SolarEdge Technologies, Inc. (NASDAQ:SEDG) Q4 2023 Earnings Call Transcript

SolarEdge Technologies, Inc. (NASDAQ:SEDG) Q4 2023 Earnings Call Transcript February 20, 2024

SolarEdge Technologies, Inc. beats earnings expectations. Reported EPS is $-0.92, expectations were $-1.47. SolarEdge Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the SolarEdge conference call for the fourth quarter and year ended December 31, 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 JB Lowe, Head of Investor Relations for SolarEdge. Please begin.

JB Lowe: 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 31, 2023, as well as the company’s outlook for the first quarter of 2024. With me today are Zvi Lando, Chief Executive Officer, and Ronen Faier, Chief Financial Officer. Zvi 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 US 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 non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to, financial measures prepared in accordance with US 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 Zvi.

Zvi Lando: 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 under-shipped 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 end 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 installations. 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 season of 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 US 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 product in the US 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 US C&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 undership demand by approximately $200 million. Considering the market dynamics that we have discussed as well as normal seasonality patterns, we expect to reach an underlying business run rate of $600 million 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 million 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 a 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 US 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 US installation of our 330-kilowatt inverter at the 1 megawatt ground mount project in California, following initial installations in Europe and Asia. This inverter is coupled with our new H1300 2:1 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 we’ll continue to ramp production for further deliveries in 2024 to US, 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 product in various region. 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, maximized 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 markets, 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 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 C&I 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 import — and export 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 our simple and user-friendly interface. I will now hand it over to Ronen.

Ronen Faier: Thank you, Zvi, 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 revenue 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, to 305 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% 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 3-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 sales 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 $0.236 a 44% increase from $0.164 in the last quarter, while the typical ratio of inverters to optimizers is 1:24, the ratio this quarter was 1:30. 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 shipment of our commercial battery, which carry a lower ASP per kilowatt hour as well as the previously announced price decreases on our residential batteries.

Following the discontinuation of our LCV business, this revenue is mostly attributed to our energy storage division. Consolidated GAAP 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 benefit. 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 margin and the impact on the current and next quarter’s margin level.

This breakdown will provide more detail than we typically disclose, and we will provide this additional color on our quarterly earnings 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 a typically 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 offset 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 cost of goods sold or other COGS to the direct costs. OCOGS are not directly related to the product volumes sold in this quarter. Some [indiscernible] are variable, such as shipment costs and tariffs and warranty accrual on a newly sold product and some are not variable, such as warranty expenses on our existing fleet, manufacturing and support departments and contract manufacturers chargers. 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 departments 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 in 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 cleared 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 Sella 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 the 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 million 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 GAAP results. As mentioned in the previous call, 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 GAAP 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. GAAP net loss for the fourth quarter was $162.4 million compared with a GAAP net loss of $61.2 million in the previous quarter. Our non-GAAP net loss was $52.5 million compared to a non-GAAP net loss of $30.1 million in the previous quarter. GAAP net diluted loss per share was $2.85 for the fourth quarter compared to $1.08 in the previous quarter.

Non-GAAP net diluted loss per share was $0.92 compared to $0.55 in the previous quarter. As Zvi discussed, we expect to reach an underlying business run rate of $600 million 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 $600 million to $650 million a quarter, consolidated non-GAAP gross margins would return to 30% to 32% on 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 US 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 returned 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 31, 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 earnings release for the first quarter of 2024. We are guiding revenues to be within the range of $175 million 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 million to $130 million. Revenues from the solar segment are expected to be within the range of $160 million 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 benefits. I will now turn the call to the operator to open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Andrew Percoco with Morgan Stanley.

Andrew Percoco: 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 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.

Ronen Faier: 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 impact. In general, there is 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 you have a certain level of revenues is what is the amount of customers that has — or at 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 with — 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 this 970 basis points to come back, not all of them, but the majority. I will add up with one important thing, Andrew, and I think that it will maybe be a thing that we will discuss over this call. The situation that we see today, as mentioned by Zvi, is that the channels are very much filled with inventories because of all of the dynamics that Zvi has 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 ex-inverters and ex-optimizers. In some cases, these customers are stopped buying, and they buy only those things that you see. And this is why you 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. We saw a lot of customers buying more inverters and 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 countries 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 situation 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 inventories is normalized and you see a little bit more, I would call it, reasonable or natural ratios of products.

Andrew Percoco: Great. That’s super helpful. And then maybe just as one follow-up question on demand. It sounds like you’re still bullish on European demand acceleration beyond the first quarter, both for residential and commercial, but still somewhat more muted and negative on the US 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.

Zvi Lando: 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 US and commercial in the US. 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 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. And in the US, 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 into revenue for us.

But we are relatively optimistic about continued growth in the commercial market in the US again, a lot of it is driven by enterprise, module prices and at some point, also availability of IRA product 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 C&I in the US. And the residential in the US 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 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 US, 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 with our expectations.

Andrew Percoco: Thank you.

Operator: Thank you. Our next question comes from Philip Shen with ROTH MKM.

Philip Shen: Hi, everyone. Thanks for taking my questions. I 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 and net debt is roughly $600-plus million. It seems like you may have burned $200-ish 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.

Ronen Faier: 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 cash — sorry, the AR balance that we have right now, which is approximately $700 million of AR balances, which we will collect. 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 a 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 US, for IRA purposes. We want, of course, to capitalize on these benefits and second is 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 a 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 SolarEdge 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.

So 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 cap expanding. 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 increase as 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 purchase of shares, which we still believe that at this time is a good use of our money.

Philip Shen: Ronen, thanks for all that color. Shifting over to the demand outlook in Q4, it was Q4 — sorry, $500 million in Q4 and now you’re saying back half $600 million to $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 at midpoint, excluding IRA and also with IRA? Thanks.

Ronen Faier: 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 precursor 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 2023 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 Zvi mentioned that are not baked into our plan, such as the commercial batteries, such as the trackers, such as the 330 kilowatt inverters.