Good day, everyone, and welcome to the SolarEdge Conference Call for the Third Quarter Ended September 30, 2018. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Event Calendar page. This call is the sole property and copyright of Solar Edge with all rights reserved in 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 Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge.
Please go ahead.
Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2018 as well as the company's outlook for the fourth quarter of 2018. With me today are Guy Sella, Founder, Chairman and CEO, and Ronan Fire, Chief Financial Officer. Guy will begin with a brief review of the results of the third quarter ended September 30, 2018, Ronin will review the financial results for the third quarter and provide the company's outlook for the fourth quarter of 2018. Then we will open the call up 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 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 U.
S. GAAP. Listeners who do not have a copy section of the company's website. Now, I will turn the call over to CEO, Guy Salim.
Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call today. I am happy to report that once again, we concluded our 3rd quarter with record revenues of $236,600,000. Up 42% year over year. We are reporting a GAAP net income of $45,600,000 and a non GAAP net income of $42,700,000.
We also reported a cash flow from operations of $34,300,000. In the third quarter, we shipped 1.1 Gigawatt of AC nameplate inverters, Approximately 4.80 Megawatt of which was shipped to North America, up from 4.60 Megawatt shipped to North America last quarter. Our sales grew this quarter in all regions evidenced by our record high revenues. Once again, this quarter, our commercial sales continued to grow representing 46.2 percent of our megawatt shift. Our commercial shift in this quarter exceeded 506 Megawatt of products, which includes a 50 Megawatt project delivered and installed in Israel.
This quarter, we also celebrated operational records. We shipped approximately 3,000,000 power optimizer and approximately 122,000 inverters. In all, we have now shipped more than 30,900,000 optimizers since launching shipment of products in early January 2010. On the noteworthy side, we began integration of our newly acquired UPS division and appointed the Thai Rosenfeld as general manager. It tile brings extensive experience to SolarEdge as a well seasoned business manager in the high-tech industry and I am confident that with his leadership, we have the tools we need to build a leading global UPS business.
While not concluded in this quarter, it is not worth it to mention the Kokam acquisition, which we signed and closed in the 1st 2 weeks of October. Kokam has been manufacturing lithium ion sales and providing reliable, safe, high performance battery solutions for the past 29 years. Kokam provides battery solution for a wide variety of industries, including ESS energy storage systems, UPS, electric vehicles, aerospace, marine, and more. This acquisition will enable us to increase our competitiveness a majority of solar system will include storage. On the competitive landscape, we believe that we continue to take market share And while we are seeing new players in the MLP market, in limited geographies, we remain confident in our technology leadership innovation and the intellectual property we have to defend it.
To conclude, we are very proud to deliver record revenue and a non GAAP diluted EPS $0.86 per share. Our financial strength enable us to continue to grow market share expand into new areas of business and invest the needed resources to develop new products for new segments and in more geographies. And with this, I hand the speaker over to Ronen, who will review our financial results.
Thank you, Guy, and good afternoon, everyone. Before starting the review of our financial results for the third quarter of 2018, I would like to remind listeners that while the overview will be on a GAAP basis, In certain cases, I will be discussing non GAAP numbers and measures, which exclude the impact of the newly adopted revenue recognition standard stock based compensation, one time asset disposal, one time transition tax, changes in deferred tax, intangible assets, amortization and cost of product adjustment related to asset acquisition of the UPS division as well as non GAAP earnings per share. Full reconciliation of the pro form a to GAAP results discussed on this call is available on our website and in the press release issued today. Let's start with the financial results for the third quarter of 2018. Total revenues were $236,600,000, a 4% increase compared to $227,100,000 last quarter and a 42% increase compared to $166,600,000 for the same quarter last year.
Our record revenues this quarter were mostly driven by nominal growth in all geographies This quarter, revenues from the United States were $119,700,000 and represented 50 50.6 percent of our overall quarterly revenues. Sales in Europe were $83,900,000, a record amount and representing 35.4 percent of our quarterly revenue. Rest of the World revenues reached a hold time high of $33,000,000 representing 14% of our total revenues. This quarter, our top 10 customers represented 59.9% of our quarterly revenues, a decrease from the last quarter while only one customer accounted for more than 10% of revenues. Blended ASP decreased this quarter, mainly due to an increased portion of commercial product sheet.
This quarter, revenues from the UCS product were negligible. Gross margin for the quarter was 33% compared to 36.1% in the prior quarter and 34.9% in the same quarter last year. On the business side, the competitive environment remained unchanged, and we believe that we are gaining market share. Residential ASP in the United States decreased slightly as a result of a higher proportion of sales to customers who benefit from volume discounts a weaker euro also slightly reduced our gross margins. However, this was offset almost entirely by increased efficiencies in our supply chain and reduced air shipments.
The main decrease in our gross margin this quarter was a result of higher than expected customer support expenses Our efforts to satisfy market demand, while introducing many new products yielded less focus on optimizing our support expenditures both on product and delivery cost. In the coming quarters, we will gradually reduce these support related expenses while continuing to satisfy market demand and introduce new products. Related to our M and 3% compared to the previous quarter and an increase of 40% compared to the same quarter last year. As in the last quarters, this increase mainly attributed to an increase in headcount as consistent with our decision to invest resources in product development and innovation, cost reduction and investment effecturing processes, as well as the absorption of R and D resources from the asset purchase of the UPS division, Imatronic. Sales and marketing expenses for the quarter were $16,900,000, an increase of 6% compared to the previous quarter and 28% compared to the same quarter last year.
The increase is mainly attributable to an increase in headcount as we continue to grow our sales and marketing forces as well as participation expenses were $6,900,000 for the quarter, an increase of 19% from the prior quarter and a 36% increase year over year, This increase is mainly affected by higher consultancy, insurance and administration costs related to the UPS division. Legal proceeding initiated by the company and other expenses associated with expanding our infrastructure and support our growth. In total, operating expenses for the 3rd quarter were $43,900,000 or 18.6 percent of revenues compared to $41,300,000 or 18.1 percent of revenues in the prior quarter and $32,700,000 19.6 percent of revenues for the same quarter last year. Operating income for the quarter decreased to $34,000,000 compared to $40,700,000 in the previous quarter, an increase compared to $25,400,000 for the same period last year. Financial expenses for the quarter were $700,000 compared to a financial expense of $2,500,000 in the previous quarter and finance income of $2,700,000 for the same period last year.
These financial expenses are a result of the adoption of the new revenue recognition standard that charges the interest on prepayments received from customers for monitoring and communication services and extended warranties. The euro and new Israeli shekel devaluation against the U. S. Dollars were offset by increased by interest earned on our investment, so the net effect was marginal. This quarter, we had a tax credit of $12,300,000 compared to a tax expense of $3,600,000 in the prior quarter and a tax expense of 100,000 for the same period last year.
The company recorded a provisional one time tax of $19,200,000 related to undistributed profit of our non U. S. Subsidiaries In according with the accounting guidance that require the company to use its best judgment, while making this accrual. This quarter, the company remeasured its earnings and profit calculation based on recent proposed regulation practices and publications and came to the conclusion that the provisional accrual should be decreased by $10,300,000. Based on the same principles, the company remeasured the new guilty tax accrual resulting in a $3,900,000 crude reduction this quarter.
The overall one time effect of these two adjustment is $14,200,000. GAAP net income for the 3rd quarter was $45,600,000 compared to a GAAP net income of $34,600,000 for the previous quarter and 28,000,000 for the same quarter last year. Our non GAAP net income was 42,700,000 compared to a non GAAP net income of $40,600,000 in the GAAP net diluted earnings per share was $0.95 for the 3rd quarter compared to $0.72 in the previous quarter and $0.61 for the same quarter last year. Non GAAP net diluted EPS was $0.86 compared to to $0.82 in the previous quarter and $0.66 in the same quarter last year. Turning now to the balance sheet.
As of September 30, 2018, cash, cash equivalents, restricted cash, short term bank deposits and investments were $453,200,000 compared to $437,600,000 at June 30, 2018. During the third quarter, we generated $34,300,000 in cash from operation. This relatively low cash flow generation compared to the previous quarters is a result of concentration of a higher portion of our revenues being generated in the later part part of the quarter $6,000,000 tax payment in the United States. AR net increased this quarter reaching $151,100,000 compared to $118,100,000 last quarter. DSO this quarter increased to 69 days, up from 58 days last quarter.
This increase is related to the later timing of shipments during this quarter. As of September 30, 2018, our inventory level net of reserves was $107,200,000 compared to $102,000,000 in the prior quarter. Before guiding on the next quarter's forecast, I would like to relate to two events that will impact our financials in the upcoming quarters. On September 24, U. S.
Tariffs in the amount of 10% were levied on our inverters and optimizers manufactured in China. These tariffs are expected to increase effective January 1, 2019, to 25%. We are working on mitigating this effect by increasing manufacturing capabilities outside of China an effort that will take a few quarters to complete. In the meantime, we have increased our prices in the United States. Although the net effect of this price increase is expected to yield the same dollar gross profit, it will yield lower gross margin percentage 2nd, as Guy mentioned earlier, on October 17, we closed the acquisition of Kokam.
The financial results of this transaction will be reflected in the next quarter's financial results. Moving now to guidance for the fourth quarter of 2018. Given our recent M and which will eliminate the expected accounting effects of to $255,000,000. We expect non GAAP gross margins to be within the range of 32% to 34% and GAAP gross margins are expected to be 2 I will now turn
you. You. We'll take our first question from Philip Shen with Roth Capital Partners.
Hey guys, thanks for the questions. As it relates to the pricing increases that you talked about, our checks were coming back that price increases for Q4 might be around 3%, 4% or 4% to 5%. And then in Q1, potentially as much as 15% to 20%. Can you talk about how much you expect to raise pricing in Q4 and Q1?
Hi, Phil. In general, the expectation is to increase prices in the amount that will allow us to cover all of the additional costs that will be resulted from these new tariffs. In general, and as we mentioned before, today, some of our manufacturing is done already outside China, and we are working to increase this percentage. That means that in general, the amount of tariffs that we will pay will be very much dependent on how much we're able to produce And at the same time, it is going to be dependent on what is going to be the cost difference related from this, production. Our intention is to make whole of the, I would call it, lost margins due to these tariffs, and we will increase the prices based on the demand that we see on the product mix that we will see to leave us with the same dollar result on the gross profit.
As it relates to the Q1 margin, you talked about it a little bit in terms of the impact of the tariffs. Can you talk us through what kind of volume visibility you have for Q1? Is it perhaps 20% of production or something in that ballpark? And then from a margin standpoint, if you could give us a little bit more color as to how margins in Q1 might look relative to either Q4 or for Q3. That would be very helpful.
We just reported Q4. You're not expecting that field to report Q1, right? To give you any guidance from Q1. We barely can, with our limitation, give you guidance for Q4.
Okay. Fair enough. At least I wanted to try that. Thanks, guys. Great work on that 50 megawatt project, if it sounds like you're making progress in commercial, in the U.
S. And globally. Any chance you can share what the project name is or who developed it?
It's a local it's one of the biggest companies in Israel doing solar There is only one, I think, in this size of a project. We don't feel comfortable to give data of our customers. So, unfortunately, but not too many rounds, so it's easy to find.
Okay, great. And one final quick one. In terms of Kokam, how much revenue is in the Q4 guide from Kokam as well as what the margin impacts specifically from Kokan?
So in general, again, we do not yet provide the number. And by the way, not the fact that we're trying to hide it, simply that it's a relatively new investment that we closed. We have already understand that the way that they recognize revenue may be different than ours. And as such, we took a very, very limited amount of revenues coming from them. To have better numbers, but at this time, we took very small amount.
Thank you very much, Phil.
Thank you. We'll take our next question from Mark Strouse of JP Morgan.
Yeah, good evening. Thank you very much for taking our questions. Just a follow-up on gross margins. Obviously, a lot of moving parts with tariffs and M and A and everything, but just kind of curious, if you look long term, can you still stick to your kind of long term targets that you put out there? And how should we think about the the trajectory of margins over the next, call it, year or so, assuming the tariffs stay in place, but as the Kokam acquisitions, assuming they get better?
Just how should we think about that? Anything high level would be great.
On the longer term, with our original estimation of 37 plus-1 percent. I guess it will take us few quarters to stable again the operational parameters needed to reach this number And it's the, of course, the combination of increasing the prices to the level that will compensate for the majority of difference between what we produce outside of China and what we produce in China. This of course will go down since I expect in few quarters, we'll produce all the necessary inverters and optimizers for the it outside of China and we'll be able to eliminate this price increase. The effect of the two acquisitions, one of them, we are now building the business plan. We have Ittai as the manager and we'll have, in a matter of couple months the planning for 2019 and beyond and we'll have much better visibility on what will be the effect.
But again, I assume that few quarters after the total results won't negatively affect our long term model. While with the Kokam due to the fact that it's a Korean company and different accounting and we, the acquisition was closed like quarter after the Gamatronic acquisition, it will probably take us another quarter to analyze plan it properly and to adapt to the same operational parameters to the Kokam acquisition. So all in all, I believe that in few quarters, 3 or 4, we're supposed to be able to reach the same numbers in the long term model.
And then since the Chinese policy revisions were made this summer, we've seen bifurcation in the pricing for inverters, utility scale versus C and I versus residential. Residential is held in quite a lot better. Just kind of curious if the pricing trends that you've seen in utility scale and C and I alter your plans for getting more aggressive in those markets in the near to intermediate term?
I think that the result prove that, okay, it's the question is complex to answer because in different geographies, we see different constraints and different prices. So overall, I can refer better to the main market we have, which are in for commercial, which are mainly North America and Europe. I, I have in Australia, we have much less visibility on the total prices constraints in places like India and few more big geographies. In those three markets, we managed to take a market share in the commercial space and we do it within the range of prices we've planned at the beginning of the year. And we didn't see effect or different competitiveness, from the classical competitors in those specific markets.
Saying that, I am aware that there is some surplus inverters coming from China that in some markets expect even to reduce prices further, given our overall Markets are in the global commercial. I think we have enough room to 18 in those very low prices. Thank you.
Thank you. We'll take our next question from Jeff Osborne with Cowen and Company.
Hey, good afternoon guys. Two questions on my end. I was hoping Ronan or Guy, you could just discuss the customer support expenses. Could you just give a few samples of that, what led to that, either from poor planning, or is it just a diversification of your company in terms of international and it looks like your top 10 customers went down as a percent. I just want to better understand it sounds like it's pretty meaningful impact to gross margins and what you're doing, A, why it happened and then B, what you're doing to resolve it?
So in general, I would try to, divided to several reasons. In general, we're facing right now a very large increase in the productions and volumes that we're selling today into the market. We see higher demand in all geographies. Year over year, we're growing almost 50 percent in revenues. And if you take into account a little bit of ASP declined, it's about 50% of the volumes that we're shipping And in general, the entire company is focused on one thing.
And this is to produce as much as possible to introduce as many new products to the market as much as possible and as quickly as possible. And at the same time, by the way, to, deal with the component shortages that really affect the way that the company is working on all fronts from cost reductions through production, manufacturing and planning. And this puts a lot of burden on us. In addition with this, of course, comes the effect that with all product in the market as we had before and as we have today, products are fading from time to time and you need to serve them. And in this regard, our ability while at the same time developing methodologies for support, for example, how many replacement new units you give in return or instead of just boards that you need to replace.
And at the same time, if you need to ship so much more products to customers that are waiting from new customers, do you expedite shipment for support, or do you use slow shipments as you did before? All of these moving parts, while not being related to anything that was much different than what we saw before, is coming into a very large burden that we have on the same teams. And our main focus right now is simply to produce as much as we can to take and fulfill all of the demand that we slower shipment and all of the negotiation that we have to do related to the way that we store a product and the way that we refurbish a product and simply be able to manage this growing volume, not only on the supply side, but also on the service side. Now at the same time, it is important say that we do not want to compromise on the customer satisfaction. So even if it costs us much more money, we will ship as fast as possible to our customers.
And we will provide them with new product, even if we could maybe fix some products and then send them back.
Got it. No, I understand you want to have a happy customer for sure. Is there a way to say customer support cost gross margins 200 basis points, FX was 50. Is there any more granularity that you can give? It sounds like you're trying to articulate that pricing pressure is fairly benign and you're still gaining share, which is is nice to hear, but is there does your accounting system quantify any of those line items that you could be more detailed on?
Yes. First of all, Yes. So first of all, yes, we account for everything. I'm not sure whether we can give all the details possible, but I could tell you one thing. And the way that we look at it as management, we look at it as we described by the way in the script, there is the business environment.
And in the business environment, you have competition, you have market share, you have prices, And you have cost of products in those other than a little bit of ASP that we saw in the U. S. And the euro headwinds that were offset, we saw very, very negligible effect on gross margins. I would say close to none. The vast majority came from the support expenses that we simply know how to model quantities, but I'm not sure that we knew exactly how to account for the associated costs when you're expediting so much shipments and you were doing everything as fast as you can to make sure that the customers are happy.
And to be honest, by the way, as a, I would call it, almost we decided that first of all, we want to have happy customers. And then, we knew that we can sacrifice a little bit of margins in order to get this. And I would say that the remaining small amount is related to the M and A accounting. So in general, very little from the business negligible amount. All the rest is coming from the support warranty and a little bit of, PPA M and A activities.
Got it. If I could switch gears on you and last question, just on Kokam, the press release about the acquisition was extremely vague. I thought Can you just talk about the more detail on the rationale? And it looks like Kokam was trying to change its business model over the past 18 months. Some more of a system integrator, but, you highlighted their cell capacity.
I just want to understand, is your model still a CapEx light model or are you intending to compete with LG and Samsung and some of the Korean neighbors? I just want to understand, I get that you offer a bundle in solar plus storage is growing. But specifically with the acquisition, can you just touch on what the actual business strategy is?
Think the answer here is, is relatively, intuitive. Today, I think we all understand that we are face seeing a word where the majority of solar systems will come with a battery storage. It make that solution of PV much more smart and much more in favor of mankind savings of environment. Today, in the current module, TV module prices, it is almost inherently required to put storage with every system. The problem is that there is a severe shortage of good quality sales and the ability for us to be able to give a really holistic solution with storage that really work as a complete plug and play and which will allow us to reach lower and lower prices for the storage is by owning the lithium ion technology.
Kokam has a unique quality of lithium ion batteries And in our vision, we're going to increase production to a level that will allow us serve all of their current businesses outside of solar, while at the same time, we'll increase capacity to allow us to use 100% of what we believe will be the demand on the market from a full product we are manufacturing in house. This will, of course, give us much better product at a much better gross margin.
I understand that. Maybe, guys, is that cost you $50,000,000 to $100,000,000 a year in terms of CapEx? I mean, there's battery companies that's been 1,000,000,000. So I just want to understand what the plan is here.
So of course, it depends on our growth, but we are not looking at anything close to this number in the long term or else we will find ourselves that we developed so big of advantage that is allowing us with time to compete on a much broader market of lithium ion. Currently, we are not facing or we are not aiming to compete head to head with Panasonic, LG Samsung on the biggest market which is the automotive. We believe that what we I don't think that in the coming 2, 3 years, we'll need to get to anything close to the amount of CapEx investment you mentioned. At the same time, I don't think that in the coming few years, we'll going to compete on the commodity or in the cell selling itself against the LG and Samsung.
Got it. Thank you. I appreciate it.
Thank you. We'll take our next question from Colin Rusch with Oppenheimer.
Thanks so much guys. As you look into, have looked at these acquisitions, surely you've had some some metrics that you're looking at in terms of ROI and growth. Can you talk to us a little bit about the Kokam acquisition and what those metrics look like?
I think it's not a matter of the metrics. It's more a matter of the strategic. So on the metrics side, you can assume we can assume we believe that very soon, above 30% all solar system will come inherently with, with storage connected to them. So with this amount of, of a tax rate and the current, statutory storage prices, you're talking of a very big increase of revenues with very nice gross margin once you control the full chain from the sale up.
Okay. And just shifting gears a little bit with just given the growth in EVs and component capacity. Can you talk a little bit about what's happening for you guys in terms of efforts on design cycle and redesigning products with different levels of components that may be easier to get as we go through the balance of this year and into next year?
You talked with general component shortage in our current products portfolio, correct? Just to answer the right question. So, we are living under this severe situation since, more or less April 2017. So it's like year and a half plus that we adopted our system. As reported to you in the past, the majority of the effect is on the fact that we took most of the accrue teams that we have to work on cost reduction and use them in order to verify that we can increase production, meaning the majority of our capabilities check and retest different components on current products, mostly devoted, for being able to keep reducing.
Saying that on many of the components, we managed to build against safety stock of 1 or 2 quarters in some of the critical components. We are not yet in this point and we have very, very, I think, innovative programs for 2019 2020 to solve this problem inherently and at the same time to verify that we have a much better technology and much better ability to use variety of components. It will allow us to go completely out of the few areas where we kind of limited with the suppliers' capabilities. At the same time, once we'll reach this point, it will allow us, of course, to keep reducing prices in a pace closure to what we did until the, the stress on component availability.
We'll take our next question from Joseph Osha with JMP Securities. Hi.
So, to return to this question on battery capacity for a moment, understanding you don't want to get too specific, but looking at how big your business is and agreeing, by the way, that you could see attach rate of up to a third, this would suggest that you're going to be trying to potentially support a storage business that run at, say, a gig, a gigawatt a year, which is a fair amount. And if that's the case, understanding course that you're not going to be like LG or Samsung. It would seem that there would have to be some reasonably substantial CapEx to get Qualcomm to that level? Is that a fair observation?
Yes. It's a bit more complex than that because there is some more flexibility based on the fact that Kokam technology is produced by another factory, which has lots of capacity not used today. So, there is a little bit more flexibility, but I think that the numbers you're giving make all the sense. Within reasonable time, I think we feel comfortable we can get to 30% attach rate. And currently, that means that we need to increase the capacity by a factor of 4 or 5, And that's, I guess, is something that will be done over a couple of years.
Okay. And to follow on on that then if it's a gig that would kind of imply that Qualcomm right now is in an annual run rate of maybe 200 megawatts or so ish?
That's a good, that's more or less the right number.
Okay, cool. Thanks. And then just to looking at the Q4 gross margin gap versus non GAAP, disconnect, Is that, amortization of acquisition related intangibles that is driving that 200 basis point disconnect or is that actual dilution from the Kokam revenue or help if we could dig into that a little bit?
Sure. So the answer is very what you said at the beginning of the question. For those maybe who let us know the accounting principles around the business combination, Once you acquire a company, you have to allocate the price that you have paid to the various assets, tangible or intangible within the target company. One of the issues that you do is that once this company carries finished good product, you need to account for these products. For accounting purposes, it's the price to the customer and not actually the cost basis of this inventory.
That means that once you are actually selling those products, you're generating revenues while you generate 0 accounting a profit. And this is something that affects margin. In addition to this, there are some intangible assets such as backlog, and some other assets that are depreciated and amortized into the cost of goods sold. To be very honest, is the first time that we do this size of an acquisition and our ability to assess just now about a week and a half or 2 weeks after closing these what will be the amount of the purchase price allocation to each and every component and where and the timing of the exact amortization into COGS, we decided to provide for the first time our non GAAP measure that allows us to show a little bit more of what we control and what we know and to leave the effect in the non GAAP, which we in the gap, sorry, which we expect to be 2%. But honestly, speaking, we have to go into now PPA allocation with a big firm and to really understand what is the product.
What makes it a little bit more complicated is the fact that, guys mentioned before, it's a Korean company using Korean GAAP measuring in Korean 1 and taking all of this into account will take a little bit of time until we report Q4.
Sure. And we'll be able to see it eventually on the, on your Q, I would assume.
Yes, you're seeing the reconciliation between GAAP and non GAAP.
Yes. And then finally, just to return to some of the earlier points about margin understanding, of course, that it's it's difficult to say with precision. I mean, it would seem to me on a not a dollar margin, but a percentage margin basis that what I'm hearing is on an apples to apples basis that the 1st part of next year is probably going to be down on Q4. Is that a fair observation?
Down in Q4, not revenues or what are you out of gross margins?
No. Gross margin percentage.
I don't think. From our analysis, it's preliminary, of course, we don't see why it should be the gross margin should be lower in Q1 over Q4. I think that it a lot depends on execution, of course, but I think that we will even have a good chance to improve between Q4 and Q1. Okay.
Thank you
very much.
Just to add to what Guy said, One more thing to add to what Guy said, and this is actually pretty mathematics, and we try to also explain it. While on the tariffs side, especially if the tariffs are going to increase we're going to make whole all of our additional payments with increasing prices. So that means that the dollar stays the same, but the thing is that you know mathematically If you take the same amount of revenues and you add the tariffs on the cost and the same amount on the revenues, the percentage is slightly lower. Is unfortunately mathematics. This is something that Q1 will affect, but as Guy mentioned, on the real business realistic world of real numbers, real dollars, there is no reason why not to see higher gross margins in Q1.
In dollar terms. Yes.
Thank you. This concludes our questions for today. I'll turn it back to Guy Sella for closing remarks.
In summary, our third quarter results show continued successful execution of our business with record revenues and consistently stable profitability. We are well positioned to continue to expand our business with new product offering and in new territories. We look forward to continuing this momentum. Thank you all for joining us on today's call. All the best.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.