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Earnings call: SolarEdge Technologies sees growth amid challenges

EditorAhmed Abdulazez Abdulkadir
Published 2024-08-08, 12:38 p/m
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect
SEDG
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In the second quarter of 2024, SolarEdge Technologies Inc . (NASDAQ:SEDG) reported revenues of approximately $265 million, with the solar segment contributing $241 million. Despite a negative GAAP gross margin of 4.1%, the company shipped significant volumes of its solar products and revealed plans for new product launches and technological innovations, aiming for a revenue target of $550 million for the second quarter of 2025. SolarEdge also emphasized their focus on customer support, product development, and financial stability, and expects to be cash flow positive in the first half of 2025.

Key Takeaways

  • SolarEdge's Q2 2024 revenue stood at around $265 million, with solar business revenues at $241 million.
  • Shipped 2 million power optimizers, 66,000 inverters, and 128 MWh of batteries; undershipped demand at $275 million.
  • New product plans include a silicon carbide-based inverter and a U.S.-made DC-coupled LFP-based battery.
  • The company is ramping up U.S. production, expecting to ship domestically produced batteries in Q1 2025.
  • Total revenues for Q2 were $265.4 million; GAAP net loss was $130.8 million.
  • Cash, cash equivalents, and investments totaled $814 million as of June 30, 2024.
  • Inventory levels are expected to decline, with a target of $1.3 billion by end of 2024.
  • Q3 revenue guidance is set between $260 million and $290 million, with non-GAAP gross margin between -3% and 1%.

Company Outlook

  • SolarEdge anticipates reaching a quarterly revenue level of $550 million in Q2 2025.
  • Focus on expanding product offerings, including a software-based energy optimization platform.
  • Plans to begin shipping domestically produced batteries in Q1 2025 to access bonus credit.
  • Aiming to be cash flow positive in the first half of 2025.

Bearish Highlights

  • GAAP gross margin was negative at 4.1% for the quarter.
  • Operating loss reported at $160.2 million, with a GAAP net loss of $130.8 million.
  • Inventory levels remain elevated, with a slow recovery in Europe impacting inventory management.

Bullish Highlights

  • Growth in the US residential market, notably in California and Puerto Rico.
  • Channel inventory expected to normalize by the end of Q3.
  • Domestic manufacturing allows for a 10% domestic content ITC adder, which could benefit sales.

Misses

  • Undershipped demand of $275 million due to inventory and production constraints.
  • Non-GAAP gross margin was just 0.2%, reflecting tighter financial conditions.

Q&A Highlights

  • The company clarified a 23% gross margin expectation for Q2 next year, including IRA and 45x benefits.
  • Discussed macroeconomic factors such as electricity prices, interest rates, and policy affecting market growth.
  • Acknowledged the impact of complex grid management due to increased use of heat pumps and electric vehicles.

SolarEdge Technologies Inc. is navigating a complex market environment with strategic focus on innovation and market expansion. The company's efforts to ramp up domestic production and introduce new products are poised to meet increasing demand and regulatory requirements, setting a path for future profitability and growth.

InvestingPro Insights

As SolarEdge Technologies Inc. (SEDG) sets its sights on future growth and profitability, several key metrics and insights from InvestingPro provide a deeper understanding of the company's financial health and stock performance. Here's a snapshot of the current landscape for SolarEdge:

  • The company's market capitalization stands at $1.32 billion, reflecting its valuation in the market.
  • SolarEdge is currently trading at a low Price/Book multiple of 0.59, which could indicate that the stock is potentially undervalued relative to its book value.
  • Revenue for the last twelve months as of Q1 2024 is reported at approximately $2.24 billion, with a significant decline of 34.19% compared to the previous period.

InvestingPro Tips for SolarEdge highlight management's proactive approach with aggressive share buybacks, which could signal confidence in the company's future. However, analysts are cautious, anticipating a sales decline in the current year and expecting net income to drop. These concerns are also reflected in the stock's performance, which has seen a substantial decline over various time frames, including a 74.8% drop year-to-date as of 2024.

For those looking to delve deeper into SolarEdge's financials and stock performance, InvestingPro offers a total of 19 additional tips, providing a comprehensive analysis to investors considering this stock.

To explore these insights further and gain access to the full range of InvestingPro Tips for SolarEdge, interested readers can visit: https://www.investing.com/pro/SEDG.

Full transcript - SolarEdge Technologies Inc (SEDG) Q2 2024:

Operator: Hello and welcome to the SolarEdge Conference Call for the Second Quarter ended June 30, 2024. This call is being webcast live on the company's website at www.solaredge 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 J.B. Lowe, Head of Investor Relations for SolarEdge. Please begin.

J.B. Lowe: Thank you, Jess. Good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2024, as well as the company's outlook for the third quarter of 2024. With me today are Zvi Lando, Chief Executive Officer; and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the second quarter ended June 30, 2024. Ronen will then review the financial results for the second quarter, followed by the company's outlook for the third quarter of 2024. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release, the slides posted on our website ahead of this call today and our filings with the SEC for a more complete description of such risks and uncertainties. Please note this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation because we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. Reconciliation of these measures can be found in our earnings release, presentation and SEC filings. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended June 30, 2024 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. I will now turn the call over to Ziv.

Zvi Lando: Thank you, J.B. Good afternoon and thank you all for joining us on our conference call. Starting with highlights of our second quarter results. We concluded the quarter with approximately $265 million in revenue. Revenues from our solar business were approximately $241 million, while revenues from our non-solar businesses were approximately $24 million. This quarter, we shipped 2 million power optimizers, 66,000 inverters and 128 megawatt hours of batteries. Our sell-through for the quarter was approximately $520 million, up 18% from the first quarter, meaning we undershipped demand by approximately $275 million, in line with our expectations. Before we dive into the regional breakdown, I'd like to address the recent moves we have made to strengthen the company and our business and our key focus areas as we navigate this volatile time in the solar market. We are focusing on 3 areas. The first is supporting the business of our customers and growing our share through their satisfaction and success. Over the last year, we have made significant improvements to customer service and product quality and to the customer experience through ease of installation of our products. We are already seeing positive momentum in sell-through data resulting from these efforts. Second is execution of our product road map which is aimed to improve our share and profitability in segments we serve and build a position in new segments by pushing the envelope of hardware and software technology advancements in the energy generation, storage and management space. We are seeing gradual growth in revenue generated from new products released over the last 12 months, including our ground mount 330-kilowatt inverter system, trackers and commercial storage. We are also excited and focused on the next generation of products that we will release within the next 12 months, including inverters, optimizers and batteries for the U.S. and European residential markets. Third is ensuring financial stability and sizing the company infrastructure such that we are in a healthy position for further growth post channel inventory clearing when our revenue is aligned with our true business run rate. Ronen will touch on this in his remarks. And now to the details of our second quarter results. Starting with the U.S. residential segment. Generally, market reports suggest that installations were relatively flat in the second quarter. While our sell-through of inverters and optimizers in the U.S. residential space grew 32% quarter-over-quarter and our battery sell-through rose 55% quarter-over-quarter. We attribute this growth to the general trend in the market towards TPOs and large installers, where we traditionally have a strong position and the growing recognition in the market of the benefits of our DC-coupled backup storage system, in particular, during extended outage periods as have been experienced recently in several events across the country. We are seeing strength, in particular, in California and Puerto Rico where installations of our batteries were up substantially in the second quarter. We are focused on maintaining our momentum in the U.S. residential market through the shift towards domestic content products as we are shipping domestic content residential inverters and optimizers now and expect to begin shipping domestic content batteries in the beginning of 2025. Moving to U.S. commercial. Sell-through was up 18% quarter-over-quarter from a seasonally low first quarter and up 13% year-over-year. We remain encouraged by the potential of the U.S. C&I market as large enterprise customers are increasingly interested in standardizing their global portfolio on our solution due to our panel level monitoring, enhanced safety features, cutting-edge cybersecurity capabilities and highly sophisticated energy management systems. Added to this is the very strong interest we are seeing for domestic content commercial products that we expect to begin shipping before the end of this year. Moving to Europe. The residential market continued to be slow in Q2 and, in fact, declined in the Netherlands for the third straight quarter. For SolarEdge, our residential sell-through in Europe in the second quarter was up 10% quarter-over-quarter, with inverters and optimizers up 6% and batteries up 20%. In commercial, sell-through was down 3%. In general, the European C&I market has been relatively flat over the last 3 quarters and there is not an expectation for acceleration in the second half of the year in most countries. In the Italian market, however, a special incentive plan equivalent to the residential eco-bonus program which significantly boosted the Italian residential market in recent years, is in final stages of regulatory approval. Between our strong market share in the Italian C&I market and our recently released commercial battery, we are in a position to benefit from this program which will likely include a commercial storage component. Until that time, however, the inventory consumption of our commercial products in the European channels will likely remain sluggish. In the International Markets region, revenue in the second quarter was $56 million, up 43% quarter-over-quarter. We are making nice strides in the Thailand market, where we posted record quarterly revenues in the second quarter. The momentum here is related to what we discussed above as enterprise customers standardize their global supply chain infrastructure on our equipment in order to meet safety standards and in many cases, to address various Scope 1 and Scope 2 emission requirements for corporate ESG ratings. We are continuing to make progress on clearing the channels and expect channel inventory in the U.S. to be largely normalized by the end of the third quarter. In Europe, the clearing process will likely extend into the early part of 2025 due to the above-mentioned slower recovery and changing inventory holding behavior of distributors in the European markets who are targeting lower levels of days on hand compared to past practices. During this period, as the channel clears inventory, our revenue will continue to track below the underlying demand for our products. Moving to products and to expand on the second focus area I discussed in the start of my remarks, our product road map. At Intersolar in Munich in June, we announced the global rollout of SolarEdge ONE for C&I, our software-based energy optimization platform for commercial and industrial applications. SolarEdge ONE for C&I is a key piece of our strategy to capture market share and margin as systems and requirements become more complex and require sophisticated energy management software and enhanced cybersecurity protection. We have already started to sell recurring software services and we'll be adding additional features in the quarters ahead. SolarEdge ONE for C&I is based on a combination of organic capabilities developed by SolarEdge as well as the integration of technical and go-to-market assets we added through the acquisition of Hark and Wevo. Let's talk a bit about cybersecurity. In recent months, a growing share of customers, especially in the C&I segment, have made cybersecurity a go-no-go factor in their procurement decisions. While this has long been common and sensitive installations like military bases or government buildings, it is becoming the new norm for all types of customers from universities to gas stations. We have built significant expertise in this area which is becoming a real differentiator. At the same time, several countries have already started putting more comprehensive cybersecurity regulations in place for critical grid infrastructure. We have many meaningful dialogues with regulatory bodies as these new rules are drafted and we expect to be in a position to quickly comply with any new regulation as a result which should further set us apart from the competition. In fact, we invite any of those that are attending RE+ next month in California to join the workshop we are leading on cybersecurity for solar systems to learn more about this critical topic. Also at Intersolar, we unveiled our next-generation 3-phase residential energy solution for European markets that will be available next year, comprised of our next-generation 3-phase inverter and next-generation battery. This new inverter will significantly reduce cost per watt and is designed to fully optimize backup attached solar systems on larger rooftops that we are increasingly seeing in the German-speaking countries. This inverter will also be simpler to install significantly reducing installation times and costs. In the second quarter, we made first shipments of our commercial outdoor batteries to Europe. This is a market that we think has the potential to follow a similar growth trajectory seen in the residential storage space in recent years. Our offering will expand within an indoor commercial storage battery that will be released in 2025. At RE+ next month, we will be displaying our next-generation single phase residential system for the North American market that is expected to be released in the second half of 2025. This new system will include an inverter, battery backup interface and meter collar. The inverter will be based on silicon carbide switching elements and advanced power topology to deliver enhanced system level efficiency, greater backup power and safety features above and beyond our current offering. The new inverter will also come pre-equipped with PCS which means customers can install much more PV while avoiding costly main panel upgrades. Also at RE+, we will be showcasing our next-generation battery. This new battery will be a U.S.-made DC-coupled LFP-based modular and scalable solution from 4.4 to 44 kilowatt hour that will bring our expertise in module-level optimization to the battery module level. We expect it will also represent a significant improvement in our cost structure relative to our current single phase offering. Our tracker product also continues to gain momentum. There are now approximately 175 megawatts that have been installed or are in the process of installation and confirmed orders for approximately 30 additional megawatts that are scheduled to be installed this year. Moving to operations. In our Austin, Texas facility, we manufactured approximately 450 megawatts of single phase inverters in the second quarter. And as we announced last month, we achieved our target run rate of 500 megawatts during Q2. We also announced the shipment of the first 20,000 of our domestically produced optimizers in the second quarter from our second U.S. contract manufacturing facility in Florida. We believe that the inverters and optimizers we manufacture in the United States when paired with U.S.-made racking equipment that is available in the market, allow our TPO customers to use elective Safe Harbor to qualify for the 10% domestic content ITC adder today. We are also on track to have domestic content commercial product available by the end of the year. As mentioned above, we also expect to begin shipping domestically produced batteries in the first quarter of 2025 which is expected to enable solar plus storage TPO installations to access the bonus credit as well. These IRA designated products are an exciting opportunity for the solar and storage market as more installers are able to access the various incentives. To conclude my remarks, we have taken steps to return to profitability and cash flow stabilization post channel inventory clearing at a quarterly revenue level of $500 million which our underlying business represents already today. The actions we are taking in the areas of market share gains and product road map should enable us to surpass $550 million in quarterly revenue in a post inventory clearing environment which we expect will be in the second quarter of 2025 and set the stage for additional growth with more products and continued technological innovation. I will now hand it over to Ronen.

Ronen Faier: Thank you, Zvi and good afternoon, everyone. Total revenues for the second quarter were $265.4 million. Revenues from our solar segment which includes the solar -- the sales of PV attached residential and commercial batteries were $241.2 million. Solar revenues from the United States this quarter were $97 million, representing 40% of our solar revenues. Solar revenues from Europe were $88.2 million, representing 37% of our solar revenues. Rest of the World solar revenues were $56 million, representing 23% of our total solar revenues. On a megawatt basis, we shipped 261 megawatts to the United States, 278 megawatts to Europe and 333 megawatts to the international markets, for just under 875 megawatts of total shipments. As in the last 2 quarters, the geographical mix of our revenues is mainly a result of inventory levels in the channels and does not necessarily represent installation rates, competitive environments or long-term trends. 65% of the total megawatt shipments this quarter were commercial products, while the remaining 35% were residential. In the second quarter, we shipped 128 megawatt hour of batteries, with the majority shipped to Europe and international markets. Our U.S. battery shipments as a percentage of total shipments were lower this quarter but still represent a significant drag of approximately 500 basis points on our margins. In the second quarter, due to the continued inventory imbalances in the distribution channels, as well as a larger portion of commercial products within our revenue mix, we shipped a higher ratio of optimizers to inverters than in the last quarter. As a result, ASP per watt this quarter, excluding battery revenues, was $0.214, a 25% increase from $0.172 last quarter. While the typical ratio of optimizers to inverter is 24:1, the ratio this quarter was 30:1. In the first quarter, we began to implement promotions to help our distribution channel partners to reach balanced level of inventory which started to be reflected in our financials in the second quarter. In all, we expect the effect of these measures to translate to average price reductions within the mid- to high single-digit range in 2024, as we have previously discussed. Our blended ASP per kilowatt hour on all TV-attached batteries was $371 this quarter, down from $383 per kilowatt hour in the previous quarter. The decrease is largely due to previously announced price reductions and geographic mix shifts. Revenues this quarter from our nonsolar business, comprising our energy storage in all other segments were $23.9 million. Consolidated GAAP gross margin for the quarter was a negative 4.1% compared to a negative 12.8% in the prior quarter, as we benefited from the economies of scale that resulted from higher revenues. Non-GAAP consolidated gross margin this quarter was 0.2% compared to negative 6.5% in the prior quarter. This amount includes 330 basis points of net IRA benefit. Gross margin for our solar segment was 1.3% compared to negative 3.5% in the prior quarter, including 360 basis points of net IRA benefit. Our direct gross margin this quarter was relatively similar to what we saw in the first quarter. In the second quarter, our non-GAAP other cost of goods sold as a percentage of revenues decreased by approximately 400 basis points as a result of economies of scale related to higher revenues, offset by seasonal increase in warranty expenses and additional expenses related to the ramp-up of our U.S. manufacturing. Notably, it's the fact that our measures to improve product reliability as well as the impact of lower revenues yielded an over 70% decrease year-over-year in warranty-related expenses and accruals on an absolute dollar basis. Gross margin from our nonsolar segment was a negative 11% compared to negative 47.2% last quarter, a result of higher sales in our nonsolar storage business. Our non-GAAP -- on a non-GAAP basis, operating expenses for the second quarter were $114.8 million compared to $109.2 million in the prior quarter. The quarter-over-quarter increase is largely related to the roll-off of onetime items that reduced operating expenses in the first quarter. Following the cost reduction measures we have taken in recent quarters, we anticipate operating expenses to stabilize in the range of $100 million to $105 million, including the impact of the workforce reductions we implemented in the first and the third quarters. We will work to continue to push our expenditures down while allowing significant resources for new product development. GAAP operating loss for the quarter was $160.2 million compared to an operating loss of $173.7 million in the previous quarter. Non-GAAP operating loss per quarter was $114.3 million compared to operating loss of $122.5 million in the previous quarter. Operating loss for the solar segment was $105.1 million this quarter compared to operating loss of $110.4 million in the previous quarter. Operating loss for the nonsolar segment was $9.3 million this quarter compared to operating loss of $12.1 million in the previous quarter. Non-GAAP financial income for the quarter was $1.2 million compared to a non-GAAP financial income expense of $4.8 million in the previous quarter. GAAP other income was $18.6 million, the majority of which represents the early redemption of our September 2025 convertible notes as part of the 2029 convertible debt issuance. Our non-GAAP tax benefit was $11.9 million this quarter compared to non-GAAP tax benefit of $18.7 million in the previous one. Our non-GAAP tax rate for the quarter was 11% and we expect it to climb back towards 20% upon return to profitability. GAAP net loss for the second quarter was $130.8 million compared to a GAAP net loss of $157.3 million in the previous quarter. Our non-GAAP net loss was $101.2 million compared to a non-GAAP net loss of $108.6 million in the previous quarter. GAAP net diluted loss per share was $2.31 for the second quarter compared to $2.75 in the previous quarter. Non-GAAP net diluted loss per share was $1.79 compared to $1.90 in the previous quarter. Turning now to the balance sheet. As of June 30, 2024, cash, cash equivalents, bank deposits, restricted cash bank deposits and investments were $814 million. Net of debt, this amount is approximately $165 million. This quarter, cash used in operating activities was $45 million. This cash utilization was largely a result of our reported net losses. Working capital was a source of cash in the second quarter as collections far exceeded vendor payments. However, a delayed tax reimbursement and an increased accumulation of IR credits resulted in higher cash consumption than we initially expected. Cash investment activities, in addition to CapEx related to our U.S. manufacturing included $38 million related to the acquisitions of Wevo, as well as the minority share of AMPEERS, both of which closed this quarter following the receipt of legal and regulatory authorization. In addition, we increased long-term credit to customers by $30 million. Additionally, this quarter, we repurchased 247,000 shares of our common stock for an average gross purchase price of $68.70 per share, a total of approximately $17 million. Free cash flow for the quarter was use of $140 million. In the third quarter, we expect our free cash burn to be reduced to a range of $70 million to $90 million and anticipate the burn to step down again in the fourth quarter. We expect to be cash flow positive in the first half of 2025. Accounts receivable net decreased this quarter to $295.6 million compared to $404 million last quarter. As a result, we brought down DSO from 220 days in the first quarter to 153 days in the second quarter. We continue to successfully make collections from customers despite lengthened payment terms made by European customers and in particularly in the Dutch market. As of June 30, our inventory level net of reserve was at approximately $1.5 billion compared to $1.55 billion in the prior quarter. Our average inventory days decreased from 619 days in the first quarter to 519 days in the second quarter. This quarter, we have accelerated the timeline of our U.S. manufacturing ramp given the significant demand we are seeing for U.S.-made products, particularly as it relates to domestic content. I would note that while our inventory level declined in the second quarter, they remained elevated largely due to the slower recovery in Europe. We expect our inventory levels to continue to decline through the end of 2024 to approximately $1.3 billion. In late June, we issued $300 million in convertible notes due 2029 and used a substantial portion of the proceeds to repurchase a portion of our convertible notes due 2025. This raise was part of our third focus area of ensuring financial stability and positioning ourselves to capitalize on opportunities that will strengthen the company in the long term. Before turning to the third quarter guidance, in light of the decline in our stock price and as a result of our market capitalization, we intend to conduct an in-depth evaluation of the book value of our assets in the third quarter to determine whether impairment of certain items is required. We will give an update on this impairment testing on our next earnings call and in our Form 10-Q for the third quarter. Turning now to our guidance for the third quarter of 2024. We are guiding revenues to be within the range of $260 million to $290 million. We expect non-GAAP gross margin to be within the range of negative 3% to positive 1%, including approximately 560 basis points of net IRA benefit. We expect our non-GAAP operating expenses to be within the range of $111 million to $116 million. Revenues from the solar segment are expected to be within the range of $245 million to $280 million. Gross margins from the solar segment is expected to be within the range of 0% to 4%, including approximately 590 basis points of net IRA benefit. I will now turn the call over to the operator to open it up for questions.

Operator: [Operator Instructions] We'll go first to Philip Shen with ROTH Capital Partners.

Philip Shen: So it sounds like normalized revenue might be closer to $550 million now. And it sounds like it could be realized in the back half of '25. What might the associated margins be with this normalized revenue? If you mentioned on the call, sorry if I missed it. And what might the quarterly cadence of the margins look like between now and when you hit 550?

Ronen Faier: Thank you, Phil. So first of all, correction, we stated that we expect a normalized level of $550 million to arrive in the second quarter of 2025. And we expect gross margins at that point to be around 23% gross margins. The -- actually, going through the next 2 quarters until we get there is going to be a relatively moderate increase in Q4 and Q1 of 2025 in revenues which will also yield in a relatively modest growth in the gross margins in this quarter. That is also, by the way, supported by some of the seasonal impacts that we see related to our warranty expenses and support expenses. So therefore, given the economies of scale that we will see once we're getting to the $550 million, most of the growth that will happen between Q1 to Q2 will be accompanied -- in revenue, sorry, will be accompanied with a similar strong growth in gross margins between Q1 to Q2 2025.

Operator: We'll take our next question from Brian Lee with Goldman Sachs (NYSE:GS). Mr. Lee, your line is open, if you could check your mute button.

Brian Lee: Yes. Can you hear me, sorry about that. I think I might have been on mute.

J.B.Lowe: Yes, we hear you.

Brian Lee: Maybe just to follow up on Phil's question. When you think about the Q2 $550 million run rate, it sounds like that's when you also expect to get back to a free cash flow positive run rate or maybe cash flow neutral. But in the interim, if I just kind of do the math, it sounds like you'll burn maybe another $100-plus million of free cash flow between now and that period and you still have the outstanding converts in the '25 time frame. So just wondering, is there a strategy in place to address that? And is that going to be part of the strategic review you're going through in terms of determining asset value? Are there potential divestitures, not just write-downs but things you could potentially look to monetize? I guess how wide-ranging is the scope of what you're looking to review here as you look into '25?

Ronen Faier: Thank you, Brian. So I'll start from the second part of the question. Actually, the review that we're going to do is mostly related to the book value of our assets rather than to the other elements that we can do in order to either reduce cost or improve profitability which is something that we do constantly on the business side. So whatever we do in this review will be mostly related to the book value of our assets. Now when you look at the cash and cash accumulation that -- or usage that we see, in general, I would assume that your assumption of around $100 million, give or take, is something that we also see as possible given the fact that, again, we believe that will be anywhere between $70 million to $90 million in the next quarter and then in a much lower number in the fourth quarter. And this is actually a number that still keeps us above all the debt that we have. The more important part of it, though, is the fact that now that we have actually issued the new debt, the timing of returning the convert has basically changed. We're only about $330 million needs to be repaid in September '25 which we intend to do and this is our strategy here, while another $300 million -- and by the way, the greenshoe was also exercised. So it's a little bit of a bigger amount will be only returned in '29. So in general, the way that we see it is that we have enough cash that we have enough cash to support everything. The last thing that I would state and this is very important. Part of the burn that you see right now is actually related to the acceleration of the manufacturing that you do in the U.S. and the IRA result of it. In a normal world, had it been an ITC credit, there would have been already a very developed market where we could have sold the IRA credits like the quarter after it is being incurred. Right now, the market for 45x credit selling is not yet there. And as such, we expect to have by the end of the year, approximately $100 million of ITC credits that will be accumulated but not yet claimed during this year. And this is part of the thing that we see right now. We are accelerating the time frame of manufacturing. This, in turn, is increasing our IRA credits accumulation that we cannot sell immediately which means that, by the way, we're utilizing cash. We expect to recover all of these $100 million of IRA credits accumulated before the end of the year, either when we will have an open market for this kind of selling these assets and I think that it's a matter of 1 or 2 more quarters. Or else, we will simply ask for a direct pay when we file our financials or tax reports in the second or third quarter. So in essence, part of the burn that you see right now is actually just putting money aside and expecting it to be paid by the IRS. And as long as we feel that getting money from the IRS is something that should happen, it should be viewed as, I would say, almost equivalent to cash in the level of confidence that we have on it.

Operator: Our next question comes from Mark Strouse with JPMorgan (NYSE:JPM).

Mark Strouse: Just kind of following up there on Brian's question. To the extent that in-market demand does come in lower than expected, maybe that $550 million is lower or it gets pushed out to a later time frame. Can you just kind of talk about how your how you're weighing kind of selling it into the market, improving your cash flow versus trying to have a clear channel that's out there yet?

Ronen Faier: Sure, Mark. So first of all, I'll start by saying that -- yes, Mark and thank you for the question. So I'll start by saying that we are already today based on the sell-through data that we have for Q2 at above $520 million. So the $550 million is not a result of a massive growth that we expect to see but rather very much where we are already today and add to this the natural growth that we expect to see to our new products related to the 330-kilowatt inverter, the trackers, the commercial battery which is something a product that we see a lot of demand, especially right now, we start to see it in Italy and other places in Europe. So in general, we feel very comfortable with the $550 million and as we also said in the prepared remarks, we view it as a stepping stone to additional increases that will follow given the fact that we do expect to see more growth in our sales. Now when we are planning cash, I think that there are 2 stages to look at cash utilization above when we get to this number. First of all, getting to this number will involve releasing a lot of the inventory that we already have and paid for. Most of the growth that we expect to see will come from Europe and most of the European inventory is something that we have. That means that the majority, if not all of the sales that we will do into Europe over the next few quarters will come from inventories that we've already paid for. And actually, most of the cash usage is going to come from manufacturing in the United States. So that's one thing that we will see. And therefore, we assume that getting to the $550 million and even throughout 2025, cash flow should be positive because of this. Once we cross 2025, that means that inventories will clear from our warehouses, not only the channel and then we will need to return to manufacturing and then it's a question of what will be pace of growth and how much cash will be needed. But at least in 2025, most of the growth will be financed from products that will already been paid for.

Operator: Our next question comes from Colin Rusch with Oppenheimer.

Colin Rusch: Sorry about that, I was on mute. Guys, can you talk a little bit about the competitive landscape as you continue to invest in innovation here, like how much -- how fast is the cadence of change happening? And how big an opportunity is there for you to start taking share by innovating the products and a little bit more aggressively?

Zvi Lando: So thanks, Colin. I think as I mentioned in the prepared remarks, the first step that we are focused on in terms of share growth is actually via share growth of our customers. It is literally a situation where their success is translating to our success. And in that regard, we're very focused on enabling their efficiencies with improved service and ease of installation. And that is also translating to more installers either coming back to us or trusting us. And I think it's evidenced by the high ratio of increase in sell-through in the second quarter versus the first quarter. The second -- the second step is indeed new products and innovation. Some of them are aimed at segments that we are already with a strong presence in like the next-generation single phase inverter and next-generation single-phase battery. And some of them are for segments that we have an offering for but it's not the ideal one. Like for large residential installations in Europe, we are today for a 20-kilowatt inverter which is becoming the larger -- for 20-kilowatt installation which is becoming the larger residential segment. In Germany, we support that with a solution of 2 inverters and our next-generation inverter will be able to do this at a much reduced cost with one inverter and with high efficiencies at both ends of the performance, also in low power and also in high power which is an innovative solution and a potential key differentiator. So there's innovation in the segments that we are in. There are innovation to the evolving or parts in the segments that we are in that we don't serve in an ideal manner. And then there are new solutions for segments that we don't serve today completely like commercial storage for both indoor and outdoor. But what we're seeing is that innovation today is around, I would say, 3 components. The first is the old-fashioned power efficiency and increased harvest, together with safety. The second is cost reduction and to a large extent, installation cost reduction because the systems are more complex. They take the installers a lot more time to install. They take more resources, expensive electricians. There's a lot of room for optimization and innovation in that space. And the third is the whole area of software and energy management which extends into cybersecurity and grid interaction. So we're very focused on innovation in these 3 segments. And essentially, when you talk about software, the cadence of releasing new features and capabilities is very high. And as a result of that, we're seeing this type of impact of what we feel are faster conversions in turnarounds with customers.

Operator: We'll move next to Andrew Percoco with Morgan Stanley (NYSE:MS).

Andrew Percoco: I just want to come back to some questions that have already been asked. But I mean just look at the margins that you guys are posting today in your business clearly set up for a much stronger and higher revenue environment. I understand that there's still a lot of undership happening but it feels like that destocking cycle will continue to get pushed to the right. At the same time, that underlying demand is continuing to maybe deteriorate in some of your key markets. So can you maybe just discuss what you're doing internally to maybe rationalize some of your fixed costs such that if this continues to get pushed to the right, you have the balance sheet and liquidity to kind of to sustain yourselves to the extent that this destocking doesn't actually cleared by the second quarter of 2025.

Ronen Faier: Sure, Andrew. And first of all, thank you very much for the question. So I'll start by saying that actually we do not see the sell-through deteriorating at all. Actually, on the opposite. We do see it increasing. It increased in Q2 at about over 20% in the U.S. residential, over 30% in U.S. commercial. And the only place where you saw a little bit of deterioration in point of sale was in the commercial Europe, where it was about 3% which in our view, is almost flat. So in that case, we do not see a lot of changes there. But to the base of the question and I think that this is part of the reasoning that we have also raised the convert and took some of the other elements of cost reductions. First of all, when we look at the way to control cash is, first of all, how are we able to reduce the operating expenses and, I would call it, variable costs in our cost of goods sold. And here -- actually, we have implemented at the very beginning of the third quarter, a reduction in force as painful as it was. It is something that will help us reducing expenses by approximately $15 million compared to where we were before. And this is something that we did by cutting more activities that were not very necessary for the very short term. By the way, some of them are painful because we thought that we will need them for the long term but it is right now something that we did not invest so much. We are increasing our efforts and speed of migrating some of our activities to lower-cost regions, like moving some of our support centers to lower coast areas and of course, renegotiating pricing and renegotiating every term that we can have, applying more AI power tools in order to make sure that we can translate conversations to many languages in a way that allows our representatives even if they talk completely different language to respond as if they were local. So a lot of things are being done there. The next thing that we are doing is, of course, looking at what are the expenses that we have related to our manufacturing. And again, here, the fact that we have a lot of inventory doesn't help cost reduction but in the -- given the fact that we have a lot of inventory that we need to sell. But on all of our products, we are continuing to do cost reduction. And even on products that we're manufacturing in the United States, we already take measures to reduce costs. So, I would say that the -- in general, the fact that, yes, we do see a relatively stable sell-through that is indeed pushing a little bit the timing of getting normalized. But using this time in order to reduce operating expenses to reduce cost, to be more efficient in a way that we do things, to reduce spending on other items, if we can, is something that we're pushing all the time. And if all of these are not needed, we have basically deferred about $300 million of debt that we needed to return by the end of 2025 and we delayed it until 2029. So this is something that also buys us enough water below the kill of this ship, so we can continue sailing securely while the inventories are being cleared.

Operator: We'll move next to Dimple Gosai with Bank of America (NYSE:BAC).

Dimple Gosai: Quick question. As I look at your gross margin guidance, can you elaborate on product mix? So more specifically, to what extent did single-phase battery sales impact gross margin this quarter? And how many years of inventory on hand would you say you have?

Ronen Faier: Sure. So first of all, thank you for the question again. So I'll start from the batteries themselves. The single-phase batteries represented a drag of approximately 500 basis points on our gross margins this quarter. And this is always, I would say, very much dependent on the overall revenues that we have because the bigger revenues are, the portion of this product is a little bit lower. In general, when it comes to this product, it is a product that right now we're actually rationing given the fact that we have enough products we can basically sell this products relatively quickly seeing the growth in the sell-through of these products that we see in mostly in the U.S. market where it is directed. But given the fact that our next-generation product will be ready only towards the second half of 2025, we need to ration the usage of these batteries until then. So we expect to use these batteries up until somewhere in the middle of 2025, maybe not longer than the third quarter. And by then, we will simply will not have these batteries anymore. Other than this, the influence that we see on the margins is also related to the -- how much of commercial products we're selling compared to residential products. And what we actually see this quarter as much as we saw it also in the last quarter is that the commercial portion of our -- of products sold right now is getting higher. Actually, this quarter, 65% of the megawatts that we have shipped were commercial, by the way, the majority of them are going to Europe and international markets that are characterized with much lower gross margins. And we do expect that once the U.S. market residential will start to grow again, as is the expectation for the next years and also residential in Europe that are enjoying better margins, we will also see some help there.

Operator: We'll go next to Jordan Levy with Truist.

Jordan Levy: You guys have talked a lot about this but I just want to get a sense of kind of where your confidence levels lie in that kind of first half of next year inventory clearing in Europe? And then maybe kind of along those lines, how you all kind of approach the complicated dynamic of undershipment and that sort of thing.

Zvi Lando: Yes. I'm trying to make sure I understand the question properly. But we are looking and we get reports from our distributors on a per part number sales that they make. And that's how we look at the sell-through. And we obviously track installations and as soon as an inverter is installed, it connects and it -- and we see the installation. So we are able to view the underlying business quite accurately on a product basis, on a country basis and on a channel basis. So when we're seeing in the second quarter, the underlying business growing from about $440 million in the first quarter to a little bit above $520 million in the second quarter, we have good visibility in terms of which countries this is coming from and which products are the ones that are being installed and where are we gaining share and where is there more opportunity. And this is the basis for our expectations. And then, of course, relative to what we ship to quantify the under shipment. So this is the basis for our expectation and plan how this leads to clearing of most of the U.S. inventory by the end of the third quarter and the -- of this year, the third quarter of 2024 and the European inventory at the beginning of 2025 and in the -- in the international market segment, we're already pretty much at a routine of no under shipping and a revenue run rate of this quarter which was about $56 million.

Operator: Our next question comes from Corinne Blanchard at Deutsche Bank (ETR:DBKGn).

Corinne Blanchard: So one more question on the inventory but maybe is there anything you can do any measure you can take to maybe go through that faster? I mean, is there anything that is in your call that you could enter 1Q of 2025 with a very little inventory and we see that normalized revenue coming sooner?

Zvi Lando: Yes. Thanks for the question. And first of all, obviously, this is exactly what we're trying to do. And I think that this is -- was reflected to a large extent in our message that for the remaining of 2024, our main objective is to help our channels clear as much and close to all of the inventory that we have. Now our inventory is -- because of our breadth of product and offering, the inventory management is complex. There are some places where there is already a deficit in optimizers and customers need optimizers. And at the same time, in other places they need inverters. So our efforts to help in clearing the projects to a large extent or in some cases, are mating between distributors or between installers so that they have the opportunity to move inventory and as well as directing our promotions that were mentioned by Ronen in the prepared remarks which effectively are price reductions on the missing parts that some of the channels have in order to be able to move bigger portions of inventory. So this is indeed what we are focused on and through these means of looking and optimizing on a regional and global level and not only on a country level and special promotions and support in order to clear the channel again by the end of the year or likely into the first quarter of next year.

Operator: We'll go next to Dylan Nassano with Wolfe Research.

Dylan Nassano: I just wanted to go back to the prepared remarks around changes to distributors purchasing patterns in Europe. In the past, you've spoken about how distributors were reducing the number of OEMs they've stocked. Can you just provide an update on where they are in that process? Or I guess said another way, how much second- and third-tier inverter brands are still kind of taking up space in the channel?

Zvi Lando: So this is a qualitative comment and you need to look at it one distributor at a time. But we're definitely seeing that trend being executed. Now that doesn't mean that they are not still in the market and in various types of second tier or sub-distribution remaining inventories from second- and third-tier suppliers. But the large first tier distributors, as a general term, in Europe have rationalized to a large extent, their line card to something that is more similar to the pre-2022 shortage period with the combination of, in our case, some mix of module-level power electronics with local string with non-European string but a much shorter line card than before -- than before but there are still -- as I said, there are still volumes of second- and third-tier inverters and products that are moving around and gradually declining.

Operator: We'll move next to Chris Dendrinos at RBC (TSX:RY) Capital Markets.

Chris Dendrinos: I wanted to go back to the question on inventory balances, your manufacturing footprint and cost rationalization efforts. My question is, as you continue to ramp the U.S. manufacturing supply, do you believe you have an optimized manufacturing footprint today? Or is there opportunity to further refine that global capacity going forward?

Zvi Lando: Thanks for the question. It is -- it is indeed a challenge and we have shut down a number of manufacturing facilities outside of the United States and we still are in the process of ramping the United States. So we are not at an optimized point right now. And as a result of that, we are -- and our gross margin is still affected by underutilization cases, underutilization costs for some of the factories that have still not come to complete closure or that we haven't been able yet during this transition to fully optimize. So that is where we're going to have the ramped facilities in Florida and in Austin in the U.S. and leave probably one manufacturing facility outside of the United States. But it's not optimized yet. It will take us a few quarters to reach a full optimized footprint for the forecast that we are seeing for 2025 and 2026.

Operator: We'll move next to Christine Cho with Barclays (LON:BARC).

Christine Cho: I just had a clarification question. I think in the past, you've talked about streamlining manufacturing. And I think you said that the U.S. facilities that you have will only be producing 11 kilowatt inverters. Is that right? And I guess, if that is, how should I think about how that sets you up competitively for your customers who may want domestic content but don't necessarily need that inverter size.

Zvi Lando: The inverter that we are manufacturing is a backup capable inverter with backup power of up to 11.4 kilowatts and on grid power which is fit for the requirement of the customer. So it actually gives them a benefit when they are buying a system targeting it for the amount of PV that they have and the grid connection that they are aiming for, for on-grid applications. The 11.4% backup capability is a benefit is not -- it does not make it -- it doesn't come at the expense of their competitiveness to them.

Operator: We'll move next to Kashy Harrison with Piper Sandler.

Kashy Harrison: And yes, thanks for a sliding on me in here as well. So to clarify on the response to Phil's question, just real quick, did the 23% gross margins include the 500 basis points of 45x? And then maybe just a bigger picture question. You talked about a new suite of 3-phase resi products for Europe at Intersolar. You're also talking about domestic content products for solar and storage within the U.S. And so I was just curious, how do you think about the risk of finished goods inventory obsolescence in Europe, if the distributors want the newer product you're launching next year? And then similarly, that same risk within the U.S., if all of a sudden, the distributors and installers are really just focused on the domestic content that you're discussing.

Ronen Faier: Thanks, Kashy, for the question. So first of all, yes, we are, of course, starting to manufacture new products related to domestic content here and a little bit later the new 3-phase products. But actually, when we are looking at product transitioning and this is something that we have done in the past as well, I think that there are 2 elements to take here into account. The first one is when exactly it is done. And that means, for example, that by the time that we expect to have our new 3-phase product for the residential 3-phase product that we're discussing so much, this is a product that today is, first of all, approaching a segment of the market that we're not very much addressing which is the large installations between 15 to 30 kilowatts that you mostly see in Germany. And therefore, here, this product is mostly not cannibalizing any of the other products that we're selling today, other than the fact that when it will come at the beginning of 2025 and by the time that we will ramp up, we will also consume some of this inventory. The second thing that we're doing when we are producing new products or new product lines is the fact that we can basically play within the geographical areas in which we are actually selling them. So for example, if we're having inventories of 3-phase products, we can start selling a new 3-phase product only in Europe while continuing to sell for a while the other generation in our international markets or in the United States. And therefore, this ability to play both with timing but more importantly, with the regions and locations that we are releasing the inventory is very much helping us. So this is on the 3 phase. On the domestic content, it's, first of all, a relatively similar answer. But here, there is another element that domestic content made products are mostly important for TPO installation while we know that some of the market is still a loan market. And by the way, as we expect interest rates to go down, I also expect that you will see the loan market coming back to life. And this is inventory that can be used there. Unfortunately, for good and bad, we need to from time to time replace products, so we can use this for this product as well. So in general, the way that we view it is that we are, in a sense, rationalizing and introducing the products in a way that will lead to minimal to none write-offs. We've done it very successfully in the past, really writing off, I would say, marginal or not even -- sometimes we didn't write off anything because we continue to use old products for support purposes. Now with this harder inventory, of course, this is something that becomes a little bit more complex but we'll simply have to run it delicately. The most important thing is that -- to know is that at least by the end of Q2, when we evaluated our inventory levels in light of these product introductions as well, we did not find any reason to accrue or already to write down products. So this is also something that we do on a very regular basis.

Operator: We'll take our next question from Jon Windham with UBS.

Jon Windham: I just want to go back. You had mentioned in your prepared comments some changes of behavior with the amount of inventory being held by, I believe, installers in Europe. If you could just give a little bit more color on what you were talking about there. I'd really appreciate it.

Zvi Lando: Yes. Thanks for the question. I think we were referring to distribution and distributors in Europe. And if -- and it's not only in Europe. I think in Europe, it's a bit more evident. If, prior to the current challenging period, a typical distributor would want to hold about a quarter worth of inventory in order to be able to respond to market opportunities. We are seeing them now trying to hold and reach a point where they are holding less than that, maybe 2/3 or even half of that level of inventory. So with that in mind, it's -- that being their goal, it is extending a little bit the time that it will take to clear our inventory from their channels and reach that level of -- the level that they desire and resume by buying patterns that fit the level of business that we've been discussing.

Ronen Faier: And to Zvi's answer, Jon, the fact is that they also know what are the level of inventory that we're holding. And if you take, for example, a distributor in Germany knowing that within half a day of truck delivery, we have a warehouse footing millions or tens or hundreds of millions of dollars of products. This is something that also allows them at least to be much more lean in the way that they're managing their inventory. But that means that once our inventories are cleared also from our warehouses, they will have to go back to their previous behavior as well.

Operator: We'll move next to Austin Moeller with Canaccord. Mr. Moeller, you may check your mute button. We'll check back with him. I'll move next to Joseph Osha with Guggenheim Partners.

Joseph Osha: Returning to the cash issue, one of the big inputs to the model is where your trade accounts and, of course, your inventory are headed. Can you give us some sense as to what the assumptions are there that underpin the operating cash burn number you talked about?

Ronen Faier: So in general, what really moves it is that we expect, first of all, as mentioned, to be at the end of the year at approximately $1.3 billion of inventory compared to $1.5 billion where we are today. So I'll answer towards then but I will also answer how it will move forward into '25. So the first thing that happened is that the vast majority, if not all products sold in Europe over the next Q3 and Q4 will be inventories that already exist and are sitting on our warehouses. And that means that in general, take an assumption, if you saw that last quarter -- for example, Europe was about 40% of our revenues, take 40% of your estimate of revenues and take the gross margin assumptions, you'll get to the inventory that can go out based on this. The second thing is that we also very much decrease our purchase of new components that we're utilizing or selling today. Today, if you look at the $1.5 billion of inventory that we have, approximately $400 million of those are raw materials that are going to be used and consumed even through the local and domestic content products that we're going to utilize here. And this is also something that reduces the inventory quite substantially. I would say that if we want to look into -- and again, so that we expect to be approximately $200 million towards the end of this year. If you look into '25. I would say that a good assumption will be that raw material inventory will not increase significantly compared to the end of the year. And again, I would assume that at the end of the year, we'll be at around, let's say, $300 million of raw materials. And at that point, once raw materials are not growing during 2025, just assume that we have enough product to take us to the vast majority, if not all of '25 on our sales in Europe. So again, whatever proportions are models for Europe, you can basically make this calculation. So that's the way that we look at it. We are trying, of course, to accelerate various other products that we have and the usage of them. I think that the only product that we're not accelerating sales are the batteries and the single phase batteries that are a big drag on our margins related to the batteries made of Samsung (KS:005930) cells because here, we don't really have product that we can make before the second half of next year. So that will be, I would say, the only exception to this.

Operator: We'll go next to Julien Dumoulin-Smith with Jefferies.

Julien Dumoulin-Smith: Appreciate the time. May I can go back to where some of the others were talking about gross margin and that recovery. Can you clarify what portion of U.S. inverters and optimizers are now qualifying for domestic content? And how is that impacting your view of the competitive landscape here, especially as you guys think about shipments in third quarter and fourth quarter. I heard your comments about Austin and reaching the run rate for 500 megawatts here, Florida ramping up. But how is that impacting your market share here and expectations here success which your competitors have already achieved reasonably high domestic content market share in the products that they're selling, as well as how does that impact your margin expectations and expansion expectations to the 23% in the next year?

Ronen Faier: So Julien, I'll start and if I'm not answering all of it, please help me by completing. But in general, we are already shipping domestic contact products right now. We started shipping those already in Q2. And actually, from now on, the majority of the product that will be sold in the United States, for all those that need actually domestic content, will be delivered here from products that we make here and we'll reach there. So we expect really not to see any kind of market share losses related to domestic content, given the fact that we believe that we'll be accelerating our full domestic content. Now we started in Q2, we're accelerating in Q3. This is, by the way, some of the cash investments that we're doing are related to this one and batteries that will come at the beginning of Q1. So we see a very negligible part of your question related again to gross margin and where it is going to meet -- to meet us and this is actually a good question because on one hand, making domestic hunting products is going to be more expensive, especially now until the supply chain is really, I would say, optimized. And that means that those expenses will be higher, given the fact that the benefit given to our customers by having a domestic content where they can actually get 10% higher ITC credit on the entire installation elements, including service and everything that goes through the next years by having us just increasing, I would say, not very significantly the cost of manufacturing here is something that we believe that we will recover some of these amounts and more in a way that it will at least won't be harming our gross margin. So, I hope that answered all of the elements of the question.

Operator: [Operator Instructions] We'll move next to Andrew Steinhardt with Canaccord.

Andrew Steinhardt: Just 2 quick ones. First, the recent news with SunPower (NASDAQ:SPWR) and the PM&M bankruptcy last month, I guess, just generally speaking, have installer bankruptcies slowed the clearing out of the sales channel. And then, I guess just a second question in a different direction here. Have the latest home batteries started to take any significant share from the Tesla (NASDAQ:TSLA) Powerwall in the U.S.?

Ronen Faier: So I'll start maybe with the first question and Zvi will answer the second one. In relation to the bankruptcies themselves, in general, we do not believe that bankruptcies of installers are significantly slowing or changing the market. At the end, the problem today in the U.S. market is that the demand is relatively lower. And usually, the installation companies are simply fulfilling this demand. We do see installers go out of business, of course, PM&M and of course SunPower are large ones and names that we know but we started to see bankruptcies starting before -- and that means that those remaining installers will continue to serve the demand that is there, that is not impacted by the bankruptcies. I do not expect to see maybe even it will be a little bit better given the fact that you'll see some economies of scale coming from these installers. So this may actually make them a little bit more healthy as time goes by. But in general, we do not see any impact or significant impact on the market. You may see maybe pinpoint areas where, if a company is going bankrupt, maybe some products are being fire sale from their inventory. But again, given the size, at least of our exposure which was only to PM&M which was not a very large one, we do not see a major impact here. Do you want to talk about...

Zvi Lando: On the second question, the fact that the share in batteries is growing, I think, is evident also in some of the third-party reports, it is spelled out in that way. And also when -- as we reported in the prepared remarks, growing our sell-through by -- around 55% from the first quarter to the second quarter is a higher growth rate of the market. I can say for sure, at the expense of who are -- is the share gain from a geographical point of view, we pointed out that the state at which we've seen the highest growth are Puerto Rico and California. So that helps realize where the share gains are coming from. But I think it's across the board. And for the reasons that I mentioned before, the DC coupled configuration with the module-level power electronics is beneficial from an efficiency and power generation point of view which is important also in on-grid applications but even more in backup applications and also our battery has a very positive reputation for ease of installation and commissioning time and that is another element behind the share gains, we believe.

Operator: Next question comes from -- we'll return to Andrew Percoco with Morgan Stanley.

Andrew Percoco: I just want to come back to the margin question. I'm not sure I heard the answer to it but is that 23% gross margin by the second quarter of next year, is that inclusive of 45x? And if it is, that would be like materially lower than the 30% to 32% margin expectation and what you guys have characterized for your expectation in a normalized environment earlier this year. So if you could just provide some clarification on that, that would be helpful.

Ronen Faier: Yes. Of course, Andrew and thanks for the question. And sorry, Kashy, for not answering before as well. So, thank you Andrew for this. Actually, yes, first of all, the 23% is including the IRA benefit and the 45x benefit. However, just to clarify that when we were talking about the 30% to 32%, this was on a normalized revenue of $600 million to $650 million. And as we've mentioned all along, since we have a relatively large portion of $100 million to $120 million, that is almost no almost fixed item within our COGS related to the past warranty that we need to serve, the departments that we have. Actually, the bigger revenues are this percentage of these expenses are going down. So we do believe that, first of all, we will reach eventually to the $600 million to $650 million, not maybe in the second quarter but we will reach there because we believe that the market will grow -- and we are expecting this to happen. And once this will happen, we will be, as said, in 30% to 32%, we are not expecting to see a change in this.

Operator: We'll return next to Austin Moeller with Canaccord.

Austin Moeller: So my first question here, what do you do as being the key near-term catalyst for acceleration in Europe residential demand given rooftop solar is mainly cash business there?

Ronen Faier: Austin, sorry, we couldn't hear you well. Can you repeat the question?

Austin Moeller: Sure. Can you hear me now?

Ronen Faier: Yes, we do.

Austin Moeller: What do you view as being the key near-term catalyst for acceleration in residential Europe demand given rooftop solar is mainly a cash business there?

Ronen Faier: So first of all, I must say that I'm not sure if there is a very immediate catalyst to this growth and this is part of the assumption that we have at least for Q3 and Q4 not to see a major increase. But the problem with Europe is always the fact that this is a combination of various countries and several countries with different behavior. I think that the main catalyst for not growing actually right now is the fact that the Dutch market that used to be one of the largest market is now becoming very small, given the, I would call it, opposition and media coming from the utility companies there as well as the inclarity from the government policy around solar; so that's one thing. And I think, by the way, this is bigger than cash or anything else because if you do not have a clarity when you build the system that you will be able to sell electricity to the utility, why would you put the system no matter how much of what is interest rate or the cost of alternative investment is there? When it comes to the other countries, we believe that the catalyst for growth after maybe the next quarter or so is the fact that we still see in Europe relatively low electricity prices compared to what we've seen in the past. And during the midst of the war between Ukraine and Russia, electricity prices actually skyrocketed in Europe, they went down quite significantly at the beginning of this year, reaching in the second quarter to really almost historically low prices or at least history -- near history as we know it. And we do not expect these electricity prices to continue in prevailing the market, given changes that may happen in LNG prices as well as investments that are needed in utility. And when you are looking at the market in Europe, I would say that usually, you will see policy, electricity prices as the main catalyst -- sorry, in interest rates as the main catalyst I think that policy in most places will be relatively supporting or at least not negatively supporting once you are dealing with storage. Second is that electricity prices are expected to continue and move up and interest rates are expected and already, by the way, started to be reduced in Europe. The CEB just reduced the interest rates in about 1.5 months ago and more reduction is expected. So we think that this will eventually push it up but again, not in our assumptions in Q3 or Q4.

Zvi Lando: And maybe add to Ronen's comments, just 2 additional comments. The element of increased electricity usage -- the trend towards heat pumps and EVs in Europe is there. It's not at the rate that it was and maybe not at the rate that was expected but it is still there. And with that comes the complexity in grid management and that you definitely see more and more regions and countries in Europe that are moving to all kinds of more complex rate structures and varying great. And we see this every time we release a feature like maximizing sales consumption or negative rate optimization or other such features that you get thousands of registrations within a short period because there's a wide variation of complex rate structures across Europe and that will only increase and that is pushing people towards controlling their own destiny as well. And all of that said, is on the residential side, the commercial side in Europe has an additional driver to everything that we said before which is decarbonization and ESG which is still high on the agenda on the regulatory and political agenda in Europe. And with that, is the expectation that the commercial market will at some point, resume faster growth.

Operator: We'll turn next to Kashy Harrison with Piper Sandler.

Kashy Harrison: So my follow-up is on the sell-through. I think you flagged $520 million of sell-through in 2Q. Can you give us a sense of the geographic mix? And then how much do you expect to drain the channel in 3Q? I think you said $275 million in 2Q? Just trying to think about that number in 3Q as well.

Zvi Lando: Yes, I guess, we're just putting up the notes to answer the question on the sell-through. I think it was probably on the remaining that is not international markets which was the $55 million or so out of the $520 million. The remaining is probably about 60%, 40% towards Europe, I think, from a percentage point of view. So I think it's about 60% of that was Europe and 40% was U.S. roughly. In terms of inventory clearing in the third quarter, we expect it to be maybe flat, maybe a little bit lower in that type of range as it was in the second quarter.

Operator: With no other questions holding. I will now turn the program back over to Zvi Lando for any additional or closing remarks.

Zvi Lando: Thank you, Jessie. And I just wanted to thank everybody for joining us on our call today and wishing everyone a good evening. Thank you.

Operator: Thank you. That does conclude today's program. We thank you for your participation. You may disconnect at this time.

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Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
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