SolarEdge Technologies, Inc.

Welcome to the SolarEdge conference call for the fourth quarter and full year ended December 31st, 2021. This call is being webcast live on the company's website at www.solaredge.com in the investor section on the event calendar page. This call is the sole property and copyright of SolarEdge. With all rights reserved and any recording, reproduction or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to webcast replay of this call by visiting the event calendar page of the SolarEdge investor website. I would now like to turn the call over to Ms. Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Please go ahead, ma'am.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year ended December 31, 2021, as well as the company's outlook for the first quarter of 2022. With me today are C.V. Lando, Chief Executive Officer, and Ronan Fire, Chief Financial Officer. CV will begin with a brief review of the results for the fourth quarter and full year ended December 31, 2021. Ronan will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2022. 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 in 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 that they provide investors the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended December 31, 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 Stevie.

Thank you, Erica. Good afternoon and thank you all for joining us on our conference call today. We are pleased to report that we have concluded the quarter with record revenues of $552 million and record revenues for the year 2021 of just below $2 billion. During 2021, we released and began to ramp several new products like our energy bank residential battery and higher power optimizers and inverters in our residential and commercial offerings. In recent months, we are experiencing a surge in demand for these products, which we attribute to the positive reception of the technology in parallel to market growth spurred by electrical power prices increasing globally, and the increased government and corporate focus on sustainability and use of renewable energy. We are excited about this rapidly growing opportunity and are intending to do everything needed to capitalize on it. However, in the current challenging operational and supply chain environment, expanding infrastructure and ramping production to meet this higher demand level is putting temporary pressure on our gross margins. In the call today, we will provide detail on all of these factors. I would like to start with a summary of 2021 and the main themes which shaped the year and how we expect them to impact our business moving forward. Total revenues in 2021 grew 35% over the previous year and 32% in the solar business. Growth in the solar business was across all segments and regions and practically in every country in which we operate. The larger year-over-year growth of significant size markets was in Italy, Germany, Taiwan, France, Poland, and Israel. While we usually focus our comments on North America and Europe, which grew substantially this year, 29% and 36% respectively, I want to shed some light on the long-term growth opportunities in Southeast Asia and the Middle East. In these markets, we grew in 2021 by more than 43%, representing not only market share gains, but also the high growth rate of these markets, which is expected to continue. In these countries, the market consists primarily of commercial installations, and our momentum here is indicative of our overall momentum in commercial, which I'll be discussing later. Other noteworthy dynamics of 2021 include significant increase of battery attach rates in residential installations, which increased by more than 50%, most of which were third-party batteries sold by our partners, DC couple to our inverters, as our residential battery ramp was slower than we originally planned. Also in residential, we are seeing growth of the average installation size and momentum in our sales of self-consumption devices such as EV chargers and smart water heaters as consumers seek to optimize their home energy consumption and reduce their dependency on higher-priced energy coming from the grid. In the area of grid services, we are now active in programs in 13 states across the United States, in all states in Australia, and in some European countries. Also in 2021, we saw 70% increase in use of our designer software, which enables full system design, including advanced features such as shade analysis, battery usage and consumption optimization, bill of materials generation, financial analysis, and automated creation of the offers to the end customer. More than 1.1 million unique site designs were performed by installers on this platform last year. Overall, we are pleased with the growth we have seen in 2021 and the progress made with our strategic initiatives. Now turning to the fourth quarter results. As mentioned, revenues for the fourth quarter were a record $552 million, driven by North America, where revenue grew quarter over quarter by 37% due to higher battery sales, increased residential inverter sales, in particular of the higher priced energy hub inverter and the growth of sales to the commercial segments. Moving to our global residential business where we continue to see strong demand, healthy inventory in our channels, increasing sellout by our distributors and a strong backlog of orders. In fact, we already have firm orders for delivery in 2022 of a megawatt volume that represents 60% of our megawatt residential shipments in the entire year of 2021, not including batteries. In commercial, we are seeing a real shift in market momentum driven by a few factors. The rising electricity prices across Europe and other regions, as well as the trend of corporations wishing to progress their ESG programs and offset their carbon emissions. together with a stable and favorable regulatory environment in many countries, such as Germany, where the new government has announced aggressive growth plans for PV, lay the ground for an increase of demand in markets where SolarEdge already has a solid local presence and strong brand awareness. At the same time, we are seeing increased acceptance of our commercial product offering released last year, which includes the Synergy 120 kilowatt inverter, and high power optimizers supporting the high power bifacial modules now commonly used in commercial installations. Combined, these market and product dynamics are driving the record demand for our commercial solutions, where our current megawatt firm order for delivery in 2022 are 143% of all commercial megawatts we shipped in 2021. While the increased backlog is partially related to longer lead times, the amount of planned projects and the increase in design wins, including for ground mount projects, demonstrates what we believe to be a true inflection point in the commercial market. Ramping production to meet this demand in the current supply chain and logistic environment is having an impact on our top and bottom line. As we prioritize expedited shipments, in order to meet customer schedules, at times at the expense of our gross margin. We expect this situation to last until the middle of the year as we adjust our infrastructure and ramp manufacturing capacity to this new level of demand. Moving to product updates. In the residential segment, we released last quarter the 10 and 11.6 kilowatt energy hub inverter with 10 kilowatt backup power and a new three-phase EV charger to join the single-phase charger we have been shipping for a couple of years. We are seeing strong demand for the EV charging portfolio, driven by the growing adoption of electric vehicles, in particular in Europe. Our Energy Bank residential battery has now been installed in 11 countries. We are receiving positive customer feedback, in particular related to the ease of installation with the new EnergyNet wireless communication technology incorporated in our residential offering. Our battery manufacturing ramp has been slower than anticipated due to delayed supply of several components used in our DC to DC and BMS boards. For most of these components, we have already qualified additional sources and we are working closely with suppliers to assure timely and consistent supply for the remainder of the year. In the fourth quarter, we shipped 42.5 megawatt hour of batteries versus the 70 megawatt hour planned. We plan to close this gap already in Q1 of 2022, reaching a production run rate of 300 energy bank batteries per day by end of the quarter, as we discussed in the last quarter's call. In Q1, we plan to shift between 100 to 120 megawatt hour of residential batteries. In the commercial and industrial segment, we continue to test our 330 kilowatt large scale inverter in sites in Israel and Europe. We are on track for ramp later this year, further strengthening our offering for ground mount installations. We will provide more detail on our ground mount offering as well as other new products and services in our analyst day scheduled for March 29th. Moving to operational infrastructure and progress in that area. In Q1, we will begin to ship residential inverters and optimizers for the North American market from our new contract manufacturing facility in Mexico. We expect to be able to deliver practically all of the U.S. residential demand from the Mexico factory by the end of the year. This will have a favorable effect on shipping costs, tariffs, working capital management, and timely meeting the U.S. demand and lead times. The commercial product manufacturing capacity will be expanded in two phases to meet the new growing level of demand, which I detailed earlier. We are increasing manufacturing capabilities in Vietnam for delivery of products to all regions, and that will be followed by additional manufacturing growth in Mexico to supply commercial products to the U.S. market. The surge in demand is creating manufacturing capacity challenges and pressure across the supply chains. where we need our suppliers to allocate component quantities well above those supplied in previous years. We are working closely with our key suppliers who are supporting us in our mutual growth as they too see the value in this long-term opportunity. Moving to our non-solar businesses. 2021 was a record revenue year for our non-solar businesses, totaling $176 million. coming mostly from our energy storage and e-mobility divisions. Our energy storage division concluded the year with record revenues and was profitable for a second year in a row. Cellar 2 construction for the manufacturing of our own lithium ion cells continues per plan and is expected to begin production ramp in the second quarter of 2022. In the e-mobility division, We experienced some slowdown early in Q4 of 2021 due to our customers' temporary halt in production, which resumed to normal levels by the end of the fourth quarter. We expect normal levels of delivery in the first quarter and through the year. In our critical power division, we started first shipments of our three-phase UPS offering, which was designed and productized in-house since the acquisition. We will elaborate more about these segments in our analyst meeting in March. To summarize, we are facing an accelerated growth opportunity in a challenging operational environment. As we have proven in the past, I am confident that our global team will excel in execution, ensuring our customers have the benefit of our technology when and where they need it. And with this, I will turn the call over to Ones.

Thank you, Tibi, 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 release issued today. Segment profit is comprised of gross profit for the segment, less operating expenses that do not include amortization, stock-based compensation expenses, and certain other items. Total revenues for the fourth quarter were a record $551.9 million, a 5% increase compared to $526.4 million last quarter, and a 54% increase compared to $358.1 million for the same quarter last year. Revenues from our solar segment were a record $502.7 million, a 5% increase compared to $476.8 million last quarter, and a 54% increase compared to $327.1 million for the same quarter last year. Overall this quarter, we shipped approximately 5.1 million power optimizers, approximately 197,000 inverters, and 4,250 batteries representing 42.5 megawatt hour. US solar revenues this quarter were a record $257.4 million, a 36.6% increase from the last quarter, and represented 51.2% of our solar revenues. Solar revenues from Europe were $193.2 million, or 38.4% of our solar revenues representing strong revenues in Germany, Netherlands, Italy, and Poland. Rest of the world's solar revenues were $52.1 million, or 10.4% of our total solar revenues, and included a record revenue quarter in Taiwan. On a megawatt basis, we shipped 751 megawatts to the United States, 752 megawatts to Europe, and 419 megawatts to the rest of the world. 45% of shipments were commercial products, and the remaining 55% were residential. ASP per watt, excluding battery revenues this quarter, was 25.3 cents, a 0.8% decrease from 25.5 cents last quarter, a result of a high volume of residential product shipments to North America, offset by an increased portion of large US customers that benefit from larger volume discount within the overall mix and the weaker Euro which reduced our ASP on products sold in Europe. This quarter, two US customers accounted for more than 10% of our solar revenues. In light of the increased cost associated with the manufacturing of our products and the accelerated ramp-up cost associated with meeting the surge in demand for our products, we have initiated price increases in the fourth quarter of 2021 that will continue into the first half of 2022. These price increases vary among product lines and geographies depending on the competitive environment, demand level, and specific cost increases related to specific products. The price increases are aimed at covering part of the component and manufacturing cost increases and are not focused on more temporary logistic expenses which relate to time-limiting increased customer demand. We expect the full impact of these price increases to materialize in the third quarter of 2022. This quarter, revenues from our non-solar businesses were $49.1 million. Revenues of our energy storage division achieved a record quarterly revenue, while our e-mobility division revenues reflected lower delivery of powertrain units to the final customer as explained by CZ. Consolidated gap gross margin for the quarter was 29.1% compared to 32.8% in the prior quarter and 30.8% in the same quarter last year. Non-gap gross margin this quarter was 30.3% compared to 34% in the prior quarter and 32.5% in the same quarter last year. Gross margin for the solar segment was 32.8% compared to 36.6% in the prior quarter. Gross margin within the solar segment is affected by various factors. The combination of the following factors contributed to this result. From a customer geography and product mix perspective, High volumes were shipped this quarter to large customers in the United States that benefit from volume discounts, and these contributed to the lower margin. This was coupled with a weaker euro, which eroded our margins on sales in Europe since revenues are euro-denominated, while manufacturing expenses are stated in US dollars. Lastly, the growing share of battery shipments that are characterized with lower gross margins further contributed to this margin decrease. From an operational and supply chain perspective, our accelerated growth combined with the known industry challenges of component shortages, limited manufacturing output, and constrained and expensive shipment environment continued to adversely affect our margin this quarter while we are still recovering from the forced shutdown of our Vietnam facilities that returned to normal operation in mid-November. In supply shortage period, component manufacturers tend to allocate goods among their customers based on past quantities. Given our current accelerated growth rate, some of our suppliers are having difficulties supplying sufficient component quantities in a timely manner. This has resulted in a need for expedited shipping goods shipments to meet the customer delivery times, and in certain cases, payment of unutilized capacity to our contract manufacturers. As Tzvi mentioned, our battery manufacturing suffered this quarter from delayed arrival of components, resulting in lower shipment volumes at a higher cost. Goods subject to tariffs shipped into the United States from China accounted for 66% of our US shipments in Q4. To summarize the solar segment margin discussion, we view the impact on inverters and optimizers margin as transitory and expect to return to our normal level in the second half of 2022. Gross margin for our known solar segment was 4.2% compared to 8.7% in the previous quarter, mostly related to reduction in e-mobility revenues and margins. On a non-GAAP basis, Operating expenses for the fourth quarter were $94.1 million or 17.1% of revenues compared to $83.8 million or 15.9% of revenues in the prior quarter and $72.9 million or 20.4% of revenues for the same quarter last year. This increase is mainly related to the fact that we reduced our hiring in the third quarter of 2021 and increased our headcount again in Q4, mainly in our R&D and sales and marketing groups worldwide. This quarter, we also experienced a gradual increase in sales and marketing activities as travel restrictions due to the pandemic are starting to ease and trade show activity as well as customer visits begin to return to normal. Our solar segment operating expenses as percentage of solar revenues were 15.8 percent compared to 14.6 percent last quarter. Non-GAAP operating income for the quarter was $72.9 million compared to $95.2 million in the previous quarter and $43.5 million for the same period last year. This quarter, the solar segment generated operating profit of $85.3 million compared to an operating profit of $104.9 million last quarter. The non-solar segment generated an operating loss of $12.4 million compared to an operating loss of $9.7 million in the previous quarter. Non-GAAP financial expense for the quarter was $2.2 million compared to a non-GAAP financial expense of $3 million in the previous quarter. Our non-GAAP tax expense was $7.9 million compared to $10.1 million in the previous quarter and $4.6 million for the same period last year. GAAP net income for the fourth quarter was $41 million compared to a GAAP net income of $53 million in the previous quarter and $17.7 million in the same quarter last year. Our non-GAAP net income was $62.8 million compared to a non-GAAP net income of $82.1 million in the previous quarter and $55.7 million in the same quarter last year. GAAP net diluted earnings per share was 74 cents for the fourth quarter compared to 96 cents in the previous quarter and 33 cents for the same quarter last year. Non-GAAP net diluted earnings per share was $1.10 compared to $1.45 in the previous quarter and $0.98 in the same quarter last year. Turning now to the balance sheet. As of December 31, 2021, cash, cash equivalent, bank deposits, restricted bank deposits, and investments were $1.2 billion. Net of debt, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $548 million. During the fourth quarter of 2021, we generated $89.6 million in cash from operations. Accounts receivable net increased this quarter to $456.3 million compared to $416.2 million last quarter. As of December 31, 2021, our inventory level net of reserve was at $380.1 million compared to $304.7 million in the prior quarter. Most of this increase is related to increased raw materials, battery cells, and component inventory in our solar segment, while our finished good inventory continued to decrease as a result of the growing demand and limited capacity. Our non-solar inventory level remained practically similar to the previous quarter. Let's move now to summarize the full year of 2021. Revenues for the year was $1.96 billion, a 34.6% increase from $1.46 billion in calendar 2020. Revenues related to the solar segment were $1.79 billion, or 32% increase compared to 2020. GAAP gross margin was 32% compared to 31.6% in the prior year. Non-GAAP gross margin was 33.5% compared to 33% in the prior year. GAAP net income for 2021 was $169.2 million, a 21% increase compared to 140.3 million in the previous year, and GAAP diluted EPS of $3.06 compared to $2.66 in the prior year. Non-GAAP net income for 2021 was $272.9 million, a 22% increase compared to $224.4 million in 2020, and GAAP net diluted earnings per share of $4.81 compared to $4.11 in the prior year. This year, we generated $214.1 million of cash from operations. Turning to the guidance for the first quarter of 2022. The combination of strong demands for our products and the operational adjustments and efforts in fulfilling this growth within an environment of component constraints, fast manufacturing capacity expansion, which require higher investment, logistic constraints, and high shipment charges as well as the expanded rapid growth of our battery shipments that are characterized with lower gross margin will have a positive effect on our revenues growth rate for the entire year and will continue to put pressure on our gross margin in the first half of 2022. We expect this impact to be temporary and will be mitigated upon full ramp of our Mexico manufacturing, which is expected to be concluded by the end of the year. On an annual basis, we expect that revenue growth as well as the operational expense leverage will offset the temporary margin impact and will increase our overall expected profit levels. As such, for the first quarter of 2022, we are guiding revenues to be within the range of $615 million to $645 million. Revenues of the solar segment are expected to be within the range of $575 million and $595 million. We expect non-GAAP gross margin to be within the range of 28 to 30%. Gross margin of the solar segment is expected to be within the range of 30 to 32%. I will now turn the call over to the operator to open it up to questions. Operator, please.

Thank you, Mr. Speaker. If you would like to ask a question, please signal by pressing star 1 on your phone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Again, press star 1 to ask a question. We will take the first question from Mr. Mark Strauss from JP Morgan. Your line is open. Please go ahead.

Thanks very much for taking our questions. Zevi, I just wanted to go back to your comments about potentially seeing an inflection point in the commercial market. Do you think, just kind of looking out beyond your guidance a bit, but do you think 2022 becomes a year where we start to see the C&I business become the majority of your shipments? And then I'm trying to remember if you've ever disclosed exact details, but can you just remind us kind of the difference in margins between the resi and the C&I business?

Mark, I'll take the first part and I'll hand it to Wonen for the second part. I think the answer is from a megawatt perspective is likely. The demand is such and the rate of increase is such that it is likely that from a megawatt shipment this year, we will ship more commercial And I think also the word commercial is becoming limiting because a significant part of this is already ground mount installations, in particular in the U.S. So generally these larger installations will be a larger portion of our megawatt shipments in 2022, I estimate at this point.

And Mark, with regards to the gross margins, I'll start with the qualitative and then I will move to the quantitative margin assumptions. In general, you usually see that the gross margin for residential, I would say, is 200 to 500 basis points higher than what you see in commercial. And this is depending on, first of all, what is the residential offering? For example, is it an energy hub or is it a regular inverter? And also related to whether we are talking about large commercial or smaller commercial installations. So by definition here, the scenario very much changes, and this is before talking about geographical mix. So 200 to 500 basis points will be the quantitative answer. On the qualitative answer, I think that what we need to understand is what is going to be the margin profile on our solar inverters and optimizers. And here, actually, we expect that towards the second half of the year, we will be back to our regular 35% to 37% gross margin for inverters and optimizers. And here, you actually see a little bit of this polarization. On one hand, we see residential where the margin is expanding on the unit and sale. At the same time, we see the increase in volume of commercial installations and products sold that are characterized with lower margin, but all in all, they are stabilizing to this 35 to 37% margin range. This is basically a mix issue, but the important thing is that in general we continue to see the general model that we used to describe in the past.

Okay, that's very helpful. Thank you. And then if I can just squeeze in one more. You mentioned pricing increases in 4Q and continuing in the first half kind of based on the competitive dynamics in certain markets. just any more color there, you know, where you think you have the kind of the most pricing power, least pricing power across products or geographies, whatever it might be.

I think it's, the variation is by segment, and generally speaking, the commercial market is split to a large extent between lower cost string inverters and our MLPE solution. And with the introduction of the larger inverters and the larger optimizers, we are able to bring the cost per watt on our MLPE configuration down a bit. And then it gives the people that still have the interest and motivation towards safety module level optimization and monitoring the return on investment in order to prefer our solution over a string inverter. So there the opportunities are relatively tight in terms of the ability to increase prices because it's a very Amit Singer- cost driven analysis and we are managing a defined gap and we are now at a point where we are able to on large scale justify that gap. And that's what increase is increasing the demand generally in residential the opportunity is a bit is a bit bigger in that regard. Amit Singer- And and even more in batteries under the current circumstances of shortages in the market and the favorable feedback that we're getting for our battery.

Okay. Very helpful. Thank you.

We will take the next question from Brian Lee from Goldman Sachs. Your line is open. Please go ahead, sir.

Hey, guys. Good afternoon. Thanks for taking the questions. Maybe first I want to follow up on the gross margins. Just was wondering, Ronan, you're talking about getting back to 35% to 37% gross margin target for solar. Is that in the second half? Is that starting in Q3? Maybe if I could just clarify that. And then there's a roughly 500 basis point bridge between what you guided here for Q1 versus getting back to those targets. Can you kind of drill into some of the pieces. It sounds like freight, it sounds like some of the supply chain issues, but maybe give us the big pieces that bridge the 500 basis points between this quarter and a couple from now and have a follow-up. Thanks.

Yes, of course. And I would like even to clarify more the question or my answer before I detail. What we discussed as returning to normal on the 35 to 37 is on the inverters and optimizers and not the batteries. Because if you remember, we discussed that batteries will be approximately 25%. So let me first of all talk about the overall, I would call it, bridge to get back to the 35 to 37% on the optimizers and inverters. and I will then try to connect everything to the battery. So in general, we see, I would say, five to six elements that will enable us to bridge from where we are today into Q3 and Q4. The first one is the fact that once we are increasing our manufacturing capacity, and this means that we're adding Mexico and expanding Vietnam, as Stevie mentioned before, we have much more capacity that can be placed on boats and ships and sent to the target without the need for expedited shipments, which are today extremely expensive, especially in the price environment that we see right now. So increased capacity means lower expedited shipments and much more regular shipments. This by itself contributes few hundreds of basis points to the margin. The second one is Mexico as a site by itself, because not only contributes for the additional capacity, It also means that now we can eliminate, first of all, increased tariffs that we pay today. As we said on the prepared commentary, 66% of the products that we brought to the US in Q4 were subject to tariffs, and this amount will be reduced as Vietnam is back, but most likely when Mexico is down. So this will dramatically reduce the expenses, plus the fact that we will not be needing the ocean freight, which is today again very expensive compared to land freight. The next thing will be the price increases that we have implemented. We usually implement price increases on new orders, and that means that most of the price increases that we're implementing, because of the lengthening period or lead time period, is taking time until they kick into the system, and we expect to see all of them materializing in Q3. We also have a few more issues that will help in general. The first one is that today on the batteries, and this is already now related to the solar segment, not necessarily on inverters and optimizers, we're using the Samsung energy cells from our one gigawatt deal. Once we have CELA 2 towards the end of the year, Cells that will be manufactured by our Korean part of the storage division will allow us to reduce this cost. The scale, because of the very high revenue that we will see or revenue growth that we will see, the scale of our fixed costs will become lower. And eventually, eventually, we will see, of course, continued increase in the other non-solar segments that will actually push us again to the better margins. Again, this is not related to solar. In the analyst day, we will basically layer all of this and we will provide how everything is impacting. But to summarize, yes, we will see solar inverters and optimizers go to 35, 37. Batteries stay at about 25%. And now the portion of batteries to solar inverters and optimizers will very much determine the end result of the solar segment. And all of the other factors will increase margins in general for solar and non-solar. I hope that it answered your question, Brian.

Yeah, that's super detailed and helpful context. I guess related to that last piece, the solar and the storage ratio, I know the battery ramp sounds like it's a little bit behind schedule, but there's a big acceleration here implied in Q1. Can you give us a sense of kind of what we should expect going forward in terms of the battery ramp? Because you got You know, the SDI volume, but then you also have SELA 2 coming online in Q2, and I would expect that to add some volume in the back half of the year. So just any sense on the battery ramp we should expect off the Q1 acceleration. And then in terms of mix for batteries, you know, U.S. versus non-U.S., are you shipping it all into the channel, or are you seeing, you know, direct Q1 demand, just any sense of kind of where you're seeing that $100 to $120 range? for Q1. Thank you.

Okay, so first of all, from the revenues and the growth of the battery, we need to remember that 2021, we first of all utilized the Samsung deal that we have. And this means that at least in the first quarter, as we mentioned, we already guided for 100 to 120 megawatts. And by the end of this quarter, we will be at approximately 180 megawatt run rate per quarter. We will continue to ramp these manufacturing capabilities in Q2, where at the end of Q2, we would reach 250 megawatt hour per quarter. And this is actually the run rate of cells that we have from Samsung, and we expect to run in this rate for Q3 and Q4. The sales from COCOM and the ramp up of the manufacturing based on this one will be dependent on two major items. The first one is demand again that we will see in the market and assuming that, of course, it can consummate all of the 250 megawatts. And here, the second element will be really CELA2 will just start to ramp, as we said, with test runs in the second half and, sorry, in the second quarter. And in the second half, we will start to ramp up the manufacturing. And here I would say that, you know, the manufacturing pace will very much determine what will be the additional volume that we should bring. So plate safe, I would say about 250 megawatts from Q3 and forward. And there is an upside coming from the additional CELA2. And this will guide, of course, as we will move and we'll have much more certainty on CELA2. I'll move to Tzivi for the second geographic mix.

Today we're kind of shipping probably 50-50% to North America and to Europe, prioritizing customers that we believe have a potential for consistent large volumes over time. And while there's a huge opportunity also for retrofit of batteries on existing systems, We're making sure that the batteries that we're shipping today are such that they bring a full solar installation with them. And as capacity grows, we'll start making batteries available also for retrofit on existing systems.

All right. Thanks, guys. I'll pass it on.

Okay. Thank you.

Thank you.

We will take the next question from Mr. Stephen Bird from Morgan Stanley. Your line is open. Please go ahead, sir.

Thanks so much for taking my questions. A lot of my questions on the results have been addressed. I was thinking more about evolution of your technology and thinking about developments around the integrated home and smart energy management. Are there technology developments that we should be thinking about in the future for you? Are there areas where you feel like you need to acquire capabilities outside of sort of organic capabilities there. I'm just curious if you could just speak a little bit more to the evolution on the technology side, especially sort of the idea around the integrated home and just, you know, continued evolution there.

Yeah, it's a good question and obviously would require a long answer, which is we intend to at least try and give in the analyst day at the end of March. But That said, and maybe as an appetizer, we are focused on really expanding our technologies and capabilities that everything that has to do with generation, storage, and consumption of electrical power generated from renewable sources. So with that being the overriding vision from a technology point of view to deliver on that. There are technology areas where are not our core strengths today that we are gradually building capability in as well. But again, hopefully in much more detail at the end of this day, we can share more on this topic.

Yeah, very fair. It's a big topic that is better suited for the investor event. I guess stepping, this is another big picture, I guess, question, but just thinking about demand for storage, it's very clear storage demand is skyrocketing globally and you're well positioned there. You've talked a lot about expansion and just, I guess, longer term as we think about that potential, how do you think about the best approach to growing your capacity, whether it's in terms of geographic mix, whether it's contracted capacity versus in-house manufacturing. It feels like there's a long runway ahead, a lot of growth, but that also means a lot of planning in terms of how you approach having the capacity. And this is all, as you described, in an environment of pretty severe supply chain dynamics. So how do you think about kind of longer-term growth strategy to meet this rapidly growing demand for storage?

Again, a big question, maybe two comments. First of all, I think what we are learning and experiencing in the residential environment, that while people talk a lot about the batteries and compare one to each other, it is really the system integration and the system performance that is determining the actual value for the, in this case, of residential, the consumer. And we expect that storage systems attach rate will increase also in commercial and we are seeing already signs for that in in Europe and in North America and we believe that there too the issue will be yes the battery parameters and and comparison of cost and cycles and and in the typical parameters in which people compare batteries to each other but really what will determine is The value for the user, whether it's residential or commercial, is the way the system is integrated and operates and serves the need that they have, whether it's backup power, self-consumption, or a combination of both. So that is where we're focused on, and that is at the core of our motivation to have access to, from the cell level, the technology at the level of the cell to the full system solution. But that doesn't necessarily mean that we will have in-house capacity to deliver on all of the demand. It just means that we will be able to optimize a complete solution from cell to system and have flexibility to meet some or most of the capacity on our own and maybe supplement that from others. So that's kind of at high level the way we're looking at it. I hope that that helps explain it.

Yeah, that's helpful. Thank you very much.

The next question is from Julian Dumalin Smith from Bank of America. Your line is open. Please go ahead.

Hey, good afternoon, team. Thanks for the opportunity. I'm just going to pick up where Steve left off here. Can you talk specifically about storage supply ramp going into 2023 here? As best I understand, the Samsung deal is transient. How do you think about not just complementing but supplementing and expanding that availability into 23? You know, you talk about a 250 run right here. What could that 23 number look like, and how do you think about providing data points to ramp into that here?

So first of all, I will divide the ability to grow in 2023 into two. The first one is everything that we get from Sela 2. Sela 2 initial capacity is designed for 2 gigawatt hour annually. And of course, we can take this entire amount and direct it if needed for storage in 2023. But actually, we can substantially increase the capacity of Sela 2 within a matter of several months, not even a year, to almost double this amount. So that means that once we will see the Samsung SDI capacity being consumed and we will understand what are the, I would call it, stabilized level of demand, we will decide whether to make the investment in Sela 2 actually in advance of 2023 in order to open the year with a higher capacity. So this is one thing. The second thing is the fact that our strategy has been from the very beginning not to be dependent necessarily only on one battery. And therefore, we can always try to team or get more capacity from Samsung should we see that the demand is so big that higher capacity is needed. Of course, we'll always try to take whatever we can, first of all, from Sela 2, both from pricing and, of course, because of economies of scale. But in general, with a little bit of preparation, we believe that 500 megawatt hour per quarter is relatively easy. I would say almost double this amount with some work is not very complicated. And going to Samsung and get more is something that is feasible.

Got it. So 500 is not the commitment on 23, but that sounds like at least an outline of where you can go. Yes, yeah. Okay, great. And then just related here to the component shortage, can you elaborate a little bit more on the strategy here? Just obviously you had some very specific acute shortages in 4Q. Strategy to address it broadly, if you can, 1Q specifically and onwards. I know you addressed it somewhat in the call comments.

Yeah, I think if you recall, especially at the beginning of the – a season of shortages, we were relatively in a very good position because we were prepared also with inventories and also with alternatives on most of the critical components that we were using and that enabled us to execute with less constraints for the first three or four quarters of the period. We're now facing more constraints and a bigger challenge, primarily just because of the elevated volumes and people's, you know, they tell us you're getting your allocation is what it was or 1.5x what it was. You should be happy, but that doesn't make us happy because we need, you know, 2 or 3x of the volumes that we consumed in the past. Now that's the challenging side. The positive side is that we are becoming a much bigger portion of our supplier's business and we did and we are consolidating into some specific larger component suppliers such that on one end, we're more dependent on them. On the other hand, they are dependent or our business is more critical to them and they are bigger and more reliable suppliers. So we're in the process of doing that and in cooperation with some of these big suppliers. And that's giving us reasonable visibility but not complete visibility and there could be still hiccups along the way and those hiccups usually translate into some type of expedited shipments in one form or another. But generally we are consolidating into larger suppliers and being a bigger part of their business and gradually, especially on the new products, also building the alternatives in order not to be dependent on any specific component in any of our products. But this is a process. Again, it will likely have some hiccups along the way.

Right. Hence your comments for back half of the year to normalize. Is that aligned with the timing that you're thinking about there? Again, hence the... The back half of the year for margins to normalize. That assumes that those hiccups to get, you know, to move past that, if you will, and to ramp with those larger suppliers.

Yeah, that's part of it. And for sure, the big suppliers that we're working with, we have their capacity plans and know when their new fabs are coming online. And that's aligned with that. But at the same time, we still have a lot of components coming from other manufacturers that And it's not that I'm saying with full confidence that in the second half of the year we won't be experiencing challenges and hiccups in these areas. It's just that the bigger portion of our component supply will be more secure in the second half of the year.

Thank you, guys. Thank you.

The next question is from Mr. Philip Shen from Roth Capital Partners. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking my questions. Follow up on the storage megawatt hours. I think you talked about 42 megawatt hours recognized in Q4, or at least shipped. Can you talk to us about how many megawatt hours was recognized in revenue in Q4? And then of the 100 to 120 megawatt hours expected in Q1 shipped, how much do you think you could recognize in revenue in Q1? Thanks.

We generally do not give this data simply due to the fact that the shift to revenue may sometimes change simply based on the destination of where you're shipping. I would say that you should assume that generally at this point of time, the majority of what you ship becomes revenue relatively quickly due to the fact that you either ship to Europe or you're trying to time the shipping in a way that shipping to the U.S. will go out from Europe manufacturing at the beginning of the quarter. So I would say that here there is almost a similarity, although, of course, shipment is always larger than revenue. In the future, and in T1, we specifically cannot tell simply because of the fact that we do not know what we'll get to the customers at what point of time. So it will be down. It will be lower revenue than shipment, but I think that that's the most we can say right now.

Okay. Thanks for that. As it relates to the battery supply chain dynamics, as you ramp up to the much larger numbers in the back half of the year, do you see any bottlenecks as it relates to lithium or any other raw materials, and if so, how are you addressing that? Thanks.

Let's divide between battery cells and the electronics around it. On battery cells, we feel very much secure. Samsung is very organized and precise on their supply of battery cells, so here we don't see a major issue. I think that, as Steve mentioned, on the electronic components, Here, we believe that we resolved, at least for the near future, the problem that we saw before. And we are in very good contact with the suppliers here. But again, sometimes simply these kind of delays are not in our hands and we cannot actually forecast them. Hence, the missing disk in 4Q had we known that we would not even guide for the number that we had. So I think that we are in good alignment with our vendors, but as Stevie mentioned, there are surprises that are happening from time to time. Sometimes the suppliers themselves do not control all of it.

Okay.

The next question is from Mr. Mahib Manloy from Credit Suisse. Please go ahead, sir. Your line is open.

Hey, thanks for taking my questions here. In terms of the CELA 2 expansion, can you just talk about how much of raw material supply visibility do you have for that? And specifically just looking at, you know, the lithium carbonate nickel price is kind of like increasing here versus last year. So I just want to understand your sourcing strategy for that. And how do you think about like expansion beyond 22 for CELA 2? Thanks.

So in general, first of all, you know, the raw materials for battery manufacturing is a little bit more predictable than electronic components, simply given the fact that once you have developed the battery cell and the underlying cathode anode material and the electrolyte, you know, you're basically locked. So in a sense, you do not even complete the development of a cell before you have a battery viable source and non-source for all of these products, and this is the case of SELA2. I would say that in SELA2, we do not expect to see issues related to the quantities which are there. Actually, most of the issues is related to pricing because the price of all of these materials is related to the London Materials Index, and here, this is the place where you can see a little bit of variation. So as long as we see, and in continuation to the answer to Julian, approximately 500 megawatt hour per quarter heading into 2023. This is something that we can cover with raw materials. We believe that we can also cover the expansion that we said can be almost doubled within a period of time because you still need to invest a little bit in the factory itself.

Next question from Mr. Colin Rush from Oppenheimer. Please go ahead, sir. Your line is open.

Thank you so much. Can you talk a little bit about the channel inventories and where you're at and how you see that getting refilled over the course of the year just in terms of order of magnitude and cadence?

We heard the first part. Generally, inventory levels I would separate between residential and commercial and a bit between regions. Inventory levels for residential products are relatively healthy in most places in the channel, maybe a little bit lower than distributors typically like to have, especially on the newly released larger single phase inverters, the 10 and 11 kilowatt inverter. is probably below normal inventory levels that distributors desire, but still I don't think there's, we're not experiencing shortages at this time on residential products either in Europe or in the US. On commercial products, I think inventory levels in the US, inventory levels on commercial products are tight everywhere for the reasons that we described before the demand is super strong and our capacity is not yet there to fulfill it fully with inventory levels on top of the project demand. So we accelerate shipment and airship and these are large volume products and that's where the costs are coming from. So on CNI inventory levels are low And they're probably lower in Europe and Asia, Australia, compared to the U.S., where they're a bit better.

That's helpful. And then, you know, it was just around the cadence of how the channel inventory gets refilled. So if you could make a couple comments on that, and then I will follow up.

So unfortunately, we're still in a bit of a non-smooth flow that started off with the Vietnam shutdown and expanded into Chinese New Year for the last few weeks that obviously affects not only China manufacturing, but also Vietnam manufacturing. So the last few months have been more of a pulse supply and less of a continuous flow. Now, we hope that after factories are back to normal operation with the conclusion of Chinese New Year, that we don't have any more post-events in the next few months, and then flow is going to be much more smooth and more simple to forecast and manage inventories.

We'll take the next question from JB Lowe from Citi.

Please go ahead. Your line is open.

Hey, afternoon, JB, Ronan, Erica. I hope you guys are doing well. My first question is a little bit more detailed. Just on the Mexico contract manufacturing facility, you had mentioned that it would be online by the end of the year. I think you had initially said that you would be able to ship some of the first product out of there in the first half, so I'm just wondering if that's not the case anymore. And then my second part of it was, you know, given how much you've already booked on the commercial side for 2022, I think you said it was over 130% of your 2021 shipments booked already. How much, how much more time do you have? You know, how much, how many, how much more can you book this year or what timeframe can you book commercial product and still have it delivered before the end of 2022? Thanks. Yeah.

Yeah, so just to clarify on the first part, what we said was we are beginning to deliver products from Mexico to the U.S. in this quarter already in Q1. What we said by the end of the year is to reach a point where all of the residential product or almost all of the residential product consumed by the U.S. market will be coming from Mexico. So this is a process that is starting now. and will end by the end of the year. But already in the first quarter, there will be meaningful shipments of inverters and optimizers from Mexico to the US market. So that's on the first part of the question. The second part of the question, the dynamics, first of all, we are taking orders today in commercial for July, August, and on, pretty much. The dynamic in CNI is a little bit different. The design phase is longer, and that's part of the reason we're now expediting shipments, because customers have trusted our offering and designed in our portfolio a few months ago, and now they need the equipment to execute those projects. And in many cases, that is the first time that they're using our products after they've been, you know, been able to buy into the technology. And that's why it's so critical for us to support them, even at the expense of the expedited shipments. So that timeframe is typically, it can range anywhere from three, four, five, five months between design in and when the product is actually needed. So the lead times that we're giving right now, and we're still taking orders for July, August is a bit longer than the design cycle, but still reasonable to give customers the confidence that they can continue to design us in at the rate that they, that they have been recently.

We'll take the next question from Kashi Harrison from Piper Sandler. Your line is open. Please go ahead.

Good afternoon. Thank you for taking my questions. So my questions are all on SELA 2. So with respect to the second half of the year, if for whatever reason there's not enough demand on the residential side for batteries powered by SELA 2. How easy is it and is there enough demand for you to redirect that capacity to non-residential segments? And then, Ronan, I was just wondering if you could just help us think about the difference in returns associated with building capacity like you did with SELA 2. versus buying capacity like you did with Samsung SDI using whatever preferred metric you want to use? Thank you.

Okay. So I'll start with the capacity. So first of all, our storage division has sales of storage products that are independent of the solar residential battery of course so by definition we can take and by the way we plan to take capacity from Sela2 into this area as well we simply of course prioritize the solar related business rather the non related business but we believe that the capacity is there and it's enough so yes if we do not see that there is enough capacity coming from Sela2 first of all we need or for Sela2 we need to consume the amount from Samsung because this is a contractual obligation and and we will direct the excess capacity to the other sources. And here we can actually either sell them as battery cells or as packed products. And our storage division have both sell and pack deliveries. We, of course, prefer to sell everything as a pack rather than in a cell because in this case we have better margins and, of course, we have a better ASP per watt-hour. So in general, we can take this and we can divert not maybe 100% of this capacity, but still enough to make Sela 2 operating and able to grow. When it comes to the return on the investment, this is a little bit more tricky. Because first of all, again, the question is, what are you using the factory for? And whether you use it for more tax or more sales that you're selling. In general, I would say that the way the metric that we have used is returned on capital investment. And I can tell you that our return on investment on SELA 2 compared to the buy option, and this is before taking the fact that you get certainty on the number of sales that you can get and the capacity that you can get, was a multiple I would say single digit, low single digit of years for return on the investment of SELA2 compared to buying from other sources. So we view it as an extremely attractive ROI model.

We will take the next question from Biju Perincheril from SAS Guahana. Your line is open, please go ahead.

Hi, good afternoon. Thanks for taking my question. Maybe one more question on the long-term battery demand. As you sort of see the surge in commercial demand for inverters, what's the reach you get from those customers for their appetite for storage products? Could this be an avenue for the additional capacity from seller

So I'll separate the answer to two, and I addressed it a bit earlier. We see the commercial storage dynamic repeating in a way the residential storage dynamic just a few years later and maybe a slightly slower evolution. But we definitely expect it to come, and there are already early signs of it today, and for the same motivations and reasons, whether it is continuity of power supply in areas of grid instability or controlling demand charges or increasing self-consumption in order to save on the pricing coming from the grid. You know, we have a large solar installation on CELA 1 factory here in Israel, and we will put a large installation in CELA 2, and in both cases for economic reasons. When will we add storage? It's probably, depending on the region, probably a couple of years out still before attach rates begin to be double digits on commercial installations. And by that time, capacity from CELA 2 or by then from additional expansions that we will do is definitely what we have in mind and where we are aiming to go.

The next question is from Mr. Michael Bloom from Wells Fargo.

Your line is open. Please go ahead.

Thanks for taking my question. A little bit of a high-level question, I guess. I know NEM 3.0 in California is not finalized yet, but I wanted to get your views on how this and similar changes in other states here could impact demand in the U.S. market, and how does that impact your long-term thinking on sales trends to the U.S. versus Europe and the rest of the world? Thanks.

Yeah, I think the latter part of your question is very valid to the first part. We are and we have been operating in Europe and other places in the world for a very long time. And if you look at some of the countries in Europe, their regulatory environment is very, I don't know if it's very similar, but it has some similar characteristics to what was intended in in the original name three proposal and and and then it turns into a self-consumption market with much much higher battery attach rate as you see today in Germany battery attach rates are 70 to 80 percent and in a much much much stronger demand for Self-consumption enhancing components like solar driven water heaters, EV chargers, smart switches, and other elements. So this is already the environment we live in, in Germany and some of the other European countries. And if that is the direction that eventually California takes, we believe the market will be similar. maybe you know maybe bigger maybe smaller but but at the same time installations will be will be much more you know call it complex expensive technological because of the the potential return through through self self consumption so overall it it will change the characteristics of the market but but we don't think it will you know, it will erase the market. And we think actually ourselves that we're pretty ready and familiar with that type of environment if and when it comes to the U.S.

The next question is from Mr. Amit Thakkar from BMO Capital Markets. Please go ahead, sir. Your line is open.

Hi, thank you for taking my questions. I just wanted to follow up on the prior question real quick. Can you give us a sense for kind of the percentage of your 21 revenues that were from California residential markets?

You know, I don't have the exact numbers in front of me. It is, you know, U.S. was typically is around... 40, 50% of our revenue. And then in the US, it's made of residential and commercial. And then residential is split across many states with California being the larger one. So I would venture to say that it's a significant number and in the double digit range, but probably in the lower double digit, as a result of the fact that it's a part of our global business, both geographically and segmentally.

It appears that there are no further questions at this time. I'd like to turn the conference back to Mr. C. V. Landau for any additional or closing remarks. Please go ahead, sir.

Yes, thank you. So in summary, we concluded an operationally challenging yet positive year on all fronts with record revenue. All of this while continuing to invest and laying the ground for future growth and expansion into adjacent markets, the fruits of which we are already beginning to see today. Thank you all for joining our call today and have a good rest of the week.

This concludes today's call. Thank you for your participation. You may now disconnect.