SolarEdge Technologies - Q2 2023
August 1, 2023
Transcript
Operator (participant)
Welcome to the SolarEdge conference call for the Q2 ended June thirtieth, 2023. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Events Calendar page. This call is the sole property and copyright of SolarEdge, with all rights reserved, and any recording, reproduction or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event Calendar page of the SolarEdge investor website. I would now like to turn the call over to JB Lowe, Head of Investor Relations for SolarEdge.
JB Lowe (Head of Investor Relations)
Thank you, David, good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the Q2 ended June 30, 2023, as well as the company's outlook for the Q3 of 2023. With me today are Zvi Lando, Chief Executive Officer, and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the Q2 ended June 30, 2023. Ronen will then review the financial results for the Q2, followed by the company's outlook for the Q3 of 2023. 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 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 that they provide investors with the 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 quarter ended June thirtieth, 2023, press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now I will turn the call over to Zvi.
Zvi Lando (CEO)
Thank you, JB. Good afternoon. Thank you all for joining us on our conference call today. Starting with highlights of our Q2 results. We concluded the quarter with record revenues of approximately $991 million. Revenues from our solar business were at a record $947 million, while revenues from our non-solar businesses were $44 million. This quarter, we shipped 5.5 million Power Optimizers and 335,000 inverters. This quarter, we also shipped 269 megawatt hours of residential batteries, a 22% increase from last quarter. Our solar business revenue grew quarter-over-quarter by 4% and by 38% year-over-year, mostly driven by record revenues in Europe, offset by a decrease in revenue in the United States and rest of world.
We saw record revenues in many countries this quarter, including Germany, the United Kingdom, Switzerland, South Africa, and Thailand. Particularly noteworthy is the growth we have been discussing for several quarters in the commercial segment, which has seen megawatts shift go from 1.5 gigawatt in the Q4 of 2022, to 2.1 gigawatts in the Q1 of this year, to 2.6 gigawatts of shipments this quarter. The solar market is going through a transition, emerging from the recent period of component shortages, high energy prices, and rapid growth, to one now impacted by higher interest rates and excess inventory. Given this shift, I would like to review the major trends we are seeing in the various regions and how it affects our company. In Europe, installation rates continue to be high in both residential and commercial.
However, the strength in the market is somewhat more moderate than what was anticipated heading into 2023, largely due to a milder winter, reduced concerns over energy resilience, and lower electricity prices. With that in mind, our growth in Europe in the Q was very strong. Overall, our megawatt shipments to Europe grew by 52% quarter-over-quarter, including 57% in residential and 50% quarter-over-quarter growth in commercial. Additionally, sell-through by our distributors in the Q2 was up 49% year-over-year in residential and up 115% year-over-year in commercial. On the supply side, the distribution channels in Europe are experiencing higher than optimal inventory levels, especially as it relates to solar modules.
During the recent period of shortages and expectations for high growth, distributors placed large orders for modules and inverters in order to ensure stability of supply to support the growing demand. As growth in demand has tapered off, distributors are taking a more cautious approach in order to better manage their cash flow. In addition to taking actions to reduce inventory levels, distributors are also reducing the number of suppliers in their portfolio, which had expanded during the period of shortages. This is a dynamic seen before in the industry during a shift from a period of extreme shortage and accelerated growth to a period of more gradual growth and undisrupted product availability. We expect this inventory adjustment period to continue for the next two quarters, especially when also taking into account the typical Q4 seasonality effect in Europe.
We see this environment as an opportunity to grow market share based on our offering that is very suitable to the growing complexity of the European grid, where dynamic tariffs and negative rates are becoming more common. To deal with this growing complexity, our customers require advanced energy management, hardware and software, of the sort we recently announced at Intersolar, and about which I will elaborate in a few moments. Moving to the U.S. residential market, the combination of higher interest rates and the new Net Metering 3.0 regime in California, have led to a decrease in demand compared to the second half of last year. As a result, inventories of our product in the various channels are higher than normal, as they were built in anticipation of substantial market growth that did not materialize.
As a result, our shipments to the U.S. residential markets were down 29% this quarter from the last quarter. Sell-through of our products by our distributors, however, actually rose by over 10% during the same period. We expect the process of inventory normalization to last at least through the end of the year. Looking into 2024, there are two market trends that we view as positive for our business. First, the expected increase of third-party ownership installations, driven by the shift to lease versus loan financing, a sub-segment where our market share has traditionally been higher. Second, is the expected increase in storage installations, in particular, the evolving NEM 3.0 battery market, where our DC-coupled system can offer up to 10% more energy on an annual basis when compared with a non-DC-optimized module-level electronics solution.
In the U.S. commercial market, we continue to see stable demand, which we expect to gradually grow as a result of lower module prices and as projects that were on hold begin to move forward. This is expected as some developers who had halted project in anticipation of IRA clarifications related to the 10% ITC domestic manufacturing adder, move forward with the project execution after realizing that IRA clarity will likely take longer than anticipated. In rest of world, we see a mixed picture, where some countries are experiencing headwinds due to a higher interest rate, while others, such as South Africa and Thailand, are growing rapidly due to grid instability and favorable regulatory environments. Moving to products. I want to spend a few moments discussing the increased investments we are making across our digital solution platform, which is focused on three main pillars.
First, our energy management software, known as SolarEdge One, which we recently introduced at Intersolar in Munich. SolarEdge One helps home and business owners optimize their energy production, consumption, and storage. With the proliferation of time of use and dynamic tariffs and growing attach rate of batteries, we believe this will become an increased area of differentiation for our PV plus storage solutions. Second is our installer toolkit, which is a set of tools aimed at helping our customers design, sell, install, and commission PV and storage systems in a fast and efficient manner. At RE+ in September, in addition to demonstrating improvements to our already short installation and commissioning times, we will be launching our new installer proposal tool, a sophisticated step-by-step software platform to help installers be more effective when selling a PV plus battery system at the kitchen table.
Third, digital infrastructure, which includes grid services and other advanced applications. In the field of grid services, our total number of enrolled sites grew by 70% in the Q2 to over 13,000 sites. In the United States, 16% of our battery installations are now enrolled in grid services programs. In the Netherlands, we launched through two electricity aggregators, our first commercial grid services program aimed at grid balancing and already enrolled dozens of commercial sites into the program. We have a high number of additional enrollment requests and are looking at integrating with additional aggregators in the coming months. Another part of our digital offering is based on our acquisition earlier this year of Hark Systems, which offers commercial customers significant monitoring and connectivity capabilities across increasingly complex energy systems.
While still not significant in absolute numbers, and likely won't be significant for several quarters, our broad digital offering augments and solidifies our leadership in the residential and particularly in the commercial markets. More importantly, as electrical grids become more constrained and penetration of distributed solar and other renewables increases, optimized interaction with the grid, as well as optimized energy management at the home and in the business, will be critical to the positive functionality and economics of the solar installation. We see this as an opportunity for differentiation for technology companies like SolarEdge, and a key reason why we don't believe that the inverter markets will become commoditized. More on the product side, we are seeing good progress with our tracker offering, as we now have more than 30 megawatts of trackers either installed or in the process of installation.
This new product, which is both lightweight and has a small footprint, provides access for us to new market opportunities and will initially enable us to offer a full solution to the growing Agri-PV segment, which is lately receiving significant regulatory support. On the electrical vehicle charging fronts, we continue to supply our AC EV chargers, both the inverter-integrated and standalone versions. To date, have shipped over 45,000 units globally. As we unveiled at Intersolar, next year, we plan to release our bidirectional DC EV charger that will be DC-coupled, enabling greater charging efficiency through fewer AC to DC conversions. Moving to operations, we are making strides towards building out our U.S. manufacturing footprint.
In the Q3, we expect to ship several thousand inverters from our contract manufacturing partner site, with this number growing to above 30,000 inverters that we expect to ship from this site in the Q1. More broadly, we mentioned earlier the fact that inventory levels are high for some products. However, on certain products, such as three-phase inverters in the European market, even though we increased output significantly in the Q2, we are still delivering below demand, and thus, air shipments have been required. Part of the relief in this area will be via the long-term purchase agreement we announced last week with Infineon, that will help give us assurance in the availability of critical power semiconductor components in the years ahead.
In our non-solar business, our Sella 2 battery factory continues to ramp and is on track to reach its full capacity by the end of this year. Additionally, we have initiated manufacturing of the type of cells that will be used in our portfolio of next-generation batteries, starting with the release of a new residential battery planned for the first half of next year. In closing, while we discuss the inventory corrections taking place, the actual PV market is continuing to grow in many places around the world. For example, Germany, one of the largest solar markets, is expected to grow from 7.5 gigawatts installed in 2022 to 10 gigawatts installed in 2023, with further growth anticipated in 2024.
I believe that our portfolio and positioning within diverse markets and applications will benefit us as markets continue to grow in some areas and we begin to recover in others. I will now hand it over to Ronen. Ronen?
Ronen Faier (CFO)
Thank you, Zvi, and good afternoon, everyone. This financial review includes a GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. Segment profit is comprised of gross profit for the segment, less operating expenses that do not include amortization of purchased intangible assets, impairments of goodwill and intangible assets, stock-based compensation expenses, and other certain items. Total revenues for the Q2 were a record $991.3 million, a 5% increase compared to $943.9 million last quarter, and 36% increase compared to $727.8 million for the same quarter last year.
Revenues from our solar segment, which include the sales of residential batteries and trackers, were a record $947.4 million, a 4% increase compared to $908.5 million last quarter, and a 38% increase compared to $687.6 million for the same quarter last year. Solar revenues from the United States this quarter were $195.6 million, a 23% decrease from the last quarter, and a 37% decrease from the same quarter last year, representing 21% of our solar revenues. Solar revenues from Europe were a record $688.5 million, a 19% increase from the last quarter, and a 112% increase from the same quarter last year, representing 73% of our solar revenues.
In Europe, we continue to see meaningful quarter-over-quarter revenue growth in general, and noticeable records in Germany, with 64% growth, reaching close to $300 million of quarterly revenues. Sweden with 106% growth, the United Kingdom with 50% quarter-over-quarter growth, and Slovenia with 54% growth. Revenues from batteries grew slightly this quarter in Europe, limited by the fact that we are still constrained by three-phase inverter supply, which is needed for battery-coupled systems. We do identify some excess battery inventory in the European channels, which will lead to lower battery shipments in the second half of the year. This inventory buildup will be alleviated as the ramp up in deliveries of our new three-phase residential backup inverter catches up with our battery manufacturing and delivering pace....
We intend to use air shipments in the third and Q4 in order to resolve this imbalance and fulfill the demand for our products in this segment, as a single inverter is typically installed with two to three batteries. Rest of the world solar revenues were $63.3 million, a 17% decrease compared to the last quarter, and a 19% increase from the last year, and representing close to 7% of our solar revenues. This quarter, we saw record revenues in South Africa and Thailand. On a megawatt basis, we shipped 666 megawatts of inverters to the United States, a record 3.3 gigawatts to Europe, and 397 megawatts to the rest of the world, surpassing 4.3 gigawatts of record quarterly inverter shipments.
60% of our megawatt shipped this quarter were commercial products, and the remaining 40% were residential, a result of strong European adoptions of our products and higher European revenues in the total mix. In the Q2 we shipped 269 MWh of our residential batteries, an increase from 221 MWh last quarter. The vast majority of our batteries continue to be shipped to Europe. ASP per watt this quarter, excluding battery revenues, was $0.188, a 14% decrease from $0.22 last quarter. This ASP per watt decrease is predominantly a result of increased commercial inverters in the overall mix, partially offset by a stronger euro. In general, our prices did not change this quarter.
Our battery ASP per kilowatt hour was $479, slightly up from $475 last quarter, mostly a result of a stronger euro. Revenues this quarter from our non-solar segment were $43.7 million, an increase from $35.2 million last quarter, a result of higher storage division revenues. Consolidated GAAP gross margins for the quarter was 32%, a slight increase compared to 31.8% in the prior quarter and 25.1% in the same quarter last year. Non-GAAP gross margin this quarter was 32.7%, compared to 32.6% in the prior quarter and 26.7% in the same quarter last year.
Gross margin for the solar segment was 34.7%, compared to 35% in the prior quarter and 28.1% in the same quarter last year. The quarterly solar margin change was mostly a result of product mix changes. This quarter, in our solar division, our inverter and optimizer gross margins were approximately 37%, our residential inverter and optimizer product margin continued to exceed 40%, and our battery margins were slightly below 25% due to a higher portion of single-phase batteries within the mix. Goods subject to tariffs, excluding batteries shipped into the United States from China, accounted for 6% of our US shipments this quarter, the lowest on record, as a result of the ramp-up in our Mexico manufacturing facility, which is at a level that we expect to maintain in the next quarters.
Gross margin for our non-solar segment was -9.6%, compared to -31.3% in the previous quarter. Our Sella 2 ramp-up continues as planned, and the increased revenues from our storage division are contributing to the margin improvement in this division. This quarter, we also include, for the first time, results of our newly acquired Hark Systems in our financial results. While still a very small portion of our revenues, Hark software sales are characterized with very high gross margins.
On a non-GAAP basis, operating expenses for the Q2 were $133.3 million, or 13.4% of revenues, compared to $123.6 million, or 13.1% of revenues, in the prior quarter, and $109.6 million, or 15.1% of revenues, for the same quarter last year. Our operating expenses as percentage of revenue increased as a result of our annual employee merit process that takes place in the Q2. Our solar segment operating expenses as percentage of solar revenues were 12.8%, compared to 12.3% last quarter, resulting from the same reason.
Non-GAAP operating income for the quarter was a record, $191 million, compared to $183.8 million in the previous quarter, and $84.7 million for the same period last year. The solar segment generated a record operating income of $207 million this quarter, slightly up from $206.7 million last quarter. The non-solar segment generated an operating loss of $16.1 million, compared to an operating loss of $22.9 million in the previous quarter. Non-GAAP financial income for the quarter was $4.4 million, compared to a non-GAAP financial income of $24 million in the previous quarter.
As the euro to U.S. dollar rate is above 1.1 dollars per euro, we continue to reduce our exposure to the euro by higher frequency of currency conversions to the U.S. dollars. Our non-GAAP tax expense was $38 million this quarter, compared to $33.2 million in the previous quarter, and $7 million for the same period last year. We expect to maintain approximately 20% tax rate on both GAAP and non-GAAP basis for the rest of the year. GAAP net income for the Q2 was $119.5 million, compared to GAAP net income of $138.4 million in the previous quarter, and $15.1 million for the same quarter last year.
Our non-GAAP net income was $157.4 million, compared to a non-GAAP net income of $174.5 million in the previous quarter, and $56.7 million in the same quarter last year. GAAP net diluted earning per share was $2.03 for the Q2, compared to $2.35 in the previous quarter, and $0.26 for the same period last year. Non-GAAP net diluted EPS was $2.62, compared to $2.90 in the previous quarter, and $0.95 in the same quarter last year. Turning now to the balance sheet. As of June 30, 2023, cash, cash equivalents, bank deposits, restricted cash, restricted bank deposits, and investments were $1.5 billion.
Net of debt, this amount is $853.5 million. This quarter, cash used in operation was $88.7 million, mostly related to inventory buildup. As we believe that we have seen the bottom of our cash use, we expect substantial cash buildup in the next quarters, starting in Q3. Accounts receivable net increased this quarter to $1.015 billion, compared to $969.5 million last quarter, representing 126 days outstanding, a reflection of our increased revenues that were skewed towards the end of the quarter, and in certain cases, extension of credit terms to our customers, mainly in the United States. As of June 30, our inventory level, net of reserve, was $984.2 million, compared to $874.2 million in the prior quarter.
As a result of the slowdown in the shipments to the United States, slower growth rates in Europe, and more streamlined manufacturing, our finished good inventory increased substantially this quarter. At the same time, we are slowly reducing our component safety stocks and battery cells as component availability becomes less of an issue. Turning to our guidance for the Q3 of 2023. We are guiding revenues to be within the range of $880 million to 920 million. We expect non-GAAP gross margin to be within the range of 28 to 31%. We expect non-GAAP operating income to be within the range of $115 million to 135 million.
Revenues from the solar segment are expected to be within the range of $850 million to 880 million. Gross margins from the solar segment is expected to be within the range of 30 to 33%. I will now turn the call to, over to the operator to open it up for questions. Operator, please.
Operator (participant)
At this time, if you'd like to ask a question, please press the star and 1 keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue by pressing the pound key. In the interest of time, we do ask that you limit yourself to 1 question and 1 follow-up question. We will take our first question from Mark Strouse with JP Morgan. Please go ahead.
Mark Strouse (Managing Director and Senior Equity Research Analyst)
Great, thanks for taking our questions. I wanted to start with the 3-key revenue guide. When we look at the $80 million to 90 million dip quarter-over-quarter, can you break down how much of that is driven by Europe, US, rest of world? It sounds like the inventory issue is fairly broad, but I'm just curious if we should think about that kind of, you know, if Europe is 70% of your revenue and US, 20%, is that similar kind of mix for the change quarter-over-quarter?
Ronen Faier (CFO)
Hi, Mark. Thank you very much for the question. Actually, when we look at the guidance for the next quarter, we need to look a little bit region by region because we see a little bit of a different dynamics. I would say that most of the reduction that we see is coming, first of all, from less revenues of batteries, mostly in Europe. As we mentioned in the prepared remarks, we found a situation that our batteries shipments were a little bit faster than our ability to ramp up the inverters that come with them, mostly three-phase inverters. As a result, there is a built inventory within the channels there that needs to be cleared in order to continue and grow.
This will be cleared mostly through the adoption or getting more inverters from us during the third and the Q4. This is why, by the way, we're also increasing our air shipments. The first, first of all comes this decrease. The second one comes actually from optimizers. Again, in Europe, it's also happening in the United States, but a little bit more in Europe, because Europe is more characterized with commercial systems. Because of the fact that inverter shipments were a little bit slower to ramp compared to the other products, again, because of the three-phase products that we needed to get more components, what we usually see is that installers, and especially commercial installers, who are installing the modules faster than they do the inverter.
Actually, they install the inverter only at the very last moment, used to take a little bit more optimizers in order to make sure that they can basically complete the installations of the modules in their, either on the roof or in the overall installation. Then once the inverter comes, they simply install it and commission it. Since the majority of the revenues came from Europe, the majority of the down this quarter is also coming from Europe because of these two phenomena.
At the same time, when we go to the United States, as Sivi mentioned, we believe that we have basically seen a lower amount that we do not expect to go much lower in the next quarter, because of the fact that on one hand, indeed, the inventories are high, but still, some of the products that are needed, are still missing there, and we're going to ship them. When it comes to rest of the world, again, it's a relatively mixed situation, where again, we expect to see, I would say, something that will be relatively flattish. The majority will come from Europe, the majority will come from batteries and inverters that were, first of all, delivered-
Zvi Lando (CEO)
Optimizers.
Ronen Faier (CFO)
Optimizers, sorry, that were first of all delivered, and rest will be relatively flattish to maybe slightly down.
Mark Strouse (Managing Director and Senior Equity Research Analyst)
Okay, that's extremely helpful. Thank you. Your, your comments were, were interesting regarding the, the European distributors, and, and kind of managing the number of suppliers. Just curious if you can give us a fairly high-level update on what you're seeing with the, the overall competitive environment.
Zvi Lando (CEO)
Yeah. Mark, the phenomena that I described, and it is indeed a, for those that have been active in Europe for years, it's something that we've seen through the cycles. I, I could give you an example that some of our distributors in Poland are carrying today, 10 brands of inverters. 6 or 7 of them are new that they didn't have before, that during the period of shortage, they just took whatever they could get a hold on because that's what the installer needed. Now as things stabilize, they're paring down the number of brands to, that they're carrying into a more classical combination of, call it the high end, the base, and the, and the economic solution, if you will.
This is a dynamic that, that has repeated itself, multiple times, and it's more pronounced in the module side. If you've seen some of the reports and from our discussions in with distributors, they also emphasize that, that the inventory levels on modules are abnormally high, and a lot of that inventory is, by now, the module pricing in the market is significantly lower than the prices at which those modules were purchased.
There are, a lot of distributors are in some form of financial challenge, and with that, they are resolving that by going to a, on the overall offering, to low levels of inventory that are maybe lower than those that they, they would normally carry, in this type of a period, especially because the overall demand is still high, but just in order to control their financials. The market is very active. Installations are up, and demand for equipment is strong.
Just there, there, there's an adjustment on the channel side to limit the, their portfolio, drain the volumes that they've accumulated during the closing months of the shortage period, and get back to a more sustainable growth type of model, excuse me.
Mark Strouse (Managing Director and Senior Equity Research Analyst)
Okay. I'll take the rest offline. Thank you very much.
Zvi Lando (CEO)
Thank you.
Ronen Faier (CFO)
We'll take our next question from Brian Lee with Goldman Sachs. Please go ahead. Your line is open.
Brian Lee (Managing Director and Senior Equity Research Analyst)
Hey, guys. Thanks for taking the questions. I had a couple here. I guess first off, maybe for you, Ronen, appreciate, you know, some of the color around the different dynamics in Europe, rest of world, US, that played into the, the weaker, maybe than expected 3Q guidance here. It, it sounds like some of that's persisting, though, beyond just this quarter. Can you give us sort of an early read into what you're expecting as you think about the timing of inventory rebalance, battery shipments, and, you know, weakness in US as well as seasonality you called out? Like, is there a path for 4Q to be flat up/down? Just kind of give us the puts and takes around, you know, how, how we should be exiting the year on the top line.
Then I, I might have missed this, but did you give a specific battery shipment guidance as well?
Ronen Faier (CFO)
I'll start from the second. No, we didn't give a specific guidance for batteries, but they are going to be down substantially next quarter compared to this one, given the dynamics that we see, especially in Europe, more batteries in the channels than I would say normally, the distributors would like to have because they're still missing the inverters. On batteries, it's definitely going to be substantially lower next quarter. When it comes to the dynamics and the quarters, unfortunately, life is very complex in this area, and I will try to give a little bit of the puts and takes there. I'll start from Europe again, being the center of our sales today.
In Europe today, what we see is that the inventory levels on one hand are relatively high, but when you look at the days outstanding, which is a result of the sales through from the channel, they're not high at all. They're actually at the normal level. When we are looking at the point of sale data of how much is being sold from the channels, we see record levels over the last 2 quarters, that to our understanding, are continuing. Which means that in that case, the demand is there, the demand is fairly strong, not maybe as strong as people believed from the very beginning of the year, but still very strong.
Therefore, you would say that the levels of inventory that the distributors have, and maybe a little bit of change in patterns in making orders a little bit, a shorter time, from the time that they need it, because there is enough supply in the market, creates a situation where basically some of them even say that it'll be one or two quarters, but not more than this until the inventory levels are adjusted, because you don't see a big gap. The problem in Europe is that you go into the Q4 and going back to the normal days of solar, usually the Q4 is seasonally low in Europe compared to the Q3.
First of all, because of the fact that this is start of the winter and nobody wants to enter the market with, or the winter with, too much inventory. Second, because of the holidays themselves, there are less days to install during the quarter. Here we see a mixed phenomena, where we believe that the market dynamics are very healthy and will require faster recovery of the inventory levels and faster increase in volumes. The impact of winter is not known, and let's not forget that there is still a war in Europe, so I'm not sure what where is going to be the concerns about electricity there. In the United States, I think that we see a different phenomena.
In the U.S., we do see that the inventory levels are a higher, much higher than the supply than the distributors would like to see. We do see that, as Stevie mentioned, point of sale for our products at least improved in the last quarter, but it is still at a relatively lower level. Therefore, we believe there that overall, it's going to be to be more than 1 or 2 quarters until the situation is being changed. If I try to summarize everything, I would say that we're cautiously optimistic to see Q4 being flat to up, rather the opposite. Again, it is a quarter with many different phenomenas that are sometimes contradicting, that are happening at the same time.
Brian Lee (Managing Director and Senior Equity Research Analyst)
That's super helpful. I appreciate that. Maybe just to follow up on that, you didn't mention batteries. Is the battery adjustment happening all in 3Q? Do you think it goes back up in 4Q? Then I'll just squeeze in my last one. On gross margins, you know, kind of surprised by how much gross margins are being guided down relative to the strong performance at the beginning part of the year here. Is the entire 300 basis points at the midpoint coming from the air freight, and does that go away after 3Q, or are there other impacts embedded in there?
Just trying to understand, you know, the, the 35% solar gross margin going to, you know, basically 32 in, in 3 months, and then what the, what the sort of forward would be in terms of recapturing some of that, what, what the levers are there? Thank you.
Ronen Faier (CFO)
Okay. First of all, I think that the question that was sneaked will be higher answer than the first one. I'll start from the first one. In general, we, we expect the batteries in Q4. Again, we do not guide yet, we expect them to be similar and maybe slightly up compared to the Q3. Here, the reason is, again, it's end of the year. Nobody would like to enter-- to exit the year with too much of an inventory. We assume that this is more related to less market dynamics and more of inventory management dynamics.
Especially, by the way, knowing, understanding, Brian, that this is a product that is relatively expensive, and once you have availability in the market, and the distributors know that the suppliers do have availability, and the availability is relatively close to them, they know that they can get sometimes batteries within day, days. They try to shift a little bit the load at the end of the year, because of their financials and the way that they look to the vendors or to the manufacturers themselves. I would say that at least from a if I would take not 1 or 2 quarters, but let's say, you know, like 2 or 3 quarters ahead, the phenomena is going to be of a growth inventory, a pattern rather than declining or stabilizing one.
It's just that, again, there is a little bit of play where end of the year is, is, is a determining factor. On the margins, actually, here, it's again, it's a little bit of a different situation. The first thing is that we are going to ship much more inverters that are three-phase commercial inverters during Q3 and Q4. This is the product that is mostly missing in Europe, and this is the product that is usually carrying the lowest gross margins of our inverters, compared to, compared to any other product, except, except for batteries, by the way.
The second thing is that when you couple Because of the characteristics of the installations, when you usually do 2 modules per 1 optimizer, actually, when you look at the gross margin of the entire solution, the optimizer is also contributing to a better gross margin on the entire solution than the inverter. The fact that now we're.
Zvi Lando (CEO)
... shipping not only more commercial inverters, but actually more inverters than optimizers in the overall mix, this has a bigger impact of this imbalance on the gross margin. This is something that we expect to see into Q3, maybe into Q4, because Q4 we already see very large amount of commercial inverters that we're going to ship in. I would say that actually major part of it will be more of the more of the inverter rather than the air shipment. The air shipment, of course, is very expensive and is also substantial, and this is something that, again, we expect to go away during Q4. I would say that these are the 2 major factors, and both of them are supposed to go away after Q4.
Philip Shen (Managing Director and Senior Research Analyst)
Okay, thanks so much. I'll pass it on.
Operator (participant)
We'll take our next question from Philip Shen with ROTH MKM. Please go ahead. Your line is open. Philip Shen, your line is now open. We will next move on to Colin Rusch with Oppenheimer and Company. Please go ahead.
Colin Rusch (Managing Director, Senior Research Analyst, and Head of the Sustainable Growth & Resource Optimization franchise)
Thanks so much, guys. Can you talk a little bit about the R&D spend and, and how you're thinking about, you know, the, the relationship with Infineon? Anything that we should be attending to from a prepayment perspective, you know, how that might streamline some of your R&D spending? Anything else in or around that agreement?
Zvi Lando (CEO)
Yeah, Colin, I, I, I think the R&D spending pattern is not changed significantly. We're continuing to invest with mild growth as we're expanding into new areas, new products, and continuing to develop next generation products for the existing markets that we serve. The cooperation with Infineon has two elements to it. The first is assurance of supply to the components that we use in mass in our current products. This is semiconductors and, and, and more significantly, IGBTs that are used in every inverter that we do. That's the first layer of the cooperation with them, and that, that does not impact R&D obviously. It's more about, that's an operational view.
The second element is working together on a next generation power semiconductors like silicon carbide and gallium nitride. That is a long-term cooperation that that is, is again, it's not, it's not a big swing on R&D investment one way or another. It's preparing the future of our, of our power semiconductors by by working with with one of the leading companies in this area, as well as other companies that that we work with. It's, it's a strategic partnership for us. Obviously, it's not something that has a direct impact on our R&D spend, but more on our our roadmaps and assurance of supply.
Colin Rusch (Managing Director, Senior Research Analyst, and Head of the Sustainable Growth & Resource Optimization franchise)
Thanks so much. Then from a pricing perspective, obviously, you know, we've gone through multiple rationalizations of the, the solar, you know, demand profile over the, over the years, and you've adjusted pricing in various ways. Yeah, I guess, what, what would you need to see to start taking some price action in the market at some point to continue to take market share? How do you think about, you know, the importance of market share in terms of long-term growth of the business?
Zvi Lando (CEO)
Yeah, I, I think exactly as you described, there's a business as usual mode for the market and for being a technology and high-end supplier within the market, where we focus on differentiation and constantly make sure that our pricing is justified by the value and differentiation relative to our competitors. If you look historically in the market, there is a dynamic where on an annual basis, there's cost improvements that suppliers make. We invest a lot in cost reduction.
There is a volumes increase, that supports our, our cost reduction, that, in turn, also enables some price reductions and making sure again, that the gap relative to our competitors is justified by our value. The last couple of years have been very disruptive or very different in terms of the dynamics. I do think that it's likely that next year, following some of the dynamics that we described over here, the market will be back in more of its normal type of situation, where things are stable, there is more activity on the area of cost reduction and as well as more activity on the area of reasonable price reduction.
I, I don't rule out that happening sometime next year. Right now, we're still not in that type of environment, and we, we, we don't see the need to reduce prices, and our prices have been stable recently.
Colin Rusch (Managing Director, Senior Research Analyst, and Head of the Sustainable Growth & Resource Optimization franchise)
Thank you so much.
Operator (participant)
We'll go back to the line of Philip Shen with ROTH MKM. Please go ahead, sir.
Philip Shen (Managing Director and Senior Research Analyst)
Hey, guys. Sorry about that. Thank you. You talked about how pricing is stable. That said, are you open to price reductions in early 2024?
... and, perhaps you can talk through by geography and by end market. Also, can you talk through how many weeks of inventory maybe in the channel by end market and also by geography? Thanks.
Zvi Lando (CEO)
Starting for the, with the second part, you know, at high level, it's probably in Europe, the inventory levels are still, I would say, below a quarter, probably in the range of 2 months. For some products, like the three-phase inverters, it's less than 1 month. For some products like single-phase inverters, it's probably more than 2 months. Historically, these are very reasonable inventory levels for the European market. What's happening is what we described, and I described before, is a dynamic where they're sitting on very, very large inventories of modules and trying to control financials, and in a way, maybe call it taking a risk or being on the edge in terms of the overall inventory levels that they're holding.
I think that the inventory levels in Europe are, are in that range and, and considered reasonable, maybe on the high end of reasonable. Considering the very high sell-through and installation rates, it's not, it's not the major bubble, if you will. The U.S. probably, the inventory levels are higher. They're, they're closer to a Q2 level. As, as Ronen described, although we're seeing gradual uptick in installation rates and sell-through to work through that type of inventory will probably take a bit longer, unless there's a significant- more significant uptick on installation rate as maybe as NEM 3.0 becomes more clear. We are seeing much more activity in terms of understanding the, the, the value of our DC-coupled architecture for California.
I discussed what, what we had -- the anticipation that we have, that, that commercial will also begin to pick up. If there isn't a major pickup in installation rates in the US, it will take a bit longer to work through through that inventory. In regards to the first question on, on pricing, going back to, to the answer to the previous, to, to the previous question. During 2024, I think that this topic will be a relevant topic as we, we have a better view on our cost management structure, the market is in a more stable condition.
As I can't say that we rule it out, at this point, it's just not something that is in discussion for the coming few months.
Philip Shen (Managing Director and Senior Research Analyst)
Great, thank you. Shifting over to C&I for a bit, was wondering if you could update us on what the backlog is there? In terms of your financial targets, if the implied lower EBIT margin for Q3 is just operating deleverage, just curious about that, or if you think there's something more structural. You know, can you address whether or not the 2023 exit rate targets of 20 to 22% EBIT margins are still achievable? Thanks.
Ronen Faier (CFO)
First of all, when, when we look at the operating margins levels, we, we don't see anything structural in the way that our financials and our business is working at that point of time. I would say that the majority of the less of a leverage that we're going to see in Q3, and again, Q4, we're not yet guiding, but, but this will be exactly the same phenomena, is actually related to the level of revenues rather than related to the level of anything that is happening on the margins or on the pricing level. Now, in general, I can say that we're relatively restrictive on growing operating expenses in general. You know, we've been and we've seen through various stages of the solar market.
We do not see this stage as, as was the case in Germany, let's say, in or Europe in 2013, when market disappeared. Again, we see it more of a correction rather than a crisis that's going around the overall, overall, I would call it, situation related to financing and a little bit of availability that exists there. The, the operating margin improvement model is, is, is exactly the same. It will resume exactly to be the same operating leverage once revenues are up. I would say that the Q4 target will be achievable based on the revenues forecast that we will provide at that point of time. If, whether it will be this or not, it's only a revenue issue rather than anything else.
Then, Philip Shen, I, I apologize, but, I lost the train of thoughts on your first part of the question.
Philip Shen (Managing Director and Senior Research Analyst)
No problem. It's on C&I backlog. can you give us-
Ronen Faier (CFO)
Oh, yeah.
Philip Shen (Managing Director and Senior Research Analyst)
an update?
Ronen Faier (CFO)
Yeah, yeah, sure.
Philip Shen (Managing Director and Senior Research Analyst)
Yep, thanks.
Ronen Faier (CFO)
On C&I backlog, I want to talk about, first of all, volumes and then on the backlog. From volume point of view, from the very beginning of the year, we have already delivered the volume that is very close to the entire last year, and the backlog that we have is more than what we have already delivered for this first half. When last quarter we said that we had something which with a very simple math, you could see about 11 gigawatt this year, this is still a number that we see happening for this year, and again, based on our availability. If we'll have more products, it can even be bigger. From backlog buildup on the other hand, this is something that is changing.
Because as long as, the distributors knew and the installers knew that there's a lead time of sometimes 12 months for a product, they saw very good reasoning to put an order into place, binding orders, as soon as possible to make sure that they get product. Sometimes, by the way, they did it simply because they knew that there was going to be a little bit of allocation, so they wanted to ensure their places. Once we're moving into product availability in the field, and also if you look at our inventory levels and finished goods inventory levels that are building, by the way, in a healthy way, to reduce shipment costs in the various regions, there is no reason for any particular distributor to put now a backlog into a year from now.
I can tell you that we have a solid backlog for Q3, of course, Q4, and even Q1. From Q2, where we still take orders sometimes, by the way, we see a smaller backlog, and I would estimate that over the next few quarters, we will see backlogs being shorter in nature compared to where they were 1 year ago. This is not necessarily indicative of the actual volumes. It simply means that we will turn more orders into revenues in the same quarter than, maybe, compared to the spoiled situation that we were a few quarters ago, where we knew before we started already, you know, that everything that we can manufacture, we can sell.
Zvi Lando (CEO)
Great. Thanks, guys.
Operator (participant)
We'll take our next question from Andrew Percoco with Morgan Stanley. Please go ahead.
Andrew Percoco (Executive Director and the Head of North America Autos and Shared Mobility Research)
Great. Thanks so much for the time. I just had another follow-up question on the commercial segment. You know, that, if the percent of total megawatt sales continues to drive, go higher quarter-over-quarter, it sounds like that's gonna be a driver of lower margins in the Q3. Have you disclosed what the margin level on some of those commercial customers look like on, maybe on an average basis? Just trying to think through if commercial continues to grind higher in 4Q and into 2024, what we should think about for a potential floor on gross margins. Thanks.
Ronen Faier (CFO)
Sure. I'll start by, by first of all, a little bit of, of the numbers. We used to say that usually commercial margins were 500-700 basis points lower than residential margins. This is, by the way, still the case, dependent on the size of the installation, where usually when we have a, the bigger the installation is, the lower the margin is on the product. From that point of view, I think that it gives an answer. We also, by the way, need to remember that not all three-phase inverters that we're shipping are commercial because Europe, and especially Germany, Austria, Switzerland, are markets that are three-phase markets, where we sell three-phase inverters.
Again, most of our shortages today are in three-phase, both in commercial and residential. I would like to add one more thing, and this is that, yes, of course, the more commercial you see, the lower the gross margins, but at the same time, usually because of the fact that these are installations that are bigger, their contribution to the operating margin is close to similar to what you see in residential, simply because they draw with them much less operating expenses. While you do see usually lower gross margin, you can see almost similar operating profit when it comes to these products specifically.
Andrew Percoco (Executive Director and the Head of North America Autos and Shared Mobility Research)
Got it. That's helpful context. Maybe just to follow up, and apologies if I missed the answer to this, but have you broken down what your expectation is in the Q3, on your solar revenue, specifically between Europe and, and the US in terms of quarter-over-quarter trends?
Ronen Faier (CFO)
No, we usually don't, don't break it, on a forward-looking basis.
Andrew Percoco (Executive Director and the Head of North America Autos and Shared Mobility Research)
Okay, thank you.
Ronen Faier (CFO)
Thank you.
Operator (participant)
We'll take our next question from Jordan Levy with Truist Securities. Please go ahead. Your line is open.
Jordan Levy (VP and Equity Research Analyst)
Good afternoon. I think most of my questions were answered, but maybe I'll just ask, sort of thinking on the progression on the battery side. First, kind of on the performance of the current battery state as you ship them and volumes ramp, and then maybe looking out into next year as you roll out some of the new initiatives there, and just an updated, thought there.
Zvi Lando (CEO)
Yeah, so sorry, we didn't hear you that great. If I understand correctly, the question is about the performance of batteries. Specifically, batteries are not yet challenged in terms of lifetime and cycles. It's hard to give a clear answer on those. It will take a few more years. From the two parameters that I would consider critical at point at this time is, the first is ease of installation and commissioning time, and the second is reliability and failure rates. I think we are, we're far from perfect, but I think we're doing good, and we're getting positive feedback from the market on both.
We've introduced continuous improvements on installation times, commissioning software, a wizard that guides the installers through the installation process, and are getting very good feedback for the market on that topic. On reliability as well, our failure rates have been low and performance has been robust, so we're pretty satisfied in that area. Again, that said, on lifetime and cycles, there's still it will take some time until that picture is clear.
Jordan Levy (VP and Equity Research Analyst)
Absolutely. Appreciate you taking my question.
Zvi Lando (CEO)
Thank you.
Operator (participant)
We'll take our next question from Corinne Blanchard with Deutsche Bank. Please go ahead. Your line is open.
Corinne Blanchard (Director and Senior Equity Research Analyst)
Hey, good afternoon, and thank you for taking my question. Maybe as a follow-up, you mentioned having probably take Q2 or to clean the channel in the U.S. I think in at the beginning of the call, you mentioned that the sales through of your product did increase by 10% this quarter. I just wanted to clarify this, and then I would have a follow-up on, on the battery side after.
Zvi Lando (CEO)
Yeah, I think, again, it's a, it's a bit about magnitudes. We are seeing a positive indicator, I would say, of sell-through by our distributors, that has increased in the U.S. by 10% quarter-over-quarter. As I described, I think the inventory levels are still such that this is not a sufficient enough increase to drain the inventories quickly. Either it will take a bit longer for the inventories to decline, unless this is an indicator that will continue to improve and sell-through and installation rates will go much higher. At the current rate, it will take at least a couple of quarters to get through the inventory.
Corinne Blanchard (Director and Senior Equity Research Analyst)
Okay, makes sense. Then the follow-up on the battery. Maybe I missed it, so I apologize if I did, but, can you just give a quick update maybe on Sella 2 and where you trend and where do you see the pricing on battery going over the next 12 months or so?
Zvi Lando (CEO)
Remember, Sella 2 is, or our current residential battery offerings are not yet using cells from Sella 2. Sella 2 is, is ramping, and as we described in the prepared remarks, will reach its full capacity by the end of the year, and is in parallel, selling cells and batteries for other applications. Meanwhile, they are also beginning to produce the type of cells that we intend to use in our next generation batteries that will be reduced, that will be introduced, beginning to be introduced in the first half of next year.
Gradually, the capacity of Sella 2 will move more into our to our own batteries, and that will give us flexibility also in terms of assurance of supply, also in terms of pricing, and also in terms of technology, of making sure that, that really the cells are optimized for the application and the system of our own of our own batteries and inverters. That's, that's the picture regarding Sella 2. Regarding battery pricing, again, we're, we're not seeing major trends. We did, we did reduce slightly battery prices in on our single-phase single-phase batteries. Generally, we don't see additional major shifts on battery pricing in the coming couple of quarters.
Corinne Blanchard (Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
We'll take our next question from Julian Dumoulin-Smith with Bank of America. Please go ahead.
Julien Dumoulin-Smith (Managing Director)
Hey, excellent. Thanks, team, appreciate it. Just following up on a few different comments here. Actually, first off, if I can, Section 45X, just would love to get an update here on that front. What, what percent of the overall production do you think, ramping into 2024, do you think could ultimately qualify? To what extent could you ultimately leverage even European volume to take advantage of Section 45X? I just wanted to make sure we double back to that as we get some final clarity here on that front, first off, and then I get a follow-up on the margin conversation.
Zvi Lando (CEO)
As I described, we're starting off with inverter manufacturing that will be. Already we will be delivering inverters that qualify for Section 45X in the current quarter. But they won't be significant from a financial point of view. In the Q4, we will be delivering more than 30,000 inverters, and that's when it will begin to have an impact. We intend to continue to ramp, of course, into 2024, add optimizer manufacturing to the mix, and ramp initially, of course, to satisfy the U.S. the U.S. demand.
t milestone, we'll continue to add capacity for other purposes, assuming we can benefit from the same incentives for other regions. But that's still going to take time, and by then, I think a lot of the IRA regulations will be more clear in terms of what is possible and what is not
Julien Dumoulin-Smith (Managing Director)
Got it. It sounds somewhat dynamic, looking to scale off the 30,000 units in 4Q. The plan, especially as you think about the C&I compliance, is still in, in flux, it, it seems like. If, if I can actually jump back to the margin question and, and the conversation on that front real quickly. Just to clarify earlier, right, you talked about this inventory issue persisting on the residential side for some quarters here, but obviously the C&I looks much healthier. How do you think about that, the target margin going back to the earlier 20 to 22%? As you see, or at, at least as you seem to imply, that 2024 is going to see materially higher C&I contributions as a percent of the total mix. Again, I, I don't want to read too far into that.
Ronen Faier (CFO)
Again, yet to see 2024, because, you know, we're also surprised a little bit by the second half of 2023. I would say that the dynamic should be as follows: What we see right now, especially in Q3 and Q4, is the fact that the U.S. market that is correcting right now, which is usually characterized with high resi and higher margins, by the way, compared to other regions, is slowing down very much, which of course, impact negatively the margin. At the same time, Europe is growing, and the commercial side is also growing, and this is also something that takes us a little bit down, because the portion of commercial-
Zvi Lando (CEO)
... compared to residential in our overall mix, at least in Q3, Q4, is higher than we anticipated or anticipate to see. If you combine these two, yes, the expectation should be that in 2024, where we believe that first of all, Europe will come back to course much quicker than the United States, and we will also see, of course, again there an increase in residential. Plus, the fact that the U.S. market that contributes to margin very nicely is also going to go up within, I don't know, 2, 3, 4 quarters, but this is still within 2024. Yes, we do expect that 2024 margins should come back to levels that we've seen at least in the last quarters.
With that said, again, the, the major ace is going to be here batteries, because we do see that battery prices continue to go down, at least right now. As we've mentioned before, batteries, target gross margin should be around 25%. Even if today or in some quarters it's higher than this, I'm not sure that this will persist. I, I would cautiously say that 2024 should be, of course, first of all, back in the model, by the way, which we also believe that this may be the case even this year as well, for the next two quarters. Second is that, yes, there are some drivers that suggest that 2024 can be on the upside part of it, rather than on the downside part of it.
Julien Dumoulin-Smith (Managing Director)
Fair enough. I'll leave it there. Thank you, guys. Actually Section 45X, any, any expectations there, just to go back that far?
Zvi Lando (CEO)
I, I'm not sure where the expectations are, but, you know, at least from a, as we said, we believe that the $0.065 is something that we have already in our pocket, so everything that we'll manufacture this year will be at least the $0.065. We believe that we will retain at least 50% of these to our margins, given the fact that manufacturing in the U.S. is a little bit more expensive.
Julien Dumoulin-Smith (Managing Director)
Thank you.
Operator (participant)
We'll take our next question from Kashy Harrison with Piper Sandler. Please go ahead, your line is open.
Kashy Harrison (Managing Director and Senior Equity Research Analyst)
Good afternoon, thanks for taking my 1 question. Maybe just at a higher, at a higher level, just given the increasing availability of equipment supply, do you think that the distributor's definition of normal is going to structurally decline? Do you think, just given some of these cash flow dynamics, or do you think this is more of a temporary thing, where if they thought, you know, to your point, 2 months was normal before, by the time you get back to 2024, that's what they define as normal, or does that 2 months become a month or half a month? Just want to get some sense of how you think about distributor thought process and cash flow dynamics, et cetera.
Zvi Lando (CEO)
What I'm, what I'm saying, you know, is based on experience and the conversations that we had with distributors recently, but it could be different. Our judgment would be that at some point it goes back to the type of dynamics that, that we've seen in the past. If you look today, first of all, also installers are holding inventory today, which is a phenomena that usually installers don't want to hold to hold inventory. And then on top of that, the picture of how much inventory installers are actually holding is not clear. On top of that, the distributors, they're carrying 7, 8, 9 types of inverters, a similar number of module suppliers.
For each one, they're holding inventory, many part numbers. It's really in their interest and their classical behavior to bring it down and to have a, you know, a much smaller line card and much more control. In that type of environment where installers don't hold inventory anymore, distributors hold a limited portfolio of products, even though the suppliers and the equipment manufacturers will have availability, it still, I believe, will go back to the classical model of holding in the range of a quarter worth of inventory within the distribution channel, give or take, you know, depending on the type of product and dynamics.
I, I think that that's likely going to be the steady state that the channels will return to, following this adjustment and the amount of time it takes.
Kashy Harrison (Managing Director and Senior Equity Research Analyst)
Thank you.
Operator (participant)
We'll take our next question from Joseph Osha with Guggenheim Partners. Please go ahead, your line is open.
Joseph Osha (Managing Director and Senior Research Analyst)
Thanks very much. We've spent a bunch of time talking about the, you know, what the inventory drawdown might look like, in particular in Europe. You know, as we enter next year, it does seem that we have a few policy headwinds, you know, in particular in Southern Europe. I'm just wondering, you know, I, I know it's early, if, if you can opine, what you see the demand picture looking like, you know, early next year as we come out of this inventory correction. Thank you. In Europe.
Zvi Lando (CEO)
Yeah. Yeah, thanks for the question. Actually, just a few data points. Our installation rates in, take Italy, for example, right now, are higher than they were a year ago, despite the fact that some of the programs have changed. Some of the installations are less lucrative for the homeowners. We're, we're not seeing the policy changes having, in the countries where there are, what you would consider maybe negative policy changes, having an impact. I, I think it's an opportunity also to explain a little bit more what, what Europe is.
You have the large markets like, you know, the German market, where I mentioned that it, in 2022, it was 7.5 GW, and this year is expected to be somewhere between 10-12 GW of installations and to continue to increase into 2024. In parallel to that, you have all kinds of different size markets with different type of environment. Just in a, as an example, in the prepared remarks, Ronen mentioned Slovenia. Our revenue in Slovenia in 2022 was EUR 25 million. In 2023, our revenue in a country like Slovenia is expected to be in the range of EUR 70 million-EUR 80 million annually. These are small markets that are evolving.
They're not so small, and there are, and there are not many, but there are multiple such, such markets. All in all, again, things can change, but looking at the European landscape, at least for us, and considering our position in many of these large, small, and mid-sized markets. We're, we're very optimistic still about the dynamics in the European market going into 2024.
Philip Shen (Managing Director and Senior Research Analyst)
Okay, thank you.
Operator (participant)
We'll take our next question from Vikram Bagri with Citi. Please go ahead. Your line is open.
Vikram Bagri (Director and Senior Equity Research Analyst)
Good evening, everyone. Ronen, first off, first off, you mentioned substantial cash buildup or generation in the next few quarters. Can you talk about capital allocation and particularly about share repurchases, if that's, that's in the budget?
Ronen Faier (CFO)
In general, we do not, we do not have plans for this right now. We do experience right now, because of the phenomenon that I replaced, that I explained a little bit later, a longer cash creation cycle. This is something that will start to play out in Q3, simply given the fact that we are starting to reduce inventories and collection is going to be a little bit faster. With that said, we still believe, and this is why, we also raised capital, last year, is that there are opportunities out there, to present faster growth and to present a much more comprehensive growth. We do not believe that we have exhausted these opportunities. We're still reviewing them.
Some of them are being due diligenced these days as well. At least at this point, we believe that there is much better creation of value to investors by acquiring companies, building the business and building a portfolio rather than just returning it to the investors. Once, by the way, we feel that this will not be the case, we will shortly, shortly consider this, but we don't have any religion against it. I believe that, you know, opportunities are going to be created, I believe in the near term to use this cash.
Vikram Bagri (Director and Senior Equity Research Analyst)
Thank you. My follow-up is on, on inventory again, the 100th question on the same topic. I apologize if this has been answered. Can you provide the magnitude or at least cadence of rebalancing in Q3 and Q4? Ronen, you mentioned in your prepared remarks, U.S., the shipments were down 25 to 29%, but the sell-through rose more than 10%. Inventories in the U.S., it seems like, are already down more than 30%, and are, you know, still manageable. Your comments on Europe, it sounds like, the inventory rebalancing required is not, the magnitude is not that big. It seems like most of the rebalancing happens in Q3. The balancing in Q4 is more dependent on your projected demand and sort of born out of caution, and it might not, not happen.
If, if, if you can comment on the magnitude, if you can characterize what the, the impact on revenue is and the cadence, you know, how much of the rebalancing happens in Q4 and Q3? Thanks.
Ronen Faier (CFO)
Well, I, I'm not sure that I can cover all of it because again, we see, you know, multiple segments, multiple regions, and multiple phenomena, such as the, you know, again, a Q4 seasonality in Europe, which is usually a big drawback compared to the fact that, as you've mentioned, and rightfully so, that we believe that the inventory corrections, at least in, in Europe, are going to be a little bit quicker.
In general, I would, I would go again one by one and say that in Europe, I think that, yes, the correction within the distributors should be relatively quick, given the fact that the inventories level, that Tsvi mentioned before, are not so high when it reflects inventory days, while we still see very high, record-high, point of sale data. The bigger question there is going to be: How will Q4 look like? What is going to be, from a cash perspective, the appetite of the larger installers to continue and maintain, sorry, distributors, continue and maintain inventories? That, that's, I think, the biggest question. Again, I would say that we're cautiously optimistic there, but I, I, I'm not sure that I have a good answer.
In the U.S., your analysis is, is almost correct, other than the fact that we start from a relatively high level of inventory. Even though, you know, we decreased the shipment, when we look at the exiting point of the quarter, this is the time where Zvi mentioned that sometimes we've seen some distributors close to two quarters of inventory. This is exiting the quarter, this is why we think that this is something that will take a little bit more time.
Zvi Lando (CEO)
In general, we believe that since Europe is very strong for us, since the rest of the world, by the way, continues to be very strong, this will be the thing that will, and this is, by the way, together today, close to 80% of our business. This will be the area that will be moving quicker from this kind of correction into more normalized patterns of orders, where we think that the US will lag, I would say by, by, I don't know, maybe 2 or 3 quarters after Europe in this sense.
Operator (participant)
We will take our next question from Jonathan Kees with Daiwa. Please go ahead. Your line is open.
Jonathan Kees (Executive Director and Senior Research Analyst)
Great. Thanks for squeezing me in. I'll just ask one in the interest of time here. Just wanna double-click on, you're saying, one of the trends for 2024, the third-party ownership. I mean, when can you provide some more color? Is that something that has obviously a shift undertaking now? Do you see that being... I guess you're anticipating that to be quite material in 2024, more the first half, second half, and that should have a big offset for the higher interest rates. Yeah, if you could just provide some more color about that, that'd be great. Thanks.
Zvi Lando (CEO)
Yeah, I, I, this is, you know, it's a trend that a lot of people in the market anticipate for the reasons that you mentioned. There are some benefits in the IRA for third-party ownership and as well as the impact of interest rates on, on, loans. Some of the large installers that we speak to are beginning to see this shift, although not in a dramatic manner yet. I, I think it will take some time to build up. Of course, you know, that refers to the origination. That's at the time that the consumer closed the contract for that to move through to purchases and installation takes a little bit longer.
We're not seeing anything rapid happening in this regard, but there is a trend in that direction that is expected by the people. We don't have any special visibility in this, so it's more what we read and hear in the market, is expected to be a meaningful shift from loan to third-party ownership to lease.
Jonathan Kees (Executive Director and Senior Research Analyst)
All right, great. Thank you.
Operator (participant)
There are no further questions on the line at this time, so I'll return the program to SolarEdge CEO, Zvi Lando, for closing comments.
Zvi Lando (CEO)
Thank you. In summary, we're pleased with our results this quarter, which demonstrate the advantages of our position across diverse markets and applications. Thank you all for joining us today, and have a good evening.
Operator (participant)
This does conclude today's program. Thank you for your participation, and you may now disconnect.