Solaredge Technologies, Inc. Q1 FY2022 Earnings Call

Good day, ladies and gentlemen. Welcome to the SolarEdge Conference Call for the First Quarter ended March 31, 2022. This call is being webcast live on the company's website at www.solaredge.com in the Investors section of 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 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 Mike Funari, with 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 first quarter ended March 31, 2022, as well as the company's outlook for the second quarter of 2022. 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 March 31, 2022. Ronen will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2022. We'll then open the call for questions. Please note, 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 statement contained in our press release, 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 US GAAP. The non-GAAP measures are presented in this presentation, as we believe 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 a substitute for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter ended March 31, 2022 press release or the supplemental material, may obtain a copy by visiting the Investors section of the company's website. Now, I'll turn the call over to Zvi.

Thank you, Mike. Good afternoon and thank you all for joining us on our conference call today. Starting with highlights of our first quarter results. We concluded the quarter with record revenues of approximately $655 million, more than $100 million over our previous record revenues achieved last quarter. Revenues from our solar business were at a record high of $608 million, while revenues from our non-solar business were $47 million. This quarter, we shipped 5.7 million power optimizers and 211,000 inverters, an increase of 600,000 and 14,000 units, respectively, from last quarter. Our solar business grew quarter-over-quarter by 21%, driven by growth in all segments and geographies, including record quarterly revenues in the United States and 14 European countries, including the Netherlands, Italy, Poland, Spain, Switzerland and the UK. There's a lot of attention recently to what is happening in Europe, and I would like to add some color on this topic, since it is a large source of our revenues. Traditionally, the first quarter in Europe is seasonally lower than other quarters, with significant pickup in the second quarter of each year. However, this year, we have seen significant increase in demand already in the first quarter and the growth in our megawatt shipments from Q4, 2021 to Q1, 2022 was 40% in the residential segment and 52% in the Commercial segment. On top of this, when we examined the sell-out data from our distributors in Europe, it is at an all-time high and inventory days on hand at the distributors are exceptionally low. Considering the current dynamics in Europe of elevated electricity prices, supportive government initiatives and our historically strong position in this region, and taking into account our current portfolio and new products we plan to release in the coming quarters, we expect our strong growth momentum in Europe to continue. In order to meet the high demand in Europe this quarter, we did have to ship additional products by air, which in combination with the euro to dollar decline, put pressure on our gross margin. Ronen will elaborate on this in a few moments. In the US as well, this was a record revenue quarter. In particular, we saw high quarter-over-quarter growth in the commercial segment where megawatt shipments grew by over 40%. This correlates with the global strong commercial momentum that we described in the Analyst Day that is associated with corporate ESG focus and high electricity prices. We continue to grow also in regions outside Europe and the US with record revenues. Noteworthy among these countries is Taiwan, where we shipped this quarter more than 50 megawatts of products, and in Japan, where we are ramping sales and installations of our newly certified residential offering. On the product side, we shipped this quarter approximately 100-megawatt hours of our SolarEdge home residential battery. We are seeing good market acceptance and strong demand for multiple countries for this product, most recently with the successful launch in Australia. Customer feedback continues to be positive, particularly regarding ease of installation, multiple battery flexibility and the overall advantages of a DC-coupled system. We are on track in ramping our manufacturing facility and plan to ship over 200-megawatt hours of batteries in the second quarter. We are also experiencing strong demand for all of our other SolarEdge home products, including water heaters, meters and most notably, our stand-alone and inverter integrated EV chargers, of which we shipped approximately 8,000 units worldwide in the first quarter. In the commercial and industrial segment this quarter, we released the S1200, a high wattage power optimizer based on our fourth generation ASIC that supports the recently available high-power and bifacial modules. We also continue to test our 330-kilowatt large scale inverter in sites in Israel and in Europe and are on track for ramp later this year, further strengthening our offer for ground mount installations. I would like now to elaborate on the operational challenges we are facing while ramping production of inverters, optimizers and batteries to meet the continuously increasing demand we are seeing. We are facing three main areas of challenge while building our capacity to meet this demand. The first is electronic component availability, in particular, at the elevated volumes we require. The second is unpredictable COVID-related disruptions such as the recent one in Shanghai, affecting some of our raw material and component suppliers, and third logistics routes affecting both incoming supply to manufacturing sites and finished good shipments. In order to overcome these challenges and to continue to supply our customers with the products they need, when and where they need them, now and in the future, we are on the one hand investing and growing our contract manufacturing facilities by adding space, people and equipment. And on the other hand, managing the component supply chain with expedited shipments, paying in some cases high logistic costs to get components to our factories and to get products to our customers. While we have raised prices to cover increased components and material costs, we are not placing all of the infrastructure development and expedited shipment costs on our customers. We expect that some of these costs will be mitigated as we grow manufacturing capabilities such as in Mexico, where this quarter, we began to ship inverters and optimizers into the US and we are on track to supply our entire residential inverter and optimizer US offering from the Mexico factory by year-end. While we do not have clear visibility on when the shortage of components will stabilize and our elevated demand will be met in a more predictable manner, we are optimistic that the work we are doing to qualify additional component suppliers and to align short and long-term forecasts with top management of our key suppliers will ease the constraints towards the end of the year. In our non-Solar business, our e-Mobility division continued delivering full powertrain units and batteries for the Fiat E-Ducato in Europe, doubling our deliveries from the prior quarter and we expect to grow another 30% in the coming quarter. In our Energy Storage division, the Sella 2 factory for lithium-ion cells and batteries in Korea is now fully constructed and has received permits required to initiate test runs for full cell qualification. In summary, this is an exciting period where we are capitalizing on our long-term investment in a broad portfolio and global presence and are significantly growing our infrastructure and our business globally, albeit in a challenging operational environment. With this, I hand it over to Ronen, who will review our financial results.

Thank you, Zvi and good afternoon, everyone. This financial review includes a GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. Segment profit is comprised of gross profit for the segment less operating expenses and do not include amortization, stock-based compensation expenses and certain other items. Total revenues for the first quarter were a record $655.1 million, a 19% increase compared to $551.9 million last quarter and a 62% increase compared to $405.5 million for the same quarter last year. Revenues from our Solar segment, which include the sales of residential batteries were a record $608 million, a 21% increase compared to the $502.7 million last quarter and a 62% increase compared to $376.4 million for the same quarter last year. US solar revenues this quarter were a record $265.2 million, a 3% increase from the last quarter and represented 43.6% of our solar revenues. Solar revenues from Europe were a record $285.4 million, a 48% increase from the last quarter and represented 47% of our solar revenues. Rest of the World Solar revenues were a record $57.4 million, a 10% increase compared to the last quarter and represented 9.4% of our total Solar revenues with a very strong quarter in Israel, Australia and Japan and a record quarter in Taiwan. On a megawatt basis, we shipped 721 megawatts to the United States, 1.1 gigawatts to Europe and 309 megawatts to the Rest of the World. 47% of the megawatt shipments were commercial products and the remaining 53% were residential. ASP per watt, excluding battery revenues this quarter was $0.269, a 6.2% increase from $0.253 last quarter, a result of our geographic and product sales mix as well as a price increase implemented in several regions. These price increases will fully materialize in Q3. This quarter, one US customer accounted for more than 10% of our Solar revenues. Revenues from our non-solar business were $46.9 million. A significant portion of these revenues came from our e-Mobility division, where the volume of powertrain units delivered to Stellantis continue to grow. Consolidated GAAP gross margins for the quarter was 27.3% compared to 29.1% in the prior quarter and 34.5% in the same quarter last year. Non-GAAP gross margin this quarter was 28.4% compared to 30.3% in the prior quarter and 36.5% in the same quarter last year. Gross margin for the Solar segment was 30.2% compared to 32.8% in the prior quarter Since our Solar segment gross margin have gradually eroded over the last few quarters, I would like to spend some time explaining the main drivers compared to the last quarter in order to provide a broader perspective. There were four primary factors which impacted our gross margins this quarter versus last. The first was increased shipping expenses, both on finished goods and raw materials for the reasons previously detailed by Zvi. This had a strong impact on our margin. And at current level, it is 480 basis points above where we were in the first quarter of 2021. We expect this to continue in the second quarter and gradually ease from the third quarter onwards as we ramp Mexico and decrease the portion of Chinese-made products for the US market. The second is related to costs paid to our contract manufacturers in order to continue manufacturing during the Chinese New Year period and are one-time in nature, and for ramp-up expenses in Mexico, China and Vietnam that will continue through the end of this year. The third element is the increase in revenues from batteries out of our total product mix which have lower gross margins. Fourth, relates to the devaluation of the euro against the US dollar, which impacted us significantly due to the high volume of sales in Europe. We expect this last factor to continue and negatively impact our gross margins into the second quarter as reflected in our guidance. Goods subject to tariffs shipped into the United States from China accounted for 32% of our US shipments this quarter. Gross margin for the non-solar segment was 5.6% compared to 4.2% in the previous quarter, mostly driven by higher margin on the storage product and improved margins in the E-Mobility business. On a non-GAAP basis, operating expenses for the first quarter were $98.9 million or 15.1% of revenues compared to $94.1 million or 17.1% of revenues in the prior quarter and $76.2 million or 18.8% of revenues for the same quarter last year. For the solar segment, operating expenses as a percentage of solar revenues were 13.9% compared to 15.8% last quarter, representing an improved operating leverage as our revenues continue to rapidly expand. Non-GAAP operating income for the quarter was $87.2 million compared to $72.9 million in the previous quarter and $71.9 million for the same period last year. This quarter, the solar segment generated operating profit of $98.7 million compared to an operating profit of $85.3 million last quarter. The non-solar segment generated an $11.5 million compared to an operating loss of $12.4 million in the previous quarter. Non-GAAP financial expense for the quarter was $4.9 million compared to a non-GAAP financial expense of $2.2 million in the previous quarter. Our non-GAAP tax expense was $13.5 million compared to $7.9 million in the previous quarter and $10.1 million for the same period last year. It is worth mentioning that due to the way that the tax provision related to GILTI income is calculated, the company's effective tax rate is not linear throughout the year and is generally higher in the first half of the year, and it will decrease in the second half of 2022. This non-linear calculation reduced our EPS this quarter by approximately $0.05, which is expected to be recovered in the second half of the year. GAAP net income for the first quarter was $33.1 million compared to a GAAP net income of $41 million in the previous quarter and $30.1 million in the same quarter last year. Our non-GAAP net income was $68.8 million compared to a non-GAAP net income of $62.8 million in the previous quarter and $55.5 million in the same quarter last year. GAAP net diluted earnings per share was $0.60 for the first quarter compared to $0.74 in the previous quarter and $0.55 in the same quarter last year. Non-GAAP net diluted EPS was $1.20 compared to $1.10 in the previous quarter and $0.98 for the same quarter last year. Turning now to the balance sheet. As of March 31st, 2022, cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $1.6 billion. Net of debt, this amount was $979 million. During the first quarter of 2022, we used $163 million of cash for operating activities. High cash consumption is not necessarily unusual for a rapidly growing business. In this case, the non-typical cash consumption in the first quarter is a result of the extended shipping times for both finished goods and components, high volume purchases of battery cells from Samsung for batteries to be manufactured and delivered in the second quarter, and the consumption of working capital, while increasing our revenues rapidly. We expect this trend to be reversed in the next quarter. Accounts receivable net increased this quarter to $676.8 million compared to $456.3 million in the last quarter as a result of our growing revenues. As of March 31, 2022, our inventory level, net of reserve, was at $432.5 million compared to $380.1 million in the prior quarter. Most of this increase is related to an increased level of raw materials, battery sales and component inventory in the solar segment, while our finished good inventory continued to decrease as a result of the growing demand for our products. Our non-solar inventory levels slightly decreased compared to the previous quarter. Turning to our guidance for the second quarter of 2022. We are guiding revenues to be within the range of $710 million to $740 million. Revenues from the solar segment are expected to be within the range of $660 million and $690 million. We expect non-GAAP gross margins to be within the range of 26% to 29%. Gross margin from the solar segment is expected to be within the range of 28% to 31%, mostly impacted by the euro-dollar exchange rate and an increased level of European revenues. I will now turn the call over to the operator to open it up for questions.

Thank you. We'll take our first question from Brian Lee with Goldman Sachs. Please, go ahead.

Thank you for taking the questions. I appreciate all the updates regarding margins and the complexities involved. First, Ronen, you mentioned in the last couple of quarters and at the recent Analyst Day your target margins for the inverters and optimizers aim to reach around 35% to 37% in the second half of 2022. Is that still the target for the latter half of this year? Do you have any visibility on achieving that? Additionally, what are the main factors that would help you move from the current low 30% gross margin for those products to the targeted levels? It seems like you would need a 400 to 500 basis point increase. Where do you see that improvement coming from over the next couple of quarters? Thank you.

Okay. So, first of all, thank you very much for the question, Brian. So, first of all, yes, the target is still, as we mentioned in the Analyst Day, to go back on the inverters and optimizers to 35% to 37% gross margin. And I think that when we are analyzing this and what should happen, I think that we need to differentiate between items that are within our control and those that are beyond them. In the items that are within our control, the first thing that happens is actually the fact that we are ramping Mexico very nicely next quarter alone. The Mexico factory is supposed to provide about 20% of the products going into the United States. And this, obviously, reduces the cost of shipment and the need for expedited shipments. The second issue that we do see as well is the fact that we continue to get components or expect to start getting components in a more regular way that will reduce the necessity to air ship products and sometimes air shipped components to the manufacturing sites. And this is, of course, going to impact as well. And the third issue are the price increases that we have affected starting Q1 and will materialize into Q3 that are compensating for some of these elevated costs and some of the costs associated with the increased price of our components. All of those items are within our expectation, and we simply execute on them one quarter after the other. Within the items that are not within our expectation is, first of all, the situation that we see on global supply chain, especially around what happens right now in Shanghai and other ports. Some of our component manufacturers have logistic hubs there. And this is something that may affect a little bit the supply of their components and some of the parts that we need into our factories. This is something that may necessitate more expedited shipments. And, of course, we also believe that this is something that may create a little bit more pressure on ports once this traffic jam in Shanghai is going to be released. The last issue that is beyond our control is actually the euro versus the dollar currency. Our sales in Europe are growing by absolute value and also sometimes as a percentage of the revenues. And when we see dollar to euro that if I'm not mistaken, right now, the rate is at the lowest part since 2002, this is something that has impact as well. We, of course, can affect some price increases, but they do not have an immediate effect. So with all those items that within our control, this is the target, and we believe that we can achieve, and we hope that things will set a little bit in Shanghai and that currencies will not work very much against us.

All right. No, fair enough. That all helps. So it sounds like if I summarize you're, sort of, looking at margins troughing here in Q2 and depending on some of those factors you don't control even with the shift to Mexico manufacturing lower freight expenses, you should see a meaningful margin pickup in Q3 and then even into Q4, that's a fair way to summarize that?

That's correct. Yes.

And then second question on batteries, and I'll pass it on. I appreciate you've given us the ASP on the inverter side, so when we kind of back into the 100-megawatt hours of shipments here this quarter, it implies somewhere in the $350 to $400 per KWH range is the implied ASP for the residential battery. First, is that kind of the right ballpark to be in? And second, are there pricing increases on that product, either being contemplated or having already been implemented that will push that number higher as we move through the year? Thank you.

So Brian, thanks. The number is not fully accurate because of the difference between shipment and revenue. So while we shipped 100-megawatt hour this quarter, we did not recognize revenue on a 100-megawatt hour this quarter, and that's part of where the misalignment is coming. But the second part of the question is yes. So, there's been – we've implemented the price increase on the batteries. We typically trying not to increase pricing retroactively on orders that customers gave us a significant time in advance. So that's why it takes a little bit longer to materialize. And that's what Ronen mentioned that some of the price increases that will materialize in the second and more significantly in the third quarter are on the battery as well.

Okay. Thanks a lot guys, I will pass it on.

Thanks, Brian.

We'll take our next question from Mark Strouse with JPMorgan. Please go ahead.

Yes, thank you very much for taking our questions. You talked about strong demand in US, but obviously getting a lot of questions on the anti-circumvention case. So, I just wanted to specifically ask what you are hearing from your customers in that region and kind of what you're expecting, what you're baking into your guidance in Q2?

First, like anyone else in the industry, we understand that unpredictable disruptions are not beneficial for business or the market, especially during this crucial energy transformation period. It's not an ideal situation for anyone. However, since a significant part of our business operates outside of the US, some anticipate that module prices may decrease there, potentially creating additional momentum. So far, we haven't observed that internationally; our business remains strong, module prices are stable, and module availability is good. Within the US, despite concerns, we haven't noticed any delays or changes to our backlog, both in residential and commercial and industrial sectors. We don’t expect any short-term impacts, certainly not in Q2, likely not in Q3 either, as our backlog is robust and the volume of expedite requests indicates strong demand. However, new project development for larger-scale initiatives towards the end of this year and the start of next year might face challenges, especially in large commercial and industrial projects and utilities. Nonetheless, US commercial is a significant area for us, although it doesn’t constitute a large percentage of our overall business.

Right. Okay. And then just as a follow-up, just hoping you could give a bit more color on the component constraints that you're talking about. Just maybe a bit more color on what those are. And then kind of the time that's needed to not only qualifying additional supplier, but for that supplier to ramp up with you?

I believe we can differentiate between tactical and strategic approaches. On a tactical front, as Ronen mentioned, some major US component suppliers have distribution centers in the Shanghai area from which they send out their components after packaging in Asia. Therefore, there is significant attention being given to managing the logistics of getting goods in and out of Shanghai and other impacted areas in China. Like everyone else, we are waiting for the situation to improve. It seems to be getting better, but that will definitely be a gradual process. With port congestion affecting inbound and outbound shipments, even as conditions begin to normalize, it will take time for the flow of goods to become more seamless. On a strategic level, as we plan for our business ramp, especially for projects in 2023, we are already discussing significant volumes of components that will require attention and long-term agreements with some suppliers. Over the past three months, we have been actively engaging with them, sharing our forecasts, and aligning our needs with their plans. Many suppliers are prioritizing renewable energy, and we want to ensure that as part of their growth strategies for the next 12 to 24 months, they are expanding their capacity to meet our anticipated demands. This includes various components such as transistors, IGBTs, and ASICs from foundries. We are aligning mid-term forecasts with these key suppliers and building strong relationships to guarantee the supply we need. In the short term, we hope the challenges in Shanghai, particularly, and across Asia generally, will ease, allowing operations to return to normal. This should make the upcoming quarters, especially in Q3, a bit more manageable. Looking ahead to 2023, our focus will be on significantly increasing capacity with suppliers and cultivating strategic relationships with these essential component manufacturers.

Very helpful. Thank you.

We'll take our next question from Laura Sanchez with Morgan Stanley. Please go ahead.

Hi, thank you so much. Thank you for taking my question. I think if I can go back to the DOC investigation. I'm wondering, do you think installers have sufficient inventories to supply demand for the rest of the year, or is it that installers can pass the higher cost to customers in case they start importing from China?

I believe it's likely a combination of factors. It starts with the distributors, particularly in the residential sector, where they may have some inventory. Both distributors and installers still have the ability to adjust pricing without significantly affecting demand. However, eventually, these price increases will begin to influence demand. The length of this unstable situation will be important to determine whether this is a temporary surge due to rapid industry movement or if it will become a prolonged issue that starts affecting demand towards the end of this year and into next year, initially impacting utilities, followed by commercial and industrial sectors, and eventually residential markets, though that may take longer. Ideally, this crisis will be resolved quickly enough to avoid such a scenario.

Understood. As a follow-up, do you think it's possible for the supply in those four southeastern countries to meet the strong demand in Europe? As you mentioned earlier, a significant portion of your revenues, over 50%, comes from Europe. I'm considering whether any potential impact in the US from the DOC investigation could be offset by increased demand in Europe, especially if manufacturing constraints are alleviated by supply from those four southeastern countries.

I think it's reasonable to consider that module companies might be redirecting capacity originally meant for the US to Europe and other global markets. This could potentially lead to a strong supply situation, possibly even an oversupply, and result in price reductions and further growth in Europe, which we might benefit from. However, the momentum in Europe is already so strong that it may not require additional support. Currently, the rate of installations in Europe is slowing due to labor shortages and other factors. Therefore, even if US-bound modules are diverted to Europe, the existing momentum may not increase significantly. In countries that are more sensitive to pricing, such as those in Asia, the additional availability of modules could enhance project development in nations like Thailand, Taiwan, the Philippines, and Japan, which would be advantageous for us. Nonetheless, it’s still early to confirm that this is the prevailing trend. The pace at which the administration in the US addresses and resolves this situation will influence whether this dynamic evolves or if we return to a more typical business environment.

That's very helpful. Thank you so much. And I think you touched on the labor restrictions. Last question here. Could you comment on the sales channel and your ability to continue to gain micro share in Europe because that does seem to be an area of concern that we're hearing about?

Separating the question into two parts, the installation rates of solar in Europe are significantly increasing. This is evident in countries like Italy and Germany. As our European General Manager mentioned during Analyst Day, these trends are driven by market dynamics rather than our influence. In some parts of Europe, the increasing demand is nearing the limits of available installation crews. Many of these crews were sourced from Ukraine, which presents a challenge. While Europe has the potential to grow faster than current levels, labor availability is constraining even stronger growth. As for our position, we're robustly established in Europe, operating in all the growing countries and segments, particularly residential and commercial. We are benefiting from this growth and are committed to ensuring that we supply our products to meet installation demands. We maintain a positive outlook on the current momentum in Europe, expecting it to strengthen further, independent of the dynamics in the US. I hope this provides a clear, albeit complex, picture of the situation.

Very helpful. Thank you so much.

Yes.

We'll take our next question from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Hey, good afternoon, team. Thanks for the time and opportunity. Just wanted to go back to the gross margin conversation that we were starting with earlier. I'm just trying to understand a little bit more in the back half of the year, specifically on ASPs and pricing increases, you talked about that are really kicking in, talk about third quarter, you didn't define the magnitude quite yet there. Can you talk about it a little bit? I mean, obviously, ASPs here in the first quarter, up a nice amount on the core solar side. Can you talk a little bit more about the order of magnitude that we should be expecting here? And basically, just to hear you out loud about this, as both the shipping and the logistics considerations ease themselves up with Mexico and as ASPs improve, how meaningful of a gross margin improvement can we see? Is this about reversing year-over-year trends, or is it about better than that, if you will.

Thank you for the question, Julien. To start, regarding price increases, we typically do not raise prices on existing orders. For orders placed in the first quarter that extend into the second and third quarters, we honor the previously confirmed pricing. This means any material changes expected by Q3 are primarily tied to logistics and delivery commitments. Generally, we have implemented price increases in the high single digits across various regions and products. However, in the commercial sector, we face heightened competition in Europe from Asian companies that are not raising prices and maintain good product availability, limiting our pricing power. We aim to increase prices only in response to inflation in our manufacturing and shipping costs, while trying to absorb some of these expenses to manage the high demand we're experiencing. When comparing Q1 this year to Q1 last year, which was already elevated, we saw an increase in costs by about 480 basis points. We anticipate that returning to production in Mexico will significantly help with logistics costs. Although gas prices are rising, making shipping from Mexico to the U.S. more expensive, we will avoid the costly expedited shipping and ocean freight from countries like China or Vietnam. So from a logistics standpoint, we estimate about 480 basis points of potential improvement. Additionally, there are other opportunities for cost reduction, particularly as we stabilize our R&D organization and focus on cost efficiencies. We believe we can return to gross margins of 35% to 37% on inverters and optimizers. Although we see opportunities to achieve these goals, there are also challenges, such as currency fluctuations, that we must consider. Overall, we remain confident in the outlook we've shared during the Analyst Day.

Got it. Excellent. I want to clarify a bit more on pricing. You mentioned pricing in high single digits, and you were up 6% in this quarter based on the core ASP per watt metric you provided. So, is that suggesting a 3% increase in the second half of the year? I understand that it's difficult to compare directly as it wasn't framed in the same way, but I just want to grasp the scale of the remaining potential for that ASP increase.

Okay. So it's not necessarily because part of the 6% is also related to mix changes between US and Europe. So I would say that I would believe that about roughly half of it is still there to utilize.

Hi, everyone. Thanks for taking my questions. First one is on accounts receivables, the number was up $220 million or so in Q1. Ronen, I think you talked about revenue being up. But when you look at it from a days outstanding perspective, I think days went up from, call it, 70% or 65% historically to 93% or so in Q1. Can you talk through a little bit more on what's going on there? thanks.

Sure, of course. So, I think that the phenomenon is mostly related to – first of all, as you mentioned, the absolute value is related to the fact that we have higher revenues. Actually, the phenomenon that you see is also related to the pattern of when we are shipping to our customers. And Q1, in particular, is a complicated quarter because of Chinese New Year. During Chinese New Year, in some cases, we are not manufacturing at all, and ports in China are mostly closed. In our case, during Q1, we actually paid to our contract manufacturers to maintain operations almost as usual, but still ports were not open. So that means that a lot of our shipments, at least related to Q1 were more backend loaded simply because of this closure of the Chinese New Year. And this, of course, is increasing. If you look at I would say – and by the way, this is a phenomenon that we also saw in Q4, given the fact that we needed to pick up from shutdown in Vietnam. And again, China needed to grow relatively quickly and then Vietnam was open. So again, it was a little bit of backend loaded. In general, I can tell you that our payment terms to customers are not changing. They're ranging between usually 30 to 60 days in general. And this is not changing at least as far as we see right now. And most of the phenomena that you see is simply related to the patterns of shipments within the quarter. Again, we hope that once we'll have the more capacity in Mexico, the more we are regulated and being able to really produce on a regular manner throughout the quarter, then we will see the DSO going back to the levels that we used to see before.

Great. That makes a lot of sense. Thanks. And then in terms of the battery megawatt hours recognized in revenue, can you share what was recognized in Q1? And then how many megawatt hours do you expect to recognize in Q2 and Q3? I know you gave the shipment expectations, but in terms of revenue recognition, that would be great? Thanks.

In general, as long as we're experiencing growth, we usually recognize revenues in the following quarter for anything not recognized in the previous one, which stabilizes everything. Currently, we have seen about 100% growth from Q4 to Q1, and we anticipate another 100% growth from Q1 to Q2. We recognized approximately 70% to 80% of our battery revenues in the same quarter, with the remainder being delayed. This recognition is also influenced by how much we are shipping into Europe, as our manufacturing is based there. Higher shipments to Europe lead to quicker recognition, while this quarter we had slightly more shipments to the United States, which also impacted our recognition. So, to summarize, the figure is around 70%, and the factors affecting this have been detailed.

Good evening and thanks for taking the questions. Just on Europe, just going back to it, could you just talk more about which countries do you see more demand from in Q1 and Q2, and just stepping back, like how should we see this European share grow in Q2 and the second half versus Q1? Thanks.

Thank you, Maheep. As we mentioned, there was significant momentum across Europe, particularly in major markets like the Netherlands, where we achieved a record quarter, and Germany, which, while not at a record high, still performed strongly. Italy is currently a dynamic market due to some local government incentives. Notably, smaller countries such as Austria, Switzerland, Sweden, and Poland are also emerging as significant markets. The push to enhance installation rates in these regions is driven by rising electricity prices, which are unlikely to decline in the near future, suggesting this momentum will persist. In our Q2 projections, we anticipate solid growth in Europe, and we expect this trend to continue. Additionally, we foresee an increase in battery shipments and attachment rates in these markets. Germany has a high concentration of battery use, but previously, markets like the UK, Netherlands, and Italy had lower battery adoption, which is changing quickly. This creates a compounding effect as solar installation rates rise, along with the revenue and costs associated with each installation. We expect sustained strong momentum in our European figures moving forward.

Thank you. At this time, we have no further questions in the queue. I would like to turn the conference back to Zvi Lando for any additional or closing remarks.

Thank you, Keith. I just wanted to thank everyone for joining us today. Take care and stay safe and see you in another quarter. Thanks…

Thank you. Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.