The SolarEdge Conference Call for the third quarter of 2023 is being webcast live on the company's website. The call is the property of SolarEdge and any recording or transmission without their consent is prohibited. The call will include a review of the company's results and outlook, as well as forward-looking statements. Non-GAAP measures will also be discussed.

The non-GAAP measures are included in the presentation to help investors understand the company's operating performance. The company is facing challenges due to market dynamics and inventory trends. The call will provide details on third quarter sales and future business levels. The industry experienced a surge in demand in 2022, leading to a backlog of orders for the company's products. However, operational challenges have hindered the company's ability to meet this demand.

In the third quarter of 2023, the company faced challenges with high demand for three phase commercial inverters and low supply, but saw improved supply and record shipments in the first half of the year. However, market demand slowed in the third quarter and the company received requests to cancel or delay orders. This resulted in significantly lower revenue for the third and fourth quarters and put pressure on margins. The company expects revenue to stabilize after inventory corrections and is taking short-term actions to address the financial impact. In the third quarter, the company had revenues of $725 million, with $676 million from solar business and $49 million from non-solar businesses. They shipped 3.3 million power optimizers, 274,000 inverters, and 121 megawatt hours of residential batteries.

The solar business revenues for the company have declined by 29% quarter-over-quarter and 14% year-over-year due to a market slowdown and high inventory. In Europe, there were unexpected cancellations and push outs from distributors, which were greater than anticipated. Germany, the largest rooftop solar market in Europe, is expected to connect 10 gigawatts of solar to the grid this year and has a long-term goal of reaching 215 gigawatts by 2030. The company's residential energy hub and three-phase battery are optimized for the German market and have seen good adoption. The Swiss and Austrian markets, which are about a third of the size of Germany, also saw significant growth and are expected to continue growing in the future.

In the third quarter, Switzerland was a strong market for SolarEdge, with record revenue and continued growth expected in 2024. The Netherlands market has been affected by government policies and the phase out of net metering, but there are potential opportunities for SolarEdge in the long term, such as increased implementation of dynamic tariffs and the potential for upsell and retrofit of existing installations. The combined Belgian and Netherlands market saw a slight increase in sell through, while the Italian residential market declined due to the end of a tax credit. However, the commercial market in Italy has seen significant growth.

In the third quarter, the point of sale data for commercial products in Italy increased by 216% year-over-year, while the overall megawatt filter in Italy was up 85% year-over-year. However, the European market saw a decline in demand due to high expectations and inventory buildup. In the US, market dynamics have remained relatively unchanged, with high interest rates and uncertainties around NIM 3.0 adoption affecting the market. Sell-through data for residential and commercial products in the US showed a decrease and increase respectively. Battery sell-through was also up. The rest of the world market is stable, but impacted by higher interest rates. Based on these market dynamics, the company predicts a gradual decrease in inventory levels and a return to normal revenue and margin levels.

The company used third quarter 2023 sell-through data as a baseline for their revenue projections and did not include potential revenue from new products or market share improvements. They estimate that it will take two to three quarters to correct their inventory levels. To align with reduced demand, they have discontinued manufacturing in Mexico and reduced capacity in China, while ramping up production in their U.S. facility. They also plan to begin producing commercial inverters and optimizers at a second site in the second quarter of 2024. The company has also decided to discontinue their light commercial vehicle e-Mobility activity and will continue to make adjustments to achieve profitability. They have recently installed a new 330 kilowatt inverter in the U.S. and will be ramping up production for further deliveries in 2024.

The company is expanding its offerings for ground mount applications and has approved a share repurchase program. The ongoing situation in Israel has not affected the company's ability to manufacture and deliver products. The demand for their products is expected to be strong in the fourth quarter and the company is focused on gaining market share. The financial review includes both GAAP and non-GAAP discussions. A full reconciliation of pro forma to GAAP results is available on the company's website and in the press release.

The segment profit for the company decreased by 27% in the third quarter compared to the previous quarter, and 13% compared to the same quarter last year. Revenues from the solar segment also decreased by 29% compared to the previous quarter and 14% compared to the same quarter last year. The United States accounted for 29% of solar revenues, while Europe accounted for 62%. Revenues in Europe saw a significant decline, with notable decreases in Germany, Netherlands, UK, and Poland. However, there was growth in revenues in Switzerland and France. The decline in European revenues was attributed to lower sales of batteries and an accumulation of inventory in the channels. Revenues from the rest of the world remained relatively flat.

In the third quarter, the company shipped a total of 3.8 gigawatts of inverters worldwide, with a higher ratio of optimizers to catch up with previous sales. The majority of the shipments were for commercial products, with a smaller portion for residential. Battery sales decreased compared to the previous quarter, but remained stable in the United States. The average selling price per watt decreased due to a lower optimizer mix and increase in commercial inverter sales, as well as a weaker euro. Revenues from the non-solar segment increased. Gross margins for the quarter were lower compared to the previous quarter and same quarter last year. Gross margin for the solar segment also decreased.

The decrease in gross margins in the third quarter was due to a combination of variable costs and indirect costs. A significant portion of the decline was attributed to the product mix, customer mix, and currency exchange rates. The remaining decline was mainly due to indirect costs such as warranty and service costs, allocation of operations and support departments, and increased logistic costs. The discontinuation of manufacturing in Mexico also contributed to the decrease in margins, which is expected to continue in the fourth quarter due to low revenues.

The company's indirect costs decreased quarter-over-quarter and are expected to decrease further in the fourth quarter. Margins are expected to improve in the first and second quarters of the next year due to cost reduction and normalized revenues. The non-solar segment had a gross margin of minus 22.8% and the solar segment generated operating income of $45.7 million. Non-GAAP operating expenses were $128 million or 17.6% of revenues. Non-GAAP operating income was $23.1 million, down from $191 million in the previous quarter. Non-GAAP financial loss was $7.4 million due to a weaker euro. Non-GAAP tax expense was $46.6 million and the company expects an annual non-GAAP tax rate of 22% to 24%. GAAP net loss for the third quarter was $61.2 million.

The company's non-GAAP net loss for the third quarter was $31 million, compared to a net income of $157.4 million in the previous quarter and $54.1 million in the same quarter last year. GAAP net diluted loss per share was $1.08, while non-GAAP net diluted loss per share was $0.55. The company expects stabilized solar revenue levels to be $600 million to $700 million quarterly, with targeted non-GAAP gross margins of 30% to 32% and operating profit margins of 11% to 14%. The company's cash, cash equivalents, and investments were $1.5 billion as of September 30, 2023, with $831.4 million net of debt. Cash generated from operations was $40.6 million, and accounts receivable decreased to $940 million with 149 days outstanding.

The company experienced an increase in customers' days sales outstanding due to extended payment terms provided to assist with higher inventory levels. The inventory level net of reserves was $1.2 billion. The company expects revenues for the fourth quarter to be within a range of $300 million to $350 million, with a non-GAAP gross margin of 5% to 8%. The solar segment is expected to contribute revenues within the range of $275 million to $320 million, with a gross margin of 7% to 10%. The call was then opened up for questions, with the first question asking for further clarification on the expected revenue and margin trends in the coming quarters.

The speaker addresses a question about the mix challenge in the previous quarter and the expected mix for the next quarter. They explain that forecasting changes is difficult due to the rapid changes in the market. They mention that current numbers represent about 50% of their normal level and there is a difference between the U.S. and Europe in terms of seasonality. They believe that Q1 in Europe will see higher revenues due to the uneven distribution of commercial and residential products. They also mention that they have shipped more inverters than optimizers in the last few quarters.

The company expects to see a steady growth in Europe in the second and third quarters, depending on how the winter season affects installations. In the U.S., revenues are expected to remain relatively stable, with a slight slowdown in the fourth quarter. The rest of the world is also expected to see linear growth. Overall, the company predicts a linear growth from the first quarter to the third quarter, with the possibility of a larger impact in the first quarter if the winter is lighter.

The speaker is discussing the potential impact of the winter season on their business and inventory clearing. They do not expect major changes in variable costs, but non-variable items such as fixed costs for contract manufacturers may weigh on revenues in the fourth and first quarters. These charges are expected to decrease in the second quarter, and expenses for support departments will remain relatively flat. The percentage may improve due to higher revenues.

The company does not expect to see a linear growth in gross margins, with the improvement being more tilted towards the second and third quarters of 2024 due to various factors such as ramping up the U.S. factory and increasing IRA. The complexity of the business results in a less linear revenue return. In terms of cash flow and balance sheet, the company anticipates an increase in cash flow from operations in the next three quarters, as well as an increase in free cash flow due to capital investments. However, as the company grows, it will require more working capital, leading to a rise in inventory and customer credits.

In the fourth quarter, the company expects to see higher numbers due to large customer balances and increased payment terms for European customers. They also have high inventory levels and anticipate consuming it over time, which will positively impact cash flow. The company is reducing capital expenditures and investing in new labs to support growth.

The speaker discusses the expected increase in cash flow from operations and decrease in cash flow from investing activities, leading to overall growth in cash. The next question asks for more details about the U.S. market, specifically which states are seeing strong and weak demand. The speaker explains that overall residential connection rates have been flat, with a slight decline in California and an increase in other states. However, battery installations have been consistently increasing, with California seeing an increase due to many installations including batteries, and other states such as Puerto Rico also seeing an increase. Overall, the U.S. residential market is relatively stable, with some states showing slight declines and others showing slight increases in installation rates.

The speaker discusses the current state of commercial installations and connections in the U.S., noting a gradual increase in activity in markets strong for commercial projects. This is attributed to projects that were previously on hold due to uncertainty about the Investment Tax Credit and interest rates. The competition in the U.S. is briefly mentioned, with the speaker expressing confidence in their current single phase portfolio and their market share among mid-tier installers.

The speaker discusses incremental dynamics and the lack of major changes in patterns in the U.S. market for inverters and batteries. They expect price stability to continue for inverters and optimizers, but may reduce battery pricing for volume purposes. The speaker also addresses concerns about lower margins, attributing it to factors such as the euro and component issues, but assures that they are taking steps to improve margins.

The company is being cautious in their approach to evaluating their normalized level of expenses and is considering whether it should be higher. They are taking all necessary cost reduction activities but are also aware of potential market fluctuations. They took a cautious approach in their modeling but will still make efforts to reduce costs.

The paragraph discusses the growth of commercial products within the company's portfolio, with 66% of megawatts shipped being commercial products in the current quarter. The company expects to see further growth in this area and is aiming for higher profitability and margins in the next two to three quarters. They also plan to provide more information on the normalized level of commercial products in the next call. The company is being conservative in their revenue modeling and will adjust as needed.

The speaker responds to concerns about a potential share loss in the company's market by providing a subjective data point from a recent survey with a large European distributor. They also mention that in late 2022, they noticed a loss of share due to high demand and limited supply, leading some installers to try other products.

The company has been able to recover lost market share due to availability constraints and has been working to systematically identify and regain installers who had decreased their usage of SolarEdge. They have also seen an increase in their share of sales with a pan-European distributor. The company is optimistic about recovering lost market share and does not see it as related to the current inventory situation. They are also looking at potential new geographies for growth while potentially exiting others.

Zvi Lando discusses the evolving markets in Europe, such as Slovenia and Romania, which are influenced by nearby central countries like Italy. He also mentions the growing markets in Spain and Greece, which were previously quiet but are now seeing a resurgence. Outside of Europe, Brazil, Thailand, Taiwan, and the Philippines are also growing markets, while the Korean market has not met expectations. Lando believes that, given the current interest rate environment, Europe and the U.S. present the most opportunities.

The company expects to see significant growth and demand improvements in larger markets, but is currently benefiting from the current market conditions. The company plans to shift to using internal battery cell manufacturing for its residential batteries, but due to lower installation rates, this shift will not happen until 2024. In the meantime, the company will continue to ramp up production and sell to both existing and new customers. The distributor cancellations and order delays experienced in the latter half of the quarter seem to have accelerated.

Zvi Lando, speaking about the stability of the company's sell-through numbers, states that their highest ever sell-through month was in June of 2023. The sell-through in July was slightly lower, but this is typical for the vacation month in Europe. The installation rate decline occurred in the second half of the quarter, resulting in a 22% quarter-over-quarter reduction. However, the installation rate has been relatively stable since then, with some countries showing an increase and others a decrease in connection to monitoring. Lando acknowledges that this is not a guarantee of future stability or growth.

Zvi Lando, CEO of SolarEdge, discusses the company's baseline scenario for stabilized revenue projections and their belief in the long-term and midterm growth of the solar market. He also mentions their priority to continue developing their product portfolio to maintain their leadership position in the market, which may include leaning into their balance sheet and potentially pursuing R&D and M&A opportunities during the current macro downturn.

Julien Dumoulin-Smith of Bank of America asks the team to recap how they got to where they are today, given the swift pace of the cycle. Ronen Faier explains that they look at three major sets of data, including shipping and destination, in order to analyze the business and determine its trajectory. He also mentions the impact of the COVID year of 2022.

The paragraph discusses the point of sale data and inventory levels of the company's products. The company has seen a correlation between their shipments and the point of sale data from their distributors, which has resulted in low inventory levels. However, the company has seen a relief in their ability to manufacture products and has returned to normal levels of inventory. The overall days inventory on hand ranges between 60 to 90 days, which is considered normal. The company continues to monitor inventory levels closely.

In this paragraph, the speaker discusses the monthly reports they receive from Europe and the United States. They mention that in July, they received record high numbers, leading to continued orders from customers. However, in August and September, they saw a decline in numbers, which is typical due to summer vacations in Europe. By the end of September, their distributors reported that September was not meeting expectations, leading to a decline in orders and pressure to delay them. In October, they received the September data and found that it was lower than August for the first time in many years.

The unexpected increase in inventory levels and longer on-hand days has led to a cautious approach for Q4 numbers and guidance. This deviation from the usual pattern was only realized in the last few weeks of September, causing many orders to be pushed out. The company is now working on improving visibility into inventory levels at installers.

The company is considering adding more data points to better track fluctuations in installation rates and inventory levels. The next question from an analyst asks about the demand levels assumed for the company's forecast of normalized revenue, and why there wouldn't be a decrease in pricing in the second half of the year. The CEO responds by stating that the forecast is based on current point of sale data and takes into account potential changes in pricing. They also mention that they have not changed prices in the third quarter and do not plan to in the fourth quarter due to low demand and inventory levels.

The speaker is asked about the impact of the call up in Israel on the company. They clarify that it affects 11% of the staff in Israel and 6% worldwide. They state that it is not material but significant. They are asked if the call up is more prevalent in certain departments or professions, and the speaker responds that it is across the board, including business, professional, and engineering roles.

The speaker addresses a correction regarding the male and female distribution in their business activities and explains that their manufacturing and business operations are not significantly impacted by the current situation in Israel. They mention that there is an impact on R&D, but they are able to reallocate resources to focus on key projects. The speaker also discusses backlog cancellations and explains their decision-making process and their long-term relationships with European countries.

The company has a network of partners for distribution and installation in various countries, and they plan to continue working with them for a long time. They prioritize long-term success in the market and strive to support their partners during difficult times rather than forcing them to take unnecessary inventory. The call has now ended.

This summary was generated with AI and may contain some inaccuracies.