SolarEdge Technologies, Inc.

Welcome to the SolarEdge conference call for the third quarter ended September 30th, 2023. This call is being webcast live on the company's website at www.solaredge.com in the investors section on the events 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 expressed 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 investor website. I would now like to turn the call over to J.B. Lowe, head of investor relations for SolarEdge.

Thank you, Leo, and good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30th, 2023, as well as the company's outlook for the fourth quarter of 2023. With me today are Zivi Lando, Chief Executive Officer, and Ronan Fire, Chief Financial Officer. Zivi will begin with a brief review of the results for the third quarter ended September 30th, 2023. Ronan will then review the financial results for the third quarter, followed by the company's outlook for the fourth quarter of 2023. 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 for management's current expectations. We encourage you to review the safe harbor statements contained in our press release, the slides published today, and our filings with the SEC for a more complete description of such risks and uncertainties. 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 US GAAP. The non-GAAP measures are presented in this presentation because we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter ended September 30th, 2023 press release or the supplemental material may obtain a copy by visiting the investor relations section of the company's website. Now I will turn the call over to Zevi.

Thank you, JB. Good afternoon and thank you all for joining us on our conference call today. As reflected in our preliminary announcement a few weeks ago and in the guidance we are giving today, We are going through challenging times in terms of general market dynamics and specific inventory trends related to our products. In the call today, we will share details of third quarter sales and megawatt sell-through data aggregated from distributors in some of the regions and our latest estimates of underlying business levels in the near future and estimate how long it will take to reach the associated revenue level. Before getting into the regional picture, I want to start with high-level perspective. During 2022, and in particular the second half of 2022, our industry went through an unprecedented surge in demand, which we attributed to geopolitical and other reasons discussed in our prior calls. Indicators in the beginning of 2023 were that demand would continue to increase this year, in particular in Europe. This led to a buildup of significant backlog for our products, in particular because at the time, we faced operational challenges to supply all the demand. Specifically, this was related to three-phase commercial inverters that were in high demand and low supply in the late part of 2022, and our supply improved dramatically in early 2023. Additionally, in early 2023, we released in Europe a differentiated three-phase residential offering of a backup inverter and battery, which our customers were waiting for and excited to adopt. As a result of these factors, our shipments in the first half of 2023 were at record levels and we were in the process of increasing capacity to meet the elevated channel demand. However, market demand began to slow in the third quarter and distributors began to experience financial challenges. As a result, we received a large amount of requests to cancel or push out orders. We should note that while these orders are technically binding on our distributors, the nature of our relationship with these customers is such that we accommodated most of these requests. As a result, our third quarter revenue and fourth quarter expected revenues are significantly lower than our run rate in recent quarters. While the infrastructure we built to support the anticipated sale growth has created a burden that is putting pressure on our margins in the near term. I will describe when and how we believe our revenue will reach a level that reflects stabilized market demand post-inventory corrections, and Ronen will elaborate on the margin and financial infrastructure impact of the short-term actions we are taking. Now let's go over the highlights of our third quarter results. We concluded the quarter with revenues of approximately $725 million. Revenues from our solar business were $676 million, while revenues from our non-solar businesses were $49 million. This quarter, we shipped 3.3 million power optimizers and 274,000 inverters. Additionally, this quarter, we shipped 121 megawatt hours of residential batteries down from 269 megawatt hours last quarter. Our solar business revenues declined quarter over quarter by 29% and by 14% year over year, driven by market slowdown and high inventory of our products in the channels. Moving now to market by market dynamics. Starting in Europe, As already described, during the second part of the third quarter, we experienced significant unexpected cancellations and push-out of existing backlog from our European distributors. Although the dynamics are consistent with what we cautioned during our second quarter earning call, the magnitude grew much greater than we anticipated. We also note that the European market is a diverse one, and each country comes with its own regulatory environment and energy-related dynamics. I will give some color on what we see on per country basis in some of the top countries in which we operate. According to market reports, Germany, which is the largest rooftop solar market in Europe, is on track this year to connect to the grid more than 10 gigawatts of solar compared to 7.5 gigawatts in 2022. The government has announced a long-term goal to reach 215 gigawatts by 2030, which in order to be achieved would require annual installation of approximately 20 gigawatts per year, indicating the expected long-term strength of the German market. Consistent with this trend, our residential energy hub three-phase inverter, introduced in April of this year, and our three-phase battery are optimized for the German market. We continue to see good adoption of this solution. From a demand perspective, our sell-through in Germany in the third quarter was up 44% year-over-year and down 37% quarter-over-quarter from the peak levels typically seen in the second quarter. The Swiss and Austrian market, which revenue-wise are about a third of the size of our revenue in Germany, utilize the same portfolio of products as Germany, and similarly grew significantly so far in 2023, and are expected to continue to grow in 2024. In fact, Switzerland was a record revenue quarter for us in Q3, and we are well positioned to continue growth in these markets in 2024. Delve through in these markets was up 213% year over year, and up 42% quarter over quarter. Moving to the Netherlands. The market in the Netherlands is dramatically down from peak levels due to uncertainty around government policies and the phase out of net metering, which may become clearer after the elections in November. That said, there are several trends that we believe will work in our favor in the mid and long term in this market. The increased implementation of dynamic tariffs combined with the phase out of net metering is likely to increase the number of full system installations with batteries, EV charging, and advanced home energy management capabilities, similar to the SolarEdge One platform that we launched at Intersolar in June. Additionally, depending on changes in regulation, the Netherlands could have a large potential for upsell and retrofit of existing installations with additional products, including batteries and EV chargers, as well as software capabilities, which is a great opportunity for SolarEdge, given our market leadership and vast install base in this country. Furthermore, there has been a push for new residential homes to be built with three-phase service in what has traditionally been a single-phase market. This will enable the use of our differentiated three-phase offering that we have been successful with in Germany as described earlier. Those were our products in the combined Belgian and Netherlands market were up 4% year over year. and down 25% quarter over quarter. In Italy, the residential market has been sluggish since the super bonus tax credit ended earlier this year. And we saw our point of sale of residential products in this market decline year over year by 48%. On the other hand, the commercial market has seen significant growth and has largely offset the decline in the residential market. Our point of sale data for commercial products in Italy was up 216% year-over-year in the third quarter. Overall, our megawatt sell-through in Italy was up 85% year-over-year and down 6% quarter-over-quarter. All in all, the underlying demand in the European market was strong in the nine-month period ended September 30th. Although below the much elevated expectation heading into the year, leading to the inventory buildup that I described earlier. On an aggregated basis in Europe, our sell-through in the third quarter was up 34% year-over-year and down 22% quarter-over-quarter. Moving to the U.S., we have not seen a significant change in market dynamics since our second quarter call. The market is still being adversely impacted by high interest rates and uncertainties around the pace of adoption of NEM 3.0 systems in California. In commercial, we are seeing a slight improvement as projects that were on hold appear to be moving forward, possibly related to availability of low-priced modules. In our data, sell-through in the third quarter for residential was down 13% quarter over quarter, and commercial was up 8% quarter over quarter. Battery sell-through was up 31% quarter over quarter. We expect these market dynamics to continue without significant change in the coming quarters. In the rest of the world, our third quarter revenues were relatively stable, and we do not see dramatic shifts in overall revenue over the next several quarters. The rest of world markets are largely dominated by commercial installations, which are impacted by the higher interest rate environment. Local dynamics in specific countries are largely offsetting each other. Taking into account these market dynamics, we use the demand patterns represented by the sell-through data discussed above to model the time we think it will take to run down the inventory level and have estimated a normalized level of revenue and margin following the inventory corrections. We used our sell-through data for the third quarter of 2023 as a baseline and did not include potential additional revenue from new products that we will discuss separately for market share improvements that we are working on and for which we see positive signs. This modeling currently indicates in a non-inventory challenge environment a revenue run rate of approximately 600 to 700 million dollars per quarter. Using this model and looking at inventory data that we received from our distributors, we estimate the correction could take two to three quarters of gradual improvement quarter over quarter. Moving to the operational side, we are of course already taking measures to adjust our cost base to this projected level of business. To align with reduced demand, we have discontinued manufacturing of our product in Mexico, and reduced capacity in China. In parallel, we are ramping up manufacturing in our US facility, where we expect to ship 12,000 energy hub inverters in the fourth quarter, ramping to a run rate of 50,000 units per quarter. Additionally, we are targeting for a second site to begin producing commercial inverters and optimizers by the second quarter of 2024. An additional step of cost reduction is our decision to discontinue our light commercial vehicle e-mobility activity, which we consider as non-core. And as such, we delivered final kits to Stellantis in October. We intend to continue making adjustments to achieve the levels of profitability at the revenue run rate discussed earlier, which Ronen will elaborate on in his comments. Moving on to products. We recently installed our first 330 kilowatt inverter in the US following similar installations that have been running for some time in Europe and Asia. This product is specifically targeting community solar and Agri PV applications. We will be ramping production in the fourth quarter for further deliveries globally in 2024. This will expand our offering for these ground mount applications beyond the tracker product that we released a few months ago. This quarter, we are also announcing the approval by our board of directors of a share repurchase program, which reflects our confidence in the future growth of our company. The plan authorizes the repurchase of up to 300 million of the company's stock through 2024. I would like now to address the ongoing situation in Israel and how it is affecting our company. We have seen no disruption to our ability to manufacture and deliver products and services to our customers. Approximately 11% of our Israel-based workforce, which is approximately 6% of our global workforce, has been called up for reserve duty, and we are prioritizing and reallocating resources between projects to make sure that the impact to our business is minimal. To conclude my remarks, Setting aside recent and upcoming inventory corrections, we believe the underlying demand for our products, while at a reduced level from the first half of 2023, is above our projected fourth quarter revenue and represents our strong position in the market. On top of this, our global sales force is energized and focused on gaining market share based on the products and improvements made to our core portfolio in the last 12 to 18 months. This, together with the new products we have developed for the new segments we have entered, should create an opportunity for incremental growth at a faster rate than the solar market in the coming year.