Welcome to the SolarEdge conference call for the second quarter ending June 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 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 Erica Mannion at Sapphire Investor Relations, investor relations for SolarEdge.
Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2018, as well as the company's outlook for the third quarter of 2018. With me today are Guy Sella, Founder, Chairman, and CEO, and Ronen Faier, Chief Financial Officer. Guy will begin with a brief review of the results of the second quarter ended June 30, 2018. Ronen will review the financial results for the second quarter and provide the company's outlook for the third quarter of 2018. We will open the call up for questions the following. 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 a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter ended June 30, 2018, press release or the presentation may obtain a copy by visiting the Investors section of the company's website. Now, I will turn the call over to CEO Guy Sella.
Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. I'm happy to report that we concluded our second quarter with strong results. We are reporting record revenues for the quarter of $227.1 million, gross margin of 36.1%, GAAP net income of $34.6 million, and a non-GAAP net income of $40.6 million. We also reported cash flow from operations of $43.9 million. Let's look at what has driven these very positive results. Our revenues once again reach a record high this quarter, and we continue to execute on our business plan. Revenues increased from last quarter by 8% and by 67% from the same quarter last year, despite a flat market in the United States. Our growth was driven by both the megawatt expansion of our commercial and residential business in the United States and continuously strengthening demand for our products in Europe.
The growth of our commercial business, of course, by nature, reduces the blended ASP per watt. This is within our expectations and our plans. In the second quarter, we shipped 985 megawatts of AC nameplate inverters, approximately 460 megawatts of which were shipped to North America. Overall, we shipped 2.7 million Power Optimizers and 114,000 inverters. Yet another record. I want to take this opportunity to highlight some aspects of our business and to address some additional noteworthy metrics. For the third consecutive quarter, we saw growth in our commercial sales, comprising today 43.5% of our overall megawatt shipment. Among those projects is a 27-megawatt large ground-mounted installation in India, currently under commissioning. We continue to increase our investment in R&D and related expenditures in order to drive down product cost, more important, to introduce new products.
We believe that one of our differentiators is technological innovation, which leads the PV market in new developments that have changed the way that power is harvested from the sun. The success of the entire PV industry has been and continues to be driven by innovative technology that makes PV energy more affordable and ubiquitous. Such innovation requires significant financial investment and years of dedication and hard work from skilled R&D engineers. To that end, in the past two months, we filed a lawsuit for patent infringement against Huawei Technologies Co., Ltd.; the Chinese entity, Huawei Technologies Düsseldorf GmbH, the German entity; and Wattkraft Solar GmbH, the German distributor for Huawei. The lawsuit was filed in the Regional Court of Mannheim in Germany, one of the most prominent German patent courts.
Assert authorized use these three patented technologies and is intended to protect our significant investment in our innovative DC optimizing virtual technology and our innovative power optimizer technology. The lawsuit was filed initially on one patent, then, as we announced earlier this week, was extended to an additional two patents and six monetary damages in injunction and the recall of the infringing Huawei inverters and Power Optimizer from the German market. The lawsuit is intended to prevent Huawei and its distributors from selling any multilevel inverters and Power Optimizer that infringe upon SolarEdge PV inverter technology that is protected in the asserted patents in Germany. We have said for many years now, it is our position that the illegal use of proprietary technology can stifle the solar industry and inhibit investment in furthering technology.
This is not our preferred course of action, we believe that this is necessary evil that is required to ensure the integrity of the entire PV industry, secure a level of playing field, and protect SolarEdge intellectual property. On a very different front, on July 1st, we announced the closing of the asset purchase agreement with Gamatronic, a company that developed, manufactured, and sold UPS, uninterruptible power supply systems, also known as UPS. The acquisition for approximately $11.2 million gives SolarEdge an entry into adjacent business with intellectual property, brand recognition, and product line that we believe will support our plan to expand our technological offering in power electronics to additional area of business. The integration of Gamatronic include approximately 100 employees, many of whom have extensive R&D experience and will contribute to our innovations. Gamatronic's UPS business serves as a basis for a new division of SolarEdge.
I would like to share a few words about grid services and virtual power plant. This quarter, we announced innovations that support the newly growing shared energy economy. With the increasing proliferation of PV and storage around the world, the energy production industry is transitioning from a centralized system to a distributed network in which energy is produced closer to the location it is stored and consumed. This provides PV and storage systems owners with a new revenue stream opportunity by selling their self-produced and stored energy. However, the new complex network of distributed generation requires sophisticated management platforms to provide real-time, aggregated control of the demand and supply of energy. Our grid services now offer aggregative control and data reporting, enabling the pooling of PV and storage in the cloud for creation of virtual power plants.
This solution will provide utilities with tools to leverage distributed energy generation system to more efficiently meet demand. At the same time, energy retailers will enjoy protection from price peaks, and PV system owners can increase their revenue from joining this new energy economy. Also worth noting is our continued investment in manufacturing capacity. Together with our growth come the challenge of one-time delivery of quality product. We continue to focus on improving and automating our manufacturing line so as to enable flexibility of manufacturing locations to accommodate our global sales. Given the current environment in the United States, it would be remiss to end my remarks without addressing the proposed new tariff on specified import products originating from China, which presumably are expected to include inverters and optimizers.
These tariffs and the possibility of additional tariffs in the future have created uncertainty in the industry concerning whether they will cause material increase in the price of solar system in the United States. As you know, we have third-party manufacturing capabilities in both Romania and Hungary, which include automated assembly lines for our Power Optimizers. Should these tariffs be enforced, we are confident in our ability to extend our Power Optimizer manufacturing capacity in this location within two quarters in order to meet the full demand in the United States for Power Optimizer. Similarly, we anticipated, if needed, meeting the vast majority of the inverters demand for the U.S. will take between two to four quarters, such that overall, in the long term, we do not expect that the tariffs will negatively impact the pricing of our products for the United States.
While there may be temporary slight increase in cost of products coming into the United States due to imposed tariffs, we are working proactively to minimize the effect on any such tariffs of importations from China into the U.S. when it comes to SolarEdge product and SolarEdge customers. We continue to be confident that our continuously increased cash position, which now exceeds $437 million, put us in a strong position to continue to develop new products and expand our business both geographically and into other areas. I would like to conclude with a brief look at our bottom line numbers. Our non-GAAP net income was $40.6 million, and we generated cash from operation amounting to $43.9 million.
Our financial strength positions us well to continue to develop innovative technology and bring value to extending markets with new products to current and new markets while managing a very effective cost reduction plan. With this, I hand the speaker over to Ronen, who will review our financial results.
Thank you, Guy. Good afternoon, everyone. Before starting the review of our financial results for the second 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, and deferred tax, as well as non-GAAP earnings per share. 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. Let's start with the financial results for the second quarter of 2018. Total revenues were $227.1 million, an 8% increase compared to $209.9 million last quarter, and 67% increase compared to $136.1 million for the same quarter last year.
Our record revenues this quarter were mostly driven by strong growth in Europe and stable revenues in the U.S. and rest of the world. This quarter, revenues from the U.S. were $118.5 million and represented 52.2% of our overall quarterly revenues. Sales in Europe were $82.3 million, a record revenue, and 36.3% of our quarterly revenue. Revenues generated from sales outside of the U.S. and Europe were $26.3 million, representing 11.6% of our total revenue. From customer concentration perspective, our top 10 customers represented 61.7% of our quarterly revenues, an increase from the last quarter, while only one customer accounted for more than 10% of the revenues, and the overall sales distribution across the big 10 customers was more distributed compared to the last quarters.
On per watt basis, blended ASP decreased this quarter due to multiple reasons, including a combination of a weaker EUR against the USD, with higher proportion of sales in Europe that are denominated in EUR. Additional reason is the increased proportion of commercial products that are characterized with lower ASP per watt in our overall mix. Gross margin for the quarter was 36.1%, compared to 37.9% in the prior quarter and 34.6% in the same quarter last year. As we mentioned in the past quarters, the company has stabilized its gross margins level at approximately 37%, which was the average margin in the past six months. Fluctuations of 1% up or down are expected as the company cannot match the timing of all elements affecting margins such as ASP trends, regional mix, time of consummation of cost reduction activities, currency exchanges, freight cost, et cetera.
This quarter's margin is partially a result of an ASP decrease of our commercial products aimed at growing our market share in this segment, combined with cost reductions associated with our increased capacity products for which manufacturing has been ramping up in the last few months, but is not yet full capacity. A tailwind of the euro currency devaluation against the US dollar, combined with higher sales in Europe, resulted in lower US dollar revenues, while manufacturing costs of these products sold in Europe remained the same as they are US dollar denominated. Lastly, we continued to airship products this quarter, although to a lesser extent than in the last quarters. We expect to maintain an average 37% margin moving forward. Moving to operating expenses.
R&D expenses were $19.6 million, an increase of 9% compared to the previous quarter and an increase of 54% compared to the same quarter last year. As in the last quarters, this increase, mainly attributed to an increase of headcount, is consistent with our decision to invest resources in product development and innovation, cost reduction, and advanced manufacturing processes. Sales and marketing expenses for the quarter were $16 million, a decrease of 2% compared to the previous quarter and a 33% increase compared to the same quarter last year. While we continue to grow our sales and marketing forces, the weaker euro this quarter offset a slight increase in headcount in those departments. G&A expenses were $5.8 million for the quarter, an increase of 23% from the prior quarter, and 77% increase year-over-year.
This increase is mainly affected by higher consultancy costs related to legal proceedings initiated by the company and other expenses associated with extending our infrastructure to support our growth, such as increase in our information systems personnel and increase in the finance and legal expenses, both in headcount and external consulting. In total, operating expenses for the first quarter were $41.3 million, or 18.2% of revenues, compared to $38.8 million, or 18.5% of revenues in the prior quarter, and $28 million or 20.5% of revenues for the same quarter last year. Operating income for the quarter remained stable at a level of $40.7 million, compared to $40.8 million in the previous quarter and $19.1 million for the same period last year.
Financial expenses for the quarter were $2.5 million, compared to a financial income of $0.6 million in the previous quarter, and to finance income of $3.6 million for the same period last year. This financial expense is a direct result of the euro devaluation against the US dollar that was offset by interest earned on our investments. It is important to note that this exchange rate loss is mostly related to the company euro-denominated assets, mainly accounts receivables. For actual conversions of euro to US dollars, the company partially hedges these amounts or uses natural hedges of revenues against euro expenses. This quarter, we had tax expense of $3.6 million, compared to a tax expense of $5.7 million in the prior quarter, and tax expense of $0.2 million for the same period last year.
GAAP net income for the second quarter was $34.6 million, compared to a GAAP net income of $35.7 million for the previous quarter, and of $22.5 million for the same quarter last year. Our non-GAAP net income was $40.6 million, compared to a non-GAAP net income of $42.6 million in the previous quarter, and $25.8 million for the same quarter last year. GAAP net diluted earnings per share was $0.72 for this quarter, compared to $0.75 in the previous quarter and $0.50 for the same quarter last year. Non-GAAP net diluted EPS was $0.82, compared to $0.87 in the previous quarter and $0.55 in the same quarter last year. Turning now to the balance sheet. As of June 30, 2018, cash equivalents, restricted cash, and investments were $437.6 million, compared to $400.8 million at March 31, 2018.
During the second quarter of 2018, we generated $43.9 million of cash from operations, which is our normal operating cash generation run rate after one-time record last quarter. AR net decreased this quarter, reaching $118.1 million, compared to $127.5 million last quarter. DSO this quarter decreased to 58 days, down from 64 days last quarter. As of June 30, 2018, our inventory level, net of reserves, was at $102 million, compared to $98.4 million in the prior quarter. As our manufacturing levels adjust to our higher revenues with less disturbance from component shortages, which we carefully manage, our finished goods levels are increasing, allowing us to reduce air shipment expenses. Before guiding on the next quarter's forecast, I would like to mention that on July 1, we closed the asset purchase transaction of Gamatronic and employed its employees.
The financial results of this transaction will be reflected in the next quarter's financial results and are expected to have insignificant effect on revenues and bottom line. Moving on to guidance for the third quarter of 2018. We expect revenues to be within the range of $230 million to $240 million, and gross margins to be within the range of 36%-38%. I will now turn the call over to the operator to open it up for questions. Operator, please.
Thank you. At this time, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Mark Strouse with JPMorgan.
Good evening. Thank you very much for taking our questions. I'll apologize for a very open-ended question to start. Guy, just curious if you can give a bit more color on the competitive environment, specifically those markets where Huawei has entered with a product. As far as the U.S. goes, are you seeing any change in customer buying behavior ahead of anticipated launch from them?
Far, we show products coming into Australia, Germany, not yet, I think in the U.S. I think in the U.S., currently there are alphas, not yet sales of systems. In Australia and Germany, the amounts sold are negligible today. While Australia, I think they sell practically from about January, and we still see negligible amount of Huawei in the field. The adoption is not fast and maybe even the production, I'm not sure about that. I'm sure about the adoption
We don't see any single account that we lost any share to Huawei. While if you will follow GPM from Q1, I would expect that you will see the same trend in Q2, we are gaining market share in residential in the U.S., as we are gaining market share in commercial. Far, we do not see any loss of market share. If at all, the opposite. We are sure that the practical competition will come, like any competition, it will be passing away, it will improve the industry, our product, and at the end, the value proposition for the customer. We feel very comfortable with the overall position and with our ability to keep the growth under the current circumstances, with the availability in some areas of the Huawei products.
Okay. Just two quick questions regarding the patent case. You filed a case in Germany. Can you just kind of talk about the general expectations for timing of resolution for that market?
Since it's under court procedures, we of course cannot give any specific data. Unfortunately, I cannot answer this question with any type of data. As we said, we filed one suit and then another one related to optimizers, the other related to the HD-Wave inverter technology, and we feel very confident with the strength of the case, but it's under the process, and we cannot give any more details, unfortunately.
Okay. That's understandable. Just one real quick follow-up. Is it fair to assume that the patents in Germany, fairly similar to the patents that you have in the U.S., if Huawei were to come to the U.S. with the exact same product in Germany, that we may potentially see a case in the U.S. as well?
Without giving any details, I would expect that you would expect that we are working on few levels of protections against any type of infringement also in the U.S. The total portfolio of patents we have in the U.S. is dramatically stronger than the portfolio we have in Germany.
Okay. Very helpful. Thank you very much.
Thank you.
Thank you. Thank you. We'll take our next question from Colin Rusch with Oppenheimer.
Thanks so much. Can you talk a little bit about component shortages, how you're managing that? Obviously, it looks like you're working a little bit with your balance sheet to mitigate that and how that might impact growth in the fourth quarter and into early next year.
There is a component shortage, as I said, I think twice already, we are putting lots of R&D resources in order to overcome many hiccups on a weekly basis. Just to understand the phenomena from increase of new technologies, data storage, EV in general, and more electronics in any type of vehicles, there is a huge shortage or, on the other hand, book-to-bill is very high for classical analog components, such as high-quality transistors, ceramic capacitors, but many more other components. We face this since the beginning of 2017, and I would expect that it will be with us in the coming few years. We managed to develop a system that so far didn't block any of our production, and we can produce, and we are producing at the capacity needed.
If to compare to a year and a half ago, our finished good inventory is dramatically smaller. Therefore, in the last three quarters, we had to ship via air a quite big portion of our products. As Ronen mentioned, we do see ease in this regard, and we air shipped this quarter less than what we shipped last quarter and the quarter before. I would expect that in couple of quarters, we will go back to a completely reasonable dollar-wise amount of air shipment. We are building in almost all critical components, bigger and bigger safety stock, not with all of them, of course. We are developing new sources.
That of course, to be honest, comes on the pace of the cost reduction because it's more or less the same amount of people that we could put either on furthering our cost reduction or balancing between cost reduction and creating more sources for components that are under risk or that we already know that we'll have limitations with them. All in all, I think that we manage, and we have all the tools to keep the gross margin that we told you before, 37 ± 1%, and use the availability of product, plus the fact that we can still reduce prices in order to increase market share.
Okay, great. Then in terms of the strategy around monetizing the grid services and grid management functionality, obviously that could be direct to the utilities or grid operators or with your other customers. What are you seeing so far in terms of early indications on who's going to be using that functionality and your ability to monetize? How should we think about that in terms of market share sticking to those customers and any sort of recurring revenue that would come from that?
I suggest to look at it from two angles. One angle, and it will take long time, is a stable, long-term, monthly payment from every inverter. The amount of payment we can get today from inverter, and it's very small, two or three or four cases, two, if I remember properly, in the U.S. and two in Australia, is very interesting. It put the total revenue of inverter over 12 years to be very significant. Saying that, it's negligible volume today. As I said about storage batteries three, four years ago when it started, it's very hard to predict how fast can it grow.
The main reason is that in order to make this very broad, you need the collaboration of the utilities and in most cases also the installers because they are the ones that really have the deal with the customer and can share the dollars coming from the utility between us as the technology providers, them, the installers since they did sell something more, and the homeowner that need to have some upside as well. Those models, as other models that have many players in them, it takes longer to develop to efficient level and therefore I think that it will become very interesting revenue income because it come only from software, no more hardware, very little expenses in the back office. Still, it's not something that we would consider to influence dramatically or even to a level that would be interesting for you in 2019.
Thank you. We'll now take our next question from Philip Shen with Roth Capital Partners.
Hi, everyone. Thanks for the questions. First one is on the 301. Let's say they actually go through the 25% tariff instead of 10%. Guy, I know you had some comments in your prepared remarks. Just want to make sure I understood. I think you said it might take two quarters to expand capacity in Romania and Hungary to be able to address the U.S., and then conversely, that would suggest your Chinese facilities would be shipping internationally. Can you confirm kind of your overall plan and then beyond that, what kind of margin impact could we see as a result of the inversion, if any, at all? Thanks.
You're referring to the fact that we'll produce the product in Europe instead of China, correct?
Yes.
Okay. Let's put proportion. If it remain at 10%, the effect at our product gross margin, you can recalculate it from the gross margin, will be about 5% either reduction in gross margin or 10% increase in products in the market, which from the total residential installation is negligible. If it were under 25%, that become more complex. Today, the situation is that we are managing to produce products in Europe at the same price and maybe a bit cheaper than products in China due to the fact that we are more automated in Europe than what we are automated in China.
Once we will move the majority or all production to Europe, I would expect that we wouldn't need to change anything, and we'll see the same gross margin and maybe a bit better due to the fact that with the growth and the amount of people we are adding, we will have every quarter more and more people to maintain cost reduction. Overall, once we'll produce all or vast majority in Europe, I don't think we'll see any effect on any of the profitability parameters.
Great. Just want to confirm I understood that right. As it relates to China, is the idea to ultimately shut down China or keep it at a kind of skeleton type volume?
No, the idea is to Originally, we opened the factories in Europe under the concept of serving Europe from Europe, the U.S. from U.S., and the rest of the world, plus backup from China. Under the current situation, we will use the European capacity to ship to the U.S., while we will ship to Europe from China. We need all the capacity in China for rest of world. Plus, we just basically swap. Instead of producing in Europe for Europe, we'll produce for Europe in China and for the U.S. in Europe.
Great. Okay. Much clearer. Thank you. As it relates, just a quick housekeeping question on the lawsuit. Can you comment on what kind of increase in OpEx we might see as a result of the lawsuits in Q3 and Q4?
At the current couple three quarters, I would expect that it will be below $1 million a quarter, all in all. I would expect, I don't know, $600,000-$1 million until end of the year and maybe the beginning of next year. Depends on move from both sides. It, of course, will increase, but I don't know when and to what extent.
Finally, can you comment on the utility scale product launch? Are you still thinking about launching by year-end of this year and then more commercial sales 6 months to 12 months thereafter because of the long sales or development time frames there?
It a little bit depend on the exactly what you defined as what. As you saw, we're already commissioning a 23-megawatt field in India. We're in the process of larger projects. We will have, in phases, but we'll have more suitable products, some of them, as you mentioned, coming already the end of this year, some of them coming by mid next year. I think that there will be coming two very big steps sometime by the end of 2019, the beginning of 2020. It will be over more or less four steps. Each one will increase our competitiveness and will open bigger and bigger opportunities.
Okay. Thanks, Guy. I'll pass it on.
Thank you. We'll now take our next question from Joseph Osha with JMP Securities.
Good afternoon. I wanted to follow up a little bit on the previous question on the utility, let's call it the utility scale launcher. Are we talking about the 40 kilowatt-
Sorry, about utility, how you describe it? The utility-
I'm sorry.
Excuse me.
All right.
Just go ahead on your question. It's hard to hear.
Okay. Sorry. Yeah. Are we talking about the 40 kW three-phase product that you all showed? When you talk about a utility scale launch, is that the product that we're talking about?
No. Today you have the Synergy which combines three inverters together with one communication board, reduced dramatically the installation time and the cost of AC installation. That's already in the market and shipped. I was referring to four next steps that we didn't yet present. Each one will decrease the labor involved and will decrease price and the total benefit we're bringing to utility scale installations. None of them will we expose now.
Okay. That's not the Synergy product. For Synergy, you've rolled out-
No.
33 kW and 40 kW times three, right? The last I saw, you were up to-
Correct
120 kW.
Correct.
What you're talking about now is something else.
Correct. That's a natural evolution of the current set of products. I'm referring to four sets of new products.
Okay. Then just to follow up on that, and I know I keep on asking, but I'm going to ask again. Any senses to when we might see HD-Wave show up in some of the three-phase products?
In three-phase? That's what-
Yeah
we refer to mid next year. We're still on the plan for mid next year to be actually sold. Alpha's probably earlier.
I'm sorry, what's probably earlier?
Alphas of the product probably earlier, I hope will be in shipment by mid next year. This is unique topology, lots of innovation, and the chances of delay of such big step in innovation is, of course, still very. We feel a good chance that the schedule will slip. Currently, we feel comfortable with mid next year.
Okay. Thank you very much.
Thank you.
Thank you. We'll take our next question from Jeff Osborne with Cowen and Company.
Hey, good afternoon, guys. I wanted to explore three quick questions. The ASP decline, if I heard you right, and you talked about you proactively lowered pricing on the commercial side to gain share. A, did I hear you right, and B, was there any movement on pricing deliberately on the residential side as well to gain share, or was that just a commercial effort?
Basically, there are four elements. One, in order to take market share, and I guess you saw the wonderful result, it's already 43.5% of our total shipment in megawatt. In order to increase market share, and I'm quite confident we'll see very nice results in many geographies, we reduced prices by the beginning of the year. We had where to reduce it from without moving from the 37 ±1% that we shared with you when we went public. We believe that for this part or this time of the evolution of the company, this is the right amount of gross margin to aim to. The second element was currency, that didn't work in our favor this quarter. The third element is, of course, derived from the first one, it's the mix.
The average selling price of commercial, as you know, is dramatically lower than the average selling price of residential. The more you have commercial, of course, it pushes the total gross margin down. The last element is that not all the cost reduction that have been done and the agreement of pricing in Q2 were matured enough to get into the accounting policy, therefore, we'll see their benefit coming in the coming quarters.
Following you on the last one, if you were aggressive on pricing at the end of 2Q would
It depends on the
You hurt your margins in the third quarter?
I will explain. It depends when you close the price list with your manufacturers, and then how you roll it into the accounting. If it's not closed on the right timing, you will get it from the beginning or from the period you agreed upon, but you will be able to put it in the accounting only later. That's the situation regarding Q2.
Got it.
It's very technical.
Okay. Two other quick ones here. The tax rate was a little lower than we were modeling. Can you just remind us on what the anticipated tax rate would be in the second half of this year and for fiscal 2019?
Yes, sure. In general, tax rates should be 14% moving forward, because whatever we're saving-
One-four.
14%, yeah. Whatever we are saving in Israel, we are paying as GILTI taxes in the U.S. You will see from time to time fluctuations from this rate, mostly related to some of the tax assets or benefits that are created, that are mostly related to the various jurisdictions. Usually, you should see 14% moving on from now.
Just running with the tax rate this quarter, had some one-time items then? Was it lower than you anticipated?
Yes.
Was this in line?
Yes. We've basically, once we have filed the, or prepared the actual tax returns, some of the assessments that we took at the end of Q4, were now actually realized. Therefore, there were a little bit of changes in the, what we call, tax assets, but not in the actual payment that was done right now. In general, it's 14%, though.
Got it. The last one is, you highlighted the potential OpEx impact from the lawsuit, which is understandable. I know you highlighted Gamatronic is negligible to the top and bottom line, but can you just give us a rough ballpark of what the 100 people that are coming over with the acquisition, how we should think about modeling those people from an OpEx perspective in particular?
In general, it is about $2 million. It's approximately $2 million on OpEx.
Annually or full year?
No, quarterly.
Quarterly. Sorry.
In general, the division itself is already profitable in a very, very low number. The overall sales, while you reduce the cost of the group, will contribute very, very little.
Yes. To the bottom line
at day one, we believe that it will be able to dramatically increase the profitability of the group within maximum of four quarters.
Great. I appreciate it. Thank you.
Thank you. Again, if you would like to ask a question, please press star one at this time. We'll take our next question from Edwin Mok with Needham & Company.
Hey, guys. Thanks for taking my question. Sorry about the background noise. First question I have is, if I missed it, I apologize, did you talk about how much of your sales come from commercial this quarter? How do you think that will trend, let's say, for the second half of the year and towards in 2019?
For Q2, the contribution was 43.5% in megawatt. As we said before, it's hard to predict quarter by quarter because the difference between when you get design in, when actually you sell the product to, in many cases, to the distributor. In general, we're expecting increase in the total megawatt and also in the percentage to a level of about 50%. As you remember, probably, that's what I said couple years ago. We believe that it will become around 50% sometime next year, and in few years, we'll be able to balance something in the area of 40/40/20 or 40/30/20 between resi, commercial, and utility.
Is there a limitation of how big of a type of project, or commercial project you can go after right now based on the product that you have? When we talk to investor, a lot of times they will say that your product cannot be cost competitive because of the architecture. Can you kind of talk a little about the advantage of your product?
With what we have today, in many cases, if you run PV sims and put dollar and dollar and dollar, it will make sense to do any size of big field. Saying that, it's always complex to convince in the beginning, that in cases with no shade, just a PID problem and mismatch of panels and growing mismatch with time and dirt, that PV sims present, which is third party too, we didn't do anything, present so much benefit. Most customers, it will take time to convince. We're in the first stages.
If you would put it in Excel, you will see that even with what we have today, we could penetrate in theory to a bigger percentage of the utility fields with no limitation on size, because no matter the size of the utilities field, the connection of transformer points are in the size of one, two, three, four, five megawatt. It's not bigger than that. For example, in the 27 megawatt field we are doing in India, there are 11 connection points. In theory, you can do 11, you can do many more. I think we can be competitive if the customer is willing to run a very thorough Excel with the view of 20 years ahead.
It's marketing, it's sales, it's time, and what more important, or this is the SolarEdge way, we convince customers mainly by bringing a better and better fit of product. That's what I referred before, that in the coming year and a half, we'll have four steps of product that specifically were designed for utility, and I'm sure will increase our market share there, not overnight, but with lots of hard work, I think we'll become an influence player also in the utility field.
Just to be clear, Guy, you talk about the HD-Wave version of the three-phase inverter. Is it as much of a cost saving as you would expect on the single-phase product, or is it less because it seems like your existing commercial inverter, you already have done a lot of work in terms of driving cost down. Is there a way to think about the difference of that cost saving on three-phase versus single-phase?
I think the ratio for the inverter is the same, or in the same proportion, and maybe even better. Even better in the inverter portion. In the optimizer portion, of course, this alone will be divided by more or less half, because with the current optimizers, we're working on the optimizer that will be the perfect fit for this product to gain more or less the same benefit on the specific commercial optimizer as well.
Okay, great. That's all I ask. Thank you.
Thank you.
Thank you. We'll take our next question from Carter Driscoll with B. Riley FBR.
Guy, you talked in the past about, while ASP per watt is lower on the commercial side, that it's more profitable than resi. Is that still the case?
Sorry, one more time. I said that the ASP is, of course, naturally, different completely.
Right.
The profitability is.
The profitability is better.
The profitability and average is quite similar. I don't know the numbers exactly. It depends on the fluctuation in deals is bigger than in residential because we still, in many cases, compete, and need to penetrate markets like India, et cetera. The variance on the ASP within the segment is higher than the variance in residential. More or less, the percentage of profitability are similar. There is no dramatic difference in profitability.
Okay. Is the slight shift, at least in terms of your top 10 customers, this % of sales, due to the mix shift between C&I and resi, or is there something else at play geographically that caused it to go up? I think it had been on a fairly steady downtrend.
Sorry, I'm not sure what in downtrend.
You're talking about your customer concentration within your top 10 actually ticked up this quarter and had been in a pretty steady-
Yeah
downtrend. I'm wondering, is that anything to do with your commercial share gain, or was it more geographic in nature, or was it-
No
versus the national play?
It come from two main reasons. One, the big PPAs in the U.S. and are in general, the three together, losing market share to the mid tail. Where in the other geographies, we are gaining more and more logos, and since there are no big players in Australia, in Europe, none of them is big. Practically, we gain more logos on the mid-size and therefore the overall slowly reduce the amount of the 10 biggest customers.
Maybe this last one from me. You talk about some of your non-solar initiatives. You talked about virtual power plant, but maybe EV charging, any update there or storage, any incrementally in different geographies we're seeing attach rates increase and/or vis-a-vis competitive positioning improving?
The vision is, of course, to supply everything beyond the meter to resi and later to commercial. Today, we're supplying batteries. We're still limited with volume due to the fact that the vast majority is going with the LG battery, which is having today, overall limitation in production, because what they have, they need to split between stationary storage for solar, UPS, and automotive. We're working, of course, on other solutions for that. EV inside inverters is already shipped and, again, very nice acceptance. I would expect that, again, with time, but much faster than other improvements, we'll see a very fast adoption rate. It's very simple, especially in the U.S. Once you go EV in the inverter, you save all the installation cost of EV in the future.
The installation cost of EV in the future is anything from $500 to $600, $700, depends on your house, load board, the length between the EV location and the load board, et cetera. For the customer to take inverter which is already EV ready, is a difference of around $300. They save already $300 just by having this opportunity. And since we and most customers believe that in the three, four, five years, most of those customers will have at least one electrical vehicle, it just make all the sense and different than what I said about batteries in the past and grid services. I think that here the adoption will be fast.
Appreciate it. Thanks, guys.
Thank you. This concludes our question and answer session today. I'll go ahead and turn the call back to Guy Sella for closing remarks.
Thank you all. In summary, our second quarter results show continued successful execution of our business strategy, with record revenues and consistently stable profitability. We're 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 for joining us on today's call. All the best.
Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.