Welcome to the SolarEdge Conference Call for the Second Quarter ended June 30, 2023. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Events/Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved, and any recording, reproduction or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event/Calendar page of the SolarEdge Investor website. I would now like to turn the call over to J.B. Lowe, Head of Investor Relations for SolarEdge.

Thank you, David. And good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2023, as well as the company's outlook for the third 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 second quarter ended June 30, 2023. Ronen will review the financial results for the second quarter followed by the company's outlook for the third 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 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. 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, 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, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now I will turn the call over to Zvi.

Thank you, J.B. Good afternoon. And thank you all for joining us on our conference call today. Starting with highlights of our second quarter results, we concluded the quarter with record revenues of approximately $991 million. Revenues from our solar business were at a record $947 million, while revenues from our non-solar businesses were $44 million. This quarter, we shipped 5.5 million power optimizers and 335,000 inverters. This quarter, we also shipped 269 megawatt hours of residential batteries, a 22% increase from last quarter. Our solar business revenue grew quarter-over-quarter by 4% and by 38% year-over-year, mostly driven by record revenues in Europe, offset by a decrease in revenue in the United States and rest of world. We saw record revenues in many countries this quarter, including Germany, the United Kingdom, Switzerland, South Africa, and Thailand. Particularly noteworthy is the growth we have been discussing for several quarters in the commercial segment, which has seen megawatts shift from 1.5 gigawatts in the fourth quarter of 2022 to 2.1 gigawatts in the first quarter of this year to 2.6 gigawatts of shipments this quarter. The solar market is going through a transition, emerging from the recent period of component shortages, high energy prices, and rapid growth to one now impacted by higher interest rates and excess inventory. Given this shift, I would like to review the major trends that we are seeing in the various regions and how it affects our company. In Europe, installation rates continue to be high in both residential and commercial. However, the strength in the market is somewhat more moderate than what was anticipated heading into 2023, largely due to a milder winter, reduced concerns over energy resilience, and lower electricity prices. With that in mind, our growth in Europe in the second quarter was very strong. Overall, our megawatt shipments to Europe grew by 52% quarter-over-quarter, including 57% in residential and 50% quarter-over-quarter growth in commercial. Additionally, sell-through by our distributors in the second quarter was up 49% year-over-year in residential and up 115% year-over-year in commercial. On the supply side, the distribution channels in Europe are experiencing higher than optimal inventory levels, especially as it relates to solar modules. During the recent period of shortages and expectations for high growth, distributors placed large orders for modules and inverters in order to ensure stability of supply to support the growing demand. As growth in demand has tapered off, distributors are taking a more cautious approach to better manage their cash flow. In addition to taking actions to reduce inventory levels, distributors are also reducing the number of suppliers in their portfolio, which had expanded during the period of shortages. This is a dynamic seen before in the industry during a shift from a period of extreme shortage and accelerated growth to a period of more gradual growth and undisrupted product availability. We expect this inventory adjustment period could continue for the next two quarters, especially when also taking into account the typical fourth quarter seasonality effect in Europe. We see this environment as an opportunity to grow market share, based on our offering that is very suitable to the growing complexity of the European grid, where dynamic tariffs and negative rates are becoming more common. To deal with this growing complexity, our customers require advanced energy management hardware and software of the sort we recently announced at Intersolar and about which I will elaborate in a few moments. Moving to the US residential markets, the combination of higher interest rates and the new Net Metering 3.0 regime in California has led to a decrease in demand compared to the second half of last year. As a result, inventories of our product in various channels are higher than normal, as they were built in anticipation of substantial market growth that did not materialize. As a result, our shipments to the US residential markets were down 29% this quarter from the last quarter. Sell-through of our product by our distributors, however, actually rose by over 10% during the same period. We expect the process of inventory normalization to last at least through the end of the year. Looking into 2024, there are two market trends that we view as positive for our business. First, the expected increase of third-party ownership installations, driven by the shift to lease versus loan financing, a sub-segment where our market share has traditionally been higher. And second is the expected increase in storage installations, in particular in the evolving NEM 3.0 battery market, where our DC coupled system can offer up to 10% more energy on an annual basis compared with a non-DC optimized module level electronics solution. In the US commercial market, we continue to see stable demand, which we expect to gradually grow as a result of lower module prices and as projects that were on hold begin to move forward. This is expected as some developers who had halted projects in anticipation of IRA clarifications related to the 10% ITC domestic manufacturing adder move forward with the project execution after realizing that IRA clarity will likely take longer than anticipated. In the rest of the world, we see a mixed picture where some countries are experiencing headwinds due to a higher interest rate, while others such as South Africa and Thailand are growing rapidly due to grid instability and favorable regulatory environments. Moving to products, I now want to spend a few moments discussing the increased investments we are making across our digital solution platform, which is focused on three main pillars. First, our energy management software known as SolarEdge ONE, which we recently introduced at Intersolar in Munich. SolarEdge ONE helps home and business owners optimize their energy production, consumption, and storage. With the proliferation of time of use and dynamic tariffs and a growing attach rate of batteries, we believe this will become an increased area of differentiation for our PV plus storage solutions. Second is our installer toolkit, which is a set of tools aimed at helping our customers design, sell, install, and commission PV and storage systems in a fast and efficient manner. At RE+ in September, in addition to demonstrating improvements to our already short installation and commissioning times, we will be launching our new installer proposal tool, a sophisticated step-by-step software platform to help installers be more effective when selling a PV plus battery system at the kitchen table. And third, digital infrastructure, which includes grid services and other advanced applications. In the field of grid services, our total number of enrolled sites grew by 70% in the second quarter to over 13,000 sites. In the United States, 16% of our battery installations are now enrolled in grid services programs. In the Netherlands, we launched, through two electricity aggregators, our first commercial grid services program aimed at grid balancing and already enrolled dozens of commercial sites into the program. We have a high number of additional enrollment requests and are looking at integrating with additional aggregators in the coming months. Another part of our digital offering is based on our acquisition earlier this year of Hark Systems, which offers commercial customers significant monitoring and connectivity capabilities across increasingly complex energy systems. While still not significant in absolute numbers and likely won't be significant for several quarters, our broad digital offering augments and solidifies our leadership in the residential and particularly in the commercial market. More importantly, as electrical grids become more constrained and penetration of distributed solar and other renewables increases, optimized interaction with the grid as well as optimized energy management at the home and in business will be critical to the positive functionality and economics of the solar installation. We see this as an opportunity for differentiation for technology companies like SolarEdge and a key reason why we don't believe that the inverter markets will become commoditized. More on the product side, we are seeing good progress with our tracker offering, as we now have more than 30 megawatts of trackers either installed or in the process of installation. This new product, which is both lightweight and has a small footprint, provides access for us to new market opportunities and will initially enable us to offer a full solution to the growing agri PV segment, which is lately receiving significant regulatory support. On the electric vehicle charging front, we continue to supply our AC EV chargers, both the inverter integrated and standalone versions and to date have shipped over 45,000 units globally. As we unveiled at Intersolar, next year, we plan to release our bidirectional DC EV charger that will be DC coupled, enabling greater charging efficiency through fewer AC to DC conversions. Moving to operations, we are making strides towards building out our US manufacturing footprint. In the third quarter, we expect to ship several thousand inverters from our contract manufacturing partner site, with this number growing to above 30,000 inverters that we expect to ship from this site in the fourth quarter. More broadly, we mentioned earlier the fact that the inventory levels are high for some products. However, on certain products such as three-phase inverters in the European market, even though we increased output significantly in the second quarter, we are still delivering below demand and thus air shipments have been required. Part of the relief in this area will be via the long-term purchase agreement we announced last week with Infineon that will help give us assurance in the availability of critical power semiconductor components in the years ahead. In our non-solar business, our Sella 2 battery factory continues to ramp and is on track to reach its full capacity by the end of this year. Additionally, we have initiated manufacturing of the type of cells that will be used in our portfolio of next-generation batteries, starting with the release of a new residential battery planned for the first half of next year. In closing, while we discuss the inventory corrections taking place, the actual PV market is continuing to grow in many places around the world. For example, Germany, one of the largest solar markets, is expected to grow from 7.5 gigawatts installed in 2022 to 10 gigawatts installed in 2023, with further growth anticipated in 2024. I believe that our portfolio and positioning within diverse markets and applications will benefit us as markets continue to grow in some areas and we begin to recover in others. I will now hand it over to Ronen.

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 purchased intangible assets, impairment of goodwill and intangible assets, stock-based compensation expenses, and other certain items. Total revenues for the second quarter were a record $991.3 million, a 5% increase compared to $943.9 million last quarter and a 36% increase compared to $727.8 million for the same quarter last year. Revenues from our solar segment, which include the sales of residential batteries and trackers, were a record $947.4 million, a 4% increase compared to $908.5 million last quarter and a 38% increase compared to $687.6 million for the same quarter last year. Solar revenues from the United States this quarter were $195.6 million, a 23% decrease from the last quarter and a 37% decrease from the same quarter last year, representing 21% of our solar revenues. Solar revenues from Europe were a record $688.5 million, a 19% increase from the last quarter and a 112% increase from the same quarter last year, representing 73% of our solar revenues. In Europe, we continue to see meaningful quarter-over-quarter revenue growth in general and noticeable records in Germany, with 64% growth reaching close to $300 million of quarterly revenues. Sweden, with 106% growth, the United Kingdom with 50% quarter-over-quarter growth, and Slovenia with 54% growth. Revenues from batteries grew slightly this quarter in Europe, limited by the fact that we are still constrained by three-phase inverter supply, which is needed for battery coupled systems. We do identify some excess battery inventory in the European channels, which will lead to lower battery shipments in the second half of the year. This inventory buildup will be alleviated as the ramp-up in deliveries of our new three-phase residential backup inverter catches up with our battery manufacturing delivering pace. We intend to use air shipments in the third and fourth quarters to resolve this imbalance and fulfill the demand for our product in this segment, as a single inverter is typically installed with two to three batteries. Rest of the world solar revenues were $63.3 million, a 17% decrease compared to the last quarter and a 19% increase from the last year, representing close to 7% of our solar revenues. This quarter, we saw record revenue in South Africa and Thailand. On a megawatt basis, we shipped 666 megawatts of inverters to the United States, a record 3.3 gigawatt to Europe, and 397 megawatts to the rest of the world, surpassing 4.3 gigawatts of record quarterly inverter shipments. 60% of our megawatt shipped this quarter were commercial products and the remaining 40% were residential, a result of strong European adoption of our products and higher European revenues in the total mix. In the second quarter, we shipped 269 megawatt hours of our residential batteries, an increase from 221 megawatt hours last quarter. The vast majority of our batteries continue to be shipped to Europe. ASP per watt this quarter, excluding battery revenues, was $0.188, a 14% decrease from $0.22 last quarter. This ASP per watt decrease is predominantly a result of increased commercial inverters in the overall mix, partially offset by a stronger euro. In general, our prices did not change this quarter. Our battery ASP per kilowatt hour was $479, slightly up from $475 last quarter, mostly a result of a stronger euro. Revenues this quarter from our non-solar segment were $43.7 million, an increase from $35.2 million last quarter, a result of higher storage division revenues. Consolidated GAAP gross margins for the quarter were 32%, a slight increase compared to 31.8% in the prior quarter and 25.1% in the same quarter last year. Non-GAAP gross margin this quarter was 32.7% compared to 32.6% in the prior quarter and 26.7% in the same quarter last year. Gross margin for the solar segment was 34.7%, compared to 35% in the prior quarter and 28.1% in the same quarter last year. The quarterly solar margin change was mostly a result of product mix changes. This quarter, in our solar division, our inverter and optimizer gross margins were approximately 37%, our residential inverter and optimizer product margin continued to exceed 40%, and our battery margins were slightly below 25% due to a higher portion of single-phase batteries within the mix. Goods subject to tariffs excluding batteries shipped into the United States from China accounted for 6% of our US shipments this quarter, the lowest on record as a result of the ramp-up in our Mexico manufacturing facility, which is at the level that we expect to maintain in the next quarters. Gross margin for our non-solar segment was minus 9.6% compared to minus 31.3% in the previous quarter. Our Sella 2 ramp-up continues as planned, and the increased revenues from our storage division are contributing to the margin improvement in this division. This quarter, we also include for the first time results of our newly acquired Hark Systems in our financial results. While still a very small portion of our revenue, Hark software sales are characterized by very high gross margins. On a non-GAAP basis, operating expenses for the second quarter were $133.3 million or 13.4% of revenues compared to $123.6 million or 13.1% of revenues in the prior quarter and $109.6 million or 15.1% of revenues for the same quarter last year. Our operating expenses as a percentage of revenue increased as a result of our annual employee merit process that takes place in the second quarter. Our solar segment operating expenses as a percentage of solar revenues were 12.8% compared to 12.3% last quarter, resulting from the same reason. Non-GAAP operating income for the quarter was a record $191 million compared to $183.8 million in the previous quarter and $84.7 million for the same period last year. The solar segment generated a record operating income of $207 million this quarter, slightly up from $206.7 million last quarter. The non-solar segment generated an operating loss of $16.1 million compared to an operating loss of $22.9 million in the previous quarter. Non-GAAP financial income for the quarter was $4.4 million compared to a non-GAAP financial income of $24 million in the previous quarter. As the euro to US dollar rate is above $1.1 per euro, we continue to reduce our exposure to the euro by higher frequency of currency conversions to the US dollar. Our non-GAAP tax expense was $38 million this quarter compared to $33.2 million in the previous quarter and $7 million for the same period last year. And we expect to maintain approximately a 20% tax rate on both GAAP and non-GAAP basis for the rest of the year. GAAP net income for the second quarter was $119.5 million compared to GAAP net income of $138.4 million in the previous quarter and $15.1 million for the same quarter last year. Our non-GAAP net income was $157.4 million compared to a non-GAAP net income of $174.5 million in the previous quarter and $56.7 million in the same quarter last year. GAAP net diluted earnings per share was $2.03 for the second quarter compared to $2.35 in the previous quarter and $0.26 for the same period last year. Non-GAAP net diluted EPS was $2.62 compared to $2.90 in the previous quarter and $0.95 in the same quarter last year. Turning now to the balance sheet, as of June 30, 2023, cash, cash equivalents, bank deposits, restricted cash, restricted bank deposits, and investments were $1.5 billion. Net of debt, this amount is $853.5 million. This quarter, cash used in operation was $88.7 million, mostly related to inventory buildup. As we believe that we have seen the bottom of our cash use, we expect substantial cash buildup in the next quarters starting in Q3. Accounts receivable net increased this quarter to $1.15 billion compared to $969.5 million last quarter, representing 126 days outstanding, a reflection of our increased revenues that were skewed towards the end of the quarter and in certain cases, extension of credit terms to our customers, mainly in the United States. As of June 30, our inventory level net of reserve was $984.2 million compared to $874.2 million in the prior quarter. As a result of the slowdown in the shipments to the United States, slower growth rates in Europe and more streamlined manufacturing, our finished goods inventory increased substantially this quarter. At the same time, we are slowly reducing our component safety stocks and battery cells as component availability becomes less of an issue. Turning to our guidance for the third quarter of 2023. We are guiding revenues to be within the range of $880 million to $920 million. We expect non-GAAP gross margin to be within the range of 28% to 31%. We expect non-GAAP operating income to be within the range of $115 million to $135 million. Revenues from the solar segment are expected to be within the range of $850 million to $880 million. Gross margins from the solar segment are expected to be within the range of 30% to 33%. I will now turn the call over to the operator to open it up for questions. Operator, please.

We will now take our first question from Mark Strouse with J.P. Morgan.

I wanted to start with the 3Q revenue guide. When we look at the $80 million, $90 million dip quarter-over-quarter, can you break down how much of that is driven by Europe, US, rest of the world? It sounds like the inventory issue is fairly broad, but I'm just curious if we should think about kind of – if Europe is 70% of your revenue and US 20%, is that similar kind of mix for the change quarter-over-quarter.

Actually, when we look at the guidance for the next quarter, we need to look a little bit region by region because we see a little bit of a different dynamics. I would say that most of the reduction that we see is coming first of all from less revenues of batteries, mostly in Europe. As we mentioned in the prepared remarks, we found a situation that our batteries shipments were a little bit faster than our ability to ramp up the inverters that come with them, mostly three-phase inverters. And as a result, there is a built inventory within the channels there that needs to be cleared in order to continue and grow. And this will be cleared mostly through the adoption or getting more inverters from us during the third and the fourth quarter. And this is why, by the way, we're also increasing our air shipments. So, first of all comes this decrease. The second one comes actually from optimizers. Again, in Europe, it's also happening in the United States but a little bit more in Europe because Europe is more characterized with commercial systems. Because of the fact that inverter shipments were a little bit slower to ramp compared to the other products, again, because of the three-phase products that we needed to get more components, what we usually see is that installers, and especially commercial installers, who are installing the modules faster than they do the inverter, actually they install the inverter only at the very last moment, used to take a little bit more optimizers in order to make sure that they can basically complete the installation of the modules either on the roof or in the overall installation. And then once the inverter comes, they simply install it and commission it. So since the majority of the revenues came from Europe, the majority of the down this quarter is also coming from Europe because of these two phenomena. At the same time, when we go to the United States, as Zvi mentioned, we believe that we have basically seen a lower amount that we do not expect to go much lower in the next quarter because of the fact that, on one hand, indeed, the inventories are high, but still some of the products that are needed are still missing there and we're going to ship them. And when it comes to the rest of the world, again, it's a relatively mixed situation where, again, we expect to see, I would say, something that will be relatively flattish. So the majority will come from Europe, the majority will come from batteries and optimizers that were first of all delivered, and rest will be relatively flattish to maybe slightly down.

Your comments were interesting regarding the European distributors and kind of managing the number of suppliers. Just curious if you can give us a fairly high-level update on what you're seeing with the overall competitive environment.

Mark, the phenomena that I described, and it is indeed – for those that have been active in Europe for years, it's something that we've seen through the cycles. I can give you an example that some of our distributors in Poland are carrying today 10 brands of inverters. Six or seven of them are new that they didn't have before that, during the period of shortage, they just took whatever they could get a hold on because that's what the installer needed. And now as things have stabilized, they're paring down the number of brands that they're carrying into a more classical combination of, call it, the high-end, the base, and the economic solution, if you will. And this is a dynamic that has repeated itself multiple times. And it's more pronounced in the module side. And if you've seen some of the reports and from our discussions with distributors, they also emphasize that the inventory levels on modules are abnormally high. And a lot of that inventory is by now – the module pricing in the market is significantly lower than the prices at which those modules were purchased. So a lot of distributors are in some form of financial challenge. And with that, they are resolving that by going to, on the overall offering, to low levels of inventory that are maybe lower than those that they would normally carry in this type of a period, especially because the overall demand is still high, but just in order to control their financials. So, the market is very active. Installations are up. And demand for equipment is drawn. Just there's an adjustment on the channel side to limit their portfolio, drain the volumes that they've accumulated during the closing months of the shortage period, and get back to a more sustainable growth type of model.

We'll take our next question from Brian Lee with Goldman Sachs.

Had a couple here. I guess, first off, maybe for you, Ronen, appreciate some of the color around the different dynamics in Europe, rest of the world, US that played into the weaker, maybe the unexpected 3Q guidance here. It sounds like some of that's persisting, though, beyond just this quarter. So can you give us sort of an early read into what you're expecting as you think about the timing of inventory balance, battery shipments and weakness in the US as well as seasonality you called out? Like, is there a path for Q4 to be flat, up, down? Just kind of give us the put some takes around how we should be exiting the year on the top line. And then I might have missed this, but did you give a specific battery shipment guidance as well?

First on the second, no, we didn't give a specific guidance for batteries, but they are going to be down substantially next quarter compared to this one, given the dynamics that we see, especially in Europe, more batteries in the channels than I would say, normally, the distributors would like to have because they're still missing the inverter. So in batteries, it's definitely going to be substantially lower next quarter. Now, when it comes to the dynamics in the quarters, unfortunately, life is very complex in this area. And I will try to give a little bit of the puts and take there. I'll start from Europe, again, being the center of our sales today. In Europe, today, what we see is that the inventory levels on one hand are relatively high, but when you look at the days outstanding, which is a result of the sale through from the channel, they're not high at all. They're actually at the normal level. And when we are looking at the point of sale data of how much is being sold from the channels, we see record levels over the last two quarters that, to our understanding, are continuing, which means that, in that case, the demand is there, the demand is fairly strong, not maybe as strong as people believed from the very beginning of the year, but still very strong. And, therefore, you would say that the levels of inventory that the distributors have, and maybe a little bit of change in its patterns and making orders a little bit shorter time from the time that they need it because there is enough supply in the market creates a situation where, basically, some of them even say that it'll be one or two quarters, but not more than this until the inventory levels are adjusted because you don't see a big gap. The problem in Europe is that you go into the fourth quarter, and going back to the normal days of solar, usually the fourth quarter is seasonally low in Europe compared to the third quarter, first of all because of the fact that this is start of the winter. And nobody wants to enter the winter with too much inventory. Second, because of the holidays themselves, there are fewer days to install during the quarter. So here we see a mixed phenomena where we believe that market dynamics are very healthy and will require faster recovery of the inventory levels and faster increase in volumes. And the impact of winter is not known. And let's not forget that there is still a war in Europe. So I'm not sure where it's going to be the concerns about electricity there. In the United States, I think that we see a different phenomenon. In the US, we do see that the inventory levels are higher, much higher than distributors would like to see. We do see that, as Zvi mentioned, point of sale for our products at least improved in the last quarter, but it is still at a relatively lower level. And therefore, we believe there that, overall, it's going to be more than one or two quarters until the situation is being changed. So if I try to summarize everything, I would say that we're cautiously optimistic to see Q4 being flat to up rather than down. But again, it is a quarter with many different phenomena that are sometimes contradicting that are happening at the same time.

Maybe just to follow-up on that. You didn't mention batteries. Is the battery adjustment happening all in 3Q? Do you think it goes back up in 4Q? I'll just squeeze in my last one. On gross margins, kind of surprised by how much gross margins are being guided down relative to the strong performance at the beginning part of the year here. Is the entire 300 basis points at the midpoint coming from the air freight and does that go away after 3Q? Are there other impacts embedded in there? Just trying to understand the 35% solar gross margin going to basically 32% in three months and then what the sort of forward would be in terms of recapturing some of that, what the levers are there?

First of all, I think that the question that was sneaked will be a higher answer than the first one. So I'll start from the first one. In general, we expected the batteries in Q4 – and again, we do not guide yet, but we expect them to be similar and maybe slightly up compared to the third quarter. And here, the reason is, again, it's end of the year. Nobody would like to exit the year with too much of an inventory. So we assume that this is more related to less market dynamics and more of inventory management dynamics. On the margins, actually, here, it's a little bit of a different situation. The first thing is that we are going to ship much more inverters that are three-phase commercial inverters during Q3 and Q4. This is the product that is mostly missing in Europe. And this is the product that is usually carrying the lowest gross margins of our inverters compared to any other products except for batteries, by the way. And the second thing is that when you couple it, because of the characteristics of the installations when you usually do two modules per one optimizer, actually, when you look at the gross margin of the entire solution, the optimizer is also contributing to a better gross margin on the entire solution than the inverter. The fact that now we're shipping not only more commercial inverters but actually more inverters than optimizers in the overall mix, this has a bigger impact of this imbalance on the gross margin. This is something that we expect to see into Q3, maybe into Q4 because Q4 we already see a very large amount of commercial inverters that we're going to ship in. So I would say that actually major part of it will be more of the inverter rather than the air shipment. The air shipment, of course, is very expensive and it's also substantial. And this is something that, again, we expect to go away during Q4. So I would say that these are the two major factors and both of them are supposed to go away after Q4.

We'll take our next question from Philip Shen with ROTH MKM. We will next move on to Colin Rusch with Oppenheimer & Company. Please go ahead.

Can you talk a little bit about the R&D spend and how you're thinking about the relationship with Infineon? Anything that we should be attending to from a prepayment perspective, how that might streamline some of your R&D spending, anything else regarding the agreement?

I think the R&D spending pattern has not changed significantly. We're continuing to invest with mild growth as we're expanding into new areas, new products and continuing to develop next-generation products for the existing markets that we serve. The cooperation with Infineon has two elements to it. The first is assurance of supply to the components that we use en masse in our current products. So this is semiconductors and most significantly IGBTs that are used in every inverter that we do. That's the first layer of the corporation with them. And that does not impact R&D, obviously. That's an operational view. The second element is working together on next-generation power semiconductors like silicon carbide and gallium nitride. And that is a long-term cooperation that is again – it's not a big swing on R&D investment one way or another. It's preparing the future of our power semiconductors by working with one of the leading companies in this area as well as other companies that we work with. So it's a strategic partnership for us. Obviously, it's not something that has a direct impact on our R&D spend, but more on our roadmaps and assurance of supply.

From a pricing perspective, we've gone through multiple rationalizations of the solar demand profile over the years and you've adjusted pricing in various ways. I guess what would you need to see to start taking some price action in the market at some point to continue to take market share and then how you think about the importance of market share in terms of long-term growth of the business?

I think exactly as you described, there's a business as usual mode for the market and for being a technology and high-end supplier within the market, where we focus on differentiation and constantly make sure that our pricing is justified by the value in differentiation relative to our competitors. If you look historically, in the market, there is a dynamic where, on an annual basis, there's cost improvements that suppliers make, we invest a lot in cost reduction, there's volume increases, and that supports our cost reduction. And that, in turn, also enables some price reductions and making sure, again, that the gap relative to our competitors is justified by our value. So the last couple of years have been very disruptive or very different in terms of the dynamics. I do think that it's likely that, next year, following some of the dynamics that we described over here, the market will be back in more of its normal type of situation where things are stable. And then there is more activity on the area of cost reduction as well as more activity in the area of reasonable price reduction. So I don't hold out that happening sometime next year. Right now, we're still not in that type of environment and we don't see the need to reduce prices and our prices have been stable recently.

And we'll go back to the line of Philip Shen with ROTH MKM.

You talked about how pricing is stable. That said, are you open to price reductions in early 2024? And perhaps you can talk through it by geography and by end market? And also, can you talk through how many weeks of inventory may be in the channel by end market and also by geography?

Starting with the second part, at a high level, in Europe, the inventory levels are still, I would say, below a quarter, probably in the range of two months. For some products like the three-phase inverters, it's less than a month. For some products like single-phase inverters, it's probably more than two months. And historically, these are very reasonable inventory levels for the European market. What's happening is what we described it and I described before, is the dynamic where they're sitting on very, very large inventories of modules and trying to control financials, and in a way maybe call it taking the risk or being on the edge in terms of the overall inventory levels that they're holding, but I think that the inventory levels in Europe are in that range and considered reasonable, maybe on the high end of reasonable. But considering the very high sell-through and installation rates, it's not the major bubble, if you will. The US probably – the inventory levels are higher. They're closer to two-quarter levels. And as Ronen described, although we're seeing gradual upticks in installation rates and sell-through, to work through that type of inventory will probably take a bit longer, unless there's a more significant uptick in installation rates. Maybe as NEM 3.0 becomes clearer, we are seeing much more activity in terms of understanding the value of our DC coupled architecture for California. And I discussed the anticipation that we have that commercial will also begin to pick up. But if there isn't a major pickup in installation rates in the US, it will take a bit longer to work through that inventory. In regards to the first question on pricing, going back to the answer to the previous question that, during 2024, I think that this topic will be a relevant topic as we have a better view on our cost management structure and the market is in a more stable condition. I can't say that we rule it out. At this point, it's just not something that is in discussion for the coming few months. So, in summary, we're pleased with our results this quarter, which demonstrate the advantages of our position across diverse markets and applications. So thank you all for joining us today and have a good evening.

This does conclude today's program. Thank you for your participation, and you may now disconnect.