Solaredge Technologies Inc (SEDG) 2025 Q1 法說會逐字稿

Hello and welcome to the SolarEdge conference call for the first quarter ended March 31, 2025. This call is being webcast live on the company's website at www.solaredge.com and the Investors section on the Events Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved and any recording, reproduction, or transmission of this call without the express written consent of Solar Edge is prohibited.

You may listen to the webcast replay of this call by visiting the event calendar page of the SolarEdge Investor website. I would now like to turn the call over to JB Lowe, Head of Investor Relations for SolarEdge. Please begin.

Good morning. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31, 2025, as well as the company's outlook for the second quarter of 2025. With me today are Shuki Nir, Chief Executive Officer; and Asaf Alperovitz, Chief Financial Officer.

Shuki will begin with a brief review of the results for the first quarter ended March 31, 2025. Asaf will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2025. 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 earnings press release, the slide presentation 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, during this earnings call, we may refer to 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 being presented because we believe that they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance.

Reconciliation of these measures can be found in our earnings press release, slide presentation, and SEC filings. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP.

Listeners who do not have a copy of the quarter ended March 31, 2025, press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website.

With that, I will turn the call over to Shuki.

Thank you, JB. Good morning, everyone, and thank you for joining us today. Before we dive in, I want to welcome Asaf Alperovitz to the SolarEdge team. Asaf brings deep financial and operational experience, and I'm confident it will be an important part of executing our turnaround and reaching our full potential.

Now to build, I will start with the progress on the four strategic priorities we set for the year then I'll walk through our approach to mitigating the impact of the recently imposed tariffs. And finally, I'll share my perspective on the state of the business across our key geography.

Let's begin with our priorities. Last quarter I outlined the four key priorities that are going to drive the SolarEdge turnaround story and position us for sustained long-term growth. First, strengthening our financials. Second, regaining market share. Third, accelerating innovation. And fourth, ramping up our US manufacturing.

I believe that our first-quarter results and our second-quarter outlook demonstrate meaningful progress across all four priorities. First on financial strength. In Q1, we delivered quarter-over-quarter and year-over-year revenue growth. We expanded our gross margins. We reduced our operating expenses. And we delivered our second straight quarter of positive free cash flow. All that, in the face of a more challenging global environment.

We are not done focusing on operational efficiency. Last month, we sold one of our battery manufacturing facilities in Korea to Enovix. And last week, we divested our tracker business, which will reduce our operating expenses without a significant impact to our top line.

Our second priority is recapturing market share. This effort spans geographies, product lines, market segments, and customer types. Starting withthe US. In 2024, Wood MacKenzie recognized SolarEdge as the number one inverter supplier in the US for rooftop solar installations. We believe this is a result of our focus on customers, our leading technology, our strong service and support capabilities, and our enhanced product quality and reliability.

In US resi, we have seen a continued shift to the TPO model, where our domestically-made inverters and optimizers help to qualify for the 10% domestic content adder. We are also seeing higher demand for our residential batteries, in part due to the change in section 48E as well as our growing participation in VPP programs. Over 35% of our battery attached sites participate in 1 of 28 different VPP programs, through our TPO partners or directly.

A similar shift towards domestic content in the C&I space provides us with a distinct competitive advantage and an ability to take share in this growing segment. Enterprise accounts are a large and growing part of the C&I segment. We believe that we are the perfect partner for these customers because they have complex requirements, they demand efficient, cost-effective energy generation, they want leading-edge energy management capabilities and they hold their vendors to the highest standards of service, safety, quality, and reliability

We see a healthy and growing pipeline of opportunities in the enterprise space and have already signed several agreements. For example, last month, we entered into a multi-year strategic partnership with a global leader in logistics real estate. Under our partnership, this leading logistics real estate enterprise is planning to integrate SolarEdge’s products across its global portfolio.

Turning to Europe. We are cautiously optimistic that we have turned the corner in our market share position. Our strong POS in the quarter and feedback from our channel partners indicate promising results from our pricing and promotion campaign.

Two markets that have seen particular strength are Germany, where our sell-through was up quarter over quarter, and the Netherlands where our sell through was up for the second quarter in a row. In the Netherlands, we see some positive momentum from our upgrade campaign that replaces a PV-only inverter with a new backup inverter plus two batteries. Given our large installed base in the country, we expect this battery upgrade campaign to be a source of growth as the Netherlands gets closer to eliminating net metering.

Turning to our third priority: accelerating innovation. Intersolar starts tomorrow in Munich, and if you are in town please stop by our booth and one of our associates would be happy to take you through our latest offerings. Starting with the new Nexis platform, which remains on track for initial volumes in the fourth quarter of 2025. At Intersolar, we will be displaying live production data from our three phase inverter Alpha sites, and our new single phase and scalable storage solutions will also be on display.

We have also announced that our SolarEdge ONE Controller for Residential is compliant with Germany's regulation 14a, which applies to most new installations of batteries, EV chargers, and heat pumps. This opens up a significant opportunity for us in the German residential market by providing our customers with a simple solution to comply with a complex regulation.

On the C&I side, we are launching our new EV charging hardware and software solution, which significantly reduces EV charging costs for businesses. This solution is integrated into the ONE for C&I energy optimization software platform, which is now available to all SolarEdge customers.

At the core of these solutions is our team’s drive for meaningful innovation, that adds value to our customers and differentiates us from our competition. It therefore makes us proud to be recognized by VDE Renewables, a leading provider of quality assurance services for the global renewable energy sector. Their recent report covers several areas where our technology has a distinct advantage in efficiency and safety.

VDE reported that our advanced safety solutions effectively prevent fire hazards and exceed international PV safety regulations. On cybersecurity, the VDE report highlighted that SolarEdge provides an example of how robust cybersecurity mechanisms are essential to mitigating risks associated with cyber threats. They also note that our approach aligns with international best practices and validates the growing need for cybersecurity within the solar industry. We believe that such recognition does not go unnoticed by our customers.

Our fourth key priority is ramping up our US manufacturing. In Q1 we executed our plans to ramp up manufacturing of US-made products. We have created nearly 2,000 jobs in the US, helping us reach a capacity of 70,000 inverters per quarter, including the shipment of our first domestic content C&I products.

As you can see, we've made a lot of progress in a short time. With that, let me turn to our plan to mitigate the impact of the recently imposed tariffs. One of the benefits of our US manufacturing footprint is that it positions us well to handle the current tariff environment. SolarEdge has already done the hard part. We already reshored manufacturing to the United States. Our operations team can now focus on alternative sourcing and supply chain optimization for whatever tariff scenario is in place.

Of course, until we fully optimize our sourcing, operating in an environment with newly announced and incremental 145% tariffs on products from China, and 10% tariffs on imports from other countries, will have a negative impact on our financials. In the second quarter, assuming these tariff rates, we expect the negative impact will be limited to a 2% reduction in our gross margins as we have non-tariffed inventory already located in the US.

In the second half of the year, assuming the same tariff rates, we anticipate a 4-6% gross margin impact net of pricing adjustments. To mitigate the impact of tariffs, our experienced team has been working relentlessly to diversify our supply chain. We are moving quickly and have already taken several actions that we believe will reduce the impact of tariffs to a 2% gross margin impact net of pricing adjustments in Q1 2026 and we will do our best to offset the entire gross margin impact later in 2026.

The tariffs will also impact our cash flow. Last quarter, we discussed that we expect to generate positive free cash flow in 2025. With the new tariffs in place, we expect to be approximately free cash flow breakeven for the full year.

Moving to the regions. Our sell-through for Q1 was approximately $370 million. In North America our sell through was down 18% quarter over quarter, mainly due to seasonality. Our channel inventories here remained largely normalized. While there is an additional uncertainty in the US market due to potential policy changes and tariffs, the underlying fundamentals of solar and storage still have support. Power prices continue to increase in several key states and regions, and battery attach rates continue to rise.

In Europe, our sell-through was up 6% quarter over quarter and we expect the majority of our distribution partners to reach normalized inventory levels by the end of Q2 2025.

To summarize, we are still in the early stages of our turnaround journey and have lots of work ahead of us. The numbers speak to the solid progress we’ve made, but it’s the energy inside the company, the pace of innovation, and the conversations we’re having with our customers that make me the most optimistic.

With that, I will turn it over to Asaf.

Thank you, Shuki, and good morning, everyone. I'm excited to join SolarEdge at such a pivotal time for the company and to support the execution of our turnaround plan. A little bit about myself: I have an extensive accounting and operational background with over two decades of leadership experience with global companies that includes transforming organizations and leading financial strategy. Most pertinent to my new role here at SolarEdge, I have significant experience with global industrial manufacturing organizations, so I am well versed in logistics, supply chain, and operations, and I am excited to apply this experience to help drive operational and financial excellence here at SolarEdge.

Turning now to the quarterly results. Total revenues for the first quarter were $219.5 million. Excluding revenues from our discontinued operations at the Kokam Energy Storage division of $7.4 million, our Non-GAAP revenues were $212.1 million.

Revenues from the US this quarter amounted to $132.1 million, representing 62% of our non-GAAP revenues. Revenues from Europe amounted to $47.4 million, representing 22% of our non-GAAP revenues. International market revenues amounted to $32.6 million, representing 16% of our non-GAAP revenues.

On a megawatt basis, we shipped 642 megawatts to the United States, 324 megawatts to Europe, and 242 megawatts to the international markets, for approximately 1.2 gigawatts of total shipments, which is the highest shipment level we’ve had since the third quarter of 2023. 50% of total megawatts shipments this quarter were commercial and utility products and 50% were residential.

ASP per watt, was $0.173 cents, down 17% from Q4. Lower pricing in Europe and a lower optimizer to inverter ratio, drove the quarter over quarter decrease. In Q1 we shipped 180 megawatt-hour of batteries with the majority shipped to Europe. Our blended ASP per kilowatt-hour on all PV attached batteries was $267 dollars in Q1, which was up from $262 dollars in Q4. This increase is largely due to mix.

Non-GAAP gross margin this quarter was up to 7.8% compared to negative 39.5% in Q4. Non-GAAP operating expenses for the first quarter were $89.1 million compared to $106.8 million in the previous quarter. In the first quarter, we were able to collect certain aged AR balances, which resulted in a reversal of an accrual for bad debt. Excluding this amount and other non-recurring items, our non-GAAP operating expenses would have been approximately $96 million.

Non-GAAP operating loss for Q1 was $72.4 million compared to a non-GAAP operating loss of $184.1 million in Q4. Our non-GAAP net loss was $66.1 million in Q1, compared to a non-GAAP net loss of $202.5 million in Q4. Non-GAAP net loss per share was $1.14 in Q1, compared to $3.53 in Q4.

Turning now to our balance sheet. As of March 31, 2025, our cash and investments portfolio was approximately $794 million. Our cash position, net of short-term debt, was approximately $455 million. Net of total debt, this amount was approximately $113 million.

This quarter, cash provided by operating activities was approximately $34 million. Net of approximately $10 million in CapEx, and excluding $3.8 million of positive cash flow from discontinued operations at the Kokam Energy Storage Division, free cash flow generated in the quarter was approximately $20 million. This is the second straight quarter of positive free cash flow generation, which is a direct result of our focus on working capital management and control.

As Shuki mentioned, considering the incremental impact of newly introduced higher tariffs, we would expect to be approximately free cash flow breakeven for the year. AR net decreased this quarter to $133 million compared to $160 million last quarter. We are working closely with our customers and continue to focus on DSO improvement through effective collection management.

Our inventory level, net of reserves, was $637 million, compared to $646 million in the previous quarter. Q1 marked the fourth consecutive quarter of inventory reduction. This is despite our continued ramp of US production to support anticipated growth and the introduction of new products. During the quarter, we consumed roughly $60 million of finished goods from existing inventory.

Turning now to our guidance for the second quarter of 2025. We are guiding revenues to be within the range of $265 million to $285 million. We expect non-GAAP gross margin to be within the range of 8% to 12%, including approximately 2 percentage points of new tariff impact. We expect our non-GAAP operating expenses to be within the range of $90 million to $95 million.

I will now turn the call over to the operator to open it up for questions. Operator?

(Operator Instructions) Christine Cho, Barclays.

Storage was quite strong this quarter. Can you just give us an idea of how much commercial storage is growing within this? And then given that some of your peers in the US are going to be subject to very high Chinese tariffs and your price increases, can you talk about what your strategy is going to be given I don't think that you have some of the same issue. And then if you can also just talk through your new battery roll out, if timing is going to be impacted at all because I do believe that uses lithium (inaudible).

Thank you for your question. So we started with the commercial battery, and as you know, we're not detailing specific numbers about specific products, but overall, as we indicated last quarter, we are pleased with the growth of that category for us and we're seeing increased attach rate for commercial batteries in different countries in the world.

As it pertains to the US, and I assume that you refer to commercial batteries or to batteries in general, over there, we are also seeing an increase in attach rate of batteries. And the new battery that you're referring to, if I'm not mistaken, is the Nexus one, which is on the residential side.

And over there, we expect to start shipping towards the end of the year in the fourth quarter, and we believe that the solution we're going to introduce is going to benefit our customers immensely, both in terms of PV as well as the combination of PV and storage as we develop the battery together with the inverter to be an optimized system.

When you talk about your 4% to 6% impact on gross margins from the tariffs, can you give us an idea of how much of that is from China versus other regions?

So we -- the guidance or the estimate that we provided is based on the currently known tariffs of 145% for products coming from China and 10% for products that are coming from other markets. And this is how we base our calculation. So obviously, the impact on products and components coming from China is much more -- is much higher than from other countries.

At the same time, as we said, our supply chain team is working diligently in order to find alternative sources as well as to optimize our supply chain based on whether it's coming from China or from other places to provide us with, number one, the most supply chain friendly sources, but at the same time, we are very cognizant of the need for quality products.

So we are not going to rush and just substitute one component with another because they are cheaper. We're going to actually test them, make sure that the quality is according to our standards, and then we're going to roll it out.

Colin Rusch, Oppenheimer.

Thanks very much. Can you talk a little bit about your price strategy as you get into the mid of the year, as you think about some of the dynamics around continuing to flush some of the inventory that's still on the channel and continuing to work towards improved margins. I just want to get a sense of how aggressive you feel like you can be on raising prices and halting existing prices.

Yeah, thank you for your question. It's -- so talking about pricing in general, and globally speaking even, what we try to do and what we will continue doing is to price our product and our solutions based on the value that we bring to our customers and based on the competitive advantage or the competitive advantage we have in specific markets. So for example, when VD appreciates the energy that we generate, all the increased energy that we generate, we will take that into account and we'll price it accordingly, and other factors in the market are going to impact our pricing as well.

Overall, we feel that our pricing promotion in Europe is actually doing well, and the feedback that we received from the channel partners is that these promotions and pricing actions that we took are having initial positive signs. And we will continue monitoring that and adjust as needed.

Thanks. And then the follow up here is really around the inventory reduction. So you're kind of flat quarter over quarter on an inventory basis. What's the right level of inventory that you guys want to be able to carry and how quickly can you get there?

So in terms of inventory, we are consuming inventory -- existing balance inventory mostly within the European continent. In terms of inventory, we are working exclusively with the operation team, and we want it to constantly reduce it quarter by quarter. I don't think we want to provide the specific guidance or targets for that, but it's one of our main priority in terms of reducing, the DAO consistently.

Thanks so much, guys.

Philip Shen, Roth Capital Partners.

Thanks for taking my questions. First one's on pricing. I believe back in November you guys cut pricing for your distributors, and I think there was a 24% discount, but then there was also a 15% recovery discount. I think that recovery period might be coming to an end. Do you have plans on expanding or extending that recovery period? And then can you elaborate more explicit or just more in general about how you expect your EU -- the EU ASPs to trend by quarter through the rest of the year.

Thank you. So you refer to the price promotion in Europe just to make sure that everyone is on the same page. And as we indicated, together with our distribution partners, we launched a campaign in Europe back in November in which we are trying to actually gain share or regain share in Europe. Part of it is pricing and part of it are other things that we are doing in order to engage more installers with the solar solution and we're showing them the value of the product and our service.

As it pertains to pricing, as we said in our prepared remarks, we expect the majority of our distributors to reach normalized levels of inventory at the end of Q2. And we believe that when they are going to reach that level, we will no longer have to provide the incremental pricing adjustment.

These are obviously things that are changing from day to day, from market to market. As I mentioned earlier, our pricing strategy is to be competitive in the market with a price that actually reflects the value that we're bringing to the customers. So these things can move left and right, but overall, and when the channel inventory is going to be normalized, we believe that we will be able to reduce the level of support that we give to our (inaudible).

Great. Okay, thank you, Shuki. Shifting to the distributors and a with the massive drop in value of modules and batteries, do you see a shift of power from the pan-European distributors to more local distributors? What are your thoughts on that dynamic and how could that impact the way you sell to the European markets?

So actually, tomorrow, I'm heading to Intersolar in Germany, and we are going to meet with many of our customers, both distributors and installers, and I will be able to ask them that question and get a better answer than what they can provide you now.

And at the same time, we at SolarEdge, we look at our customers and our channel partners, whether they are large or small is important ones. We're trying to address their needs and whether it will be large distributors that have more share or small distributors that will have more share, we treat them as partners and we are working together with them in order to actually deliver the best products to our installers, right, who are the ones that choose to work with our and choose to install our solutions to their end customers.

Mark Strouse, JPMorgan.

Thanks for taking the questions. It's [Jir] on for Mark. First one, I'm going to go back to pricing here, but maybe think about it in a different way. You talked about the gross margin impact net of pricing. Can you just talk about what you're seeing in the market for -- the market's ability to withstand higher pricing and what that will do to demand. And then also what you're seeing from your competition in the market and how much your price increases are going to compare to others.

Thank you, it's an excellent question, and thank you for that. I assume that you refer to the US market in this specific question and as we mentioned, the tariffs they came not so long ago, and still there is uncertainty in the market about their impact and what will actually happen.

As you -- as we mentioned, we are actually manufacturing in the US. So from that perspective, the adjustments that we need to make to our cost and to our supply chain are limited to sourcing and optimization of the supply chain.

When it comes to pricing, we've made our estimates about where we believe the customers are going to be or the value that we're going to provide them is, as well as the competitive landscape. But I think that the -- we haven't seen any specific number or any specific figure that I can share with you from our competition.

Okay, thank you. And then just excuse me, one follow up. I appreciate the updated full-year free cash flow outlook. Can you just talk about how that's impacting your decision to address the convert.

Yeah, in terms of the converts, at this point, our plans are not changed compared to last time, which is to use the cash on our balance sheet to pay down the debt fully. As you've seen, the balance sheet for the [Q] we have enough cash to pay it, giving us $794 million in cash balance. But as we noted in the past, we're always assessing different options that may be available, but practically, again, at this point, plans are unchanged.

Great, thank you.

Corinne Blanchard, Deutsche Bank.

Thanks for taking my question. The first question would be on the storage. And it's two questions. How fast can you take your more ex-China supply? And then could you guys rethink your strategy regarding set up too, because you are that facility and it could be like an easy -- a relatively easy way to get more battery and not be exposed to as much tariff. And then the second question would be on Europe, if you can provide like a European demand in the market update, what you're seeing, that would be very helpful.

Okay, thank you. So starting with your question about batteries. So we -- as we said, we've provided what we believe would be the impact of the new imposed tariffs on our gross margin in total. We're not breaking it down into specifics whether it's batteries or other components.

And our supply chain team is -- has started actually looking into different ways in order to optimize our supply chain and our sourcing and to find the best possible way and while maintaining the quality of our products that we will be able to deliver quality products to the US to our customers in the US.

As it pertains to Sella 2, as you may recall, the technology over there is NMC technology, and at this stage, we don't think that we are going to use that facility to make battery cells.

Would you (multiple speakers) I'm sorry, just on that one, could you change that line to [LSP] or would it be too time consuming and too much CapEx consuming?

It will require a substantial CapEx investment and time which at this stage we are focusing on what we can control on our non-core. And it's important for us to focus the resources that we have, both the people and the funds, and to direct them to the core business and to make that business grow and become profitable.

Your second question was about Europe, if I'm not mistaken, but could you please repeat the question?

Sure. If you can just provide an update, what you're seeing in Europe. Obviously, it has been quite challenging in the last several quarters. So just wondering if you see like an improvement in certain market or is the situation has remain unchanged.

Yes, so the market in Europe, as you know, it's challenging at this stage, and our estimate as well as other people's estimate is that the market is going to decline year over year. Obviously, Europe is -- consists of different countries and different markets, but as a whole, we expect it to decline year over year. At the same time, the early indications that we have and show that we we've turned the corner in terms of our market share position, and we feel that our channel partners are sharing with us as well as the POS, the sales rule that we've seen -- that we saw in Q1.

These are all good indications that show that we may turn the corner in terms of market share and start to gain share in the market.

Julien Dumoulin-Smith, Jefferies.

This is Hannah Velásquez on for Julien. Thanks for the update. So one quick question and then a follow up. How are you thinking about the 90-day tariff pause as it pertains to your maybe longer term margin impact? I know you talk about improving to 2 points by 1Q '26 and then improving further thereafter, but does not assume the 90-day pause on ex-China tariffs gets extended?

As we said, all the numbers that we provided over there are based on the assumption that the incremental tariff on products coming from China is 145%, and then -- and we have the 10% on products coming from other places. So we did not assume any changes or extended clauses or anything of that sort.

Okay, thank you. Super clear. And then can you just talk a little bit about how you're thinking about any potential changes to transferability as it pertains to 45X? I assume no current changes reflected in your guidance, but just an update there in terms of how you're thinking about it.

In case we experience timing issues, which are related to certain limitation on transferability of the IRA 45 tax credits, we believe that we will be able to get a refund through a direct pay mechanism. Considering these credits are backed by the federal authorities, we believe we can find proper bridge financing, for short-term mortization, if required, if needed.

Brian Lee, Goldman Sachs.

Thanks for getting me on the call. I was a little bit late joining, so I apologize if some of this was covered, but when we look at the implied ASP per watt, it was lower than expected, but I think megawatt volumes shift in the quarter were much better than expected, so I guess a question on that. Did you clear out volume through price in the quarter or was there just maybe a higher mix of commercial versus expected in the quarter?

And then how should we think about price per watt embedded in the 2Q guidance and for the rest of the year? Is this is this kind of the level $0.17 a watt that's implied or is that going to go back up, go down? I'm just trying to get a sense of what to read through on the pricing side based on just the reported results for Q1.

Thank you for your question. As it relates to Q1, the explanation is relating to the shipments versus their actual revenue recognized. We had the relatively more deferred revenues this quarter than usually, than typically, due to timing of shipments versus the actual revenue recognition. And as it relates to Q2, we don't provide this level of details, so that's as much as I can say.

Okay. And then maybe just on the battery side, I know there's been a lot of questions and focus on not giving the tariff situations. I mean, SolarEdge is a little bit unique because, you have this Samsung NMC contract. I'm not sure if there's any volume still left, but can you kind of update us on the status of that?

Is there something that will go towards satisfying US battery storage demand this year so you're a little bit less impacted. And then just the strategy going forward sourcing LFP versus NMC and what suppliers are you planning to work with and from what regions. And then maybe what by what timeframe, if you could give us some more elaboration on the different pieces around your strategy.

Yeah, thank you, Brian. So as we said, we do not break down the impact between the different components and the different products and the different sources. And the impact, keep in mind, it's also a net of pricing adjustment.

What we are focused on is to find the best solutions. Our supply chain team is working diligently to find either -- to optimize our supply chain by finding the best sources both in terms of price as well as in terms of quality. So we don't want to compromise on that, obviously. And the impact that we've provided to you based on this, the second quarter, the second half, and later in 2026 is a combination of all of these things.

Austin Moeller, Canaccord.

I know you've talked about Europe already, but can you provide any details on the clearing of the channel, given where electricity rates are throughout Europe?

Yeah, thank you. So as we said, we expect the majority of our distribution partners to reach normalized inventory level by the end of Q2. And it has to do with the underlying demand that exists for Solar, for the market, as well as the activities, the actions, and the promotions that we've put in place in order to gain share within this market.

So the combination of these two things are helping us gain share. In addition to the growth in the tax rate of batteries, which is also helping us in that regard, and the combination of all of these things. Obviously, it does -- it is impacted by energy prices, but the other factors that are contributing to the demand as well.

Okay. And just to follow up, are you seeing a substantial demand pull forward in the US relative to what you expected, given the risk to the investment tax credit as of January 2026, or do you think that's being somewhat muted by current interest rates?

Thank you for that. We don't really see anything of that sort. Obviously, the uncertainty in the market is there. Our customers -- we are engaging with our customers and we, if they have any specific needs or any specific deals or transactions that they would like to engage with, we're going to definitely look into that.

But as we indicated, we've just signed a multi-year agreement with the leading global real estate enterprise, and over there it's something that is going to take several years to actually execute on, installing solar products in all of their facilities. So I -- while there is some uncertainty in the short term, we believe that the underlying demand is there and the growth and need for electricity is going to continue growing.

Kashy Harrison, Piper Sandler.

Thanks for taking the question and congrats on all the progress during the quarter. So first question for me, what were the safe harbor revenues in 1Q and then as you look into two, is the revenue growth coming from the US or Europe? And I have a follow up.

So in terms of Q1, a portion of safe harbor, as we already indicated in the past, we don't break this out. In terms of Q2, what we can say is that there is a lower safe harbor amount in Q2 compared to Q1.

And is that -- so the 2Q growth, is that revenue growth, is that coming from the US or is that coming from Europe?

I don't think we can elaborate beyond what I just said, sorry.

Okay, fair enough. And just for my follow-up question, if we look at your margins in 2Q I think they would have been 12% if you -- before the impact of the tariffs. If you could theoretically close that gap between your selling at [275] and your sell through at [375]. So in other words, if revenues increase to [375], where would you expect the margins to be, again, before the impact of tariffs?

So clearly, in terms of the levers on the gross margin, the biggest driver is high revenue leverage, given our fixed cost position and infrastructure and the higher the revenue, the better utilization of fixed costs and the higher the marginality. Just to talk about a couple of two relevant I think major levers that would be the new products coming in later this year with better cost structure and higher margins.

And as long as we continue as we indicated to ramp up the US production, which is the most economically attractive location to manufacture considering the IRA credits, we will see an increase in the margins and marginality.

Ameet Thakkar, BMO Capital Markets.

I just have a couple of quick housekeeping questions, and thanks for the time. The $100 million kind of increase in prepaid expenses and other assets on the cash flow statement and then I guess some kind of $52 million decline in different remedies and customer advances, is that safe harbor and kind of 45X tax credit sale related and if so, can you kind of just kind of clarify which line items have which.

Yeah, these line items refer largely to the 45X credits and to the deferred revenue, and deferred revenue mostly declined due to the shipments of our safe harbor transaction which we announced in Q4. And you pointed there rightly to the relevant balance sheet items.

Thank you.

Jordan Levy, Truist.

It's Henry on for Jordan here. Thanks for squeezing me in. Just a quick one for me, noting this is still a small part of the business, but looks like the utility segment also had a nice quarter relative to last year. I'm just curious on your thoughts around that market this year and your ability to compete there.

Yeah, thank you for that. Yeah, it's a -- as we said before, SolarEdge technology is actually optimizing the production, the power production of a given set of modules, and it excels in conditions that are not ideal. So initially, utility was something of -- the utility space was something that we did not participate in. However, last year, we introduced a product that is addressing what we refer to as optimized utility.

There are several types of utility type projects that require optimization and the advantages that SolarEdge brings to the table. So we figured that we can actually not only compete in this space but actually add value and demand or gain the share that we deserve in that segment of the market, and we're actually seeing traction to that which you can see in the increased revenue of that segment.

(Operator Instructions) Vikram Bagri, Citi.

I apologize. I joined a little late in case you've already answered these questions. I wanted to ask a few housekeeping questions. First, on OpEx, good progress there. I believe your current plan is to have OpEx run rate of non-GAAP OpEx run rate of $80 million to $90 million. Is that still the plan? Has that target moved at all in the last few months?

Secondly, I think you mentioned break-even free cash flow this year. Does that mean second quarter will be somewhat break even too in case you've disclosed what the second quarter free cash flow target is? And then finally, you've highlighted the majority of distributors will have normalized inventory by the end of second quarter. What does it mean in terms of selling matching sell through? Should we expect third quarter revenues to be normalized quote-unquote revenue level or should we see some inventory reduction noise in third quarter as well?

Hi, good morning and thank you for the three questions. So in terms of the OpEx, I think as you noted, and we previously communicated, we have a target OpEx level by the year-end of $85 million to $90 million range. I think Shuki mentioned before that we will continue to focus on our core business, which could result in additional cost savings. And we are reviewing, and that's part of my job, any particular -- every avenue for efficiency improvement measures, and it's something again that I'll be proactively driving.

In terms of the second question on the cash flow, so as you may know, we are not providing any particular quarterly free cash flow guidance as it depends on timing of cash flows which may shift between quarters. We are saying, we did say, however, that we will be approximately break-even for the year and that of course includes the incremental tariff impact.

As it pertains to the third question, the inventory levels in in Q3, I said before that we are very focused on reducing our DIO and inventory levels and consuming the balance sheet inventory in the European continent, but I guess -- and that's as much as we can say for Q3 inventory.

Thanks.

Thank you. And this concludes the question-and-answer session. I will now turn the program back to Shuki for closing remarks.

Thank you, everyone, for joining us this morning. As we mentioned, we are pleased with the progress that that we've made, and we are focused on what we can control in this environment, and I look forward to continue updating you on our progress with the turnaround story of SolarEdge. Thank you and have a great day.

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