Steve Fleishman: Okay, thank you.
Operator: Our next question will come from Jeff Osborne with Cowen. Please go ahead.
Jeffrey Osborne: Badri, I was just curious on your expectation for a 2Q recovery. What is your working assumption on normalized inventory in the channel? I think in the past you talked about 8 weeks to 10 weeks and assuming that is still the case, I guess, is there an argument that now that manufacturing is localized and continent by both yourself as well as competitors that — why wouldn’t that number be 5 or 6 weeks and maybe pressure would continue into Q2.
Badri Kothandaraman: Yes. I mean, what you’re saying is possible, but we don’t think so. So I’ll give you a quick primer on the weeks on hand. So you follow it. And I think generally, I’d like to say that everybody follows it. For example, if you have — let’s say, you start off with 100 units at the beginning of a quarter in the channel, and let us say you drain inventory at 10 weeks — I mean 10 units a week. And you also ship into the channel at 10 units a week, okay? So you ship into the channel at 10 units a week. You drain from the channel at 10 units a week. Therefore, at the end of the quarter, you find yourself at the same 100 because 100 plus 130, which is 13 weeks, minus 130, you have 100 units at the end of the quarter.
You ask yourself what is the weeks on hand. You say that is 100 divided by 10. That’s 10 weeks. So remember that number, 10 weeks. Now I say, oh, my demand is suddenly dropped by, let us say, 40%. That means I have 4 units a week that is accumulating. So that means — and assume I ship the same number of units into the channel, because I am slow in recognizing that the situation has changed. So let us say I still ship the same 130 as before. But now my dream is only 78 instead of 130. So I therefore end up with 4 units’ excess per week which is 52 units more than the last case. So now I have at the end of the quarter 152. 152, but my end customer demand is only 6 units a week. So I tell you that my weeks on hand now is 152 over 6, which is 25 weeks.
So I suddenly go, my weeks on hand increases by 150% due to a 40% drop in demand. If I am — I continue to be oblivious of — continue to be oblivious and ship the same material into the channel. So we can blow up disproportionately right? And of course, the further the demand drops, the further your weeks on hand will go up and the converts true. So if the demand improves a little bit, the weeks on hand is going to come down fast. So we think that the distributors — I mean, we’ll look at logical things here because even a 10 to 12-week inventory will be the similar dollar number that they have had in the past. And in fact, the lesser dollar number that they’ve held in the past. So we think logic will prevail and — of course, end market demand could change all of that pretty quickly.
So weeks on hand is not something that you — that is obvious. It can really change drastically by small changes in demand, which I gave you the example there.
Jeffrey Osborne: I appreciate that. My follow-up — and correct me if I’m wrong, but I think you’re allowed to, under the IRA export U.S. manufactured goods, to international jurisdictions. Is that something you’re already doing or do you intend to do in 2024?
Badri Kothandaraman: Not doing today, but of course, will consider.
Jeffrey Osborne: Got it. Thank you.
Operator: And our next question will come from Julien Dumoulin-Smith with Bank of America. Please go ahead.
Julien Dumoulin-Smith: Hey good afternoon, team. Thank you guys very much for the time. Appreciate it. I just wanted to pivot to a slightly different direction here, right? So you have a few of these exclusive deals across a number of different customers, but some larger ones, if you will. I’m curious, how do you think about how locked in those are going into the next year? And how are you think about working together realistically as partners, optimizing your value proposition while dealing and addressing with their respective needs, which are clearly and likely dynamic, especially given the backdrop in California. If you can speak to that, those dynamics? I know I’m not trying to get into the contract specifics here, but really working with them, if you will, and how you think about how locked in that portion of volumes are.
Badri Kothandaraman: Yes. I mean, I presume you’re talking about one large customer here, that’s the only one we have, which is official. The — we love our partners, right? We work very closely with them. We value their relationship a lot. And we are there — I mean, we are at their service all the time, whether it’s quality, whether it’s customer experience, we value their relationship a lot. So yes, of course, we will be looking to renew all of those.
Julien Dumoulin-Smith: Right. Yes. Fair enough. It’s difficult to [indiscernible] too much. And then just coming back to all these different contract manufacturing relationships, I know they might not be identical here, but how do you think about underutilization costs here? I mean what are the commitments like how flexible are the terms as you look at both flexing down and up the volumes through the course of the year here under these new arrangements?
Badri Kothandaraman: Right. I did talk about it answering a prior question, and I will say the same thing here. We have great contract manufacturing partners. Flex has been great for us. They particularly helped us when we were in trouble in 2017. We are grateful there. Our relationship has been very healthy. Even during these times. And we are working together. Sometimes, we look at a problem and say, is this a short-term problem or a long-term problem. If it is going to cost them pain, we are willing to restructure. And all of those accounting are in our P&L. We report it as part of our non-GAAP and GAAP gross margin. So you should read the P&L and know that everything is there. And we view this particular situation is temporary. But we are very cognizant of the fact that under loading is a pain for our contract manufacturing. So — and we think the right approach is to make sure both of us are profitable and share the pain. And we will be doing that.
Julien Dumoulin-Smith: Got it. Alright. Best of guys. We’ll speak to you soon.
Badri Kothandaraman: Thank you.
Operator: And our next question will come from Andrew Percoco with Morgan Stanley. Please go ahead.
Andrew Percoco: Hi, thanks so much for squeezing me in. So I just wanted to come back to a prior question. So it’s clear that the demand backdrop is going to be a tough demand backdrop potentially for the next few quarters. Can you maybe just discuss the health of the average installer that is a recurring user of your equipment and their ability to manage through this period and transition to the TPO model? I think there’s been some challenges around working capital and tax equity. So just curious what you’re seeing and what you’re hearing from some of those maybe repeat buyers on the smaller scale side of the installer community. Thank you.
