Hello and welcome to the SolarEdge Conference Call for the Third Quarter ended September 30, 2024. This call is being webcast live on the company's website at www.solaredge.com in the Investors Section on the Event Calendar page. This call is 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.

Thank you and good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2024, as well as the company's outlook for the fourth quarter of 2024. With me today are Ronen Faier, Interim Chief Executive Officer; and Ariel Porat, Chief Financial Officer. Ronen will begin with a brief review of the results for the third quarter ended September 30, 2024. Ariel will review the financial results for the third quarter followed by the company's outlook for the fourth 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 presented in this presentation because we believe that they provide investors with the 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 September 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 Ronen.

Thank you, J.B. and thank you for joining our call. As you're well aware, SolarEdge is going through a transition. 18 months ago, the market and the company were on an accelerating growth trajectory driven by record demand and outlook. Market dynamics change abruptly, leading to high inventory levels, both in the channels at SolarEdge and the recovery from this situation has been longer than we anticipated. This current situation is challenging and requires us to delve into every aspect of our business and change the trajectory that the company has been trending over the past five quarters. While going through the transition period, we do not lose sight of the many strengths that SolarEdge has to offer to the renewable energy market nor of the opportunities that lay ahead of us. SolarEdge strengths are many. Our technology which includes cutting hedge homegrown software capabilities and cybersecurity positions us well to lead the rapidly changing energy market. This leadership requires relentless innovation in highly sophisticated technologies in order to provide the most advanced, robust and cost-efficient solutions. In addition, our DC optimized architecture is ideally suited for all segments of the solar market from residential to small-scale utility due to its scalability. Lastly, our last installed base represents a significant opportunity for additional revenues from interior upgrades to addition of storage EV chargers, integration with heat pumps and software-based services. Enabling empowering all of these strengths is our people. We have an extremely dedicated and talented team of innovative thinkers that are passionate about shaping the renewable energy landscape through a proven track record of technological disruption. We believe our opportunities are numerous. The PV market is still in its early stages with relatively low rates of penetration in many areas. As demand for energy increases, more sophisticated technological products…

Thank you very much, Ronen and good afternoon, everyone. This quarter, my first, as the CFO of SolarEdge, was characterized by a thorough analysis of the company's financial situation and its assets and liabilities in relation to our business outlook. As Ronen mentioned, the first of our three priorities its financial stability. Specifically, our top objective within this priority is to work towards positive free cash flow generation and profitable growth. I am extremely pleased that we were able to announce yesterday our first sale of 45x advanced manufacturing production tax credits in consideration for approximately $40 million net of discounts and fees. The liquidity provided by the sales of these credits will enhance our cash position, further strengthening our balance sheet. On the side of expenses, we have and will continue to focus on reducing costs and reach our non-GAAP OpEx target of $100 million to $105 million per quarter by the beginning of 2025 and put ourselves on a path to continue to reduce expenses even further. Before reviewing the results of the third quarter, I would like to address the impairment and write-downs of various assets that significantly impacted our financials this quarter. This was the result of a thorough analysis of the current economic value of our assets as required by GAAP, due to the significant difference between the book value of our assets and the company's market cap due to the sustained decline in our stock price. The result of this review was an impairment and write-down in the amount of $1.03 billion which impacted many line items of the company's P&L and balance sheet. I will start with the inventory. This quarter, we wrote down $612 million of inventory, of which $536 million is related to our solar business and $76 million is related…

[Operator Instructions] We will take our first question from Brian Lee with Goldman Sachs.

First off, on the new price reductions and the asset revaluation, it seems like that's a little bit more steep than we had been anticipating. So I know, Ronen, you had talked about last quarter, you can exceed kind of, I think it was $550 million in revenue when inventory normalizes by 3Q '25. That was the view last quarter. Given the pricing and just sort of the promotional activity, sell-through obviously is much lower than that right now. Can you speak to kind of what the cadence is of this new level and whether that $550 million is still in play for later 2025?

So I think that you know when, especially today after the results of the actions last night, I think that we understand that we are living now in a little bit of more of a volatile world. If you look at the U.S., the U.S. for us was good in Q3, we expect it, by the way, to continue and be good. But with the recent developments here in the United States, it's very hard to see and to understand what will be the, the market's looking like in the next year. So here, I would say that while we did see an improvement, I think that this has become a little bit unclear. When it comes to Europe, Europe is definitely, as we see today is continue to decline. It is not actually strengthening. And we believe that we may see this decline continuing into 2025. And as such, for us to commit to a number, given the fact that volumes may change, political stances are taking a very large, I would call it, impact on the market as it's going to look in the near term. And the fact that, as you mentioned, we did increase our prices but also, by the way, launched some of the promotions that we did throughout the last quarter. I think that will be very hard for us to commit to such a number and the timing of this amount. At the same time, we do believe that the actions that we've taken will allow us to continue and especially, as we said, towards the second quarter of '25 to increase the revenues again because we are helping with those prices, the channels to be clear, slightly quicker than even anticipated. We do believe and we also got feedback from the last price reductions and promotions from our distributors that they believe that this is something that can improve share. But again, the extent and timing, I think, today is hard to predict.

Maybe just a quick follow-up and I'll pass it on. So just based on your comments, it sounds like you're inferring that obviously, the Q4 guide is down for revenue but it sounds like Q1 would be down again and then Q2 is when it starts to pick back up sequentially. If that's the right cadence to expect, can you kind of speak to -- you undershipped by about close to $200 million this quarter. What's the expectations over the next few quarters? And then on market share specifically, it sounds like you're acknowledging there's some share last year. How much of that is also playing into sort of the declines you're seeing over the next few quarters? And are you expecting on the 2Q pickup that's when you start to see share gains? Is that kind of the base case view?

So first of all, Brian, actually, we do not expect Q1 to be necessarily lower than Q4. What we see in Q4 is, first of all, the impact of the fact that we have reduced our prices while we will not see an immediate impact on the quantities that are going to be sold. You would like to assume that there is some kind of elasticity of demand to the pricing and usually lower pricing should bring the demand up. But Q4 is usually characterized with, first of all, seasonality impact of going into winter, also for many of our distributors, this is the time for their -- being a private company, this is the time that they released their annual reports in Europe, these are reports that are made public even for private companies sometimes. And that means that they would like to reduce inventories. So therefore, I would say that Q4, for us, I believe, is similizing a little bit of a lower point because we are taken the toll of the price decreases but we don't see any of the impact. I would also add to this, by the way, that we took a little bit of assumptions here about, again, what would be also the amount and composition of inventories that some of the distributors would like to hold at the end of the year. So we believe that we should see stabilization, if not even increase in Q1, simply because we believe that there will be some impact to the price reductions that we did in the past. Now moving forward to where we are on share while in the U.S., it's relatively easy, you have Wood McKinsey [ph] and we need to look at their charts and I think that we can see what's…

We will take our next question from Colin Rusch with Oppenheimer.

As you target getting back to breakeven on a cash flow basis, can you give us some of the assumptions that you're working with from a megawatt basis, OpEx and gross margin perspective, just to give us a sense of -- or magnitude of how much business you'll be doing and what that margin profile looks like?

So while we cannot give the actual percentages because simply, they're changing very much based on the amounts that we're selling in each and every market, the composition of each and every market products between those inventories that we haven't done. And also, by the way, again, the gross margin that's going to be determined from those ones because, for example, if you sell batteries, this is much lower gross margins than inverters. It's not something that we do but I'll try to give you at least a direction around it. Far and foremost, the most important thing is that when you look today and if you'd say that roughly 50% of our business is coming from non-U.S. market, that means that this is an inventory that already exists. So by taking the sales that we have or revenue that we have every quarter in the non-U.S. market, just take the gross margin and assume that it comes from inventory. And here, you have the first source of our cash intake. That's, by the way, in the last quarter, we said that we approximately consumed $95 million of inventory. So as you saw that operating expenses were lower, this by itself is covering. And if you saw that -- or if you see in our guidance that next quarter margin will be approximately zero, even at zero margin, you're plus/minus [ph] covering the operating expenses. The other aspect that we're looking and I think that we're happy to announce yesterday is the fact that we're able now to start selling our IRA credits. So we did sell already $40 million of IRA credits. These are credits that were accumulated until the first half. As we mentioned on the call, we have a similar or actually higher number if you take the $0.11 number for Q3. So now we're working to sell this one. So I think that the cadence of starting to sell IRA credit, let's say, a quarter or two quarters after they're being actually accumulated. And the fact that at least half of our business will come from inventory that is already paid for and exists on our balance sheet is something that by itself should cover the operating expenses and will allow us to generate cash flow. And lastly, by the way, because we talk about free cash flow and not just operating cash flow, We've -- I think, very much materialized most of our investments needed in the U.S. in order to grow. So also, capital expenditures are going to be low. So these three things, almost zero capital expenditures, sale of IRA credits and usage of inventory should get us there irrelated almost to the level of OpEx.

And then, how quickly can you start bringing in new products into the portfolio and starting to sell them?

So they are expected to be introduced during the course of next year. But the order that we're going to basically introduce them is that, first of all, we will introduce our 20-kilowatt inverter for the 3-phase inverter for the German and Austrian market that is growing very rapidly. But more important, by the way, it's growing most rapidly in the 15- to 30-kilowatt installation sizes which is exactly where this inverter is aiming at. The second one will be our second-generation battery that will enjoy better cost structure. It's a modular battery that is designed to work with our new invertors, very much simplifying the installation, very cost-effective from the fact that it is based on LFP sales [ph]. And therefore, this will be a month or two or three -- about a quarter after the introduction of the first inverter. And then, by the way, our U.S. fourth generation inverter that will come towards the end of the year. So everything will come during the next year. The pace of introduction is very much dependent on two things. One is how quickly we can ramp up the manufacturing for those products. We will usually start to manufacture them as the NPI [ph] units in our Sella 1 factory but then expecting them to our other factories worldwide. And then how quickly we're able to really ramp up production using the fact that we're also going to use our automated assembly lines to make those products. And this is also relatively new for us doing inverter may change a little bit. But I would assume that over the course of next year, you will start to see first shipments of all of these products. I would say that most of our statements related to next year's cash generation at least, are not related to those new products. So basically, we're relatively conservative in our financial planning around them. We don't take a lot of impact or expected impact from them. But I can say that this is a great focus for us to make sure that these products are coming out on time, automatedly, manufactured and I think that these are very good products for the market as we see it developing.

And we will take our next question from Mark Strouse with JPMorgan.

A follow-up to Colin's question there on cash flow. Can you just kind of give us an update now that the convert is current how you're thinking about refinancing, repaying that. Is the goal to kind of demonstrate your improvement in cash flow, potentially wait as long as possible to get better terms. Is there anything you're looking to tactically do sooner? And then just a real quick follow-up. On the 45x tax credit transfer, are you able to talk about the net pricing that you received on that, maybe just in general terms, if nothing else kind of low to mid-90s maybe?

Sorry. Can you please just repeat that, sorry, I lost my train of thought. Can you repeat only the first part of the question?

Yes, of course, Ronen. The first part was now that the convertible debt is [indiscernible].

Sorry, I lost my train of thought. So first of all, from a convert return, I'll take this and Ariel will take the sale of credit. On the convert, our intention is very simple. We have the money, we have financed the old convert or at least part of it by new convert which means -- and we repurchased a large portion or at least half of the old convert already. So the way that we look at it right now is that we will wait until September when the converts are maturing. We have the money, we set it aside, we're not going to use it or not intend to use it. It is still yielding a very nice result for us from an interest income. So our strategy here is simply use the money invested until it needs to be repaid. Once it's going to be repaid, we will do so and we don't see any issue with this. Ariel, would you like to address the 45x?

Sure. Thanks, Mark. Yes. Basically, we sold -- we got roughly $40 million net charges and we sold it for mid-90s, give or take.

We will take our next question from Andrew Percoco with Morgan Stanley.

I do want to just come back to pricing point for a second. I guess in your prepared remarks, you discussed a few different drivers here. I heard some promotions, I heard that you're planning on selling below cost to kind of clear out some of this inventory in Europe. But then I also heard you're trying to regain some market share and compete with some of your low-cost competitors in the European region. And I guess I'm just trying to get a sense for how much of this pricing reduction is one time just to clear the inventory and to get to a point where your run rate and kind of where your sell-through is? And how much of it is kind of structural in nature where you need to be more competitive on price to be able to sustain your market share in that region and if it's the latter, what does that mean for go-forward margins in the European market, if you have to structurally kind of take down your price to stay competitive?

So first of all, let me explain what are the prices and what are the promotions because I think that, that's part of the answer itself. During the -- actually, since the end of 2019, actually, our prices went up. They went up because of the fact that we started to see tariffs in the United States then came COVID with all of the shipping expenses and then came component shortages. And actually, we saw close to 20%, 25% increase in our prices over 4 years. While, by the way, the cost structure has not changed significantly, I would call it, on a permanent basis because during the -- we did see that during the component shortages, prices of components went up but they went down again. And this will be very important for our margins in the future. So what we're basically doing is that price decreases that we're doing are actually decreasing the long-term prices on a more permanent basis because we will need to go back to the levels of the, I would say, pre-COVID prices that we used to see in the market. By the way, a lot of our competitors, especially in Europe already did so, hence, a relatively large gap that was opened between our pricing and theirs. And promotions will be usually a kind of a spot discounts that we give on the purchase of new products that are aimed at helping our distributors to sell their inventory. So for example, we had the B-Wise [ph] optimized discount or I would call it promotion on optimizers because we knew that our distributors have a lot of inverters and they needed to buy optimizers. So by buying cheaper optimizers, it helps them to be more competitive and clear. So when I look now at…

And maybe to launch that into my next question. You mentioned kind of refocusing to core markets. And I know there's a lot of kind of added uncertainty here with the election now behind us. But I guess, how do you see or how do you view your core markets? You've grown into Europe pretty meaningfully over the last few years and has become a majority of your market share, your revenue concentration. Do you see that shifting back to the U.S., just given I think the value that local installers have for domestic manufacturing and how that probably continues under the new administration? Or are you still committed to the European market still being a majority of your business?

So, I'll start by saying that both the European and the U.S. markets are going to be very significant for us in the coming years. And I would say that they are equally important, even though I think that you will see a little bit of shift between the two. First of all, you mentioned the new administration and when we were preparing even for this call and we talked about what can happen after elections, we just remember that actually, that was the previous Trump administration was the best time for Solar in the United States. We did see that the Solar market grew and we saw a very nice extension. And even if I'm not mistaken, the ITC was extended under the Trump administration as well. So, I think that the dynamics that we see right now in the United States and if you combine it with the weakness that we see in Europe, will increase at least in the short term, the weight that we put on the U.S. market given the fact that this is, at least now, a growing market, becoming more and more healthy market and I think that, of course, for the long term, as we've mentioned in some of our meetings and meetings with investors, we truly believe that investments in U.S. infrastructure will be needed and electricity prices will increase which means that it will be a good market in the long term. When we look at Europe, we believe that what we see in Europe is I would say temporary, I don't know for how long temporary but temporarily lower prices because we do see that because of gas prices, because of some of the European governments trying to rearrange the grid after having so much solar, there is a little bit of a thinking process that is happening there. But even after all of these changes, we cannot ignore the fact that when you look at Germany, when you look at other European markets, even by the way, the Dutch market that is suffering so much, you look at anything between 6 to 8 years of payback on investment which is still a very good investment, or I would call it a reasonable investment to make. So, I would say that we are committed to both markets we will put efforts in both of them. In the short term, I see better U.S. market or more leaning towards the U.S. market than European but I'm not sure that this is going to be something that will prevail for many years to come.

We will take our next question from Philip Shen with ROTH Capital Partners.

Just wanted to follow up on some of the undershipment comments. Can you give us a sense for what the under shipment was in Q3, what you expect it to be in Q4? And then if you can share what it could be in '25, that would be great.

So I'll start from Q3. As we mentioned on the prepared remarks, since we sold about $450 million of point-of-sale data compared to about 240 million that we shipped. The math is relatively clear. Moving forward, this is a little bit more complicated because, again, first of all, the price decreases that we're doing are not allowing us to really measure what will be the undershipment because how do you measure it against the oil prices, the new prices and what is it? And second and we do not yet know what will be the impact of the promotions and the price decreases that we did on the pace of clearing the channels, especially by the way, again, at the beginning of '25 because again, in '24, we do believe that we will not see substantial increase in purchasing from us or selling out because of the seasonality. So, I would say that we still believe that we'll see by the second half of next year European channels being in a much healthier situation than they were but I'm not sure that we are able, right now, at least, to quantify it in a reliable manner.

And then coming back to prices, our checks over the past week suggests that the EU list price that you guys sell into your customers or to your customers was reduced by 20% to 30%, depending on the product. And in talking to some of your customers, it sounds like they don't necessarily think that it might -- that it will increase demand much and so the reason why is because there's still so much channel inventory in Europe where prices -- you can get that pricing today. So if you're an installer, you can actually get that price or if you're a distributor, you can also get that price because you can buy from another peer. And so I know you addressed this, Ronen, a bit in your remarks you're not sure what kind of demand -- might be but just wanted to understand if you are -- like how much channel inventory is there remaining you think, in Europe? And then if the demand stimulus is not that effective, might you need a write-down -- not write-down but rather lower your price into the European market again? And if so, what kind of timing might that be?

So, the answer is complex because it involves a lot of I would say assumptions about behaviors. And also, I would call it trends that you may see within the distributors themselves. And I'll try to elaborate a little bit on this. So first of all, on the price decreases that we did, I think that the numbers that you're having is actually including both price decreases and promotions that we did. So some of them of a shorter term and some of them are going to be permanent. But as we said, yes, it's the double digits, at least in Europe. So on that front, that's definitely the case. Again, I do not know what the channel check said but since everything was done last week, I believe that whatever the channels are reporting one week in November to already estimate the impact of the price decrease may be a little low but from what we at least heard from those that we consulted with and these were the large players prior to doing this, they believe that this is something that will allow us to take the share. And we'll simply need to see how it is going to work moving forward. We believe that we will see actually the channel clearing accelerating due to these price promotions and -- price decreases and promotions because in some cases, the promotions that we're doing are actually allowing the channels to take the excess inventory they have and actually cleared a little bit faster by averaging prices that they have already today with products that they need to buy anyway because of the fact that they miss either optimizers or batteries or something else and therefore, reducing the overall cost of the systems that they have. And at least again, from the first impressions that we're getting, there should be an impact. I do not know yet. Again, it's only a week since we did it. As I promised, of course, we will report I would tend to believe that there is some kind of elasticity of demand to prices that we will see coming. But we'll simply have to wait and see. And to the later part of your question, if we see that for some reason, this is something that is not working. We'll find a way to make it work. At the end, we are a significant player in this market. We are at least a technology provider that this market required our solutions. And I believe that you can always find the right price to be there. Again, my feeling is that we are already at the right place.

We will take our next question from Julien Dumoulin-Smith with Jefferies.

Maybe just a follow-up on some of the commentary here and just ask it more explicitly. How do you think about the decision tree given the cost that's contemplated to stay in some of these markets? I know you've been talking about some of the merits and paybacks. But can you elaborate specifically as you think about the potential for further cost cuts below that $100 million level? Is there a potential to pull back and re-entrench [ph] entirely from certain geographies as you think about not just the sort of incremental value of selling an incremental unit here but rather the fixed cost of being in a given country or whatnot, sort of re-entrenching if you will. Or what are other avenues of cost reduction beyond that $100 million as you think about run rating into '25?

Sure. So Julien, first of all, all the assumptions are right. This is the way that we look at the markets. But I'm starting from even a different point. Other than looking at the market, the inventory and the profit that we can make in this market, we also look at what is the requirement of this market from our other resources because sometimes the fact is that you can see a market that is relatively healthy and that you can get relatively good return but it's not a large market in the overall picture but still it takes, for example, R&D resources in order to make sure that this product actually complies with the regulations in this market. and the ability to certify it and the ability to continue with the pace of changing certification. So I would say that it's not always just looking at the profitability of this market is also how much effort and the alternative costs it takes from us. Looking at the decision tree. Decision tree will be very simple. First of all, we are looking at whether a market is or was profitable over the last few quarters. And we analyzed what was the reason for this result? Is it something that is related to more of a permanent reasoning? Or is it something that is more related to something specific that happened in this market. If a market is a market where we don't see any future profitability coming, we will pull out of this market. Of course, we will do it in a way that is allowing our customers to continue to get service and to get service and to get all of the support that is needed but we will not sell new products. If it is a market that…

We will take our next question from Joseph Osha with Guggenheim.

Looking first at the fourth quarter, I am trying to understand how much of the sequential revenue decrease that you're talking about in solar is coming from volume versus price. Can you give us some rough sense as to what you feel like the megawatt volume comp might look like Q3 to Q4? And then I have another question.

So first of all, Joe, part of it is -- I would say that part of what you see, first of all, is not even coming from volume of, I would call it, product in the long term but rather the fact that we had a relatively high portion of batteries that were sold in Q3 where given the fact that the battery is the more complicated product to hold, especially when you go into the less busy season of winter, Usually, the distributors do not want to hold a lot of batteries. So the first thing that we actually see in Q4 compared to Q3 is that we will sell less battery compared to other products. And again, this is something that we believe will recover in the next quarter. I would say that if I need to rank them without breaking exactly the impact of each and every one of them, I would say that the first element will be actually the price decrease. As mentioned in one of the previous questions and especially in Europe, we did double-digit decreases in pricing. And that means that this is even selling the same volumes will take about -- if you'll take 50% of the business coming from Europe and international market. I assume 20%, let's say, decrease and decrease it from the last quarter, you already see a relatively large amount that is going down from Q3 to Q4. So that will be the first one and the biggest one. The next one will be the battery shipment, as we said before and then the last thing will be the fact that this is a -- we're going into winter. And we feel that at least in this environment, we were not trying to push too hard or help too much to take products outside of the regular holding pattern during winter. So that will be, I would say, the majority of the impact.

And then my second question, this has been asked about a couple of times already. So you've got this convert coming up. Yes, you have the money theoretically to pay it back if you continue liquidating inventory and so forth. But it's happening right at the same time where you're planning to spool your business back up and where presumably it will become user of working capital rather than a generator of working capital again. So my question to you is why on earth do you want to take that risk of ending up short on cash in the second half of next year versus placing the business on a firmer footing financially now?

So it's a combination of several things. The first one is the fact that we do see already that the amounts of the amount of IRA credits that we're accumulating on a quarterly basis is increasing. And the confidence that we have after the last treasury regulations that came out and the fact that we were able to sell, we believe that with the sale of those credits, together with cleaning the inventory, even by the way, after paying the convert back is something that will leave us with enough, I would call it, working capital to continue and grow the business. At the same time, I would say that well, this is what we plan to do right now. I think that we have enough time until the convert time comes. And if we need, we will change our plans here. At this stock price, it's this expectation of our business at the amount of credits that we believe that we can sell right now, we believe that it will not be necessary. And I think that for the sake of shareholders, for the sake of stock price and dilution that may be taken by doing or taking another convertible debt or issuing stock at this point, I think that it doesn't necessarily serve for the benefit of the shareholders. But again, I would say that we will -- as we did in the past, we will be very financially sound planning our cash balances moving forward especially towards growth that we expect to see happening, I believe, in the latter part of 2025.

We'll take our next question from Christine Cho with Barclays.

I just have one but I wanted to kind of talk about the timing finally enacting the price cuts, especially in Europe. The backdrop there has been pretty challenged for a while and you've held off on actual price cuts there, even though your competitors continue to cut pricing, as you mentioned and I -- although you've done different kinds of promotions. So curious if your price cuts was driven by this accounting review that was sparked by your book value being higher than market value or if it was something else? And I hate to be backward looking but if you knew back then what you know now, would you have taken the price cuts earlier? Or do you think the outcome would have been the same regardless?

I'll start by saying that I would like -- even wearing my previous hat to think that accounting will not be the thing or the reason to drive business decisions but basically to reflect them. But I would say that here, even looking at the hindsight, I'm not sure that the timing to do these price cuts were much before we did them. We already started to do price cuts actually in the second quarter but these were mostly promotions rather than price cuts. We simply looked at how the market is developing and we believe at least at that time that by allowing to do the promotions, we will be able to help the distributors to get rid of inventory because once you're cutting prices, it is something that helps newcomers to the market but it doesn't help your distributors that have a lot of inventory because once you cut prices, they immediately have inventory that's worth a little bit less. And that means that, by the way, sometimes they need to write it off and that means that sometimes their financing that's coming from bank and based on the valuation of their inventories being damaged. And therefore, we felt at least until recently that by providing promotions that do not let those distributors to take this kind of a heat was the right thing to do. I would say that at least when I took the interim CEO position Ariel came in, I spent a little bit more time together with our sales team, together with our customers. And we decided together with our management and board that we would like to start pushing inventory a little bit quicker right now, given the fact that we believe that those promotions that we did were, I would say, helpful…

We'll take our next question from Kashy Harrison with Piper Sandler.

So I have two questions. My first question, just given your sell-through in Q3 of about $450 million, your commentary that Europe has the potential to decline next year, uncertainty surrounding the U.S. market, market share risk from Tesla in the U.S. given CPO leverage. Why aren't you taking more aggressive actions to reduce OpEx? If you're essentially going back to pre-COVID pricing, at least in Europe, why aren't we going back to pre-COVID OpEx?

So I'll start by saying that, as mentioned in the prepared remarks and both Ariel and mine, we are continuing to do these kind of OpEx reductions. We do it in the form of, again, looking at the markets in which we operate, whether they are profitable or not, whether we should be there product lines where we continue to develop them or not and looking at every other expense that we do. So by definition Kashy, to your question, we continue and we will continue to reduce OpEx because this is something that is needed. At the same time, I would say that we need to make sure that the future of this company will come from new products that we need to develop and new technologies that we need to roll. At least on the residential side, for a long time did not release new products to the market. We have now in, I would call it, advanced stages, three new products that are coming to this market that we believe have a lot of strength, both to allow us taking share in segments of the market that today were not very strong in, especially, the very large installations in the [indiscernible] region which is still, by the way, even though Europe is reducing. This is a growing segment so we want to be there. And second is to make sure that we are able to refresh and to come with products with a better growth, with a better cost structure. So, we will continue to reduce OpEx. This is going to be an ongoing mission to go back to pre-COVID OpEx, I'm not sure if it's completely possible but we will try to aim to be or to get as close as we can to this. But this will be something that we will do in a very, I would call it, careful manner just to make sure that all of the products and all of the initiatives that we believe that will have a lot of benefits in '25 and especially when the market will go back to growth will not be eliminated by doing so.

And then, just my follow-up. I want to go back to your response to Joe's question earlier on the Q3 to Q4. What I'm trying to understand is how to explain the $80 million quarter-over-quarter decline. I would have thought that if you're no longer destocking within the U.S., there should be some sort of uplift as you close that gap between whatever that sell-through, sell-in spread was. So can you help us understand why that isn't at the very least offsetting the decline that we're seeing in some of these in batteries or from the pricing side?

So I'll start by, first of all, product that we shipped and then I'll talk about pricing. We had large battery shipments in Q3. And we do not these battery shipments going into Q4, mostly because of the fact that batteries have a kind of a shelf life, plus the fact that it's a product that it's very expensive to store, very expensive to hold and you see that at the end of the year, your distributors trying to minimize inventory as much as they can both for reporting purposes but also they do not want to take the financial liability because they know that for them, unless it's a relatively mild winter, they will start to see a lot of installation mostly happening in March. So if you're a European and by the way, most of the battery shipments that were up in Q3 were in Europe and most of the battery down shipments that we see in Q4 are in Europe for that reason. Why would someone -- if they know that they have batteries in inventory, they can get it within 5 or 6 days, hold inventory for two months, especially when it's such an expensive product. So that's the first thing that they do. They simply bought a lot of batteries in Q3, they consume it in Q4, they remain with low inventory by the end of the year and they start buying again in Q1. So that's the first thing. The second thing is that, again, because of the reduction of the prices and because of the fact that usually our revenues are more tilted towards the end of the quarter. If you take a business, let's say that Europe was approximately this quarter around $100 million. So just take $100 million, reduce the price but let's say, again, 20%, you'll see about $20 million that is going away from the same shipments even though the quantities are exactly the same. So these will be the two major areas. And again, the last thing which is less influential but it's also important. We deliberately let you know nature takes its course here clearing the inventory. It's end of year, it's going into the more of the seasonal slowdown. I think that it's a good time to make sure that our distributors are fastly going to these high inventory turns policy that they would like to see.

We will take our next question from Dimple Gosai with Bank of America.

So a couple of questions. Just going back to the makeup of the inventory write-down, right? To what extent can we expect further write-downs? And in what scenario could we realize a higher value than what was written off, right? That's the first part of the question. And the second part, when I try to think about that inventory write-down, how do I kind of square or think about the proportion that it relates to domestic adds versus inventory that just didn't get sold in Europe, right? The U.S. component and the European component [indiscernible].

So first of all, from an inventory write-down, I'll start by saying -- and please direct me if I'm not answering all of your aspects of the question but we do not expect -- the inventory rentals that we did, we believe, are what is needed and we do not expect to see more of those inventory write-downs in the solar division. Now the write-downs were basically a result of the following aspects. First of all, we do see that at least in the European market, the demand that we see because of the fact that European is going down a little bit, the demand that we see is a little bit slower than we anticipated. And as such, we decided to at least to see that inventories that we do not expect to sell within a certain period, we decided to basically write off because as time goes by and prices are changing, we may not see these inventories are going away. This is basically what we call a kind of inventory absence. It means that it's not that we're reducing the cost of it but we're reducing the -- we're assuming that it will be obsolete. The second part, again, are units of inventory that we expect not to continue to actively promote because they provide less of value to the customer, given the prices that we see today, competitive offers that they have in these specific sizes of installations or simply the fact that we start to see that in some places, maintaining those kind of inventory sales will require higher certification and support costs. So this is something that we also do. And then comes the fact that, as you mentioned, indeed, in the U.S., we see a very fast move towards consumption of domestic content…

We will take our next question from Vikram Bagri with Citi.

We saw the announcement of "drastic price reductions with immediate effect on [indiscernible] products" but the announcement was pretty recent from some of your distributors. It sounds like pricing went down by 20%. One clarification on that, does the $450 million sell-through in 3Q reflects the full impact of this pricing, it sounds like it does not. And then on related to the same topic, I believe you previously retained enough manufacturing capacity to generate about $1 billion of quarterly revenues. How much capacity are you maintaining now I'm trying to understand what level of revenues do you need to generate mid-20% gross margins? And what levers can you pull to get there, especially given your comments about Europe still declining, pricing being a headwind in 2025 versus 2024 once again. On the same topic, same question on OpEx. Ronen, you mentioned there are a lot of uncertainties around OpEx and putting a target there. Going back to prewar levels of OpEx is somewhat tough. How are you thinking about OpEx given the revenue outlook is uncertain. Is there sort of like a target as a percentage of revenues? Is there a target in terms of head count? Is there a target? How are you thinking about sort of like OpEx target? And how do you get there?

Well, I think I'll try to shorten my response as we -- as I look at the time. Basically, to your question, we didn't -- the price reductions that you mentioned were not reflected all of them in Q3. Of course, we had price reductions and promotions in Q3 as Ronen mentioned but the price reduction -- the big ones, price reductions and promotions in Europe were actually launched only last week. So of course, they're not reflected in the Q3 numbers.

And Vikram, it becomes back to the manufacturing footprint and looking ahead, we no longer have the $1 billion capacity. When we did the $1 billion capacity, it's included Mexico that no longer exist. It included China that is almost non-existent right now, it includes Vietnam that is still existing but we basically separate until we see a growth in inventories. We had a factory in Europe that we are basically no longer using or not our factory but the third-party factory and we have Sella 1 which we still use by the way, for NPI and other areas. So in that sense, we do not longer have the infrastructure for $1 billion. I would say that being at approximately 20% gross margin, very much going to be determined by the percentages of how much we're going to sell in Europe compared to the United States because this is also very much impacting the IRA benefit that we're going to get. So I would say that I believe that 20% gross margin could be achieved. If we discussed it before at the $550 million, this is something that should be at a lower number. Again, giving the number exactly is hard because of the mix that I do not know right now. And when we're looking at OpEx, again, we're still trying to understand how the market looks like and we'll be able to be, I believe, a little bit smarter once we see how things are developing in the U.S. and Europe but I would say that, of course, as a company, we need to be in the course of '25 to reach at a certain point to a level of OpEx that is bringing us to be breakeven, if not profitable. So again, this is something that we look but I'm not sure that I have a number right now.

And it appears that we have reached our allotted time for questions. I will now turn the program back to CEO, Ronen Faier, for any additional or closing remarks.

Thank you very much. So I would like to thank all of you for joining our call today. We know that the solar market has always been interesting, and I think that over the last few days it's been more interesting. We stay very committed to bringing the company back to its growth trajectory. We're very focused on the measures that we're taking, we're happy to explain them today, and we'll be happy to continue informing and updating you all on the progress of our journey. Thank you very much and have a good and safe evening.

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.