SolarEdge Technologies, Inc.

Please stand by. Your program is about to begin. If you need assistance during today's call, press star zero. Hello and welcome to the SolarEdge conference call for the fourth quarter and year ended December 31st, 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 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 investor website. I would now like to turn the call over to J.B. Love, head of investor relations for SolarEdge. Please begin.

Thank you, and good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year ended December 31st, 2023, as well as the company's outlook for the first quarter of 2024. With me today are Zivi Lando, Chief Executive Officer, and Ronen Feier, Chief Financial Officer. Zivi will begin with a brief review of the results for the fourth quarter and full year ended December 31st, 2023. Ronen will then review the financial results for the fourth quarter and full year followed by the company's outlook for the first quarter of 2024. 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, the slides posted on our website ahead of this call today, and our filings with the SEC for a more complete description of such risks and uncertainties. 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 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. Reconciliation of these measures can be found in our earnings release, presentation, and SEC filings. These NOMGAP 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, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now, I'll turn the call over to JB.

Thank you, JB. Good afternoon, and thank you all for joining us on our conference call today. Starting with highlights of our fourth quarter results, we concluded the quarter with approximately $316 million in revenue. Revenues from our solar business were approximately $282 million, while revenues from our non-solar businesses were approximately $33 million. This quarter, we shipped 2.2 million power optimizers and 74,000 inverters. This quarter, we also shipped 133 megawatt hours of batteries. As reflected in our fourth quarter results and in the first quarter guidance released today, we continue to face challenges from general market dynamics as well as the inventory levels of our products in the channels due to the abrupt slowdown in demand in the second half of 2023. That said, we undershipped end market demand by approximately $200 million during the fourth quarter. As we did on our last earning call, we will share details of fourth quarter sell-through data in several of our major regions and markets, and provide an update on our outlook for the normalization of inventory levels and return to revenue growth. Starting in Europe, following the unprecedented surge in demand for solar and storage products seen in 2022 and early 2023, The recent combination of increased product availability and an unforeseen tapering of demand has led to elevated inventory levels across Europe. As it relates to demand across our residential products, sell-through on a dollar basis in Europe in the fourth quarter was down approximately 35% quarter over quarter. Sell-through of our residential inverters and optimizers was down 39%, while sell-through of our residential batteries was down 16%. This decline from the third quarter to the fourth quarter is more pronounced than the 10% to 15% seasonal decline we typically see in Europe in the fourth quarter, largely due to early onset of winter, combined with the market dynamics in Europe, associated with high interest rates and regulatory issues and uncertainties in some countries. Looking past the winter season, we expect a more positive environment in the European residential market. In Germany, regulatory policy remains quite favorable, despite the recent headline news about renewable subsidy cuts, which do not impact residential solar. In fact, a portion of the subsidies that were eliminated were caps on electricity prices that were put in place to protect the consumers from soaring energy costs seen in 2022. The elimination of these caps is expected to result in higher electricity prices for the German consumer in 2024, improving the return on investment for solar installation. In Austria, the fourth quarter was abnormally weak as the market paused in anticipation of the elimination of the solar VAT tax, which came into effect on January 1st of this year. We expect this market to accelerate in the coming quarters now that customers can benefit from lower cost solar. Moving to the Netherlands. Following the first half of 2023 that saw installation rates nearly 50% above 2022 levels, the market by the fourth quarter fell more than 50% from peak levels due to uncertainty around the Dutch election, and potential policy changes in net metering. While the recent decision by the Dutch Senate to keep net metering in place for the foreseeable future relieves some of the uncertainty in the market, questions remain as to the eventual policy around net metering. Therefore, while we believe the market will likely react positively, it remains to be seen if it will return to 2022 levels. This decision, however, will slow down the transition of the Netherlands to a battery market. We are well positioned for a solar-only Netherlands market, as well as for the transition to battery and self-consumption that will take place in a few years' time. I will have more to say on the specific product that we have introduced to capitalize on our market-leading position in the Netherlands in a moment. Considering these countries' specific dynamics and typical seasonal patterns, We think European residential installations will bottom in the first quarter and improve thereafter. Moving to our European commercial business. Sell-through in the fourth quarter was down approximately 40% quarter over quarter. The European commercial market was down in the second half of 2023 for similar reasons as the market as a whole. We are more optimistic about the potential growth of the commercial market due to seasonality the expected rise in electricity prices, as well as regulatory support for both Agri-PV, renewable energy communities, and solar on multi-dwelling units, or MDUs, in certain countries on the continent. Moving to the U.S. residential market, dynamics here are relatively unchanged from what we witnessed in the second half of 2023, namely a significant slowdown in installations in California, due to the rollover of NEM 2.0, and continued slow growth in the uptake of NEM 3.0, and in the rest of the country, slowness in markets with lower electricity prices. Sell-through of our residential products in the U.S. in the fourth quarter was down 8%, with inverter and optimizer sell-through down 12%, and battery sell-through up 43%, as more customers realized the benefit of our DC-coupled storage architecture. We do not expect significant changes in the residential market dynamics in the US until such time as interest rates decline. In addition, the market should improve as installers are able to benefit from the various incentives offered by the IRA. The commercial market in the US continues to be the most positive segment from a growth perspective. In fact, commercial sell-through in the US was up 22% quarter over quarter to hit a record high. Given the continued drive towards net zero carbon emissions by enterprises, our new product introductions which serve broader portions of this market, and the expected benefits from the availability of our IRA-eligible products, we expect a positive 2024 for the USC&I market as a whole, and for us as a leader in this market. Moving to the rest of the world, we do not see dramatic shifts in overall revenue over the next several quarters outside of typical seasonality. We continue to see good potential in Australia, Taiwan, and Thailand, where a rapid shutdown requirement for commercial rooftops was recently put in place. Moving now to our current expectation for the inventory clearing pace. In the fourth quarter, sell-through from our distributor customers was slightly below $500 million, indicating that we undershift demand by approximately $200 million. Considering the market dynamics that we have discussed, as well as normal seasonality pattern, we expect to reach an underlying business run rate of $600 to $650 million in the second half of the year. Our expectation for the first quarter is that sell-through should be flat to slightly down versus the fourth quarter, meaning we expect to undership demand in the first quarter by approximately $250 to $300 million. Looking ahead, we expect underlying demand to improve in the second and third quarter, given typical seasonal improvements and market dynamics discussed earlier. Therefore, we expect to undership less in each successive quarter after Q1 until inventory in the channels have normalized by year end. With our expectations on reduced revenue levels over the course of 2024, we have made and continue to implement several measures to align our cost structure with the projected business outlook, including a 16% reduction in our workforce that we announced last month, closure or capacity reductions across our manufacturing base, and exiting from certain lines of business. Through these actions, we made sure not to impact our R&D activities in the development of future products that will enable us to maintain our strong position in this market, which we remain optimistic about over the mid and long term. Ronen will discuss the financial impact of these measures in his remarks. Moving on to operations, we have reduced our manufacturing footprint globally. At the same time, we continue to ramp manufacturing at our U.S. facility where we shipped over 90 megawatts of energy hub inverters in the fourth quarter. We expect to manufacture over 200 megawatts in the first quarter and to hit the quarterly manufacturing run rate of 500 megawatts in the second quarter. Additionally, we are on target to begin producing optimizers and commercial inverters at the second contract manufacturing location, with small quantities expected in the second quarter and significant volumes in the third quarter. Moving on to products. We have recently begun commercial shipments of three new products that address market segments that we did not previously serve and that we expect will positively contribute to our business in 2024 and beyond. Starting with the recent announcement of the commissioning of the first U.S. installation of our 330 kilowatt inverter at the one megawatt ground mount project in California, following initial installations in Europe and Asia. This inverter is coupled with our new H1300 221 power optimizer. This is our first optimizer equipped with high frequency DC power line communication technology, which allows communication with large number of optimizers for ground mount applications, as well as improved remote software upgrade capabilities. We are excited about this product and its application in the community solar and agri PV markets and will continue to ramp production for further deliveries in 2024 to U.S., Europe, and Asia. Second, in the fourth quarter, we delivered to customers in South Africa the first shipment of our 102-kilowatt-hour commercial backup battery. This represents an entirely new business opportunity for rooftop and ground mount solar with applications across many geographies and customers. We intend to roll out the product to multiple European countries in the coming quarters as we certify the products in various regions. Third, our tracker product continues to gain momentum. To date, we have installed approximately 37 megawatts and have already confirmed orders for approximately 110 additional megawatts that are scheduled to be installed this year. This tracker is optimized for installations on constrained and sloped terrains, eliminating the need for costly grading and construction, and as such is well-suited for community solar and agri-PV. The trackers come with advanced software that is designed to optimize production, predict weather changes, maximize bifacial gains, and respond to remote commands. Each of these three products by themselves, and in combination, allow us to provide our customers with an optimized solution for multiple special outdoor applications like floating solar, community solar, carports, Agri PV, and others. Let's talk about software. We have been talking about SolarEdge One for residential since its launch at InterSolar last year, and have been consistently releasing new features into the market. One very topical example of SolarEdge One's benefit is currently taking place in the Netherlands. In the last year, many utilities in the Netherlands have adopted negative rate policies in which at certain times, consumers who export power into the grid are penalized for the power they are exporting. To alleviate this, we introduced the negative rate optimization feature that through integration to the energy market, knows when export rates turn negative, and automatically stops export of energy and maximizes consumption from the grid, providing customers with incremental savings. Beyond the Netherlands, this capability has already been rolled out to Belgium, Sweden, and Poland and will be rolled out to additional countries on an as-needed basis. As it's a cloud-enabled solution, This feature can serve our entire legacy fleet, as well as new installations of residential and CNI systems. Since launching the feature late in 2023, over 9,000 customers have registered for it, and there have been more than 70 events in the last three months where customers have saved money using the feature. Another important software feature that we are in the process of field testing is dynamic rate optimization. Dynamic rates are complex energy trading methods where utilities publish the electricity imports and exports rates every day for the next 24 hours, which change dynamically throughout the day. The SolarEdge One energy optimization algorithm imports the rates from the utility company and optimizes PV production, energy storage, and energy consumption to maximize homeowner savings. Through the strength of the algorithm team that we have built in our R&D group, we aim to provide a best-in-class energy management software suite in order to generate maximum savings for our customers through a simple and user-friendly interface. I will now hand it over to Onan.

Thank you, TV, and good afternoon, everyone. The market situation which resulted in lower revenue levels in the fourth quarter and in the next quarter creates various anomalies in our financials, which I would address today. For a full comparison between our financial results for the quarter and the same quarter last year, please refer to the press release issued today and to the supplemental materials posted in our investor relations section on our website. Total revenues for the fourth quarter were $316 million. Revenues from our solar segment, which includes the sales of batteries, were $282.4 million. Solar revenues from the United States this quarter were $112.8 million, representing 40% of our solar revenues. Solar revenues from Europe were $120.5 million, representing 43% of our solar revenues. Rest of the world, solar revenues were $49.1 million, representing 17% of our total solar revenues. On a megawatt basis, we shipped 283 megawatts to the United States, 335 megawatts to Europe, and 283 megawatts to the rest of the world, for just over 900 megawatts of total shipments. 61% of the megawatt shipments this quarter were commercial products, with the remaining 39% were residential. In the fourth quarter, we shipped 133 megawatt-hour of our residential and commercial batteries, with the majority shipped to Europe. From a product perspective and as a result of the high three-phase channel inventory in the German-speaking countries, this quarter our shipment was heavily skewed to single-phase batteries that are manufactured using the Samsung cells and that carry significant lower margins. In the fourth quarter, Due to inventory imbalances in the distribution channels, we shipped higher portion of optimizers to inverters. As a result, ASP per watt this quarter, excluding battery revenues, was 23.6 cents, a 44% increase from 16.4 cents in the last quarter. While the typical ratio of inverters to optimizers is 1 to 24, the ratio this quarter was 1 to 30. In general, Our unit prices were largely unchanged this quarter. Our battery ASP per kilowatt hour was $403 this quarter, down from $475 per kilowatt hour in the previous quarter. The decrease is largely due to an inclusion of our first shipments of our commercial battery, which carry a lower ASP per kilowatt hour, as well as the previously announced price decreases on our residential batteries. Revenues this quarter from our non-solar businesses comprising of energy storage and all other segments were $33.5 million. Following the discontinuation of our LCV business, this revenue is mostly attributed to our energy storage division. Consolidated gap gross margin for the quarter was a negative 17.9% compared to positive 19.7% in the prior quarter. largely due to our discontinued operations and restructuring activities. Non-GAAP consolidated gross margin this quarter was 3.3% compared to 20.8% in the prior quarter. Gross margin for the solar segment was 4% compared to 24% in the prior quarter. This amount includes 210 basis points of IRA benefits. Given that the low revenue environment creates various anomalies in our margin structure, I would like to spend a few minutes addressing the main drivers of our gross margins and the impact on the current and next quarter's margin levels. This breakdown will provide more detail than we typically disclose, and we will provide this additional color on our quarterly earning calls as long as the current situation persists. The first layer of gross margin is what we define as direct gross margin, which is the difference between the price paid by our customers and our direct costs paid to our contract manufacturers. This part of the gross margin is affected by the prices in which we sell our products, the customer, the product, and the geographic mix, and the cost of components and other manufacturing costs. This margin layer is not dependent on revenue level but is only dependent on price, cost, and mix. In the fourth quarter, direct margin was 970 basis points lower than the third quarter, a direct result of an atypically high portion of large customers within our mix that enjoy volume discounts and a very high portion of our single-phase batteries that are based on Samsung sales purchased under prices that prevailed in the battery cell market in 2022. These were offsets by IRA incentives on products we made in the United States. We expect to recover most of this gross margin in Q1 due to product and customer mix changes. Total gross margins are achieved by adding additional costs of goods sold or other COGS to the direct cost. All COGS are not directly related to the product volumes sold in this quarter. Some OCOGs are variable, such as shipment costs and tariffs, and warranty accrual on newly sold products. And some are not variable, such as warranty expenses on our existing fleet, manufacturing and support departments, and contract manufacturers' charges. While in the fourth quarter, we lowered our OCOGs by approximately 50% on an absolute dollar basis, The greater decline in revenue on an absolute basis led us to these economies of scale that had negative impact of 930 basis points on our fourth quarter solar gross margins. By means of example, we lowered our production and support department's costs by 12% on an absolute basis in Q4, and yet these costs accounted for 670% basis points negative impact compared to the third quarter on gross margin due to lower revenue. Another example is warranty expenses and accrual, which were 49% lower on an absolute dollar basis in Q4, and yet accounted for 200 basis points negative impact on gross margins due to the lower revenue. Although we further expect reduction in the absolute dollar value spending in the first quarter of 2024, the lower guided revenues will continue to negatively impact our gross margins. This phenomenon is expected to reverse throughout the year as channel inventories clear out. Gross margin for our non-solar segment was negative 2.2%, an improvement from negative 23.9% last quarter, a result of higher revenues from our energy storage division and better utilization of Sela 2 factory. On a non-GAAP basis, operating expenses for the fourth quarter were $118.3 million compared to $128 million in the prior quarter. This reduction is predominantly related to reimbursements of salaries of Israeli employees that entered reserve service, as well as lower accrual for doubtful accounts and additional savings. As announced in the beginning of the year, During the fourth quarter of 2023 and the first quarter of 2024, we took significant cost reduction measures, including a reduction of 16% of our workforce. We expect our non-GAAP operating expenses to stabilize in the second quarter of 2024. And once the full impact of those cost savings is realized, we would expect operating expenses to range between approximately $112 to $117 million a quarter, while we continue to seek further efficiencies in all of our operations. This quarter, we also incurred significant discontinuation and restructuring costs in our gap results. As mentioned in the previous quote, upon the termination of our agreement with Stellantis, we have exited the light commercial vehicle business. The Stellantis contract termination generated an inventory write-off of $36.2 million and additional discontinuation costs of $0.8 million. In addition, as previously reported, we discontinued our manufacturing in Mexico and reduced our manufacturing levels in China. Our gap results for the fourth quarter include $23.2 million of restructuring expenses, the majority of which relates to contract manufacturer charges and equipment retirement costs. GAAP operating loss for the quarter was $237.6 million compared to an operating loss of $16.7 million in the previous quarter. Non-GAAP operating loss for the quarter was $107.8 million compared to an operating profit of $23.1 million in the previous quarter. Non-GAAP financial income for the quarter was $30 million compared to a non-GAAP financial loss of $7.4 million in the previous quarter. Our non-GAAP tax benefit was $25.5 million compared to a non-GAAP tax expense of $46.6 million in the previous quarter. Our non-GAAP tax rate for the year was 27%, and we expect it to decline over the next several years. Gap net loss for the fourth quarter was $162.4 million compared to a gap net loss of $61.2 million in the previous quarter. Our non-gap net loss was $52.5 million compared to a non-gap net loss of $30.1 million in the previous quarter. Gap net diluted loss per share was $2.85 for the fourth quarter compared to $1.08 in the previous quarter. Non-GapNet diluted loss per share was 92 cents compared to 55 cents in the previous quarter. As we discussed, we expect to reach an underlying business run rate of $600 to $650 million in the second half of the year, and we expect the process of inventory normalization to last until the end of this year. We continue to expect that at the revenue level of $6 to $650 million a quarter, consolidated non-GAAP gross margins would return to 30% to 32%, including approximately 500 basis points of benefit from IRA manufacturing tax credits, and operating profit margins would return to 11% to 14% after implementing cost reduction activities. Turning now to our balance sheet. As of December 31, 2023, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $1.3 billion. Net of debt, this amount, was $634.7 million. This quarter, cash used in operating activities was $140 million. This cash utilization is a direct result of two main factors. First, we have extended payment terms to certain customers, As a result, our DSO increased from 149 days in the third quarter to 265 days in the fourth quarter. Second, our inventory level increased significantly to the abrupt slowdown in demand. Our inventory days increased from 169 days in the third quarter to 386 days in the fourth quarter. We expect to see a slight increase in inventory levels in the first quarter as we ramp our U.S. manufacturing. which along with the lower guided revenues will result in higher inventory days. This trend of increased inventory days is expected to begin to reverse in the second quarter of 2024 once revenues return to growth and as we manufacture less products. We did not buy back share in this fourth quarter, and we expect to start executing our $300 million stock repurchase program in the first quarter of 2024. Accounts receivable net decreased this quarter to $622.4 million compared to $939.5 million last quarter. As of December 31st, our inventory level net of reserve was at $1.4 billion compared to $1.2 billion in the prior quarter. The increase is solely attributed to higher finished goods inventories a result of the abrupt slowdown in shipments offset by a decrease in raw material inventory. Turning to our guidance as discussed in our earning release for the first quarter of 2024, we are guiding revenues to be within the range of $175 to $215 million. We expect non-GAAP gross margins to be within the range of negative 3% to positive 1% including 850 basis points of IRA benefit. We expect our non-GAAP operating expenses to be within the range of $122 to $130 million. Revenues from the solar segment are expected to be within the range of $160 to $200 million. Gross margins from the solar segment is expected to be within the range of 1% to 5%, including 900 basis points of IRA benefit. I will now turn the call to the operator to open it up for questions.

To ask a question, press star 1 on your phone keypad. And to remove yourself from the queue, press star 2. Again, that is star 1 if you would like to ask a question. Our first question comes from Andrew Perocco with Morgan Stanley.

Great. Thanks so much for taking my question. And good evening, guys. So maybe just kind of starting out on the margins here. Apologies if I missed all the numbers, but I think you mentioned about 970 basis points or so of impact from volume-driven price discounts and some battery mix shift. Can you maybe just kind of reiterate or go over those numbers again in terms of how much you expect to come back in the first quarter or and then maybe the cadence beyond the first quarter in terms of the back half of the year where you expect to get and how you get there? Thank you.

Sure, and thanks for the question. So, first of all, to explain a little bit again the term of the direct gross margins and then what are the impacts. In general, there's a price that we charge our customers and this price has not changed dramatically in the first quarter. as we mentioned before, other than batteries, where we started to increase costs, as previously mentioned. The second part, of course, is the cost that we pay to our contract manufacturers. And this is also, by the way, something that's relatively fixed, given the cost of bill of material and manufacturing costs with our contract manufacturers. So when we look at the first level of this direct gross margin, the only difference that we have when we have a certain level of revenues is what is the amount of customers that have, or the size of the customer that have different volume discounts, that's number one. And number two, which was actually a little bit more important and influential this quarter, is what is the mix of our products? So the first thing I would say that of these 970 basis points loss of gross margin compared to the previous quarter, A lot of it is actually related to the fact that our portion of single-phase batteries was much higher than in the previous quarters. Now, we need to remember that these are batteries that we manufacture based on cells that we acquired from Samsung. It's an agreement that we signed at the very end of 2021. At that time, by the way, NMC battery prices skyrocketed. And as a result of this, and since this was related also to the raw materials index during the war in Ukraine in 2022, those prices went up dramatically. And that means that today when we're selling batteries, single-phase batteries made on these Samsung cells, our gross margins are very, very low. The second thing that happened is that actually in this oversupply environment, some of the customers that managed well their inventories and were able to either grow and actually need products to maintain their growth were large customers with very strong buying power. And therefore, in general, these will be customers that usually will be, I would say, less than 20% of the overall revenue. This quarter, they were like 60% or 70% sometimes of the overall revenues. Again, these are just numbers by means of example. So that was the second part. But I would still say that the biggest difference was first of all coming from the batteries and then from the customers. So I hope it helped on that side. What happens next quarter? So next quarter, two things are happening. The first thing is that across the mix of products that we expect to see and customers, we will see a little bit less of these very large customers with lower gross margins simply because of the fact that, again, they have right now what they need. And the second thing is that the overall portion of the single-phase batteries will most likely be slightly lower compared to what we saw this quarter. And that means that we expect the majority of these 970 basis points to come back. Not all of them, but the majority. I will end up with one important thing, Andrew, and I think that it will maybe be a theme that we will discuss over this call. The situation that we see today, as mentioned by Tzivi, is that the channels are very much filled with inventories because of all of the dynamics that Tzivi's mentioned. And what we do see is that today customers are not buying a typical order from SolarEdge as they used to do before of X inverters and X optimizers. In some cases, these customers are stopped buying And they buy only those things that you see. And this is why I sometimes see a little bit of an abnormal situation where a customer is buying only inverters because they have too much optimizers. This quarter, actually, it was the other way around. You know, we saw a lot of customers buying more inverters than optimizers. Sometimes, sorry, more optimizers than usual at the ratio of inverters. We may see, as we mentioned this quarter, that the three-phase batteries in the German country's are relatively heavy on the channel inventory, but once they start to be clear, then we will see higher purchases of these products that enjoy very nice gross margins. So I would say that the cadence of coming back to the level that we saw before is mostly related to the stabilization of the inventory situations in the channel, which again, we expect to see in the second half of the year, because then we will start to see back that the level of inventory is normalized, and you see a little bit more, I would call it, reasonable or natural ratios of products.

Great. That's super helpful. And maybe this is one follow-up question on demand. Sounds like you're still bullish on a European demand acceleration beyond the first quarter, both for residential and commercial, but still somewhat more muted and negative on the U.S. outlook for 2024. Can you maybe just help us bridge the gap there? What's driving the demand in Europe? Is it just purely power price driven? Is it energy security driven? Because it seems like the macro environment is somewhat similar in both geographies. I'm just curious what gives you more confidence in the medium term outlook in Europe. Thank you.

Yeah, thanks. We tried specifically actually to break it down to four segments, if you will, residential in Europe, commercial in Europe, and residential in the U.S. and commercial in the U.S. So in Europe, I don't know if the word is bullish, but we believe that there will be growth from the rates that we were in the fourth quarter and in the first quarter, primarily based on seasonality. and historical breakdown of installations and revenue in Europe between the various quarters. And that combined with some of the regulatory clarifications that we mentioned, both of these elements together in our mind translate to the fact that from the first quarter and on there will be a gradual improvement in installation rates and clearing of inventory and eventually of revenue in Europe. And this is true for both segments, residential and commercial. Overall, the expectation is for stronger growth in commercial than in residential related to market dynamics and some of the enterprise push for decarbonization. That relates to Europe. In the U.S., we see a very different pattern between residential and commercial, and that we've been seeing already. So as I mentioned, commercial, from an installation rate and sell-through point of view, is continuing to grow. It grew significantly in the fourth quarter compared to the third quarter, and we are at record historical levels from that perspective in terms of sell-through by our distributors. There's still time until the inventory clears and that begins to translate significantly. into revenue for us, but we are relatively optimistic about continued growth in the commercial market in the U.S. Again, a lot of it is driven by enterprise, module prices, and at some point also availability of IRA products that I mentioned we will begin to deliver in Q2 and deliver in volumes in Q3. So that is the source of why we expect a positive trajectory on on CNI in the U.S. And residential in the U.S. is the segment where we are less optimistic about growth, at least in the short term, and expect the market to continue to be a bit slow with gradual trends of people realizing how to sell and operate within a NEM 3.0 environment in California. And we see this slow growth trajectory in that regard. and availability of IRA products later in the year and especially installers and TPOs learning how to construct their business such that they can benefit from the IRA and that should help push the market forward a bit in the later part of the year. But this segment out of the three is the one that we see as more stagnant. In Europe, we see gradual growth in resi and commercial And in the U.S., we expect continued growth on commercial. All of this, again, from the perspective of installation rates and point of sale, that will eventually clear the inventory and result in our revenues as well as our expectations.

Thank you.

Thank you. Our next question comes from Philip Shin with Roth MKM.

Hi, everyone. Thanks for taking my questions. Wanted to explore your capital plan a bit more. I think you guys were talking about the potential for a buyback. And I think your cash in of debt is roughly 600 plus million. Seems like you may have burned 200 million in Q4. If the macro remains challenged through the first half of this year, could you guys be in a situation where you need to raise capital? Can you talk about your plan to manage the liquidity dynamics in general, and how much cash you would like to maintain on balance sheet. Thanks.

Sure. So in general, cash flow for operation this quarter was, as mentioned, about $140 million. And as usual, you also have a little bit of capital expenditures. When we look into the next year, let's first of all try to understand the cash dynamics, and then I'll discuss the capital allocations. We're basically going into a few quarters where quarterly revenues will be lower than the AR balance that we have right now, which is approximately $700 million of AR balances, which we will collect. And we collect them slower than we want, given the fact that, again, some of our customers are seeing difficulties. But we're confident in our ability to collect those. The second thing that will happen is, of course, the fact that since we're sitting on such large inventory levels, these are products, of course, that are not expected to be replaced over the very near future. For example, in our optimizers, we've just started our fourth generation selling of this product this year. These are products that usually do not have shelf life, and therefore, we expect to see that a lot of our revenues in 2024 will be continued to be sold from the inventory that we currently carry, where the manufacturing that we will do will come mostly in the U.S. for IRA purposes. We want, of course, to capitalize on these benefits and second these in other places because we want to maintain our manufacturing capability for the next year. By this, the result should be is that 2024 is going to be most likely a year in which we are going to generate a substantial amount of cash, at least I would say from the second quarter, once all of these trends will start to reverse. So in that sense, we do expect that cash flow will raise again, and it will be, unfortunately, when you're not growing so rapidly, I would say working capital needs are usually less pronounced. The second part is, when it comes to the capital allocation, is the fact that we will not execute the plan as long as we do not feel very comfortable with the cash position that we have. We feel very comfortable today that acquiring solar shares by the company is a good use of the cash of the company. We will do it in a very, I would call it, measured way to make sure that we are matching the pace of our purchasing of stock to the pace of our cash generation in order to make sure that we're not running, if something goes bad, into a problem. And in any case, of course, we are going to be very, I would say, concise on how we're going to continue and generate the cash flow from the inventory and customers. I think that right now we do not see that we will need to raise capital. I believe that we will actually generate a little bit more capital. And we believe that buying stock or shares is the right solution. I will just end with one more thing, and this is the capex spending. The general trend is that since we're reducing manufacturing footprint, of course we will invest much less in capital expenditures related to our manufacturing capacity increases we did in the past. So for example, some of the activities that we're ramping right now in the United States can be supported by equipment that we have already purchased, by testing equipment that was already built and is now being mobilized from other factories. So all in all, we see low usage of cash, high generation of cash, and a very measured and responsible a purchase of shares, which we still believe that at this time is a good use of our money.

Well, then, thanks for all that color. Shifting over to the demand outlook in Q4, it was 500 million in Q4, and now you're saying back off 600 and 650 million. Can you talk about the year-over-year growth? It shouldn't really be seasonal because we're really comparing Q4-24 to Q4-23. And then also when you get to that level of revenue again, what do you expect the new gross margin outlook to be on that $625 million of Bitcoin, excluding IRA and also with IRA? Thanks.

So first of all, I'll start from describing the, I would call it revenue environment between the two Q4s. and then I'll answer the margin. As we mentioned in the prepared remarks, we saw that the Q4 sell-out from or sell-through from our channels being approximately $500 million, which, by the way, based on our estimates, was actually even below the installation rates that happened throughout 24. We do understand that, sorry, Q4 23. We do understand that two things are happening, especially when we look into the beginning of the year. The first thing is that we saw a decline in the installation rates in the fourth quarter of 23 towards the end of the year, which is something that is usually happening because of the overall holiday season and the fact that actually Winter in Europe started relatively early this year and was relatively strong. And therefore, our belief is that throughout the year, first of all, the fact that you will see seasonality in Europe going back at least in the second and third quarter is something that we expect to increase the underlying demand that we saw compared to Q4. And since we're under shipping to the channel at this point of time, we will simply have to eventually adjust into these, I would call it installation levels that we see. And this is why if we saw $500 million of sell-through and a higher installation, when we look at the markets one by one, we believe that we'll see at least, if not higher, installation rates at the end of 2024. And by the way, this is not including new products that Sivi mentioned that are not baked into our plan, such as the commercial batteries, such as the trackers, such as the 330 kilowatt inverter. So we feel very much confident on this when we're looking at market by market. Once we are going to go through this year, what will happen is that we expect that we will eat the majority of the inventory or excess inventory that is in the channel, which we, by the way, at least at Q4 estimated about a quarter and a half worth of inventory. excess inventory sitting in the channel. And what we will see is that, you know, as the installation rates are continuing, our undershipping will go down quarter by quarter until, again, we believe that at the end of the fourth quarter, they will be relatively minimal. So that's how we view the trends that we see. And again, these are based on discussions that we had with our customers, analysis of historical trends that we saw, seasonality, and market by market also from political and other regulatory environment. Gross margins in this situation. So when it comes to the gross margin, as I mentioned in the prepared remarks, we expect that once we're back to $6 to $650 million of revenues a quarter, we should be at 30% to 32% gross margins, which already include 500 basis points of IRA benefits. And the way to get there is actually twofold. Once, of course, is our regular product gross margin that will not change significantly from a cost point of view because of the high inventories, and we actually bake in a small ASP erosion throughout the year. So we expect actually here that the costs will be relatively flat but price is going a little bit down, but we will see a much more normalized distribution between geographies and between customers, and therefore product margins will go back a little bit. The second thing is this OCOG part that we discussed in the past. And here, first of all, the combination of our cost-saving measures taken in Q1 when it comes to reduction in force, the closure of Mexico and reduction of China, coupled with a lot of work that we did in the quality of product front, starting from changing components in our products to automotive grade components that already shows a lower, of course, failure rate and therefore requires lower cost of service of warranty and also lower warranty accruals. and also a little bit of fixes that we did to our existing fleet when it comes to software that also reduces this amount. So we expect to see, even compared to the last time that we were at $600 million, a little bit of a lower fixed cost or O-cost as we saw before. So these will be the drivers that we currently see when we aim again being at 30% to 32% at $600 to $650 million of revenues.

Thank you. Our next question comes from Ryan Lee with Sachs. Hello, Mr. Lee. Your line is open.

Hey, guys. Sorry I was on mute. Thanks for taking the questions. You know, Ronan, I apologize. I'm going to kind of beat the dead horse a little bit here. But a follow-up to Phil's question. So if we bridge – I know you gave a lot more gross margin clarity than you typically do, and it sounds like you'll do that for the next couple quarters. But it sounds like there's 900-plus basis points direct, 900 basis points plus of some of the other COGs. So given where you're guiding to for Q1, basically like flattish gross margin, You've got, like, 1,800 basis points you've spoken to. What is the remaining bridge to get to 30 to 32? I guess that's where I'm struggling with because, you know, you've identified about 20 percentage points. Where does the other – 1000 basis points come from and then you know just to follow up to that would be you know previously you talked about 500 basis points included for IRA credits that was before the 45x clarity on optimizers being applicable for 11 cents you know came out in December so as your view changed there did you always embed 11 cents as your base case you just trying to understand all the puts and takes but definitely the bridge to the final 30 to 32 thanks okay I'll try at least fine so I'll start from the second part which is easy

As we said all along, our assumption was that we will get the 11 cents when it comes to optimizers. And therefore, our 500 basis points is already assuming that we will reach the capacity of inverters that we want to reach, which is 500 megawatts a quarter. And a certain level of optimizers, which is, by the way, approximately a million optimizers a quarter that we expect to have this run rate by the end of Q3. So this is something that was already baked in the same projection that we gave. Now, actually, when it comes to the bridge to the 30% to 32%, the two things that you will see, as we believe, is that, first of all, on the product gross margin, you will see a very modest increase after Q1. Again, Q1... is already going to recover a lot of these 930 basis points that we lost. And this is because of the more balanced mix of products that you will see. So actually, on the direct gross margin, you do not expect a lot. The thing that you should expect a lot is actually the all-cooks part. And I will do it very simple. Assuming that this number will be, just by means of example, $100 million in Q1... divided by $200 million of revenues, this is 50% gross margin impact. Just imagine that now we're moving into $600 million revenue. You need to take this 50% and divide it by three. And here comes approximately 33% of gross margins that are just added. So that's the whole story. And to make it even more, I think, easy to explain is that we've built our cost structure to support the company that is relatively diverse from a segment point of view, product point of view, serving complicated segments such as CNI, for example. And that means that we have a relatively heavier cost associated with this kind of a company that we've built. Once you reduce in revenues, even if you are reducing some of these costs, unless you reduce them exactly by the same level that you reduce your revenues, you see the P&L impact. And when you're working on such a small revenue basis as you see right now, the impact of gross margin is simply huge. So again, most of the bridge, economies of scale, even without changing costs. On our fixed cost, most of the bridge going to 30-32 will come simply economies of scale.

Appreciate that. Okay, makes sense. One more for me, and I'll pass it on. And this one's maybe a little bit nitpicking, but I think last quarter you said... You were talking about like a $600 million to $700 million revenue quarterly view, you know, at the end of this year, kind of when you normalize. Now you're saying $600 million to $650 million. Is there something embedded in your updated view here in three months, you know, share loss, pricing? It just seems like something's down ticked a bit on a number and a range that, you know, may not have the most precision to begin with. So just trying to understand, one, has something changed? And two, How much, I guess, confidence, visibility on the 6 to 650 not maybe changing again going forward?

Okay. So I think that when we said it's 600 to 700, this is, if you remember, based on sell-through level that we saw in Q3, and we assumed that this is the level. Throughout this quarter, we did a lot of work going deeper into our channels to understand what's happening there, looking at installation rates, dissecting almost every country by the various trends that we see there. And talking, by the way, to a lot of the installers to actually understand exactly what they see as well, which was one of the things that we did a little bit less prior to this period. And we simply were able to get the things a little bit more accurate.

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

Thank you. Our next question comes from Kashi Harrison with Piper Sandler.

Good afternoon, everyone. Thanks for taking the questions. So just first one for me, can you provide us with maybe a detailed walk on how we get from $500 million of sell through in full Q23 to the $600 to $650 that you're talking about by the middle of the year? And then can you also give us a sense of what the total dollar of product that you're attempting to destock from the channel is, you know, with as much detail as you can, if possible. And I have a follow-up.

So, Kiyoshi, first of all, the move from 500, 600, and 50 towards the second half of the year is mostly related to seasonality impacts that we see. And again, in some cases, a little bit of analysis of the market. You know, we've went through and looked at how seasonality looked in Europe, by the way, prior to COVID and the war in Ukraine. You wouldn't believe it, but there were a little bit of a normal years. And when we looked at normal years, we usually saw an increase of about 17, 20 percent from Q1 to Q2 and about 15 percent from Q2 to Q3. And by this, you simply see how the market is behaving. So That's the first thing that we did. Then we looked into the level that we see right now in Q4 and a little bit into January. What's happening in the Netherlands where we know that there was a little bit of a shift in the market. So we simply went one by one and we looked at the United States and what are the levels that we see here, how the sell-through behaves, and we simply did it one by one. We added to this information coming from other sources. We have a software called Designer that allows installers to design systems with our homegrown products. We've looked at how many new designs were made in the past, how many of them were turned into real installations, and what is the level that we see right now. So we took this into account. So we actually consolidated various sources of data, historical and current, in order to get to this point. I forgot the second part of your question, so please. A dollar of inventory that we expect to clear So in that sense, as we mentioned before, when we see the sell-through of about $500 million in the fourth quarter, as we mentioned, based on this, we assume that there is about a quarter and a half worth of excess inventory sitting in the channel. We believe that we'll clear, as mentioned by TV, $250 million in the first quarter. And from then, it's going to be gradually... declining towards the end of the year, it's not going to be exactly linear, but it's going to decline towards the end of the year where we'll still see a small amount in Q4. So that's basically our assumption.

Thank you for all that detail. Really appreciate it. And then my follow-up question. So, you know, OPEX post the, you know, the tough restructurings, you know, it's declining to, I think you said, 115 million at the midpoint. and that's down about 12%, I think, from 3Q at 130. But, you know, if we look at the change in revenues, though, you're saying sell through up 600 to 650, which is down maybe 34% from the selling peak at 990. And so, you know, I guess my question is, you know, what's behind the reluctance to more aggressively sell attack the operating cost structure.

I think we use the 600 to 650 as an indicator of the trajectory, but we believe it's a transitional point and we are developing products and Ronen mentioned as well that even in that number of the 600 to 650, we are not including products that we already released and will be generating revenue during 2024, albeit not with dramatic impact on the overall number of 2024. So this is a transitionary point which we sized the company for and are taking a lot of actions in order to be able to grow past that in the midterm based on how we see the industry evolving and how we see our portfolio evolving in order to do this.

Fair enough. Thank you. Thank you.

Thank you. Our next question comes from Mark Strauss with J.P. Morgan.

Yes, good afternoon. Thanks very much for taking our questions. So a lot of focus on near term and appreciate all the numbers. I wanted to go back to the RIF, though. I think on the last call you had talked about kind of trying to protect your ability to, you know, if the market rebounds. Quickly, you wanted to be in a position to meet that demand and not airship and some of the other things that we've dealt with over the last several years. The reduction in force, though, I mean, does that signal any kind of structural changes that you're looking out to kind of over the medium term? And then also kind of as a follow-up, is there any detail that you can provide as far as the reduction in force, the impact on you know, Resi versus CNI, U.S. versus Europe, you know, kind of by markets, by geography, anything you can provide on the reduction in force. Thank you.

Yeah, Mark. I think it correlates also to my answer to the previous question. Of course, the reduction in force was not uniform across the departments and the operations of the company. So we were... very determined not to impact significantly our R&D capability to maintain strong presence in the regions and in terms of being close to the customers and being able to service them properly in a manufacturing infrastructure that we believe can meet the needs in the near future and be flexible to grow beyond that. So all of that was was part of the assessment and the methodology that we implemented. And I would say even a more positive note, on a net number, more R&D people are working today on new product development than did a year ago when a big part of them were working on component replacements and addressing other things related to supply chain issues. So in that regard, actually, I think we're in a better situation today. We did, as mentioned, discontinue some projects in the area of e-mobility. We discontinued some other peripheral projects in the broader solar and energy market and are very, very concentrated on residential and commercial projects. and having an offering of a complete solution from everything that has to do with generation, storage, and consumption, everything from inverters, batteries, EV chargers, water heaters, et cetera. So that, we believe, is where we see the future and where we're investing the resources.

Okay. I'll take the rest offline. Thank you. Thank you.

Thank you. Our next question comes from Colin Rush with Oppenheimer.

Thanks so much, guys. You know, with the change in volumes, you know, and looking at your component sourcing, can you talk a little bit about any adjustments that we should be thinking about in terms of actual component costs and volume breaks going the other way on you guys as you take volumes down and how that might reverse as you get through the balance of this year and into next year?

So first of all, Colin, I'll start by the fact that given the inventory levels that we see right now, a lot of the costs will not change this year because if you take the inventory levels and expected revenues, you'll see that we're pretty much covered for this year. And of course, we will continue to manufacture in the U.S. to enjoy IRA and maintain other areas. So I don't expect a short-term situation here. When it comes to the components themselves, First of all, we have some strategic components and strategic component manufacturers with whom we have agreements. With all of them, we discussed the terms of the agreement and how to move forward. I think that most of the discussion is more on timing of consumption of volumes rather than pricing right now, because we thought also when component prices spiked during COVID, usually this will be more related to overall consumption. I would say global trends rather than the volumes that we're consuming, yes or no. So I do not expect to see a lot of changes there. There is always, by the way, a little bit of a change to the cost per unit in manufacturing because the more units you manufacture, usually that goes down. But at least when it comes to the level that we see, what we try to do is to reduce manufacturing locations instead of, you know, maintaining many locations and reduce the volumes in each one of them. So this is something that is relatively also going to be staying flat. So no major changes are expected in the very near future.

Excellent. And then, you know, with your sales team, you know, given suppressed levels of sales, you know, obviously you guys have had a really effective sales team historically. You know, can you talk about any sort of retention metrics that you're having to engage in or, Are you giving folks a little bit bigger geographies to work with? How is that team changing shape and incentivized going forward?

I also, in one of the previous questions, our global sales force was less impacted by the reduction in force because we wanted to keep the strong sales force that we have and the strong links to the customers that we have. And I think that that by itself buys some level of loyalty and motivation. Our Salesforce, to a large extent, has been with us for a long time and is very experienced in the industry and very experienced with the company to understand that cycles take place and have optimism about the continuation of the cycle to the other side of it. And together with that, we are making sure that that they're properly incentivized for the work that is maybe a bit more difficult now than in a bullish market. But I think we're happy with the level of engagement and motivation and optimism that we see across the sales force in the various geographies.

Thank you. Our next question comes from Christine Cho with Barclays.

Hi, thank you for squeezing me in. My first question, how do you determine how to under ship every quarter? I think you mentioned that you're going to continue to under ship through year end, just less in the subsequent quarters, but why not just front load that and not under ship? And then with the forecast that you discuss in your trajectory and revenue improvement, How do you factor in potential market share losses or gains and any pricing decreases that you might look to do as we move through the year?

Yes, the first part of the question is actually it's more the customers determine that than we determine that. And Hunen mentioned, because of the breadth of our product, even though we talk about a lot of inventory in the channel, there are various products that are still – either in high demand or in some way short, and a lot of the revenue is driven from those. So we're not trying to push onto the customer's product that they have and don't need. We're responding to their needs, either in anticipation of something that's going to happen in the market or as their inventories decline for specific reasons. for specific product lines. In our modeling and plans, we obviously have a lot of focus on share and believe that we're taking actions that will enable us to gain share. We did not factor anything dramatic in that regard into our assumptions when looking at the projected sell-through numbers that we gave.

Thank you. Our next question comes from Julian Dublin Smith with Bank of America. Hi there. Hey, this is Cameron Lockridge on for Julian.

Can you guys hear me okay?

Yes, we do.

Awesome. Thank you. So I just wanted to come back actually to that last question on pricing and kind of how you see that evolving, particularly in Europe with the inventory challenges that's taking place over there. You know, either from a competitive standpoint, how are you seeing competitors behave, and how does the pricing strategy evolve for you guys kind of as the year progresses in Europe?

So I'll start from what we see and then what it means for us. First of all, we do see an intense, intensifying, I would say, pricing environment in Europe right now. The fact is that... As mentioned, everyone is trying to push their volumes to try to grab some share. And we do see that across the board, at least when it comes to Chinese string inverters, prices are going down sometimes a little bit more than we used to see in the past. Now that channels are starting to clear inventories, then prices can play a little bit of a part. When it comes to us... We will need to adjust prices along this year. And as we've mentioned, we expect to see prices going down across the board in, I would say, mid to high single digit this year. Not all of it is going to be in the same continent or not on the same product, but in general. But the other side that still plays a very important part is actually the fact that what is the offering that is provided. Because today, the offering that we provide is considered to be a premium product comes from the software capabilities, from the abilities to respond to dynamic charges, the fact that we can make a lot of changes to our software over the air, over time, and change the product capabilities in relation to what we see in the market, our DC capital batteries. And therefore, we have certain benefits that allows us to continue and maintain our premium position. So we're not completely immune to price reductions that will happen in this market. At the same time, at least what we see right now is not something that necessitates a very big change in our pricing strategy.

Thank you. Our next question comes from Corinne Blanchard with Deutsche Bank.

Hey, good afternoon. Thank you for taking my question. Most of it I've already talked about, but maybe if you can try to talk a little bit more about the competition, especially in the U.S. We definitely have heard over the last six months increased competition coming from Tesla. There are some of your peers as well that have some contracts expiring, so that could give you as well some advantage. So maybe if you can talk a little bit about the dynamic here in terms of competition in the U.S.

Yeah, it's a competitive environment and always has been. We don't sense a big shift in the competitive environment in the U.S., at least not right now. We know that new products are coming in. And I'm sure there are good products coming. There are good string inverters available already in the market today. The North American market had for many years now understanding and tendency towards module-level electronics and all of the benefits of that in terms of of energy harvest safety, uh, et cetera. So, so we, we expect that that will still be the main philosophy in the, um, um, in the North American market. And so far we don't, uh, we don't see a, uh, a strong shift in another, um, in another direction. But that said in, in Europe, there is, there is a good offering of, um, of, uh, string inverters and, um, and, and what an elaborated before on the competitive environment, uh, environment over there. So more competition is coming in, and it's becoming more challenging, but we're very comfortable with the quality of our offering and its differentiation.

Thank you. Our next question comes from Joseph Osha with Guggenheim Partners.

Hi there, guys. Two questions. First, you've talked a lot about what you expect to happen in the U.S. relative to Europe as the year progresses. So as you think about the $600 and $650 million run rate, I'm wondering how we should think about that breaking down Europe versus the U.S. and also perhaps commercial versus residential.

Thank you. Joe, can you please repeat the question?

Let's, you know, as we think about Q4 and the $600 to $650 million you've talked about, how much of that do you think might be in Europe versus the U.S., say, and how do you think that breakdown might look in terms of residential versus commercial market?

Yeah, I think we... Resi versus commercial. So as we explain, we anticipate commercial to grow at a higher rate than residential. So we've typically been on a megawatt basis in recent quarters, roughly 50-50 between the two. We expect that looking at the trajectory into 2024, that the ratio on a megawatt basis, which is very different, of course, in the revenue, basis will lean a bit more towards commercial. In terms of the ratio of U.S. to Europe, so as I mentioned, we expect mild growth in the two segments in Europe of residential and commercial, and we expect stronger growth in North American commercial and some level of stagnation in in North America residential. So overall, I think relative to Q4, we do expect Europe to be a bigger portion of our sell-through and eventually revenue going into 24, and closer to how it was in the majority of 23, where Europe was a much higher portion than North America. So So Q4 was a bit different. We think that going into continuation of the year, the ratio of Europe will increase relative to the ratio of the U.S., and the ratio of commercial will increase slightly compared to residential.

Thank you. Our next question comes from Tristan Richardson with Scotiabank.

Hey, good evening, guys. Appreciate all the commentary. Lots been asked and answered, but maybe just curious, dialing into Europe a little bit, can you talk about maybe where the Netherlands has been for you historically as a component of Europe, and then where you see that going in the 600 to 650, particularly as we are sort of in limbo in terms of what happens long-term from a policy perspective?

Yeah, the Netherlands, I think it's well known that it was a very strong market for us historically. Actually, just as a reference point, I think we have an installed base of more than 800,000 residential homes in the Netherlands that have a SolarEdge system on them. And we believe that someday, and maybe that day after the pandemic, after the ruling of last week, is a bit further out there than we thought originally, many of these 800,000 homes will have a SolarEdge battery added to the SolarEdge solar system that already exists. So the Netherlands is a very significant stronghold for us and has been a good market for us, kind of on par to Germany. in terms of the size of business for us, although very different in scale and size of the market. I mentioned in the prepared remarks, compared to the baseline that existed in 2022, during the surge in demand, the Netherlands, for us, increased installation rates by about 50% in the early part of 2023. and then declined from there 50% to be about, I think, 20 or 30% below the 2022 run rate is the installation run rate in the Netherlands right now. And as I said earlier, we believe that the ruling, which was not to overturn net metering right now, is overall positive, but it doesn't really give very strong long-term clarity to the market. So I think people will go from saying, I don't want solar or I maybe don't need solar because I'm not going to get net metering to saying, okay, I'll have net metering for the near future. It maybe makes sense to put solar, but it's hard to say if this really is going to drive a surge in the market. We think it's going to improve. but maybe not quickly to the levels of 2022 and definitely not to the level of 2023. So it's still a strong and good market, and we also see already an uptick in battery adoption, but it is lower than what it used to be in 2022 for us and definitely at the peak of 2023.

Thank you. Our next question comes from Amit Thakkar with BMO Capital Markets.

Hi, good evening. Just one question for me. I just wanted to come back to, I guess, the comments earlier on the kind of expectation of free cash flow for entering 2024. I think the expectation was that 4Q was going to be positive free cash flow. And I was just kind of wondering if you could kind of maybe pick apart, like, was it an unexpected increase in finished goods inventory or changes in payment terms on the AR balance that caused you guys to kind of deviate from that and kind of push that out a little bit further in 2024 with respect to free cash flow generation? Thanks.

Sure. So I think it's the combination of the two. I'll start by the fact that we needed to extend payment terms. Sometimes we wanted, sometimes we had to extend payment terms to our customers. We do understand that some of our customers are do experience a lot of, I would call it, cash difficulties right now because of the fact that, you know, if sell-through is lower, they also collect a little bit lower. The fact that we work, by the way, with large customers give us a little bit more confidence in the ability to collect those, but I would say that sometimes we wanted, sometimes we were forced to collect a little bit slower. One interesting phenomenon was that some customers, you know, it's end of the year, They need to present their financials. They simply chose, you know, to pay instead of the 30th of December. On the 3rd of January, we have those as well. So that was the first part. The second part was, again, the inventory buildup. We had about $200 million of inventory buildup that happened. We, in addition, of course, to the inventory buildup that we saw in Q1, in Q4, we usually paid to our vendors in average within 60 days. So not only that we paid for the inventory buildup that happened in Q4, we paid quite a lot for some of the buildup that happened in Q3 into the sales of Q4 that did not materialize eventually. So the combination of the two was the end result of what we saw, and I think that it's mostly the very abrupt stop of revenues, or sorry, reduction in revenues, coupled with the customer's, I would call it, inability to pay when needed.

Thank you. Our next question comes from Austin Mahler with Canaccord.

Hi, good evening. My first question here, what is the attach rate that you're currently seeing for home batteries with inverters in the U.S. versus in Europe?

So it obviously varies significantly by country. So, you know, Germany attach rates remain in the 80 to 90%, while in Italy, I'm working off of memory here, but it's in the range of 40 to 50%. And then, as I said before, in the Netherlands, it's up 10% if we take these as representative markets of countries. in the U.S., in Europe, excuse me. In the U.S., it also varies, of course, by market. So in California, overall attach rates right now is about 40% to 50%, but that splits, of course, between some of the remaining NEM 2.0 installations that won't necessarily take a battery and the NEM 3.0 that do take a battery. We mentioned that the sell-through of batteries in the U.S. was up 40-something percent in the fourth quarter. So you can assume that the majority of this is going to California, and the attach rate is gradually increasing. In the other states, in the U.S., it's fairly low. Again, off memory, it's probably in the range of between 10% to 15% or so.

Thank you. Our next question comes from Vikram with Citi.

Good afternoon, everyone. I apologize, but I wanted to ask one more question about the long-term revenue outlook. Zvi, I think you mentioned the outlook assumes some market share gains. I was wondering if you can highlight the markets where you see market share gain opportunity and what the strategy will be to capture that market share. And It doesn't sound like the second half assumes any inventory restocking. But I wanted to clarify fourth quarter sort of the outlook six to 650 does not assume any inventory restocking in any way. And then I have a follow up.

And the first question, I think I discussed there is the topic of new segments that we have entered that we previously didn't serve at all. And obviously, they're Every shipment is a market share gain, and the ground mount, now that we're shipping 300 kilowatt inverters, we're gaining market share, and the same is in trackers, and same elsewhere. From a revenue perspective, the scale is not huge, and we also didn't include it in the assumptions. In the core markets, share gains are obviously much more incremental. We don't give specific numbers or expectations or markets. We have plans. We didn't bake them into the assumptions on the sell-through trajectory leading on into revenue trajectory. Vikram, can you clarify again the second question just to make sure that we understand it correctly?

I was asking... The outlook for fourth quarter 6 to 650 does not assume any inventory restocking in any way. I believe it does not, but I wanted to clarify.

It assumes that the distribution channel will be by then at the balanced inventory level that they typically have. want to maintain that historically is somewhere in the range of 60 to 90 days of inventory is what our experience is that most distributors and channels want to hold. So that is kind of what we modeled, again, a bit variations on countries and regions and products, if that is what, if that is It helps with the questions.

Thank you. We have no further questions at this time. I now return control of the conference back over to the presenters.

Okay. I just wanted to thank everyone for joining us on the call today, and have a good evening. Thank you.

This concludes today's teleconference. You may now disconnect your lines. Thank you for participating.