Hello and welcome to the SolarEdge conference call for the fourth quarter and year ended December 31, 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 JB Lowe, Head of Investor Relations for SolarEdge. Please begin.

Thank you and good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year ended December 31, 2023, as well as the company's outlook for the first 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 fourth quarter and full year ended December 31st, 2023. Ronen will then review the financial results for the fourth quarter and full year, followed by the company's outlook for the first 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 US 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 US GAAP. Listeners who do not have a copy of the quarter ended December 31, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now, I'll turn the call over to Zvi.

Thank you JB. Good afternoon and thank you all for joining us on our conference call today. Starting with highlights of our fourth quarter results, we concluded the quarter with approximately $316 million in revenue. Revenues from our solar business were approximately $282 million, while revenues from our non-solar businesses were approximately $33 million. This quarter, we shipped 2.2 million power optimizers and 74,000 inverters. This quarter, we also shipped 133 megawatt hours of batteries. As reflected in our fourth quarter results and in the first quarter guidance released today, we continue to face challenges from general market dynamics as well as the inventory levels of our products in the channels due to the abrupt slowdown in demand in the second half of 2023. That said, we under-shipped end market demand by approximately $200 million during the fourth quarter. As we did on our last earning call, we will share details of fourth quarter sell-through data in several of our major regions and end markets and provide an update on our outlook for the normalization of inventory levels and return to revenue growth. Starting in Europe, following the unprecedented surge in demand for solar and storage products seen in 2022 and early 2023, the recent combination of increased product availability and an unforeseen tapering of demand has led to elevated inventory levels across Europe. As it relates to demand across our residential products, sell-through on a dollar basis in Europe in the fourth quarter was down approximately 35% quarter-over-quarter. Sell-through of our residential inverters and optimizers was down 39%, while sell-through of our residential batteries was down 16%. This decline from the third quarter to the fourth quarter is more pronounced than the 10% to 15% seasonal decline we typically see in Europe in the fourth quarter, largely due to…

Thank you, Zvi, and good afternoon, everyone. The market situation, which resulted in lower revenue levels in the fourth quarter and in the next quarter creates various anomalies in our financials, which I would address today. For a full comparison between our financial results for the quarter and the same quarter last year, please refer to the press release issued today and to the supplemental materials posted in our Investor Relations section on our website. Total revenue for the fourth quarter were $316 million. Revenues from our solar segment, which includes the sales of batteries were $282.4 million. Solar revenues from the United States this quarter were $112.8 million, representing 40% of our solar revenues. Solar revenues from Europe were $120.5 million representing 43% of our solar revenues. Rest of the world, solar revenues were $49.1 million, representing 17% of our total solar revenues. On a megawatt basis, we shipped 283 megawatts to the United States, to 305 megawatts to Europe and 283 megawatts to the rest of the world for just over 900 megawatts of total shipments. 61% of the megawatt shipments this quarter were commercial products with the remaining 39% residential. In the fourth quarter, we shipped 133-megawatt hour of our residential and commercial batteries, with the majority shipped to Europe. From a product perspective and as a result of the high 3-phase channel inventory in the German-speaking countries, this quarter, our shipment was heavily skewed to single-phase batteries that are manufactured using the Samsung sales and that carry significant lower margins. In the fourth quarter, due to inventory imbalances in the distribution channels, we shipped higher portion of optimizers to inverters. As a result, ASP per watt this quarter, excluding battery revenues, was $0.236 a 44% increase from $0.164 in the last quarter, while the typical ratio…

[Operator Instructions] Our first question comes from Andrew Percoco with Morgan Stanley.

Great. Thanks so much for taking my question, and good evening guys. So maybe just kind of starting out on the margins here. Apologies if I missed all the numbers, but I think you mentioned about 970 basis points or so of impact from volume-driven price discounts and some battery mix shift. Can you maybe just kind of reiterate or go over those numbers again in terms of how much you expect to come back in the first quarter and then maybe the cadence beyond the first quarter in terms of the back half of the year where you expect to get and how you get there? Thank you.

Sure, and thanks for the question. So first of all, to explain a little bit, again, the term of the direct gross margins and then what are the impact. In general, there is a price that we charge our customers and this price has not changed dramatically in the first quarter, as we mentioned before, other than batteries where we started to increase costs, as previously mentioned. The second part, of course, is the cost that we pay to our contract manufacturers. And this is also, by the way, something that's relatively fixed, given the cost of bill of material and manufacturing costs with our contract manufacturers. So when we look at the first level of this direct gross margin, the only difference that we have when you have a certain level of revenues is what is the amount of customers that has -- or at the size of the customer that have different volume discounts, that's number one. And number two, which was actually a little bit more important and influential this quarter is, what is the mix of our products. So the first thing I would say that with -- of these 970 basis points loss of gross margin compared to the previous quarter, a lot of it is actually related to the fact that our portion of single phase batteries was much higher than in the previous quarters. Now we need to remember that these are batteries that we manufacture based on cells that we acquired from Samsung. It's an agreement that we signed at the very end of 2021. At that time, by the way, NMC battery prices skyrocketed and as a result of this and since this was related also to the raw materials index during the war in Ukraine in 2022, those prices went…

Great. That's super helpful. And then maybe just as one follow-up question on demand. It sounds like you’re still bullish on European demand acceleration beyond the first quarter, both for residential and commercial, but still somewhat more muted and negative on the US outlook for 2024. Can you maybe just help us bridge the gap there? What's driving the demand in Europe? Is it just purely power price driven? Is it energy security driven? Because it seems like the macro environment is somewhat similar in both geographies. I'm just curious what gives you more confidence in the medium-term outlook in Europe. Thank you.

Yeah, thanks. We tried specifically actually to break it down to four segments if you will. Residential in Europe, commercial in Europe and residential in the US and commercial in the US. So in Europe, I don't know if the word is bullish, but we believe that there will be growth from the rates that we were in the fourth quarter and in the first quarter, primarily based on seasonality and historical breakdown of installations and revenue in Europe between the various quarters. And that, combined with some of the regulatory clarifications that we mentioned, both of these elements together in our mind, translate to the fact that the first quarter and on, there will be a gradual improvement in installation rates and clearing of inventory and eventually of revenue in Europe. And this is true for both segments, residential and commercial. Overall, the expectation is for stronger growth in commercial than in residential related to market dynamics and some of the enterprise push for decarbonization. That relates to Europe. And in the US, we see a very different pattern between residential and commercial. And that we've been seeing already. So as I mentioned, commercial from an installation rate and sell-through point of view is continuing to grow. It grew significantly in the fourth quarter compared to the third quarter, and we are, at record, historical levels from that perspective in terms of sell-through by our distributors, there's still time until the inventory clears and that begins to translate into revenue for us. But we are relatively optimistic about continued growth in the commercial market in the US again, a lot of it is driven by enterprise, module prices and at some point, also availability of IRA product that I mentioned, we will begin to deliver in Q2 and deliver in volumes in Q3. So that is the source of why we expect a positive trajectory on C&I in the US. And the residential in the US is the segment where we are less optimistic about growth, at least in the short term, and expect the market to continue to be a bit slow with gradual trends of people realizing how to sell and operate within a NEM 3.0 environment in California. And we see this slow growth trajectory in that regard. And availability of IRA products later in the year and especially installers and TPOs learning how to construct their business that they can benefit from the IRA, and that should help push the market forward a bit in the later part of the year. But this segment out of the three is the one that we see as more stagnant. In Europe, we see gradual growth in resi and commercial. And in the US, we expect continued growth on commercial. All of this, again, from the perspective of installation rates and point of sale that will eventually clear the inventory and result in our revenues as well with our expectations.

Thank you.

Thank you. Our next question comes from Philip Shen with ROTH MKM.

Hi, everyone. Thanks for taking my questions. I wanted to explore your capital plan a bit more. I think you guys were talking about the potential for a buyback. And I think your cash and net debt is roughly $600-plus million. It seems like you may have burned $200-ish million in Q4 if the macro remains challenged through the first half of this year. Could you guys be in a situation where you need to raise capital? Can you talk about your plan to manage the liquidity dynamics in general and how much cash you would like to maintain on balance sheet? Thanks.

Sure. So in general, cash flow for operation this quarter was, as mentioned, about $140 million and as usual, you also have a little bit of capital expenditures. When we look into the next year, let's first of all try to understand the cash dynamics and then I'll discuss the capital allocations. We're basically going into a few quarters where quarterly revenues will be lower than the cash -- sorry, the AR balance that we have right now, which is approximately $700 million of AR balances, which we will collect. We collect them slower than we want, given the fact that, again, some of our customers are seeing difficulties, but we're confident in our ability to collect those. The second thing that will happen is of course the fact that since we're sitting on such a large inventory levels, these are products of course that are not expected to be replaced over the very near future. For example, in our optimizers, we've just started our fourth generation selling of this product this year. These are products that usually do not have shelf life. And therefore, we expect to see that a lot of our revenues in 2024 will be continued to be sold from the inventory that we currently carry, where the manufacturing that we will do will come mostly in the US, for IRA purposes. We want, of course, to capitalize on these benefits and second is in other places because we want to maintain our manufacturing capability for the next year. By this, the result should be is that 2024 is going to be most likely a year in which we are going to generate a substantial amount of cash, at least I would say from the second quarter once all of these trends will start to reverse.…

Ronen, thanks for all that color. Shifting over to the demand outlook in Q4, it was Q4 -- sorry, $500 million in Q4 and now you're saying back half $600 million to $650 million. Can you talk about the year-over-year growth? It shouldn't really be seasonal because we're really comparing Q4 ‘24 to Q4 ‘23. And then also when you get to that level of revenue again, what do you expect the new gross margin outlook to be on that $625 million at midpoint, excluding IRA and also with IRA? Thanks.

So first of all, I'll start from describing the, I would call it revenue environment between the two Q4s, and then I'll answer the margin. As we mentioned in the precursor remarks, we saw that the Q4 sell-out from or sell-through from our channels being approximately $500 million, which by the way, based on our estimates, was actually even below the installation rates that happened throughout ‘24. We do understand that -- sorry, Q4 ’23. We do understand that two things are happening, especially when we look into the beginning of the year. The first thing is that we saw a decline in the installation rates in the fourth quarter of 2023 towards the end of the year, which is something that is usually happening because of the overall holiday season and the fact that actually winter in Europe started relatively early this year and was relatively strong. And therefore, our belief is that throughout the year, first of all, the fact that you will see seasonality in Europe going back at least in the second and third quarter is something that we expect to increase the underlying demand that we saw compared to Q4. And since we're under-shipping to the channel at this point of time, we will simply have to eventually adjust into these, I would call it installation levels that we see. And this is why if we saw $500 million of sell-through and a higher installation, when we look at the markets one by one, we believe that we'll see at least if not higher installation rates at the end of 2024. And by the way, this is not including new products that Zvi mentioned that are not baked into our plan, such as the commercial batteries, such as the trackers, such as the 330 kilowatt…

Thank you, our next question comes from Brian Lee with Goldman Sachs. Hello, Mr. Lee, your line is open.

Hey, guys. Sorry I was on mute. Thanks for taking the questions. Ronan, I apologize. I'm going to kind of beat the dead horse a little bit here, but a follow-up to Phil's question. So if we bridge, I know you gave a lot more gross margin clarity than you typically do and it sounds like you'll do that for the next couple quarters, but it sounds like there's 900 plus basis points -- direct to 900 basis points plus of some of the other COGS. So given where you're guiding to for Q1, basically like flattish gross margin, you've got like 1800 basis points you've spoken to. What is the remaining bridge to get to 30% to 32%? I guess that's where I'm struggling with because there's -- you've identified about 20 percentage points. Where does the other 1,000 basis points come from? And then, just a follow-up to that would be, previously you talked about 500 basis points included for IRA credits That was before the 45X clarity on optimizers being applicable for $0.11 came out in December. So has your view changed there, or did you always embed $0.11 as your base case view, just trying to understand all the puts and takes, but definitely the bridge to the final 30% to 32%. Thanks.

Okay. I'll try at least, Brian. So I'll start from the second part, which is easy. As we said all along, our assumption was that we will get the $0.11 when it comes to optimizers. And therefore, our 500 basis points is already assuming that we will reach the capacity of inverters that we want to reach, which is 500 megawatts quarter, and certain level of optimizers, which is by the way approximately a million optimizers, a quarter that we expect to have these run rates by the end of Q3. So this is something that was already baked in the same projection that we gave. Now, actually when it comes to the bridge to the 30% to 32%, the two things that you will see as we believe is that first of all, on the product gross margin, you will see very modest increase after Q1. Again, Q1 is already going to recover a lot of these 930 basis points that we lost. And this is because of the more balanced mix of products that you will see. So actually on the direct gross margin, you do not expect a lot. The thing that you should expect a lot is actually the OCOGS part. And I will do it very simple. Assuming that this number will be just by means of example, $100 million in Q1 divided by $200 million of revenues, this is 50% gross margin impact. Just imagine that now we're moving into $600 million revenue. You need to take this 50% and divide it by three. And here comes approximately 33% of gross margins that are just added. So that's the whole story. And to make it even more, I think, easy to explain is that we've built our cost structure to support the company that is relatively diverse from a segment point of view, product point of view, serving complicated segments such as C&I, for example. And that means that we have a relatively heavier cost associated with this kind of a company that we've built. Once you're reducing revenues, Even if you are reducing some of these costs, unless you reduce them exactly by the same level that you reduce your revenues, you see the P&L impact. And when you're working on such a small revenue basis as you see right now, the impact of gross margin is simply huge. So again, most of the bridge economies of scale even without changing costs. On our fixed cost, most of the bridge going to 30%, 32% will come simply economies of scale.

Appreciate that. Okay, makes sense. One more from me and I'll pass it on. And then this one's maybe a little bit nitpicking but I think last quarter you said you were talking about like a $600 million to $700 million revenue quarterly view at the end of this year kind of when you normalize. Now you're saying $600 million to $650 million. Is there something embedded in your updated view here in three months, share loss pricing? It just seems like something down ticked a bit on the number and a range that may not have the most precision to begin with. So just trying to understand one, has something changed, and two, how much, I guess, confidence visibility on the $600 million to $650 million not may be changing again going forward.

Okay, so I think that when we said it's $600 million to $700 million, this is, if you remember, based on sell-through level that we saw in Q3, and we assumed that this is the level. Throughout this quarter, we did a lot of work going deeper into our channels to understand what's happening there, looking at installation rates, dissecting almost every country by the various trends that we see there, and talking, by the way, to a lot of the installers to actually understand exactly what they see as well, which was one of the things that we did a little bit less prior to this period. And we simply were able to get the things a little bit more accurate.

Understood. All right. I'll pass it on. Thanks, guys.

Thank you.

Thank you. Our next call -- our next question comes from Kashy Harrison with Piper Sandler.

Hi, good afternoon, everyone. Thanks for taking the questions. So just first one for me. Can you provide us with a, maybe a detailed walk on how we get from $500 million of sell-through in 4Q '23 to the $600 million to $650 million that you're talking about by the middle of the year? And then can you also give us a sense of what the total dollar of product that you're attempting to destock from the channel is with as much detail as you can, if possible? And I have a follow-up.

So Kashy, first of all, the move of $500 million, [$600 million] (ph) towards the second half of the year is mostly related to seasonality impacts that we see. And again, in some cases, a little bit of analysis of the market. So we went through and looked at how seasonality looked in Europe, by the way, prior to COVID and the war in Ukraine, you wouldn't believe it, but there were a little bit of a normal years. And when we looked at normal years, we usually saw an increase of about 17%, 20% from Q1 to Q2 and about 15% from Q2 to Q3. And by this, you simply see how the market is behaving. So that's the first thing that we did. Then we looked into the level that we see right now in Q4 and a little bit into January. What's happening in the Netherlands where we know that there was a little bit of a shift in the market. So we simply went one by one, and we looked to the United States and what are the levels that we see here, how the sell-through behaves. And we simply did it one by one. We added to this information coming from other sources. We have a software called Designer that allows installers to design systems with our homegrown product. We've looked at how many new designs were made in the past, how many of them were turned into real installations and what is the level that we see right now. So we took this into account. So we actually consolidated various sources of data, historical and current, in order to get to this point. I forgot the second part of your question. So please, a dollar of inventory that we expect to clear. So in that sense, as we mentioned before, when we see the sell-through of about $500 million in the fourth quarter, as we mentioned, based on this, we assume that there is about a quarter and half worth of excess inventory sitting in the channel. We believe that we'll clear as mentioned by Zvi, $200 million to $250 million in the first quarter. And from then, it's going to be gradually declining towards the end of the year. It's not going to be exactly linear, but it's going to decline towards the end of the year, we will still see a small amount in Q4. So that's basically our assumption.

Thank you for all that detail. Really appreciate it. And then my follow-up question. So OpEx, post the tough restructurings, it's declining to, I think, you said $115 million at midpoint, and that's down from 12% -- that's down about 12%, I think, from 3Q at $130 million. But if we look at the change in revenues, though, you're saying sell-through of $600 to $650 million, which is down maybe 34% from the [sell-in $990 million] (ph). And so I guess my question is, what's behind the reluctance to more aggressively attack the operating cost structure?

I think it's -- we use the $600 million to $650 million as an indicator of the trajectory. But we believe it's a transitional point and we are developing products and Ronen mentioned as well that even in that number of the $600 million to $650 million, we are not including products that we already released and will be generating revenue during 2024 albeit not with the dramatic impact on the overall number of 2024. So this is a transitionary point which we size the company for and are taking the actions in order to be able to grow past that in the midterm based on how we see the industry evolving and how we see our portfolio evolving in order to do this.

Fair enough. Thank you.

Thank you.

Thank you. Our next question comes from Mark Strouse with JPMorgan.

Yes, good afternoon. Thanks very much for taking our questions. So a lot of focus on near term, and I appreciate all the numbers. I wanted to go back to the risk, though, I think on the last call, you had talked about kind of trying to protect your ability to -- if the market rebounds quickly, you wanted to be in a position to meet that demand and not airship and some of the other things that we've dealt with over the last several years. The reduction in force, though, I mean, does that signal any kind of structural changes that you're looking out kind of over the medium term? And then also kind of as a follow-up, is there any detail that you can provide as far as the reduction in force the impact on resi versus C&I, US versus Europe, kind of by market, by geography, anything you can provide on the reduction in force? Thank you.

I think it correlates also to my answer to the previous question. Of course, the reduction in force was not uniform across the departments and the operations of the company. So we were very determined not to impact significantly our R&D capability to maintain strong presence in the regions and in terms of being close to the customers and being able to service them properly in a manufacturing infrastructure that we believe can meet the needs in the near future and be flexible to grow beyond that. So all of that was part of the assessment and the methodology that we implemented. And I would say even on even a more positive note on a net number, more R&D people are working today on new product development and did a year ago, when a big part of them were working on component replacements and adjusting other things related to supply chain constraint. So in that regard, actually, I think we're in a better situation today. We did, as mentioned, discontinue some projects in the area of e-mobility. We discontinued some other peripheral projects in the broader solar and energy market and are very, very concentrated on residential and commercial and having an offering of a complete solution from everything that has to do with generation, storage and consumption, everything from inverters, batteries. EV chargers, water heaters, et cetera. So that, we believe, is where we see the future and we're investing the resources.

Okay. I’ll take the rest offline. Thank you.

Thank you.

Thank you. Our next question comes from Colin Rusch with Oppenheimer.

Thanks so much guys. With the change in volumes and looking at your component sourcing, can you talk a little bit about any adjustments that we should be thinking about in terms of actual component costs and volume breaks going the other way on you guys as you take volumes down and how that might reverse as you get through the balance of this year and into next year?

So, first of all, Colin, I'll start by the fact that given the inventory levels that we see right now. A lot of the costs will not change this year because if you take the inventory levels and expected revenues, you'll see that we're pretty much covered for this year. And of course, we will continue to manufacture in the US to enjoy IRA and maintain other areas. So I don't expect a short-term situation here. When it comes to the components themselves, first of all, we have some strategic components and strategic component manufacturers with whom we have agreements. With all of them we discussed the terms of the agreement and how to move forward. I think that most of the discussion is more on timing of consumption of volumes rather than pricing right now because we thought also when component prices spiked during COVID. Usually, this will be more related to overall, I would say, global trends rather than the volumes that we're consuming yes or no. So I do not expect to see a lot of changes there. There is always, by the way, a little bit of a change to the cost per unit of manufacturing because the more units you manufacture usually, that goes down, but at least when it comes to the level that we see, what we try to do is to reduce manufacturing locations instead of maintaining many locations and reduce the volumes in each one of them. So this is something that is relatively also going to be staying flat. So no major changes are expected in the very near future.

Excellent. And then with your sales team, given suppressed levels of sales. Obviously, you, guys, have had a really effective sales team historically. Can you talk about any sort of retention metrics that you're having to engage in? Or are you giving folks a little bit bigger geographies to work with? How is that team changing shape and incentivized going forward?

Yeah. So -- I also -- in one of the previous questions, our global sales force was less impacted by the reduction in force because we wanted to keep the strong sales force that we have and the strong links to the customers that we have. And I think that, that by itself buys some level of royalty and motivation. Our sales force to a large extent, has been with us for a long time and is very experienced in the industry and very experienced with the company to understand that cycles take place and have optimism about the continuation of the cycle to the other side of it. And together with that, we are making sure that they are properly incentivized for the work that is maybe a bit more difficult now than in a bullish market. But I think we're happy with the level of engagement and motivation and optimism that we see across the sales force in the various geographies.

Thank you. Our next question comes from Christine Cho with Barclays. Q - Christine Cho Hi, thank you for squeezing me in. My first question, how do you determine how to undership every quarter? I think you mentioned that you're going to continue to undership through year-end, just less in the subsequent quarters. But why not just front load that and not undership? And then with the forecast that you discussed in your trajectory and revenue improvement, how do you factor in potential market share losses or gains and any pricing decreases that you might look to do as we move through the year?

Yeah. So the first part of the question is actually, it's more the customers determine that, and we determine that. And Ronen mentioned, because of the breadth of our product, even though we talk about a lot of inventory in the channel, there are various products that are still either in high demand or in some way short, and a lot of the revenue is driven from those. So we're not trying to push on to the customers' product that they have and don't need. We're responding to their needs, either in anticipation of something that's going to happen in the market or as their inventories decline for specific product lines. In our modeling and plans, we obviously have a lot of focus on share and believe that we're taking actions that will enable us to gain share. We did not factor anything dramatic in that regard into our assumptions when looking at the projected sell-through numbers that we gave.

Our next question comes from Julien Dumoulin-Smith with Bank of America.

Hey, this is Cameron Lochridge on for Julien. Can you, guys, hear me okay?

Yes, we do.

Awesome. So I just wanted to come back actually to the last question on pricing, kind of how you see that evolving, particularly in Europe with the inventory challenges that's taking place over there? Either from a competitive standpoint, how are you seeing competitors behave? And how does the pricing strategy evolve for you, guys, kind of as the year progresses in Europe?

So I'll start from what we see and then what it means for us. First of all, we do see an intense intensifying, I would say, pricing environment in Europe right now. The fact is that, as mentioned, everyone is trying to push their volumes to try to grab some share. And we do see that across the board, at least when it comes to Chinese string inverters prices are going down, sometimes a little bit more than we used to see in the past. Now the channels are starting to clear inventories, then prices can play a little bit of a part. When it comes to us, we will need to adjust prices along this year. And as we've mentioned, we expect to see prices going down across the board in, I would say, mid- to high single digit this year. Not all of it is going to be in the same continent or not on the same product, but in general. But the other side that still plays a very important part is actually the fact that what is the offering that is provided. Because today, the offering that we provide is considered to be a premium product comes from the software capabilities from the abilities to respond to dynamic charges. The fact that we can make a lot of changes to our software over the air, over time and change the product capabilities in relation to what we see in the market, our DC capital batteries. And therefore, we have certain benefits that allows us to continue to maintain our premium position. So we're not completely immune to price reductions that will happen in the market. At the same time, at least what we see right now is not something that necessitates a very big change in our pricing strategy.

Thank you. Our next question comes from Corinne Blanchard with Deutsche Bank.

Hey, good afternoon. Thank you for talking my question. Most of it have been already talked about, but maybe if you can try to talk a little bit more about the competition, especially in the US. We definitely have heard over the last six months increased competition coming from Tesla. There are some of your peer as well that have some contracts expiring, so that could give us with some advantage. So maybe if you can talk a little bit about the dynamic here in terms of competition in the US.

Yes, it's a competitive environment and always has been, we don't sense a big shift in the competitive environment in the US, at least not right now. We know that new products are coming in. And I'm sure there are good products coming. There are a good string inverters available already in the market. Today, the North American market had for many years now, understanding and tendency towards module-level electronics and all of the benefits of that and in terms of energy harvest, safety, et cetera. So we expect that, that will still be the main philosophy in the North American market. And so far, we don't see a strong shift in another direction. But that said, in Europe, there is a good offering of string inverters. And when elaborated before on the competitive environment, environment over there. So more competition is coming in, and it's becoming more challenging, but we're very comfortable with the quality of our offering and its differentiation.

Thank you. Our next question comes from Joseph Osha with Guggenheim Partners.

Hi there guys. Two questions. First, you've talked a lot about what you expect to happen in the US relative to Europe as year progress. So as you think about the $600 million and $650 million run rate, I'm wondering how we should think about that breaking down Europe versus the US and also perhaps commercial versus residential? Thank you.

Joe, can you please repeat the question?

Let's -- as we think about Q4 and the $600 million to $650 million you've talked about, how much of that do you think might be in Europe versus the US today? And how do you think that breakdown might look in terms of residential versus commercial market?

Yeah. I think. We -- resi versus commercial, as we said, we anticipate commercial to grow at a higher rate than residential. So we've typically been on a megawatt basis in recent quarters, roughly 50-50 between the two. We expect that looking at the trajectory into 2024 that the ratio on a megawatt basis, which is very different, of course, than the revenue basis will lean a bit more towards commercial. In terms of the ratio of US to Europe, so as I mentioned, we expect mild growth in the two segments in Europe on residential and commercial. And we expect stronger growth in North American commercial and some level of stagnation in North America residential. So overall, I think relative to Q4, we do expect Europe to be a bigger portion of our sell-through and eventually revenue going into '24. And closer to how it was in the majority of '23, where Europe was a much higher portion than North America. So Q4 was a bit different. We think that going into continuation of the year, the ratio of Europe will increase relative to the ratio of the US and the ratio of commercial will increase slightly compared to residential.

Thank you. Our next question comes from Tristan Richardson with Scotiabank.

Hey, good evening guys. Appreciate all the commentary. A lot has been asked and answered. But maybe just curious, dialing into Europe a little bit. Can you talk about maybe where the Netherlands has been for you historically as a component of Europe? And then where you see that going in the $600 million to $650 million, particularly as we are sort of in limbo in terms of what happens long term from a policy perspective.

Yes. The Netherlands is -- I think, it's well known that it was a very strong market for us historically. Actually, just as a reference point, I think we have an installed base of more than 800,000 -- more than 800,000 residential homes in the Netherlands that have a storage system on them. And we believe that someday and maybe that day after the -- after the ruling of last week is a bit further out there than we thought originally, many of these 800,000 homes will have a SolarEdge battery added to the SolarEdge solar system that already exists. So the Netherlands is a very significant stronghold for us and has been a good market for us and kind of on par to Germany, in terms of the size of business for us, although very different in scale and size of the market. We mentioned -- I mentioned in the prepared remarks, the -- compared to the baseline that existed in 2022, during the surge in demand, the Netherlands for us, increased installation rates by about 50% in the early part of 2023 and then declined from there, 50% to be about, I think, 20% or 30% below the 2022 run rate -- is the installation run rate in the Netherlands right now. And it's -- as I said, earlier, we believe that the ruling which was not to overturn net metering right now, is overall part, but it doesn't really give very strong long-term clarity to the market. So I think people will go from saying, "I don't want solar" or "you maybe don't need solar because I'm not going to get metering" to saying, "okay, I'll have net metering for the near future." It maybe makes sense to put solar, but it's hard to say if this really is going to drive a surge in the market. We think it's going to improve but maybe not lead to the levels of 2022 and definitely not to the level of 2023. So it's still a strong and good market, and we also see already an uptick in battery adoption, but it is lower than what it used to be in 2022 for us and definitely at the peak of 2023.

Thank you. Our next question comes from Ameet Thakkar with BMO Capital Markets.

Hi, good evening. Just one question for me. I just wanted to come back to, I guess, the comments earlier on the kind of expectation of free cash flow for entering 2024. I think the expectation was that 4Q was going to be positive free cash flow. And I was just kind of wondering if you could kind of maybe pick a part like was it an expected increase in finished goods inventory or changes in payment terms on the AR balance that caused you, guys, to kind of deviate from that and kind of push that out a little bit further in 2024 with respect to free cash flow generation? Thanks.

Sure. So I think it's the combination of the two. I'll start by the fact that we needed to extend payment terms. Sometimes we want it. Sometimes we had to extend the payment terms to our customers. We do understand that some of our customers are -- do experience a lot of, I would call it, cash difficulties right now because of the fact that if sell-through is lower, they also collect a little bit lower. The fact that we work, by the way, with large customers give us a little bit more confidence in the ability to collect those. But I would say that sometimes, we wanted sometimes we were forced to collect a little bit slower. One interesting phenomenon is that some customers, it's end of the year, they need to present their financials. They simply chose to pay instead of the 30th of December. On the third of January, we have those as well. So that was the first part. The second part was, again, the inventory buildup. We had about $200 million of inventory buildup that happened. We -- in addition, of course, to the inventory buildup that we saw in Q -- in Q4, we usually pay to our vendors in average within 60 days. So not only that we paid for the inventory buildup that happened in Q4, we did quite a lot for some of the buildup that happened in Q3 into the sales of Q4. They did not materialize eventually. So the combination of the two was the end result of what we saw. And I think that it's mostly the very abrupt stop of revenues -- or sorry, reduction in revenues, coupled with the customers, I would call it, inability to pay when needed.

Thank you. Our next question comes from Austin Moeller with Canaccord.

Hi, good evening. My first question here, what is the attach rate that you're currently seeing for home batteries with inverters in the US versus in Europe?

So it obviously varies significantly by country. So Germany attach rates remain in the 80% to 90%. While, in Italy, I'm working off of memory here. So -- but it's in the range of 40% to 50%, 50%. And then as I said before, in the Netherlands, it's up 10%. If we take these as representative markets in the US -- in Europe, excuse me. In the US, it also varies, of course, by market. So in California, overall attach rates right now is about 40% to 50%. But that splits, of course, between some of the remaining NEM 2.0 installations. They don't necessarily take a battery and the NEM 3.0 that do take a batteries. We mentioned that the sell-through of batteries in the US was up 40-something percent in the fourth quarter. So you can assume that the majority of this is going to California and the attach rate is gradually increasing. In the other states in the US, it's fairly low. I would, again, off memory, it's probably in the range of between 10% to 15% or so.

Thank you. Our next question comes from Vikram Bagri with Citi.

Good afternoon everyone. I apologize, but I wanted to ask one more question about the long-term revenue outlook. Zvi, I think, you mentioned the outlook assumes some market gains. I was wondering if you can highlight the markets where you see market share in opportunity and what the strategy will be to capture that market share? And it doesn't sound like the second half assumes any inventory restocking, but I wanted to clarify, fourth quarter sort of the outlook $600 million to $650 million does not assume any inventory restocking in any way? And then I have a follow-up.

On the first question, I think I discussed there is the topic of new segments that we have entered that we previously didn't serve at all. And obviously, there, every shipment is a market share gain. And the ground amount now that we're shipping 300-kilowatt inverters. We're gaining market share, and the same is in trackers. And same elsewhere from a revenue perspective, the scale is not huge, and we also didn't include it in the assumptions. In the core markets, share gains are obviously much more incremental. We didn't -- we don't give specific numbers or expectations or market. We have plans. We didn't bake them into the assumptions on the sell-through trajectory, leading on into revenue trajectory. Vikram, can you clarify again the second question just to make sure that we understand it correctly.

I was asking the outlook for fourth quarter, $600 million to $650 million does not assume any inventory restocking in any way. I believe it does not, but I wanted to clarify.

It assumes that the distribution channel will be by then at the balanced inventory level that they typically want to maintain that historically is somewhere in the range of 60 to 90 days of inventory is what our experience is that most distributors and channels want to hold. So that is kind of what we modeled again a bit variations on countries and regions and products, if that is what -- if that helps with the question.

Thank you. We have no further questions at this time. I now return the call of the conference back over to the presenters.

Okay. Just wanted to thank everyone for joining us on the call today, and have a good evening. Thank you.

This concludes today's teleconference. You may now disconnect your lines. Thank you for participating.