Solaredge Technologies Inc (SEDG) 2016 Q3 法說會逐字稿

Welcome to the SolarEdge Fiscal Third Quarter 2016 Conference Call. This call is being webcast live on the Company's website at www.solaredge.com in the Investor section on the event calendar page. This call is the sole property and copyright of SolarEdge, with all rights reserved, and any recording, reproduction, or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by vising the Event Calendar page of the SolarEdge Investment website.

I would now like to turn the call over to Erica Mannion at Sapphire Investment Relations, Investor Relations for SolarEdge.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fiscal third quarter of 2016, as well as the Company's outlook for the fiscal fourth quarter of 2016. With me today are Guy Sella, Founder, Chairman, and CEO, and Ronan Faier, Chief Financial Officer. Guy will begin with a brief review of the fiscal third quarter results, Ronan will review the financial results for the fiscal third quarter and provide the Company's outlook for the fiscal fourth quarter of 2016, then we will open up the call for questions.

Please note that this call will include forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from Management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies, [with] all rights reserved.

Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with US GAAP. The Non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating and understanding how the Company's management evaluates the Company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the fiscal third quarter press release or the presentation may obtain one by vising the Company's website under Press Release and Investor Relations sections.

Now, I will turn the call over to CEO, Guy Sella.

Thank you, Erica. Good afternoon, and thank you for joining us on our conference call. I am happy to report that we concluded our fiscal third quarter with strong results. We are reporting record revenues for the quarter of $125.2 million. Our gross margin was 32.5%, and we show a record GAAP net income of $20.8 million, a record non-GAAP income of $23.3 million, and a non-GAAP diluted earning per share of $0.51. Our cash flow from operations continued to increase quarter-over-quarter.

Let's look at what has driven these positive results. Once again, our revenues continued to grow, and we executed on our business plan in all parameters. We improved our gross margin and profitability while keeping the ASP stable. In the fiscal third quarter of 2016, we shipped 416 megawatt of AC nameplate inverters, approximately 302 megawatt of which was shipped to North America. Overall, we shipped over 1.4 million power optimizers and more than 52,000 inverters. The number of inverters shipped is slightly lower than last quarter, which is the reflection of our increasing commercial sales and the growing acceptance of our large-scale inverters.

Our gross margin came in at 32.5%, higher than anticipated. As Ronan will explain in further detail, these results are mainly due to the excellent operational execution and the fact that the certain parameters that are not under our control were in our favor more than anticipated. We expect that next quarter gross margin will return to the growth rate previously planned.

As most of you know, traditionally in our industry, the quarter ending March 31st is negatively impacted by the seasonal slowdown of winter months. Despite this, our revenues grow this quarter. Nonetheless, we're seeing a general slowdown of residential PV business in the US reflected by a reduced rate of installations of large players in the industry. Since we are supplying to all of these players, we are exposed to their result. We remain confident that, in the mid- and long-term, market demand will continue to increase.

Our commercial sales this quarter continued to grow, both in the US and Europe, signifying broader market acceptance of our 27- and 33-kilowatt inverters, and clearly we are seeing the fruits of our focus and investment in sales and customer support team for this market segment.

In parallel, we continue to see a growing demand for our storage solution primarily in Europe, Australia, South Africa, and the United States. We finally feel that this new segment can, with time, become a significant source of revenue growth for our business.

While the majority of our R&D team is focused on innovation and new products, we continue as planned to work on cost reduction of both our power optimizers and inverters. We believe that the right blend of technology development, new product, and continued cost reduction is the key factor for long-term success.

This quarter we are planning to begin mass production of our HD-Wave inverters, which further improves our competitive advantage. Based on our revenues recognition policy, we will not recognize revenues from HD-Wave sales in the fiscal fourth quarter of 2016.

On the operations side, as part of our cost reduction activities, we reevaluate our production strategy and determined that manufacturing in Mexico with our planned contract manufacturer would not achieve the expected long-term economic competitiveness. As such, for now we have decided not to proceed with the full ramp-up, and instead we have increased our capacity in our current manufacturing sites to accommodate our continued demand growth.

On a final note, I want to emphasize our continued growth in profitability and cash generation. Given this competitive industry, we are highly focused on profitability and cash from operations, even sometimes on the account of growth in revenues. We believe that profitability and strong balance sheet is a key to long-term success in this industry, and it is critical to being able to support a 25 year's warranty that characterized [model-level] power electronics products.

And with this, I hand the speaker over to Ronan, who will review our financial results.

Thank you, Guy, and good afternoon. Before starting the review of our financial results for the fiscal third quarter of 2016, I would like to mention that, while the overview will be on a GAAP basis, in certain cases I will be discussing non-GAAP numbers and measures which excluded the impact of stock-based compensation, as well as non-GAAP earning per share. Full reconciliation of the pro forma GAAP results discussed on this call is available on our website and in the press release issued today.

Now, let's start with the financial results for this quarter. Total revenues were $125.2 million compared to $124.8 million last quarter and $86.4 million in the same period last year, representing a slight increase of 0.3% compared to the prior quarter, an increase of 44.9% for the same period last year. This quarter we shipped products to customers in more than 37 countries. While our mixed ASP per watt slightly increased mainly as a result of change in customer mix, the ASP per product line remained relatively stable this quarter.

Gross margins for the fiscal third quarter hit a record of 32.5% compared to 30.9% for the prior quarter and 27.4% for the same period last year. As these gross margins were higher than we anticipated, I would like to emphasize what drove these results. Gross margins are the outcome of multiple items, some that are in the Company's control, such as ASP, cost reduction, and operational expenses, and some are beyond the Company's control, such as geographical mix of sales, product mix of sales, and exchange rates.

This quarter, almost all factors were in our favor, including a relatively stable ASP despite of a competitive environment, timely execution of cost reduction measures, and continued efficiencies in our supply chain activities. All of these factors, together with seasonally lower sales in Europe, which are characterized by lower margins, a high ratio of commercial revenues that have higher gross margins, and finally, favorable exchange rate effects of a stronger euro against the US dollars drove our gross margins upwards.

These margins also include the write-off of certain deferred inventory associated with unrecognized revenue to a customer that filed for bankruptcy, where revenues for a sale to these customers have not been recognized yet as collectability was not reasonably assured. We expect that, next quarter, we will see some ASP erosion as was planned. In addition, we anticipate that sales to Europe will increase as is common in the warmer seasons. These factors, coupled with less favorable exchange rate, will most likely result in our gross margins returning to the previously planned growth rate.

Moving to operating expenses, research and development expenses were $8.7 million, an increase of 4.9% compared to the previous quarter and [58.6]% year-over-year, an increase that, like in the previous quarter, was mostly driven by increasing our R&D headcount. Sales and marketing expenses for the quarter were $8.8 million, a flat result compared to the previous quarter, and 37.4% increase on a year-over-year basis. G&A expenses increased to $3.5 million this quarter, and 58.1% increase compared to the previous quarter and a 73.9% increase on a year-over-year basis. The increase in G&A expenses is mostly as a result of abnormally lower G&A expenses in the previous quarter, which resulted from the reversal of an allowance to doubtful account.

In total, operating expenses for the fiscal third quarter of 2016 were $21 million, or 16.8% of revenues compared to $19.3 million, or 15.5% of revenues in the previous quarter, and $13.9 million, or 16.1% of revenues, for the same quarter last year. We expect operating expenses in the fiscal fourth quarter of 2016 to continue an increase as we further expand our R&D team and our geographic footprint.

Operating income for the fiscal third quarter was $19.7 million compared to an operating income of $19.3 million in the previous quarter, and an operating income of $9.8 million for the same period last year. Financial income for the quarter was $2 million compared to financial expenses of $1 million in the previous quarter and financial expenses of $3.4 million for the same period last year. This income is mostly a result of changes in the euro-dollar, and the dollar-New Israeli shekel exchange rates.

GAAP net income for the fiscal third quarter was $20.8 million compared to a GAAP net income of $24.1 million for the previous quarter, and a GAAP net income of $6 million for the same quarter last year. A reminder here - our GAAP net income last quarter was positively impacted by the creation of $6.6 million tax asset which generated a $5.8 million GAAP tax benefit in the quarter.

Our non-GAAP net income was $23.3 million compared to a non-GAAP net income of $19.8 million in the previous quarter and a non-GAAP net income of $8.7 million for the same quarter last year. GAAP net diluted earning per share was $0.47 for the fiscal third quarter compared to $0.55 in the previous quarter and $0.01 net diluted GAAP EPS for the fiscal third quarter last year. Non-GAAP net diluted EPS was $0.51 compared to a non-GAAP net diluted EPS of $0.44 in the previous quarter and a non-GAAP net diluted EPS of $0.20 in the same quarter last year.

Turning now to the balance sheet, as of March 31st, 2016, cash, cash equivalents, restricted cash and investments were $172.2 million compared with $162 million as of December 31, 2015. During the fiscal third quarter, we generated $15.3 million of cash from operations. As of March 31st, our inventory level net of reserve was $85.5 million compared to $87.4 million for the last quarter. While slightly down from the previous quarter, this amount still reflects remainders of our preparations for the Chinese New Year manufacturing disruption, and we therefore expect that the inventory levels will continue to decrease.

Our guidance for the fiscal fourth quarter of 2016 is as follows - we expect revenues to be within a range of $125 million to $134 million, and gross margins to be within the range of 29 to 31%.

I will now turn the call to the operators to open it up for questions. Operator, please?

Thank you. (Operator instructions.) Paul Coster, JPMorgan.

Yes, thanks very much for taking my question. Obviously the residential solar market is changing pretty significantly at the moment. The growth rates at the Big Three are kind of reining in a little bit, and it looks like some of the business is going to either the [loan] market or to the regional distributors. Can you talk to us about how you're positioning for that change? Is it a good thing or a bad thing?

I think that in general, from the perspective of a supplier to the food chain, the better and the more diverse the market will be, it's better for us. So, a year ago, we could think that with the circumstances of SunEdison buying Vivint, we might find ourselves where we have two very, very large buyers, and therefore they will control the prices, and we'll be under a lot of price pressure.

I think that with the diversification in the market and the fact that I would expect, under the circumstances that you described, that the long tail will become stronger. I think overall it's good for the market, and definitely for equipment providers. So, I think that in general, it's a very good trend for us.

And one quick follow-up. You talked I think about how you're changing your outsourcing strategy a little bit. I mean, I guess I've taken the view that you're going to be outsourcing aggressively and automating aggressively. But, it sounds like at least one part of that strategy has changed a bit. Can you just elaborate a little bit? I may have misunderstood.

So, the change is -- [tactics] in its nature. We have two big contract manufacturer that we share our business between them. That's Flextronics Circuits and Jabil, and we're planning to open another factory in Mexico. We found out that, long-term, our ability to achieve better prices within Asia, and the fact that we can increase production in one site, we'll enjoy more economy of scale. And therefore, we decided not to ramp up the Mexico factory simply because we ended up with a better product price while [landing] in the US.

And so, is it just one outsource partner rather than two, or do you mean by that you're taking it in-house?

No, no, we stay with two partners. The purpose was to stay with two, but to spread it over three factories. We'll stay with two -- over two factories. So, it's a very small technical change.

Okay, that makes sense. Thank you.

Edwin Mok, Needham & Company.

Hi, guys, thanks for taking my question. First, sorry I missed your commentary about how much your revenue come from the US market, and how much was commercial? I think you mentioned you [grew both] in US. And [kind] international market, maybe give some color about -- kind of explain where the growth is coming from?

We never give specifics on this, but it didn't change much from last quarter. So, around three quarters are coming from the US, little bit below, and the remaining mostly from Europe. So, in this split, there is no change between the quarter as it moves by 1%, 2%, 3% between quarters, but it's (inaudible) the same point.

I see. And then, [kind] of the commercial growth that you talk about on the call, I think you mentioned both US and Europe. Maybe kind of explain where it's coming from. And I thought you'd been selling into Europe for a while. What drove the growth there?

So, we see growth in both our geographies. Commercial over resi grow by few percentage, and the growth coming mostly from the US specifically in commercial, but it still -- not still, but is growing in both geographies.

Okay, great. Then, one question on the HD-Wave rollout. I think, firstly, you guys talked about maybe by third quarter of this year you will get vast majority of your resi inverter will be moved to HD-Wave. Is that still the plan? And where are you in terms of cranking those out on production side, and how's the [market] adoption for HD-Wave so far?

So, we're rolling it out slower than expected, mainly because of the fact that we need to adapt the production lines to it. And due to the high demand, it take us longer than expected. I think that in Q3 calendar, the majority will still be the current [venues] we are selling, which is a very attractive, great inverter, and we keep reducing its price, and we'll get to the majority probably a couple quarters later.

I see. Can you charge a premium for the HD-Wave inverter given its smaller form factor, one-man installation, and [count] some of the other benefits you (inaudible)?

So, it's smaller, more efficient. While it will be fully ramped up, it will be easy to produce, and will allow us to keep decreasing the price while increasing the gross margin. All this with using [electro-light]-free product, meaning no electronic capacitors at all, and that's (inaudible) supposed to help us increase the lengths of the warranty of the product.

I see, okay. Last question I have, on the guidance, I think you cited (inaudible) the US, some of the weakness in US resi market, and also I guess shift of mix, right, because your mix will increase. So, that have some impacts on gross margin for the quarter, for the June quarter on a relative sequential basis. Kind of talk about your long-term target of 32% to 37% range, right? You were there on the first quarter. You expect to come in -- back a little bit in the June quarter. How do you guys think about that? Is it still something that we need Wave for -- HD-Wave to be fully ramped, or when do you think we can get to that, and any color on that?

If you look at your notes from the road show, you'll probably find that we increase our gross margin faster than expected. And we still believe that, in the long-term model, numbers will stay as we presented them during the road show. We're not expecting to reach lower numbers, and maybe we'll reach these numbers a little bit earlier than expected.

We just wanted to mention that the big step-up in this quarter gross margin came, the majority of course, from an excellent operational execution, but we enjoy this one time of the fact that parameters that are not in our control worked in our favor. So, you shouldn't expect that every quarter all parameters that not in our control will keep work in our favor. It should average with time.

Yes, I understand that, but do you need to [accelerate] to be fully ramped up for you to get to that range on a normalized situation?

Of course, of course we do. We gave this number for long-term. So, yes, we will reach full HD before we reach these high numbers of gross margin, that's for sure.

Great, that's all I have. Thank you.

Jed Dorsheimer, Canaccord Genuity.

Hi, thanks for taking my question. I'm on the road here, so apologize for any feedback. The first question, just on the storage opportunity and product, I'm not sure how well appreciated it is in terms of the competitive differentiation of your product and the number of times that you need to convert back while compared to your competitors in what that translates into in terms of, I guess, lower losses, if you will.

So, I was wondering if you could just articulate that value proposition. And then, as a follow-up, should we be expecting a similar type cost curve reduction where you've gone through now four generations of cost-downs on the solar side? Should we be expecting a similar type ramp as -- and again, over time, as storage ramps, but a same type of trajectory in that business, as well? Thanks.

So, the storage system we have is different than anybody else have. We're the only one currently that I'm aware of that have DC coupling storage system, meaning the battery is connected to the high voltage DC bus before the inverter input. That basically save you the need for a conversion, where other competitors are doing DC to AC, then AC to DC in order to charge the battery, and then in order to use the energy stored in the battery, you need to do again DC to AC. So, we don't need this double conversion, so we charge the battery directly from the DC bus before we convert it to AC. And then, we convert the energy stored in the battery only one time to AC.

So, in general, you probably gain 2%, 3%, to 4%, 5% of efficiency overall. I think that it's not only that, but it's also the fact that you can save compared to most other solution in the market. You save a full box of inverter-charger because most other people, if they want to give you a solution which is on-grid and off-grid, so backup and [grid-tight] solution, you will need to take two separate inverters. In our solution, it's all based with a [software] ability with one piece of hardware. So, I think that we have a clear advantage over any other solution that I'm aware of in the market. (Multiple speakers.)

I was going to say, just with respect to that value proposition, if we look at the inverter products, you've had -- your cost advantage is about, what, 70% compared to your -- or 60% compared to your nearest competitor. Would you say it's a similar type advantage given the fact that you can stay with single conversion versus the double conversion on the storage side?

I think that if you compare a full on-grid and backup system, the difference in cost will be very significant. I am not sure. I didn't calculate as fast as (inaudible), and I'm not sure that it's 60% or 70%, but it's a very significant difference in cost.

As to your question about the roadmap for cost reduction, I'm not sure I understood the question in full. But, as with any product, we start with the fastest, best product we can into the market. And like any -- I guess like any other hardware company, once you have a product, you already have the ideas of how to make the next product better, and the one after it will probably be better. And that's, I think, a natural technology evolution, and we are very -- we are great believers in the fact that, whatever we do today, we can do much better in the next product. And I think that we prove that, with any generation of product, we can do it better and can reduce cost. So, I think that nothing should be different with the storage product.

I guess just to clarify, I was asking from a timeline perspective. If we look at the timeline from your gen one to your gen four [APIC] on the solar side and the cost-downs that we've seen as a function of that generation product development, should we see -- that's been about, what, five years, six years -- five years, I think. So, should we expect a similar type timeframe, or do you see that as being accelerated on the solar side -- on the storage side?

What you gave is the roadmap of [optimizering] inverters. Basically we went through three generations in more or less six years. So, every couple years, we should expect -- you should expect a new generation of product. And I believe that with storage product, that should be the case. It's basically inverter technology, not an optimizer technology. So, I think that the ratio of big improvements, that is every couple years.

Great. Thank you.

Thank you.

Colin Rusch, Oppenheimer.

Hi, this is Shivani Sud on for Colin Rusch. Just two quick questions from us. Which geography surprised you most to the upside in the quarter?

I think that in general nothing really surprised us too much. Basically when we plan a quarter, and given the fact that we provide hardware, we usually have a relatively -- buildup of backlog that, when we enter the quarter, then we usually expect what's coming.

I think that what we saw was in line of our expectations, where Europe -- where the winter is much more influential, was a little bit weaker, while the US was stronger. This was also the case in the first quarter of calendar 2015, and there was no difference here, as well.

Great. And then, just one more. Are you seeing anything new to the market now that SMA has invested in Tigo?

So far, no, it's very short time since they announced this investment, so we don't see anything new in the market. And knowing these two competitors very well for many, many years, SMA's still the biggest [in] inverter market. When we started to sell inverters, we were, like, number 200, and they were number one with 48% market share worldwide. Today we're at number two or three, and they have, like, 60% market share.

So, I think we're very well equipped to compete with SMA. Tigo started in parallel to us in 2011. They probably were the same size, and I think that today, or in 2014, where they I think were a little bit stronger in sales, they probably were a tenth of our size. So, I think that we -- equipped to compete with them, as well.

Saying that, it's a very big market, and we're not expecting not to have the strong competition. So, I am sure that it will force us to become even better and faster in what we're doing in our cost reduction, and I think that it will -- it's a very healthy situation.

Thank you.

Michael Morosi, Avondale Partners.

Hey, guys, Matt here for Michael. Thanks for the question. You just mentioned some exposure to a company who recently filed for bankruptcy, and I was wondering if you could talk a little bit more about your exposure there, and if you anticipate any impacts on 2016 guidance.

So, all in all, all of the financial impacts related to this company is already fully represented in our financials. There are no further expectations of any effect. The only thing could be, I would say, positive effects, given the fact that this customer, as well as our other [customers' AR] is insured. And once a customer files for Chapter 11, we go to the insurance company. But, other than this, there are no more expectations or any impact.

Now, in any case, so just to mention what the effect was, the effect was [unrecognition] of revenues that were sold to this customer, and at the same time we completely wrote off all of the inventory that was associated with these unrecognized revenues, and therefore nothing to expect there.

Okay, thank you. And then, on a more high level, could you just talk about the rapid shutoff legislation, and kind of what that means for the long-term penetration of MLPE? There's been some progress recently in the Northeast, and just wondering where can you get some future wins in this.

So, the rapid shutdown expected to be adapted by all states by latest January 2017, of course in any and every state that will adopt it, our competitiveness will increase due to the simple fact that, if you are not using MLPE, you will need to install the classical string inverter and install additional system with additional box connected to every string, and additional centralized AC to DC controller. So, I think that we clearly see that in every state that adopt rapid shutdown, we take bigger and bigger market share. So, I think it's 100% in our favor, and I think that's part of the growth we are seeing in the US.

Fantastic. Thanks for the questions, guys.

Brian Lee, Goldman Sachs.

Hey, guys, thanks for taking the questions. I hopped on a bit late, so apologize if some of these have already been asked. Maybe I'll start off with one that is very real-time and is playing out on a separate call here, but can you guys give us some sense of where you're seeing traction to mitigate or make up for the slower growth at your largest customer, and then what the general outlook is for you to be able to continue to diversify that exposure, and if you have a percentage number, would love to hear what the percent of sales this quarter you saw from your top customers.

So, the total -- Hi, Brian. So, the total business of the five biggest partners is more or less stable between the quarters, but in between them there is a change. So, SolarCity, for example, went below 10%. That's first time after many, many quarters.

Saying that, we see that the increase of distribution is growing, and that's a very good signal for us, because that's a lot of effort and for a few quarters that we are doing, in order to increase our share in the long tail. So, I think that today we have very good share in the next 15 big customers. So, after the Big Five, we have another 15 or 20 that we have a definitely very big market share within their accounts. And we focus more and more on the long tail, which of course we unfortunately cannot present to each of these installers on one-on-one, and therefore we need to get stronger and stronger with the distribution channels, and that's happening. Actually, the biggest customer for Q1 was actually a distributor.

So, I think that the trend and the effort and the strategy we put in evolving the sales in the US is actually successful so far, and I think that is part of how we manage to keep flat revenues on the quarter that the customer is, like, 20% lower than Q4 for most players in the US.

Okay, thank you, Guy, that's helpful. Second question was just on -- if I remember correctly from last quarter, when you just look at the blended ASP trend, it was in the low to mid-teens year-on-year, but I think there was some mix issues, and you also had costs come down correspondingly. So, from a margin perspective, you [held in] pretty well.

Just wondering, can you talk to what's embedded in the margin guidance for fiscal Q4? I would have thought it'd be maybe a bit better than your guidance, given the revenue level is growing here. I don't know if there's a mix issue. And if you can maybe comment to what you're seeing in the MLPE space from some of your peers who continue to be pretty aggressive, if you're seeing more impacts from that on your pricing, as well?

So, first of all, Brian, as you mentioned, the ASP, in general ASP, we're -- on a product basis was pretty stable this quarter, and actually on an ASP per watt, we increased a little bit. But, I think that most of the reason for this is divided by two. First of all, the first quarter is usually (inaudible) with lower sales to Europe, and sales in Europe are usually at lower margin. May be because of the competition from many inverter companies that are European-based, so these are their home markets, and they sell at lower prices. In some cases this is the fact that the euro exchange rate is still lower compared to where it was, like, two years ago, and therefore the overall margin there is a little bit lower. So, the fact that the US was higher than the regular drove the gross margins up.

In addition to this, we manage -- and as you mentioned, there is a competitive environment outside. We've managed through our sales to keep the ASP relatively flat. And what we do see for the next quarter is in line of our previously guided 7.5% to 10% ASP erosion throughout the year. We will do part of the cost reductions and price reductions in the second quarter as we planned them in the beginning. At the same time, Europe will become bigger. Usually Q3 and Q2 calendar are very strong in Europe, so this will drive the gross margin down, as well.

And as you also know, and I think that it's also reflected in our projections so far, we try to be very responsible in the way that we guide, because just as like this quarter, some of the issues that were beyond our control worked in our favor. Sometimes they work on the other side. So, I think that this is the main drivers of the guidance, or gross margins guidance, at least, for the next quarter.

Thank you. That's very helpful. And if I could just squeeze two more in, and then I'll jump back in the queue, on batteries, first one would be Tesla, they cited 2,500 shipments of Powerwalls in Q1. Can you give us a sense of how much share you have currently on this shipment base? And of the ones that shipped in Q1, are you recognizing revenue in your fiscal Q3, or is this in your fiscal 4Q guide? And if so, how much is embedded in the guidance? And then, I'll save my follow-up after the answer.

So, I think that practically from what Tesla shipped in Q1, I guess 100% came with our inverters. I am not aware of any inverter currently working with the Powerwall. I think SMA will have a product soon, and probably Fronius in Q3 as well. But, currently, I think we were the only inverter shipped with the Tesla Powerwall.

As for revenue recognition, we recognized -- we have two solution, on-grid and off-grid. So, the on-grid, which we shipped earlier, is already recognized this quarter. The off-grid, not yet, because of the same policy that I just mentioned before. We are not recognizing revenue in the first three months on a new product.

Okay, thank you. So, just as a follow-up to that, so the majority of the 2,500 shipments that Tesla saw in their Q1 you would see in your fiscal [4Q]? Am I understanding that correctly?

I don't know if the majority or not. I don't know how many -- what percentage went with on-grid and off-grid. I don't think we can give you the good ratio of the two.

One more thing, just to answer, Brian, is the fact since in most cases we're not selling the Tesla batteries, in some cases even if they sell a system, if the system is not yet installed or sold to the sub-distributor [some time], they have not yet bought the system from us. So, in some cases, there might be some, I would call it, differences, at least in the short-term, between what they deliver and what we deliver simply because of timing.

Okay. No, that's helpful (inaudible), then. Last one from me and I'll pass it on. We heard that LG Chem's second-gen residential battery for grid storage is set to debut in a few months, and that your storage product is now qualified. Are there more OEMs you'd expect to get qualified with in the next few quarters? And how do you expect pricing and margins on those revenues to compare to those of the one with Tesla? Thank you.

So, we didn't finish any integration with another battery at this point other than the Powerwall, and we didn't announce another partnership. But, we do work with other integrations. It's not yet proven and not yet ready to sell. So, once we'll finish integration, we'll go into the product announcement stage. We're not yet there.

(Operator instructions.) Philip Shen, Roth Capital Partners.

Hey, guys, thanks for taking my questions.

Hey, Phil.

I've been jumping between calls, so apologies if this has been asked. But, just wanted to clarify the customer concentration. I think you mentioned that SolarCity is less than 10% of your overall mix. And then, could you talk about, of the remaining four customers, what percentage of the total mix do they represent overall? Or perhaps you can tell us about the top five in general, how much do they represent. Is that 50%, less than that, et cetera? Thank you.

We never give the precise numbers mainly because it's influenced by many (inaudible), but it's less than 50%. And indeed, SolarCity, as I mentioned before is, for the first time after quite a long period, is below 10%

Great. And that's great news, given the challenges that they're experiencing. And in some of the work that we've done, it seems like the commercial segment is becoming a meaningful source of strength for you. Can you quantify the mix that you might see of commercial in your fiscal Q4 guide, and then how you expect the mix of commercial and residential to shift as we go through the rest of the calendar year?

So again, also here we're not giving the exact numbers, but it is increasing every quarter by a few percentage. It's not yet got to third of our total business, but it's in the right direction. As I think previously our goal is to reach 2017 -- to finish 2017 where 50% of the business coming from commercial, and 50% is coming from residential, and I think it's doable. So, I think we're on the long-term goals, we will reach these numbers.

Okay, great. And in terms of -- through some of the other discussions we've had with folks out there, it seems like the HD-Wave rollout might take a little bit longer than expected. And I think originally you were expecting maybe 80% to 90% of your inverter sales to be gen three as of calendar Q3. So, what is the update on that score, and can you provide a little more color as to the reason for the delays, and what the potential impact on margins might be? Thanks, Guy.

So, as mentioned before, I guess that we're a little bit slow on this rollout. And I would expect that, if we were expecting the majority to be from the new inverter in Q3, I think that will be two quarters later. The reason are simple. We mainly, in one hand, didn't want to stop the cost reduction on the older products, and we need them for storage because it will take a little bit longer until we will adopt the new inverter for storage purposes.

So, we had to keep enough resources on keep improving and reducing the cost of the current generation, and that came a little bit on the favor of rolling up the new inverter. That plus the fact that we need to adapt the production line, and we don't want to risk the total capacity and to take even a slight risk of being, again, in a situation that we need to [air-ship] inverter as we have been doing five, six quarters ago.

The total of the two elements cause us to slow down a little bit ramp-up and to be a little bit more careful in this, but nothing is in another level. So, we feel very comfortable that we can meet all of our cost reduction targets with the current blend we have, so I think that we'll keep increasing gross margin as was originally planned with the current blend between the current inverters and the new one, which is, as mentioned before, a little bit different than what we thought few quarters ago.

Okay, great. Thank you, Guy. I'll jump back in the queue.

Thank you.

Jeff Osborne, Cowen & Company.

Yes, good evening. Just following up on that question, so it sounds like the HD-Wave was going to be made in Mexico. You're not proceeding with that factory. Are you installing a new line currently in China to make the dedicated HD-Wave from the start, or can you just -- I guess I'm looking for a bit more detail on the reason for the delay.

The plan was to ramp up all the products in Mexico. We're just ending up with the economy of scale in China and in Europe. We found out that we'll -- ending up with more expensive inverters coming in Mexico than from China, and it wouldn't make anything positive to our growth. But, we're planning to put all product, the full [mirroring]. So, we keep the full mirroring, and we'll just have the two factories we currently have will adapt, line-by-line, to produce instead of the current inverters, the new inverters. And that's why it take a little bit longer than expected. But, we weren't ever planning to do Mexico only from the new inverter. That wasn't the plan.

Got it. That's helpful. And then, just given that you're not going to be recording revenue for the first three months of HD-Wave, how do you think about that ramping up? Are you going to disclose what the [avoided] revenue was? Is that an issue that we need to consider for the September quarter? I know you're not giving formal guidance, but just as we look at our forward models?

No, I think that we will -- what I believe, that we won't have impact on the long-term model as well as on the revenues. I think that we do the blend early enough and slow enough so I think that it won't affect the model you have.

Got it. And the last question I had, Guy, was just on the optimizer robotics and automation. I think you have one line in Hungary. Can you just talk about what improvement you're seeing on the cost side there, and then also how we should think about you phasing that into the other lines that you have?

So, the line is running very smoothly and very nicely in general. It has the potential to reduce big portion of the labor that can impact up to 10% of the cost of the optimizer. We didn't -- we need six automated [line] currently. We have one. Five others supposed to be ready some time in Q3, and hopefully installed still during 2016. So, I think that most of the real impact of a fully automatic line from the financial perspective will occur during next year.

But again, saying all this, everything that we have in the model is supported by the cost reduction plans that we're currently having, and we feel very comfortable with keeping (inaudible), increasing our gross margin and profitability along the lines that we previously gave you.

Perfect. Thanks so much.

Thank you.

Carter Driscoll, FBR Capital Markets.

Thanks for squeezing me in. Just qualitatively, getting back to slowing in the US resi market, obviously your biggest customer (inaudible) longer-term maybe a little near-term disruptive. But, could you talk about maybe some of the regulatory changes we're seeing in the state level versus maybe the increasing penetration leading to maybe an elongation (inaudible) of the closing residential customers versus the discussions you have obviously with your customer base?

Is that [elongating]? Are there -- is it getting more challenging from a financing perspective? Are there fewer for qualifications? Just trying to get a sense of the slowdown in resi, how long it's going to last, whether it's a penetration issue versus a regulatory one.

So, I feel that we have a relatively good view, but I'm not sure that we are the experts. I think that people like SolarCity, that actually focusing on selling it, will have a better view compared to us. But, from what we see, in one hand the fact that the ITC was lengthened for a very long period took some people in the market from a rush environment to "We have time, we can do it this year or next year or the year after." So, I think it in a way make the market much more normal.

I think that on the other hand, the fact that states will adopt the rapid shutdown will increase our market share. So, I think that, all in all, I think we will see from our small angle, or small perspective, we will see the increase in 2016 at little bit slower than what was expected before the change at the ITC. But, I think that in -- while the ITC is slowing the market, the fact that more and more states adopting the rapid shutdown increase our market share, all in all I think we will see a very nice growth in North America resi market.

Okay. All right, that's fair. And maybe just switching gears on the storage side, [how you're growing], you're talking about qualifying other battery OEM. Will that potentially change your geographic focus, or will that just continue largely in the US and Australia? Can you talk about maybe some of the other geographies, maybe with Tesla and then with potential other battery OEMs that you're going to integrate with?

Sorry, okay, can you one more time? It was a little bit broken. I'm not trying--.

--Yes. What I was just trying to get a sense of moving beyond Tesla at some point as your battery partner, whether that'll expand your geographic focus, maybe timing of when you think you might be able to (inaudible) discuss another partner, and then maybe just very high level some of the geographies outside the US that you see some of the uptake. Obviously you talked about Australia in the past, maybe just a couple other geographies you think you might see some penetration in the near-term? Thank you.

So, I think that as [we described] in the past, the main geography so far for on-grid is Europe, mainly Germany, because of a specific subsidy. They are subsidizing 25%, direct subsidy of 25% of the extra, or the direct cost of the storage part of the solar system. So, Germany is the biggest market today for storage. Australia, as mentioned before, is a very strong market. US, we start to see a very nice demand. And South Africa is probably the fourth country due to a unstable grid.

So, these are the main four markets we see. We do see very big potential in many other countries, such as India and some other remote areas. But, I think this will come to [a massive] only when the prices of the batteries will reach a price of below $200 per kilowatt hour. So, I think that the fact that we'll have other suppliers will not change [the] geography. It will just simply give the customer the ability to choose from more than one option.

Okay. And then, just maybe a last one to sneak in, is it possible that your commercial percentage of sales could eclipse resi, say, by the end of calendar 2017?

I think we plan that it will be 50%-50%. Commercial is growing worldwide very nicely, and we are growing very, very nicely in commercial, and we are becoming more and more competitive with every larger inverter we're introducing. So, I think that it is definitely growing. I wouldn't expect it to be more than 50% in 2017. I would expect it to be more than 50% beyond 2017. But, for 2017, I think we'll end up where it should be around 50%-50%. I don't think it will grow faster than that.

I appreciate you taking all my questions. Thank you, gentlemen.

That concludes today's question and answer session. At this time, I'll turn the conference back to Mr. Guy Sella for any additional and closing remarks.

In summary, our fiscal third quarter results show continued successful execution of our business strategy, with strong revenues, consistent growth in profitability, and accelerated cash generation. Thank you for joining us on today's call.

This does conclude today's conference. Thank you for your participation. You may now disconnect.