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spk11: You are currently on hold for SolarEdge conference call for the second quarter ended June 30, 2022. At this time, we are assembling today's audience and plan to be underway shortly. We appreciate your patience and please remain on the line. Welcome to the SolarEdge conference call for the second quarter ended June 30, 2022. 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 a webcast replay of this call by visiting the event calendar page of the SolarEdge Investors website. For participants that would like to ask questions, we ask that you limit to one question and one follow-up question only. I would now like to turn the call over to Ms. Erica Mannion at Sophia Investor Relations for SolarEdge. Thank you.
spk10: Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2022, as well as the company's outlook for the third quarter of 2022. With me today are 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 second quarter ended June 30, 2022. Ronan will review the financial results for the second quarter, followed by the company's outlook for the third 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 and the slides published today for a more complete description. All material contained in the webcast is a sole property and copyright of SolarEdge Technologies with all rights reserved. Please note this presentation describes certain non-GAAP measures including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended June 30, 2022 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.
spk15: Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. This quarter, once again, we saw record revenues for the company led by record revenues from our solar business in the United States and Europe. Our growth in the United States reflects record megawatt shifts of commercial inverters, which is more than double from the previous quarter. This is a result of the strong commercial and community solar momentum in the U.S., where we are well positioned. We expect this market to continue to grow, especially in light of the most recently proposed bill and its favorable terms for commercial and community solar projects. Additionally, this quarter, we saw a 12% quarter-over-quarter increase in residential inverter megawatt shifts to the United States. In Europe, we hit record megawatt shipments of both commercial and residential inverters this quarter. The strength in Europe is led by record revenues in 14 countries, most notably in Italy and in Germany. Outside of Europe and the United States, we are seeing particularly positive momentum in Brazil Australia, South Africa, and India. While our shipment rate continues to increase, channel inventory remains low due to the very high rates of installations of our products. During this quarter, more than 160,000 new sites were added to our monitoring platform, bringing us to a total of more than 2.8 million monitored sites around the world. For clarification purposes, a single site can be anywhere from a residential home installation of 2.5 kilowatts to a 77 megawatt site like the one we discussed last quarter in Taiwan that was recently commissioned. The importance of this indicator and of getting these sites installed, sometimes at the cost of expedited shipments, is that many of these sites are potential for follow-on revenue in the future. as we expand our portfolio and offering of commercial storage, residential and commercial EV chargers, and other hardware and software products and services. Overall this quarter, we shipped 5.2 million power optimizers and approximately 230,000 inverters, both below our original plan for the quarter. The main cause for this was the extended lockdown in Shanghai impacting a supplier's backend manufacturing facility of a set of components used in our inverters and optimizers. The lockdown created discontinuity in our manufacturing, and when the facility finally opened, we expedited shipments of the components to our manufacturing facilities and the finished goods to our customers. Additionally, the event impacted our opening inventory for the third quarter, And as such, we will need to expedite some shipments this quarter as well to enable our customer installations to take place as planned. Our battery shipments through this quarter in line with our plans and reached 251 megawatt hour, more than doubling shipments from last quarter. We are receiving positive feedback on our battery, in particular relating to ease of installation and commissioning time. This quarter, we released a new software version that focuses on these elements, and we have heard from installers about installation times in the range of 10 to 15 minutes. Note that our average installation time is currently around half an hour, and we continue to roll out the new software and training to enable improved experience and installation times across the installer base. At the core of this simplified installation process is our SolarEdge Home Network, wireless technology that links the inverter, the battery, and all of the related components in a seamless way, eliminating the need to physically connect the various system elements with cables and connectors. Also related to our battery offering, at Intersolar in Munich in May, we highlighted our SolarEdge Home residential portfolio, which includes our newly introduced three-phase SolarEdge Home battery designed for the German and other three-phase European markets. We began shipments of this new battery this quarter. With a high attach rate for batteries in Germany, we anticipate healthy demand. The three-phase battery also includes the SolarEdge Home Network wireless technology discussed before. More on the product side. In residential, in addition to the battery focus that I discussed, we are working on releasing higher power inverters to address the global trend we are seeing for larger size installations. in particular in self-consumption-driven markets. In the U.S., we are ramping the 11.4-kilowatt inverter released a couple of quarters ago. And this quarter, we released a 10-kilowatt inverter designated for the Australian market. We expect this segment of large residential system, where we are particularly strong due to the favorable economics of our DC architecture, to continue to grow with a relatively high attached rate of batteries. In commercial, we began initial installations of our new S1400 power optimizer, which enables connection of two high-powered G12 modules to a single optimizer, thus significantly reducing system cost per watt, while ensuring full harvest of the power generated by the modules. Also in commercial, we recently commissioned a 13-megawatt floating system in Taiwan. As we discussed at the analyst day, a strength of our architecture is the adaptability to the different applications of the commercial market, one of which is the growing floating solar application, where in many cases the practice is to apply rapid shutdown safety protection, even in countries where it is not a regulatory requirement. Moving to our non-solar business. Our revenues from e-mobility declined this quarter relative to last quarter due to reduced demand from our customer, which is in line with the overall automotive industry's supply chain related instability. Considering the continued lack of visibility in this space, we believe that revenues for this project this year will be lower than originally expected. Moving to critical power. This quarter, we made and implemented a decision to discontinue our standalone UPS market-related activities. At the time of acquisition four years ago, we saw this market as an additional pillar for the growth of the company, expecting a potential inflection point in the UPS market. At this time, however, considering the rapid growth and magnitude of the opportunities we face in our core solar market, and as we believe that parts of the UPS market will eventually converge with the solar plus backup market, we judge that both the technology we developed and the teams we built are best utilized within our solar organization. As such, we are discontinuing the development of UPS-specific products and commercial operations in the standalone UPS market, and the already developed technologies will be integrated in solar products as uninterrupted power supply becomes required or relevant. In this and in recent earning calls, we have discussed the increase in demand we are seeing globally triggered by elevated power prices and general transition towards renewable energy by corporations, businesses, and individuals. Notably, over the last few weeks, multiple governments around the world have implemented or announced their intent to implement new policies aimed to accelerate installations of PV as part of their energy independence and climate control initiatives. This reiterates the exciting opportunities that lay ahead for us and for our industry as a whole. And with this, I hand it over to Onan who will review our financial results. Onan.
spk12: 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 release issued today. Segment profit is comprised of gross profit for the segment, less operating expenses that do not include amortization of purchase intangible assets, impairments of goodwill and intangible assets, stock-based compensation expenses, and certain other items. Total revenues for the second quarter of 2022 were a record $727.8 million, an 11% increase compared to $655.1 million last quarter and a 52% increase compared to $480.1 million for the same quarter last year. Revenues from our solar segment, which includes the sales of residential batteries, were a record $687.6 million, a 13% increase compared to $608 million in the last quarter and a 59% increase compared to $431.5 million in the same quarter last year. Solar revenues from the United States this quarter were a record $309.8 million, a 17% increase from the last quarter, and represented 45% of our solar revenues. Solar revenues from Europe were a record $324.7 million a 14% increase from the last quarter and represented 47% of our solar revenues. Sales in Europe are typically denominated in euros, and therefore the devaluation of the euro negatively impacted our U.S. dollar denominated revenues and gross margin. Specifically, the impact of the euro devaluation between last quarter and this one translated into a reduction of $18 million in revenues and 240 basis points of gross margin. Rest of the world's solar revenues were $53.1 million, a 7% decrease compared to the last quarter, and represented 8% of our solar revenues. On a megawatt basis, we shipped a record 936 megawatts to the United States, a record 1.2 gigawatts to Europe, and 357 megawatts to the rest of the world, surpassing for the first time 2.5 gigawatts of quarterly product shipments. Fifty-one percent of the megawatt shipped this quarter were commercial products, and the remaining 49 percent were residential. This quarter, we also continue to see an increase in revenues related to our batteries that are currently sold in 12 countries. Of the batteries we shipped this quarter, 75% were shipped to Europe, 21% to the United States, and 4% to the rest of the world with first shipments and installations in South Africa. ASP per watt, excluding battery revenues, this quarter was 23.6 cents, a 12% decrease from 26.9 cents per watt last quarter. This ASP per watt decrease is a result of a growing portion of commercial product in our mix and the geographical mix that lean towards Euro, which was subject to currency rate erosion of the Euro against the US dollar. This ASP erosion was partially offset by price increases implemented in Q2 that will be fully materialized in Q3. This quarter, one U.S. customer accounted for more than 10% of our solar revenues. Revenues from our non-solar businesses were $40 million, most of which came from our e-mobility division. Consolidated gap gross margins for the quarter was 25.1% compared to 27.3% in the prior quarter and 32.5% in the same quarter last year. Non-GAAP gross margin this quarter was 26.7% compared to 28.4% in the prior quarter and 33.9% in the same quarter last year. Gross margin for the solar segment was 28.1% compared to 30.2% in the prior quarter. The quarter-over-quarter decline in gross margin is the result of few factors. More battery revenues in our overall product mix, Euro-to-dollar erosion, as discussed above, a higher portion of commercial sales, and expedited shipments related mostly to the supply chain issues discussed by Tzivi. The decline in margin was lower than the accumulated impact of all of these factors, thanks to price increases implemented in prior quarters. Heading into the third quarter, the current USD-to-euro exchange rate will offset the price increases that we have implemented in Europe. Goods subject to tariffs, excluding batteries shipped to the United States from China, accounted for 31% of our U.S. shipments this quarter. This is a slight decrease compared to 32% in the last quarter and is mainly a result of increased supply to the U.S. market from our manufacturing facility in Mexico, where ramp-up continues as planned. Gross margin for our non-solar segment was 2.7%, compared to 5.6% in the previous quarter, mostly driven by high margins in the storage division and lower margin in the e-mobility business, a result of lower volumes. Our gap gross margin included a write-down of $4.3 million this quarter as a result of the discontinuation of critical power division related activities. On a non-GAAP basis, operating expenses for the second quarter were $109.6 million or 15.1% of revenues compared to $98.9 million or 15.1% of revenues in the prior quarter and $81.5 million or 17% of revenues for the same quarter last year. The main reason for this increase compared to the previous quarter is the annual merit increase to our employees' salaries and its impact on vacation accruals as well as the pickup in marketing activities and travel. Our solar segment operating expenses as percentage of solar revenues were 13.7% compared to 13.9% last quarter, representing an improved operating leverage as our revenues continue to expand. Our gap operating expenses this quarter included a $4 million write-down of goodwill and intangible assets related to the discontinuation of the critical power segment activities. Non-gap operating income for the quarter was $84.7 million compared to $87.2 million in the previous quarter and $81.3 million for the same period last year. This quarter, the solar segment generated operating profit of $99.2 million compared to an operating profit of $98.7 million last quarter. The non-solar segment generated an operating loss of $14.6 million compared to an operating loss of $11.5 million in the previous quarter. Non-GAAP financial expense for the quarter was $20.9 million compared to a non-GAAP financial expense of $4.9 million in the previous quarter, a result of the erosion of Euro-denominated cash balances and Euro-denominated accounts receivable balances that amounted to €239.7 and €354.3 million, respectively. Our non-GAAP tax expense was $7 million this quarter compared to $13.5 million in the previous quarter and $10.5 million for the same period last year. GAAP net income for the second quarter was $15.1 million compared to a GAAP net income of $33.1 million in the previous quarter and $45.1 million for the same quarter last year. Our non-GAAP net income was $56.7 million compared to a non-GAAP net income of $68.8 million in the previous quarter and $72.5 million in the same quarter last year. GAAP net diluted earnings per share was $0.26 for the second quarter compared to $0.60 in the previous quarter and $0.82 for the same quarter last year. Non-GAAP net diluted EPS was 95 cents compared to $1.20 in the previous quarter and $1.28 in the same quarter last year. The unrealized financial expenses related to foreign exchange had negative impact of 25 cents on our non-GAAP EPS. Turning now to the balance sheet. As of June 30, 2022, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $1.6 billion. Net of debt this amount is $973.3 million. During the second quarter of 2022, we generated $77.4 million of cash in operating activities representing a return to cash generation after the last quarter cash consumption. ARNet decreased this quarter to $669.1 million compared to $676.8 million last quarter. As of June 30, 2022, our inventory level net of reserve was at $470.3 million compared to $432.5 million in the prior quarter. This entire increase is related to increased level of raw materials, battery cells, and component inventory in the solar segment, while our finished goods inventory continued to decrease as a result of growing demand for our products. Turning now to our guidance for the third quarter of 2022. We're guiding revenues to be within the range of $810 million to $840 million. We expect non-GAAP growth margin to be within the range of 26 to 29 percent. We expect non-GAAP operating profit to be within the range of 90 to 110 million dollars. Revenues from the solar segment are expected to be within the range of 765 million dollars and 795 million dollars. Gross margins from the solar segment is expected to be within the range of 27 to 30 percent, mostly impacted by the Euro-dollar exchange rate and amplified by anticipated increase in European revenues within our overall mix. I will now turn the call over to the operator to open it up for questions. Operator, please.
spk11: Thank you, ladies and gentlemen. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach other equipment. We ask that you limit to one question and one follow-up question only. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll now take our first question from Steven Bird, From Morgan Stanley, your line is open. Please go ahead.
spk04: Great. Thank you very much. I wondered if you could just speak to your thoughts on the draft legislation in the United States and just want to make sure just at a high level that we're thinking through all the potential elements that could benefit you. I know there's a lot to digest in the language, but just as you look at the support that could be coming in the U.S., how do you think about the potential impacts?
spk15: So obviously it is positive even before discussing the content itself, just for the fact that it gives stability and visibility to the overall industry. Then looking at the content itself, it has favorable acts in many of the segments that we serve. As I mentioned, there's a focus on commercial in general and community solar in particular, which is a segment that we've been having good progress in the last 12 months or so, as well as obviously for residential and for storage. So we feel that it has a potential positive impact across all of our business lines. And we're studying the other elements related to potential benefits for local manufacturing and elements like this. Now, as I mentioned in my remarks, this is on the heels of similar, although in a very different type of incentives and policies announced in various countries recently in Germany. There was a significant or meaningful update to the feed-in tariffs on top of the very aggressive that were introduced a couple of months ago in Italy. There were some very strong government commitments and incentives presented for growth in the agricultural photovoltaic segment, which is a subset of the commercial segment where we have, we believe, a good offering. it's very evident that there is a very strong drive globally and here in the US, the recent or the intended bill is the North American share in that momentum. And of course, we see it positively and are excited about it.
spk04: Thank you. And if possible, I just wanted to follow-up on a remark you made about pricing that you see the ability to increase price and help offset some of the headwinds on margin and things like exchange rate. More broadly, just given the magnitude of demand, I guess we're hearing some commentary from a number of companies that with kind of just what you just said, that the demand is so strong in places like Europe and the United States that and also that clean energy looks so much cheaper than sort of conventional energy. Do you see that sort of pricing power extending beyond just the next quarter? Do you see some ability for margins to expand given that clean energy does look so much more attractive and that demand is just so incredibly strong? In other words, how persistent might your ability to extract better margins over time via pricing as a result of all these dynamics we've been talking about?
spk15: Maybe try to divide the answer to two and then we'll back me up with additional information. Our approach has been to increase prices to compensate for the increase of costs related to raw materials and all other standard elements of doing business. And we've been implementing those price increases gradually over the last two or three quarters. as a policy tend not to implement it on existing backlog for the most part and implement it on orders going forward. So that's why it takes a little bit longer to affect our ASPs and resulting bottom lines. What we did not do and we don't intend to do is where there are one time or what we call transition transitionary challenges like factory closing and then the need to expedite and things like that, those type of costs we typically incur and don't automatically move them on to the customers. In terms of looking forward, I think the opportunity is more in the fact that the systems are becoming larger, more complex, and includes more elements like batteries and accessories all of which give an opportunity to improve margin. And that comes back to what I commented also about the larger inverters and the larger systems and EV chargers and such elements. That is where we see good opportunity to improve margin. And we are also seeing, I would say, early signs of some improvement in the cost structure around some logistic costs that are beginning to go the other direction, some raw material costs that are showing signs of, or first signs of decline, et cetera. So we think that there is definitely potential for gradual margin improvements in the coming quarters, not necessarily from direct price increases on existing products.
spk12: And if I may add one more thing, and this is a little bit related to the international, I would call it, aspect of our business. If you take, for example, Europe, You know, the average exchange rate, for example, for us during Q1 was approximately $1.09 per euro. During Q2, the average was about $1.06. And by the way, right now we see that every euro is $1.02. And that means that If you take the overall price increases that we did and you reflect it in the specific market, you see that in Europe, our customers saw a real increase and a relatively large increase in prices because they pay in Euro and they make money in Euro while in our case, this increase was not really translated into gross margins simply because of the erosion of the euro against the U.S. dollars. So I think that here, you know, this time it is working against us. In other places where the euro will move more favorably, it can help us. But not every price increase or price change is directly impacting our gross margin immediately in the same direction that we've actually implemented it.
spk01: Thank you very much.
spk11: We'll take the next question from Brian Lee from Goldman Sachs. Your line is open. Please go ahead.
spk05: Hey, guys. Good afternoon. Thanks for taking the questions. I had two here. First one was, you know, can you provide a bit more color on the China backend issue? Which components specifically are you referencing were impacted? And do you have any mitigation strategies in place besides the expedited shipments, any new suppliers you're working with, or inventory build, just anything else planned there to kind of get you over the hump from that impact? And then I had to follow up.
spk15: So without getting to be too specific, it was about three or four components, and as I said, also for inverters and also for optimizers. The lockdown was extended. We actually were able, at least for some of them, to qualify alternatives in a reasonable amount of time and start to replace, and that's why the hit was less than it could have potentially have been. And that's an effort that is going on across the board of making sure that we have alternatives available to the critical components that we use, but I think the caveat is that the rate that our capacity and demand is growing, it's not only about qualifying an alternative, it's also sometimes the suppliers need to add additional lines and capacity to meet our elevated demand. Right now, for this specific event, it's behind us, and as I said, it impacted us, but to a lesser extent than it could have, thanks to qualifying alternative components to the ones that we were short on in this case.
spk05: Okay, fair enough. Just my follow-up was, with respect to the margin guidance, I guess I'm sort of surprised margin guide for the solar segment is down a bit for 3Q from 2Q. You know, maybe talk to some of the dynamics there. I know you quantified, you know, Zevi and Ronan, the dynamics for 2Q with 4X and expedited shipments, but I guess as we think about the 3Q guide here, how much additional headwind from 4X are you embedding? You know, what's the expedite cost impact? And then just any other puts and takes, if you can quantify into sort of a basis of gross margin impact you're seeing. And then also maybe within the context of that prior 35% to 37% gross margin target on optimizers and inverters you've talked about for the second half. Not sure if that's still intact, but maybe sort of help us bridge the gap here. That'd be helpful. Thank you.
spk12: Sure. So first of all, the main, or I would say the only impact actually on Q3 margin is foreign exchange rate changes. In general, in the volumes that we see going to Europe into Q3, every cent difference or every lower euro against dollar rate by one cent is impacting our margins by 50 basis points. And in general, what we see and what we have planned for this quarter at least is compared to approximately, as I mentioned, if our average US dollar to euro ratio in Q2 was $1.06 per euro, we're now looking at 101. US dollars to Euro. And of course, you know, the time that you're making the shipment very much changes it, you know, because if you do more shipments towards the end of the quarter where we don't know what is the exchange rate, this may change a little bit. So in essence, If you take only this, we're talking about 250 basis points that we expect this quarter to be impacted only by a gross margin. Now, it's important to say that exchange rates, sorry, and it's important to say the other thing, and this is that When we discuss gross margin, there are always those elements that are within our control. We are continuing to increase the manufacturing in Mexico, and this is something that is happening in line with our plans. This quarter already we saw that we shipped Although the percentage was slightly lower, but since the revenues that we shipped to the U.S. were record revenues and record megawatts, that means that higher portion of units came from Mexico. This is something that we do and we were able to do, to enjoy. From a logistic point of view, we do see a little bit of an easing in what we see in prices for contracts, at least for the next few quarters. Here, the lockdown that Sivi mentioned in Shanghai not only created a situation where we paid a little bit more in Q2, it actually took away three weeks of manufacturing during the quarter that we now need to expedite through Q3. But still, by the way, even had it been for the regular exchange rate, we would see our gross margins going up. To summarize it, everything that is within our control is happening exactly as planned, and everything related to the underlying permanent costs that we see for our product is actually improving, including some components, price reductions that we are now already starting to hear from vendors for the next quarters. This is a pure game. of FX rates, at least in this quarter. The fact that this quarter will be much more heavy on sales to Europe in the overall mix makes it a little bit more tough in this sense. And this is why when we're looking at, and we know that currencies are moving in a cyclical, I would call it trend, we still believe that, you know, had it been for a, you know, 103, I would say, $7, $8 per euro, and not to talk about higher rates, the 35% to 37% on optimizers and inverters is definitely a rate that we see feasible because all of the underlying costs are actually allowing you to do it, and the pricing environment is allowing us to do this.
spk01: Okay. Thanks a lot. I appreciate all the comments.
spk11: We'll take the next question from Philip Shen from Roth Capital. Your line is open. Please go ahead.
spk19: Hey, guys. Thanks for taking my questions. Just as a follow-up on the margin theme, I know you haven't provided Q4 guidance, but in the past, you know, you've talked about healthy margin expansion in the back half, and now with Q3 margins flat quarter over quarter. I was wondering if you might be able to help us understand the trend in margins in Q4 and and Q1 specifically, and then also coming back to the topic of the long-term 35 percent margin target, as you see the commercial mix growing much more, is that as realistic of a target, or because of mix alone, it may not be as achievable? Thanks.
spk12: Okay. So again, I'll start, and again, of course, we do not guide for Q4 and Q1, but we do see the direction. And I would like to go back to what we've discussed in the previous goals. When we discussed the margin expansion or return to levels that we were, We said that there are several elements that can get us there. The first one is to increase the amount of products that we're manufacturing in Mexico that will allow us to reduce the tariffs and will allow us to reduce the ocean freight costs and costs of taking these products and the associated supply chain from China to the United States. This remains intact. For Q4 as well, we continue to see the ramp. We've said in the past that we expect Mexico to be 100% run rate at the end of Q4 of everything that goes to residential U.S. This is something that we still have on site, and this is a claim that is still valid. The other issue we discussed is related to prices of components. And this is actually, again, happening. We already start to see that material prices related to aluminum and copper are decreasing. They're far from the levels that they used to be in the past, but they are decreasing, and this is something that we continue to see. And the same applies, by the way, for some of the components, because we do see and we do talk to our vendors and we see that some I would call it capacity that they put online is materializing which will allow us not only of course to get the products at the lower cost but it will also be in a more constant manner. So this is something that we expect into Q4 as well. The next one is actually continuity of the supply. And when you have more capacity and when you have your lines working at full pace without being halted for a few weeks or days because of lack of shipments, you're not paying to your contract manufacturers what we call unutilized capacity chargers that are going as chargers to your gross margin. And again, you are missing the output there. All of these impacts are happening exactly as we have planned and as we have thought they will. The biggest change here is the exchange rate, because when we were standing in Carnegie Hall just about, I think it was four months ago, exchange rates was $109 per one euro. At that level, the 36 plus minus 1%, even including commercial, is holding. And if you remember, we even discussed it in my part that since we see that our residential products at debt rate is about a 40% gross margin, then we said that whatever we do in commercial is basically taking the margin down to this 35 to 37%. So in that sense, And, you know, we could have been, if the euro rate was 130, you know, we were standing here saying how smart we are simply because we did everything. But the fact is that from all perspective, this is a foreign currency game more than anything else. And under, I would call it, you know, again, normalized 110 or 109 dollars to euros, this is definitely, a target that we see visible.
spk19: Okay, thank you. As it relates to Biden's trip to Saudi Arabia recently, Zivi, I think you guys may have been one of the beneficiaries of that Mideast trip. Can you talk about your recent trip there and share some more details on the agreement that you put in place? Thanks.
spk01: Yeah, thank you, Phil.
spk15: I'll answer briefly. The topic of renewable energy and climate change has a lot of governments and leadership around the world busy, and what's interesting is that it's also in countries that are strongly linked to fossil fuels, like in the case of Saudi Arabia. There's a push from the leadership over there to implement renewable energies and solar in particular, focusing on this new very modern city that they're building and that is supposed to be net zero. And with that, we've been in a dialogue with a local company and signed this MOU agreement to explore what are the opportunities related to the new city and related in general to the Saudi market and the The nice thing was that this agreement was culminated and signed as part of the visit of President Biden to Saudi Arabia. So it was a very exciting and inspiring event. It is not going to translate into any type of meaningful numbers anytime soon, but I think what we see as As positive is that it's an indication to the spread of our industry globally and the interest in the topic all over the world. And the interest and the fact that they reached out to us is an indicator to the position and reputation that we built in the market as a leader, not only in inverters, but in the energy transition as a whole. That's the background and story behind this event.
spk01: Great. Thanks, Evie. I'll pass it on.
spk00: We will now take the next question from Mark Strauss from JP Morgan.
spk11: Your line is open. Please go ahead.
spk08: Yeah, thanks very much for taking our questions. So, completely understand there's a lot of focus on FX on this call. Ronen, I'm curious, though, if you can talk about kind of the European gross margins excluding FX and how we should think about those compared to the U.S. market. Is that still kind of a 300 to 400 basis point differential or reason to think that that improves over time?
spk12: So the problem is that it's very hard to relate European margins without looking at exchange rates because the basic fact is that We are selling in euros and we're manufacturing in US dollars. So by definition, the FX rate is embedded. Now, the question of whether it is two to three basis points below, it very much depends to where you are compared to those margins. Okay. Yeah, that makes sense. And by the way, and just to add one more thing, and this is the fact that, again, it also relates to the mix of the products within this market. So, for example, if you have battery, usually it will be a little bit of a lower one. If it will be a residential system, then margins are a little bit higher. And sometimes you'll see a little bit differences there. But in general, I would say that FX is the most, I would say, determining factor.
spk08: Okay. And then just a quick follow-up. I apologize if I missed it, but did you give a megawatt hour shipments or revenue recognition target for the 3Q guide and just kind of generally how we should think about that over the coming quarters and years if that has changed at all?
spk12: So actually, we didn't give it, but I will just, you know, rely back to what we said in the previous quarters that we expected to grow to about 250 megawatt hour a quarter and to stabilize there. We have reached this goal during Q2, and therefore, we expect to continue to be at that level. This quarter, specifically in Q2, and when the Q will be filed, of course, you'll be able to see we recognize approximately $105 million of revenues, which is still lower than the number of revenues that we shipped. And from next quarter, it's going to be almost one-to-one what we shipped and what we recognize because we're going to be at the same size of, or same volume of shipments.
spk08: Got it. Thank you very much.
spk11: Next up, we have Julian Dumoulin-Smith from Bank of America. Your line is open. Please go ahead.
spk17: Yeah, excellent. Thank you, Tim. Appreciate the time. Let me just clean up here on a couple questions. First off, just the forward trajectory with respect to the EU here. I understand, you know, the litany of different headwinds, including FX, but how do you think about growth beyond just third quarter here? Compounding, obviously your peers really talking it up and yourself quarter-by-quarter having a more modest trajectory here for a second quarter. If you can speak high level, again obviously cognizant of the dynamics in third quarter, maybe even speaking fourth quarter and beyond what the sort of normalized trajectory you would think for EU and your product.
spk15: I'm not sure that we heard the question in full. In terms of the general dynamic, In Europe, as reported, the market is very, very strong, driven from the high power prices. And we're seeing this also in residential, also in commercial, and across practically every country in Europe. Our portfolio is very strong in Europe. We have close to 500 people. In Europe, we added the more specific European battery this quarter, and we'll be continuing to, we added EV chargers to the European market a quarter or two ago, and we will continue to be adding solutions that are customized or more specific for the European market. And you talk to anybody, no one is indicating any type of expectation for electrical power price reductions that would lead to the market cooling down. But obviously, there are a lot of external factors that can impact that. But for the foreseeable future, and also based on announcements from various governments, we see this market continuing to grow at a high rate. very confident in our position within this market that we built over the last 10 years or so.
spk17: Got it. Fair enough. But not prepared to share kind of a specific percentage growth target or something like that. And maybe related to that, if I can, just to talk about this, I mean, can you speak a little bit more about manufacturing trends and just the thought process here on committing to further expansion here? Obviously, Mexico underway, et cetera. But what about beyond that? I mean, you talked about low inventory levels. You talked about being constrained. Again, admittedly, perhaps referencing the last question, the trajectory in the EU and U.S., how do you think about the continued ramp of the product, again, across your core business as well, of course?
spk15: Yeah, so first of all, we are definitely right now in a situation where we are capacity limited compared to the magnitude of the... of the demand. And this is not only related to events like in Shanghai. Just in general, demand is progressing at a higher rate than we are able to add capacity. At the same time, we are pushing on added capacity as much as we can. And with the long-term vision of having significant manufacturing capability in all of the main continents that we serve and building out also the rest of the supply chain to be able to supply this manufacturing capacity. The immediate additional expansions that we are dealing with right now are the expansion of the factory in Mexico and also reaching target capacity levels in our Asian factories in Vietnam and in China. In the European factory, right now we are increasing battery manufacturing capacity, but inverter and optimizer capacity will be increased in Europe in the second phase. So the long-term plan is to have significant volume manufacturing capability in each of the main continents, being Asia, Europe, and North America. And right now we are working hard to increase the capacity in the existing factories to meet the elevated demand that we are seeing. And similarly across the supply chain, because as I said before, It's also about the capability of the suppliers to meet the type of numbers that we need right now for transistors, magnetics, other components. These are very, very high numbers that in some cases require our suppliers to expand their factories, and that's a work in progress as well.
spk11: We will take the next question from Mahit Mantloi from Credit Suisse. Your line is open. Please go ahead.
spk03: Hey, thanks for taking the questions. Just switching away from FX, just on the cash side, you have more than a billion dollars of net cash right now. Can you talk about what are the plans at this stage, either on M&A or otherwise?
spk15: Yes, obviously, Mahit, we're not... We're not going to discuss anything specific other than a little bit about what we are looking to do and a little bit about how we are doing it. So what we iterated also in the analyst day is that we are looking in terms of our strategy on technologies that help or deal and improve generation of renewable energy, storage of renewable energy. and smart consumption of renewable energy, and the software that controls all of these. And we are looking at technologies in all of those elements, additional methods of generating clean power, additional technologies and innovations in chemistry and packaging of batteries, expanding into additional means of energy consumption with EV chargers. We're working on DC EV chargers, and we're looking at advanced technologies in those areas. And a big element is looking at various types of software controls for energy management in all of the segments that we cover, residential, commercial, utility, and expanding into various ways that people can benefit from these assets, whether it's energy management or trading or whatnot. And another element is in cyber. So especially as we go more into large commercial sites and utilities, we have some inherent strains for understandable reasons. I think in cyber, we think that cyber will be important in the future for the growth of the industry, and we have access to innovative technologies, and we're looking at those as well. And in terms of the how, we've added a group of professionals with a history of M&A in our industry, so we are very comfortable with how we're going about it right now, and expect to to take some actions in the coming future in these areas.
spk03: I look forward to those. And just one last one for me. On grid-forming inverters, your competitors are seeing some price premium. Any plans of introducing that product? I know last time you said you have those products in Japan, but any plans to introduce that in the U.S. markets?
spk15: If you're referring to various ways of non-storage based backup, as we said in the past, we see all over the world the focus on proper backup with the consistency and continuity needed. And even as I mentioned in my reference to the UPS, backup combined with ensuring smooth and continuous electrical power, we see that as the important technology for enabling this transition. And right now, we don't see interest or demand to move out of Japan the local non-storage-based backup capability.
spk03: Appreciate the call. Thanks.
spk11: Next up, we have Colin Rush from Oppenheimer. Your line is open. Please go ahead.
spk07: Thanks so much, guys. Could you talk a little bit about the mix in Europe, you know, in 2Q and 3Q, you know, relative to residential, commercial, and utility scale, just to get a sense of how that's breaking down for us?
spk15: So utility is a small, negligible part of what's going on in general and what we are doing in Europe, although there have been some announcements that there's going to be a renewed government effort in some countries towards large projects as well, which were less common in Europe for the last three or four years. The demand is very strong in both. Actually, what is affecting our mix right now is more related to supply than it is to demand. And our growth rates from the last quarter to this quarter has been pretty much the same in terms of residential versus commercial. But again, it's not so much due to the demand necessarily being even. I think that probably although residential is growing very fast, commercial is probably growing a bit faster for sure in megawatts just because of the dynamics that we mentioned before of companies looking at fitting out tens of factories with solar also to compensate for the increases in power prices and also for ESG needs. So when you have these large type of commercial installations going on, it covers a lot of megawatts and compared to the very strong growth in residential as well. Probably the demand growth in commercial is a little bit higher than that in residential in Europe, but the difference is not dramatic. And in our shipments also, there hasn't been a significant change in pattern between the two.
spk07: Okay, that's super helpful. And then, you know, you've had pretty significant operating leverage off the sales and marketing as well as G&A. But R&D is kind of scaling with revenue. I'm curious about, you know, as you go forward, if there are going to be some optimizations around some of the efforts within that R&D spend, you know, in terms of some of the technology platforms and your ability to get a little bit of leverage out of that spending.
spk15: So the answer is yes, but to be honest, it's not. Our main focus is the opportunities that we have out there and expanding the portfolio. And in that regard, we are looking for more R&D resources and actually we are a bit optimistic that with some of the challenges that we're seeing in other industries around us, we are seeing access to talent that maybe a few months ago would be more difficult to bring on board. So we're focusing on efficiency and we're definitely leveraging, for instance, our capabilities in storage and sales from residential to commercial to utility and similarly in other areas. But really we want to do more and we want to do more in an efficient way and are not focusing right now on trying to do less.
spk11: Next up, we have Jeff Osborne from Colvin and Company. Your line is open. Please go ahead.
spk18: Good evening. Two quick ones. I was wondering, Ronan or Zibi, if you can touch on lead times and backlog visibility that you have in both the U.S. and Europe, and then add a follow-up for Ronan.
spk12: So, from lead time perspective, it is very much related to the product. And because in general I can tell you that our lead time for residential products is a little bit shorter than the one for commercials. Results from, you know, components availability and manufacturing capacity. I would say that on the backlog that we're seeing today, it's a backlog that is good for two, three quarters at least that we already have. And from lead time CV, I would say a few weeks, like 12 weeks.
spk15: As Ronen said, in residential, it's probably in the 12 to 14-week range. And in commercial, it's a little bit longer. It varies a lot by product.
spk18: Got it. That's helpful. And then, Ronen, just for you, why not hedge at all? Can you touch on your hedging philosophy?
spk12: So actually, we are hedging, but our hedging philosophy is that we're hedging cash flows and not necessarily a balance sheet item. The main reason for this is that we have a fairly large balance sheet, I would call it, items, especially now with seeing the increase in Europe, and this can create a very large actual payments to the banks, you know, whenever you are closing a position. In our view, and we saw it, by the way, you know, I saw it in 2015, I saw it in 2018, The fact that we sit on a very large amount of cash allows us to benefit from the fact that we can wait and go through those cycles. And when the gross margin, when the FX is changing, we're able to enjoy converting those balances. In essence, I can tell you that we do not see any pressure in utilizing the euros. And we simply feel that, you know, seeing in this case, you know, if we would hedge the balance sheet, we would have to pay cash $20 million this quarter only for hedging. We simply believe that, you know, waiting and not spending this cash flow makes a little bit more sense in this sense, in this case.
spk19: Got it. Thank you. That's all I have. Appreciate it.
spk11: We'll take the next one from Michael Bloom from Wells Fargo. Your line is open. Please go ahead.
spk13: Thanks. Thanks for taking my questions. My first question, I just want to talk about the battery shipments. You saw a really big up, you know, nice uptick in the second quarter. I wonder if you could just talk about attach rates, where that sits today, and where you see that heading over the next, you know, few years, and then how do you manage the impact to the overall gross margin?
spk15: So I'll discuss the attach rate, and then we'll talk about the gross margin. So attach rates are highest in Europe right now in a combination of the places where self-consumption is driving the attach rates. And typically, that's the strongest driver. So wherever the policy is more towards self-consumption, and power prices are increasing, that's where the attach rate is the highest, and that's why you see in Germany attach rates of... Today on our systems, we might be seeing it at 60%, but that's just as we're ramping the new battery for the German market. But generally speaking, attach rates in Germany can reach 80% and 90%, and similarly in Italy. And in some of the other European countries that are today on net metering, as they gradually shift out of net metering, like the Netherlands and the UK, you will start seeing in the coming years high battery attach rates over there. And that's part of what we see as a very big opportunity because of the magnitude that I mentioned of our installed base in these type of countries. In the US and Australia, the attach rate is significantly lower. It can range in the 10, 15% or so, depending on period and depending on area. And the increase in attach rate is gradual. It is not, I don't think it's going to reach 50% attach rate across all of the US. um in uh you know in a matter of a year or so it's going to take longer but the tax rates are going to gradually increase also in the us and also in uh um in australia and all of this is residential and uh and commercial storage is probably uh two steps behind with global attached rates today in in the low single digit percentages but definitely a um trend towards A slow trend of increase and it will follow what is happening in residential in in the coming years in the coming years as well.
spk12: And just to conclude on the on the margin side. The way that we look at it is that we prefer managing the operating profit margins, rather than the growth margin. And the reason is that Batteries will always be products with a lower gross margin. But still, this is a product that adds very much to the overall profitability of the company, of the EPS. So if I have, let's say, a very big demand for batteries, let's say, at 15% gross margin, and the alternative is either not to sell them and not make 15% profits, or to sell them and erode gross margins, we would prefer to erode gross margins and count the 15% net profit in our EPS. So I think that we don't manage, in this case, at least gross margins, but rather operating profit margins.
spk15: And maybe adding on to that point, one quick point also is the ratio of batteries per installation is also going up. So the amount of kilowatt hours per site is increasing together with the amount of kilowatts peak per site. And this is increasing consistently one quarter after another. We're averaging today, I think, somewhere between 1.1 to 1.2 batteries per site. And that also improves the revenue and the economics, because all of this is sitting on the same infrastructure of sales, service, and G&A. Great.
spk13: Thanks for that. I guess another kind of just high-level question for you. You know, we've got high interest rates, inflation, potential recession, and yet it doesn't seem like there's really been any slowdown in solar demand. So I'm wondering if that's, from your perspective, an accurate assessment, and if you have any view of why solar demand is seemingly not impacted by any of these macro factors, or is it just too early to say that? Thanks.
spk15: I think, you know, and I'll use Europe as an example. The return on investment for a solar installation in Germany was cut by half more or less over the last 10 months. So in an inflationary and price increase environment, it's already a very, it's a financial investment. in order not to deal with the very high power prices. And I think that that's also part of what's driving the business here in the U.S. on top of the incentives is the expectation that over time there's a certain likelihood that power prices are going up. So people view it right now as a combination of the financial investment and resilience. and choosing, again, in the cases that they choose, to spend their money in this way. And it's the same at the residential level and at the commercial level. So from everyone I spoke to about this, especially, like I say, in Europe, that's where the thinking is. This is a wise financial decision in an unstable financial environment.
spk11: Next up, we have Joseph Osher from Guggenheim. Your line is open. Please go ahead.
spk14: Hello, everyone. I'm not going to ask about foreign exchange anymore. I am curious, given all the opportunities you have in your core markets and I think what we just learned about UPS and the fact that you are taking some gross margin pollution in some of your other businesses, not to put too fine a point on it, why are we still in this e-mobility business? and why would it not make sense at this point to just kind of fold the tent there and focus on the many core opportunities that you have?
spk15: It's a valid question, but there are actually very few similarities between the e-mobility market and critical power and UPS and the way we are active within these two markets. You know, e-mobility is a huge, it's a rapidly growing market a lot of paths in which it's evolving and opportunities well beyond what's usually spoken about of passenger cars and trucks that are moving to EVs. The opportunities are in areas like construction, agriculture, and others that are going through electrification. And these are very, very closely linked to the need for distributed renewable energy on the site where the electrical vehicle is charging. And we also said this in the analyst day, we're focused and interested in this high growth area. However, we are shifting our focus from where we started off as a tier one component supplier to mainstream OEM and are evaluating where we can have a system architecture that gives benefit and links the generation from the solar system to the mobility system that requires and needs this energy. And we're seeing some good traction in that area, and we think that in the long term it is the right investment for the company, but we are taking it in a slightly different path than the one that we originally intended to.
spk01: Okay.
spk12: And just one addition, by the way, which will be a little bit of a technical, but, you know, as part of our accounting treatment of this specific area, you know, we're reviewing every year some accounting balances related to intangible assets related to this, and this is something that we will view this year. You know, whatever we do here is more accounting or accounting The checking is more of an accounting from a, I would call it business perspective. We're staying equally interested and believe in this business. Okay.
spk14: Is that, before I go away, a diplomatic way of saying we might see you write down part of that investment?
spk12: No, it's just saying that we will need to evaluate it at the end of the year as we do with all of the other investments.
spk14: Okay.
spk12: All right. Thank you, Ronan.
spk11: Next up, we have Kashi Harrison from Piper Sandler. Your line is open. Please go ahead.
spk16: Good afternoon, and thanks for taking the questions. So just one quick question, Ronen. Just looking at the operating profit guidance for 3Q, I think it implies another decent increase in operating expenses. And I was wondering if you could just maybe just speak some more about what's driving that increase and then how you think about The trajectory of operating expense leverage moving forward and then I have a follow-up.
spk12: Thank you So in this case I can already tell you that actually what what you see there is not a result of the Of an increase that we plan in the expenses, but rather being a little bit more cautious on the FX side And its impact in general I can tell you that when we plan on the operating expenses for the remaining part of the year. It is going to be relatively small, but in the environment that we're now acting and we see so many movements and the base of the Expenses, you know, is denominated in many cases not in US dollars, but, you know, for example, the Israeli shekels related to our R&D people, we simply prefer to be more cautious. From a realistic point of view, the level of increase, again, had we had FX fixed, you will see a relatively small increase.
spk16: Okay. And then a quick clarification question on the component issue you had in China. With the Mexico facility ramping up, does your risk go to zero from another lockdown in China, or would that potential risk still exist? And then if it does, you know, just maybe some thoughts on how you think about just general mitigation, given that, you know, China's view on zero COVID and the high probability of another lockdown over the next, you know, 12 to 24 months.
spk15: So the answer is no. And just to clarify, the event in China was not a lockdown of our factory. It was a back end facility of a component manufacturer. And as a result of that, we could not get components into our manufacturing lines anywhere for that matter, China or Mexico. And as Monen said, it had a double impact or literally a triple impact. We didn't produce as much as we wanted. we when we what we were able to produce and when we were able to resume on some of the lines we had to expedite the shipments and and in some cases the actual contract manufacturing sites we had to participate with the contract manufacturer in some of the costs of the line standing idle waiting for for components so this event was in our supply chain not in our CM manufacturing facility on the CM side so the fact that Mexico ramps is very favorable as when I mentioned for tariffs and for and for shipping time etc but it doesn't compensate for the volumes that we produce In Asia, on the contrary, because of the very strong demand, we're ramping capacity everywhere. So if, for whatever reason, a factory of ours would be shut down due to COVID, it would have a significant impact on the output, our overall output of the company.
spk01: Thank you.
spk11: Next up, we have Biju Parin-Shirel from Susquehanna. Your line is open. Please go ahead.
spk02: Hi, thanks. Thanks for taking my question. I had a quick follow-up on the battery attach rates for residential. Are you still seeing some third-party batteries being used with solar energy inverters, or has it all switched over to your batteries now? And if you can quantify that, that would be great, too.
spk15: Yeah, we are seeing a meaningful portion of use of third-party batteries and attaching to our systems, in particular in areas like in Europe or three-phase where until recently we didn't have a battery of our own, and in some cases also with single-phase for various reasons. Also, we don't always know because a lot of people are still doing AC coupling of the battery. So our system is a big advantage, and the architecture that fits our battery is the DC coupling. But you can still attach batteries in an AC coupling structure, and we don't necessarily have visibility to it, but we do see a lot of reports and pictures. images of people attaching different types of batteries in an AC coupled manner to our inverters. It would be hard for me to say the ratio. On single phase, I would probably guess that right now the ratio is in the range of 50-50, so 50% with our battery and 50% with third party. On three phase in Europe, right now it's It's all third party just until recently when people began installing our batteries as well.
spk02: Okay. And then if you look at few quarters, do you have an expectation where that 50-50 could move to?
spk15: Yeah, we definitely think that the ideal architecture is the one that is based on our battery and a DC coupling and with the seamless integration. And the trend is definitely in that direction that a higher percentage will be attaching our battery.
spk11: Next up, we have Amit Thakkar from BMO Capital Markets. Your line is open. Please go ahead.
spk06: Good evening. Thanks for squeezing me in. I just wanted to ask, I guess, a couple quick follow-up questions on kind of how the mix is kind of translating into what you're seeing in operating income margins, since that's kind of, I guess, the metric that you're kind of working for. So like the lead times are higher on the commercial side versus the residential side. It looks like the gross margins are a little bit lower. So are you guys saying that you still haven't seen kind of any dilutive impact from kind of the, I guess, the four consecutive quarters on growth in commercial versus residential and operating income margins? And then I guess the second question to that is how quickly can you pivot your contract manufacturing lines to produce more residential versus commercial if lead times or margins kind of diverge from your expectations going forward for those two segments?
spk15: Yeah, I'll start with the second that relates to the production line. So, it's actually the differentiating factor is more single phase versus three phase. because a lot of Europe residential is three-phase. So we have flexibility to shift our three-phase production from residential three-phase to commercial three-phase and back and forth depending on the demand. We have good flexibility in that regard. Right now demand is super, super strong for both of those. And then the rest of the residential world is single-phase. We don't have very good flexibility to move capacity from single-phase to three-phase. We have ability to move within these specific lines and adjust if there is a need to adjust from a demand perspective or if from a supply chain point of view we have available more components and elements for one versus the other, we can adjust production. So I hope that answered the question in terms of the dilution effect of gross margin of commercial. I think Conan answered before, but maybe you can clarify.
spk12: Yeah, and here, I think on the heel of TV's answer, when it comes to the operating margin, the difference is not very large between residential and commercial, because on one hand, The residential on a let's say kilowatt basis enjoys a better gross margin, but requires a little bit more of a high touch. you know, sales or high touch, I would call it, usage of operating expenses, while at the same time when you're selling, when you're making one sale of commercial system, the ASP per watt is smaller, but in essence the OPEX associated with it is also relatively small simply because it's a single deal. So we don't see a very big difference on the operating margin between residential and commercial. And right now, and especially in the market situation that we see, It's hard for me to say that we're even planning it or trying to optimize it. We simply try to manufacture and provide as much as possible for customers that are striving to get products and to install them rather than optimizing. We do sometimes a little bit of, I would call it, marginal optimization because we are, for example, sometimes deciding to prioritize areas or regions with higher gross margins of specific products compared to regions that the same products will bear a little bit of a lower gross margin, which is of course lower operating margin. But I would say that right now we simply try to manufacture and to sell as much as possible rather than to optimize mix.
spk09: Thank you.
spk11: It looks like there are no more questions at this time. I would like to turn the call back to over Mr. Zivilando for any additional or closing remarks.
spk15: Thank you very much. We will end here, and thank you all for joining us on our call today. Thank you.
spk11: This concludes today's call. Thank you for your participation. You may now disconnect.
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