Ladies and gentlemen, welcome to the SolarEdge conference call for the third quarter ended September 30th, 2019. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Events Calendar page. This call is the sole property and copyright of SolarEdge, with all rights reserved, and any recording, reproduction, or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Events Calendar page of the SolarEdge investor website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, investor relations for SolarEdge. Please go ahead, ma'am.
Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2019, as well as the company's outlook for the fourth quarter of 2019. With me today are Zvi Lando, acting CEO and VP Global Sales, and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the third quarter ended September 30, 2019. Ronen will review the financial results for the third quarter, followed by the company's outlook for the fourth quarter of 2019. We will open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description.
All material contained in the webcast is the sole property and copyright of SolarEdge Technologies, with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with US GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with a means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter ended September 30, 2019, press release or the presentation may obtain a copy by visiting the Investors section of the company's website. Now, I will turn the call over to Zvi.
Thank you, Erica. Good afternoon, thank you all for joining us on our conference call. Before I begin, I want to address the unfortunate circumstances that have led me to this position. I was fortunate to work with our founder, Chairman, and CEO, Guy Sella, from 2009 and until his passing two months ago. I think everyone who knew Guy will confirm that he was not your typical CEO and that his vision, leadership, and dedication that led SolarEdge to become a world leader in PV smart energy technology will be greatly missed. Those of us at SolarEdge miss not only his leadership, but Guy, our mentor, travel companion, technology guru, and true friend. The SolarEdge executive management team, most of whom have been working together now for many years, are dedicated to continuing Guy's legacy forward through the continued success of SolarEdge. Now for our results.
I'm happy to report that once again, we concluded our quarter with record revenues of $411 million, representing strong growth led by record revenues in the U.S., where we often see upswing in business in the second half of the year, and record revenues in Europe, where typically the third quarter is not as strong due to summer holiday season. Similarly, we saw strength in growth in most other regions in which we operate. These revenues were based on record quarter in our solar business of approximately $388 million. With this record revenue, we have surpassed for the first time the milestone of $1 billion of revenues in a financial year, and this has been achieved through just the first three quarters of 2019.
This revenue growth, coupled with our gross margin levels at the upper end of our guidance and increased operational leverage, has enabled us to generate record non-GAAP net income and a record net diluted non-GAAP earnings per share of $1.21. In the third quarter, we shipped 1.5 gigawatts of AC nameplate inverters, approximately 598 megawatts of which shipped to North America, up from 430 megawatts shipped to North America in the previous quarter. Shipments to Europe consisted of 712 megawatts, up from 658 megawatts shipped in the previous quarter. This quarter, we shipped 543 megawatts of commercial products, compared to 591 megawatts in the previous quarter. This reduction is mainly a result of the higher demand in the U.S. for residential products and prioritization of the manufacturing mix on our production lines accordingly. This quarter, we shipped approximately 4.6 million power optimizers and approximately 188,000 inverters.
All in all, we have now shipped more than 45.4 million optimizers and 1.9 million inverters since launching shipments of products in January of 2010. On the noteworthy side, effective September 1st, we welcome to our management team Mr. Uri Bechor as our Chief Operating Officer. Uri brings to SolarEdge over 20 years of operational senior management experience, serving in both Senior Vice President and general management level roles at Flextronics International. In his last position, Uri served as Senior Vice President, Global Operations, Europe and the Americas of Flextronics, where he oversaw more than 40 manufacturing sites and was responsible for revenues of more than $10 billion. Uri has been a friend of SolarEdge since we began manufacturing in 2010. He was the general manager of Flextronics Israel, where we produced our first products, and he knows our operations team well, so his integration has been seamless.
As our operational needs grow and diversify globally, this is a much-needed addition to our executive management team, and we are grateful to have him on board. In order to address the increasing demand level for our products, we are adding manufacturing lines in China, ramping up manufacturing in Vietnam, and increasing the number of automated lines for power optimizer manufacturing in Hungary. This quarter, we shipped the first significant volumes of optimizers from the Vietnam facility, and inverter manufacturing will be initiated by year-end. The ramp of manufacturing is continuing as planned, and we are expecting that a major portion of the product supplied to the U.S. will be manufactured in Vietnam and Hungary by the first quarter of 2020. We continue to increase the number of our automated manufacturing lines for optimizers, and we now produce about a third of our optimizers on automated lines.
We have already ordered additional lines such that by the end of 2020, we expect that the vast majority of our optimizers will be manufactured by fully automated machinery. We already see the resulting improvement in quality on these production lines and in the field. At the same time, in recent months, we experienced an increased number of single-phase inverter failures and heightened call center activity. This was due to a combination of two reasons. First, releasing new products and capability is typically characterized by an initial period of stabilization until manufacturing processes are fully mature. Second, during this period, due to our growth in market share and increased shipments, there was a significant increase of new installers and accounts using our technology for the first time, and there is a short learning curve for them as well.
In the last months of the quarter, we and our customers have seen significant improvements on this front. Our strong growth in the last quarters, and especially in this quarter, comes with a price. The increased demand for our product and our desire to meet this demand in a timely manner, coupled with our need to increase manufacturing capacity much quicker than we planned, resulted in significant air shipments this quarter, which negatively impacted our gross margin. In line with the plan and expectations communicated by Guy in the last call a quarter ago, we expect this increased level of air shipments to continue and intensify in Q4, while capacity additions are expected to enable us to gradually decrease air shipments in the first quarter of 2020.
Having said that, we were able to keep our non-GAAP gross margins of the solar business at a healthy and steady rate of 35.4%, largely due to cost reductions and operational efficiencies. On the product side, we started shipments of the three-phase residential storage inverter Guy discussed last quarter. We already have a healthy backlog for this product, which gives us access to a large segment of the German, Austrian, and Swiss residential markets, for which we did not have an optimal offering until now. In the next few months, we will be releasing a series of new products for both the residential and commercial segments, including the integrated single-phase HD-Wave inverter, combining storage and smart energy capabilities, and larger power inverter and power optimizers targeting the commercial ground mount segments. A few comments regarding Safe Harbor.
We expect roughly $10 million of revenues in Q4 will be related to Safe Harbor, with the definition of Safe Harbor being product delivered today in order to be used in 2020 above the normal level of demand typically supplied in Q4 for use in Q1. We have orders and are working with customers on additional Safe Harbor volumes, which will be delivered in Q1 and Q2 for use in 2020 and beyond. These customers are both for residential and commercial products. On the new business side, we saw modest growth in revenues this quarter, and for the first time, we're break even from an operational standpoint, mostly related to higher gross margins on sales of Kokam. With this, I hand the speaker over to Ronen, who will review our financial results.
Thank you, Zvi, good afternoon, everyone. After reporting 18 quarters as a public company alongside Guy, I want to begin by saying that working with him was an honor, a daily challenge of every assumption and fact, an ongoing process of continuous improvement, and with all of it was truly fun. He is greatly missed. Before starting the review of our financial results for the third quarter of 2019, I would like to remind listeners that while the overview will be on a GAAP basis, in certain cases, I will be discussing non-GAAP numbers and measures which exclude stock-based compensation, one-time asset disposal, changing deferred taxes, one-time acquisition related expenses, amortization and depreciation of acquired assets, and cost of product adjustment related to the acquisitions of SMRE, Kokam, and the UPS division.
Expenses related to the impact on financing expenses of the revenue recognition standard and the adoption of the newly enacted leasing accounting standard, non-recurring expenses, as well as non-GAAP earnings per share. I will conclude this introduction by noting that the effect of the new acquisitions closed in the past 15 months on the GAAP result is meaningful as a result of amortization of accounting elements identified in the preliminary purchase price allocation studies that we have recently performed. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. For the third quarter of 2019, total revenues were $410.6 million, a 26% increase compared to $325 million last quarter and a 74% increase compared to $236.6 million in the same quarter last year.
Revenues from the sale of solar products were $387.8 million and were driven by strong growth in all regions. In line with the normal seasonality in this industry, which is characterized by increased revenues in the United States in Q3, U.S. solar revenues grew this quarter to $197.6 million and represented 51% of our solar revenues. These revenues did not include any safe harbor revenues. Revenues from Europe were $155.7 million, or 40% of solar revenues. Rest of the world solar revenues were 9% of our solar revenues. A similar geographic allocation is expected to continue in the fourth quarter of 2019. This quarter, the top 10 solar customers represented 68% of our quarterly solar revenues, an increase from the last quarter, and two customers continued to account for more than 10% of revenues, both of whom are distributors.
Blended ASP per watt increased this quarter, mainly due to price increases in the United States, which were implemented to mitigate the negative impact of the increase in tariffs on Chinese-made products from 10%-25%. The overall pricing environment for our products remained stable this quarter. This quarter, revenues from our non-solar products were $22.8 million, mostly driven by increased sales of lithium-ion batteries and energy storage products. Revenues from automated machinery products from SMRE and from UPS products were not much different from the last quarter. As the sales of these non-solar activities are characterized with positive seasonal effect towards year-end, we expect these revenues to continue and grow in the coming quarter. GAAP gross margins for the quarter was 33.9%, compared to 34.1% in the prior quarter and 33% in the same quarter last year.
Non-GAAP gross margin this quarter was 35.1%, compared to 35.7% in the prior quarter and 33.6% in the same quarter last year. Non-GAAP gross margins for the solar activities was 35.4%, compared to 36.9% in the last quarter. The substantial growth in revenues over an already significant revenue base require us to quickly expand our manufacturing capabilities. As Zvi mentioned, while this is well underway in our contract manufacturer site in China, Hungary, and Vietnam, we are not able to meet the tight delivery schedule without substantial air shipments. Air shipments this quarter decreased our gross margins by 254 basis points compared to the last quarter, in which we already air shipped substantial amount of products. Another negative impact on our gross margin is related to the increase in the US tariff on Chinese-made products, which increased in June from 10% to 25%.
Although these tariff increases were absorbed by our customers, the net arithmetic effect of the U.S. custom tariffs negatively impacted margins this quarter by additional 80 basis points compared to the last quarter. Those elements were partially offset by continued cost reduction as well as economies of scale, the overall result was 150 basis points decrease in our non-GAAP margins compared to the last quarter. Non-GAAP gross margin for our non-solar activities was 28.5%, compared to 14.9% in the previous quarter. Most of this increase is related to the sale of higher margin product in Kokam. Looking at gross margin for the next quarters, we continue facing strong demand for our products while our finished goods inventory levels are very low.
In addition, while our capacity building in Vietnam and Europe continues as planned, the Chinese New Year, which significantly slows down production, is celebrated this year very early, adding to the capacity planning complexity. In addition, the increased portion of U.S. revenues over our total Q4 2019 mix will further increase the negative arithmetic effect on our gross margin related to tariffs. Our Q4 2019 margins are expected to be negatively affected by an additional 100 basis points of air shipments, all on top of our Q3 margins. Moving to operating expenses. In total, operating expenses for the third quarter were $73.3 million, or 17.9% of revenues, compared to $65.3 million, or 20.1% of revenues in the prior quarter, and to $43.9 million or 18.6% of revenues for the same quarter last year.
On a non-GAAP basis, operating expenses for the third quarter were $54.8 million or 13.3% of revenues, flat compared to $54.9 million or 16.9% of revenues in the prior quarter, and $37 million or 15.6% of revenues for the same quarter last year. Our non-GAAP solar operating expenses as percentage of solar revenues were 12.3% compared to 15.3% last quarter, representing the continued operational lever we achieved as our solar revenues grow much faster than our operating expenses. This quarter, GAAP operating expenses included non-recurring expenses of $8.3 million related to the acceleration of equity awards and other payments related to the untimely death of Guy Sella. Our GAAP operating income for the quarter was $66 million, compared to $45.4 million in the previous quarter and $34 million in the same quarter last year.
Non-GAAP operating income for the quarter was $89.2 million, compared to $61 million in the previous quarter and $42.5 million for the same period last year. This quarter, our non-solar activities resulted in modest non-GAAP operating loss of $0.3 million compared to net loss of $5.2 million in the previous quarter, mostly related to increased revenues and better margins in Kokam. Financial expense for the quarter were $17 million compared to financial income of $0.8 million in the previous quarter and a financial expense of $0.7 million for the same period last year. The increase in financial expense in this quarter was solely attributed to unrealized exchange rate differences on euro balances, such as cash and accounts receivable as a result of our large sales in Europe and on intercompany loans related to the acquisition of SMRE.
Tax expense for the quarter was $7.3 million compared to $13.2 million in the prior quarter and a tax benefit of $12.3 million for the same period last year. Our non-GAAP tax expenses were $10.2 million compared to $14.2 million in the previous quarter, and a tax benefit of $0.2 million for the same period last year. GAAP net income for the third quarter was $41.6 million compared to a GAAP net income of $33.1 million in the previous quarter and $45.6 million for the same quarter last year. Our non-GAAP net income was a record $63.6 million compared to a non-GAAP net income of $49.3 million in the previous quarter and $42.7 million for the same quarter last year. GAAP net diluted earning per share was $0.81 for the third quarter, compared to $0.66 in the previous quarter and $0.95 for the same quarter last year.
Non-GAAP net diluted EPS was a record $1.21 compared to $0.94 in the previous quarter and $0.86 in the same quarter last year. Our non-solar business generated a $0.05 non-GAAP diluted earning per share loss attributed mostly to financing expensive differences compared to $0.13 loss per share in the last quarter. Turning now to the balance sheet. As of September 30th, 2019, cash equivalents, bank deposits, restricted bank deposits and investments were $432.9 million compared to $373.6 million on June 30, 2019. Our net cash position today is similar to the position we held prior to the initiation of our M&A activities 15 months ago. During this quarter, we generated $68.7 million in cash from operations. In addition, our balance sheet includes net debt of $21 million related to loans taken by Kokam and SMRE prior to our acquisition.
We repaid some of SMRE debt this quarter and are expecting to continue and do so in the upcoming quarters. In relation to the Kokam debt, as we previously mentioned, our current plans are to maintain this debt until we finalize our capital need for Kokam related to the increasing in cell manufacturing capacity. AR net increased this quarter reaching $292.2 million compared to $237.8 million last quarter. DSO this quarter in the solar business was 75 days, a slight increase from 74 days last quarter and mostly affected by higher portion of sales, which were delivered in the later part of the quarter. As of September 30, 2019, our inventory level, net of reserves, was $134.3 million compared to $148.9 million in the prior quarter.
The majority of this inventory for the solar business is raw materials, while our finished goods inventory levels are extremely low and only represent inventory in transit. Additionally, approximately $44 million of our inventory amount relates to non-solar inventory, the majority of which is raw materials held by Kokam. Moving now to the guidance for the fourth quarter of 2019. We expect revenues to be within the range of $410 million-$420 million. Revenues from the sale of solar products are expected to be within the range of $388 million-$398 million. We expect gross margins to be within a range of 32%-34%. Gross margins from solar activities are expected to be within the range of 33%-35%. I will now turn the call over to the operator to open it up for questions. Operator, please.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing *1 on your telephone keypad now. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please also limit your questions to one question and one follow-up before re-queuing. We'll try to take all follow-ups if time allows. Again, press *1 to ask a question. Our first question comes from Philip Shen with Roth Capital Partners.
Hi, everyone. Thanks for the questions. The first one is on 2020. I know you don't have official guidance for the year, but can you comment in general about the growth, perhaps qualitatively? Perhaps, do you see mid-teens type growth for megawatts or revenue? Can you also comment on what regions you might be seeing some strength as well as some weakness in? For example, Netherlands historically has been a big part of your business, and that country has grown substantially. Do you see any risk for that country to slow down at all as the grid gets congested there? Thank you.
First of all, thank you for the question, Philip. In relation to the 2020 guidance, as you mentioned, we did not provide the guidance yet. As we guided for the last few years, we continue to see, as we said all the time, a low double-digit growth that is usually translated for us between 15%-25%. This was what we said before. We have no reason to believe that we cannot maintain this in the solar business for 2020 and the years to come. I will let Zvi answer more about the markets themselves.
Yeah. I don't think there's any particular market where we are seeing weakness or expect a negative trajectory. There's a lot of potential growth, obviously, in Australia. There are some new markets evolving where we are investing a lot, specifically in South America, Brazil, and we also see a lot of opportunities in India. On top of that, we see a positive trend in all of the regular markets that we serve. Obviously, there are a few markets where our market share is at a very high level, and that is always a challenge to continue to grow. The Netherlands would represent one of those. At the same time, the commercial market in the Netherlands is expected to grow dramatically in size next year, and we are in a very good position in that segment of the market.
We do see and anticipate growth in that market as well, together with all of the others that I mentioned before.
Okay, great. Thanks. As it relates to pricing trends, I was wondering if you could comment kind of by geography as well as by segment for what you see for pricing. Specifically, what's the outlook for U.S. resi pricing, especially as you guys ramp up Vietnam and Hungary in Q1. Do you expect to eventually reduce pricing because the tariff won't be a factor? How do you expect the outlook for U.S. commercial pricing to trend as well as international resi and so forth with international commercial? Thanks.
Phil, with regards to the pricing trend, I think that other than in the U.S., where we did increase the pricing in June to overcome the tariff, we do not see major changes. I think that all in all, the pricing environment is relatively stable, and we do not see any change. Outside of the United States, we also see across all geographies, and I think across all segments, a very stable pricing environment. Most of the changes that we see are mostly related to fluctuations in foreign currencies rather than in the price of the products themselves, and therefore, we didn't see any major changes there. Again, we do not see any dynamic that should change it going into 2020, as you mentioned before. In general, we are ramping Vietnam.
We do expect that at a certain point of time, we will have more non-tariff or products that are not subject to U.S. tariffs. We said all along that our intention is to eventually pass this along to our customers as just, we were able to pass the tariffs along to them. We will do it in a gradual manner that will reflect both the ramp-up, the pricing that was stable in Vietnam, and also the ratio of the Vietnamese-made products in the overall mix of our products coming into the U.S.
Thank you. Our next question comes from Maheep Mandloi with Credit Suisse.
Hey, thanks for taking the question. Just from Philip's first question, could you just talk about the cadence of the shipments for next year? Do you see a similar seasonality as we saw in 2019? Just on the Netherlands market, we did see some news flow around a congested grid out there. Have you seen any concerns on that front as the market grows over there?
No. I'll start with the second part. No, we don't see any slowdown of the market in the Netherlands. It's a strong market for us, and we see strong demand. In regards to the first part of the question, I think as was discussed also in the previous call, as well as in our comments from today, we expect that in Q2 of next year, we will be at the point where we have a large enough gap between our manufacturing capability and demand and a much more stable environment in terms of supply and air shipments. Until that point, we will still be challenged with high air shipment expenses and some lumpiness in deliveries.
Got that. Second question, if you could just talk about the Q4 guidance. What are the growth rates or growth regions of the mix for international versus U.S. and residential versus commercial in Q4, how you see that shaping up? Then just a follow-up on the inverter failure run rates, which you spoke about, and how should we think about its impact on either new customer orders or the warranty costs going forward embedded in the cost structure? Thanks.
Yeah, I'll take the first part of the question and hand it to Ronen for the latter. In the fourth quarter, we expect Europe to be seasonally down and the U.S. to be seasonally very strong. We also expect the fourth quarter to be stronger on commercial and to resume growth in that area from the third quarter. I think that answers the question. I'll let Ronen deal with the second part.
Maheep, if you can just repeat so I'll be able to answer correctly. Maheep?
Hello?
Maheep, your line's open. Please repeat your question.
Hi. Yeah, thanks for opening the line. Yeah, with regard to the inverter failure, just want to understand how should we think about the failure run rates in Q4, and when do you expect a return to normalized run rates, and have you seen any customer deflections because of the inverter failure issues?
In general, we see a decreasing trend in our failure rates. It starts, first of all, from the more stabilized product that we see there, the optimizers, the three-phase inverters that are, I would call it, more mature product in general. We saw a decrease over time. We continue to see this. In our single-phase inverters, we see a decrease that we believe that will continue in Q4. When it comes to the expenses, we need to, of course, remember that the expense is not just related to the amount of failures, but rather to the cost of each and every failure treatment. Meaning, for example, do you use expedited shipments or not? Do you use a new product versus a refurbished product? Do you use a full product compared to a single card?
In general, we expect the actual expenses to go down into Q4 due to the improvement in the number of failures that we see and, I would call it, relatively controlled cost. We do not see any major changes there in Q4. In general, I think I basically answered everything.
Thank you. Our next question comes from Mark Strouse with JPMorgan.
Hey, good afternoon. Thank you very much for taking our questions. Just wanted to see if you could give an update on demand that you're seeing for storage, if you've seen any uptick or change in conversations with customers from events such as the fires in Northern California. Also, I know it's still kind of early, but the initial feedback that you've gotten from some of your new storage solutions you unveiled at SPI. I have a follow-up, please.
Yeah. For the first part of the question, yes, we do see increased demand as a result of singular events, and this has been the dynamic in storage for the last few years. We definitely see it in the last few weeks. That comes in parallel to a steady increase in storage adoption, but that's not a dramatic increase. It is more of a steady, low percentage rate increase. We see both of these phenomena, and we expect to ship in the fourth quarter and in the first quarter more storage systems than in the third quarter. It has not yet reached the point that the adoption rate of storage globally is really spiking and increasing significantly.
Okay, that's helpful. Thank you. Just if you can, an update on the competitive environment. If your conversations with customers have changed at all since SPI and in some of the competitive offerings that were unveiled at that show. Thank you.
Not really. I think customers know the difference between products that are out there and tested to products that seem attractive but are in a prototype phase. Most our conversations are with experienced installers and that are installers in large volumes and relate to our products and our issues, whether it's availability or other. We don't spend, and we didn't see much discussions about other alternatives, and we don't see any real impact on the conversation or the demand.
Thank you. Our next question comes from Brian Lee with Goldman Sachs.
Hey, guys. Thanks for taking the questions. I had two of them. Maybe to start off, a follow-up to one of the questions around pricing. Ronen, it sounds like you are, and you've said this for a couple of quarters, you're effectively going to cut pricing in the U.S. in 2020. I understand it's going to be gradual, but can you give us a little bit more just from a modeling cadence perspective, it'd be helpful. What quarter does that start? How many quarters will that flow through? Once complete, assuming all else equal mix, et cetera, would blended pricing be back to the low to mid $0.20 per watt range where it was last year before tariffs started to drive the pricing increases? I had a follow-up.
I wish you know that I can give you already the right timing that we can do it. I think that unfortunately, in basic, it is going to be very much related on the cadence of our ramp-up of Vietnam and also the demand that we see here in the United States, because those two elements are going to very much determine what is going to be the overall mix pricing that we see here between tariff and non-tariff products. In general, again, the view is that we would like our customers to get back the prices that we increased in order to overcome the tariff. We will do it. I don't know if it will be immediately in Q1.
I would expect it to take a little bit of time because even products that are produced in Q1 and shipped will take time until they reach the United States. To be honest, once we'll have a much better view on this, we will be happy to share so you can model it. In general, whatever we took in order to overcome this tariff issue, we would like to return to our customers eventually.
Okay. No, that's fair. Makes sense. Second question, just maybe a little bit on the competitive landscape as we head into 2020. Clearly, you've had good growth here and hung on to market share gains, if not expanded that through most of the year. I think one of your peers then Enphase inferred that they had one business, had a new customer, tier 1 installer in the U.S. that's historically been an important customer for you. Just wondering, can you update us or provide some more color on the competitive landscape in the U.S. as we head into 2020? How you're thinking about potentially mitigating some of that potential share loss here to appear. Just on the Safe Harbor, maybe if I could squeeze one last housekeeping one in.
The $10 million that you're guiding to for Q4, is that all ordered and shippable product before December 31st? How do you define the $10 million? Thank you.
Okay, I'll start from the $10 million, which is quicker. Basically, all of these are products that, yes, that are going to be shipped before the end of the quarter. These are basically, the way that we look at it, is simply products that without a Safe Harbor, might have been ordered and delivered in January. Of course, as you know, Safe Harbor takes many faces and forms, but this specifically relates to products that are to be provided this year and expected to be consumed next year. Now, in relation to the competitive environment and here in the U.S. or specific competitors. In general, I think that Zvi also alluded to this in one of his answers. We already have countries in which we have very high market share. The U.S., of course, is this one.
According to GTM, we're approximately 60% of the U.S. residential market. The Netherlands is one. When it comes to this market share, some of this market share we know, at least in the United States, was attributed to the fact that some of our competitors could not actually ship products, therefore, naturally, some customers came to us. I believe that those customers that came to us because of the fact that they couldn't get product, some will stay with us, some may go back. I also believe that as we are growing and becoming so strong and dominant, some of the other players would like to take second sources, which is something that, again, is very natural. We also, in our production, try to take second sources in any case.
I would say that in general, we do expect that we can continue and maintain our sales level in the United States and continue to increase them. We believe that if one customer, for whatever the numbers will be, will reduce the share using us, we have the ability to grow share with others. In general, we believe that we will not see any major effect on our business due to this specific issue, which simply is, I would call it natural market dynamic, where you have such a big market share.
Thank you. Our next question comes from Jeff Osborne with Cowen and Company.
Yeah, good afternoon. Just two questions on my end. Ronen, I was wondering if you could just touch on the manufacturing capacity challenges and what the current lead times are. Was there any revenue that, in particular in commercial, with that being down sequentially and the prioritization towards U.S. residential, is there a way to quantify what the foregone revenue was or what the demand was that you were unable to fulfill?
I think, starting on the capacity area, we increased capacity in the current quarter by about 15% or so compared to the prior quarter. We will increase capacity in a higher level, close to 40%, going into Q4. At the current levels, we are roughly matched between supply and demand, and that's why we're air shipping. I wouldn't be able to put a specific number on revenue number that was missed at this dynamic. There could have been a project here and there that someone needed product urgently, especially commercial product, because maybe a different inverter that they designed for wasn't available, and that opportunity was missed due to insufficient product in the channel. Generally speaking, at the current levels, supply and demand are matched.
We are aiming to, as I mentioned before, to reach a point in Q1 where there's a small gap between the two in favor of capacity, and in Q2 already to have a large gap that will allow us to have inventories and no one having to go elsewhere when he wants our product.
Got it. That's helpful. Just two sort of housekeeping questions. Is there a way that you can elaborate on the field failures? You alluded to some new customers. It doesn't sound like it was off-spec components. I think that's what you had highlighted in the past. Is this a communication module or something in the manufacturing process of the optimizer or the inverter that had an issue? I was just wondering if you can elaborate on what specifically was the root cause of the problem at the start of the quarter that you feel more comfortable with exiting the quarter. Maybe for Ronen, on the housekeeping side, my understanding is with Safe Harbor, you folks need to receive the cash by year-end. You talked about $10 million of revenue for this quarter.
Do you have any sense of what the revenue would be through April of next year and that cash that would need to be paid and in your hands by the end of the year?
I'll start with the first part of the question. As also mentioned in the note, the focus is on the single-phase inverters. Actually, on 3-phase inverters and optimizers, we're seeing stable and low failure and replacement rates, and they continue to trend down. On the single-phase inverter, as mentioned, it's a couple of phenomenas. The first are stabilization of the production line, not with any specific issue, but learning processes on handling, on some manufacturing processes that were causing some failures. As the corrective actions were taken, the failure rates declined. This, combined with what was mentioned, that we track very closely the new installers that are registering on our monitoring for the first time and doing their first-ever SolarEdge installation. We've seen an increase in that number.
We train them, but there is definitely a learning curve over there to know how to install our product quickly and robustly. That was a second cause. The third was we introduced, towards the end of the winter, the screen-less single-phase inverters that have a new method of commissioning that some of our installers, including veteran installers, had challenges to adapt to that new methodology in the initial phase. That wasn't necessarily a cause of failure, but definitely a cause of congestion in our phone lines, which I referred to as well. Those are the three dynamics that we saw pretty much between May and end of August and beginning of September. We're tracking all the relevant indices and are seeing a gradual decline since mid-September until now.
Jeff, with related to the Safe Harbor. Safe Harbor basically has two phases. For whatever you deliver before year-end, you do not need to get the cash in advance or to get it before year-end. You can get it based on the regular payment terms that you have. The second form is where you get the firm commitment plus cash before the end of the year for products that are going to be delivered into March and a little bit of April. I can tell you that we already have several of these transactions that were closed, both on residential and in commercial, by the way.
We also have a number of these kind of discussions with a number of our customers, some of them are large, some of them are smaller, where we believe that they will mature and, of course, we'll see money before the end of the year. As those are not yet necessarily closed, we do not feel comfortable to give a number now. I can tell you that, in any case, it's something that is being negotiated, and we'll see it towards the year-end, and we'll simply provide data then.
Thank you. Again, if you'd like to ask a question, please press star one. Our next question comes from Colin Rusch with Oppenheimer.
Thanks so much. Can you guys talk about your capacity to deliver storage at this point, both from internal and third-party suppliers, and what we can expect from a ramp cadence as we go forward?
Currently, we deliver storage-compatible inverters, but we are not delivering batteries, and all of those are being delivered by third parties. Our roadmap has us delivering batteries of our own towards the middle of next year.
Okay. I'll take some clarifications offline. As you look at your R&D spend as a % of revenue, it certainly seems like some capacity to increase some spend. What areas are you expecting to focus on over the next period of time, let's call it the next 12-18 months?
First of all, Colin, you're very much right about the fact that as a % of revenue, the R&D spending is going down. This is basically mostly due to the fact that we are increasing revenue so rapidly that it's very hard to match it with finding, recruiting, training, and bringing good R&D people on board. Therefore, certainly, we will see continued growth in the R&D. I would say that in R&D that you see today, you need to divide between the solar and the non-solar businesses. Both of them are reported in our R&D line in the operating expenses. On the solar side, it would be a combination of three major activities. The first one will be to bring the larger inverters, as we shared the roadmap, to have our larger commercial and towards utility inverters by the end of 2020.
A second one, of course, is always to continue and increase our product portfolio in order to meet segments that we're already operating but going into new markets and developing new flavors for the relevant markets, such as the product that Zvi mentioned for the German market storage. Lastly, is cost reduction. In our industry, cost reduction mostly comes due to the better engineering and displacing of components and not necessarily just from volume. I think these are the three areas that we put a lot of emphasis into solar. On the non-solar business, of course, each company has its own. On Kokam, it will be the work or mutual work on our future battery, as well as product that Kokam is already selling in their markets.
In Gamatronic, this is, of course, the next generations of the UPS products that are going to embed storage technology and knowledge and also better manufacturability that will allow to reduce the cost. When it comes to SMRE and IET, this is more of a, I would call it, startup kind of R&D, but it is related to develop future products where naturally the time of those products is a little bit longer in the life or in the expectation of revenues.
Great. Thanks so much, guys.
Thank you. That concludes our time for question and answer. I now want to turn it back to Zvi Lando for closing comments.
Thank you. In summary, we are happy with our third quarter results that show continued successful execution of our business strategy with record revenues and increased profitability. We are well positioned to continue expanding our businesses with new product offerings and in new territories and by leveraging our acquisitions. We look forward to continuing this momentum. I'd like to thank all of you for joining us on today's call.
Thank you. Ladies and gentlemen, that concludes the SolarEdge conference call for the third quarter. You may now disconnect your phone lines, and thank you for joining us this afternoon.