Welcome to the SolarEdge Conference Call for the First Quarter ended March 31, 2023. 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.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31, 2023 as well as the company's outlook for the second quarter of 2023. 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, 2023. Ronen will review the financial results for the first quarter followed by the company's outlook for the second quarter of 2023. 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 in 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. The non-GAAP measures are presented in this 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 or as a substitute for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended March 31, 2023 press release, or the supplemental material 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 today. Starting with highlights of our first quarter results. We concluded the quarter with record revenues of approximately $944 million. Revenues from our solar business were at a record $909 million, while revenues from our non-solar business were $35 million. This quarter we shipped 6.4 million power optimizers and 330,000 inverters. This quarter we also shipped 221 megawatt hours of residential batteries, a slight increase from last quarter. Our solar business revenue grew quarter-over-quarter by 9% and by 49% year-over-year, mostly driven by record revenues in Europe and Rest of World. We saw record revenues in many countries this quarter, including Germany, Austria, Switzerland, France, South Africa, and Australia, and very strong revenues from the Netherlands and Italy. Considering this was a record revenue quarter from our non-U.S., non-Europe region, I want to share a little more information about the geographic landscape which we define as the Rest of World. Revenue this quarter from these regions was up 30% quarter-over-quarter and came from 24 countries across the Asia-Pacific, Africa, and South America. Noteworthy countries in size of market and revenue include Australia, Israel, Taiwan, Thailand, Korea, Brazil, and South Africa. What I think is often overlooked is the extent of our geographic presence and the growth opportunities in these regions. For example, in South Africa, due to a significant increase in power outage frequency and duration, we are seeing unprecedented demand for solar products, including our residential battery, or in Japan where a recent regulation of the Tokyo Metropolitan authorities has created a special incentive for PV systems with module-level power electronics for which we already have local certification. As we have said in the past and is evident this quarter, our global presence and infrastructure provide us with stability in our business and access to many growth opportunities. Moving back to the core regions and segments, the European residential markets continue to be very strong for us this quarter. As we ramped shipments of three-phase residential inverters, in particular, our new backup inverter, as well as the three-phase residential battery. We expect this momentum to continue in the coming quarters as we are still increasing the capacity of backup inverters to deliver on the significant backlog and the strong demand for this product. In the U.S., revenues were down quarter-over-quarter, driven by weakness in the residential segment related to the general effect of interest rates and lower battery sales. As we noted last quarter, residential originations in the fourth quarter were seasonally down more significantly than in prior years, but residential data has improved in the first quarter to the level of the same time last year and even slightly higher. While we expect the uncertainties in the U.S residential market to continue in the short-term, we believe that the long-term dynamics of NEM 3.0 and our advantages under this regulation, which I will discuss further in a moment, as well as the expectations for TPO share growth, cater well to our product offering and position in the market. Moving to commercial, in the first quarter, we shipped a record 2.1 gigawatts of inverters, representing 36% quarter-over-quarter and 108% growth year-over-year. This record is a result of the strong demand we have been discussing in recent quarters around corporate ESG initiatives and the multiple C&I applications, coupled with the ramp in production that we have achieved. Momentum of the C&I market is global and the inherent advantages of our solution in this market, among them safety capability and balance of system cost efficiency position us well such that the demand for our product is still outpacing capacity. On top of the strong demand and market position of our commercial offering, part of our growth strategy includes providing our customers with energy management applications and services. In this context, this quarter, we closed the previously announced acquisition of Hark Systems. Hark's SaaS products allow companies to get a granular level of energy transparency and then start acting on what they are seeing. It integrates with solar storage, EV charging, HVAC, factory machinery, building management systems, smart meters, and other assets. Now that the acquisition has closed, we will use Hark's capabilities to augment our software offering for C&I customers by providing additional monitoring and connectivity capabilities as our customers move from solar-only installation to systems with storage, EV charging, and other advanced energy needs. I want now to return to the topic of NEM 3.0, which became effective in California in April, and the suitability of our product offering to address this regulation. The main impact of the NEM 3.0 regulation is significant reduction in the economic benefit of exporting power to the grid, and as such, it is to the system's owner's advantage to use their energy the solar system produces during most times of the day other than in specific instances when the utility pays an exceptionally high rate for the electricity exported from the system. Our large installed base of solar plus batteries in time-of-use or self-consumption markets, predominantly in European countries, has enabled us to gain experience managing such use cases as well as developing specific algorithms to maximize the import and export optimization. Our analysis shows that the best return on investment under NEM 3.0 is achieved with a solar plus battery combination, but exact payback times can be affected by many different factors, including system size, consumption patterns, over sizing ratio of DC panels to the inverter, AC power, battery capacity and power, and the local utility provider's policy. In specific use cases, payback can be met within 6 to 7 years. More importantly, homeowners can offset their monthly electricity bill by up to 95% using solar plus battery when paying for the system in cash, while when using solar alone, monthly electricity bills can be reduced by approximately 30%. To achieve the best economics from a solar plus battery solution, the battery needs to be sized and managed optimally. For example, under NEM 3.0 during September, the export rate in some of the California utilities is as high as $3 per kilowatt-hour for 2 hours in the afternoon after the sun is down and there is no solar power. To take full advantage of this high rate, the battery needs to have the right capacity and power. The SolarEdge home battery with its 10-kilowatt-hour capacity and 5 kilowatts of continuous power can discharge fully during this 2-hour duration contributing to maximum savings. In addition, with our DC coupled battery, there is only one AC to DC conversion of the energy stored in the battery compared to three conversions with an AC coupled battery. We estimate that approximately 5% to 7% of the energy is lost in every charge cycle of an AC battery. DC coupled batteries also make maximum use of system over sizing since the battery is connected directly to the inverter and not through the AC panel, the system can store all excess energy generated from the panels above inverter AC capacity in the battery generating as much as 3% more power during the peak summer months. Finally, in self-consumption mode, DC coupled batteries have a simpler installation and commissioning process as they only require one DC connection to the inverter and do not require a main panel upgrade. Homeowners can choose to start with a more cost-effective self-consumption battery, what we call rate saver mode, and add the backup option when desired. In conclusion, we feel that our hardware plus software solution addresses the NEM 3.0 requirements optimally, and we look forward to good adoption of our offering in this market. Before handing it over to Ronan, I would like to give a brief update on our operational stability and growth. Over the last 2 years, we have dealt with challenges around component availability, supply chain issues, and logistic constraints. The general improvement in the market combined with the actions that we have taken have allowed us to return to a more normal mode of operation. In most product areas, we are at a point where our manufacturing capacity is able to meet demand and we can use normal shipping routes, build inventory, and reduce lead times. For other products, in particular three-phase inverters for commercial and residential use, we are still ramping and expect to reach stability within the next couple of quarters. Our operational plan includes adding manufacturing sites in the U.S to increase capacity and benefit from the manufacturing credits of the IRA where we are on track to have U.S manufactured products in the third quarter of this year. 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 that do not include amortization of purchasing tangible assets, impairments of goodwill and intangible assets, stock-based compensation expenses, and certain other items. Total revenues for the first quarter were a record $943.9 million, a 6% increase compared to $890.7 million last quarter and a 44% increase compared to $655.1 million for the same quarter last year. Revenues from our solar segment, which includes the sales of residential batteries, were a record $908.5 million, a 9% increase compared to $837 million last quarter and a 49% increase compared to $608 million for the same quarter last year. Solar revenues from the United States this quarter were $255.5 million, a 16% decrease from the last quarter, and a 4% decrease from the same quarter last year, representing 28.1% of our solar revenues. Solar revenues from Europe were a record $577.1 million, a 22% increase from the last quarter, and 102% increase from the same quarter last year, representing 63.5% of our solar revenues. Two countries in Europe represented well above $100 million each, and we achieved record revenues in several countries. In particular, we saw meaningful quarter-over-quarter growth in Germany with 17%, Switzerland with 177%, Austria with 253%, and France with 31% growth. Revenue from batteries grew slightly this quarter in Europe, limited by the fact that we are still renting three-phase inverter supply, which is needed for a battery coupled system. Rest of the World solar revenues were a record $75.9 million, a 30% increase compared to the last quarter and a 32% increase from the last year, representing 8.4% of total solar revenues. On a megawatts basis, we shipped a record 975 megawatts of inverters to the United States, a record 2.1 gigawatts to Europe, and a record 493 megawatts to the rest of the world, surpassing 3.6 gigawatts of record quarterly inverter shipments. 58% of the megawatt shipments this quarter were commercial products, while the remaining 42% were residential, a result of higher European and Rest of World revenue in the total mix. In the first quarter, we shipped 221 megawatt hours of our residential batteries, a slight increase from 217.6 last quarter. The vast majority of our batteries continued to be shipped to Europe, driven by the strong adoption and demand for our three-phase solution. ASP per watt this quarter, excluding battery revenue was $0.22, a 7% decrease from $0.237 last quarter. This ASP per watt decrease is predominantly a result of increased commercial product in our overall mix, partially offset by a stronger Euro. On a unit basis, our prices did not change this quarter. Our battery ASP per kilowatt-hour was $475, slightly up from $473 in the last quarter, mainly due to a stronger euro and customer mix changes. Revenues this quarter from our non-solar business were $35.2 million, a decrease from $53.6 million in the last quarter, a result of seasonality in the storage business. Consolidated GAAP gross margin for the quarter was 31.8% compared to 29.3% in the prior quarter and 27.3% in the same quarter last year. Our non-GAAP gross margin this quarter was 32.6% compared to 30.2% in the prior quarter and 28.4% in the same quarter last year. Gross margin for the solar segment was 35% compared to 32.4% in the prior quarter and 30.2% in the same quarter last year. Before diving into the gross margin details, I would like to note that this quarter, we have exceeded our financial targets as presented in our Analyst Day in March 2022. In the solar division, our inverter and optimizer margins have exceeded 37%. Our residential inverter and optimizer product margin exceeded 40% and our battery margins exceeded 25%. We continue to improve our gross margin through cost reduction activities and higher efficiency within our supply chain. And we expect that future growth marketing trends will be mostly driven by product, customer, and geographic mix. This quarter, our gross margin results were primarily driven by an improved exchange rate between the euro and the U.S dollar, further improvements in our shipping and logistic costs, a result of stabilized component availability and manufacturing, which also resulted in lower charges from our contract manufacturers. Offsetting our gross margin improvement was a higher portion of commercial sales characterized by lower gross margins and adjustments made to our warranty obligations. Goods subject to tariffs, excluding batteries shipped into the United States from China, accounted for 12% of our U.S shipments this quarter, a level that we expect to slightly decrease in the next quarter. Gross margin for our non-solar segment was minus 31.3% compared to minus 4.6% in the previous quarter, as a result of process stabilization costs associated with our Sella 2 ramp in Korea. On a non-GAAP basis, operating expenses for the first quarter were $123.6 million or 13.1% of revenue, compared to $119 million, or 13.4% of revenue in the prior quarter and $98.9 million, or 15.1% of revenue for the same quarter last year. We expect to continue to see our operational leverage expanding during 2023 as the revenues continue to grow faster than our operating expenses. However, in the second quarter of 2023, we will see a relatively flat percentage of operating expenses to revenue, a result of our annual employee merit process that takes place in the second quarter of each year. Our Solar segment operating expenses as a percentage of solar revenue were 12.3% compared to 13% last quarter. Non-GAAP operating income for the quarter was a record $183.8 million compared to $149.6 million in the previous quarter and $87.2 million for the same period last year. This quarter the Solar segment generated a record operating profit of $206.7 million, compared to an operating profit of $162.2 million last quarter. The non-solar segment generated an operating loss of $22.9 million, compared to an operating loss of $12.5 million in the previous quarter. Non-GAAP financial income for the quarter was $24 million, compared to a non-GAAP financial income of $59.4 million in the previous quarter, a result of the appreciation of our Euro-denominated cash and customer balances. At the prevailing exchange rates, we will gradually decrease our balance sheet exposure to the euro by converting some of our cash balances from euro to U.S dollar at a higher frequency. Our non-GAAP tax expense was $33.2 million, compared to $37.5 million in the previous quarter and $13.5 million for the same period last year. GAAP net income for the first quarter was a record $138.4 million, compared to a GAAP net income of $20.8 million in the previous quarter and $33.1 million in the same quarter last year. Our non-GAAP net income was a record $174.5 million compared to a non-GAAP net income of $171.5 million in the previous quarter and $68.8 million in the same quarter last year. GAAP net diluted earnings per share was a record $2.35 for the first quarter compared to $0.36 in the previous quarter and $0.60 for the same quarter last year. Non-GAAP net diluted earnings per share was a record $2.90 compared to $2.86 in the previous quarter and $1.20 in the same quarter last year. Turning now to the balance sheet. As of March 31, 2023 cash, cash equivalents, bank deposits, restricted bank deposits, and investments were $1.6 billion. Net of debt, this amount is $1 billion. Accounts receivable net increased this quarter to $969.5 million, compared to $905.1 million last quarter, reflecting our increased revenue. As of March 31, our inventory level net of reserve was at a level of $874.2 million compared to $729.2 million in the prior quarter. It's important to note that our inventory levels this quarter include higher levels of finished goods products as a result of streamlined manufacturing. This finished goods inventory in various regions will allow us to further improve our customer delivery time and reduce shipping and logistic expenses. Turning to our guidance for the second quarter of 2023. We're guiding revenues to be within the range of $970 million to $1.01 billion. We expect non-GAAP gross margins to be within the range of 32% to 35%. We expect our non-GAAP operating profit to be within the range of $195 million to $215 million. Revenues from the Solar segment are expected to be within the range of $930 million to $980 million. Gross margins from the Solar segment are expected to be within the range of 34% to 37%.

We'll move first to Brian Lee with Goldman Sachs. Your line is open.

Hey, guys, good afternoon. Thanks for taking the questions. Just had two. First one, kudos on the gross margin execution here. Clearly, the outlook for 2Q as you've acknowledged, Ronen is ahead of the long-term model. So just wondering if this should be the new level for the rest of this year to be thinking about, or maybe kind of what the levers are here going forward. And then what would make you consider adjusting the long-term targets at some point, and then I had a follow-up.

Okay. So first of all, thank you, Brian. So currently we're not adjusting our numbers compared to what we've guided before. Although indeed, the gross margins that we presented for the next quarter are above what was guided. In many senses, we've improved the margin drivers especially related to the logistic costs and, of course, some of the pricing differences related to the fact that the euro was a little better, and it did affect some increases of prices at the beginning of the first quarter. And this is very much impacting gross margins favorably. At the same time, we do know that we expect to see some changes to the mix of our product offerings and sales over the next few quarters, especially with a higher amount of batteries that will be shipped. And these are characterized by a little bit of lower gross margins. So on one hand, we still have opportunities to continue to grow gross margins after a long time, but we dealt with component changes and we are doing cost reduction activities within our R&D organization. There are still places to improve the shipment costs and the higher inventories that we have in general certainly help this one. But since we do expect that we'll see some changes, at least right now, we are guiding for a higher level, which will remain for a few quarters, looking at the market trends that we see and what the adoption rate of the future of our products. And then we will decide whether we need to change anything.

Okay, makes sense. Fair enough. And then just again, kudos on executing well in Europe here. There's been more and more chatter. I feel like to start the year around a potential slowdown in that region. And then also some concerns around maybe pricing getting tougher there. So maybe, Ronen, walk us through how much visibility you have in Europe for the second half? It seems like that's a region that has more visibility and historically has had more visibility, the way ordering happens there versus the U.S., but maybe if you could walk us through that. And then also on pricing, what you're doing there, commercial ready, and then also what you're seeing from competition on the pricing front.

Yes, Brian. Regarding market dynamics, we currently do not observe any changes in the demand patterns in the European market. While power prices have decreased to some extent, they remain significantly higher than in the past, and the return on investment is favorable for both consumers and businesses. So far, we do not see any shift in the market dynamics, which continue to be robust. On the competitive front, many companies have seen an increase in product availability, making the market more competitive in that aspect. The competition is evolving toward a focus on availability as well as on value, highlighting the premium features of our solutions, along with our additional advantages in service and presence. This has been a dynamic we have experienced for over a decade, and we are confident in our ability to secure premium pricing for our products and solutions.

Thanks so much guys. Can you talk a little bit about the R&D staff returning to product evolution and cost reduction programs, rather than just qualifying the components, and when we might start to see some incremental improvements on the underlying cost structure for both solar and battery products?

So, definitely, there's been a shift. I can't quantify exactly, but if at the peak times during last year, we would have suggested that about 60% of the R&D organization is dealing with finding alternative components in order to maintain and keep manufacturing products, that number has declined significantly. On top of that, we've been able to redirect the R&D resources to focus on, first of all, on the development of new products and cost reduction, in parallel to adding more R&D resources globally. I don't want to give the exact numbers because I don't remember them right now, but there's definitely been a change in that regard. Typically, cycles for cost reduction are a few quarters long until we implement the changes and then put out initial units for qualification. So usually, that type of effort translates to actual cost reduction in the production line, probably in the range of two to three quarters, after we actually put the R&D resources on it. Does that answer the question?

Yes. Sure. Thank you so much. And then looking at the battery production, obviously, there's been a lot of movement in and around raw materials. Can you talk a little bit about what your supply chain looks like in terms of pricing and how that's trending here in the next several quarters and how much of those input prices you've been able to pass on in some of your forward contracts and models for some of these customers?

Sure. So, when it comes to the battery, we have basically two streams for the battery cells. One is the agreement that we have with Samsung and the other one with the second player that we came up with close to, in both cases, as is the case. by the way, in all very major battery supplies, there is a dynamic where the cost of the battery cell is following the ability or actually the price index of raw materials used by the various manufacturers. And therefore, it's a very technical process where at the end of every quarter, there is an adjustment of the price of the battery sales based on the changes in the various raw materials that are comprised within it. On top of these, there are of course, all of the elements related to the mechanical parts and manufacturing. And here in general, the bigger the amounts are, the more the volumes are, you see economies of scale getting a little bit more buying power when buying those. The other elements that we need to take into account is the fact that we are, of course, ramping Sella 2 and once we have our own battery manufacturing, then the cost of our products will be tied again to the actual costs related to the material manufacturers, not to cell manufacturers anymore, but actually the materials manufacturers. And here the agreements that we have are following, again, price indices. In general, what we see right now is that these indexes related to the materials that are making batteries are generally moving down, although not yet at the level that we used to see before. So this is a dynamic that we see right now. And we believe that as we grow, we will be able to take more advantages given our economies of scale here.

Good morning, Ronen. Thank you for answering my questions, and congratulations on the strong results. My first question is about pricing. I've heard from several customers in the U.S. that the pricing for the home hub inverter may have been reduced by about 10% starting May 1. Can you confirm this? How do you see U.S. pricing evolving? Are you still projecting strong margins in light of this potential change? Additionally, I spoke with a European distributor recently, and they mentioned an increased availability of inverters. Zvi, you mentioned earlier that availability is less of an issue now, but could you also discuss pricing trends in Europe? They are anticipating a price decrease there as well.

Yes, starting in the U.S., we have adjusted the pricing of our single-phase offering to promote usage and align with market demands for energy, which facilitates the later integration of batteries. While it is generally more expensive than the standard inverter, some models are priced lower than before. Overall, this results in a price increase, which we believe will enhance our bottom line rather than hinder it. Regarding the situation in Europe, as I previously noted, we are in a competitive market. Key factors include the growing significance of software solutions and energy management components, which are becoming essential differentiators between technologies. This trend will continue to influence our pricing strategy, and at this time, we do not plan any widespread price reductions in Europe. So there are, Phil, I think your notion here is correct. We observe a higher level of inventory in the channels regarding weeks or days of inventory on hand compared to Europe. I would say that inventory levels in the U.S. are relatively okay. However, some sales are slightly lower, leading to a higher number of inventory weeks. In Europe, we actually see fewer days of inventory on hand. Additionally, the higher inventories in the U.S. are primarily linked to our single-phase inverter, whereas our three-phase inverter inventory in the channel shows relatively lower levels across the board in commercial and industrial sectors. It's crucial to mention that in Europe, not only do we find relatively low inventory levels, but we also see record sellouts of products from distribution channels. This has a dual effect; not only is the inventory low, but it is also selling much faster. In the U.S., we currently observe relatively normal inventory levels, but the sellout is slightly lower.

Yes, good afternoon. Thanks for taking our questions. I wanted to talk about the C&I business. We talked about this on the last call, the amount of backlog that you have given your visibility for the rest of this year. I'm curious at a high level though, some of the weakness that we're hearing about kind of on a macro perspective from the general commercial real estate market. Is that starting to impact your pipeline funnel opportunities that might manifest in 2024 or later?

No, the backlog for C&I is very strong for the remaining of the year. And as I mentioned in the remarks, we are still behind in terms of being able to increase capacity to meet it and this is true globally, there might be here and there some markets that are slowing down a little bit, but other markets that are accelerating. So overall, as also when you look at the reports that I've seen regarding the expectation for year-over-year growth in C&I in the U.S market is expected to be higher than that of the residential. And this is a phenomenon we’re seeing globally for the same combination of reasons that I mentioned, the higher power prices and the ESG motivations. And we're engaged in several portfolios of multinational companies are installing systems in several countries on their facilities, warehouses, manufacturing sites, etc. for ESG purposes. So as far as we see that the C&I market is robust, and our backlog is very strong.

Sure. First of all, our approach to U.S. manufacturing involves starting with a contract manufacturer to quickly enter the market and seize U.S. manufacturing opportunities as soon as possible. Since we are already collaborating with contract manufacturers, we have trained them on how to produce our products. A significant advantage we have with Sella 1 is the ability to bring personnel from new factories to Sella 1 for training on product assembly and line considerations. This has already been implemented, and we are currently acquiring equipment to begin manufacturing in Q3, alongside building and training employees. Initially, we expect to see relatively small production volumes in Q3. We anticipate that contract manufacturer capacity will be fully established within 3 to 4 quarters. This timeline is essential to ensure manufacturing quality meets our standards, and we prioritize taking the necessary time for this process. Simultaneously, we are proceeding with plans for our factory, which we will build and operate. We are already in advanced negotiations regarding its location. Due to the additional innovation required, it will likely take at least a year before we start producing products by the end of Q3 this year, aiming for product availability in the second half of next year. Overall, we aim to manufacture all products in the United States, ensuring we have enough capacity to meet U.S. demand as both factories scale up.

Thanks. Good afternoon. I wanted to go back to batteries for a minute. It looks like shipments are still not quite taking off. And I just wondered if you could talk about where attach rates are trending both in the U.S. and Rest of World. Should we expect battery shipments to be somewhat constrained until the three-phase supply further catches up with demand?

Yes. In the U.S., attach rates are growing, although very slowly. We anticipate a shift to NEM 3.0 as people become more adept at selling it. As I mentioned earlier, we expect attach rates to gradually rise in the upcoming quarters. Regarding Europe, as Ronen highlighted, there is strong demand for batteries, but the limiting factor is the availability of inverters. We are working to increase shipments as much as possible because without an inverter, customers can't utilize the battery. As we boost our inverter capacity, we believe battery volumes will also increase. Overall, we expect and want to emphasize that the ratio of batteries in our total shipments will rise in the coming quarters, which will positively impact our margins.

Great. Thanks for that. And then I wanted to just go back to your prepared remarks comments about rest of world growth opportunities around the countries outside of Europe. Are those markets primarily residential? Are you also seeing strong demand for C&I? And any color you can provide there would be really helpful.

So most of those markets are actually much more tilted to the C&I than to residential. Among the markets, as I mentioned, the strongest residential markets are Australia and Israel, the good residential market, and South Africa is evolving as a reasonable residential market as well as Brazil. But the C&I portion in almost all of these markets, and in particular, in the Asian markets like Taiwan and Thailand, places like that are heavily tilted towards C&I, but they are sizable markets. I don't remember right now for each of these markets, but they're in the hundred megawatts, if not gigawatts scale for many of these countries in terms of the size of the market overall. And like I say, C&I to many cases.

Right. Thank you for taking my question. The first question I want to go back on the European market and trying to get a sense on expectation in 2Q and 3Q versus the first quarter? Can we expect the same growth in the same cadence there?

So without getting into specifically what growth rate we expect in each market and how that fits into the guidance. As I commented, we see continued strength in the European market, for both applications of residential and commercial. And in both cases, most of the European residential market, not all of it, but a lot of it is three-phase based. Obviously, all of the C&I market is three-phase based. So our growth is less dependent on demand; it's more dependent on our ramp of manufacturing, which I mentioned will take us another couple of quarters until we are at a full scale of matching the supply to the demand. But right now, we continue to see the European market strong, and we are sitting on a robust backlog that we intend to deliver between now and the end of the year.

Okay. And then my follow-up is a similar question more from the residential versus commercial megawatt hour shipments. You had I believe you had a 7% or so decrease quarter-over-quarter for the residential one. How should we think about it going forward? And I believe the slowdown is mostly driven by the U.S. Should we expect like flat number? Or do you expect further decrease in there?

So again, I separate for a minute between the U.S. and Europe. In Europe, the situation is more dependent on our supply and our intent is to continue and increase capacity for three-phase residential inverters. So the outlook is for likely growth. In the U.S., the dynamic is more market related. As I mentioned in the remarks, we think that like it happens in many markets where there was a significant change in regulation or in the financial atmosphere, it takes the market some time to adjust and learn how to sell under this environment and how to install under this environment. So it's true for NEM 3.0 in California, and it is true for the rest of the market and the interest rate. How long it will take for the market to adjust, and is this the bottom level, or is it going to begin to increase? Or is it going to remain flat? I don't think we have a good specific indication on that. But as I mentioned, in terms of the midterm, we feel that the dynamics are positive, both from a solar adoption point of view and the ITC and everything around it and from our position and technology.

Hi. This is Morgan Reed on for Julien. Can you walk through the moving pieces to get to the gross margin improvement quarter-over-quarter? What's coming from cost declines and price increases, FX benefits, shift in mix, things like that? Just curious to try to understand what's driving that.

So personally, without delving into the specific numbers because of the increasing number of variables, I would highlight two main areas. The first is the difference between the cost of the products we manufacture and the prices at which we sell them. This is typically influenced by currency fluctuations and changes in product mix. In this context, the currency fluctuations have generally been beneficial since the euro has returned to about 1.8% to 1.9%. As we previously indicated, with the euro at $1.10, our profit margins in the United States are nearly balanced. Consequently, a stronger euro has been advantageous. At the same time, we noticed that our commercial products, which typically have lower profit margins, significantly increased this quarter. In that regard, both factors were relatively similar in their impact and did not dramatically affect the margin difference.

Most of the improvement that we saw this quarter came from other elements that are not related to pricing or manufacturing costs, and these are all the costs related to the supply chain. So by definition, the more streamlined manufacturing we had, the shipment costs that used to be elevated went down not yet to levels that they were before. So there's still a little bit of room to grow there. And I think that it's evident in our margin for the next quarter. We also saw that because of the fact that we have very streamlined manufacturing, the fact that some of the charges that we used to get from our contract manufacturers did not exist this quarter because they were working at the whole team, having all of the ships occupied. That's where most of our, I would say, advantage came this year. As mentioned before, we are already getting close to where we see ourselves in our model from the various costs. Now from now on, we expect that most of the changes will be related to the mix of the products. So definitely, more batteries would reduce the gross margin, even though, again, on operating profit margins, we are talking about an increase because of the operational leverage that they create. We still see some tailwinds that can help us with some shipping and other manufacturing costs. And of course, the currency is always a mystery because we do not know how to project it. At least right now, it seems to be either stable or possibly favorable. But again, this is something that very much changes. So in all aspects, I think that we are getting closer to where we want to be on a model. I think right now, the mix of the products will be the thing that will take most of the, I would call it, driving forces when it comes to our gross margin.

That's really helpful. Thank you. And I guess you alluded to it earlier, the improvement in the operating margin kind of throughout the year. I know previously, you had given the sort of guidance of maybe like 20% to 22% operating margin towards the end of this year as we exit. I'm just curious how that's faring given sort of the stronger gross margin than maybe we had expected midyear here. So just curious if your operating margin expectations are changing at all, given the strength of the gross margin line and operating leverage still to be pulled in here?

Sure. So here, definitely, we continue to see the operating leverage. We've mentioned before that we expected to see our gross margins getting to the target levels by the end of Q2 and the operating profit margins are at the end of the year to exit the year. In that sense, we're already at 19.5% of operating profit margins on a consolidated level. And on a consolidated level, we said it will be between 19% to 20% on solar, we did say that it will be 20% to 22%. And again, we are very close to this number again. We feel very confident as we guided the court that will exit the year with operating margins to be delivered.

Hello, good afternoon. Good afternoon ladies and gentlemen, and thanks for taking the questions. So as a result of the operating performance was very robust in Q1 while we're seeing a significant amount of operating income in Q1 and Q2 guide. Working capital was another big use of cash this quarter. Can you provide some context on how you're thinking about working capital and maybe some of that conversion from income to operating cash throughout the year? And then maybe even just at a high-level structurally, how you think about that conversion on a multi-year basis? And then I have a follow-up.

Okay, sure. So first of all, usually, three elements that are impacting dramatically the working capital are, of course, days sales outstanding when it comes to collections from our customers. Actually, this quarter, we saw our DSO decrease a little bit, which means that we did not see any major change. When it comes to customer to vendor payments, again, our terms have not changed significantly. The thing that changed significantly this quarter is actually related to our inventories that grew by about $150 million. This is actually almost releasing cash from the formula that I will give you in a second. This is related to the fact that based on our agreement with Samsung, we needed to buy battery cells up until the end of Q1 and pay for them while the batteries that are coming from these sales that are the single-phase batteries, mostly going to the United States, are simply being sold a little bit slower, given all of the aspects that Zvi mentioned before related to the U.S. market attachment rate and battery growth. As a result, we find ourselves where at least in Q1, we're buying battery cells where we have fewer battery cells. Again, this is about $150 million of difference in our inventory. What we expect to see during this year is that since we've already bought all of these battery cells, we will start clearing them out and therefore, we will reverse this phenomenon. We expect to see on an annual basis approximately 80% of our operating profit is turning into cash within the same period. And this is simply a result of the fact that we do see that our, first of all, we are growing, which of course means that usually we are paying quicker than we collect. Secondly, we see that in general, our sales are more inclined towards the end of the quarter. The result of this is that we believe that about 80% of operational profit will turn into cash on an annual basis. I think that this is something that didn't happen in Q1. So actually, in Q2 to Q3, we should see a little bit of a reverse situation, especially in the second half of the year where we're going to generate more than 80%. But in general, the number that we have is 80% conversion. Thanks for that added color there. Sure. Gladly. So first of all, and I apologize for maybe a little bit of education not at the beginning. But when you're ramping a battery manufacturing factory, there's a process or a stage within the ramp-up that is called process utilization. You basically adjust various elements within the manufacturing process itself, like temperature, like concentration of materials in the air level of section within vacuum chambers, and even the flow of goods on the production floor to the processes that you're using. This is exactly where we were in Q1. At that time, we are consuming a little bit more material because we are making a lot of tests and we are stabilizing the process. Not all of the materials can basically be used and therefore, the yield of the factory is not yet there. This is a process that's supposed to end sometimes within Q1 or Q2 this year. At that time, we simply start to grow over time the manufacturing capacity by ramping and increasing the speed of movement components within the manufacturing stations themselves. And this is what we expect to happen in the second half of this year. In general, the manufacturing capacity of Sella 2 is supposed to be 2 gigawatt-hours at the beginning because of yield, we expect it to be around 1.7 gigawatt-hours. We expect to get to this level either by the end of the year or beginning of next year, simply because of the fact that you need to ramp. So what are going to be the usages? First of all, we need to remember that there is a business that is actually growing very nicely for us in the storage division itself. We are currently selling within the storage division to outside customers, both battery cells and battery packs. We also sell ESS products that are going to applications that are not necessarily tied to solar and these are spinning reserves and other storage containers that you see in various places we sell in Australia and Asia. So first of all, there is a demand that is already fulfilled and that is already manufactured for these products. To date or at least until Sella 2 existed, we had limitation on our supply and not on the demand for these products. This is something that we see, and we expect to grow. To your question, yes, if we don't take enough sales to our RSS, we believe that we can utilize Sella 2 for these kind of activities. The second activity is to have our own residential storage system based on Sella 2 products. We are basically now in advanced stages of developing this product, and we expect to have first manufacturing batches coming towards the end of this year. So all in all, we believe that throughout 2024, we will consume the majority, if not all of the Sella 2 cell production capability.

Hi, this is Dave Benjamin on for Maheep. Just, I guess, a follow-up on that on one of your earlier responses, you mentioned that you foresee all U.S. products being manufactured in the U.S. But can you detail any of your thoughts on better manufacturing plans for the U.S.?

At this point, we are focused on manufacturing inverters and optimizers in the United States, beginning with residential applications and transitioning to commercial. We are also awaiting clarification on some battery regulations, and we will make decisions regarding potential battery assembly in the U.S. once we have a better understanding. Cell manufacturing in the U.S. is a more complex and long-term issue. For now, our priority is on inverters and optimizers, and we will decide on assembly in the U.S. based on the clarity of those regulations.

Hi there. Thanks, guys. Two questions. First, I appreciate sort of the operating margin target towards the end of this year. But thinking about the longer-term financial model, how quickly is OpEx likely to grow relative to the top line? How should we think about that in the out years?

I'm not sure I can provide a definitive answer as this is a complex issue, but I can explain what influences this ratio. First, there's revenue growth. We believe that over the next few years, we can achieve a growth rate of 20% to 30%. Last year, during our Analyst Day, we stated this, and we've actually exceeded it significantly with a 58% year-over-year growth. Given the current demand, there may be opportunities to grow even faster this year, provided we can secure the necessary components and capacity. So, there's potential for high growth. The second factor is how quickly we can increase our expenses. Currently, about two-thirds of our operating expenses are employee-related costs. Hiring new employees at a rate of 30% is challenging, especially with over 5,200 employees already on board. This is particularly difficult in R&D, where attracting skilled talent has become more competitive. We aim for growth, but we don't expect to consistently achieve 30% or more year-over-year. For sales, marketing, and general administrative expenses, we typically aim for a growth rate of about 50% to 60% relative to our revenue growth. This approach can affect our operating margins. We believe it is possible to exceed our current operating margins of 22% in the long run, but we must also consider how battery costs will impact gross margins. We are confident in our ability to enhance our operational leverage and will monitor the situation to determine if we need to adjust our overall operating margin target. Yes. Generally, we're targeting to try and have all of that capacity produced in the U.S. by the end of '24, beginning of '25.

Hi. Thanks for squeezing me in. Just one real quick one for me. I was wondering, you guys talked a lot about kind of the NEM 3.0 transition. But during the quarter, do you guys have a rough sense for how much of your revenues kind of came from California?

No, not really. Now generally speaking, when we look at California, in our historical distribution of our revenue globally and then within the U.S. and between the segments of residential and commercial. So California by itself has never been a huge part of our ongoing business. But specifically in Q1, how much is related to California or even the installed rate of our product in California during the first quarter, we don't have that type of information in front of us right now.

Hi. Thanks. I will take the rest offline.

Yes. Thank you. You mentioned in the trends in the U.S. that one of them was the shift to TPO, and I'm curious kind of how much did you see that actually happening in Q1 versus kind of expecting it to happen in the rest of '23 and '24?

It's definitely more of an expectation based on what you read and see in the market. It's not something that I can say that we've seen a clear indication in the first quarter. What is generally discussed related to the IRA, advantages that go to the TPOs. This has been a market segment that historically, we have been strong in and made some announcements recently and continue to strengthen and build those relationships further. Thank you. So in summary, we are pleased with our results this quarter, which demonstrates the advantages of our strong position across diverse markets and applications. I want to thank you for joining us on our call today, and have a good evening.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.