupled system that harvests more of the energy generated by the modules and feeds it into the battery, even when the power generated by the solar system exceeds the nameplate capacity of the inverter. An additional milestone on the product front is that we began installations in Japan of our JET certified HD wave inverter, which through a built-in AC socket enables direct power consumption from solar in case of power outage. This is a significant step for SolarEdge towards opening the large residential market in Japan, where this capability is mandated by regulation. Shifting to our offering of optimizers. In the third quarter, we began shipments in some regions of our fourth-generation optimizer that, among other improvements, enables high-efficiency optimization of newer generation solar modules with higher electrical currents. Additionally, this new optimizer is designed to incorporate the new safety mechanism. In some cases, electrical arcs and safety events are caused by loose connectors or damage caused to cabling from rodents or other various causes. In the new optimizer, we have incorporated a capability that actively measures the temperature at the connectors to detect excessive heat, even before it turns into electrical arc. This past quarter, we shipped more than 200,000 of these S-series Generation 4 optimizers, and we will continue to ramp in the coming quarters. On the commercial side, we continue to see increased activity driven, among other reasons, by corporations looking to reduce their carbon footprint via solar installations on their facilities. Many of these corporations choose the SolarEdge solution due to our safety and monitoring capabilities. In many cases, we are leveraging success at one site for global proliferation to other sites of these international corporations. On the smaller utility side, this quarter we installed our first ground mount installation of our new 330 kilowatt inverter. This one megawatt installation has three inverters and thousands of optimizers. These new 1.3 kilowatt optimizers are specially designed for this inverter from performance and cost point of view. and to fit the solar modules typically used in ground mount installations that are typically high power and in many cases bifacial. The experience from this installation will assist us as we ramp production and sales of this offering in 2022. Turning to our non-solar business, where we had a record quarter in revenues driven from our non-solar storage business. This is despite the lower than planned shipments in the e-mobility business, due to instability in the automotive industry. While our ability to deliver has ramped on schedule, considering the current trend in the automotive industry, we expect to end up delivering approximately $70 million from the immobility business for 2021. I will now hand it over to Ronen, who will review our financial results. Ronen.

Thank you, Tivi, and good afternoon, everyone. This financial review includes a GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press list issued today. Segment profit is comprised of gross profit of the segment less operating expenses that do not include amortization, stock-based compensation, expenses, and certain other items. Total revenues for the third quarter were a record $526.4 million, a 10% increase compared to $480.1 million last quarter, and a 56% increase compared to $338.1 million for the same quarter last year. Revenues from the solar segment were a record $476.8 million, an 11% increase compared to a $431.4 million last quarter and a 53% increase compared to $312.5 million for the same quarter last year. Overall this quarter, we shipped approximately 4.7 million power optimizers and approximately 231,000 inverters. U.S. solar revenues this quarter were $188.6 million and represented 39.5% of our solar revenues. Solar revenues from Europe were a record $234.5 million, or 49.2% of our solar revenues. The revenues in Europe were driven by record results in Germany and Italy, which grew over 50% quarter over quarter, as well as record revenues in Poland and France. Rest of the world's solar revenues were $53.7 million, or 11.3% of our total solar revenues. The revenues in rest of the world were led by sales in Australia, Japan, and Israel, and record quarter in Taiwan and Thailand. On a megawatt basis, we shipped 592 megawatts to the United States, 1,029 megawatts to Europe, and 282 megawatts to the rest of the world. 39% of this amount was commercial products and the remaining 61% were residential. ASP per watt, excluding battery revenues this quarter, was 25.5 cents, a 5.2% decrease from 26.9 cents last quarter, resulting from a lower portion of U.S. shipments and customer mix, as well as higher proportion of inverters in our overall mix. This quarter, Our top 10 solar customers represented 63.8% of our solar revenues. Two U.S. customers accounted for more than 10% of our solar revenues each. This quarter, revenues from our non-solar business were a record $49.5 million, led by record sales of lithium-ion batteries from our non-solar storage business. Gap gross margins for the quarter was 32.8% compared to 32.5% in the prior quarter and 32% in the same quarter last year. Non-gap gross margin this quarter was 34% compared to 33.9% in the prior quarter and 33.5% in the same quarter last year. Gross margin for the solar segment was 36.6% compared to 37.4% in the prior quarter. As detailed by the CV, the solar segment gross margin was negatively impacted by measures taken to compensate for our temporary shutdown of our manufacturing facility in Vietnam. This shutdown, which was compensated by more deliveries from our China factory, reduced our non-tariff shipments to 53% of the product sent to the United States this quarter compared to 88% in the second quarter. In total, the additional logistic costs and tariffs, together with some component and raw material price increases, added 110 basis points compared to our previous quarter. Our accrual for future warranty claims also rose this quarter, partially because of the increase in product costs and partially due to the increase in our overall install base. We expect this phenomenon to continue in the fourth quarter. Gross margins for our non-solar segment was 8.7% compared to 3.3% in the previous quarter due to healthy margins from the storage business and continued improvement of margins in the e-mobility business. On a non-GAAP basis, operating expenses for the third quarter were $83.8 million, or 15.9% of revenues. compared to $81.5 million or 17% of revenues in the prior quarter and $63.2 million or 18.7% of revenues for the same quarter last year. This growth year over year reflects continued investment and our expansion of our R&D and sales capabilities. Our solar segment operating expenses as percentage of solar revenues were 14.6% compared to 15.8% last quarter. Non-GAAP operating income for the quarter was a record $95.2 million compared to $81.3 million in the previous quarter and $50 million for the same period last year. This quarter, solar segment generated a record operating profit of $104.9 million compared to an operating profit of $92.9 million last quarter. This number represents 22% of our solar revenues and is above the midpoint of our 20 to 23% long-term operating profit model. The non-solar segment generated an operating loss of $9.7 million, an improvement compared to an operating loss of $11.6 million in the previous quarter. Non-GAAP financial expenses for the quarter was $3 million compared to non-GAAP financial income of $1.7 million in the previous quarter. Our non-GAAP tax expense was $10.1 million compared to $10.5 million in the previous quarter and $1.6 million for the same period last year. GAAP net income for the third quarter was $53 million compared to a GAAP net income of $45.1 million in the previous quarter and $43.8 million in the same quarter last year. Our non-GAAP net income was $82.1 million compared to a non-GAAP net income of $72.5 million in the previous quarter and $65.9 million in the same quarter last year. GAAP net diluted earnings per share was $0.96 for the third quarter compared to $0.82 in the previous quarter and $0.83 in the same quarter last year. Non-GAAP net diluted EPS was $1.45 compared to $1.28 in the previous quarter and $1.21 in the same quarter last year. Turning now to our balance sheet. As of September 30, 2021, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $1.2 billion. Nets of debt, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $524.1 million. During the third quarter of 2021, we generated $61.8 million of cash flow from operations. Accounts receivable net increased this quarter to $416.2 million compared to $343.7 million last quarter. Day of sales outstanding this quarter in the solar business was 90 days, an increase from 76 days last quarter a result of higher revenues generated in the later part of the quarter and an increase in sales to large customers that enjoy more favorable credit terms in the overall mix. As of September 30, 2021, our inventory level net of reserve was at $304.7 million compared to $321.9 million in the prior quarter. Most of this reduction is related to lower level of finished goods in the solar segment, while raw material level increased in the solar segment to support manufacturing amid the global component shortages, and slightly decreased in the non-solar segment. Turning to our guidance for the fourth quarter of 2021, as explained throughout this call, due to the shutdown of our factory in Vietnam in the third quarter, and its gradual return to normal operations, and in light of the strong demand, our fourth quarter guidance is for moderate growth at temporary reduced growth margin. As such, for the fourth quarter of 2021, we are guiding revenues to be within the range of $530 million to $560 million. Revenues from the solar segment are expected to be within the range of $490 million and $515 million. In the fourth quarter, we expect to ship approximately 70 megawatt hour of residential storage systems to the United States and Europe as we continue to ramp the manufacturing of this product. We expect non-GAAP gross margin to be within the range of 30 to 32%. Gross margin for the solar segment is expected to be within the range of 31 to 34%. Before opening the line for questions, I would like to update that we are planning for an analyst day to be held towards the end of the first quarter of 2022. We will, of course, announce the specific date closer to this time. Operator, we can now take questions, please.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. If you are using a speaker phone, please make sure that your mute function is turned off so that your signal may reach our equipment. Again, that is star one to ask a question. And we ask that you limit your question to your original one plus one follow up. Our first question will come from Brian Lee with Goldman Sachs and Company.

Hey, guys. How's it going? Thanks for taking the questions. The first one I had was just around the backlog. I appreciate you providing that additional metric and context. Ronan and Izzy, can you give us some context in terms of how much the backlog at 4 gigawatts is up versus a quarter ago? And then in terms of sort of lead times, you're quoting on that backlog mix just to get a sense of how far that stretches out. And it sounds to me like you're saying that because of the backlog and because of the supply chain and manufacturing issues, Q1 should be seasonally much better, maybe better than the modest growth we're seeing here just for Q4. But can you kind of maybe encompass all of that in the context of your backlog trends you're seeing and how it impacts into Q1. And then I had to follow up.

Yeah, Brian. So starting from the backlog, as we mentioned, we're today with backlog or orders for shipment in Q4 and Q1 combined of more than four gigawatts. And in the third quarter, which was a record quarter, we shipped 1.9 gigawatts of inverters. And we're using here inverters as the reference point. It doesn't include batteries, and it's not including the optimizers. It's just the way to compare. So the record Q3 was 1.9, and today we are with backlog for deliveries in the next two quarters of more than 4 gigawatts. To the second part of the question, let me touch on lead times, and I mentioned this as well. As you know, we have a very wide variety of products and offering, and the lead times vary by product. We're taking few orders for delivery in Q4, unless it's some specific product where we have access and availability. But we are still taking orders in Q1. So for most of the products, the lead times are in the range of 12 to 14 weeks. On some commercial products, it's a bit longer than that. And on the batteries, it's a bit longer than that as well. So it's anything that ranges from call it 12 weeks to 16, 18 weeks on batteries. The outlook for Q1 is obviously complex, and there are many moving parts and unknowns. But generally speaking, with our plans for recovering production capacity in Vietnam, as well as from the other factories, we do expect to see growth, in particular on the top line. From a margin perspective, Q1 will still be challenging in getting that equipment and quickly and on time to the customers when and where they need it. So we expect still some margin headwinds in Q1.

All right, that's super helpful. Maybe just the second question on that margin topic. So you did the 36 and change gross margin in solar products this quarter. You've got the 31 to 34% view for Q4. A couple of moving pieces there, but can you sort of bridge the gap a little bit in terms of You know, the tariff versus non-tariff mix, the shipping issues, and sort of, you know, Ronan, I think, mentioned it was temporary. Like, how temporary are some of those factors as you start to kind of get back to a more normal margin moving through 2022? Maybe if you could break down some of the pieces and maybe the potential timeframes for when they come back to a more normal state.

Sure, Brian. So first of all, in order to explain this, let's understand the mechanism that is actually creating the margin headwinds. In general, when your manufacturing capacity disappears by about 20% to 25%, as Sivi mentioned with the coal, the first thing that we did was actually to divert a lot of our manufacturing to China. And this is something that creates first two issues. The first one is that you need to start now rotating some of the components that were shipped to Vietnam into China in order to make sure that you have the right components at the right place. And, of course, we remember that this is all happening while there are component challenges worldwide. And, therefore, this by itself creates expenses related to simply mobilizing quickly large amount of components from one site to the other, usually on expedited shipments. The second part of this diversion, I would call, is the fact that while you're expediting some of the shipments, the cost of these expedited shipments also increased dramatically over the last few months, as we know from what we see all over the world. And therefore, you get a double effect that even to be able to compensate for the manufacturing itself, you need to pay much more to bring components in. Now we go into the manufacturing. And the idea is that in a normal way of operation, you would usually use your capacity to ship as much as you can using ocean freight to accumulate products close to your customers in our warehouses in Europe and the United States, and then ship them locally, all using regular ocean freight and in some cases, of course, grounded transportation. Once this capacity is gone, you basically live from your hand to the mouth in a sense, meaning that whatever you are manufacturing in China, in Israel, and in Hungary, you're trying to push as quickly as possible to your customers because they count on you and they know that they need to get products in order to install them. And the only way to do it is simply by sending expedited shipments And again, expedited shipments more than quadrupled and sometimes even six times more expensive today than they were a few quarters ago. And then you see a double effect of these expedited shipments. And the last thing, of course, is the tariffs on Chinese products. And as I said in my part of the transcript, is that our non-tariff, Shipments to the U.S. went down to 53% from 88% last quarter. So in Q3, the effect of all of this was relatively marginal because on one hand, we still had inventories that were on more regular shipments that were manufactured in Q2 and came to Europe and the United States in the regular way, and we did observe some of the costs of shipping the components from one location to the other, and you see it in this 110 basis points increase that are also including a little bit of tariffs that were paid when we entered this Chinese product to the United States, but actually some of these costs are actually capitalized on a product that we brought in Q3 and we're going to sell in Q4. And this is the 110%. If we look now into Q4, what we're going to see is that we'll see approximately 300 to 350 basis points coming from the accumulations of the effects. And that means that now we're not just shipping components that are maybe smaller and in lower volumes in an expedited way from one factory to the other. We actually start shipping large products by air or by expedited shipments to their final destination. And at this point, We do not have any more products coming to the U.S. from our Vietnam facilities from the last quarter simply because this factory was practically down. And those manufacturing that we're doing in Vietnam are not yet coming to the U.S. and allowing us to enjoy the non-tariff region. So in general, what we see is that in Q4, we're basically getting or absorb most of the hits from the lack of manufacturing in Vietnam, and of course, the expedited shipment that is created from this. When it is going to clear, in Q1, first of all, we expect Vietnam, sometimes in November, as we said, to go back to normal levels, and therefore, some of the goods will still be sent in an expedited manner to customers to meet Q4 demand, but some of it will be shipped, no, Q4, and then some of it will be shipped for Q1 in order to make sure that we have enough inventories to begin the quarter. In the same time, also again, the manufacturing in China that is now regulated will start to go in a less expedited manner. And therefore, in Q1, we will still see some effect that are residual from Q4, but you'll start to see an improvement. And towards Q2, where hopefully, unless there are more COVID waves, we will see continued manufacturing in all of our factories that have access capacity to above this demand, we will be able to come back to this, I would call it normal shipment methodology or system of ocean freight. So it's a little bit of a lengthy explanation, but the idea is that lack of manufacturing in Q4, Q3 is becoming more expensive in COBS in Q4, the improvement in Q4 is contributing to improved margins in Q1, and in Q2, hopefully, we're supposed to be back to the normal margins.

All right, thank you. Our next question comes from Mark Strauss with JPMorgan Securities.

Yeah, thanks very much for taking our questions. I wanted to go back to the new facility in Mexico. What percentage of your U.S. shipments will come from Mexico versus Vietnam? You know, kind of steady state once Vietnam is back up and running. And then can you kind of compare and contrast both the manufacturing costs between Mexico and Vietnam as well as the shipping costs into the U.S.?

So, Mike, I need you to repeat the second part. Regarding the first part, so the... The idea is to reach a point once we're fully ramped where almost all of the products that are intended for the U.S. market are coming from Mexico, and that's how we're designing the capacity. At the same time, having the flexibility that we have non-China manufacturing in multiple locations, not only Vietnam, also Israel and Hungary, will allow us to deal with fluctuations in the demand in case We cannot supply everything from Mexico, but ideally, we would want to deliver from Mexico all of the volume required by intended for the U.S.

Okay, thanks, Xavier. The second part... Yeah, go ahead, Ronan.

So for the second part... think that it's it's relatively early to understand exactly the cost compared to Vietnam because again the situation is today that that all shipment costs are very high so you know compared to where we are today Mexico is going to be dramatically cheaper than Vietnam I think that once we're starting to manufacture in Mexico and at the same time ocean freight is going back to normal I would assume that the difference is of course better in in manufacturing in Mexico, but not as dramatic. But I think that there is another thing that needs to be taken into account, and this is also related to inventory levels and the capital, uses of capital, because the line today from Vietnam to the United States is approximately six weeks where products are on a ship before they're being distributed, and once you're manufacturing in Mexico, we're talking about one week to 10 days at most, and that means that we can also make our inventory management more efficient. And of course, this is something that also saves costs. So I think it's going to be cheaper. It's a little bit hard to evaluate it right now.

Okay, that's helpful. And then just my follow-up, can you just go back to the decision to not increase pricing this year? I mean, you've increased prices in the past. I'm thinking back to when the Chinese tariffs originally came on a few years ago. Why not do it now? Do you see this as an opportunity to gain market share perhaps or any other color would be helpful?

I think the main thing is we're not looking at this as a short-term event. So it's a complex situation for everybody. Our customers gave us orders early and budgeted their activity and installations in particular commercial projects. with certain assumptions. And we feel as we did throughout the constraints of the last year that our ability to get them their product when they need it and according to our commitments is very important to our long-term relationship with them. And we see the fruits of that already today. So we don't want to react with anything drastic. quickly that will impact the business of our customers. But again, not so much because we think it's going to have an immediate impact on market share one way or another, but it's part of our long-term relationship with our customers.

All right, thank you. Our next question comes from Steven Berg with Morgan Stanley.

Hi, thanks for taking our questions. I wanted to discuss storage. You gave a discussion of the ramp up and moving next year into about 180 megawatt hours per quarter. I want to just get your latest thinking in terms of the outlook there for both sort of as you think about the sales and margin potential on storage. It's obviously becoming a bigger part of your business, and we're just interested in your latest thinking about the outlook for that going into 2022. Okay.

so in general as we mentioned before first of all indeed batteries are going to be a bigger part of our revenues and we believe that over time it's going to be around 25% gross margins that we will see on this product because we believe that some of the prices today reflect the fact that the demand is exceeding the supply dramatically and once volume will come back this will be reduced in a sense there may be an opportunity for larger margins or higher margins in the first few quarters, but we do expect that they will go down a little bit. And, of course, the first battery is based on our Samsung cells, and once we're moving to our Cella 2 cells coming by the end of next year, then, of course, we have another chance of expanding them. But in any case, I would say that they would range between $25,000 30%, they will not exceed this number dramatically. And I meet the second part of the question?

No, that's really, that's the, you answered that question. That's exactly what I was focused on. And my follow-up really is broader, which is, as we think about 2022 and even beyond 22, component sourcing challenges, you've given discussions quite a bit over time on this, but Just stepping way back, what is your sense for the timing for resolution of some of the shortages, sort of for easing some of these issues around component sourcing challenges? What's your sense of the timeframe over which we're looking at kind of a normalization?

That's an excellent question. And when you know, please let us know as well. I'd say that, first of all, the situation has not improved yet. So we are managing through this complex environment, and there's a lot of juggling going on, and R&D resources that are working on qualifying alternative sources in order to make sure that we're never short on what we really need in order to deliver. And it's especially challenging when you're growing, and you're growing in two axes. You're also growing in the volume of the existing products and also trying to release high volumes of new products. Because the kind of practice in the component business is that they allocate for you something that you received the prior year, maybe with a slight increase, and they expect you to be happy with that. But if your business is actually growing dramatically, as it is in our case, it becomes more complex. So the situation is is challenging but but again we're managing through it in terms of a sense as to when uh there's a dramatic improvement i i i don't know that that uh that we have information that someone else uh doesn't uh doesn't have so there are a couple of our suppliers that we really depend on that we do have some visibility in terms of new capacity that they are bringing and when that will happen and how we secure access for ourselves into that capacity. But that helps us on some very specific critical items. But the challenge is much, much broader than that. And, again, I don't think that we have a better understanding than what is generally reported in the news about this topic. All right.

Thank you. Our next question comes from Mahib Mandalay with Credit Suisse.

Hey, thanks for taking the question. Good evening. One thing which caught my eye was the inverter product you talked about in Japan, which works when the grid is not available. Could you just talk more about it, and is that something which you expect to launch in the U.S. as well?

Yeah, so the... The practice that in the last year has become a regulatory mandate in Japan to have with every installation or with every inverter what they call a utility outlet or a small AC socket that you can pull power from if there's an outage without any local storage. So we developed that technology for the sake of the Japanese market The Japanese residential market is a very interesting market. On one hand, you have to be patient when trying to take market share in Japan, and at the same time, some of the benefits that our system provides, like enhanced safety, monitoring capability, the ability to fit complex roofs, all of those are very relevant for the Japanese residential market, so we're We're optimistic about the potential within this residential market, and that's why we developed the technology, and we are productizing it for Japan. It could be productized for other markets, but I think if you look at the global market, there are two overriding trends that are impacting the topic of storage. It's the increase of electrification in the homes, so whether it's through shifting to EV or... or electrifying HVAC, the capacity and power requirements of the home are increasing. At the same time, grid instability is causing the need and drive towards resilience. The real solution for the North American market or European market in terms of resilience is what we are seeing. People are going to more batteries, larger batteries, larger inverters, and larger systems, and more attach rates of batteries. That's what we are aiming our offering in those markets and are optimizing for that capability. That said, we could productize this technology that we have for other markets as well. We'll kind of look and see if that is justified.

So thanks, and hopefully we can see more of that at the analyst day. And just a small kind of housekeeping or follow-up, in the cash flows line item, I see around 19 millions of investment in a private company. Just wanted to understand if that's anything specific you wanted to disclose.

So it's basically, we made early this year an investment, minority investment, into a company called AutoGrid, and that's what's reflected there.

All right, thank you. Our next question comes from Phil Shen with Roth Capital Partners.

Hi, everyone. Thank you for taking my questions. It looks like you're making progress with the battery launch. Our checks suggest customers like the stackability and a number of other features of the product. You shipped 20 megawatt hours in Q3. Expect 70 megawatt hours in Q4 and expect to ramp up to the 180 megawatt hour production run rates by end of Q1. How many megawatt hours were recognized in revenue in Q3 and how many megawatt hours do you expect to recognize in revenue for Q4? Thanks.

So in general, we provide shipment and we do not go into the revenue recognition. I can tell you that the amount was not extremely large of this amount, but we do not break this number.

Okay. Thank you, Renan. And then as it relates to market share in 2022 in the U.S., I'm picking up that there are a number of customers that are wanting to increase their mix to you guys. I was wondering if you could talk through how you see the U.S. resi market share dynamics as we get through and go into the year. Thanks.

Yeah, Phil. I think we'll repeat the answer that we usually repeat in that regard. Assessing market share in the U.S. residential market is tough. there are indicators internal and external and third party that kind of show a small swing in one direction. There's an equal number of indicators by other signs that show a swing in another direction. So looking at all of the data that we see in front of us, I don't think there's a major shift in one direction or another. I would say that if you look at something that I think is relatively clear is the growth of the share of the top 10 installers in size of the overall market. And we are typically associated to be stronger with the larger installation companies. So that's a positive indicator from our perspective. But again, it's just one of a bunch of data points and indicators that I'm not sure a certain conclusion can be drawn from.

All right, thank you. Our next question comes from Colin Rush with Oppenheimer and Company.

Thanks so much, guys. Can you just give us an update on the ramp at Kokum and how we should be thinking about that, supplementing some of this non-solar business?

So, in general, again, I think that we need to look at ramp in Kokum before CELA 2 and after. Right now, our factory is 120 to 150 megawatt hour. It's fully booked. And we're basically, whatever we can manufacture, we're shipping there. And I think that in some of the cases, we're simply able to, around the project that we do in Australia, to sell a little bit more pack business than sell business, which is providing higher revenues from this limited capacity to And this is the record revenues that you see this quarter and last quarter. Once we will go into SELA 2, then, of course, the 2 gigawatt hour capacity that we have and can be expended is something that will allow COCOM to grow much further. And in the non-solar storage business that we see in front of us, either as providing batteries for UPS, for solar, special vehicles, high-power applications, and ESS-like spinning reserves, I think that there are a lot of opportunities there. But all of those will be, I believe, mostly generated once you'll have Sela 2. And even within this, you know, we need to start producing cells from this product, this factory, send them to customers. to be qualified and then you'll see an accelerated growth coming after I believe 2022 into 2023 and more. But all in all we basically get the best possible out of the very small factory that we have right now.

Great. That's helpful. And then just in terms of mix, you know, if you guys look at this four gigawatts of you know, orders that you have, can you talk a little bit about the system size, and your expectation around, you know, how the mix is going to shift from where we were maybe a year ago into this next couple of quarters. You know, are you picking up a lot of traction on the commercial side or on some of these larger systems at this point, or are we still thinking about a lot of smaller systems at the end of the day?

So, it's a good point, and you are correct. In the backlog, there's a slight tilt towards commercial. and commercial intended for larger installations. We've been talking for the last few quarters after, um, about the recovery in the CNI space from, um, from the, uh, COVID being slower initially and ramping up, uh, recently. Um, so that's, that's seen, uh, in, in multiple places, including here in the U S with, uh, more commercial work, more community solar projects and, uh, and others. Just in general, the CNI market is in a good momentum right now and we are capitalizing on some of that. So there is a slight tilt in the backlog towards CNI and with the 120 kilowatt inverter that we released a quarter or two ago, we're increasing or improving our position with larger projects, which will, of course, towards, you know, second part or end of next year, will start manifesting itself also because of the release of the 330 kilowatt. But in the backlog today, that's not reflected, but it is slightly tilted towards CNI.

Thank you. Our next question comes from J.B. Lowe with Citi.

Hey, evening, J.B. Ronan. Erica, how is everybody doing? Question was kind of a follow-up on Phil's question, but on Europe. We know Enphase last week came out and put up, at least for them, a nice expansion internationally. I'm just wondering, how do you see the competitive dynamics, particularly as it pertains to them, if they're coming into Europe, how do you kind of see those competitive dynamics kind of playing out versus here in the U.S.? ?

Yeah, of course, I won't get into the detail of anything specific related to Enphase. Generally speaking, and we spoke about this in staff, the markets in Europe and Australia have become much more a... Chinese on one hand and premium on the other hand being SolarEdge. So it's a different competitive environment than in the U.S. because there's a very broad offering of low cost and decent quality Chinese products. And that's the dynamic of competition in these markets. And it's very different in that regards to the U.S. And we have developed some experience and specific offering for those markets that reflects that different competitive environment, especially taking into account that there's no rapid shutdown requirement in these markets. So you really have to be either cost competitive or be able to justify the cost difference compared to the Chinese alternatives that are out there. So it's a very different landscape, and that requires a special type of approach that we've adopted over the years.

Okay, great.

And my other question was on the e-mobility business. $70 million in sales this year. I know it's going to be back-end loaded anyway. And then I remember we had talked previously about kind of that business being 100 to 120 million-ish annually for the next few years, you know, kind of see how it goes. But do you think, you know, some of the delayed sales that you expected to come in at the back half of this year will be pushed into 22 and then kind of hitting that run rate? Or is it going to be a little bit more lumpier than that? How do you guys kind of see that business for the next 18 months?

Yeah, so first of the first part, actually, most of that is already done. So of what we're saying for 2021, so it's not so much back-end loaded, it's on the contrary, the dynamics of the stop and go that we've been experiencing recently is what we expect to see between now and the end of the year. And that's why we're not assuming a large number in Q4 like we might have assumed otherwise. And the expectation is to that the project will catch up whether that's going to be in the early part of 2022 in terms of the volumes and or later or in 2023. it's really related maybe even to the earlier questions about recovery of the component shortages because that's what's causing these stop and start motions in the automotive industry. So it's kind of, we're a secondary effect to the fact that the OEMs are not producing the base vehicles at the rate that they would want to because of availability of components and then they don't consume our offerings at the rate that was originally planned. So, the assumption is yes, that it's going to catch up. When is hard to say.

Alright, thank you. Our next question comes from Eric Lee with Bank of America Securities.

Hi, good afternoon. Thanks for taking the questions. First off, I wanted to talk about storage. Could you just talk about your specific progress on the rollout? I know that there was a little bit of a delay in 3Q. If you could talk to, you know, what was driving that and what's giving you confidence in the ramp to 70 megawatt hours for 4Q? And could you also talk about the ramp thereafter on capacity beyond the 180 megawatt hour out of 1Q? I think you talked to 250 megawatt hours out of 2Q, if you could just, you know, whether you can affirm that or not.

Yeah, so I'll start with the first question. So the rollout is progressing well. I think a point that was also an opportunity for us to clarify a bit is there are already about 90,000 installations of our inverters with DC coupled batteries. So in terms of know-how and capability of the broad installer base to connect the DC coupled battery to a SolarEdge inverter, that know-how is out there. We are supplementing with training on how to do it with our battery that is a little bit easier to install because of the various wireless connections, but that part of the rollout is going fine. The slightly lower than planned output this quarter was really around logistics. A lot of the parts are manufactured in China. Then it's either pay more to get them delivered quickly or get them on regular ocean freight to the assembly factory and deliver a little bit less. And here we defer to getting a little bit more profitability out of the deals. In terms of capacity, definitely as you mentioned, the intent is the 130, excuse me, the 180, the 300 batteries a day is the milestone for the end of Q1 and the intent is to ramp that further into Q2 and to consume the capacity of cells that we reported in the previous quarter. And even more once we start getting our own sales out of CELA 2 and COCA.

Got it. And as a quick follow-up, I think you mentioned CNI supply commitments locking in pricing earlier. But could you just talk to the potential ability to raise prices, you know, even if only on the residential side? I know your peers have communicated a second price increase already this year at the low-mid single-digit range. if you could just talk through your thoughts and strategy here. Thank you.

Okay. So as we explained, and we're referring to pretty much the period between now and the end of the year, and in particular considering the challenges that we are facing on margin because of the shutdown in Vietnam, on that event we decided that it is – it is not the right thing for us in terms of long-term thinking to transfer that cost over to our customers. In terms of longer terms, we're evaluating what to do. We have to look at it also regionally and also product-wise and assess the long-term implications. So what we're referring to is right now in Q4, Related to the events in Vietnam, we decided not to increase pricing and shift the cost over to the customers.

Thank you. Our last question will come from Kashi Harrison from Piper Sandler.

Good evening, everyone, and thanks for taking my questions. So on the utility scale side of the equation, I was wondering if you'd just walk us through the investment thesis for a developer to use a power optimizer solution, just given limited shading of these sites. And then what regions do you think you might have strong demand for this utility scale product?

So as I mentioned also, I think, in the call, we're talking right now, this product is aimed initially for what we call a small utility and community solar type product. type installations. And as I also mentioned, we are optimizing the cost because the value proposition needs to fit the additional cost to the customer. And there are the classical or the long-term value propositions that we offer in terms of monitoring and reduced O&M expenses and and recovering loss of energy due to mismatch, in particular with the extensive use of bifacial modules that are out there. So that's a big part of the qualification work that we are going into, is ensuring that we know how to quantify for our customers the benefits, including adding features and capabilities that will allow them to save some money on other elements of their operational their operational aspects so that's indeed the challenge and that's that's what we are preparing for this product and in that regard I think to encourage you to attend the analyst day where we can get into that get into that in more detail looking at regions and customers and this is an experience that we we've gone through also initially with residential and then with CNI is you start with early adopters that for one reason or another have a a view that they need this type of capability. Sometimes it's large projects that are on uneven land. Sometimes they might have other constraints that make it an easier decision for them to adopt this type of technology and then over time they understand the broad benefits and then start adopting it for their normal installations and then other people start adopting it as well. I assume that we'll go through a similar path, and we're actually at the beginning of that path already today in small and then larger utility, but all along optimizing the value compared to the relative increased cost.

All right. Thank you. At this time, there are no further questions in the queue, so I would like to turn the call back over to CEO Stevie Landos.

Thank you, and thank you, everybody, for joining us on the call today. Thanks.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for your participation, and you may now disconnect.