The SolarEdge conference call for the fourth quarter and year ended December 31, 2023 is about to begin. The call is being webcast live on the company's website and is the sole property of SolarEdge. The call will include a review of the results for the fourth quarter and full year, as well as the company's outlook for the first quarter of 2024. The call will also include forward-looking statements and non-GAAP measures.

The company's non-GAAP measures are presented to help investors understand the company's operating performance. The fourth quarter results showed $316 million in revenue, with $282 million from the solar business and $33 million from non-solar businesses. The company shipped 2.2 million power optimizers, 74,000 inverters, and 133 megawatt hours of batteries. Challenges from market dynamics and inventory levels affected the results, but the company expects a return to revenue growth. Details of sell-through data and an update on inventory levels will be provided.

The European market for solar and storage products experienced a surge in demand in 2022 and early 2023, but has since seen a decrease in demand and an increase in inventory levels. This is due to a combination of increased product availability and a tapering of demand, as well as market dynamics such as high interest rates and regulatory uncertainties. However, the market is expected to improve in the future, with Germany's regulatory policies remaining favorable and the elimination of the solar VAT tax in Austria leading to an anticipated acceleration in market growth.

The Netherlands saw a decrease in solar installation rates in the fourth quarter of 2023 due to uncertainty around the Dutch election and potential policy changes in net metering. While the recent decision to keep net metering in place brings some relief, questions still remain about future policy. This may slow down the transition to a battery market in the Netherlands. However, the company is well positioned for both the current solar market and the future transition to battery and self-consumption. In Europe, residential installations are expected to improve after bottoming out in the first quarter. The commercial market also saw a decrease in the second half of 2023, but there is potential for growth due to seasonality, rising electricity prices, and regulatory support for renewable energy in certain countries.

The US residential market is experiencing a slowdown in installations due to changes in net energy metering policies and low electricity prices. However, there is potential for growth in the commercial market, especially with the introduction of new products and incentives from the IRA. The rest of the world is expected to see typical seasonal fluctuations in revenue. In the fourth quarter, sell-through from distributors was slightly lower than demand, indicating an undershipment of $200 million.

The company expects to reach a business run rate of $600 million to $650 million in the second half of the year, with flat to slightly down sell-through in the first quarter. They anticipate improved demand in the second and third quarter and plan to align their cost structure with reduced revenue levels. The company has implemented measures, including a workforce reduction and closing certain lines of business, but will maintain their R&D activities. They have also reduced their global manufacturing footprint and are ramping up production at their US facility. They expect to manufacture over 200 megawatts in the first quarter and reach a quarterly run rate of 500 megawatts in the second quarter.

The company is on track to begin production of optimizers and commercial inverters at a second manufacturing location in the second quarter. They have recently started shipping three new products that will contribute to their business in 2024 and beyond, including a 330-kilowatt inverter with high-frequency DC power line communication technology for ground mount applications, a 102 kilowatt-hour commercial backup battery for rooftop and ground mount solar, and a tracker product that has already been installed in 37 megawatts and has confirmed orders for an additional 110 megawatts to be installed this year.

The tracker is suitable for various applications, including community solar and Agri-PV, and comes with advanced software that optimizes production, predicts weather changes, and responds to remote commands. SolarEdge ONE, a software designed for residential use, has been consistently releasing new features, such as the negative rate optimization feature that helps customers save money by stopping export of energy during negative rate periods. Another upcoming feature is Dynamic Rate Optimization, currently being field tested.

The paragraph discusses the use of dynamic rates in energy trading and how SolarEdge's ONE energy optimization algorithm helps maximize savings for customers. It also highlights the impact of the current market situation on the company's financials, with total revenue of $316 million in the fourth quarter. The solar segment, which includes battery sales, accounted for $282.4 million of the revenue, with the United States, Europe, and the rest of the world representing 40%, 43%, and 17% of solar revenues respectively. On a megawatt basis, the company shipped 900 megawatts, with 61% being commercial products and 39% residential.

In the fourth quarter, the company shipped a large amount of residential and commercial batteries to Europe, resulting in a higher ratio of single-phase batteries with lower margins. Due to inventory imbalances, there was a higher portion of optimizers shipped, leading to a 44% increase in ASP per watt. The unit prices were largely unchanged, but the battery ASP per kilowatt hour decreased due to the inclusion of commercial batteries and price decreases on residential batteries. The company's consolidated GAAP gross margin was negative due to discontinued operations and restructuring activities, while the non-GAAP consolidated gross margin was 3.3%. The solar segment's gross margin was 4%, including an IRA benefit of 210 basis points. The low revenue environment has affected the company's margin structure, and the main drivers of gross margin and their impact on current and next quarter's margin levels will be discussed.

The company will provide more detailed information on their gross margin during their quarterly earnings calls. The first layer of gross margin, direct gross margin, is affected by factors such as product prices, customers, and manufacturing costs. In the fourth quarter, direct margin decreased due to a high portion of large customers and the cost of single-phase batteries. However, they expect to recover most of this margin in the first quarter due to changes in product and customer mix. Total gross margins are achieved by adding additional costs of goods sold to direct costs, some of which are variable and some are not. In the fourth quarter, the company lowered their other costs of goods sold, but the decline in revenue led to a negative impact on their solar gross margins.

In the fourth quarter, the company was able to reduce costs in their production and support departments and warranty expenses. However, due to lower revenue, these cost reductions had a negative impact on gross margins. The company expects this trend to continue in the first quarter of 2024, but to improve throughout the year as channel inventories are cleared. The non-solar segment saw an improvement in gross margins due to higher revenues and better utilization of a factory. Operating expenses were also reduced due to reimbursements and cost-saving measures, and the company expects them to stabilize in the second quarter of 2024. The company also incurred significant discontinuation and restructuring costs in their GAAP results.

In the fourth quarter, the company terminated their agreement with Stellantis and exited the light commercial vehicle business, resulting in an inventory write-off of $36.2 million and additional costs. They also discontinued manufacturing in Mexico and reduced levels in China, leading to restructuring expenses of $23.2 million. The GAAP operating loss for the quarter was $237.6 million, while the non-GAAP operating loss was $107.8 million. The non-GAAP financial income was $30 million, and the non-GAAP tax benefit was $25.5 million. The GAAP net loss for the quarter was $162.4 million, and the non-GAAP net loss was $52.5 million. The company expects to reach a run rate of $600 million to $650 million in the second half of the year, with inventory normalization lasting until the end of the year.

The company expects to see an increase in revenue and gross margins in the range of $600 million to $650 million a quarter. They also anticipate a return to 11% to 14% operating profit margins after implementing cost reduction activities. As of December 31, 2023, the company had $1.3 billion in cash and cash equivalents. The cash utilization in the fourth quarter was $140 million due to extended payment terms to customers and a significant increase in inventory levels. The company plans to start executing their stock repurchase program in the first quarter of 2024. Accounts receivable decreased this quarter, while inventory levels increased due to the slowdown in demand. The company expects inventory levels to start decreasing in the second quarter of 2024 as revenues return to growth.

The company is providing guidance for the first quarter of 2024, with expected revenues between $175 million to $215 million. Non-GAAP gross margins are expected to be between negative 3% to positive 1%, with 850 basis points of IRA benefit. Non-GAAP operating expenses are expected to be between $122 million to $130 million. The solar segment is expected to bring in revenues between $160 million to $200 million, with gross margins between 1% to 5%, including 900 basis points of IRA benefits. The speaker then opened up the call for questions. The first question was about margins, specifically the impact of volume-driven price discounts and battery mix shift, which is expected to be around 970 basis points. The speaker explained that the price charged to customers has not changed significantly, but the cost paid to contract manufacturers has increased due to batteries.

The paragraph discusses the factors that influence the company's direct gross margin, including the cost of materials and manufacturing, volume discounts for customers, and the mix of products. The recent decrease in gross margin is attributed to an increase in single-phase batteries made from expensive Samsung cells and a higher percentage of sales to large customers with strong buying power.

In the next quarter, there will be a decrease in large customers with lower gross margins and a slight decrease in the proportion of single-phase batteries. This is expected to result in a return of the majority of the 970 basis points. There is currently a situation where channels are filled with inventories and customers are only buying specific products. In some cases, customers are buying more inverters and optimizers, while in others they are buying more optimizers. The three-phase batteries in Germany have a high inventory, but once they are cleared, there will be higher purchases of these products with good gross margins.

The speaker states that the pace of recovery to pre-pandemic levels is dependent on the stabilization of inventory levels in the market, which is expected to happen in the second half of the year. They also mention four segments (residential and commercial in Europe and the US) and explain their outlook for each. They believe that there will be growth in Europe due to seasonal patterns and regulatory clarifications, leading to an improvement in installation rates and revenue.

The overall expectation is for stronger growth in the commercial market compared to the residential market, particularly in Europe. In the US, the commercial market is expected to continue growing, while the residential market is expected to be slower due to factors such as NEM 3.0 and the availability of IRA products. In Europe, both the residential and commercial markets are expected to see gradual growth. Overall, the company is optimistic about future growth in all markets, but the residential market in the US is expected to be the slowest.

The speaker is discussing the company's capital plan and the potential for a buyback. They mention that the company's cash and net debt is around $600 million and they may have burned $200 million in the previous quarter. They also mention that the company's AR balance is approximately $700 million and they are confident in their ability to collect it. The speaker also discusses the inventory levels and how they expect to continue selling products from the current inventory in 2024. They mention that most of the manufacturing will be done in the US for IRA purposes.

The company plans to capitalize on benefits and maintain manufacturing capability for the next year, resulting in a substantial amount of cash in 2024. They will only execute their plan if they feel comfortable with their cash position and will purchase SolarEdge shares in a measured manner to match their cash generation. The company does not anticipate needing to raise capital and believes buying shares is the best solution. They will also invest less in capital expenditures for manufacturing due to a reduction in footprint.

In the United States, the company is ramping up activities using equipment that has already been purchased. They expect low cash usage and high generation of cash, and will continue to purchase shares responsibly. In terms of demand outlook, Q4 revenue was $500 million and is expected to reach $600-650 million in the second half of the year. This growth is not due to seasonal factors, and the company expects gross margins to be higher with or without IRA. There was a decline in installation rates at the end of 2023 due to the holiday season and strong winter weather in Europe.

The company believes that seasonality in Europe will increase demand in the second and third quarters, leading to higher installation rates by the end of 2024. They expect to eat up the excess inventory in the channel and see minimal under-shipping by the end of the fourth quarter. Gross margins are expected to be at 30% to 32% once revenues reach $600 million to $650 million per quarter, including a 500 basis point IRA benefit.

The company expects to reach its target gross margin by following two strategies. Firstly, by maintaining a consistent product gross margin, with a slight decrease in average selling price, and secondly, by implementing cost-saving measures, such as reducing workforce and improving product quality, which will lead to lower fixed costs and operating costs of goods sold. The company expects to see a lower fixed cost or OCOGS compared to the previous quarter, and aims to achieve a 30-32% gross margin at $600-$650 million in revenues. During the earnings call, Ronan provided more clarity on the gross margin and mentioned that there are 900+ basis points of other COGS that contribute to the overall gross margin.

The speaker was asked about the remaining bridge to reach a gross margin of 30% to 32%. They explained that the previous assumption of receiving $0.11 for optimizers was already factored into their projection of 500 basis points. They also mentioned that there will be a modest increase in product gross margin after Q1 due to a more balanced mix of products, but the majority of the increase will come from OCOGS.

The gross margin impact is 50% when the revenue is $100 million in Q1 divided by $200 million. When the revenue increases to $600 million, the gross margin impact is approximately 33%. The company's cost structure supports a diverse company with heavier costs, so reducing revenues has a big impact on gross margins. The bridge to 30-32% will mostly come from economies of scale without changing costs. The company previously forecasted $600-700 million in revenue for the end of the year, but now it is revised to $600-650 million. This could be due to share loss or pricing changes, and it is uncertain if the $600-650 million range will change again in the future.

In the paragraph, Ronen Faier explains that the company's projected increase in sales from $500 million to $600-650 million in the second half of the year is due to seasonality and market analysis. He also mentions that they have done extensive research on their channels and have spoken to installers to get a more accurate understanding of the market. The increase in sales is mostly due to normal seasonal patterns, with a 17-20% increase from Q1 to Q2 and a 15% increase from Q2 to Q3.

The company looked into the current market levels and trends in the Netherlands and the United States, using various sources of data. They expect to clear about $200-250 million of excess inventory in the first quarter and gradually decline towards the end of the year. OpEx is also expected to decline to $115 million at the midpoint, down from $130 million in the third quarter.

The company is focusing on the near term and is taking actions to prepare for the future, including reducing operating costs and developing new products. They believe this is a transitional period and are confident that they will be able to grow in the medium term. The reduction in force is aimed at protecting their ability to meet demand and there may be some structural changes in the future. No specific details were provided on the impact of the reduction in force on different markets and geographies.

Zvi Lando discusses the impact of the company's reduction in force on different departments and operations. They were determined to maintain strong R&D capability and presence in regions close to customers. In terms of net numbers, there are now more R&D people working on new product development compared to a year ago. The company has discontinued some projects in e-mobility and other peripheral areas, and is now focused on residential and commercial markets, offering a complete solution for generation, storage, and consumption. They are investing resources in these areas for the future. Lando also mentions that the change in volumes may affect component costs and volume breaks, but does not provide specific details.

Ronen Faier and Zvi Lando discuss the current inventory levels and expected revenues for the year, stating that they are well covered and do not expect major changes in the near future. They also mention their agreements with strategic component manufacturers and how discussions are more focused on timing rather than pricing. They also mention their efforts to reduce manufacturing locations instead of decreasing volumes. When asked about their sales team, they mention that they have an effective team and are not making major changes in terms of retention or incentives.

The speaker discusses the impact of the company's reduction in force on their global sales force, noting that they were less affected due to the company's desire to maintain strong relationships with customers. The sales force is experienced and optimistic about the future, and the company is ensuring they are properly incentivized. The speaker also mentions that the undershipping of products is determined by both the company and customers, and that they are not trying to push unwanted products onto customers.

The speaker discusses the company's response to market needs and their focus on gaining share. They also mention the intensifying pricing environment in Europe and their plans to adjust prices accordingly, with an expected decrease of mid- to high single digits.

The competition in the US market is strong, but the company's premium product offering and software capabilities give it an advantage. While there are new products entering the market, the North American market still tends towards module-level electronics. The company does not see a major shift in the competitive environment at this time.

The company does not see a strong shift in the market towards one direction, and there is good competition in Europe. They are comfortable with the quality and differentiation of their offering. In terms of revenue breakdown, they expect mild growth in Europe and stronger growth in North America, with a higher ratio of commercial to residential projects. Overall, they anticipate Europe to be a bigger portion of their revenue in the future.

The speaker discusses the performance of SolarEdge in Europe and how it has historically been a strong market, particularly in the Netherlands where they have an installed base of over 800,000 residential homes with a SolarEdge battery. The speaker believes that many of these homes will continue to add SolarEdge batteries in the future. The Netherlands is a significant market for SolarEdge, comparable to Germany.

The company mentioned in their prepared remarks that the installation rates in the Netherlands increased by 50% during the surge in demand in 2023, but have since declined to about 20-30% below the 2022 run rate. The recent ruling on net metering has not provided strong long-term clarity for the market, and while there may be an improvement, it is not expected to reach the levels of 2022 or 2023. The company also expects positive free cash flow to be delayed until 2024 due to a combination of extended payment terms and an increase in finished goods inventory.

The speaker explains that the company has had to extend payment terms to customers due to cash difficulties and slower sell-through. They also mention an interesting phenomenon where some customers pay earlier than expected. The speaker then discusses the inventory buildup and how it has affected their payment to vendors. They mention that the attach rate for home batteries with inverters varies significantly by country, with Germany having the highest rate and the Netherlands having the lowest.

The speaker discusses the long-term revenue outlook for the company, mentioning the potential for market share gains in new segments they have entered. They also mention the shipment of 300-kilowatt inverters and gaining market share in trackers. However, these gains are not included in the assumptions for revenue. In the core markets, incremental market share gains are expected, but specific numbers or expectations are not given. The company has plans for gaining market share, but they are not specified.

The speaker clarifies that the assumptions for the sell-through and revenue trajectory do not include any inventory restocking. They also mention that the expected revenue for the fourth quarter assumes that the distribution channel will have balanced inventory levels. The call ends with the presenters thanking everyone for joining and disconnecting the lines.

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