The SolarEdge Conference Call for the First Quarter ended March 31, 2024 is being held and will be webcast live on the company's website. The call will begin with a review of the results by the CEO and CFO, followed by a discussion of the company's outlook for the second 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 its operating performance, but should not be seen as a substitute for GAAP measures. The company's first quarter results included $204 million in revenue, with $190 million from solar business and $14 million from non-solar businesses. The company shipped 1.1 million power optimizers, 69,000 inverters, and 128 megawatt hour of batteries. In the U.S. residential segment, there were no significant changes and results reflected traditional seasonality, but there was continued strength in the uptake of the company's single phase battery product.

The company's strength is coming from California and Puerto Rico, where there is an increasing demand for battery tied NEM 3.0 systems. The company's DC-coupled solution is well suited for these applications. In the U.S. Commercial market, sell-through was down due to seasonality, but is expected to grow this year. In Europe, the market started slowly due to winter and regulatory changes, but the company remains well positioned in the Commercial market. Germany's market is expected to improve with the passing of Solar Package 1, which will simplify regulatory requirements and increase demand for the company's products.

The Netherlands is slowly recovering in terms of consumer confidence and the market for net metering. The company is focusing on developing software solutions to gain market share. In other parts of the world, there have not been significant changes in market dynamics. The first quarter sell-through was slightly below expectations, resulting in under shipping demand. The company expects to see a 15-20% increase in sell-through in the second quarter, but still expects to under-ship demand. A customer is looking for a hardware and software solution to generate clean and cheap electricity and optimize energy management.

SolarEdge is optimizing its asset portfolio for flexibility and plans to deploy PVs to 20% of sites and offer paid subscriptions for C&I. They believe this will differentiate their solution and increase profitability. They have also announced the first shipments of their commercial outdoor battery and plan to roll it out to more markets. They will also be showcasing a DC-coupled storage system for indoor applications at Intersolar. They are also targeting the multi-dwelling unit market and continue to add new features for residential energy management.

SolarEdge has introduced a dynamic rate optimization feature and a negative rate optimization tool for residential users in the Netherlands, with plans to expand to other countries. They have also increased investment in cybersecurity and will be showcasing a new 20 kilowatt inverter for larger rooftops and system sizes at an upcoming conference. This will further differentiate SolarEdge in the residential market.

The company is developing a new inverter and residential battery for the North American market. They are also working on streamlining their product portfolio and improving operational efficiencies. The first quarter results were in line with expectations and they anticipate an increase in installations and revenue in the spring.

The company is focused on releasing new products in the next few quarters to prepare for the next growth cycle in their industry. In the first quarter, total revenues were $204.4 million, with $190.1 million from their Solar segment. The majority of their solar revenues came from Europe, followed by the United States and the rest of the world. They shipped a total of 950 megawatts, with 68% being commercial products and 32% residential. They also shipped 128 megawatt/hour of residential batteries, with most going to the United States. Due to inventory imbalances, they shipped a higher ratio of inverters to optimizers.

The average selling price per watt decreased by 27% this quarter, excluding battery revenues. The ratio of inverters to optimizers also decreased to one inverter to 16 optimizers. This was due to targeted price decreases in certain regions and products to help distribution channel partners manage their inventory levels. The battery ASP per kilowatt hour also decreased, largely due to price decreases on residential batteries. Revenues from non-solar business were $14.1 million, mainly from the energy storage division. GAAP gross margins were negative 12.8%, but non-GAAP gross margins were negative 6.5%, including a net IRA benefit of 450 basis points. Solar segment gross margin was negative 3.5%, similar to the previous quarter.

In the first quarter, the company's direct gross margin remained similar to the previous quarter, but was negatively impacted by the higher adoption of lower margin single phase batteries in the US. The company expects to return to target margins with the next generation of batteries. The second layer of expenses, OCOGS, also decreased but the decline in revenues led to a negative impact on gross margins. However, the company has seen improvements in warranty costs and reduced accrual rates due to the use of higher quality components and other measures. Lower revenues have also resulted in lower shipment costs.

The company increased their accruals for obsolete inventory by $9 million and is working to reduce and utilize inventory levels. Gross margins for non-solar segments were negative due to seasonally low sales and low factory utilization. Operating expenses were lower than expected due to one-time items and are expected to stabilize. GAAP and non-GAAP operating losses decreased from the previous quarter.

In the first quarter, the company's solar segment had an operating loss of $110.4 million, while the non-solar segment had an operating loss of $12.1 million. Non-GAAP financial expense for the quarter was $4.8 million, and non-GAAP tax benefit was $18.7 million. The GAAP net loss was $157.3 million, and the non-GAAP net loss was $108.6 million. Cash, cash equivalents, and investments were approximately $950 million, with a net amount of $316 million after debt. Cash used in operations was $217 million, primarily due to inventory buildup and vendor payments. The company believes they have adjusted their manufacturing commitments to the required level. As of March 31, inventory levels were at $1.55 billion, compared to $1.44 billion in the previous quarter.

In the first quarter of 2024, the company's average inventory days increased, but they were able to offset this with a reduction in accounts receivables. They also repurchased shares and provided guidance for the second quarter, with expected revenues and gross margins within certain ranges. The operator then opened the call for questions.

The speaker, Zvi Lando, is responding to a question about the company's margin guidance. He explains that the revenue in the first quarter was in line with guidance, but margins were affected by a mix shift that was not anticipated. This was due to higher demand for batteries in the US, resulting in lower margins. Lando reassures that this is a temporary effect and the company is still on track to reach their 30% margin goal by the end of the year.

The company's second quarter gross margin guidance takes into account higher battery sales than initially anticipated at the beginning of the year. This will have a minimal impact on their stabilized margin projection. The company is closely monitoring cash flow, with the expectation that the first quarter will be the lowest point of the year due to commitments for inventory procurement and manufacturing. However, this will reverse in the second quarter as they start selling more than they manufacture.

Ronen Faier, CEO of a company, discusses their plans for generating cash and addressing debt. They expect to see cash generation in Q2 and increased generation in Q3 and Q4. They also mention that they treat convertible bonds as debt and do not factor them into their cash positions. In terms of pricing, they have implemented price reductions for their batteries and are planning to implement mid-to-high single digit price declines in Europe.

The company is trying to make their price reductions more effective in helping their customers, as some customers have a lot of inventory and may be at a disadvantage when prices are reduced. They are matching price reductions with initiatives to help these customers, such as temporarily reducing the price of optimizers in regions where there is a lower ratio of optimizers in the channels. This helps distributors sell at a lower price and clear out inventory. The company is flexible in their approach and puts thought into how to use price reductions properly. In the U.S., there is not a lot of this happening currently due to a relatively stable environment. The company's gross margin guidance is not improving much despite an increase in revenue in the second quarter.

The speaker discusses the factors that are affecting the company's gross margins and explains that there have been no surprises. They mention that the rate of selling residential batteries in the US is faster than expected, which is diluting margins but will ultimately benefit the company in the long term. They also mention a regular seasonal effect that leads to higher spending on warranty expenses during the second and third quarters. The speaker reiterates that the company's long-term target for gross margins remains the same.

Philip Shen asks a follow-up question about the recent pricing promotion in the European Residential segment. He mentions that checks suggest the promotion includes a free optimizer when purchasing a kilowatt and asks for more details on the promotion and its duration. He also brings up concerns about the remaining inventory in the European market and how the promotion might affect the channel clearing process. Ronen Faier explains that the promotion is a tool to address the higher ratio of inverters to optimizers in the market and that it was necessary for distributors to purchase more optimizers. He also mentions that the promotion was a way to benefit distributors who need optimizers rather than a general price decrease.

The company is offering discounts to distributors to help them sell products faster and clear inventory. Inventory levels vary between distributors and products, but overall, inventory levels are expected to decrease gradually over the year. The company is not yet giving a ratio of inverters to optimizers for Q2 due to small differences in shipments.

The speaker expects to see a higher ratio of optimizers to inverters this quarter and in the upcoming quarter. They also anticipate a higher cost reduction rate with the introduction of new products and moving to higher capacity generations. This is due to their architecture, which allows for fixed cost per watt on the module level electronics and cost reduction on the inverter side with larger systems.

The next generation three phase inverter is expected to reduce costs by 30-50% compared to the current generation. The low margin single phase batteries are based on 1 gigawatt acquired from Samsung and are expected to last until 2025. The company will continue to monitor market adoption and ensure there is no product gap.

The speaker discusses the current sales of batteries and how they are impacting margins. They mention that the three phase batteries are performing well in Europe, but sales are still relatively low due to the situation in the region. The speaker also mentions that the company is working on a product redesign, but the margin projections are not dependent on this. They explain that the potential for cost reduction is limited when it comes to batteries, as their cost is mostly determined by cell prices.

The speaker discusses the potential for cost reduction in the next generation of inverters, specifically in the range of 30-50% for power electronics. They also mention their ability to monetize virtual power plants and grid services, with a focus on residential applications. However, they note that the number of batteries or systems under these programs is not significant enough to impact margins significantly.

The company expects to generate revenue from the growing virtual power plant (VPP) market, but the growth rate is not significant and it will take time to see a big impact on their numbers. The software capabilities offered in residential markets do not currently generate revenue, but commercial markets offer a wider range of services and potential for recurring revenue. There are no known changes to tariffs or legislation that could benefit the company's products. Interest rates remain high, but there have been no significant changes in leasing arrangements for rooftop solar in core US markets like California.

Zvi Lando, CEO of a solar energy company, discusses the trend of increased leasing versus loans for solar installations. He notes that this trend is evident in the market and has led to the entrance of new lease providers. The non-solar business has seen losses in Q1, but is expected to improve in the second half of the year due to the back-loaded nature of the storage market.

The segment is divided into two parts: one focused on developing storage products, whether connected to solar or not, and the other on owning the cell manufacturing in Sella 2. The company sees great value in having this kind of asset and is investing in developing products for niche applications. These niche applications are profitable and the company is working towards selling more products in this area. The profitability of this segment will depend on how quickly the company can utilize Sella 2 and develop the right products.

The speaker discusses the value of their business segment and the need to evaluate it periodically. They also mention that their cash balance is currently at a low point due to adjusting manufacturing levels, but they expect it to increase in the future through collecting customer balances and selling from existing inventory.

The paragraph discusses the expected pace of inventory reduction over the next few quarters for the company. It mentions that there will be some payments related to manufacturing in Q2, but cash generation will be lower in Q2 compared to Q1. From Q3 and Q4, the company expects to see strong cash flow generation and less spending on CapEx. The pacing of inventory reduction will also depend on the ratio of sales in the United States and Europe, with slower pacing in the US due to manufacturing there. Once Europe starts to grow again, the pace of inventory reduction is expected to increase.

The company expects to clear two thirds of their finished good inventory by the end of the year, with the pace of this dependent on market recovery. They expect a 15-20% increase in sell-through for the second quarter, with some markets performing better than others due to promotions and price reductions.

The split between geographies and segments makes it difficult to analyze the growth rates of SolarEdge. The company is still accumulating data from distributors, but some countries in Europe, such as Italy and Switzerland, are showing faster growth rates. The recent legislation in Germany is expected to lead to an increase in growth. SolarEdge plans to gain market share through innovation and features in their software, but their expertise in power electronics remains a core priority. The R&D team is constantly working on both software and hardware innovations.

The speaker discusses a previous quarter where gross margins were affected by single phase batteries and customer discounts. They expect the situation to improve in the future.

In response to a question about customer mix, Zvi Lando explains that they did see a lower ratio of customers enjoying volume discounts this quarter, but it was offset by selling more batteries than planned. He expects the customer mix to return to normal, but it may be affected by unexpected large orders. The call concludes with Zvi thanking everyone for joining and wishing them a good evening.

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