Solaredge Technologies, Inc. Q2 FY2020 Earnings Call

Welcome to the SolarEdge Conference Call for the Second Quarter Ended June 30, 2020. This call is being webcast live on the Company's website at www.solaredge.com in the Investors section on the Event 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 expressed 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 Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Please go ahead.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2020, as well as the Company's outlook for the third quarter of 2020. 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 first quarter ended June 30, 2020. Ronen will review the financial results for the second quarter, followed by the Company's outlook for the third quarter of 2020. 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 and the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies with all rights reserved. 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 U.S. GAAP. These non-GAAP measures are presented in the presentation as we believe that they provide investors with the means of evaluating and understanding how the Company's management evaluates the Company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended June 30, 2020, press release or the presentation may obtain a copy by visiting the Investors' section of the Company's website. Now, I will turn the call over to Zvi.

Thank you, Erica. Good afternoon and thank you all for joining us on our conference call. This is the third consecutive earnings call, and a key theme of our discussion is COVID-19 and its implications on our business. Unfortunately, the pandemic continues to spread globally impacting the lives and livelihoods of millions. We hope and pray for the health of those affected and the success of those working on vaccinations and treatments. Within this context, we are satisfied to report our Q2 results achieved, thanks to the loyalty of our customers and dedication and hard work of our employees. In the second quarter, we are reporting revenues of $331.9 million at the top range of our guidance and slightly above revenues in the same quarter last year. Revenues for the second quarter in our solar business were approximately $310 million, also slightly above the same quarter last year. The decline in revenues compared to the first quarter of 2020 reflects, of course, the impact of the global pandemic that we have seen in certain regions. Overall this quarter, we shipped 3.5 million power optimizers and 142,000 inverters. During our last discussion of the business environment, we explained that in order to assess market dynamics, we are closely tracking installation rates of our products through our monitoring portal globally and per country. I said last quarter this provides part of the picture, as it’s not directly indicative of new solar system sales by our installers. However, we do think it is a helpful tool to foresee market demand. That data continues to be helpful this quarter, coupled of course with other indications we have such as new order flow and point-of-sale data from our distributors. Based on these sources of information, I will discuss the momentum we are seeing globally. Starting with the North American market. Revenues of $124 million from our solar business in the United States represented 40% of total solar revenues. While equivalent to the revenues in Q2 of 2019, this is a significant reduction relative to last quarter, though expected considering that the United States has been heavily impacted by COVID-19. Having said that, since the end of April, we are seeing positive signs of increased orders and an increase in the installation in the United States connecting to our monitoring portal. This positive trend is also manifested in the sell-out by our distributors, which in the aggregate view has been consistently month-over-month since the end of April resulting in a decline of inventories with residential products at our distributors. At the same time, our data shows that the recovery of C&I installations in the United States is slower, and thus inventory levels are still high relatively to the installation rate at this time. In summary, we are cautiously optimistic about the recovery of the U.S. market in the coming months. Moving to Europe, where we have experienced a strong quarter of growth. Revenues in Europe this quarter were $144 million, up from $122 million last quarter. We attribute these positive results to two factors; the first is that while Europe has been impacted by the global pandemic, several countries in Europe have been quick to implement measures to keep the economy strong, including incentives in renewable energy. The second is our strong position in many countries in Europe, which enabled us to serve our customers during these challenging times and grow our business with them. In particular, in Germany, our three-phase residential storage inverter is gaining popularity, and we believe that with demand, we are increasing our share in the three-phase residential European markets in Germany, Switzerland, and others. Our positive momentum in Europe is not limited to the German residential market and also includes increased revenues compared to last quarter in the Netherlands, Italy, Switzerland, Poland, and France. We are also happy with the positive momentum outside of the U.S. and Europe, where we are reporting the second consecutive record quarter, seeding from strength in sales in Australia, Israel, and Taiwan. You'll see this momentum in both residential and the commercial segments. In Japan, beginning in June, we started selling our JET certified inverter. And while these are still small quantities, it means that we are now able to address the residential and small commercial markets in this promising region. On the product side, this quarter was characterized by a production ramp of the recently released energy hubs, storage inverters for the U.S. market, which together with our backup interface enables in one inverter, full flexible home backup storage, easy charging, and generator integration. For Europe, we continued the production ramp of the three-phase residential storage inverters, and we also ramped production of the new enlarged three-phase commercial inverter. As mentioned, all of these products have been positively received in the market, and thousands of units of each are en route to the regions. We also released this quarter the ground mounts version of the new three-phase commercial inverter combined with a four-to-one optimizer targeting the community solar ground mount segments in the United States. On top of these, we continued progress in the development of our residential battery targeted for release later this year. In our non-solar business, our focus on investing and developing new product offerings continued as planned, including shipments of additional solar electrical powertrain units for final pre-production validation by an automotive manufacturer. We are also happy to update that we have completed the construction of the Seller One manufacturing facility in Israel and are beginning to ramp our own manufacturing of inverters and optimizers with first commercial shipments expected later this month. As a reminder, our objective is to use the factory to supplement non-tariff demand and, more importantly, especially during this period, to enable full qualification of quality production processes of new products prior to ramping contract manufacturing sites. In summary, we are proud that even under these challenging circumstances, we have successfully adjusted to the changing environment and are leveraging our proven execution capabilities to continue to deliver profits and generate cash while pushing forward our technology and innovation and investments in our future. And with this, I will hand it over to Ronen, who will review our financial results.

Thank you, Zvi, and good afternoon, everyone. As always, my review includes GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed this call is available on our website and in the press release issued today. For the second quarter, total revenues were $331.9 million, a 23% decrease compared to $431.2 million last quarter, and a 2% increase compared to $325 million for the same quarter last year. Revenues from the sale of solar products were $310.1 million, compared to $407.6 million last quarter. U.S. solar revenues this quarter were $124.5 million and represented 14.2% of our solar revenues. These U.S. revenues included Safe Harbor revenues of $17 million. Solar revenues from Europe were $144.3 million, or 46.5% of our revenues. Revenues generated from outside the United States in Europe this quarter were at the record of $41.3 million representing 13.3% of our solar revenues this quarter. On a megawatt basis, this quarter we delivered 404 megawatts to the United States, 748 megawatts to Europe, and 290 megawatts to the rest of the world. Residential products represented 44% of our megawatts shipped, and commercial systems were 56% this quarter. This quarter, our top 10 solar customers represented 68.4% of our quarterly solar revenues, a decrease from the last quarter, and one distributor accounted for more than 10% of revenues. Blended ASP per watt of our solar products decreased this quarter by approximately 8% compared to the last quarter due to a change in the geographic mix and increased rates of revenues generated from commercial products. These two factors were slightly offset by the strengthening of the euro against the U.S. dollar. Revenues from our non-solar products were $21.8 million, mostly related to the sale of lithium-ion batteries by Kokam. GAAP gross margins for the quarter were 31% compared to 32.5% in the prior quarter and 34.1% in the same quarter last year. Non-GAAP gross margin this quarter was 32.4% compared to 33.6% in the prior quarter and 35.7% in the same quarter last year. Non-GAAP gross margin for the solar activities was 33.8% compared to 35% in the last quarter. This reduction is a result of a higher rate of sales in Europe, which is traditionally characterized by lower gross margin due to heightened competition from European and Chinese inverter manufacturers, and a higher portion of commercial revenue that is currently generating lower margins. In addition, the combination of reduced demand and our sufficient manufacturing capacity enables us for the first time in many quarters to reduce air shipment expenses to an insignificant level. The inventory levels we have built will enable us to avoid substantial air shipments in the near future. Actual tariff payments on Chinese-made products imported to the U.S. decreased this quarter as a result of lower shipments to the United States and increased manufacturing in Vietnam. Non-GAAP gross margins for our non-solar activity were 13.5% compared to 9% in the previous quarter. The increase was a result of an improvement in the margins on the sale of E-mobility powertrain units. Moving to our operating expenses. In total, operating expenses for the second quarter were $73 million or 22% of revenue, compared to $72.2 million or 16.8% of revenues in the prior quarter and to $65.3 million or 20.1% of revenue for the same quarter last year. On a non-GAAP basis, operating expenses for the second quarter were $61.1 million or 18.4% of revenues, compared to $66.3 million or 15.4% of revenue in the prior quarter, and $54.9 million or 16.9% of revenues for the same quarter last year. The second quarter was characterized by lowering non-GAAP operating expenses due to COVID-19-related travel restrictions, which eliminated travel expenses and reduced marketing and tradeshow-related expenditures. Additionally, we reduced the base salaries of our executive team and the cash portion of our director compensation by 20%. We renegotiated other expenses, such as leases and other services, all of which contributed to the reduction of non-GAAP OpEx spending. Our non-GAAP solar operating expenses as a percentage of solar revenue were 16.2% compared to 13.5% last quarter, as a result of lower revenues. Our GAAP operating income for the quarter was $30 million, compared to $67.8 million in the previous quarter, and $45.4 million for the same period last year. Non-GAAP operating income for the quarter was $46.6 million, compared to $78.6 million in the previous quarter and $61 million for the same period last year. This quarter, the non-solar activity resulted in a non-GAAP operating loss of $8 million, compared to an operating loss of $9.3 million in the previous quarter, driven by continued investment in the critical power solutions, automation machines, and E-mobility businesses, while the Kokam energy storage business continued to be profitable. Financial income for the quarter was $11.6 million, compared to financial expenses of $16.6 million in the previous quarter, and finance income of $0.8 million for the same period last year. This is a result of foreign currency changes resulting mostly from unrealized exchange rate fluctuations in the accounting treatment of intercompany balances and intercompany loans provided for the acquisitions in Korea and Italy. Tax expenses were $4.9 million this quarter, compared to $8.9 million in the prior quarter and $13.2 million for the same period last year. Our non-GAAP tax expense was $8.1 million, compared to $12.5 million in the previous quarter and $14.2 million for the same period last year. GAAP net income for the second quarter was $36.7 million, compared to a GAAP net income of $42.2 million for the previous quarter, and $33.1 million for the same quarter last year. Our non-GAAP net income was $52.1 million compared to a non-GAAP net income of $50.7 million in the previous quarter and $49.3 million for the same quarter last year. GAAP net diluted earnings per share was $0.70 for the second quarter compared to $0.81 in the previous quarter and $0.66 for the same quarter last year. Non-GAAP net diluted earnings per share were $0.97, compared to $0.95 in the previous quarter and $0.94 in the same quarter last year. Our non-solar businesses generated a $0.20 non-GAAP diluted earnings per share loss. Turning now to the balance sheet. As of June 30, 2020, cash, cash equivalents, bank deposits, restricted bank deposits, and investment worth $592.7 million. During the second quarter of 2020, we generated $59.3 million in cash from operations. Our net decrease this quarter reached $181.7 million compared to $235.7 million last quarter. DSO this quarter in the solar business was 73 days, an increase from 62 days last quarter, due to a small number of temporary payment extensions provided to certain customers, most of which have been repaid. Despite the substantial impact of COVID-19 on our business, we did not incur any substantial losses related to customer bankruptcies. We continue to be very cautious in the way that we provide credit to our customers. As of June 30, 2020, our inventory level net of reserve was at $264.5 million compared to $198.6 million in the prior quarter. Most of this increase is related to an increase in our finished goods inventory, which allows us to reduce the cost of expedited shipments and to be prepared for a possible upside, particularly in the North American residential market. We have also been increasing the levels of safety stock of raw materials at our contract manufacturers to avoid possible supply chain disruption due to COVID-19. Additionally, approximately $38.7 million of our inventory relates to the non-solar inventory, the majority of which is raw materials held by Kokam, and is on par with the level held last quarter. Moving now to the guidance for the third quarter of 2020. We expect revenues for the third quarter of 2020 to be within the range of $320 million to $350 million. Revenues from the sale of solar products are expected to be within the range of $305 million to $325 million. We expect non-GAAP gross margins to be within the range of 32% to 34%. Non-GAAP gross margin from solar activity is expected to be within the range of 33% to 35%. I will now turn the call over to the operator to open it up for questions. Operator, please.

Thank you. [Operator Instructions] We'll hear first today from Mark Strouse with JP Morgan.

Yes. Thank you very much for taking my questions. Wanted to start with just the U.S. market. Hopefully, you can give a bit more color on your commentary about your optimism about the recovery in that market over the coming months. Just what gives you the confidence in that? And thinking back to the last call, one of the things that seemed to be holding you back on being more optimistic was kind of uncertainty around cancellation rates. Can you just kind of give us an update on that metric as well? Thank you.

So, I think actually that is where the optimism lies. So we indeed in the early parts of the second quarter experienced some level of cancellations and push-outs, but the rate of those declined throughout the quarter to a point at the latter part of the quarter, in the early parts of this quarter, we're not seeing practically any more of those types of pushouts and cancellations. And in parallel, as mentioned, we're seeing a gradual increase in order flow and in installation rates, as well as in the point-of-sale data coming from our distributors. So combining those factors is where we see clear indications of a recovery, although the pace of that recovery is questionable. And that's why we are cautious in our predictions for the third quarter.

Okay. And then just as a follow-up on the supply side, can you talk about the capacity additions in Vietnam? When do you expect that to be fully ramped? And maybe talk about kind of the mix of business going — or mix of shipments going into the U.S. And when we can see the majority? And then when we can see all of that supply becoming tariff-free?

So, in general, Mark, what you see is that in Vietnam, the capacity that we have built is already at full capacity with the amount of products they are manufacturing and what we're doing now is actually to shift more of what I would call a product variety into these factories. The capacity of manufacturing in any factory is not just related to the amount of product that they can make, but actually the amount of product that they know how to make. And by definition COVID and the restriction of travel are making this a little bit more complicated. But that said, we do see an increase in the level of products and the amount of products coming from there. We are working on this diversification. I believe that towards the end of this year, about two-thirds of our products will come from non-tariff manufacturing areas. And I'm adding to this not just the Vietnam line, but also the line that we have in Hungary and, of course, first shipments that will come from the Seller One factory in Israel. To go to a full 100% non-tariff products, I'm not sure when that will be the case, because you also have to look at the mix and how many products you want to have concentrated in one single location. I believe that the rate of 66% will continue to increase into 2021. But I'm not sure that we will be in a position where 100% of everything will come from non-tariff areas, I would say at least in the next year or so.

Okay, I'll hop back in queue. Thank you very much.

We'll hear next from Colin Rusch from Oppenheimer.

Thanks so much. Guys, can you give us an update on the progress with energy storage products in terms of getting mall approval and preparedness to begin ramping and more like to first product deliveries?

I'm not sure I got the question correctly. The question is about our residential data availability.

Correct. And getting the hardware approved and prep, so they can begin ramping and start shipping and timing around all of them.

Yes, and indeed those are the two elements. The element is the R&D which is progressing as planned. And the element of certification is more challenging these days to move the batteries around together with the people for the certification labs in order to get all the required certifications. They are still on track for availability towards the end of the year. And as we've said in previous calls, we don't expect it to be a major revenue contributor this year. While in parallel, as I mentioned, the energy hub inverter is ramping at a very high rate and it continues to be installed with LG Chem batteries in a DC coupled configuration and many other types of batteries in an AC coupled configuration.

Great. And then, as you look at the margin improvement quarter-over-quarter in the guidance, how much of that can be attributed to geographic mix? You talked about 2Q extra mix shipping to Europe being an issue on margins for logistics. But just unpack how much of the margin is driven by volume? How much is it by mix from geographies? And any other indicators or variables that would impact that?

So, in this case, since we do not yet see major shifts in the geographical mix, I think most of the improvement that we're going to see towards the third quarter, as we guided, will come from first of all additional cost reduction activities that we do. While the pandemic continues, and maybe revenue levels are decreasing, we continue to invest all the time in R&D. R&D is also directed towards cost reduction, and we're able to utilize this cost reduction in our next sales. This is something that will continue this quarter. We also see a little bit of improvement in the euro to U.S. dollar rate, which, of course, was something that hurt us a little bit in the previous quarters, and now we're benefiting from it. In general, I think that the mix itself is not expected to be dramatically different over the next quarter at least. And therefore, most of these reductions will come from either our own activities or a little bit due to exchange rates.

Okay, perfect. Thanks, guys.

We'll hear next from Maheep Mandloi with Credit Suisse.

Hi. Thanks for taking the questions. And just on Colin's question on gross margins just building on that. Could you guide to how should we think about gross margins for the residential business versus the commercial? And the new products you are launching, how should we think about in Q3 and going forward?

So here again, I think it's a little bit hard to take the margin that we think it to be and reflect them to what we're going to see in the world where COVID-19 will bring back the, I would call it more of a normal mix that we used to see before, with the U.S. taking a more substantial part of our revenue. In general when we're looking at a world as we guided by the way in our Analyst Day, where approximately 50% of revenues are coming from the U.S., where those margins are usually higher, and the ratio of residential and commercial leans more towards residential. In this case, it's a 36%, give or take 1%, that we guided this number that we still see. And this is taking into account a blend of new products and older products, a product that we are just releasing with lower gross margins, and then cost reductions that we do on the existing one. Today, what we see is that Europe both being a little bit more competitive in pricing and the fact that Europe and the rest of the world are more inclined towards relatively large commercial systems that at least today are characterized by lower gross margin given being slightly more new products where the cost reduction curve is still being handled and also where the competition is heightened. I do not think that you will see a lot of changes in at least Q3 and much into Q4 unless the shift of the U.S. sales leans towards a higher portion of this amount. So, in the world without Corona, the 36%, give or take 1%, is exactly what we continue to see. And the fact that prices are relatively stable is helping us to feel comfortable with this kind of guidance for the long term.

Got it. Thank you. And just a follow up. Talking about the European market, in the remarks you spoke about new incentives in the market. But how does that translate into higher demand or either pricing power for you guys this year or in the coming years?

So, there are a few examples in various countries regarding the stimulus efforts for the local economies. They are strengthening the incentives for installations of renewable energy systems. An example would be in Italy and a couple of other countries. So that is — and these incentives have a window for the consumers to benefit from them. So that creates, similar to dynamics in other countries, a window of opportunity where customers want to install more solar systems. And being that our position in these markets to begin with is quite strong, we are the likely ones to benefit from this trend in the business. And this is happening also on the overall policy for that across Europe as well as some local country incentives and policies.

Thanks. I'll jump back.

From ROTH Capital Partners, we'll move next to Philip Shen.

Hi. Good morning. Thanks for the questions. First one is on the competitive dynamics in the U.S. I was wondering if you could speak to what you're seeing out there now. Some of the work that we've done, it seems like Generac might be taking some share with storage. And as a result, I'm imagining that they're selling some inverters there as well. But I was wondering if you're seeing any of that as you compete? And also, just overall, what are you seeing in general with the competition?

So without referring to one specific product versus the other, I think it's actually the tendency in the time of the pandemic, I think can be expected that people are kind of sticking to what they're used to. And I don't think we're seeing, at least in the last few months, to the extent that we see the market. I'm sure that there are corners or parts of the market that we don't see clearly at any given moment. But generally, the competitive environment to the best of our knowledge has not changed significantly over the last two to three months, at least nothing that we've noticed.

Great. Thanks, Zvi. In terms of margins, was wondering for Q2, if you guys could share the commercial versus residential margin by geography. So for the U.S. I know the residential segment is likely higher, and commercial is likely lower than the corporate average. But then, it would be useful to understand how the U.S. commercial margin compares with the European commercial margin. If you have any updates or changes on that. And so, if you can give us some specific data on the Q2 quarter, that would be great? And then what you might expect ahead for each item? Thanks.

So, we're usually not breaking the segment margins by product and region. But as we mentioned, if you remember in the last quarter, at least at the end of Q1, the — let's say on a product basis, the margin difference was approximately 400 basis points on a product-to-product comparison. This is something that got a little bit better during the last quarter, mainly due to the fact that the euro evaluated against the U.S. dollar. And therefore, at least some of the 230 basis points erosion that we saw in the last nine months that ended in Q1 were recovered, not all of it. So by definition, this difference was a little bit lower. I think that the only thing that we can say is that A, the margin in the U.S. is usually better for both residential and commercial compared to Europe and the rest of the world, because as you see, the rest of the world is taking a bigger share of revenues every quarter. And the second thing is that in general, you do see that you are open and rest of the world portion of the overall commercial is a little bit bigger. And that means that there is a little bit more competition there. But other than this, I don't think that there's a lot that we can say.

We'll hear now from Jeff Osborne with Cowen & Company.

Good afternoon. Most of the questions have been asked. But I was wondering if you could confirm that pricing on a like-for-like basis. It sounded like that that was consistent or flat, but I just want to double-check?

Yes, that's definitely the case.

Is that a similar expectation for the third quarter, Ronen?

No, I think that our expectation is to not see major changes there during the quarter. By the way, one thing again to state is that at least in Europe, again, the dollar equivalent of everything that we sell is a little bit higher, but it's not the price that the actual customer is seeing, and we do not expect major changes there.

And then any read through in July about the C&I market in the U.S. recovering? You flagged that you still had some channel inventory there at distributors, but what are you seeing at the start of the quarter?

So, there is no recovery, but it is very mild and I wouldn't jump to conclusions based on a one-month data point. There's definitely more discussion, and customers that had projects in their pipeline and projects that have confirmed that they are intended to be installed with our technology. They've been silent for a couple of months. So those discussions have resumed, and more designs are flowing to our designer tool, etc. So the rate of discussions has increased. The rate of installations has increased mildly in July.

We'll hear next from Mike Cikos with Needham & Company.

Hi. Just want to add a follow-up on a couple of quick items. I know, or I believe last quarter, we were having our quarterly earnings call. There was a discussion that exiting Q2, the non-GAAP was going to be tracking around $58 to $59 million a quarter. And I'm curious if revenue trends are better than what you guys expected? So maybe OpEx should be higher than that discussion that we had last quarter?

So actually, in the last quarter, what we said is that we believed that the cuts that would take us to this level were going to be fully effective during the third quarter. Actually, due to the fact that in some cases, we reduced our headcount. And usually, that takes a little bit longer because of the notice periods that you need to give. With that said, what we see in the operating expenses is that on one hand, we have pretty good control over the operating expenses. We were able to renegotiate a lot of these terms that we had. We actually accessed almost every line on the operating expenses and tried to renegotiate it and change it. At the same time, what we continue to do, and we are leveraging our strengths, is the fact that we see in certain areas talents that we may have tried to recruit in the past and we were not able to do because, at least in the areas where we were most effective in R&D, there was a big demand for engineers and now there are more available ones. Therefore, we are using the opportunity to either hire talents that we could not get before or strengthen areas that talent was more curious. So, in the sense, the measures that allowed us to get to the $59 million were all taken. But now as we see, first of all, in considering the guidance for the next quarter, a stabilization in their revenue level. And our ability to assess what kind of resources and benefits we can get out of this situation. We are going to be wisely spending our operating expenses, knowing that we're profitable, we continue to generate cash, and we have the ability to strengthen certain areas. So all-in-all, very good control over the operating expenses. And we'll simply use our resources wisely to continue as Zvi said in the script, to invest in technology and growth.

Thank you. That's helpful. And I guess for the follow-up, I know it doesn't get much attention just because the businesses are subscale in comparison. But the non-solar businesses, would just be curious how these acquisitions have been tracking versus your internal expectations? I know there's a lot of R&D investment taking place in those businesses, but any color would be again would be helpful?

So, I think it's three areas. The first is Kokam. And Kokam, as we reported in the past, is really based on the capacity that we have available. The capacity that we have for the most part we sell and revenue is consistent. That's what we've been projecting for the year because we know that the added capacity, which we are working on will take time until that becomes available. In the two other areas of critical power and e-mobility, our expectation was to be in the investment phase in 2020 in order to start seeing some results towards the end of 2020 and into 2021. I think it's maybe we clarify that in the subjects, but what we are able to do as Ronen mentioned, thanks to the control of expenses and the revenue that we're seeing is to execute those investments as planned. We expect to start seeing some truth. There are a couple of quarters from now that really have a much longer-term play in terms of the investments of when the significant impact on the revenue will be.

Here from Goldman Sachs, we will move to Brian Lee.

Thanks guys for taking the questions. I had several modeling ones if I could squeeze these in. Just first one, Ronen, if I looked at the pricing in the U.S. for solar, just taking the revenues you provide and then the megawatts. It looks like pricing was up over 15% versus Q1. What drove that?

So, again, pricing, there was a previous question about the one-to-one comparison between products. So it's not easy and only on a segment basis. For instance, the Energy Hub inverter, that brings with it much more capabilities and is more hardware. It's also more expensive. And that means the ASP is up. On top of that, if you remember, Brian, in the previous quarter, we mentioned that there was a lot of large volume for very large customers that, with its part of the Safe Harbor during Q1, that tended to have a slightly lower ASP. So I would say that the increase in the ASP in the residential North America from Q1 to Q2 is around a bit of a product mix and a bit of a customer mix, but generally the like-to-like pricing has been quite stable.

Okay. That helps. Then second question, if I strip out the Safe Harbor revenue from Q1 and Q2, your U.S. revenue came down about 45% from quarter-to-quarter, which is kind of towards the lower end of what many of your customers have been talking about in terms of trends. Can you talk a bit about inventory in the channel? Where does the destocking cycle stand right now with respect to the U.S.? And then do you expect U.S. revenues to grow in Q3? And if that's the case, we do assume that means Non-U.S. declines just wondering, what's driving the dynamics in the near term? If that's the trend?

Ryan, I can you try again, the question is coming in with a lot of interruptions and I'm not sure that we understood it correctly.

Yes, I'll try to simplify it. Just wondering where inventory in the channel stands today, just kind of what your thoughts are around the destocking cycle?

Brian, I apologize that we simply cannot understand. The line is completely broken.

We'll have to pick it up, Brian, and we'll do a great conversation later, sorry.

So, can someone, maybe if the question can be repeated, we'll be happy to answer as well.

[Operator Instructions] We'll go back to Brian. We'll see if you can hear him any better now.

Okay. Sorry, guys. Not sure if it's my line or your line. Can you hear me better?

Yes.

Okay. Thank you. Thanks for the patience. Just wondering inventory in the channel. Could you talk a little bit about where you think that stands today and where we are on the destocking cycle? And then with respect to Q3, the outlook for solar products revenue is relatively flattish from quarter-to-quarter, so well wondering is it U.S. up in Q3 and non-U.S. is down? Or is U.S. still declining into the Q3 period?

So I'll try to answer. Again, I hope that I heard everything correctly. What we basically see and understand that you were referring to this, when you strip the Safe Harbor inventory out of the regular sales in the United States, you see a reduction of about 45%. Therefore, the U.S. was going down. And the question was, whether this is related, I believe to inventory in the channels and how do we see Q3. So, I'll answer this and if I did not pick it properly, please, let's do it after the call. But in general, Zvi mentioned before that when the year started — first of all, we started it with relatively higher inventories that came into the United States due to the Safe Harbor. By definition, some of the customers acquired more inventory than they needed for the first and second quarter on a regular basis in order to enjoy this benefit. And this was in a year where the market was expected to grow compared to the last year. With COVID coming in March and the Safe Harbor inventory coming into the United States, of course, the players that could allow themselves having these Safe Harbors did not need a lot of revenues because of the low installation rates and the fact that they were sitting on inventory. So on that front, of course, whoever bought Safe Harbor would buy less in Q2. And this is obvious. When we look at the overall distributors' inventory, the distributors usually have a pattern where they build their inventory during Q1 that will be sufficient for the strong two quarters that will follow in Q2 and Q3. And this year was no exception other than the fact that COVID came in March and affected the market. Therefore, some of the distributors found themselves with inventory levels that were not abnormally high, taking into account the regular year, but given the fact that the installation rates that they saw in April and May were so much lower compared to what they saw before. This was definitely more inventory that they wanted to have. And this is why as we mentioned in the last call, and as we did in Q2, whenever we saw a customer that was struggling with inventories, we were allowing customers to cancel orders or to reschedule those orders because we didn't want to get them stuck with too much inventory. What we do see in the last few weeks is that the installation rates are growing and therefore the sell-through or the sell-out of the distributors is growing. Therefore, the amount of inventory that the distributors are carrying is going down. At the same time, by the way, they do see that we, other than, and I believe other players are building also inventory to support them. We believe that there is a little bit more of a shift in the way that they're ordering their product in advance because they want to make sure that they're not sitting on too much.

Yes. That's very helpful. So just as a follow-up on that, does that mean non-U.S.? By virtue of U.S. growing from Q2 to Q3, and the overall solar products revenue guidance being kind of flattish from Q2 to Q3, is non-U.S. declining again from Q2 to Q3, and what's driving that dynamic if that's the case?

So if it's not necessarily the case. Again, when we're guiding, we're guiding based on projections, and therefore they can move this way or another, but in general, what I can tell you is that usually Q2 and Q3 are very strong in Europe and we see a very strong Europe right now. So that by definition doesn't imply, but we expect a reduction there. In the southern hemisphere, of course, this is now winter, so you can see some seasonal effect. But in general, we do not see or do not forecast major declines in any of the regions. But at the same time, again, there's COVID outside and we're cautious in the way that we guide.

And at this time, I would like to turn things back to management for closing remarks.

Thank you. Thank you, Erica. As we completed the hour, I'll take this opportunity to thank everyone for joining us tonight and wish you and your families stay safe and stay healthy. Thank you.

Thank you very much.

And that will conclude today's conference. Again, thank you all for joining us.