Welcome to the SolarEdge Conference Call for the Q1 Ended March 31, 2020. 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 expressed 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 Q1 ended March 31, 2020, as well as the company's outlook for the Q2 of 20 20. With me today are C. V. Landau, Chief Executive Officer and Ronen Thayer, Chief Financial Officer.
C. V. Will begin with a brief review of the results for the first quarter ended March 31, 2020 Ronen will review the financial results for the Q1 followed by the company's outlook for the Q2 of 2020. 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 U. S. GAAP.
These non GAAP measures are presented in the 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 U. S. GAAP. Listeners who do not have a copy of the quarter ended March 31, 2020, 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 Seabee.
Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. Given the unusual circumstances surrounding the COVID-nineteen pandemic, I will take the opportunity during this call to focus most of my discussion on the matters surrounding how we are managing business in light of the situation and provide insights into the coming quarter. Starting, however, with highlights of our Q1 results. We concluded the quarter with record revenues of approximately 430,000,000 dollars These revenues include a record quarter in our solar business of approximately $408,000,000 Overall this quarter, we shipped 5,000,000 power optimizers and 202,000 inverters.
This quarter was in line with our guidance and expectations for continued growth and included highlights such as the record quarter for revenues in Australia and North America and record commercial shipments by megawatts, both globally and in North America. Obviously, in the current environment, there are bigger question marks about the future, and I would like to focus on that rather than on the achievements of the quarter that has ended. At the time of our Q4 earnings call in early February, COVID-nineteen was an event concentrated in China and the concerns and question marks raised were about the availability of supply. At the time, we communicated that thanks to early measures we have taken, we expect no significant supply issues. And as our results show, we executed on this message.
Since then, the pandemic has spread to various regions of the world in varying levels of severity. Due to our global spread and in particular our large operations in the early and significantly hit locations like Korea and Italy, events on the one hand challenged the company and management, but on the other hand, these events gave us early familiarity with the dynamics, which have now affected most of the world. We learned and implemented early on the tools and procedures needed to keep our workforce safe and efficient, such that by the time the virus impacted the United States and countries in Europe, we were able to adjust rapidly. In addition, we have been sharing this know how with customers, distributors and installers. Through March April, more than 340 webinars attended by more than 25,000 people, covering subject matters ranging from news about SolarEdge products to how to sell solar systems remotely and other topics of interest for solar installers.
In some webinars, we hosted 3rd party experts who shared information aimed to enrich the knowledge capabilities of our customer base of approximately 30,000 global installation companies. On top of the customer engagement activities, early visibility of the COVID-nineteen impact enabled us to prepare all of our global service manufacturing and R and D centers such that work throughout the period continued with minimal impact other than challenges related to the inability to travel internationally. Moving on to the business environment. In order to assess market dynamics, we are closely tracking installation rates of our products through our monitoring portal globally and per country. While this is an important indicator, it provides only part of the picture as it is not directly indicative of new solar systems sales by our installers.
However, we do think it is a helpful tool to foresee market demand. During the COVID-nineteen impacted months of March April, installation rates of SolarEdge products outside of the U. S. Increased by 15% compared to the same period last year. Starting from Europe on a per country basis, installations in Italy, historically a strong solar market, declined by 47%.
In the last 3 weeks, however, the installations rates there have started to rise again. In the Netherlands, where we are the market leader, our product installations are flat when compared to March April of last year. The most positive data comes from Germany where our product installations during this period were up 42% compared to the same period in 2019. This is a result of the lower COVID-nineteen impact in Germany, coupled with market share gains related to our end of 2019 release of the 3 phase residential storage inverter. In the U.
S, during the same period, the installation rate of our products declined by 16% compared to March April of 2019. In the U. S, where the impact of COVID-nineteen hit later than in Europe, decline in installation rates in April alone were 33%, and the number of radio installations has now stabilized for the last 2 weeks. Additionally, we are in constant contact with distributors and installers to monitor their inventory levels as well as their view on new solar system sales in their markets. Generally, the sentiment in Europe and Australia is more positive than that in the U.
S. However, the data varies significantly from country to country and the money that we're in for us. Similarly, it is difficult at this point to identify a clear trend between residential and commercial. However, we believe that our global presence and diverse revenue stream, both geographically and in multiple segments, positions us well to minimize the impact of the pandemic on our business. But there will be an impact on business, and this is reflected in our Q2 guidance.
While it is difficult to foresee how long this downturn will last, we are preparing for various scenarios, including the potentially slower Q3. Preparations include careful scrutiny of our spending and management of operations. Already, we have made expenditure adjustments, including the review of all of our variable expenses. In addition, effective April 1, our senior executives voluntarily reduced their base salaries by 20%. The above measures combined with our strong balance sheet will be used to continue and push and even accelerate the strategic projects that we shared with you during and since our Analyst Day.
This month, we are beginning to shift to North America our new HD wave based energy hub inverter, which provides storage and backup offering compatible with 3rd party batteries and is the basis for our complete solution, which will be coupled with our own battery scheduled for release towards the end of the year. Later in the quarter, we will start shipping our new commercial inverter with added safety features and higher energy density, followed by a ground mount dedicated power optimizer with higher power density and better economics. Our focus on long term R and D projects continues as planned with a broad pipeline of products and capabilities for residential, commercial and utility applications. On the non solar front, our lithium ion business head out of Kogan and Korea is stable and continues to deliver revenues while utilizing our entire manufacturing capacity. Activities for the expansion of the 2 Gigawatt factory are underway as planned.
In the eMobility business, qualification by a Tier 1 automotive manufacturer of our full electrical powertrain solution continues while we deliver increased numbers of units to accelerate the validation process. In summary, we are pleased with the results of the Q1. And while we expect a challenging period in the near future, we are confident that the core strength of our company in technology and institution capability, combined with our extensive product roadmap, will enable us to come out of this period even stronger. And with this, I hand it over to Juanain, who will review our financial results.
Thank you, Sibi, and good afternoon, everyone. As always, my review includes GAAP and non GAAP discussions. Full reconciliation of the pro form a to GAAP results discussed in this call is available on our website and in the press release issued today. In addition to providing explanation and color around our Q1 numbers, I will provide as much as possible insight on the financial impact we're seeing that COVID-nineteen is having on our business. While we will make every effort to provide this insight, as you well know and as you all have seen over the last past few months, circumstances surrounding COVID-nineteen can change rapidly and are outside of our control, and so my input on this call is, of course, based on what we are seeing at present.
As for the Q1 results, total revenues were $431,200,000 a 3% increase compared to $418,200,000 last quarter and 59% increase compared to $271,900,000 for the same quarter last year. Revenues from the sale of solar products were $407,600,000 compared to $389,000,000 last quarter and were driven by growth in the United States and rest of the world. U. S. Solar revenues grew this quarter to $246,000,000 represented 60.3% of our solar revenues.
These U. S. Revenues included safe harbor revenues of $54,100,000 a slightly higher number than we originally planned as we expedited some of these deliveries over non safe harbor shipments to avoid delays related to possible border closures. Solar revenues from Europe were $122,300,000 or 30% of our revenues. Q1 revenues generated from outside the United States and Europe were $39,700,000 a record number, representing 9.7% of our solar revenue this quarter, most significantly from Australia in which we had a record quarter.
On a megawatt basis, this quarter, we delivered 9 26 Megawatts to the United States, 6 41 Megawatts to Europe and 283 Megawatts to the rest of the world. Residential products represented 56% of our megawatt chip and commercial systems were 44%. This quarter, our top 10 solar customers represented 62% of our quarterly solar revenues, a decrease from the last quarter and one distributor accounted for more than 10% of revenues. Blended ASP per watt decreased this quarter by approximately 4.3% compared to the last quarter due to a change in the customer mix and devaluation of the euro and Australian dollar against the U. S.
Dollar. This quarter, revenues from our non solar products were $23,600,000 mostly related to the sale of lithium ion batteries. GAAP gross margin for the quarter was 32.5% compared with 34.3% in the prior quarter and 31.7% in the same quarter last year. Non GAAP gross margin this quarter was 33.6% compared to 35.5% in the prior quarter and 32.8% in the same quarter last year. Non GAAP gross margin for solar activity was 35% compared to 37.8% in the last quarter.
Last quarter, our solar margin benefited approximately 300 basis points due to onetime effect related to the implementation of cost reduction measures to our warranty accrual. Excluding this onetime benefit, the solar business gross margin slightly increased as a result of lower than anticipated air shipments that represented 215 basis points this quarter. These lower than anticipated air shipments are mostly attributed to the increased capacity we built in the last quarters. The lower than expected air shipments were partially offset by a change in the product and customer mix and holiday labor rates paid to contract manufacturers who continued to work on our behalf during Chinese New Year and the subsequent lockdown down in February early March. We expect our air shipments expenses to be much lower in the Q2 of 2020.
Non GAAP gross margin for our non solar activities was 9% compared to 4.9% in the previous quarter. The increase was a result of a strong margin from the sale of our lithium ion battery, offset by lower margin in the machinery and e mobility groups. Moving to our operating expenses. In total, operating expenses for the Q1 were $72,200,000 or 16.8 percent of revenues compared to 92.7 percent or 22.2 percent of revenue in the prior quarter and to $58,100,000 or 21.4 percent of revenue for the same quarter last year. On a non GAAP basis, operating expenses for the Q1 were $66,300,000 or 15.4 percent of revenues compared to 63.1 percent or 15.1 percent of revenues in the prior quarter and $48,000,000 or 17.7 percent of revenues for the same quarter last year.
Our non GAAP solar operating expenses as percentage of solar revenues was 13.5% compared to 13.8% last quarter. This quarter, GAAP operating expenses included a non recurring income of $4,900,000 that was collected from the major selling stakeholder of Kokam as indemnification for settlement of a pre acquisition claim. As part of our reaction to the economic slowdown that we are already seeing from COVID-nineteen and as Sidi mentioned, we have reviewed carefully our business plan for 2020 and implemented certain cost cutting measures, including a reduction in executive management base salaries, general hold on recruitment and freeze on salary increases, which were planned for April. In addition, we're eliminating workforce redundancy and adjusting our headcount and to the reduced level of activity in certain regions as well as renegotiating other expenses such as rental agreements and consulting services. Some of these adjustments are still ongoing, and the effect will be seen in our operating expenses for Q2 and Q3.
Our GAAP operating income for the quarter was $67,800,000 compared to $50,500,000 in the previous quarter and $28,000,000 for the same period last year. Non GAAP operating income for the quarter was $78,600,000 compared to $85,300,000 in the previous quarter $41,200,000 for the same period last year. This quarter, non solar activities resulted in non GAAP operating loss of $9,300,000 compared to an operating loss of $8,000,000 in the previous quarter, driven by operating losses in the UPS Machinery and Emobility division and offset by profitability of the lithium ion businesses. Financial expenses for the quarter were $16,600,000 compared to financial income of $11,100,000 in the previous quarter and a financial expense of $6,200,000 for the same period last year. The decrease is a result of foreign currency changes, resulting mostly from unrealized exchange fluctuations and the accounting treatment of intercompany balances and intercompany loans provided for the acquisitions in Korea and Italy.
The impact of these unrealized intercompany exchange rate expenses on GAAP and non GAAP net diluted EPS was $0.24 Tax expense was $8,900,000 this quarter compared to $9,200,000 in the prior quarter and $3,900,000 for the same period last year. Our non GAAP tax expense was $12,500,000 compared to $10,400,000 in the previous quarter and $4,900,000 for the same period last year. GAAP net income for the Q1 was $42,200,000 compared to a GAAP net income of $52,800,000 in the previous quarter and $19,000,000 for the same quarter last year. Our non GAAP net income was $50,700,000 compared to a non GAAP net income of $87,400,000 in the previous quarter and $32,900,000 for the same quarter last year. GAAP net diluted earnings per share was $0.81 for the Q1 compared to $1.03 in the previous quarter and $0.39 for the same quarter last year.
Non GAAP net diluted EPS was $0.95 compared to $1.65 in the previous quarter and $0.54 in the same quarter last year. Our non solar business generated $0.23 non GAAP diluted earnings per share loss. Turning now to the balance sheet. As of March 31, 2020, cash, cash equivalents, bank deposits, restricted cash deposits and investments were $558,700,000 compared to $467,500,000 in December 31, 2019. During the Q1 of 2020, we generated a record $107,700,000 in cash from operations.
We are happy to be in such a strong cash position with practically no debt during these times. AR net decreased this quarter reaching $235,700,000 compared to 2 $98,000,000 last quarter. DSO this quarter in the solar business was 62 days, a decrease from 65 days last quarter. Naturally, in light of the financial situation in the market and our global operations, AR and collections are a major point of focus for us. Over the last few weeks, we have closely reviewed our AR balances and the financial stability of our customers.
In some cases, we are selectively examining and providing longer creditors to customers in order to support them in this period. We will continue to examine the creditworthiness and strength of our customers even more cautiously these days, and we'll carefully consider to adjust credit allocations as needed. As of March 31, 2020, our inventory level net of reserves was at $198,600,000 compared to $170,800,000 in the prior quarter. Most of this increase is related to raw materials of our factory accumulated in anticipation of component shortages and supply chain disruption from COVID-nineteen. These raw materials will be used for manufacturing in the next quarters.
Additionally, approximately $38,200,000 of our inventory relates to non solar inventory, the majority of which is raw materials held in coker. As Citi explained, we expect that the effect of COVID-nineteen will impact our business in the United States and to a lesser extent in Europe and will result in reduced revenue in the coming two quarters. Given our size and scale of operation, adjusting our manufacturing and inventory levels to the new level may take 1 to 2 quarters. Moving now to the guidance for the Q2 of 2020. Before outlining our guidance, I would like to remind you that the evolving impact of COVID-nineteen pandemic is unprecedented and that makes it difficult to predict with confidence its impact on the company's business for the next quarter and for the rest of this year.
Our guidance for the next quarter includes the anticipated impact of the COVID-nineteen pandemic on our businesses as viewed today. In our Q4 earnings call, we told you that approximately 70% of our Q2 2020 orders were already received. Since then, we have, of course, received additional orders. However, we have also received requests for rescheduling and or cancellation of orders. Our current Q2 backlog is large enough to exceed the guidance we have provided, and our manufacturing capacity and inventory will facilitate the delivery of those orders.
We expect revenues for the Q2 of 2020 to be within the range of $305,000,000 to $335,000,000 Revenue from the sale of solar products are expected to be within the range of $285,000,000 $315,000,000 We expect gross margins to be within the range of 30% to 32%. Gross margins from solar activity is expected to be within the range of 32% to 34%, reflecting a higher percentage of revenues from Europe that are characterized with lower margins. I will now turn the call to the operator to open it up for questions. Operator, please. Please?
Thank you. And first, we'll go to Mark Strouse with JPMorgan. Your line is open.
Sorry, I hit myself up. Can you thank
you very much for taking our questions. Appreciate it. Ronen,
if I could just start with the guidance.
The revenue range is wider than usual, not surprising given everything that's going on. But can you just kind of talk about the what needs to happen
to come in at the high end
of that range versus what might happen at the low end?
So in general, and as I mentioned, we are sitting today on a backlog that is sufficient to fulfill and basically cover the entire range that we have provided. However, during the last few weeks, we have seen requests for either rescheduling and cancellations. And at the same time, we're also seeing from time to time customers that are either struggling or we are afraid that they will struggle with payment terms. And as such, even if we have orders that were already received, already booked, already in our orders book with a defined delivery date, we're looking at every order. We talk to every actually, we made But actually, we made sure that we're not providing customers with goods that they either do not need or at the same time that we're providing credit to customers that we are a little bit afraid that we will not be able to collect.
Again, the orders are there, but the situation is changing rapidly. I think that every day and almost every week, you see new restrictions or continued restrictions. And in this case, we, almost as usual, decided to take the more, I would call it, cautious approach when guiding and given the range that we feel that we can move.
Okay. That's helpful. And then kind of related to that, just your sense given your conversations with your customers regarding channel inventory. Kind of maybe if you can talk about what that looked like maybe in late Feb, early March versus what that looks like today and any kind of trends that you're seeing with sell through for those distributors?
So of course, as Timi mentioned, what we see around the world is very much different between country to country, continent to continent and even customer to customer. So I'm not sure that I can generalize my entire answer to all of the customers that we see and we talk to. I would say that in general, we usually see 60% to 90% 90 days of inventory levels within large distributors. Usually, smaller distributors are holding smaller amounts because of the working capital needed to do this. And usually, the way that they are measuring these 90 or 60 days is based on the forecast that they see in front of them and what they expect to be.
So I can tell you that all in all, when we deliver the product, I would say that maybe the inventory level on the absolute value may be very similar to what we usually see within the customers. They do not carry much more on the dollar volume. The time that they may consume this inventory may change. And again, it very much varies. I would say that in Europe, we will see almost regular days.
And while in the U. S, at least right now, with some of the shelter in place restrictions, some of the distributors have much higher than the usual days of inventory than they usually carry.
And next we'll go to Colin Rusch from Oppenheimer. Your line is open.
Thanks so much, guys.
We've been getting some inconsistent checks on lead times in particular suites. Can you give us an update in terms of where you're at in terms of general lead times on products and if there are particular items that are extended a little bit versus the rest of your portfolio?
Sure. So the lead times, first of all, in the last few quarters, we saw lead times extending as naturally the business grew much faster than our ability to manufacture and ship. This is why we also had the substantial airship. For the beginning of the quarter, at least Q2, our lead times are almost similar as they were before. And in some cases, it was even close to 10 weeks, mostly related to the fact that we decided to avoid air shipments, and we're shipping most of our products using ocean freight.
I would say
that, in general, what we're aiming to do
is to be at around 6 weeks of lead time once we are able to replenish inventories at the desired level using ocean freight in all of the territories in which we operate.
Okay. Thanks so much. And then with
the CapEx build out with the battery factory, can you speak to what level we should anticipate for this year as a total number? And then equipment availability, if there are any delays or parts of that project that you're going to delay at this point, given availability of other supplies that you're not acquiring?
So, Konstantin, the line was not really good at. Your question is more mostly related to
the the Korean battery factory and your build out on capacity there. What the expected total CapEx is? Any equipment procurement issues that you're looking at right now? And then if there are any plans to delay that project given the ability to buy cells on the open market?
So first of all, we're very happy that actually these is continuing as scheduled despite of the fact that Korea was one of the first countries that was affected by COVID-nineteen. This product is scheduled and continuing as usual. The plan is to have a 2 gigawatt factory that will be able to start manufacturing at the beginning of 2022. The cost associated with this product project is about $95,000,000 That is including the land that we actually just bought out right after the quarter. We acquired the land, the building and the machinery.
And all of these expenses and equipment will be bought and deployed over the next 18 months. We do believe that right now, based on the schedule, we do not see delays. We do believe that the continued work that we need to do when it comes to negotiating terms on machinery and since some of the machinery is coming from outside of Korea, this will be, of course, dependent on the ability to travel to ship and to have the technicians coming in. But at least at the point where we are today, we do not see delays to these 2 gigawatt factory beginning to deliver in 2022.
And next, we'll go to Maheep Mandloi from Credit Suisse. Your line is open.
Hi. Thanks for taking my question. Just on cost controls, which you announced in the quarter, you talk about when we could see it benefit the gross margins, either in Q2 or the second half of this year?
So the cost control and
the margin, let's first of all differentiate because a lot of the cost control is also related to the operating expenses and not just to the margins themselves. So I'll start with the I'll start maybe with the operating expenses and then into the margin. Our aim is to be, by the end of Q2, at the run rate of operating expenses that was similar to what we saw in Q3 2019, and this is around $58,000,000 to $59,000,000 a quarter of operating expenses. And again, since we're implementing this, we're already in the beginning of May. Of course, not all of this will be realized in Q2.
Some of it will come in Q3. When it comes to the gross margin, the cost activities that we do there are a little bit harder to predict because not only they are dependent on what we achieve but also dependent on the revenues, the mix and the customer mix. So it's the geographic mix, sorry, and the customer mix. For example, in the Q2 of 2020, substantial part of our revenues will come from Europe. And gross margins in Europe are lower than gross margins in the United States.
So despite of the fact that we already cut costs in our cost of goods sold, in our operational department and costs related to mainly fact that we're delivering substantially higher volumes into Europe that is characterized with lower margin would take away a little bit of this effect. And this is what you see actually in the guidance that we give. So all in all, on OpEx, we will go back to about Q3. And when it comes to gross margins, the magnitude of selling each and every territory will determine what the numbers will be.
Thank you for the clarification. And just one small housekeeping and then another other question. So on the Safe Harbor, could you clarify how much Safe Harbor do you expect in the Q2 revenues? I think previously you said you might add something in April for Safe Harbor. And last question, then I'll jump back.
It's just around the other product launches. You touched upon the battery product, but can you talk about the smart module, utility scale and the Gen 4 optimizer? Thank you.
I'll talk about the first of all, about the first part of the question, and Citi will answer the second. So the Safe Harbor orders for the 2nd quarter are approximately $17,000,000 which are important to say that these are not just, of course, residential Safe Harbor orders, but also commercial. But all in all, it's around $70,000,000 Now with regards to new products, if
you can maybe So in short, as I mentioned, the residential battery is, as we said all along, it's scheduled for the second half initial shipment. We are on schedule with that. We're approaching the phases of certification that take place in multiple places around the world. So there's still some question mark how much we will be able to ship people and batteries around the world. So that's the only risk factor on meeting the schedule of delivery in the second half of the year.
Smart modules, we already delivered today. So the it's not a huge part of the business, but we are delivering every quarter embedded smart modules of SolarEdge Optimizers already today, and we expect this to ramp while it's still a small portion of the business. Optimizers, I'm not sure in particular to what you are referring. As I mentioned, we have a new optimizer that is high tower optimizers specifically for round mount installations, especially focused on the community solar market in the U. S.
That optimizer will begin to ship in the next few weeks or before the end of this quarter. On the standard residential and commercial optimizers, enhancements and improvements being introduced continuously. So there's no specific new generation that is intended in the next 3 months.
And next we'll go to Philip Shen from ROTH Capital. Your line is open.
Hi, everyone. Thanks for the questions. Looking beyond Q2, I was wondering what kind of visibility you have into Q3. How much, for example, Q3 may be booked?
How
do you expect potentially margins to trend? I know you're not providing official guidance, but if you can provide any color on that, that'd be great.
So naturally, again, since visibility is already problematic to Q2. Q3, of course, is much more. I would say that we have limited visibility. We talk to all of our customers constantly. We see the signs in each every in every country, and we are following up very closely with all of our customers and their inventory levels.
But I think that, again, the question here is not just what they have, but actually what is going to happen to the installation rate itself during the Q2. And therefore, although the visibility that we and or the level of transparency that we have with them is very open and good, the ability to predict Q3 is problematic right now because I think that neither us nor do the customers know how much of their inventory will be consumed. And this is why we talked about this limited visibility. Now when it comes to the margins themselves, again, this will come mostly due to the fact of what will be the mix between the geographical shipments that we will do. We continue to do cost reduction on the cost side on a continuous basis.
Of course, as we mentioned before, as Pivi mentioned, we are working all the time to do it and actually, this time, in some cases, we're even accelerating those. But of course, if you see different mix in different countries, this will affect the margins as well. So I would say that I don't think that we can say anything substantial right now about the quarter itself and the levels, but I can tell that we are following very closely and we're in constant dialogue with our customers to understand where their business is.
Great. I believe you may have indicated for Q1 that the ASP may have been weak because of mix. But I think the U. S. Mix went up and U.
S. Typically has a higher ASP and greater concentration in resi. So can you provide a little bit more color around why the ASP in Q1 was a bit weaker? And to what degree may have this been impacted by some competitive dynamics that you guys might be experiencing?
So I think it was not actually related too much to the competitive environment. This is mostly due to the fact that in Q1, safe harbor deliveries were made due to the fact that, again, and even expedited that we were very much concerned about closures of borders by the end of the quarter. And therefore, we decided that we expedite whatever we can in order to avoid these and actually to meet the very strict delivery times of the safe harbor. Naturally, that means that higher portion of our U. S.
Revenues came to the larger customers. And again, naturally, larger customers get larger discounts rates that were pre negotiated and known for a longer time. So here, it is really more of a mix issue rather than anything the change in pricing or pricing environment during this quarter.
And next we'll go to Jeff Osborne from Cowen and Company. Your line is open.
Good afternoon. Excuse me. Ronen, I was wondering if you could walk us through the gross margins. It's been asked a couple of times, but more specifically, the guidance of solar going from 35 to at the midpoint 33. I think you called out a 2 15 basis point headwind for air shipments.
I would assume that that goes to 0. So it looks like there's about at the midpoint a little over 400 basis points. Is it a safe assumption to say that Europe, generically speaking, is always 400 basis points lower margins? Or is it mix or are you using price in Europe to try to gain share? I just that magnitude was a little bit higher than I was thinking.
Yes. So here, again, the main effect in Europe, and I will give you even the specific numbers.
As we mentioned several times in
the past, or when we started to actually price products in Europe and the United States, the prices were about the same, but the exchange rate of the euro to the U. S. Dollar was approximately 1.20 dollars per euro. Today, we're talking about a much lower rate. And actually, over the last 12 months alone, the euro devaluated by 2.8% against the U.
S. Dollar. I can tell you that as of today,
the difference
in average, the difference between Europe and the U. S. In gross margin is about 4.50 basis points. Now this quarter, the main effect that you see is that there is a substantial shift into Europe. Europe is traditionally much stronger in the Q2 and Q3.
And this move into Europe is, of course, pushing this gross margin down. In addition to this, also in Europe, you see sometimes installations that are more heavier towards the commercial product. And in the commercial product and especially the larger product within the commercial portfolio that you have, also the gross margin is usually lower than S. Market. And this is why you see the effect.
This is entirely coming from mix due to geographic and, I would call it, segmental shift.
Just maybe to follow-up on that. A like for like system, 10 kilowatt residential system in California versus Germany, is that also 4.50 basis points difference?
Approximately, yes. And again, varying from customer to customer because customers have a little bit variations in their pricing, but in general, yes.
And next, we'll go to Brian Lee from Goldman Sachs. Your line is open.
Hey, guys. Thanks for taking the questions. Hope everyone is staying safe and healthy. I guess, question on just the guidance, Ronen. You mentioned April or Zvi mentioned April was down 33% in the U.
S, but then stabilizing at those levels. But I also think you mentioned Q3 could be slower later in the call. I might have misheard or misinterpreted, but are you actually expecting Q3 to be worse than Q2? And then if not, what sort of data are you looking at to consider Q2 the bottom here?
So maybe I'll clarify what exactly what the data we're looking at. We are looking at the rate of installations of new systems pretty much every day, new solar system every day in every country and actually even in every state. And we compare that to the rate of installation of new systems a year ago. What I mentioned is that while in Europe and across the world during March April, actually more solar systems were installed this year than were installed last year during the same period. In the United States, during April, there were 33% less installations of the new solar systems compared to April of 2019.
By the way, this is very significantly my state. Actually, Texas was more than a year ago and California is down by a bit more compared to
a year ago. And you look at
this at every single stake. That is giving us an indication on the general level of business and when we think inventories at the distributors will run down and they will begin to either bring in new orders or as Donen mentioned, reduced risk of requesting to push out or cancel orders. That is what we're basing our Q2 guidance on. Visibility for Q3, as Ronen mentioned, is very limited, especially in what relates to the United States. Generally, in several markets around the world several big markets around the world, there's a sentiment of business as usual.
And we just have to wait and see if that carries out through Q3 as well. In the U. S, things are very volatile. The business, as I mentioned, is down significantly compared to a year ago, and it's, in our mind very early to predict what will happen in Q3.
Okay, fair enough. Shifting gears a little bit here. I think on the Safe Harbor split here, just a question around the $75,000,000 you guys had originally guided for. I think last quarter, Ronen, you had said it evenly split between Q1 and Q2 roughly speaking. I know you pulled some forward into Q1 here, but it seems like if you hadn't pulled that $17,000,000 or so from Q2, you would have come in about $10,000,000 below the revenue guidance range for the quarter.
Just wondering what drove that dynamic? Was it all production issues at the end of the quarter? Or were there other issues? Because I would assume that given you gave the guidance in late February, you had volume demand pretty much locked up for the quarter. So just wondering where that slip that you might have occurred and if you're recapturing that volume in Q2 or if that's some of the reschedulingcancellations you're seeing?
Well, actually, it's neither. The situation was and again, we need to understand now how the end of March looked in China. At the end of March, it was almost impossible to ship anything outside of China. Ports were not yet there. Airlines almost stopped entirely stopped flying into China and bringing.
And in one case, I can even tell you that we chartered an entire plane to fly products from China into the United States. So in this case, we did not actually decided that we want to put in, in order to meet the revenue guidance, actually, it was the fact that we decided to prioritize safe harbor shipments over non safe harbor shipments in order to make sure that we are meeting the delivery times of those safe harbor shipments that needed to be around no later than 15 April. So in this case, revenues will be approximately the same. We simply took all of the capacity that we could have and we could send outside of China before the end of March. And in this limited and kept capacity, we have decided to prioritize safe harbor shipment.
Next, we'll go to Mike Sicos from Needham and Company. Your line is open.
Hey, guys. Thanks for taking the questions here. And I apologize if I missed this. I'm juggling between a couple of different calls tonight.
I just wanted to come back to some
of the supply chain constraints that you guys saw. And I was trying to figure out, can you give us some more color with respect to how those constraints are as we stand today? And whether or not the constraints once those bottlenecks are past you, are you looking to help your distributors build up the appropriate level of inventory in the current demand environment to help reduce your expenses on the air freight shipments?
So just to clarify, so we today manufacture in several sites. We manufacture in China, in Vietnam and in Hungary. Actually, we don't see any supply constraints right now, and we are able to deliver on all orders that we receive. What we are doing is instead of air shipping, we are ocean shipping products and building inventory gradually. But we are currently able to supply all demand and we're looking at the inventory levels of distributors very closely and making sure that no one has any shortage of parts to meet demand.
Okay. Thank you for helping me out with that. And then the follow-up I have
for you. With respect to the cost cutting measures that you guys are taking, can you
help us better understand how much of this temporary just because I have to imagine once things start sort of recover, you guys will be going back into growth mode from your current run rate. So just trying to get a gauge of how quickly these expenses may come back on as demand starts to recover?
So being veterans of cyclical business coming out of the semiconductor industry, looking at these type of events of a short term down and with not being sure for how long it will go. What we look at are the items that are indeed temporary and easy to recover when the business recovers. And it's typically activities that are directly related to the level of the operation and typically not any type of critical capability or skill that will be difficult to supplement. So we can we examine the operation entirely identify those types of opportunities And those are the cost cutting measures that we implemented. And when the business recovers, we will be able to recover with that activity quickly.
And at this time, I'll turn the call back to Phoebe Lando for closing remarks.
Thank you. In summary, I think it's appropriate to point out that we have entered this pandemic not only as a strong company, but in a strong industry. Smart energy and solar in particular has proven an excellent investment for home and business owners. And I believe that the demand for solar in a climate and world where backup and grid independence and growing with importance will continue to evolve. We took the banks at Kuvan not only for SolarEdge, but for our competitors and colleagues that this industry is mature and can service the market even in an extremely challenging period.
Thank you for joining us on the call today.
And that does conclude our call for today. Thank you for your participation. You may now disconnect.