SolarEdge Technologies, Inc. (SEDG) Earnings Call Transcript & Summary

Hey, everybody. It's Jeff Osborne over at Cowen, sustainable energy analyst. Thanks for tuning in. Very happy to have live from Israel, Ronen Faier, the CFO of SolarEdge, joining us for our virtual conference that we've got going on this week. But maybe just to kick things off, Ronen. I imagine many in the audience are familiar with SolarEdge. But for those that aren't, is there a way you could just introduce yourself and the company for a minute or 2 on what you're up to, and I certainly had a series of questions to dive into.

Okay. Great. So my name is Ronen, Chief Financial Officer of SolarEdge for the last 10 years. I started when the company was about $60 million revenue, 100 employees. Today, we're at about $1.4 billion annually and 2,700 employees. The company started its way as an inverter company. We developed a technology we call DC optimized solutions that allows solar energy to be harvested in a more efficient way that provides better LCOI -- LCOE, good monitoring, meeting all of the safety regulations out of the box and enabling very, I would call it, flexible design by installers. Over time, we became the market leader in the United States and the larger inverter company in the world today. And over the last 2 years, we've acquired 3 companies that extended our capabilities into the storage business with a battery company that we acquired in Korea; the UPS, meaning uninterruptible power supply systems by acquiring a company in Israel; and the e-mobility market, where we acquired an e-mobility developer of EV engine in Italy. All in all, a technology company selling worldwide, that's about it, I guess.

Thanks for the whirlwind tour there. Maybe just topical for everybody is how your business was impacted by COVID-19. I don't know if we could start there and then drill into some of the particular markets and products. But what was SolarEdge's experience in Israel? Did you have any issues getting components or any lingering problems? I think the sales channel and residential solar has been well documented. But any thoughts on what -- how your company as a whole was impacted by COVID-19 would be helpful?

So it started with this disease in China somewhere in January where I think that most of us thought that it's going to be a supply issue, more of a demand issue. We manufacture today in Jabil in China, Jabil in Vietnam and Flextronics in Hungary. And when in the middle of January towards Chinese New Year, news about COVID started, we thought that the main problem is going to be a supply issue. And very quickly, we started to work in a solution to make sure that our supply is not affected. Luckily or not, we had people in the office during -- or sorry, in the factories during Chinese New Year, and we were able to ramp up. As the pandemic spread westwards towards, first of all, Middle East, Europe and then the United States, we clearly understood that this is a -- more of a demand issue rather than supply. And at that time, our supply chain was already settled and almost at full capacity. And then we started to deal with the situation by doing several things. First of all, is to operate the business. We have 2,700 employees in 28 countries. We work in every country based on the Ministry of Health regulations. So in Israel, we were able -- this is where our headquarters in R&D is. We were able to operate at, I would say, anything between 25% to 85% of the people in the office at any given point of time based on the government regulations. And at that time, we were able to close the quarter, release results, of course, and come back to almost normality. In Europe, very much dependent on each and every country. I would say that we started from complete shutdown in Italy through partial operational, I would call it, situation in Germany and Netherlands. And in the U.S., again, very much dependent but our California offices were closed and most of the work was done from the offices themselves. One of the issues that was very interesting for us, though, was how to monitor the effect of COVID on the market. And the best way for us to do it was by looking at how many new systems were connected to our cloud-based monitoring portal during the time of the COVID effect. And we saw very interesting phenomena. In Italy, we saw somewhere in the middle of February, a huge drop in revenues and -- sorry, -- and installation is not in revenues because revenues came before from sales, but installations of new products came down dramatically. But the interesting part was Germany, where we saw a very nice increase year-over-year in the amount of installations. We saw almost untouched situations compared to last year in the Netherlands and Australia and other markets. And in the U.S., which was one phase after everything happened in Europe about 3 or 4 weeks later, we saw a drop in March and April installations. And I would say that since then, we very much tried to respond to each and every market and helped wherever we can. So all of our marketing tend to be -- became virtual. We're actually launching a virtual trade show in the middle of July to replace a Munich trade show that was supposed to be there. We did many webinars. We were able to be very close to our customers, to our distributors. We kept in full contact with them. And all of this was, while continuing to operate the business and especially the supply chain in China and Vietnam to continue and manufacture. The end result is what we guided in the call. We see a drop in revenues compared to Q1 from $430 million to, we said, the range of $305 million to $335 million. But I think that what we also understand as time goes by is that the effect of COVID is very market-specific, country-specific and time-specific. So some countries were affected more than the rest but are already exiting at least the first wave. Some countries were untouched. And some countries, like in the U.S., are still yet to be seen now that people are starting to get out of their homes.

That's helpful. Specifically on the U.S., I mean you gave a lot of detail on the call about different states. And that's, in broad strokes, 50% to 60% of your revenue. Can you just talk about what you've seen over the past month or so as the markets rebounded? I mean certainly, the building permit data that we're seeing is improving. Some states like New York are still struggling. But what are some of the regional observations within the U.S. market that you could share?

So I'm not sure that we can share a lot. I can tell you that in general, we do see improvement over the last few weeks. And this improvement is, I would say, in most of the areas. So every area starts in a different situation. I think that, yes, as you mentioned, New York, Massachusetts will be a little bit slower to grow. And the same would apply for California, where we see a little bit of improvement. While in some cases, we saw almost continuous revenues as we saw before. So I think that the growth is everywhere. Again, different phases with New York being last, California, somewhere in the middle and the other states are a little bit quicker. But I think that's also the interesting part, and this is something that we don't see yet is how much of the sales of new systems are being sold right now? Because when you look at some of our peers in the industry, they sell the systems, later, they buy from our distributors and then we supply to these distributors. So it's still yet to be seen for us, what is the rate of sales and how those are being translated to new installations in the next few weeks.

Got it. And for those investors on -- watching, I think there's over 70 or so tuned in. But the -- and a couple of questions are coming in, there's an opportunity at the bottom of the Zoom screen to post questions. So I'll work them into the narrative in the back and forth with Ronen. But maybe just in terms of what you talked about on the last call and just to further amplify it, if you could, was around, investor concerns around channel inventory and sort of the disconnect of when you ship and record revenue. Can you just walk us through the visibility you have as to how much has been shipped and out there, either at your own distribution centers outside of Los Angeles or Poughkeepsie, New York, relative to the distributors? So the CED Greentech, the Kranniches, the Soligents of the world?

So it's -- first of all, by the way, let's not forget that 50% of our business is outside of the United States, and we know what's going on out there as well. But I'll start actually from that side of the ocean and then move to the U.S. Europe is, I would say, relatively unaffected. So I don't think that you see many looked or too much inventory in the channels there, given the fact that, first of all, Europe is now heading into the, I would say, hottest period for solar, which is the second quarter plus the fact that the effect of corona was a little bit more limited. In the U.S., it's -- while changing from one vendor to the other, I would say that what you see across the board is that in most cases, the nominal level of inventory is not different from what we expected to see or used to see in the last few quarters. But it's the measurement that makes people, at least in those channels, a little bit more alert. And what I'm referring to is that they do not just look at the nominal level of the inventory, but what is actually what called inventory on hand. How many days of inventory they have in their possession. And we usually look at it based on the last quarter -- last month's installation, which are naturally much lower in the United States compared to where they are. So I do not think that there are abnormal amounts of inventories in the channels from a nominal and amount of units. But definitely, the rate of pulling this out of the inventory is a little bit slower. This is why we also guided for the first time in our history for a number that was lower than the backlog that we had in our hands at the time that we actually guided because we knew when we talk again to the CEDs in the West Coast and the Kranniches, we have this constant dialogue with them, where basically, if we believe and they believe that the inventory level doesn't make sense, we didn't push anything to them in order just to be able to meet the numbers and we were preferring to be a little bit more, I would call it, cautious and tuned here to their needs. So I don't think that you see piles of inventories. And I think that once we'll see a little bit of pull out from the channels, we'll be able to assess better what is the situation. Right now everything is kind of tough because people are just starting to get out of their homes.

Got it. Several questions have come in from investors. So I'm just going to read for my dashboard here as they popped up. But -- so the first one that came in is, "How do you think about the growth of your business for the next few years post COVID-19 and the key underlying drivers?" So solar market share -- or solar market growth as a whole, your market share growth, any new initiatives? I know you had an Analyst Day sometime back, but that obviously was prior to the COVID-19.

Ages ago in November, yes. So it's a good opportunity to start by saying that the solar industry entered the COVID pandemic in a good situation. All in all, the market is growing. You saw consolidation in the last few years. Companies can make money, the economics around solar makes a lot of sense. So the entire industry entered COVID as, I think, a healthy industry. And I do not think that COVID is actually changing it dramatically. And I think that post COVID, unless there is a huge -- or kind of economic crisis that right now, by the way, none of the market is reflecting as an expectation, it's a healthy industry, and it's a healthy industry on its own merit, even before governments spreading a lot of money into the markets or pouring a lot of markets -- money into the markets to stimulate the activity. And as such, from what we saw or said in the Analyst Day, we do not see major changes. We still believe that in a clear of COVID environment, we can grow at least 15% to 25% year-over-year growth, and we believe that we can get this 36%, give or take 1%, gross margins. The drivers for these increase on the solar side are several. First of all, the markets are growing. The U.S. market used to grow before. The European markets are growing in general. We're now entering markets or started entering in markets in Latin America and Asia, all of them are growing faster usually than our overall growth. They just start from small base. And the narrative that we discussed about the ARPI, the average revenue per installation, is also working, as you see more and more batteries and more and more other accessories being sold, which actually allows us to grow the revenue from each and every installation. So all of these are in place, and we believe that the profitability of solar is not changing because of COVID. I think that what some people are missing, and this is something that, again, needs to be said is that we have other businesses that are also acquired then I think that can make a difference over the longer term. The first one is our battery company. We acquired a battery company in Korea. We're building our 2-gigawatt factory there. I must say that in Korea, not even one single day in the office was lost because of COVID. And we were able to continue and progress. In 10-Q, we already announced that we purchased the land for the factory. And we're also now in the design phases, and we do not see major delays there. So this is an opportunity of $300 million additional revenue in 2022, $500 million in 2023. This is still in place, and we believe that over time, it can continue and grow. As Zvi, our CEO, mentioned on the call, we started delivering test units to a Tier 1 automotive in our e-Mobility business. And while this is, again, longer cycle of sales, if and when you are selected, this is something that can generate a lot of revenues. So I think if you clean out corona and you go back to the November Analyst Day, not a lot, if at all, changed in our view on the market.

And a couple of other things you just brought up were asked specifically. So one question was about the EV mobility road map. And the press release this morning, I think we have a General Manager of that division. Is that -- should that be insinuated as that there's some progress there in commercializing it? It seemed to be, at the Analyst Day, I don't want to say I took away that it was more of an option or a lottery ticket if you did really well in that space. So it's certainly very, very low expectations in our long-term modeling. But now that you're adding headcount to it, has there been any developments in the past several months that give you greater confidence about that unit?

So first of all, yes, we announced today the nomination of Carsten to run our EV business. Carsten is a veteran in this industry, but it is not something that is related to a specific success or act. It's the fact that we do understand that we do not know how to do -- how to run at half pace. We either run with full force or not. We were looking for a figure that can bring a lot of knowledge that we as management lacked in this business. And Carsten brought, I think, is something that we look for a while, and we're very happy to have him. I think that the biggest progress we did, and this is what Zvi said on the call is the fact that we are already providing testing units and there are tens of vehicles driving in Europe with our systems on them. I think that we learn a lot, and we're able to develop a lot of the practices around how to work there. It's a little bit different than the solar business. But we need to understand that this is really not a sprint. This is a much longer run because the sales cycle and the certification cycle is very long in this industry. And usually, by the way, when you are entering this industry, it's not something that generates high-margins business at the very beginning. It's something that you need to carve over time, but the jackpot is if you use the lottery word before, the jackpot is very big because once you're there and you design in, you usually see large volumes for a long time, and it's very hard to get you out. So I think that we've put a lot of effort. We've put a lot of people in Italy. We're dramatically, I would say, strengthening the team there in areas where we in SolarEdge know how to bring, especially around quality and manufacturing capabilities, which is exactly what was expected. And we brought Carsten. This is strictly related to the business or to the testing that we have right now, but we do expect that we will see more.

Got it. And then you -- 2 questions ago, you brought up that the margins of 36% that you gave at the Analyst Day, but an investor was asking around the gross margins being under pressure and the guidance for the June quarter. Can you just talk about what your outlook is for the rest of the year and remind us of the puts and takes as it relates from the Q1 to the Q2 step down?

Okay. So let's start with 30,000 feet. In general, customers didn't see price -- price discounts or price changes from Q4 to Q1 or Q1 to Q2, unless these are related to volumes because we have volume-tiered pricing. And we haven't done any kind of a price move in the market, in none of the markets actually. What we did see though is a change in the mix that is a little bit abnormal instead of corona, and I will try to explain it. We see basically, today, 2 markets in which we operate, almost 2 distinct markets. The first one is the U.S. market. The U.S. market is, at least in the residential space is characterized with de facto duopoly between us and Enphase. Because of the NEC 2017 regulations where we meet out of the box, our solutions are very much fitting the market. The residential market is a little bit better on pricing. And in general, it's a higher-margin market compared to others because of these characteristics of the need to comply with the NEC 2017 that does not allow a lot of competition, at least to be as attractive as Enphase and us. The U.S. market is also more inclined towards residential compared to commercial, especially in the last few quarters or last 1.5 years. The result is that in the U.S., usually the business is carrying with it a little bit better margins. The second area is rest of the world and Europe. And here, it's almost completely different market. The first of all -- the first characteristic is that the competition is usually not other MLPE product. It's usually string products that either come from Chinese or European. And in this case, the prices are dramatically lower. In Europe, I would say that a residential system in Europe can be, on a string inverter -- the cost of the inverter itself can be around $0.16, $0.17, $0.18 a watt, if you're Chinese. And if you're a non-Chinese, it could be $0.20, $0.21 a watt. Our pricing in Europe is closer, of course, to those numbers, while in the U.S., it's much higher compared to Europe. In addition to this, in Europe, we see -- and rest of the world, we see higher portion or proportion of large commercial sales that at least at this time are carrying lower margins for us because it's a newer product where we did not complete many of the cost reduction cycles as we did with the other products. What happened in Q2 is actually a mix issue. We saw that on one hand, the U.S. market is declining, which is, I think, first time in many quarters that we see sequential decline in the U.S. market because of COVID. At the same time, the European market is very much growing towards the very hot season of solar. So now we have, first of all, bigger amount of Europe. Inside of Europe, we have bigger amount of commercial systems. In Europe, we sell in euro. So now we also see devaluation of the currency, the euro against the U.S. dollar, which further erodes margin. And at the same time, we do not have the balance of the U.S. sales with a slightly higher margins that allow us to grow. The end result is the lower margin that we see. But this is mostly coming from mix and geographical mix and segment mix rather than any price moves or any competitive pressures that we see from competitive solutions.

Got it. We've had several more come in. But what one I had on my end is that SolarEdge has been aggressively at least sending out e-mails to installers around an energy hub with Prism Technology, a sort of new Swiss Army knife version. I don't know what the Israeli version of the Swiss Army knife is. But whatever that would be sort of a jack of all trades, power electronics, EV integration, battery integration. So can you just talk about that particular product and how that launches over the next few weeks? And what -- given the added functionality, I assume you'll be able to monetize that? Is there anything margin-wise? It's like a cost reduction step down in itself. So sort of a multi-variable equation or multi-variable question about the particular new product that you launched in residential.

Okay. So let's start with describing what the product is. Until recently, whoever wanted to buy a battery and to have the ability to back up his home needed, first of all, to buy our second-generation inverter, which was not the HD-Wave one and needed to buy an additional box that we call the StorEdge. The result was a product that is a little bit -- is bigger, that is a little bit more expensive, by the way, and that is with functionality that was not yet optimized. And this functionality was not yet optimized by the fact that you needed to basically separate, in some cases, between what's called critical loads and noncritical loads. You could not back up your entire home with this product. You needed to dedicate a certain circuit. And also, the way that you are taking this product and you connect it to your electrical cabinet was a little bit more cumbersome. What the new energy hub is doing is several things. First of all, it's based on our HD-Wave technology, smaller inverter, much more integrated and much more advanced from technological point of view. The product itself allows you today to do what we call a full house backup. It allows you basically to just connect it to your electrical cabinet. And now all of your homes, all of your socketed home are connected and backed up. So now you do not need to make this selection between critical and not critical loads. In addition to this, the way that you install the product and you cable it and you connect it to the main board allows you a much quicker, I would call it, connection in the future of additional products. So for example, if you want to connect the battery, you do not need more circuit boards and more cables. You basically just connect the battery to the inverter. If you want to add our EV charger, again, it's very easy. And by the way, if you just want to put an EV charger that it's not even ours, you don't need to put another circuit on your electrical cabinet, everything can be connected to the inverter. In addition to this, it has the abilities of the backup, it has the abilities related to our home energy and home energy usage, the mySolarEdge app. And basically, this is now becoming in one box. This, what we call energy brain of your house that is being able to manage everything. So it's a smaller product, a little bit cheaper product, a much more integrated. It saves a lot on the actual installation and provides, of course, with the ability to add everything that the future holds, from storage, to home automation, to EV charging and everything.

Ronen, I think you're starting with 3 and 7 kilowatts or thereabout? Now you're going to eventually roll that out in bigger system sizes over time?

I believe so, yes. I believe so.

Several other investor questions came in a bit all over the map, so to speak, on scope. But one was on the EU Green stimulus that recently was talked about, are you seeing any type of initial positive impact? Obviously, longer term, I think there's some benefits. But anything this early in the cycle or your potential customers or existing customers are talking about from that?

Not yet. I think that everyone -- first of all, we saw it, of course, and we're already trying to figure out what it is. By the way, other than the announcement, we didn't see all the details related to it. And the devil is usually there. I think that -- and this is what I related to when I said that before government started to pour money into the market. We do see that in some cases, we believe that this new stimulus programs, -- there is one in Italy, by the way, where you get -- it's called Ecobonus. If you invest in a system, you can basically get back as a tax saving 110% of the cost of the system that you put over 5 years. It's a great solution that can be taken. I think that we're still waiting in each and every country to see what are the specific details on how to use it. We are located, of course, in every country in Europe. We have foot on the ground in each one of them. And we believe that over time, it is something that is going to continue and strengthen us. And most important, by the way, that it's not just given for solar, it's usually given for other energy initiatives. For example, in Italy, again, the idea is also to use our water and heat pumps. And all of these can be also used with our systems as well. We believe that there is a nice opportunity there. But again, we need to see the details before we can understand the effect.

Makes sense. Maybe just dovetailing on the energy hub commentary. Can you just remind us on the timing of selling -- today, my understanding is that you have to partner with LG for the battery typically as your partner, even with the energy hub. Can you talk about when Kokam would have a SolarEdge-branded battery, either with third-party cells or your own, what the timing of that sort of product road map is?

Yes, sure. First of all, by the way, today, we do not partner with LG Chem. Basically, you can buy an LG Chem battery. It's irrelated to us. You can just buy and it works and the same apply by the way for Tesla batteries. And in Germany to BYD batteries. But in general, yes, by the second half of this year, we'll introduce and start shipping our own residential battery. The residential battery will be based on third-party sales, at least at the beginning. And we believe that at least until beginning of 2022, we will have only third-party sales battery. This is coming by the end of this year. By the way, right now even from corona, the effect is not -- we were very much conservative about the effect related to the ability to certify the battery. We're now, from R&D point of view, we continue. Now we need to start mobilizing batteries and people. So I hope that at a certain time, we'll start to see less limitations on travel. But all in all, you should see this at least on what we see right now by the second half of this year and substantial revenues coming actually next year. We plan to launch this product relatively, let's say, cautiously, it's a product that is different from everything that we do today. The logistic is different. RMA is different. It's a much more -- battery is much more complicated to bring, how do you handle it with your third-party logistics center. Everything is much more complicated. So we're planning to ramp it relatively, I would say, cautiously at the beginning, but you should see it. In 2022, we believe that our -- or beginning of 2022, our Kokam 2-gigawatt factory will become -- will come online. And throughout 2022, you will start to see SolarEdge batteries with Kokam cells inside.

And 2 questions on the battery. Again, what's the margin impact as you sell those batteries? Do you have any anticipated pricing and how to think about what that means from a corporate average or segment margin?

So as we said on the Analyst Day, we expect it to be around 25% margins at this point of time. And at least from pricing point of view, we have not yet released it, we do not tend to be price leaders there. So we do not expect to drop the batteries. I believe that wherever you see today, LG, Tesla will be somewhere in this neighborhood, not on the very expensive side, but definitely not the price leader pushing the prices down. And I believe that the 25% is achievable because, at least right now the lack of supply really provides very nice battery prices in U.S. market.

And we've got a battery panel at 3:30 later today. But a question did come in. Is it NMC or LFP, what type of battery?

We do not do LFP. We will do NMC batteries. They're smaller, they're easier to install. We believe they are slightly cheaper. We believe that these are -- this is the right technology.

Is it -- just out of my own curiosity, is it 622 or what type of battery formulation?

Yes, it basically is.

Okay. Got it. And then the last one we have for investors that have come in thus far in my dashboard here is, "Any progress on the rapid shutdown regulations outside the U.S.?" Certainly NEC 2017 had a profound impact on yourselves and Enphase as a whole. I think there's been on and off discussions on for the past 3 or 4 years on a handful of other countries around the world, both in Western Europe as well as, I believe, Mexico in the past, if I'm not mistaken. But what are you seeing from your policy people or latest chatter, if you will? Do you think that's a reasonable likelihood that they'll see benefits?

I don't think so. Unfortunately, for us, I don't think so. In Europe, other than a little bit of chatter, we do not see anything really happening or a lot of push for this. In Australia, we hear a little bit of chatter, but nothing specifically. I would prefer to say that we see a lot of progress with that, unfortunately, this is not the case here.

I appreciate the honesty. But maybe another one actually just popped up on ShadeFix and SMA, which -- we have Enphase tomorrow and SMA on Wednesday. So obviously, so you're not all on the same panel, and you can't put the boxing gloves on. But the hypothesis of solving the problems that module-level power electronics solve in the software layer, is that something that you think is a reasonable outcome or successful or no?

Not that we see right now. First of all, we saw major flaws in this paper. From -- first of all, from the fact that it was written by someone who was employed by a company that was acquired by SMA, other than the fact that in some cases, the testing environment was nonrealistic in the way that you see in real life. In some of the cases, the tests were not applied equally to all of the systems. And therefore, it's hard for us to relate to this. I can tell you that there are multiple evidences in publications and tests that were done. In all of them, it was shown that module-level power electronics is better than most of the other solution in generating energy and can solve a lot of the problems in real-life scenarios, not when you put and you cover a full module with a piece of cloth. And at least today, we do not understand technologically, how do you do this. Now it's also another thing that we need to understand that shading is not the entire story because if you're looking today at this kind of module or these kind of solutions, how do you monitor each and every module? If you want to have safety, how do you have safety? How do you solve the issues related to the actual design constraints that you see today on panels? So MLPE is much more than just optimization. And again, also, optimization was proven before as being real and happening. I think that there are many other attributes that are there that this technology is not solving. I cannot tell you that we didn't get a lot of questions, we got a lot. From what we explained and what we understood, after talking to our installers, I think that it's not -- it doesn't seem right now it's something that is catching a lot of, let's say, attention to something realistic that can realistically replacing optimizers.

Makes sense. What -- a common question I get from investors and I had on my list to ask you and one's come in also earlier around margins. But I think the things that has gravitated investors to Enphase is around sort of the nomenclature and naming of product cycles. You folks, maybe 3 or 4 years ago, had that event with HD-Wave. If I heard you right, around the new Prism Technology that you have with the integrated solar and storage. That then benefits from the older HD-Wave, and at a system level, should have improved margins. And so be it maybe not a higher price, if I heard your answer right. But specifically, what are the initiatives within SolarEdge to drive down cost and improve gross margins as we look forward? It seems to be a lot of small things that add up to a big thing as opposed to one big sort of product cycle like you had in years past. I think you've talked about, like, the automated production of optimizers, I don't know where we are in that journey. But can you just walk us through looking out over the next 18 months or so? What are, like, the 3 biggest things that SolarEdge is doing to improve gross margins? I know one would be the shipping and not having to put things on FedEx anymore would be a huge one. But aside from that, how do we think about product and production-oriented issues?

So I'll divide it to -- let's call it, logistics and then to the product. On the logistics side, the first thing that we do, by the way, is we're gravitating more and more towards Vietnam and Hungary, when it comes to products coming into the United States, which in turn will reduce the tariffs that we pay on product that's coming from China. And our Sella 1 factory, just north of Nazareth, I was there last week, 21st century factory, of course, will also allow us to manufacture a little bit more outside of China, but also to improve dramatically the manufacturing processes. So the first thing is that the less you see China, of course, we're able to drop some of the costs associated with the tariffs. The second one, as you mentioned, is the capacity. We've built a lot of capacity or plan to build a lot of capacity for 2020. Some of it is something that we're stopping right now due to corona, and we'll simply back to an increase over time when we see the effects of corona going away. But I believe that right now we have enough capacity. We already have boats with goods going to the United States and Europe. And as we said on the call, I believe that in Q2, we will have very minimal air shipment, if at all, which will allow us to take, at least in Q1, it was 210 basis points of weight that we had on our neck when it comes to this. And I think that this is something that is only, I would call it, logistics and planning. On the product side, there is no single thing, like, next-generation that is going to decrease the cost dramatically and change the margin profile. This is not the case. But in real life, we have multiple elements that each one of them can contribute to cost reduction. We used to call it the magazine of cost reduction, bullets. And we simply prioritize them quarter-over-quarter, and we implement them. This is a work that we needed to do before, and we did it very effectively until middle of 2018 when the component shortages basically moved all of our R&D to deal with how to displace components that you do not get. And in 2019, we came back to this. We still see very nice abilities to continue and reduce the cost, both in the optimizer and the inverter, on simply changing a little bit the layout, using different components and looking into some other solutions, especially around our ASIC that will allow us to reduce the component count. The last thing is the manufacturing methodologies that help us to [ weigh in ]. Manufacturing methodologies mean basically to move, and we're very close in this stage to replace all of our optimizer manufacturing lines to automated assembly lines. It was supposed to take us a little bit more time, but now that we increased a little bit the capacity because of corona, so we're able to ramp up a little bit quicker on this one. So this reduces 2 things. First of all, the cost of labor, which is very important. But also later on, the cost of workmanship errors and failures that are coming because of the fact that humans are involved in the manufacturing. None of this will bring into a step function change in the margin profile. The biggest step function will be once we'll have the U.S. to balance our European and non-U.S. sales, this will be the first one. But then again, as we said all along, even when we stabilize all of this, we believe that the 37% or 36%, give or take 1%, is the right level for us. And from that point, we will utilize those margins to take more share and enter new markets because we are counting eventually EPS, and we would like to continue and grow and not to be just focusing on the margins and not on the overall profit.

Sure. A very -- we're out of time, but 2 very quick ones, if you can do it in 60 seconds or less. One, utility-scale inverter. Is it still on track for a late issue?

Still on track. We will present it by the end of this year.

Okay. Great to hear. And another one came in from an investor. Again, need a quick answer here because we have to move to another session. But considering the growth opportunities highlighted in solar, why are you investing so much outside of solar such as mobility, where competition is fierce and the outcome is very uncertain?

As they said, when Mallory was asked, "Why do you climb the Everest?" "Because it's there." The opportunity is there. We have the technology. We believe that the technology for all of these areas is very common compared to what we have to solar, we can leverage on this. And eventually, we believe that everything will be tied together, EV, solar, UPS, batteries are all connected together. Once you benefit from this one, you can benefit from all of the rest. We want to be a large company in many areas but all of them are coming from the same core technology.

And has the HD-Wave's platform has applicability to all of those different areas, is that the right way to think?

I wouldn't say it's the HD-Wave platform, but principles that used us in -- that we use in HD-Wave are there.

Okay. Well hey, I appreciate it. I'd love to keep going. I can ask you questions for an hour or so.

Thank you very much. Keep safe and healthy. Hope to see you face to face one day.

Yes. Likewise. Have a great evening there in Israel. Take care.

Thank you. Bye-bye.

Thank you.