Good morning. Thank you for joining us today. I have a few quick comments before I turn it over to management. We're handing out the power banks that can charge both your phone and the cell phones, and you should feel free to use them through the event as well as we have a charging station in the back of the room. You can also take the charging the power banks home with you.
We'd appreciate it if you could put your cell phones in a silent mode. And the company will be making forward looking statements, so we encourage you to review the safe harbor statement. Now I will turn it over to C. V. Landau, CEO and VP of Sales.
Good morning. There's a story about the famous violinist Isaac Stern that was walking the streets of New York 1 morning and he bumped into a tourist who didn't recognize him and the tourist asked him, excuse me, sir, how do I get to Carnegie Hall? And Isaac Stern answered practice. So, we decided to take a shortcut and have the event in here and we're very happy that you can join us today. My name is Steve and I'm the CEO of the company.
I've met some of you over the 10 years that I was heading sales and service for SolarEdge globally. I've been in this role for the last 3 months since the passing of our founder, leader and friend Guy Sella that I know many of you have listened to over the years probably met him. And I'm sure that you remember him with respect and fondness as much as we do. The agenda for the day is such that in the first part of the day we will cover our solar business and our position in that market and our plans for that market moving forward. Then we'll discuss some of the new acquisitions and new markets that we have entered with a special spotlight on the technology of the company and how it fits both in the solar market and in the new markets we entered.
And we'll close the day with Ronen covering of course the financial aspects of the plans of the company. We took special attention to give you the opportunity to meet a broader representation of the company's management team. You'll see them throughout the day presenting and you'll have the opportunity to interact with them as well. So I'll move quickly to the first item on the agenda and I'm happy to introduce the Chairman of our Board, Nadezhda Frias, who will kick off the day with a few remarks.
Good morning, everyone. Thanks for joining us and thanks, T. V. So, I stand here today because Guy, Sella, our Founder is gone. And so, I'm both sad and proud to be here with you.
I followed SolarEdge from its inception through Guy's eyes, from its inception in 2006. And in the last 3 months, I've looked at it closely through my own eyes. And I have to tell you what you probably already know, it's a remarkable company. It's not surprising for me since I know the founders of the company for many, many years. As you might know, SolarEdge has its roots an organization that I personally know very well, the Israeli Defense Forces, specifically the special ops and technological units within the intelligence organization of the Israeli military, where I had the privilege to serve for 25 years until 2013.
Many of these years, I served under Guy Sella's leadership, and he was my friend and mentor for the last 25 years. One of the best kept secrets of the intelligence units within the IDF is that it has access to 100% of the population when they reach when they graduate from high school through mandatory service. And perhaps the best kept secret of the intelligence units is that they have the ability to screen 100% of the high school graduates 2 years before they graduate and try to predict who are the ones that have the highest aptitude to learn extremely fast, work collaboratively to face some of the biggest challenges that Israel faces as a country, sometimes existential needs. And it's in this environment that I first got to work with the founders of SolarEdge, 3 of which, Lior Von and Mayer, are here today and will talk to you after TV. So, in this environment, I had the pleasure of working with them and with Guy.
And when they continued on to start SolarEdge in 2006, I remained in the service for a few more years. I became the commander of 8,200. And as I said, I followed the building of SolarEdge through Guy's and the other founders' eyes over many years. When I retired in 2013, SolarEdge was already up and running. And actually, Guy and the founders were sort of guided me and mentored me as I started my own company called Team 8.
What Team 8 does is looks for big challenges in the area of cyber machine learning and data and where they intersect and tries to find deep tech to find sustainable, meaningful solutions for some of these daunting problems. I read the Safe Harbor about 10 times yesterday to make sure that I'm not saying anything I'm not supposed to and Rachel, our General Counsel, walked me through it again this morning. But I do believe that when historians look back at our times, they may remember or refer to Dickens in A Tale of Two Cities. I really think these are the best of times and the worst of times. I think as humanity, we've never been confronted with such great challenges on the one hand, perhaps existential challenges.
And on the other, we've never had the scientific ability, the tech depth, which is constantly accelerating, which may solve some of these daunting problems that we're facing. I think what SolarEdge is doing is focusing on one of the most challenging of these challenges of these of problems that humanity is confronting, focusing on specifically on solar in sustainability. I think we have the tech depth, the experience and the capabilities to solve some of these problems. I believe that we are now going to continue to lead the solar energy, but also have the ability to break into new business segments, as you'll be briefed today. Sibi and the rest of the leadership team, I want to express my appreciation for you and the whole management to your continued efforts and outstanding results so far, and I'm sure you'll continue to lead in the near future and beyond.
Thank you very much, and have a great day.
In the next 40 minutes, I'll be covering our status and plans for the solar industry. That will be followed by presentation about our roadmap for the solar industry and our operational plan. And after that, we will go into the new businesses. In discussing the solar our solar business, I'll cover some of the trends of the industry, why we believe this industry is expected to grow and what are our plans to continue to grow at a higher rate than the growth rate of the industry as we have done in recent years. I'll describe in detail our growth strategies and I'll focus a little bit more time on one of our strategies that we coined ARPY, which represents average revenue per installation and I'll explain that later on during the presentation.
I believe that at the end of my presentation as well as my peers, you'll be familiar with our core capabilities in the solar industry and what got us to the leadership position that we are in today and that will set the basis to discuss how we use those same capabilities together with the acquisitions that we brought in house to grow in the new markets that we've entered. SolarEdge has a track record of execution as evidenced both by our top line and bottom line growth over the last few years. If you look at it in another pattern looking at the rate at which the industry grew in megawatts installed and the rate at which we grew in inverter shift, you see that over the last few years, the industry grew by about half the rate that we grew. Another more specific way to look at this is to take a few select geographies. In this case, we chose some countries that represent a geographical diversification and are all part of our top ten sources of revenue and looked at each of these countries what was the growth rate of the solar industry in this country over the last 5 years and what was the growth rate of SolarEdge in that country during the same period of time.
There's also a notation of the size of that market in 2019 just to give you a feel for what are the sizes of the markets that we are operating in and what are the sizes of the markets where we are outperforming the growth rate of the rest of the market. The combination of vision, technological innovation and our execution capability has led us to become the number 1 inverter company in the world by revenue as well as the number 1 single phase inverter provider by megawatt shipped. And here you can see in summary a few numbers that represent the achievements and represent what we've accomplished as a company over the last 13 years since the founders began the company in 2006. Now looking ahead and let's start by looking at the markets. There are a few macro trends that are working in our favor in increasing demand for electricity and increasing usage of renewable power and generating that demand.
Population of the world is obviously growing. More of that population is moving into cities. And on a consistent basis, the average energy consumption per capita is going up. This is pretty straightforward and increasing the demand for energy of all kinds. The second trend that works in our favor in this case is the increased usage of renewable energy in supplying this increased demand globally.
As you can see, there's projections that by 2,050 roughly 30% of the global electrical consumption will be supplied from renewable energy sources. Flipping that down, another layer takes a look at the sources for renewable energy generation. And within that if a few years ago solar was a relatively small portion, it's a portion that is expected to grow at a higher rate such that by 2,030 somewhere in the range of 17% of the renewable energy delivered will be coming from solar sources. All of these trends combined are obviously leading to an increase in the size of the market that we've been serving for the last years and the market that is our primary market that we will be serving in the future. Looking at the amount of solar energy installations globally divided by segments, you can see that all segments are expected to grow.
And in general, the market is expected to grow by roughly 30% to 35% over the next few years. Within the growth of the market, the segments that are expected to grow at the highest rate are the segments in which we've been Another way to look Another way to look at the potential in this market is by looking at how many big markets exist globally. And if big we chose an arbitrary number of a market of 1 gigawatt of installations per year. So you can see that every year the number of countries that have a 1 gigawatt market is increasing. And they're very diversified globally.
What's driving this is more countries reaching grid parity and more countries adopting policies that are favoring solar installation. We are active in all practically all of these markets excluding China And we believe that this trend will continue as the market grows and expands into new countries and new geographies. What are our growth strategies to ride the wave of the growth of the industry and grow even at a higher rate as we've done in the past. So both historically and today, our growth strategy is based on a 4 pronged strategy. The first one is geographic expansion.
The second one is segment development. The third one is market share growth. And the third one is the same RP from my first slide average revenue per installation increase. And I'll spend a couple of minutes on our plans in each one of these areas and trying to tie them together and show how we plan to grow in the coming years. So geographic expansion is pretty straightforward and correlates to what I said before.
As you saw probably in previous presentations, we have today installations in more than 130 countries around the world. We have presence of teams of our own in 28 countries around the world. We typically operate in a country from remote until we recognize that the market is sizable enough, is right for our portfolio and it's sustainable and expected to remain and grow into the future. Once we are active certain geography, we recognize where there is potential and obviously increase the resources and investment in that market. In 2020, there are 3 markets on top of our regular markets where we intend to focus more as we see a lot of potential for growth and those are Australia, Brazil and India, all of their markets of 1 gigawatt in size and more.
On top of geographical expansion, we aim constantly to introduce products that bring us to more segments of the industry. If you look at our position today and try to measure how complete is our offering and how strong is our position in the market, I think it is recognized that in the residential space we are very, very strong, if not the leader. And we have a portfolio that we believe is complete and can serve all applications within that segment of the industry. In the commercial industry, we are one of the leaders and we have a very competitive and compelling portfolio, but we still have more elements to add until the portfolio is complete and we can move to the level of leadership that we aim for. In utility, we are a very small player today.
However, we have already a few 100 megawatts of installations of early adopters using our commercial and industrial products for utility type installations already today. And Leo later on will describe how we plan to add products to put us in a better position in this segment and the industry as well, such that in the future, we will reach a point of having a complete portfolio and strong position in residential, commercial and industrial and eventually in the utility segment as well. So that was the second prong of our growth strategy. The third is market share growth. This has been to a large extent the bread and butter of our growth over the years.
As you can see only 5 years ago we were ranked the number 10 inverter company in the world. And for the last 2 years, we've been consecutively ranked number 1. And an illustration of how we work in a specific geography would be our growth rate in the residential North American market and how we've come from a single digit position to a very high market share today. The methodology for a growing market share is pretty straightforward. You need to have the right product.
You need to have the right channel to bring them to the market. And you need to have the determination to fight and win every battle and gain market share in that way. This is how
we've been
a big part of our growth to date and this has been a big part of our growth plans going forward. And actually the more you are present in the market, the more you are close to the customers, the more you are willing to listen to the customers, then you can leverage your innovation to develop new products that are better tailored for the needs of those customers and keep the machine rolling and keep building on one after the other and continue to gain market share. And now to the 4th, the famous ARP, hopefully famous by now. So historically, a solar installation consisted of inverters and inverters, optimizers when we came in and modules. And we were selling the inverters and optimizers into that industry.
If you look at the solar installation today, it can contain on top of the inverter optimizers and modules batteries, meters, home automation systems, EV chargers, communication devices. Today, we supply already many of those products to our customers and in that way increasing the average revenue per installation or translating it into the ASP per installation. To put some numbers behind this, if we look at 2015, in 2015 we sold roughly 3,000 complex systems. And for the sake of the discussion, let's define a complex system as a system that has in it more than just an inverter and optimizer and some form of storage capability or home automation. In 2019, we expect to sell roughly more than 50,000 similar installations or complex installations with additional components beyond the traditional inverter and optimizers.
This of course translates to more revenue out of each of those installations. Here too, our plan is to continue to introduce more capability, more products, link them to our system and drive growth through that means as well and Leo will get into the details of the products that we're referring to. The end result is that if the pie that we were able to take a slice from in 2014 had just the inverters, by now the pie is bigger and we plan to have access and the ability to generate revenue from more slices of the pie including smart modules, inverters, batteries and many other additional smaller devices like home automation and communication. The end result of all of these plans and all of these capabilities is that we expect to be able to grow our revenue consistently year over year and make it more diversified geographically and product wise and continue to be a leading player in this industry that is growing as well. I'll now hand it over to Leo, who will share with you the product roadmap.
Hi, everyone. My name is Lior. I want to talk about products. Obviously, the most exciting presentation of the day is this is the climax of your day to day. So, what we aim to show is exactly taking the lead from what Sealy said is that we have a product plan to both average revenue per installation, both in the residential and C and I space, as well as introduce more products to deepen our early penetration into the utility scale market.
We're coupling that with a range of software products as we've seen that these software products are greatly needed in order to enable the continued expansion and proliferation of solar energy. Let's talk about these energy trends that we have in the world today. First one is decarbonization. There's more and more renewable energy being installed. And renewable energy comes with a few challenges that require attention as it is more intermittent and less easy to control and predict.
We have the trend of decentralization. Our power generation is becoming distributed. So there's more and more distributed energy generation. And we have the very strong trend of digitization, everything becomes connected. Generation systems become connected as well as loads.
Everything in our home is now connected. Everything in our building is now connected. And that brings a lot of product opportunities. So we at SolarEdge, we are enabling these trends. We are supporting these trends with cost effective solutions, with hardware and software products to allow the control management and prediction of distributed energy generation and with a range and suite of energy management solutions, which a, increase our ARPU, but also enable the growth of solar throughout the various markets.
Our products today, we already serve all 3 segments in the solar industry. We have a full product suite in residential covering everything from the roof with smart modules all the way down to the grid and even software solutions for grid operators to leverage and manage residential solar systems. We have an expanded suite of products in commercial and we are building our leadership in that market. And we already serve the utility market with optimizers, inverters for utility scale. And we are in as T.
V. Said, still attract early adopters in this market, not yet in the mass scale of our use. And with the acquisition of Kokam, we already have utility scale front of the meter storage that is being deployed in various markets. So let's start with residential. The product that you see here, this is our brand new literally being released into the market these days, all in one HD wave inverter.
This is a residential inverter that can do both PV generation as well as energy management and storage and backup to the home. Up until now, we've had PV inverters, which were based on our HD Wave technology. And for storage and backup, we still use inverters from the older inverter platform. This inverter is now being released into the market. It brings customers the ability to upgrade later.
So you can install a PV inverter without storage or backup capabilities and you can add that on later. So it creates what we call future proof your solar system opportunity as well as some opportunity for continued revenue from systems. And it brings the ability to literally one inverter acts as the energy manager to the home. Of course, it has our regular advantages that installers love and know like ability for module level optimization based on our optimizers, reduction of balance of system because of our unique DC architecture, module level monitoring and ability to do remote O and M and of course safety, which is becoming more and more important. So this inverter is actually works in harmony with a range of residential products that we are selling now, anything from backup interface, products for home backup, of course Power Optimizes metering for managing your home's energy, a range of software products for the installer and for the system owner in order to design, operate, manage your PV system.
We're already selling EV charging inverters, which is very fast growing segment is of course EV cars, smart standalone EV chargers, which work in unison inside our system in the monitoring and there is the ability to optimize your charge based on rates and energy consumption in the home. And for the European market where the 3 phase grid is much more common in residential systems, we have a 3 phase storage inverter, which we already started production of. The next product that we started selling already is a SolarEdge Smart Module. So in Australia and Europe, we already offer today a SolarEdge Smart Module. This is a module from SolarEdge manufactured at a Tier 1 bankable production site.
Customers get the benefit of getting their whole solar solution from one vendor. It already comes pre installed with the Power Optimizer, so installation and logistics are a little bit simpler. And it offers customers the ability from the roof to the grid to get one solution from 1 vendor. And it of course increases the average revenue per installation for SolarEdge. The next product that is coming in 2020 is the SolarEdge residential battery.
SolarEdge residential batteries today when people buy storage inverters from SolarEdge, they are coupled with 3rd party battery, mostly from LG Chem. And we will continue
to support that, but we
will be also offering our own battery. This is a 10 kilowatt hour, 5 kilowatt peak SolarEdge battery that works seamlessly within our system. Installation is very easy and straightforward. Everything in the configuration and and monitoring and of course service, sales, logistics, everything comes from one platform in one software platform. And we are very eager to release this product into the market.
Again, it increases our overall share of the pie for solar systems with storage. Another range of products that we have started selling and we are expanding that offering is energy management solution. So these energy management solutions allow you to control or allow our customers to control energy devices around the home, hot water heating, heat pump, pool pump, air conditioning, all of them can be controlled in one systems, all is controlled by the inverter in order to optimize your energy bill, in order to optimize your energy usage. So if with a battery, you can actually take solar energy, which is not used during the daytime and shift that energy into hours of the day where you have load, but no sunlight, with energy management devices, you can actually shift load and shift these loads into hours of the day where you have solar energy. With that, we are optimizing the whole energy usage around the home and providing one seamless energy management platform to our customers.
And of course, ease of life, because all of these interact and integrate with home automation platforms like Amazon or Google, allowing you also to get ease of life at the tip of your finger.
As you wake up in the morning, each panel in a SolarEdge optimized PV system harvest more solar energy. Combined with SolarEdge's smart energy suite, you can manage your solar energy to sustainably power the things you need throughout the day. Turn on lights and other appliances to get your day started. Heat up water for your morning shower. Charge your EV with solar boost mode before you drive to work.
And even when you're out, your inverter still uses solar energy to power your smart home. From your pool pump to cooling or heating your house, store your solar energy and battery so you can power your smart home with the sun even at night. With SolarEdge, your smart energy home is managed and monitored through its easy to use app. Now that's the power of solar in the palm of your hand.
Told you this is the highlight of your day. So what you actually see is a range of products from smart modules, batteries, smart inverters, optimizers, of course, monitoring solutions, monitoring applications, all of these together allows us to offer, as Steve said, a bigger piece of the pie and also to allow differentiated value to our customers. So because differentiation and value is all is everything that we sell. So the last piece of the puzzle is our grid services software platform. So as solar is becoming more and more prolific, utilities are having an issue with solar.
Intermittent generation, less knowledge what is actually going on, on their network because they cannot control this generation, they cannot predict this generation. So we've bought a software product, which we call the SolarEdge virtual power plant. This is a cloud software product that sits on top of our monitoring platform and allows utilities to visualize, interact and control with a fleet of solar systems. So you can actually pull together and aggregate 1,000, tens of 1000, 100 of 1000 of residential solar plus storage systems into an interface that utilities, network operators, energy retailers can actually control and visualize. It gives them visualization of what is actually going on, on their network.
So some of these 10 customers that you see here, some of these 10 agreements are actually data, where they tap into our platform just to know what's going on, on their network. It also allows them the ability to control They can dispatch energy from a pool of system into the grid as if it's a virtual power plant. They can they don't have just to dispatch, they can offer frequency stabilization services by pulling and pushing power into the grid. They can dispatch energy in a specific area where the network is congested and energy retailers even can sell energy from these systems into the grid when the wholesale price is high. So this platform, we are a technology player.
We provide this to the network, to the market participants in the different segments of network management. It is still a small part of our very, very small part revenue, but it is an enabler for more hardware sales also because the more these networks are being deployed by the fact that our inverters have this capability, we see more and more inclination to use them because of this grid flexibility ability, this actually turns solar to be 1 with the grid and not against the grid. It solves the problem for the network operators. It reduces the friction between traditional generation and distributed generation. It's a revenue source for us.
It's a differentiator for us. Again, it increases our piece of the pie with a software value that we provide. And as I said, we already have more than ten agreements of building and operating such VPPs based on our VPP platform. Okay. Moving on to C and I.
So this was all residential. Let's talk about C and I. The first thing about C and I is that our flagship inverter today in the C and I market is the synergy inverter. What you see up there is actually it looks may look you may be wrong to think that these are 3 separate inverters, but this is in actuality one inverter, which is modular made out of 3 units. And the synergy concept that we've brought into the market has grown very popular with our C and I customers.
It allows them to install inverters as if they are string, small string inverters. So you hand these 3 units very, very easily, then you connect them quickly with prefabricated connectors. So but then once it's installed, it operates in wire as if it's 1 larger C and I inverter. With this you reduce labor, you reduce AC cabling and you simplify your overall PV system. So it's kind of like a large inverter, but in terms of installation, you get all the benefits of smaller string inverters.
Today we sell our 100 kilowatt Synergy inverter in the market. We are in the midst of bringing into the market a 120 kilowatt inverter. The bigger they are, we leverage economies of scale and are able to better compete in places where dollar do what matters. And in 2020, we also plan to bring a 150 kilowatt synergy inverter into the market further leveraging these economies
of scale.
In 2020, we plan to bring our C and I battery into the market. This is a 40 kilowatt hour, 40 kilowatt peak C and I battery. This battery allows for our C and I customers to do value stacking in commercial buildings. So value stacking means that you can use the battery locally to manage your electricity consumption, avoid demand charges, maximize self consumption, and then you can also stack additional values onto the same battery by in some times of the year leveraging time of use. In other times, you can places where energy resiliency is important and we see that it's becoming more and more important in more is important and we see that it's becoming more and more important in more markets.
Look at California, this allows the PV system to order to bring more grid resiliency to your C and I campus. As we did in the residential space, we are also working on commercial EV chargers, both the DC fast charger and AC chargers. These will couple into the same monitoring platform that we have into the same energy management concept that we have for the C and I space. And they are in development these days. Let's talk about utilities.
So we today already provide inverters and optimizers to the utility market. There's more than 200 megawatts of utility ground mount systems with solar inverters in them all over the world. And basically same advantages that we have in other markets apply also for the utility market, only with different scales. So added energy is of course very important for the ROI of utility scale project, reduction of cabling, there's tens of miles of cables in utility projects and the ability to reduce cabling with our DC architecture with long strings is very important for such a project also reducing labor. And of course, monitoring, the ability to visualize so many modules in utility scale project and improve and streamline O and M is also very important.
With Kokam, we also have more than 160 megawatt hour of front of the meter utility scale storage already deployed. So let's talk about our products for the utility market. As I said, in terms of inverter, our synergy platform is the platform that is also servicing the utility market today. The main difference is that for the utility market, we also have a 4:one optimizer that is an optimizer that can control an MPP 4 modules rather than the 2:one that we use in C and I or the 1:one that we use in residential. With that, we improve economies of scale, something that is very much needed in the utility scale project.
So we have a utility optimizer that being launched in 2020. We have the synergy inverters that are already being used and deployed in utility projects. And in 2020, we are bringing to the market a larger scale string inverter. This is 380 kilowatts string inverter. It's quite big and it is aimed to help us penetrate the larger utility scale system market where systems are bigger and people still want to consolidate their AC wiring even more.
We find that the 380 kilowatt, 250 in Europe, there are different grids. So it's 250 in Europe, 380 in the U. S. Type of inverter will allow us to continue the penetration from the utility ground,
segment.
This is coupled with bringing more and more utility scale storage systems through our Kokamem acquisition to service utility projects where you need that storage capability, either as a buffer to grid intermittency or just to provide grid services and other grid balancing services. And we see that that is becoming a bigger need in more and more utility connections around solar in various networks. So, I hope that I was able to relay how our product strategy aligns very well with our overall strategy, increasing average revenue from installation, further enhancing our product leadership in the residential space, completing the portfolio for the commercial space and enhancing or hopefully even accelerating the our penetration into the utility segment, which has started and is now growing. Thank you very much.
Good morning, everybody. I'm happy to be here. My name is Uri. I've recently joined SolarEdge 3 months ago. Before that, I was having 20 years of experience in the electronic manufacturing industry.
At my last role at Flex, I was the Senior Vice President of Global Operations for the Americas and the European sites, which consists something like 40 different sites in manufacturing and logistics and more than $10,000,000,000 of revenue. I would like to in the next 20 minutes to take you through some of our key successes to our operation and show you where we want to go in the future, what's the single capabilities and processes and systems that we will need to use in our future in order to leverage them to our new coming businesses. So first of all, our manufacturing has always been a key to our success in operation. And therefore, taking these capabilities and the system that we have developed in the last 10 years and leverage them on our new businesses is something that we would like to introduce here. Automation as part of building power electronics in the most reliable reliable products with a mass production capability and the right cost will require us to develop our automation furthermore to the next step.
And last but not least, CV has talked about it and Lior has talked about it. Our product roadmap consists a lot of batteries. So if you can see in every product that we are going to be used in the future, battery is going to be a key. And such introducing independent supply chain for battery would be something that is paramount to our future product and our full year roadmap and our independency from of the supply chain. Through the years, we actually when we had started and I was part of the team that was the contract manufacturer for SolarEdge, the 1st contract manufacturer for SolarEdge 10 years ago.
And since then, ever since then, we have chosen contract manufacturing to be the platform of manufacturing for our product. We have started with the Flex Israel operation back in 2010 and then developed it to Flex Hungary operation and then to our main site in Jabil, China, which is currently the biggest site that we are building our products in. And such in order to do that and through the years we have developed kind of a playbook. This playbook help us to achieve whatever you see today. And coupled with that, we develop it and make it today to be what we call the solar rich manufacturing system.
And I'm specifically saying system because it's really important to understand that you cannot produce a mass production power electronics without a system in the level that we have done.
And such
this system was the vehicle for us to be able to manufacture these mass production volumes and we have produced over the years more than 45,000,000 different devices that are today installed in a rugged environment
at Muskegon.
But not only producing this product was key for us, also producing this product with the right cost and the right elements. This whole achievement would not of operational success and achievement would not be able to be achieved without our deep knowledge team and very dedicated team. And I'm very proud to be today part of their team and part of this financial environment. I would like to take you through a little bit of numbers and what we have talked about, about our operations and where we are going and what is it that we do. So you can see here at the beginning of 2015, we took the numbers from the IPO days until today and it is able to see here our growth year over year.
And we have growth more than 50% year over year and 2019 is going to be the year that we're going to use produce almost 60,000,000 power optimizer and more than 700,000 inverters. This is a massive number. This is a massive number, but has been able to achieve by using our systems and our manufacturing platform worldwide. We're looking to our footprint and where we are. What you can see here is a footprint of our distribution center, which is our last mile to the end customer and also our manufacturing side, starting with the Flax, Hungary site, then going to the Jabil site in China.
And recently, we have discussed with the investors about our new Jabil Vietnam factory. And this is the 2nd footprint. And last but not least is our Kokam Nomsan factory. This is part of our strategy of building cell to system power resells. And that's amazing.
So at the beginning of my presentation, we discussed about the system and processes that will enable you to produce such kind of volumes and high complex power electronics. And definitely, when we thought of how we're going to do it, we have created this system that we call the SolarEdge Manufacturing System. And this system is a comprehensive approach to everything that we have acquired through the years. It contains our quality and reliability processes. It contains and when we talk about, I just want to one second explain you what is quality and reliability.
Our products are almost the only electronic products that are worn for 25 years. If you don't apply a cutting edge, unique, innovating quality and reliability processes, you will not be able to supply these products and you will not be able to operate them in the right way. And such, we I will walk you through that bullet later on. But as such, we have really created this unique this advanced quality and reliability system. As a holistic approach to design and in SolarEdge, when we design something new, we design it in our R and D as one team through manufacturing.
So it's not that our production is siloed and our system is siloed. We take a comprehensive approach to the way that we design new products and R and D is involved from the very first the monitor of the product till the end of the product. And then we discussed about automation, data platform and automated testing. So this is our comprehensive system to achieve the targets that we want and the volumes that we want to get from our operations.
Now, I'd like
to deep dive into 2 of the elements of our system today. One of the most important element of the system is how do we really apply this for our manufacturing system? How do we really make it happen? How do we know what is being produced in our global manufacturing footprint? And therefore, there's a lot of discussion today in the industry of Industry 4 and what is connected device and what do we need to do.
But I think at SolarEdge,
it's an evidence.
And what you can see in this diagram is something that is very illustrating our ability to predict what is our product, the ad production and to understand what we have produced, in which quality we want to do and what would be the predicted quality of this product going forward to 25 in the years. So we can see in the base of the diagram, this is our machine. This is our production line. Every production line is produced from the front end and then back end manufacturing. If we take our automation, that's the back end of our operations and the assembly is the front end of the operation.
Every machine in that production line is really connected to a repository and communicating with this repository all day long and in a real time situation. This repository will apply some engines. 1 of the agent the engine is machine learning. The other one is machine to machine. And at the end of the day, you will see on the top of that, our application to control this, this application would be something that you can use whenever you want.
It could be used by our headquarters. It could side, it could be used by the operator, it could be used by everyone. And in essence, I'll give you some idea, because this chart is something that I've seen so many times, but I've never seen it in action. I've seen so many companies that are claiming to have that kind of capability and data platform, but I have seen little that are really in that stage. As far as SolarEdge, and I remember it myself, when the SolarEdge team came to my factory and said, this is what we're going to do, we kind of look at them and say, okay, yes, we're going to do it.
Nobody did it. However, today, if you can look at it, I'll take for example the automated testers. So automated testers are you can call them the pulse of the manufacturing. Those are the devices that every product is being is coming through them and is being tested through them. And all this and for example, if a product is not tested or a one result of the optimizer is not in the right threshold, you will not be able to produce it later.
You will not be able to ship it. You will not be able to do anything. You will not be able to scan it, put it on a pilot or anything else. That's the simple thing. However, this machine has also some predictable engine.
They would be able to tell you whether the issue that you have is a contamination that is part of the history in the algorithm that we put inside or is it just a wrong component or wrong number? And what is machine to machine? So now we can we know how to elevate this data. We know how to take it to the repository and we know what to do with it. But the second thing is our machine to machine.
So think about it that at
the end of the day, if
I have an option if I have an issue with 1 of the machines with the vast history of what I have done, I'll be able to talk to the previous machine and change the parameters, so the process will be improved. And therefore, you get an end to end fully processed control system to the most, I would say, complex power electronics that one can introduce to the field. And that gives us a very well prediction of what is our process, what our product and what's the quality of the product through the lifecycle of the product. I would like you to think about it as an autonomous operation. If you take one cell of automation from one end to the other end, it's kind of autonomous.
It doesn't need training. It doesn't need a ramp up. It doesn't need people. We're eliminating completely the human factor here, because we don't need to train a quality manager to look at our process. Our process took itself and has the first data of these multiple lines over multiple countries as a neuron 1 neuron network that takes all these data together.
And so I'm very excited about this capability. And in the near future, this is a key for us to grow, to grow our current business and our new businesses. I've mentioned that our projects and you all know it is power electronics that sits on the top of the roof of every place in the world from Alaska to Brazil. And the way we approach this one, the reliability of the product is with a unique is with a very advanced system that is a holistic approach to product design, to manufacturing, testing, our installed base and then the repeatable information to our from the field. So as we said, we have a data platform.
We have, as Lior explained you before, we have devices that are actually one of the biggest IoT implementation worldwide. Our inverters are an IoT device that sit everywhere and generate power and generate communication. Taking all of this one in a real time information, we can understand what is our product reliability, what is our quality, where are the malfunctioning in this process and how we can again pull it into our R and D and improve the process. And we like to see it as an ongoing circle process that improves our product and improve our process through the years. As we step forward and introducing new businesses, increasing our customer demand, and you all have heard that our regions are booking business more and more day over day and our and we have seen in the charts that every year we are growing our revenue and our product installation by 50%.
We would need to onboard few elements to our system. And I will take you through some of the four elements that we are onboarding into that system. The first one is the geographical expansion. And that's not only because our products need to be in different geographies, that's an answer that we need to I think the world has changed. If you look at the old manufacturing side and that's coming from where I were, everything was siloed, everything was in one place.
And today, with all the macroeconomic changes and the ability to reduce costs by not spending so much on shipping, the world is going slowly and slowly towards localization. Therefore, localization means that you need to change your geography and go to different geography. And again, as we said, with automation, we can do it relatively easily. If you look at the automotive industry, for the automotive industry, as we take it, the automotive industry is the most high reliability industry, it takes them years to transfer a product from one place to the other. In our case, if you have this data platform and you have this automation line, it takes you only 2 weeks or 4 weeks at a max to transfer a line and educate like 3 to 6 people.
And those employees would be only material handlers and very simple capability to ramp them out. The next one would be our Copysmart and our new business integration. So let's discuss a little bit about geographical diversification and where we are going and what is our plan in numbers. I've shown you the geographical spend of SolarEdge and I will talk a little bit about what are we doing in each of these factories. The first one is Zala is Flex Zala Hungary.
So we're increasing our capacity over there by 200%. I'm happy to say that we are halfway there and we have finished our first installation and by Q2 2020, we will be fully operated in that facility and the capacity will be as we plan for 2020. The Jabil site in China, so this is our mass production site. This is our biggest site that will be grown in 20% for Q1 and that's going to be implemented in Q1 2020. And last but most least is our Vietnam factory.
So we have talked about Vietnam factory. The first stage of putting the capacity there and ramping the site will be finished by the end of this quarter. And by end of Q by the end of Q2, we will be fully ramping Vietnam. If you ask why we are doing it is for a couple of reasons. Still have time, no?
That's yours. Okay. If you ask why we are doing, there are a couple of reasons. 1st is our customers. Our customers are increasing their demand and we need to put a plan that we'll be able to deliver them in the right time, in the right geography with the right product.
Secondly, as you know, our air shipment costs have been extensively high in the last few quarters and we'll continue to do that until we will create some buffers and inventories to be able to reduce this dramatically this shipping cost. And the last thing is tariff. We want to be by the end of 2020 tariff free products for the North American market. Just to give you a glimpse into our Vietnam operation, it's not just something that is in the chart. So you can see here our side.
You can see the front end, the back end, the products that are underlying being manufactured as we speak.
So
we said and I will emphasize automation couple of times and I want you to understand that digitization and the automation is something that is core to our to SolarEdge and it's also very advanced as opposed to other manufacturer. And therefore, today we are in about a penetration of 20% to 30% of automation. As for 2020, we are going to be by the end of this year 100% dependent on automation. And that's going to be in the 3 sites that we have discovered before. And the reason why we want to do it is because we want to ramp fast.
We want to be agnostic to human errors. We want to be in the high reliability and predictability of manufacturing product as we can. And we want to also have a fast ROI. And for this, I guess, ROI is very important for this community. And I'm really I have done automation through my years many times.
And I think ROI of something between 12 to 16 months of an automation product is something that is out of the charts. I have not seen something like that before and that's because we have taken the holistic approach that R and D is responsible for designing the product that will feed this automation. If you would look 10 years ago at the office of Fluor, you would see all these parts that they were thinking how to get this product that will be eventually on automation. You should understand this is a cutting edge. It's not something that you can develop in 1 year.
If I if you come tomorrow and say, oh, all right, I want to put in place automation, it will take you many years to have the right product to the right automation.
If you look
to our challenges and what we are trying to achieve, But basically what we're trying to achieve is take a specific product, in this case, a power electronics product, produces in the high reliability and quality, make sure that it meets the market demand in terms of quantity, reliability and cost, which is very important, and then be able to put it in each geography that we would need in the future. And that can only be achieved with a holistic approach to reliability, to engineering and R and D. Taking these all elements, we have come to a conclusion that having a proximity site next to our R and D reliability will take us to a speed to ramp this product in the most quality way that we can. And therefore, we have factory that will be in Nazareth. It's currently in the process of ramping up, fitting up the factory and will be planned to be operated in Q2 2020.
And the idea of the factory is to innovate fast as a proximity to our R and D to be able to take our product, perfect them in the factory in the processes that we know with our solar range manufacturing system and then move them as a mature product to each of our regions. So we talked about storage system, our storage infrastructure, our platform. This platform has helped us so far to grow our business. As you all know, we have acquired some other businesses. We acquired the e mobility business, which is also based on power electronics.
We have acquired the UPS business, which is also based on power electronics. And we are planning to leverage our system into that new spaces. And for example, if you take today what we have produced, the PCBAs or the boards that we are producing, you will see it downstairs in the showroom. If we take these boards, they are today produced in our infrastructure, right? And that give us economy of scale and ability to control our processes as we onboard our new businesses, same for our UPS businesses.
The next business that we onboard is we talked about our sell to system strategy. And that's kind of a vertical, which is which we are going to rely on the co co capability together with our platforms and develop the capacity that we will need to our new products and to our product roadmap. Today, our Kokam capability is 200 megawatts at theoretical capacity, and we are going to expand it in the next 2 years to a 2 gigawatt factory capacity, which will enable us independence in these critical elements of the battery solutions. 2020 numbers. So we are taking all the elements, the systems, the processes, the holistic approach of SolarEdge, our geographical expansion.
And I want to say that we are ready for 2020. And you can see that in 2020, we are planning to double our manufacturing and to double our capacity at the site and to double up the number of products that we are going to produce. There are four reasons why we want to do it. Number 1, as I said, our customer demand. They want our products and this is the capacity we are put.
We're going to be more geographical to that capacity. The second one, as you know, and probably Ronen will talk about it, We have spent a lot of money through the last quarter and the quarter before on air shipment. This capacity increase will allow us to decrease dramatically our air shipment costs and be able by and our plan is to be as a minimum of this air shipment cost at the end of 2020, while our production will be up and running in all regions. The third thing is the tariffs. So both I think this is something that worldwide is being an issue.
And I'm happy to say that by the end of 2020, we will be completely tariff free for all our North American customers. And the 4th one, which is very important that we have developed that platform, think about the economy of scale. If you look at this plan and the number of products that we are planning to build, this is over 40,000,000 products. This product and this capacity will help us to further continue our cost reduction, our ongoing cost reduction and will enable us to compete with the new businesses that we have acquired as these businesses will be with this in this platform and enjoy the economy at the scale of what we have today. And to conclude, I hope that what you have seen here today is that we are ready to deliver.
We are ready to take our processes. We have a system to do that. We know how to do it. We have been experiencing that for the last 10 years. We have a very high reliability product.
We are using automation as a key element to be able to deploy our production worldwide. We are well positioned for our growth and we are well positioned to onboard our new businesses. By that, I would like to thank you all. And I think it's Divi.
We're going to take a quick break, 15 minutes and we'll reconvene here at 10:45. There are refreshments in the hallway.
In the previous section, we discussed the solar market, our position and our plans how to continue to grow fast in the solar market. It's now time to look at the new markets that we have entered recently with the acquisitions that we made. At the premises of our strategy for growing into new markets are 2 elements. 1 is that we believe that the way people consume and produce energy in the future will be very different than the way it is today. And the second thing is that in power electronics and in particular inverters and batteries are a huge part of that transition.
And that puts us in the position where we have the opportunity to place ourselves in the middle of a transition that is growing large new markets and new applications. There are a few trends in the power industry that are driving this change. Grids are facing more extreme conditions and we need they need solutions in order to be able to deal with these conditions. Storage is becoming a bigger factor in the market. And of course, e mobility is a very significant trend that we'll dive into a little bit in more detail later on.
As we all mentioned devices are now more connected and devices can produce energy and devices can consume energy and that creates more strain on the grid, more complexity and at the same time it creates more opportunity and flexibility. And of course, in generally, power demand is increasing and the need to supply more power and at high quality is at the core of the challenges of the energy industry today.
Inverter. These inverters turn solar energy into home electricity, convert power into hot water, cool and heat up our homes and buildings with HVAC system, store solar energy in a battery to use the heating, and even charge home's energy. They convert and manage energy in our electric are all around us, they can work together in a network to smartly manage energy. They By improving the way we use and consume energy, SolarEdge is powering a better future for us all.
So the philosophy behind our entrance into new markets were markets where power electronics and in particular inverters are a key enabler, where lithium ion batteries are a key enabler and markets that are expected to grow at high rate in the coming years. And based on that philosophy, we looked into a few markets and I'll start with the e mobility one. So electrification of transportation is a hot topic. Everybody is discussing it. There is global commitment to shift across the world and industry experts expect that by 2,030 roughly 50% of the new vehicles that will be produced that year will be electric.
That represents approximately 50,000,000 electric vehicles a year.
This is
causing opportunity in the automotive industry, the shift from combustion engines to electric engines is creating opportunity for new entrants and changing the landscape of the automotive industry. And it creates opportunities for us as well. All forms of vehicles will be going through the transformation, trucks, commercial vehicles, passenger cars, 2 wheelers, 3 wheelers. There's one common or 2 common threads to all of those. They will need an electric powertrain and they will need batteries.
Looking here at one of these segments, which we chose to be our entrance into this market is the segment of light commercial vehicles and light goods vehicles. Basically, LTVs and LGVs like goods vehicles are the vans that go around the cities delivering stuff. And there there's even a higher motivation to get them electric and to reduce pollution within the city. If you look at this chart, the expectation is that in 2,030 approximately 2,000,000 such new vehicles will be produced. Approximately 2,000,000 light commercial vehicles will be produced in 2,030 and roughly about half of that in 2025.
When we looked at new markets to enter, we targeted this market and tried to find a way where we take what we have what we've developed over the year together with some additional capabilities from the we bring from the outside and have a good entrance into this market. And this is an illustration of the same thing. Basically a solar system has inverters, batteries, communication and control software and the electrical parts of an electrical vehicle has inverters, batteries, communication and control software. Through the acquisition that we did in Italy of a company called SMRE, on the basis of that we formed the SolarEdge eMobility division. What we have today or can bring to the table today on the basis of this division over here is first of all a complete offering for the LGB and LCV market.
We have a powertrain with batteries, with an engine, with everything that is needed to electrify a light commercial vehicle. Not only that with the company that we acquired, we are already in preproduction phase with leading automotive manufacturers. That together with our in house capability of R and D, of scale of manufacturing, we believe that that puts us in a good initial position to be a player in this electric e mobility market. Obviously, this is a process of years and it's a long term strategy, but it's a strategy that works to our strengths and gives us entrance into a very, very large future market. If we try to quantify the opportunity of this market and this business, A light commercial vehicle uses an engine of 60 kilowatt continuous and roughly 40 to 80 kilowatt hour of batteries.
If you take prices of power electronics today and make all the aggressive assumptions of ASP and cost reductions of power electronics and batteries, you'll reach a conclusion that on a 2,000,000 vehicle basis in 2,030, the size of the market for the solution that we are offering already today is a market of roughly $20,000,000,000 to $30,000,000,000 into 2,030 and it is going to grow gradually from where it is today to that point. That's obviously a very big opportunity and that is just in the large commercial vehicle space. This gives us the basis to develop products and offerings for the other segments of the e mobility industry on the basis of what we already have in hand and on the basis of the improvements that we'll do with our capability in power electronics. So this is the first, call it obvious, entrance into a new market for a power electronics company. And that was the thinking behind the acquisition that we did of SMRE in Italy.
A second market of interest is the UPS market. Here too, a UPS at the end of the day, it's an inverter with a battery, very similar to a solar system with communication devices and soft control software to manage the system. The market here has similarities to the inverter market. It's roughly $7,000,000,000 to $8,000,000,000 in size and it's segmented from single phase typically up to 10 or 20 kilowatt inverters and 3 phase or UPSs and 3 phase UPSs ranging from roughly 10 kilowatts into 500 kilowatts and megawatt scale UPSs, very similar to the solar industry. One of the differences is that in recent years there has not been a lot of innovation in this market.
Growth rates have been reasonable, but not very fast and there hasn't been a lot of investment in development and R and D. But that is beginning to change with the evolution of more cloud applications, mega data centers, co located data centers, the need for uninterrupted supply of power in a cost and reliable way is driving innovation in the UPS market as well. Here too, we did our entrance to the market through an acquisition of a company in Israel that has been active in the UPS business for almost 40 years, a company called Gamatronic. They had a not very large global footprint, but they had 2 assets that were of value to us. The first is decades of experience in this market.
And UPS is not only about the hardware. It's also about the application and knowing what type of scenarios might evolve and what type of scenarios you need to be capable of dealing with. And the second thing that they had was a competitive offering in the 3 phase segment between 10 to 500 kilowatts. Obviously, the synergy to our operation is very, very obvious. The products are practically the same.
The manufacturing process is the same. The network of sales and service that we have globally while different customers is set in the right places and with the right technical capability to serve this market similar to the way that we serve the solar market. Our plans here are pretty much to repeat the solar business hopefully maybe faster. We will be adding products to the portfolio in order to cover all segments of the market, in particular a single phase UPS that represents about a third of the market that we hope to or we plan to introduce in 2021. And we will use the methodologies that I discussed before in terms of sales, service, marketing, customer attention to grow market share one step at a time globally in all of the markets that we are present.
I'll spend a few minutes on the other aspects of the Kokam acquisition after Urie gave you the operational view. So practically everything that we spoke about today, everything that we discussed ends up with a lithium ion battery. The demand for lithium ion batteries has been increasing in recent years and it's expected to increase because it's serving 3 of the high growth markets. It's serving eMobility. It's serving consumer electronics.
And it's serving energy storage. The last few years because of the growth in demand capacity lagged demand and there are always challenges of availability of lithium ion from the base chemical to availability of complete cells and batteries. The market for lithium ion batteries alone is expected to be about $70,000,000,000 in 2022. So it's a huge market with the core of lithium ion and connected to power electronics capability with management with battery management systems and so on. By acquiring Kokam, we acquired a global Tier 1 provider of battery solutions.
They've been in the market for decades and they've been selling batteries for all of the known applications whether it's ESS, UPS, EV and others. They already have 600 megawatt hour of batteries installed worldwide and they have know how in the chemistry and the ability to customize chemistry of batteries for the applications that they are intended to. This is of course very attractive to us as we are serving multiple applications that consume and use lithium ion batteries. When we put a storage system with a solar system, we are not putting only a battery. We are putting the full system.
Similar when you put a battery into a EV or you put a battery with a UPS, it's not only a battery, it's going into a system. By acquiring Kokam, we are giving ourselves the ability to control the process from the cell, from the chemistry to the system. That means to design the cells such that they're optimal for the end system that they need to perform within. This gives us opportunities in terms of cost. It gives opportunities in terms of performance.
It gives opportunities in terms of quality and reliability. We will need, we will want to develop many battery products in the coming years for all of the applications that we serve. Having this independence to develop chemistries for systems that we are providing and to have uninterrupted supply is a huge advantage for us. It doesn't mean even that we will only be consuming our own batteries. We hope that the demand will be much bigger.
But by having the complete product defined, we will be able to outsource and supplement our own capacity in a more easy way from other cell and battery providers. And of course, this is common to all of the businesses that we discussed during the day, solar, EV and UPS. Quantifying the opportunity here is a bit more straightforward. As was mentioned, our current capacity is limited at roughly 200 megawatt hour a year. We intend to build a factory that will be complete in 2022 with the goal to be half capacity of 2 gigawatt hours.
Capacity of 2 gigawatt hours roughly again taking into account ASP erosion, current cell prices, current battery prices because we intend to produce batteries not only cells, you can call this an annual opportunity of roughly $500,000,000 a year, not necessarily happening in the 1st year of production. But when we peak at the 2 gigawatt hour that roughly represents the business opportunity behind this acquisition and behind entering into this market. So, if we look back at
what we
covered during the day, we discussed solar. We discussed the trends in the solar industry. We discussed what we are doing how we have outperformed the solar industry in the past and what we are doing in order to continue and outperform the growth rate of the solar industry in the future. And we discussed how we took the capabilities, how we are taking the capabilities that we've developed in the areas of R and D, manufacturing, sales and marketing and finding markets where the technologies are similar and matching our capabilities with strength that we bought from the outside to build new business divisions that will be operating in these markets in the new era of grid that is going from being a centralized polluting grid source to an interactive distributed grid based on renewable energy. Of course, this is a vision.
And one of the sayings that Guy used to share with us frequently, he used to quote Shimon Peres who was the Prime Minister of Israel and Peres used to say that dreaming big and dreaming small is the same effort. So may as well dream big because then you have a chance of actually doing something big. When we sit around in the management team, we want to dream big. The actions that we're taking, the capability that we're developing allows us to dream big of maybe being in 2,030 a company of $8,000,000,000 or $10,000,000,000 Now it's a dream, but dreaming is fun and that gives us the opportunity to have some fun in our work. And hopefully you can dream a bit with us and go through this journey together with us.
I think it's time for you guys to talk a bit and ask questions if you have.
Thank you, Tim. First of all, again, thank you very much for joining us today. Part of the benefits of having this kind of day is not to allow you just to hear us, but actually ask questions that you have on your mind and in a less narrow way than as we do in conferences where we usually look at financials and we don't have the time to talk about the broader areas. One of the issues that we expect or expected to hear a little bit of question is related to our IP lawsuits in China and Germany with Huawei. And therefore, I would like Rachel, our legal counsel, to address this and allow you to ask him a question about it.
And then we clear it out of the way and concentrate on the really interesting thing, which is more of a technology and their own financials.
Hello. So good morning, everybody. I'm Rachel Pyszkolnik, and I'm General Counsel to the company. Addressing the IP litigation matters and our IP in general, as you'll hear a little later on from Joao Gaeilin, our VP of R and D, Technology and Innovative Development is at the core of what SolarEdge does. And to that extent, we believe that our investments, which are very significant in R and D, should be protected.
And we have a portfolio of over 300 patents and continuously are drafting new patent applications. To that end, when we suspect that a competitor is infringing on our patents, we will litigate and do what we can to protect our technology and to protect those investments. And we've done that, as you know, and as we've published in Germany and later, more recently, in China. This last week, we had hearings. So, I think it's already been covered a bit in the press.
And I know Phil Shen and Brian Lee both put out short reviews about it in the last 2 days. We filed complaints against Huawei on 3 of our patents. There were 2 hearings in Germany last week on the same day, the same panel of judges. In one of the instances, the judge was less inclined to accept our claims of infringement and his decision was not in favor of infringement, we can appeal that judgment. And in the second, he has appointed a court expert to examine the Huawei products, which we're very encouraged by.
In the same week, it was a busy week for us in Europe, we had a hearing for one of our patents and indeed that patent was revoked. So what you have to remember in this process, and I'm sure some of you are familiar with it from the press and from other IT litigation matters, it's litigation, like Phil said in his report, it's not a sprint. It's very, very hard to get easy wins. Our technology is very complicated and difficult to explain in front of panels of judges. But ultimately, we believe that we will prevail.
We can appeal most just so you know, most litigation proceedings in Germany, for instance, go through at least 2, sometimes even 3 iterations before they're concluded. If someone no matter who wins in the 1st iteration, there's an appeal. And no matter who wins in the 2nd iteration, there's usually an appeal. That's what happens. Patents that get revoked get appealed.
So this is a long process. It's 3 of our patents. We have many 3 of our patents that we've challenged on. There's many. There's divisionals.
It's not, as far as we are concerned, it's the very beginning and the tip of the iceberg on the process that we see it as necessary to protect our innovations and our technology. So I hope that addresses any questions.
And if there is any question, now could be a good time to ask Rachel if there is any question about this and then we can move on.
Sure. Phil,
yes.
Okay. So thanks. So just to be clear, the patent that was revoked was revoked at the EPO level, not at a country level. That's the first thing. It doesn't have any impact on our business, on our day to day business because we've people can freely operate as long as they're not infringing other people's patents.
So, this has absolutely no impact on our business day to day. Potentially, it could impact someone else's if we convince the court that they're infringing on us, but it doesn't have any impact on our business going forward.
Please one thing, when you get questions, please wait for the mic so the listeners in our webcast can listen as well.
Yes. Thanks. I guess just a couple of questions with respect to the time line. So, you mentioned, I guess, 2 issues outstanding. So, the patent that's been revoked, what's the sort of timeline expected for your appeal process?
I know you said it's not a Sprint, but any kind of sense you can give us on that? And then secondly, on the court ordered expert opinion, if I heard you correctly, what is their unexpected time line around kind of when that process has a resolution?
Sure. So on the first instance, appealing a revoked patent is the whole process takes anywhere from about 1.5 to 2 years, from what I understand, from our lawyers in Europe. I can tell you that a lot of the unexpected happens in these processes. Judges get replaced, panels change. So there's no guarantees.
But again, as I answered to Phil's question prior, it doesn't affect our business. And it's one of a family of patents in an area of our innovative technology. Your second question was the timing on the expert. So the judge actually asked for a swift appointment of an expert. And I think we agreed with the other party by the end of December to agree on the identification of who that expert would be.
I can't I really don't know what the timing is going forward after that because, again, it's just subject to the courts of Germany. Other questions?
Rachel, what's your budget in
the legal division for patent matters? And is that going up or down in the next 2 years?
So we have 2 our budget, obviously, is not just litigation. Litigation is not something that we budget specifically and say we're only going to spend X amount of dollars on our litigation. So it's not budgeted. I have the privilege of a very free budget in that area. On our patent prosecution, we have in house a team of 7 patent engineers and a patent director who work directly under our Chief Technology Officer with a dotted line to me.
And they are working on continuous drafting of patents, which we do the initial drafting in house because we think we get better product that way. And so our patent prosecution budget goes up annually because we're developing more. I mean, now we're starting to assist the Kokam team in drafting their patents. We're working on e mobility patents. So it's not going down.
Yes. I mean, as you get more patents on more integrated systems, I mean, we heard a nice presentation about all the integrated systems that are coming up in 2020 especially. And how relevant will it I
mean, can you supersede your
the patents that are at issue here? I mean, are we is eventually the company going to eventually have patents that will make the existing ones obsolescence at some point? I mean, and we don't even have to worry about it. Is that a fair assessment?
So I think first of all, I don't think there's anything to worry about. 2nd of all, our a company that has one great invention and then stops developing patents is in big trouble, obviously. It is definitely a moving target and process. And along it's just part of our development. As we our R and D team, we have a patent innovation program.
Our R and D team is incentivized to bring new ideas to our patent team. And with every new development, of course, we issue patents and think that we are further enriching our technology portfolio per se.
Last question to Rachel.
Thanks. The patent that was revoked in Europe, while I understand that certainly doesn't have an effect on your current business, it does have implications in terms of why that was revoked. Was that revoked for prior art? And then, what would be
the U.
S. Version of that patent?
So, it's an excellent question. There is a U. S. Version of that patent. There's also a Chinese version of that patent.
There's also divisionals related to that patent. And we're very confident in the novelty and innovative step of the patent. It was revoked based on a piece of prior art, which we think we disagree with the panel's conclusions about the lack of differentiation and inventive step, and we're very confident in our abilities to prove that. The process of proceedings is a long one. And sometimes, things just do get confused in the process.
Just as a follow-up to my question, were there certain claims and one of claims was what triggered or did they say that the entire patent fell under the prior ruling for the Well, yes,
I mean, the meaning of a patent being revoked is that the main claim is, for whatever the reason, deemed not novel or not inventive, etcetera. So that was the judgment of the panel after a 11 hour hearing.
Thank you. My pleasure. So, now we would like to open the floor for questions about the presentations that you saw or any other items that you would like to hear about. And I'll just remind you, there will be another session of questions after the financial one. So you can basically split your question between what you saw already and what you'll see in the next few presentations.
Colin?
Thanks so much, Ronen. And it's Colin Rose from Oppenheimer. Can you talk
a little bit about the maturity of the business for the light duty inverters? And how soon we might see you go into preproduction and production
with some of those products? Yes. Citi?
I'm active. So as I mentioned and I think as you've seen in our recent financials and Ronen will discuss, we're not expecting or planning on significant revenue from this business in the near future. So there is a maturity of the product. There's maturity of the capability and the engagement, but it won't be a large source of revenue in the immediate future.
But can you give us a sense of the time frame when we're talking 2
years? So this it gets it falls more into the time frame of automotive qualification processes. So when you are dealing with a manufacturer, let's say of a motorcycle, the process is typically where they will test things out on a few samples and then they will buy and get a few tens of samples and run them through a much more rigorous testing period that can range anywhere between usually very long, maybe in the era of e mobility 1 to 2 years. So, on a very, very high level that is in the phase that we are either in the first few units delivered or in the first few tens of units delivered. And the automotive qualification process is of a length of 12 to 24 months at least usually.
Thanks. Hi, guys. Bryan Lee Goldman Sachs. Just had a question I guess two provide that's supporting the capacity plan? And then secondly, if you look, it's a pretty robust capacity expansion here over the next 12 plus months that you're targeting over doubling, it seems like.
The revenue growth over the past several years, I know you guys have had some fast revenue growth years here, 50% plus or minus a couple of years running. But just can you help kind of reconcile, are you building capacity multiple years in advance? Just sort of seems like it's outpacing the revenue growth potential here at least in the near term?
Okay. So, first of all, I'm not going to have a spoiler from my presentation because what will I do after lunch? So but in general, I'll try to answer at least in concept. I think that the first thing that needs to be said is that our manufacturing is done today mostly through contract manufacturers. And that means that any capacity increase is usually falling on the shoulders of these contract manufacturers.
When we look at manufacturing capacity and manufacturing equipment, we divide it to 2 different buckets. The first one is a bucket of what we call the non specific equipment, SMT machines, ovens, through hole, soldering machines. All of these are bought by the vendors themselves, and we basically do not invest in any of those. The parts that we're adding into these processes, first of all, the automatic assembly line. As Ori mentioned before, we would like to be by the end of 2020, where all of our optimizers are manufactured in an automated way.
And therefore, we're acquiring the machinery. And as also, as Rish mentioned, by the way, we have a very quick ROI on those ones. And the second item that we buy are the testing machines, the testing equipment. Usually, in the world of contract manufacturing, you get warranty of about a year to the product that you give. We're providing 25 years warranty for our optimizers.
We give 12 years warranty for our inverters. If we are not testing these equipment in the factory before it is being shipped, the consequences could be very, very adverse. And therefore, we invest quite a lot in this kind of equipment. In recent years, it's been $33,000,000 to $37,000,000 of CapEx. I will give you one note that it will be around $40,000,000 next year when it comes to CapEx related to this.
The second element of the question was how do we look at expansion of capacity from the business point of view. The first thing that we see here is the fact that in the last year, we saw growth that is way beyond what the company would usually plan. In 20 18, we grew about 56% in the solar business. In this year, if you take the mid range guidance of Q4 and Street expectations will grow at about 46% in solar, usually companies at a base of $1,000,000,000 are not planning for this kind of growth, and still it happens. We were lucky enough to be able to manufacture everything.
We were lucky enough to have Jabil support, Flextronics support here and our team, but it was at a very high cost of air shipments that was, in Q3, approximately 254 basis points above another 200 basis points that we had in Q2. And therefore, this is a very large chunk of our gross margin that went away. And the only way to take away these air shipments is by build enough inventory or enough capacity that will allow you, 1st of all, to get rid of 1st of all, to deliver to our customers in Q4, Q1 and Q2 next year to build enough inventory in access to this amount that we can ship and then we can start rolling this ocean freight and then of course to be able and to grow. We believe that the capacity that we're building right now will allow us to be in a situation that by the end of next year actually by the second half of next year, I wouldn't say eliminating, but reducing air shipments to the minimum. And of course, as I will say in my presentation, I will keep this for after lunch, is that we do expect to continue and grow, and therefore, we need more capacity.
So the way that we look at it, we should have enough buffer now to continue accelerated growth and to reduce air shipments and this is how we come. This is of course not related to whether we need to sell all of those. We hope that we will be able to sell as much and we hope that Uwe will have to deal with a lot of problems of how to increase capacity very quickly in the future. But at least right now, we plan a little bit ahead in order to simply eliminate airshipment. Yes.
By the way, question can go also to the other management members on the items that they said.
Great. Phil Shannon with ROTH Capital. In terms of your 2020 outlook, on the Q3 call, you guys talked about 15% to 25% year over year revenue growth. I was wondering if you could talk through what that geographic mix looks like, what the segment mix looks like. And then if you can touch on margins, that would be great.
And specifically, what I heard today was that you could still have tariff impact until the end of the year, Q4 2020, whereas I think prior expectations may have been for no more tariffs after Q2 of 2020? Thanks.
So, we'll do the following. We'll defer your question to after my presentation because a lot of the answers will be there and I do not want to say it before you can see it, but I will just refer to the tariff. The tariff free manufacturing is what we do by increasing or I would call it non subject to tariff product is what we do in Vietnam and what we do in Hungary. We believe that with the growth that we will see, we will need more capacity than what we initially planned. And this is why we're increasing Vietnam.
Now it's important to say that what Uri mentioned in his presentation is 2 stages of ramping up. The first one is the planned capacity that we discussed all over the last few calls. And this is to make sure that by the end of Q1, beginning of Q2, majority of our U. S. Products will come out of tariff free areas.
With the second stage of Vietnam, we will be able to take it completely off, and this is expecting again growth in our revenues in the U. S. And again, I'll answer all of the other elements of your question, Phil, in my presentation after lunch. Yes. Jed?
Hi. Thanks. Either for you, Ronen, or one of the other management team. So, two questions, if I could. The first, the light vehicle or the vehicle penetration, one of the trends that we've been seeing is the move to higher voltage architectures, vehicles, IR.
So, if you're going to higher voltage, you're going to have less amperage, which tends to have an impact from a battery perspective as well as the amount of cables. So, I'm curious, in your solution, how do you play into that environment? Or do you have a stronger position, I guess, with a lower voltage or amperage type solution? And then I have a second question.
So the drivetrain that is currently in preproduction phases for the LGV and LCV range is high voltage drivetrain. So it's a 400 volts and a little bit above in voltage in order to support exactly that higher power, lower current
drivetrain.
You mentioned 400. I mean, we're seeing bus companies that are over 1,000, for example. So, is there a limitation to your technology where, for example, you're highly competitive in that 400 to 600, but kind of over that less so or?
No. So, there is no significant difference between, let's say, everything up to the 1,000. But once you go to high voltage in terms of the battery architecture, the inverter segment of the architecture, kind of like what we do in solar, the inverter segment of the architecture can work and operate at different voltages. The trend of high voltage, let's call it 1,000 volts and above is indeed in very high heavy duty trucks and some buses, which is a market that we currently don't service. There are also a lot of regulatory issues regarding that higher voltage.
What is currently,
let's call it
acceptable and most common in the LGV, LCV type of market is the 400 to 600 volt, but there is nothing in the technology that prevents from increasing the voltage to that 1,000 voltage range. Great.
And as my second question just around the Kokam business, I'm less familiar with that business. So but in the battery markets, a lot of the differentiation is what nickel content is going to go into your cathode, for example? And as I see you scale from 162 to the 2 gigawatt per hour type nameplate capacity, I'm assuming that you are buying the and mixing the chemistries yourself to create that? Or are you buying cell production and is it more of an assembler? Could you just help us understand?
So Kokam is a cell manufacturer with internal chemistry development capabilities. As you saw in Tivi's presentation, with that acquisition, we are able to integrate from raw material and basic chemistry development. And I think that in the technology presentation that is coming after lunch, we don't want to steal anyone's thunder. We're going to see those capabilities. And yes, we are able to develop from the chemistry level, from the cell definition level and adapting cells all the way up
to the system level. So I should assume or look at that as a pure scale from the 200 to 2 gigawatts, that's the benefit there?
It's first of all pure scale. There are a lot of improvements in the processes and a lot of optimization that go into that 2 gigawatt hour plant, but predominantly scale with a lot of, I would call it, process optimization and process improvement that can be leveraged from high volume.
Thank you.
Mark Schalles from JPMorgan. So looking around, I see quite a few faces of relatively new investors to the space. So looking at all of the different companies that are coming out with storage solutions, when you go to sell the new residential system, can you just talk about what you lead with? How are you different than all these other systems that are popping up? And then secondly, who are you selling it to?
Is it the distributors? Is it smaller and medium sized installers? Or is there potential to potentially win some business with some of the larger installers that already have systems? I'm thinking like a SunSafe or Brightbox those kind
of things. So, I'll try and remember both questions. So, actually it starts from the second question. So the storage market is evolving in multiple geographies with different drivers. So in Germany today roughly one out of every 2 residential installation goes in with a battery and that's purely on the basis of self consumption.
The tariff is very low. The homeowner wants to consume as much as the and the power prices are very high. The homeowner wants to consume as much as the energy as possible. U. S, California are experiencing disaster and power outages and that is driving the storage adoption in this area.
So one of the resulting trends is that storage is moving from specialty installers to a broader base of installers that are installing storage excuse me and SolarEdge initially in smaller volumes and gradually it becomes a bigger part of their business. That's the segment that is actually for this type of segment, the advantage of having a full package from one source is very significant. It also ties into the other elements of our solution, because the small and midsize installers, if they can get the full system from one place, get the service, the warranty and everything from that place, it makes their life much easier. So we are positioned with storage solutions with the big guys and early adopters of storage and we're seeing a trend of moving of increasing storage sales by mid- and small size installers as well. And the first part of the question if I happen to answer it anyway, but
Just how you differentiate yourself when you're selling. I mean what separates your solution from a lot of the other solutions there?
No, it comes back to the same point basically. And to a large extent our audience our target audience is the installer. I think it was referenced in the slide about market share that one of the things that allowed us to grow was this focus on the installer installer level.
And for them
getting everything, getting training, getting trained how to sell even storage, that's a big thing. Installers want to sell storage. They don't know how to do it. We invest a lot of time. We brought in, in some cases, sale gurus and collected our installers and had the sales gurus talk to installers about improving their sales capabilities.
So that's the mechanism that we're taking this into the market.
Eric,
please.
Eric, please. Thanks, America. So just actually as a follow-up question towards the storage offering. Can you just frame for us expectations around attachment as well as market share based on your initial expectations as well as the ARPI increases in the context of storage?
So the storage market for the reasons that I mentioned, I don't feel comfortable in mapping out any specific market share numbers. It's a complex market with different people selling different components and any type of specific number would be potentially misrepresenting reality. So I can't answer with an accurate number that question.
Could you
talk about pricing in terms of like dollar per megawatt hour?
So the storage product that we will be selling as was presented by Leo will be available in the market next year and we'll publish the pricing as we come close and have our full cost structure understood and clear.
Okay. And just one more question on that. How do you think about storage as a full like storage system relative to your storage inverter that you're currently selling and fair with, say, 3rd party battery systems such as LG Chem?
Yes. Sorry. I didn't mean to interrupt.
How do you think about selling as a full system versus just a storage inverter that you're pairing, for instance, with 3rd party such as LG Chem? Thank you.
So until now we didn't have the offering of our own battery. So what we've been selling was the storage inverter in its 2 versions, the version for backup, which as I mentioned is more common in the U. S. And in Australia and the version which is named a bit differently, but the version for Europe of self consumption. And those get attached to many types of batteries, but the most common one as we all mentioned is LG Chem.
Our idea is to add to that portfolio of battery from SolarEdge that is obviously going to be more seamlessly integrated with our inverters. But our inverters will still be compatible with other batteries the way they are today and we expect sales of those to continue.
Mike Weinstein from Credit Suisse. What's the advantage you get from actually having Kokam integrated within the company and actually making your own batteries that are instead of going to other suppliers and maybe taking advantage of the free market out there globally that can having people compete to give you the best battery instead?
So, if you looked at the chart that we showed earlier of demand for lithium ion batteries, you saw and I discussed 3 markets: eMobility consumer electronics and energy storage. Energy storage is the smaller one. It's pretty big, big for us. But for battery manufacturers, it's a smaller one compared to the 2 other applications. We've experienced already challenges in roadmap alignments because battery manufacturers independent battery manufacturers might seek different opportunities and then you have fluctuations in supply or you have misalignment technology and roadmap because of the fact that energy storage is a smaller part of their business.
So we believe it's critical to be able to develop the products. And as we always mentioned to develop the products from the chemistry level for the applications we're serving and to have security of supply in the market which has been a big challenge in the last couple of years.
We'll give you a light.
In terms of Kokam, you're going to develop your own chemistries. Are you ultimately if it scales going to go to like a fab light or a manufacturing light strategy where you develop your chemistries, you get a lot of demand, outsource it
to a third party? So,
it's a good question that we're discussing a lot and we're taking the first step. It's a very it's a market that will shape itself in the coming years. And we are confident that the step that we're taking now is needed in order to achieve the objectives that I mentioned in answering the previous question. Demand can grow and can be much higher than the capacity that we plan to manufacture And in which case, we'll have to figure out what method to go long term And definitely relying on outside suppliers similar to our solar mechanism is one of the options.
So when I eyeball your capacity expansion of inverters versus power optimizers, is it fair to say they're both growing about 100% -ish
give or take?
In 2020 over 2019? Yes. I believe so.
And so a lot of the applications you described today seems like they would be more inverter intensive rather than optimizer intensive. So I guess I would have expected, forget the scale of the inverter and optimizer growth year over year, I would have expected a much larger inverter growth versus an optimizer growth. And just can you explain, if you move into utility scale, 4 modules, 1 optimizer, more commercial application storage with no optimizers?
How does that translate?
And our industrial engineers forecasting our business deal with those questions all the time. When you look at between segments and geographies, we are covering such a broad range of sizes of installations. So the ratio of optimizers to inverters will vary by the size of the installation. They'll vary whether we're using a 2:21 configuration like we do in commercial, but not everywhere in commercial or 1:21 in residential. And there are other elements that go into it.
So we don't we look at the bottoms up forecast in determining the exact mix because it's so multivariable that there's no one equation that you're going to put in. Here's the number of inverters. What does that translate to in terms of the number of optimizers. Also we make optimizers that are panel specific in terms of their power rating. So that has an impact as well.
Yes. Hi. Beyond the chemistry and the battery
over here,
is there anything else
you can do to improve the cost efficiency or effectiveness of
the battery design over the roadmap to be a
leader as you are in the inverter side?
I'll hand that over to the O.
So there's a lot of
so batteries are a multiple parameter beast, right? Being a power electronics engineer, I don't want to say that they are more complex than developing power electronics, but it's a multi parameter beast in terms of it's not just cycle rate and it's not just amount of current or power that you can take out of the battery, you want to maintain temperature range, you want to maintain a high energy versus high power application, number of cycles, throughput of energy to multiple parameter base. And a lot of the batteries that are designed today are not specifically designed for the ESS market. And in some elements, it helps in the cost structure, but in others, it interferes with the cost structure, least of the overall LCOE of the system, which is much more important than upfront price. I think that we've been able to show that in PV, in Brazil it's even more critical in bandwidth.
So being able to optimize an ESS solution, especially coupled with solar that has specific behaviors that are not like an EV and not like a cell phone can help drive the overall LCOE. So yes, there's lots to be done And that's exactly another reason why we need to have that lower level expertise, because capacity can always be acquired and you don't have to always in source, but the ability to tap into a lower level design of a sale and then a pack and then system is critical to win this market in the long term.
Rob, to add one more thing to Lior, and I think that this is also related to the factory that we are expanding now in Kokam. I think that's one of the major issues when it comes to the cost structure is not just the chemistry and what you try to get is actually what is surrounding it. And it's an economy of scale kind of a game. Today, the main issue that we see, for example, in Kokam is the fact that since they have a relatively small factory, their economies of scale, first of all, in the purchasing power when they buy the various components is relatively small. When you look at the ratio of the amount of variable costs, direct labors and indirect labor workforce in the factory cost is cost is much more widespread.
So I think that other than what EcoCom Factory to simply take away all of these disadvantages that we have today as a result of the smaller scale production that we do and therefore to be much more competitive. And I think that this is the major thing that drives us now in order to get to the factory size that we see. If you remember in the call that we had 2 quarters ago, we discussed about 1.2 Gigawatt factory. I don't know if it was passed unnoticed, but when both C. V.
And Urie talked, we are going to increase this capacity to 2 Gigawatt hour. Part of it is assumptions around our ability to consume all of this capacity, but also a lot of it is coming from the ability to reduce the other costs in order to do the work there. So I think that unlike other battery manufacturers, Kokam can do very nice work in a short term period to reduce the cost on the manufacturing due to the higher scale of manufacturing itself. One more question or so I think that since we have a little bit of time or we're a little bit ahead of time, let's send you to lunch with a little bit of technology taste and we'll simply have Joao and Mayer, Joao, our VP R and D and Mayer, our CIO, both funders to give you a little bit of our technology and where we're heading with it. Joao?
Hi. My name is Joao Galin. I'm the VP R and D of Flourage and I'll try to go over some of our technologies and abilities, capabilities that we use in order to make our different products. As you probably know, we believe the foundation of our success is actually our technology and our innovation in technology. So we try to have something innovative in each and every one of our products.
Our novel DC architecture provides the basis for high performance, for the rich functionality of our system, scalability, reliability and low power, and we'll discuss this in a couple of slides. We develop everything in house. So we have control over all aspects of the system. And this is important if you want to have the ability to have the right product at the right price, at the right functionality. So we have control over our own technology.
Most of our products are actually products which are digitally controlled, so they all collect information. They are all controllable and thus we collect an enormous amount of data, which we can use later on for added value to each one of our different customers. So regarding innovation, we began shipping our first product in 2010. It was our very first complete system, which was targeted for the residential market. It included the power optimizer.
It included the inverter, single phase inverters. It included a full monitoring platform. And since then, we have added more and more parts to our system, which enables us to scale to different markets and give value to different customers. In 2012, we had our first 3 phase inverters. In 2015, we had our first storage system, which included batteries.
In 2016, we had our 1st HD Wave inverter, which was the 1st presidential 99% weighted efficient inverter. Some other examples in 2018, we started our grid services platform, which enables utility companies and other customers to actually manage large fleets of systems as power plants. We had our first easy integrated charger in 2018. In 2020, we'll have our 1st residential, battery storage residential, commercial storage and so on. So we try to innovate and add functionality and components to
our system
every time we can do so. And actually, each one of those developments, everything starts with the system. And I'll try to explain why the storage system is so important and why it gives us the abilities we have. First of all, if you take the traditional PV system, which is used by most other companies, it has lots of restrictions built into it. And when we design our own system, we actually thought of those limitations and tried to find a way where we can actually overcome those limitations and give something special, which is meaningful, valuable to our customers.
During the time of system design, we actually split the system and the functionality of the system into those different components. We decide how those components interact with each other. We decide which component does what in the system. And this split actually gives a lot of abilities to our system, because once you have a good system, you can actually balance stress level on the different components. You can add functionality.
You can actually increase reliability by controlling the stress, and you can do all of these things while maintaining a low cost just by deciding what function is done in which part of the system. So this is a key point. Another key point is once you have a good system, it's actually very easy to expand, to add functionality, to add components, to do different variations, which help different customers do whatever they want with the system, get the functionality they require out of the system. So our system is based on a DC architecture. It enables to connect different DC components to a shared DC bus.
Those components interact, which is other without any regard to the actual physical attributes of the components or of the environment. So once you select to work with a component at specific voltage, it doesn't matter if the temperature shifts, if other environmental conditions change, it still interacts the same way with all the other components. This makes it very easy to add different components into the system. It also enables us to optimize the performance of each component and the way it interacts. We can add features like safety, which is something which is becoming very important for any system of this type.
We have a lot of design flexibility built into it. So our clients can easily utilize the different components without any or with limited restriction. We have in our system one point, which connects to the grid. This is the inverter. And having one point, which connects to the grid means it's relatively easy to adapt it and to change it according to grid codes or regulations.
So as we said, we have an expandable DC architecture. System elements can be either producers of energy or consumer of energy. If you take, for example, a PV module, it's a producer of energy, a battery can either consume or produce. All of those different components can interact seamlessly via our own proprietary protocol over the system and enable us to maximize the energy produced, make simpler and more reliable components, have a robust system. And as I said before, have a single point which connects to the grid gives us a lot of flexibility on how to adapt to different grid codes and regulations.
One example of the benefits of the DC Outreach Extra is, for example, when you connect a battery to a DC coupled system, if you have extra energy, you can push it into the battery and you're not limited by the actual inverter capacity, which is oftentimes limited by regulation, so on. So you can enjoy the full potential of your system without any regard to the AC side. While if you have an AC coupled system, you will always have to go through the inverter and whatever its limitation is. Our systems are software controllable on many levels. It allows us to implement many new features easily and to add features as we go along to the existing fleet.
We can do rapid compliance to different codes and regulations, whatever they are. In most cases, we were able to do the changes and have current system adhere to those standards. We have fleet level management and we have the ability to remote assist our installers. So in most cases where they have problems, we can actually detect what the problems are in the installation remotely and either solve them immediately remotely or tell them exactly what needs to be done. This is all due to the information we collect from the different components of the system.
A couple of words regarding the different capabilities we have in house, which we use to develop our products. So power circuits, they're the heart of any power conversion or power device.
So we have a lot of
expertise in physical air topologies for power conversion and so on. Control loops are actually the way you operate the power circuit, how you do the conversion. The physical layers of the power circuit and the control loop is actually how it is operated. So we do all of our control loops development in house. ASICs are a way to reduce the component count, which increases reliability.
And they're also the way to miniaturize and reduce the cost of our systems. So we use a lot of ASICs in order to get what we need. We have different for different things. And our optimizer, we're currently in our 4th generation of ASICs. Real time software, which is run on the field installable software, does the implementation of the control loops, all of the different integrations, which are done inside the system, Mechanical and thermal design for any power device is important, especially if it's an outdoor unit, which has to work in hard conditions, being able to have the mechanical design, which protects us from the elements and allows to dissipate the heat outward is extremely important in order to make sure you have a device which can run-in the field for 25 years.
Cloud software, we will discuss a bit later. Maher will show some of the examples that cloud based software enables us to collect all the information to control all of our systems via our cloud. Part of our newly acquired abilities is chemistry and materials. As has been said here before, being able to actually control the chemistry of your cells and batteries enables you to get the right cells for the right task. Having easy design cells for an ESS means you have to pay extra because you need more capacity, because you need more cycles and EVs are designed for a specific amount of cycles.
And on the other hand, ESS or residential storage needs much more cycles. So if you want to be efficient, you need to design the chemistry according to the specific task. Electric motor design and not just the motor design, but all of the different components of integrating electric motors and electric drivetrains into vehicles is something that we gained in our new eMobility division and this is also very important. A couple of words regarding the geographical spread of R and D. We have R and D teams in several locations.
We have R and D done in the U. S, in Italy, Bulgaria, Israel and South Korea. You can see we have different methods and different types of engineers that work on the different aspects of our systems. We have over 330 granted patents in varying fields of engineering, all of them relevant to our own systems, and we have over 200 pending patents. And I will give the floor now to my colleague, Mary, to describe the data driven value.
Thank you very much. Hello. My name is Maire Adest. I'm one of the founders of the company and Chief Information Officer. And as Joao in his part of the presentation talked about the hardware and the technological capabilities that we have to develop the products, I'm going to focus more on the cloud software and the values that we could provide based on the data that we collect.
So, it all starts with a single site. We have the optimizers and other devices sending telemetries to the inverters, which are smart enough to run locally algorithms for managing consumption or optimizing energy usage. This could be done continuously regardless of connection to the Internet. So even if there's no connection, the inverter could run according to these policies. But of course, as most of the inverters are connected to the Internet, they then continuously transmit real time telemetry to the monitoring server and received commands and policies from the central site.
So, if I talked about communication, obviously, this raises the question of security. We've developed security into the system from the get go. There's built in authentication and encryption in our communication system. And I think it's important to note this security, we could really call it utility grade security, has been valued by a number of utility companies and utility scale installations in numerous continents across the globe. It's been evaluated and accepted.
Of course, besides the in house rigorous testing that we do to guarantee security, we also have validation by 3rd parties. There's periodic validation by security experts and penetration tests. We also have an ongoing bug bounty program in which we let the public try and find problems with the system. So, if I was talking before about a single site, obviously, there isn't just one single site. There are many, many sites.
In fact, there are about 1,250,000 sites, which are monitored worldwide. Based from the tens of millions of optimizers, there are about 3,000,000,000 telemetries collected every day. And from the millions of inverters, there are about over 150,000,000 telemetries collected every day. All in all, over the last about 10 years, we have over 2,700,000,000,000 different measurement points and data points, which were collected from every continent except for Antarctica, across different grid types, different climate zones and many different types of equipment. And with this information, we could provide a number of benefits to the different stakeholders across the value chain.
I want to focus on 3 of such stakeholders and for each of them to show both what information they could benefit for and what actions they could do. So, the first is the system owner. And for them, we could provide visibility
into system performance.
So, they could see what how their system is performing now, but they could also get an analysis of what the expected performance is either based on what we see as similar systems performing or by comparing to historic performance of their own system. And operations they could do are around the examples of such actions they could do around energy automation, whether it's something relatively simple like remote device operation or more complicated such as policy driven energy optimization, deciding when to consume what in order to optimize the energy costs. The second stakeholder is the installer or in larger installations EPCs, who could use the information to pinpoint installation faults and this makes it much easier to troubleshoot and fix issues. And over time, by monitoring the performance of the system, they could detect impending problems and perform preventative maintenance before these problems become an issue. Some examples of operations are remote system activation, remote configuration and remote upgrades of the site.
And the last stakeholder is the grid operator who could see across 1,000 or tens of thousands or even 100 of 1,000 points in their grid, the different parameters of the grid and this better visibility enables them to both plan better and enables them to give the grid services. So I wanted to dive into a couple of examples for these values. The first is identifying performance issues. So what you see here on the right is the homeowner's dashboard. Basically, he sees all the modules they could see all the modules that they have and how much power each module is producing.
A more in-depth analysis could be seen the middle here where we could investigate the underperforming modules. So what you see here is the power over a day, the power level of each of the modules. Most of the modules are performing as expected, but one of them is underperforming. And the last example on the right here is an example of a system with modules which suffer from PID, PAD, potentially induced degradation. Basically, that's a phenomenon where when modules are expected to are exposed to high voltages over time, they start degrading and producing less power.
And indeed, what you can see here is that different modules along the string, which have been subjected to different voltages DC voltages start degrading over time. A second example of a value is basically for the grid operators. What you see here is a map of California. Overlaid on top of it is a heat map based on telemetries from the SolarEdge systems, which in this case show the power the PV power production in each county of the grid. But of course, the same visibility could be also given to many other grid parameters, grid voltage, grid frequency, power factor, basically allow the grid operator to have better understanding of what their grid looks like at different points behind the feeders, behind the substations where today not all grid operators have good visibility.
And once they have this visibility, it enables them to then address the issues. Once since we have this in-depth information of power generation at any given moment, we could couple that with our historic data that we've been collecting over years on the one hand and weather forecasting to accurately predict PV production forecasting. So this is an example of a service that we provide, basically showing estimated PV production in 1, 6 12 hours into the future with pretty high accuracy around 98%. And as a final example, I'd like to tie these abilities together and kind of demonstrate a grid service event. So what you see here in this example is a neighborhood that's fed by a substation, which is near its maximum capacity.
It's marked in red here. And the grid operator could predict usage over the next few hours. And in this example, it sees that it's expected there's expected to be high consumption behind the substation, which exceeds the capacity of the substation. This will basically, if unhandled, cause an outage in the grid. However, if the grid operator has a SolarEdge virtual power plant, which think Lior mentioned before, and they have access to the grid services dashboard, they could plan ahead of time a grid event in which they'll instruct the different distributed energy resources, which are centrally managed by SolarEdge to provide power.
And actually during that time, the excess power will be provided by the different batteries, this example, maybe even charger and prevent the outage without exceeding the capacity of the substation. Okay. So those were some examples of the values. Joao and I talked about the core competencies of SolarEdge, the power electronics, inverters, converters, chargers, batteries, etcetera in the context of the solar business. But these same competencies are proving to be very useful in the new businesses that we've acquired, whether it's the UPS business, which technically speaking is very similar to inverters or the EV powertrains, which is a combination of inverters and converters and batteries.
These are the key takeaways that you have started with. I'm not going to repeat each of them. I just wanted to I just would like to conclude by saying that our innovations are the key our technology innovations are the key for our success. And the data that we collect is also a solid basis for further services. On that happy note, I think we're going to get to lunch.
Okay. So we'll be down for lunch now. The lunch will be followed by a product showcase and augmented reality product that we have downstairs. So what we'll simply do is after lunch, we'll be divided into 3 groups. Each one will be taken by one of our founders in order to explain and to allow you ask questions about the product and see a little bit of the augmented reality, which is serving as how we see future coming with our products.
So without any further ado, this way to lunch. Okay. So this is Lior's nightmare to be in an event where the finance is the fun stuff, right? Lior, where are you? So, in the presentation that I'm going to share with you, I'll try to talk a little bit about what we've done in the past and a little bit how you should look at our business moving into the future.
I think that through the presentations and the lunch and hoping through the interactions, you were able see where we are today. So, we're already a market leader in the inverter space with still temp to capture, as you saw in Sidi's presentation. We have demonstrated sequential fast growth that is coming with profitability, that is unprecedented in the at least comparable companies around us. And this profitability was actually accompanied by cash flow generation that cannot be compared to most companies in our space. This was based on our proven track record of execution.
When we saw growth coming, we knew how to manufacture the product, we knew how to ship those products. By the way, even at the cost of air shipments that impaired our gross margins over time, but we felt that this is the right way to continue with our customers and to be able to support them. When you support them, even if it costs you a little bit more, it is something that pays off over the long term and I hope that our growth was demonstrating this one. The result of this growth, the profitability is a very solid balance sheet. We have today over $400,000,000 of cash and cash equivalents and investment on our balance sheet.
We continue to generate cash flow, which will enable us to continue and grow. And the last layer is that the new businesses that we acquired opens to us opportunities in markets that we were not present before and all of them are representing potential for high growth as C. V. Mentioned in his second presentation. What I'll try to do here in this presentation is to basically capture the past and take us into the future.
And I think that the past was relatively nice for a company that started selling products only about 10 years ago. Over the last 5 years, we've demonstrated 35% CAGR in revenues, which will translate it to about 4 times profitability, is also translated to about cash generation from operations of $240,000,000 this year out of about $21,000,000 just about 5 years ago. And this is something that we did through all of this innovation and execution that we managed to bring over the
last time. So let's start talking about the
solar business and then let's talk a little bit about the new businesses where I will try to give you a little bit of a feeling of how we see the financial future moving forward. And by definition, of course, I will not be able to tell you exactly what is going to happen and when given the more new nature of these businesses and markets in which we didn't operate it, I will try to share with you how we as management see the growth in these segments. Only 4 years ago, we were showing these slides during the IPO and some of you sitting here saw this slide. And by the way, even at that time, we saw a lot of skepticism whether we can get there because when we were showing 2014 margins of 14 percent sorry, 16% gross margin, we talked about 32% to 37%. We were talking about operating expenses as percentage of revenue of 15% to 17%, and we were talking about net profitability of 15% to 18%.
Without writing it there, we also talked about double digit growth that we are supposed or expected to generate over the next few years. And if you remember, you used to say that long term for us is about 5 years, not much more because then it becomes very, very long term. This is what we've done over time. So in all of the years since IPO, since we're out of the gate, we demonstrated growth rate that is higher than the 15% threshold that we put. Actually, in the last 2 years, the solar business grew rapidly at a pace of approximately 50% year over year, and this is of a company that starts from a base of $600,000,000 $1,000,000,000 To imagine how hard it is, you saw Urie presentation.
It's not just taking to excel and saying, okay, now we're growing 20%. This is increasing the amount of machinery, amount of labor, amount of people and amount of people in SolarEdge making sure that all of this growth is accompanied with the right quality and reliability of products. We were able to grow gross margins to about 35%. And actually, in some quarters, if you remember, we were already at 37% and 37.9%. Sometimes 2 years ago, we even changed the tone and said that 37%, give or take 1% is the long term gross margin that we should see moving forward.
And then we took it back a little bit because of the tariffs, because we were able to take all of the tariff effect and pass it along to our customers. But this comes at an arithmetic effect on the gross margins because now we took the same profitability, but simply divided it by a higher denominator, so gross margin was a little bit lower. And eventually, in profitability, you can see that operating expenses as revenues were slightly more than we expected over time. But when you look at the net income on a GAAP and a non GAAP basis, which is a little bit more pure from the economic point of view, we were able to be at around 16% to 17% of net profit after taxes. And this is after taking into account the tax reform in the United States and the fact that we see it today a lot of movement in the foreign exchange currencies and being a relatively large company that operates in many markets, 28 markets, as Tivi said before, is something that takes its toll when it comes to currency exposures.
But there is still a lot of growth ahead of us, and we believe that we can basically now reaffirm a lot of what we said during the IPO for the next few years to come. And I would like to address it by looking at the revenues, at the gross margins, operating expenses, and of course, the result is going to be the profitability. The main elements of our growth is going to come from 3 major areas. The first one is geographic expansion. In 2015, when we went public, the United States represented 73% of our revenues.
By the way, one customer called SolarCity represented 32% of our revenues at that year. Over time, we were able to expand beyond the United States, not by reducing the amount of sales in the United States, but actually by increasing dramatically the revenues in all other regions. So as we saw the 1st 3 quarters of 2019, we're already at 46% revenues coming from the United States, 43% coming from Europe and about 11% coming from the rest of the world. And of course, rest of the world and Europe are growing relatively quicker than the United States. We also talked about it before.
We see in the future a situation where the U. S, Europe and rest of the world, each one of them are contributing 1 third of our revenues without and again, I'm talking only about solar, of course, and this is without reducing the amount of revenues in each and every geography. Second area that we see and by the way, you can see that both in geographical growth and both in segmental growth, we're also we're not just growing as the market, we're actually growing a little bit faster than the market. So we simply take market share from some of our competitors. And when we look at where we are today from a segmental point of view, if in 2015, again, going public, we were at 90% residential, 10% commercial, The new suite of products that were demonstrated below brought us to a situation today where about 78% of our revenues are coming from residential, 21% come from commercial, and we saw some springs of utility still using commercial products, but utility installations.
Long term utility, residential, commercial are forming approximately onethree of the revenue pie here or worldwide. We're talking about approximately $8,500,000,000 of inverter market that is divided between these 2 technologies. We are developing our utility products. We are continuing to increase the capabilities in the commercial space, and we look ahead at a situation where 1 third of our revenues will come from utility as much as we will see it coming from residential and commercial. And the last thing is RP.
RP comes through the sale of new products. It comes from the ability to serve higher or a bigger amount of the pie. By the way, we'll give slides at the end of the the printed slides at the end of my presentation. I just didn't want you to go through all of the surprises at the beginning, right? So basically, we can continue and increase the ARP over time.
And when we look ahead, we believe that we can be in a situation where 2 thirds of the business in the solar space will come from our inverters and optimizers, but 18% 16% will come respectively from storage and smart modules that will have our products on them. So the combination of geographical spread increasing the segments and increasing the ARPU will allow us to continue and grow our revenues. The second area is the gross margins. And the gross margin that you see today is about 34% to 35 percent in the last few years are affected today by 3 major areas. The first one is air shipments.
If you take the cumulative effect of air shipments over the last quarter and we actually discussed each one of them in a discrete manner in each and every conference call, we are today in Q4 going to be affected by approximately 500 basis points simply due to air shipments. Once we have more capacity online, we will be able to gradually get away from this addiction to air shipments and we'll be able to take them away or at least reduce them to a minimum. This is about 500 basis points. In addition to this, if you take the effect of the tariffs, the arithmetic effect in the Q4 of this year, it's about 185 basis points of effect on the gross margin simply because of this net arithmetic effect. By moving into Vietnam, moving into Flextronics and having some capacity coming from Cella 1, we will be able to bypass it.
And therefore, to avoid this effect, we will, of course, transfer some of the prices back, but this will get us back to the gross margins that we used to see before. And therefore, when we look ahead, the 36%, give or take 1%, is something that we believe that can continue. And this is also taking into account more of the new products that are included in the RT. So some of them, of course, are products with higher gross margins, some of them are products with lower gross margins, but the blended effect is approximately 36%, give or take 1%. Of course, operational leverage is very leverage is also important again.
We are investing all the time to grow our infrastructure. The first thing that we do is R and D. We are a technology company. If you do not invest in technology, as Guy used to say, you're always as good as your next technology. You're never as good as the one that you had before because everyone can basically develop it over time.
So increasing our R and D spending is something that we would like to do. We continue, of course, to invest in geographical footprint. Our sales force is growing. And of course, you need to support all of those with G and A. But the way that you should look at the spread of these expenses moving forward is that we would like and hope, by the way, to increase R and D at 25% year over year.
It's not very easy. When we have today close to, if I'm not mistaken, 800 engineers worldwide, to bring another 200 engineers every year is becoming a task. And I hope that we do a good job in it, but it's not getting easier. But we would like at least to grow by 25% year over year. Sales and marketing expenses should grow at a lower pace than the growth in revenue because we do have economies of scale.
If we have a Dutch customer to which we used to sell, let's say, $10,000,000 in 20.18 $20,000,000 in 20.19, it's still the same salesperson that takes care of it and therefore economies of scale happen. And lastly and without taking litigation expenses, G and A should grow by not more than 10%, leveraging on more and more processes and more and more computerized systems that we develop in house or buy from the outside world. The result, of course, should be, as you can see in the yellow in the green line, is to see operational leverage that is actually having our profitability going up. So this is what we see for the years to come. And for the years to come meaning from the solar business for the next 3, 4 years.
We continue to feel comfortable with growth rate of 15% to 25%. By the way, on an anecdotic basis, if you look at the growth rates that is now projected to us and as was projected to us in all of the years since we went public, usually the street was a little bit more conservative than ours. In any case, we're projecting 15% to 25% year over year growth in revenues coming from all of the elements that I described. We believe that we'll be at around 36%, give or take 1%. This will be after taking the air shipments, but directing some of these margins to increase other markets.
So, if we want to bring new products at the lower margin, we can do it. If we want to
penetrate a new region where the penetration
costs should be a can do this. We basically have now another kind of, I would call it, button that we can play with in order to have our growth continued in the same pace that we used to see. Operating expenses as percentage of revenues should continue and go down. By the way, some of it is coming on a GAAP basis at the lower at the higher percentage that you see here. When stock price is higher, the cost of the expenses associated with RSU grants are a little bit higher, but on a non GAAP basis, we're already there and we will continue to push this down.
This will lead us to an operating income of 20% to 23%. We don't talk about net income anymore because we do see that currency exchanges that are beyond our ability to control are happening. The world is becoming crazy when it comes to taxation. But on an operating income, we feel comfortable to be at 20% to 23%. This was the solar business.
Let's talk a little bit now about the new businesses. And of course, by definition, going into new markets with new companies that you just acquired involves a lot of uncertainty. And this uncertainty comes from how quickly you're able to monetize these businesses and how quickly you can increase the business. I can say that none of the businesses that we acquired is an EBITDA generating businesses. All of them were, in a sense, losing.
All of them required investment. So when we look at the revenues from these businesses, we expect them to be about 10% from 2022, and we expect them to 10% of total revenues from 2022, and we expect them to continue and grow at the double digit thereafter. I would say that looking at the growth that we see in solar may be reasonable, but of course, the potential in each one of them is higher. And as we will learn a little bit more, we will give you a little bit more color into it. We simply don't want to guide on something that today at least we don't know how to project very effectively.
But we feel very comfortable with this. The Kokam factory is even or supposed to be easier to project if we are able indeed to meet the time line in expanding the factory and if we are able to utilize or actually materialize all of our expectations. We believe that with the Kokam factory, the vast majority of this factory can be taken by SolarEdge for its own applications. This is the batteries that you saw downstairs, both the residential and the commercial. There are ESS systems, of course, out there that Kokam is using.
We believe that in the future, again, UPS could be another area where we can take our batteries. But if we are able to take all of the capacity there and assuming $2.50 per kilowatt installed ASP, this will be something exceeding $300,000,000 in 2022 when the factory will be ramping up. And once we're in full ramp up capacity, we can be at $500,000,000 of revenues based on those numbers. From gross margin point of view, again, we're trying to give you a little bit of the way that we think of it. The UPS products, as Stevie mentioned before, are very similar to the products we sell today.
These are batteries. These are inverters. We believe that they should share the same gross margin as the solar businesses, and we expect it to be 30% by 2021. Why it will take us a little bit together? Simply due to the fact that we're now taking these products and we take them from the old manufacturing methodology of Gamatronic and we transfer them to the contract manufacturing and to the manufacturing capabilities that we have today.
It's a process that takes a little bit of time, but we feel very comfortable with this 30%. Looking at Kokam, we're looking at 25% gross margin. And 25% gross margin is coming due to the fact that once we have the factory, the economies of scale will allow us to be at a cost that are similar, again, to the other players in the industry. We're not going to be maybe as cheap as someone that has 70 gigawatt hour or 40 gigawatt hour. But when you build a factory, usually you have the building blocks, which are the machinery.
And based on the bottlenecks of the, let's say, widest capability machinery, you build the building block of the factory. We're building or trying to build the most efficient factory that will allow us to have the best economies of scale based on the size that we have. And of course, we'll always have more expenses when it comes to the indirect expenses compared to the large companies. But we feel that 25% is achievable, and we believe that this can be the case in 2022. And lastly comes eMobility.
EMobility is expected to be a lower margin business at least at the beginning. And as Tivi mentioned, it's not something that will come very quickly because of the processes that it takes the mobile the car companies or the vehicle companies to adopt the product. But we expect it to be 20% because these are products that are usually using higher grade of products. And usually, you see that the large auto manufacturers usually have buying power that is higher than the usual customers that we see today, we see about 20% gross margins by 2023. All of this has to be translated eventually to profitability.
So in Kokam, we will be profitable We believe that we will be profitable by 2020 in Kokam. We believe that we can be profitable by 2022, both in the UPS and the e mobility businesses compared to a situation where at least last year all of them were not profitable. A byproduct of our P and L result is our balance sheet. And today, we have a strong balance sheet. We have a balance sheet that has sufficient amount of cash to take all of our expectations about expansions of factories or geographical growth.
We have financial ratios of financial stability that are very high compared to most of our peers in the industry. Just look at the debt to equity ratio that you see there compared to some of our peers. And actually, all of this debt is debt that came from our acquisitions and not debt that we took as SolarEdge. And this is something that, of course, we feel that this stability and balance sheet strength is allowing us to continue and grow. But one thing that we would like to do with this balance sheet is to take it and help us to grow the business beyond what we see today and to basically allow us to fulfill all of our plans.
So the first one is the growth. The growth that Uri showed you in his presentation is growth that requires CapEx installation. And CapEx is coming from 2 major areas. The first one, automatic assembly lines. By 2020, we expect that by Q4 2020, all of our PAR optimizers will be manufactured using automated machinery.
This is something that will cost us money as well as the testing equipment. We're looking today at about $32,000,000 to $37,000,000 in the last two years. We believe that next year, it will be about $40,000,000 where we're going to increase capacity much more in the Vietnam and Zala areas. The second area is the Kokam factory. Two quarters ago, during the earning call, we talked about $50,000,000 to $60,000,000 but we talked about 1.2 gigawatt hour factory.
Over time and when we continue to analyze the factory, we believe that the 2 Gigawatt is the right measure for us to be. And it comes from various directions. First of all, we believe that we can take 2 gigawatt hour of product to our applications when we move forward. We also analyze the production and the cost structure. And of course, since economies of scale are playing out here, the bigger the factory is, the better you are on the cost per cell.
And therefore, we will build the factory with 2 gigawatt hour capacity, but an infrastructure to support even small growth out of this 2 gigawatt hour that if we will see that demand is coming at a higher rate than we expected, we will be able to quickly respond and increase these capabilities without having to go and build another building or buy a different land. The CelaOne factory in Nazareth is going to consume approximately $45,000,000 to $50,000,000 Most of it will be paid by the beginning of next year and the end of this year 2019. This Stella-one factory will be allowing us to continue and develop our products to be very close to our R and D and will enable us to continue and develop our automated machinery in order to make sure that then we can copy smart all of these methodologies into the contract manufacturers and the other sites that we have around the world. And of course, on top of all of this, we need to take into account $5,000,000 to 6 $1,000,000 of annual spending on CapEx simply coming from the fact that new employees are coming, they need laptops, they need a place to sit and they need another sometimes furniture.
So I think that all in all, you can see that we have a CapEx plan that is relatively extensive for the next 2 years. Our balance sheet allows us to be in this situation. And with this, I'll go back to where we started. I think that where we are today and what we were able to achieve puts us in a way in a situation where we can leverage our financial stability and financial strength to continue and grow our revenues at 15% to 25%, to be at gross margin of 36%, give or take 1%, and to have operating income of 20% to 23% on the solar business and continuing to increase all of the other elements in order to be able to show continued profitability and growing profitability in the future. And with this, I'll open it to questions.
Phil?
Great. Thanks, Renan. Phil Shem with Roth Capital Partners. In terms of your 15% to 25% year over year growth targets, can you walk us through your unit and pricing assumptions for the solar business? Do you expect pricing to decline at all?
And then in terms of margins, historically, I think they're GAAP margins that you're talking about. Do you foresee a time at some point in the near term where you maybe step away from non GAAP, especially the stock based compensation, you're very profitable. So we need to be talking about that going forward? Sure.
So let's maybe start with the let's start first of all about the GAAP and non GAAP thing. The main problem today is that the accounting is becoming a little bit more hard for us to explain how the core business looks like. With the new accounting principles like the leasing one, when you have to take long leasing agreement that you have with another company and you need to present one side as an asset, one side as a liability, You need to accrue for expenses on the liability, but you cannot enjoy anything on the asset side. The accounting do not really present where the business is. By the way, when you do accounting for M and A, so many things like technology, like customer relationship are being baked into the calculation of the P and L, and we simply do not know how to show you how we as management look at the business.
And as long as we look at the business on a non GAAP basis, we're trying to give you a flavor of how we look at it and this is why we look on the this is why we continue to provide a GAAP, non GAAP. I believe that unfortunately, as accounting becomes more economic in sense and less realistic in many senses, I think that we will have to stay with the GAAP and non GAAP. But one thing that we will continue to do is to give you all of the breakdown And you see it, by the way, in all of the tables that we publish at the end of every quarter, so you'll be able to judge by yourself what's supposed to be there and what is not. First question, you'll have to repeat because I forgot it.
What are the pricing and unit assumptions for 15% to 25%? Yes. So, I think
it is becoming a little more problematic to project those and I will tell you why. In the solar business because we both have the solar business and we have the new products, which are representing the bigger RT that we see. On the solar business, we see today and we do not expect to see major difference, we see today a relatively stable environment. You see an environment where most of the players in the industry were capacity constrained. You see that some of the players in this industry are still suffering from either component issues or tariff issues.
And actually, you see that other than SolarEdge, nobody is making meaningful money out of their business. And therefore, the rationale of relatively small ASP erosion. And when we talk about relatively small, this is lower than the 5% to 10% that we used to see in the past. And this is something that at least now we feel comfortable with. As for the unit growth, I'm not sure that I can give you a very good answer, because again it continues to have every unit that we sell today and Silly showed it in one of the presentations, we sell much more units that are what we call complex units.
And therefore, it's not just a game of how many units you sell, actually it's what is the content of the unit and what is the price of the unit when you sell it. So I'm not sure that I can give you enough granularity on this one. Great.
One more and I'll pass it on. In terms of your new businesses, can you talk through the OpEx assumptions for those new businesses? And then with the financial targets much more clear, what is the expected return on investment that you see by acquisition that you've made?
Thank you. From OpEx point of view, what we saw right now is that the numbers that we gave in solar are going to be pretty representative also assuming the new businesses. And the reason is that on at least for the next 2, 3 years, the OpEx on these businesses starts from such a lower base that even if we increase it by 2x more than solar, the effect on the overall solar expense is relatively lower. And therefore, I would assume that with the new businesses, you should see very similar effects. So on R and D, we will see bigger growth in those new businesses, but the R and D expense is relatively large, and therefore, it will be swallowed there.
The second issue is the sales and marketing. We have today already infrastructure in many places that storage didn't used to have when it was at the same size as the new businesses. So for example, if today we want to take a new person for, let's say, UPS in, let's say, Italy, I don't need to form a subsidiary. I don't need to take an office. I have all of those here.
And therefore, I would say that the new business assumptions should be the same, both for R and D and sales and marketing and both for G and A, where all of these companies do not have the publicly traded company expenses related and therefore they can be at least 10%. So I feel that it's about the same. And the beginning was
so here,
I'm not sure that I have a good enough answer. And we try to tell only things that we know already today. And today, I can tell you that the only thing that we figured out is that, 1st of all, Kokam factory should be around 2 gigawatt hour and this means this $90,000,000 to $90,000,000 of CapEx. The assumption, if you take, for example, this $500,000,000 25%, you'll see that basically the ROI on this one is going to be once we have the factory about 2 years. So I would assume that if you take the time until we get there, you should see about 2 years from the time that we have the factory to have a full return on the Kokam asset.
When it comes to the Gamatronic, the amount was very small. We paid approximately $11,500,000 I think that if we're able to grow and once we reach profitability, you should see it relatively quickly. The only thing that it's hard for me to say is the e mobility because as T. V. Mentioned, some of the processes, especially of homologation certification by the automotive companies are long enough that are not necessarily projected by us.
So I cannot tell you exactly how much it is. But in general, this is kind of the business that once it happens, it's supposed to happen in relatively large volumes and therefore you should see a relatively good ROI on this one. Next question. By the way, questions can come also not on financials, if there anything that you would like, but yes please Mark.
A lot of moving parts in 2020 with capacity expansion, the new products and seasonality from safe harboring. Can you just kind of give high level thoughts on how we should think about seasonality next year of revenue?
So, safe harbor, first of all, let's differentiate between the U. S. And non U. S. Because as you saw about the new the non U.
S. Business is already more than 50% of the business. And then usually you follow the regular seasonality in this market. That means that usually Q1 is relatively small, Q2 is strong, Q3 is stronger, and then Q4 is usually flat to down in most cases. In the U.
S, the safe harbor is a little bit changing it because the safe harbor basically prescribes that in order to enjoy the ITC at the higher rate in 2020,
at the same rate that
it was in 2019, 2 things need to happen. Either you need to buy equipment this year in 2019 or you can buy equipment where you put an order by the end of 2019, you need to pay for this order and you need to make a firm commitment, but then you can get those this equipment towards the Q1 and up until 15 April. So I think that what you will see is the U. S. Market was usually more skewed towards the second half of the year, I think that you will see a little bit more flattened seasonality in Q1 and Q2 because of the safe harbor.
But to put everything into the right perspective, the ones who can really enjoy safe harbor are only the very large players, only those who actually own the asset eventually. So by definition, not all of the U. S. Market is going to take safe harbor orders in Q1 or even in Q4 this year.
Okay. And then just lastly, just to be clear, the greater than 10% of revenue from new business in 2022 and double digits thereafter, that's solely from the 3 acquisitions you've done? Yes. Okay. And then, I guess, how should we think about the likelihood for more M and A?
Are you kind of focused on integration at the moment?
So, I don't know if
you want to comment on M and A, but in general, we look at we were very acquisitive even before we bought these companies because we, from the days of the IPO, thought of what are the prongs of growth that we can see and one of them was, of course, acquiring other companies. I can tell you that we bought 3 companies in areas that were interesting for us at a relatively short time, and that means that we now as management take a lot of effort to integrate those, to learn those and to be able to bring the values of SolarEdge to these companies. I can tell you that while we're always looking at new companies and we continue to do so, once an opportunity will come, if this is an opportunity that makes sense on the price, on the ROI in a field that is of an interest for us, and we believe as management that we can handle the integration of it, it's something that we're totally open to do. I don't know if there is a very large stone that we see right now in front of us, but some of these things are simply happening over time.
So I wouldn't rule it out, but at the same time, we'll be at least when we look at more acquisitions, we'll also look at what we've done until now with the acquisitions that we already made and whether we can actually afford one from management perspective. Yes?
Hey, Mike Weinstein from Credit Suisse. The I guess the $242,000,000 of cash generation is going to fund the CapEx program going forward? You don't see any additional need for outside financing, just
to make sure. I don't think that we need. Right now, again, it's we look at about 200 and something cash requirements next year, but we'll of course, we believe that we will continue to generate. So it's not only what we have right now on the balance sheet. We believe that we are fairly settled with what we have right now from cash perspective.
Just a quick question on the cash generation. What's the difference between the $207,000,000 of operating income and the $242,000,000 of cash generation for this?
Between the income and the cash generation, it is up expenses and expenses related to the expenses related to the PPA, purchase price allocation from our acquisitions. And also, by the way, depreciation, but to a smaller extent. Yes?
On the Kokam run rate revenues of $300,000,000 $500,000,000 I think one of the prior presentations anchored to a $2.50 per kilowatt hour number. Is that all external revenue or is that intercompany as well? How do we think?
No, no. So, first of all, Uthiti mentioned $2.50 per kilowatt installed and he talked about, again, 2 gigawatt, this is how we get to the $500 We believe that everything that we say here is going to be reported to the outside world because whatever we do as intercompany is going to be eliminated in the consolidation. And since we are practically holding almost 100% of Kokam, we hope to hold all of these intra company.
And so if you install a residential if you deploy a residential system with a Kokam battery, a SolarEdge inverter, those are just going to be accounted for totally separately, not as one unit? No, no, no.
So again, we will account all
of those from
again, we'll have to decide how to report it. But in general, this will be all revenues of SolarEdge, the company, because in the way that companies are working, Kokam will be selling to SolarEdge and SolarEdge will be selling to the outside customer. All of the intercompany transactions will be eliminated in the consolidated financials.
Then one last quick one. Do merchants get worse before they get better at the non solar businesses as you invest and ramp?
I don't think so, because right now all of them started in a relatively bad bed point. For example, if you take the Kokam factory, the Kokam factory was very inefficient when we acquired. First of all, the amount of utilization was lower. 2nd, we when we came, we did some efficiencies there. You look at the UPS business, most of the manufacturing was not done using high level, I would call it, contract manufacturers.
And the e mobility was done relatively internally. But once we are taking all of these businesses to us, two things are happening. First of all, they enjoy our economies of scale. When we're buying components that Kokam is buying or that UPS is buying, we buy those in 1,000,000 while they buy in 1,000. We get much better benefit, and therefore, we can use our purchasing power.
The second thing is that once we move into contract manufacturing, we know how to better utilize and get better prices for them because they see very large volume on the solar side. So I think that trend should be going upward. Yes, Brian?
Ronen, if we look at the some of these pie charts, revenue growth by segment, obviously, utility is a very small piece today. It looks like it's going to be in terms of official in
terms of official launch.
But how are you
comfortable with the sort of 36% plus or minus gross margin range for the solar business given that you've got this whole new sort of end market, which is historically known for very low prices and lower margins?
So, it's like you take few ingredients, you put them into 1 cake and something happens that is a little bit different from them. So, I can tell you that in general, the 36% gross margin that we guide here is not only built on this segment, but also geographies. Some geographies have better margins than the others. Some new components on the RPI, higher RPI have better margins, and we basically mix all of them together. But when we look at our approach towards both residential, commercial and then utility, you see 2 trends that are happening in the price, but they also happen in the cost.
The first thing is the economies of scale. The bigger the inverter is, the cost per watt for the inverter itself is going down dramatically. That's number 1. The second issue is how many optimizers we are attaching to the inverter or what is the ratio between modules to optimizers on this one. In residential today, we do 1:1.
In commercial, we do 2:1. We already presented a power optimizer that knows how to support 5 4 modules. So that means that when we will move towards utility, first of all, the margins may be slightly lower. But by the way, it shouldn't be and again, as we said, we're not committing yet to the price, to the margin, still far away. But in general, by concept, we should be able to drop the cost of both the optimizer and the inverter and play a little bit with the ratio, So, the overall margins should be similar.
And of course, again, once we'll have the product out and we'll see the prices, we'll guide about exactly how it is. Okay.
And then just on the product category itself, I was kind of surprised to see the smart module going from 0% to 16%. I know your peer has done a lot in that space. Can you kind of level set us as to where you're involved with module makers? What kind of visibility you have to that product category becoming a bigger part of
the growth
curve for you guys?
So maybe I suggest, Steven, if you would like to answer
a little bit for this.
So just to make sure that I understand correctly the question, this is actually we are not relying on the module makers to be the ones that are selling the product. We are actually the ones selling the product under our brand and through our channels. So we have much bigger control of how this market will eventually evolve and the capabilities to grow it. Does that answer?
I guess then can you level set us as to
sort of what the capacity is for that? Are you doing that through a partnership
or moving into the manufacturing business?
Yes. So, we are buying the modules from Tier 1 bankable manufacturer. And it is a product that is designed to our specification. And we have a lot of the control of the process, but we are not the manufacturer on our own today.
And plus we don't have any commitment, hard commitment for products, meaning that, for example, in module prices full 1.5 years from now, dramatically, we don't have any long term obligations right now that can impair this one. Thank you. Yes. More questions? Anything?
Yes, Eric.
Hi, Eric Lee, Bank of America. Just to talk a little bit more about the revenue growth by product category. Could you just discuss expectations for storage and energy management growth? I mean, I know you have your long term target of 18%, but given that you're going to begin selling this in a more meaningful way in the first half of twenty twenty, can you just talk about near term expectations on the revenue composition there?
So, first of all, the product will come actually at the later part of 2020, not at the first part because the product is still under development and in testing, and therefore, you will not see the very beginning. Now again, it's a little bit hard to answer this one simply due to the fact that while everyone talks about storage, we haven't dipped our fit into selling batteries before. And I can tell you that while CV, Peter is here, the team, when they talk to customers, all of them express their desire to have as many products as soon as possible. We would, 1st of all, like to see how this is forming out. But in general, I can tell you that when you look at the overall cost of a system with a battery and without battery, the cost of inverter and, let's say, battery, what will be the ratio between battery and inverter in price, let's say, on
a 5 kilowatt system? So, obviously, a battery is much more expensive in price. I think that the ratio would be X5 or X I think within x4 to x6, something like that.
So even if you take relatively small percentages of attachment rate that you take, it's coming into relatively large revenue number. But again, the reason and you saw it in the past, we don't try to be overselling here on something that we don't feel yet. We believe that the potential is high. We need to basically dip our feet into this storage water and see how much we can sell, but the opportunity by itself is relatively large given the size of the battery compared to the size of the inverter when it comes to the cost price structure.
Maheep Bovia from Credit Suisse. Just on the Kokam plant, could you just talk about the debt for the Kokam plant? Like how much do you expect to add? Because I think in the past, you've said that given in South Korea you need to raise debt over there for Kokam specifically and falling to that like how do you think about incremental CapEx for Kokam beyond the $80,000,000 $90,000,000 on a run rate basis to match up to industry
standards? So I'm not sure that I know the industry standard in order to compare Kokam. I can tell you that at least when it comes to the overall investment that we do there, what we try to do, and this is why it took us a while, and I know that some of you were trying to chase us. I know that some of you were frustrated with our inability to give this data before. But when we looked at the manufacturing technology that we're going to use in machinery, we tried to take a newer generation than what compared to what most of the players are using today.
And therefore, we believe that on the CapEx side, we could be a little bit less expensive than the CapEx that most of the players are doing today. One of the things that you see, especially when you run big volumes, and this is part of our sense, is to have harmonization of the manufacturing. You don't want to have many factories running with many different kind of equipment. And therefore, once you make a decision, you are pretty much tied to this decision for a relatively long time. Us coming as a relatively newer player into this market allows us to choose the manufacturing equipment and methodologies that could be a little bit more cutting edge, therefore reducing both the cost of the operation and also the cost of the CapEx there.
So I would assume that beyond this there. So I would assume that beyond this $80,000,000 to $90,000,000 that you will see on the 2 gigawatt, you shouldn't expect a very large expansion in CapEx once we would like to move forward. And actually, once we would like to move from, let's say, 2 gigawatts to 3 gigawatts, you're going to have a relatively small increment because some of the equipment that we buy already today has the capacity of 3 kilowatts. So it's just we took the equipment that the bottleneck today is about 2 kilowatt 2 gigawatt hour and we left it there. So shouldn't see a lot of increment.
As for I think the beginning was about manufacturing in Korea, right?
Yes. Just the debt for
the debt in Korea? So debt in Korea,
we need to decide. We have the money to invest, you saw it. But it comes now to taxation. And again, the tax world becomes to be very aggressive and very hard. In general, whatever you put into Korea today, you need to put you need to invest in a form of equity and a loan because there are same capitalization rules there.
And usually the rule of thumb is that you put 2 units of debt on 1 unit of capital. So if I'm to invest $90,000,000 if I put $90,000,000 in, at least $30,000,000 will be kept as a equity that if one day I would like to repatriate and I would expect that we would like to repatriate those monies to the U. S. Company simply because Kokam will be profitable enough, I will have to pay 25% dividend tax on those ones. So our approach will be very easy.
We will try to take as much as possible debt in Korea, assuming that we're able to get these from Korean banks and to have the minor possible investment into Korea coming from monies that are coming from here in the United States. And I hope that the fact that we have so much cash will allow here in the U. S. Company will allow us actually to get better terms on debt in Korea. I can tell you that from at least the initial discussions with Korean banks, they're interested, but I need to see if this is really materializing into debt that we can take.
Got that. And so one small housekeeping just on your tax rate assumptions going into the forecast for the U. S. Market just given it's a big market. And the high level question on the cash, the $250,000,000 around $250,000,000 of cash.
How do you think about capital return or use of that capital because your cash more than covers the CapEx
needs? So I'll start with the tax rate. Tax rate, we historically said 15%. I believe that it should be anything between 15% to 16%. The tax credits?
The tax credits here. So I am not sure that I understood the question, sorry.
No, sorry. Just your assumptions around
the tax credits, like do
you assume any extension or probability around the extension? So, anything from that?
We hardly know Israeli politics and lawmaking. Commenting on something in the United States is going to be far beyond our abilities. I can tell you that as a company, these are our view. We should we would like to see as little government intervention in the market as possible. I can tell you that from our point of view, we're happy with whatever the result is.
What we used to see, by the way, and we saw it in 2015, that when the ITC was extended, you actually saw a lumpy year coming the year after because now nobody was fearing from the next step down of the ITC. So they felt comfortable not to increase the installations. I do not know what's going to happen there, especially on the lawmaking. For us, whatever it is, we'll be ready and we'll be able to support it. So that will be related to this.
About cash position, as you saw us here in the presentation, and I hope that we were able to show this throughout the presentation today, it's all about growth. We believe that although we grew very rapidly over the last few years, we can continue and grow in a relatively fast pace. And growth requires cash, and there is nothing better for a company than having all the cash it needs to grow without having to go and be at the mercy of the capital market or debt markets out there. I would tell you that at least conceptually, 1st of all, working capital, then will come conceptually CapEx investments, then will come M and A and capital return will be at the last point of those. I believe that at least between the 2 or the 3 over the beginning, we have enough for the next few years.
So I wouldn't commit on anything, but this is the way that we see the priority. Yes, I think that we have time for another one. Yes, more question? Yes, Jonathan.
Can you help us understand the decision behind doubling your capacity in units in 2020 and your guidance for 15% to 25% solar revenue growth?
Sure. Of course. So
it's a combination of several things.
First of all, we say in Hebrew that whoever was burned from a soup is now on a yogurt. So it's like brewing on yogurt. We've burned in a pit due to the fact that we were very, I would say, quite responsible on the way that we planned our expansion. And therefore, when we saw the growth coming in, it came at a very high price of air shipments. So now we basically face 3 issues that we need to solve.
The first one is that I'm paying right now close to 5.50 basis points of air shipments, and I do not see the demand of my products going down. So what do I need to do? First of all, we need to manufacture enough in order to ship all of our all of the products to the customers. Then we need to ship to have excess capacity to start generating inventory that we can put on a boat that will take few weeks until it gets to the United States or to Europe and build the inventories there. We must have excess capacity in order to eliminate the air shipments because you need to start rolling this wheel of this flying wheel, I would call it, of cargo marine shipments compared to air shipment.
So that's the first logic. The second logic that we have there is the fact that, again, some of the growth needs to come not only to satisfy what we need now, but actually to have a kind of a safety plan. For example, if tomorrow morning there is, I do not know, something happening in China, we would like to have a little bit of redundancy in the other areas in order to make sure that we can continue and supply our customers. There are so many customers that are today almost exclusively dependent on us. It's our responsibility to have the geographical spread.
And that means that if you have a large capacity in China, you need to build large enough capacity in the other locations as well. And the third issue is the fact that, again, we were surprised by growth before. And although we guided in 2015 for 15% to 25%, we actually grew much more. And therefore, we're a little bit more cautious now and want to make sure that if something happens, we're able to meet it. There is one thing important to remember though here is that a lot of this investment is not done by us.
It's actually done by our contract manufacturers, and they feel comfortable enough with making this growth with us as well.
Thanks. I think the third reason was the best one.
Okay. All of them are true, so it's pick 1. Yes. So if this is it, Tivi, maybe closing remarks before we have let people drink something? Yes.
Thank you.
So this will be one minute because we really stretched at least my talking abilities in one day. What we set out to do today was to share with you our I would call it our plan, our view and our vision. So our plan in the short term, our view for the next few years and our vision for the long term of the company. I hope that we got that message across in a clear way. On top of that, we wanted to use this opportunity to expose you to the people, the people that have helped us materialize the vision that we had in the past.
And it's a very unique situation, I think, you would know of startups that 10 years later everybody is still on board and everybody is determined to carry us to materialize the view and the vision that we have for the future. So I hope that you got a good impression and confidence from meeting the whole team or most of the management team of SolarEdge. We are very excited. We're very proud of what we together of course with all of the other employees and under the leadership of Guy have been able to do with the company in the last 10 years. And we're very excited about the potential and where we can together take this company going forward.
And I hope we were able to share that excitement as well maybe in a bit of a mellow style. We are and I think that was evident by the first slide that I showed, We are a company that prides ourselves in more in doing and less in talking. We probably have an obligation to talk to you more frequently. This was our first such event since 5 years of the IPO. We will aim and plan with all of the safe harbor protection to do this at least once every 2 years and get together in this forum and share in a similar way our plans and vision at this periodic level.
And if there are no further questions, we'll try and get back to doing and you guys can go do some drinking.