Welcome to the SolarEdge Conference Call for the First Quarter ended March 31, 2023. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Event/Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved, and any recording, reproduction or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event/Calendar page of the SolarEdge Investor website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31, 2023 as well as the company's outlook for the second quarter of 2023. With me today are Zvi Lando, Chief Executive Officer; and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the first quarter ended March 31, 2023. Ronen will review the financial results for the first quarter followed by the company's outlook for the second quarter of 2023. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release in the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe that they provide investors with the 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 or as a substitute for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended March 31, 2023 press release, or the supplemental material 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, and thank you all for joining us on our conference call today. Starting with highlights of our first quarter results. We concluded the quarter with record revenues of approximately $944 million. Revenues from our solar business were at a record $909 million, while revenues from our non-solar business was $35 million. This quarter we shipped 6.4 million power optimizers and 330,000 inverters. This quarter we also shipped 221 megawatts hour of residential batteries, a slight increase from last quarter. Our solar business revenue grew quarter-over-quarter by 9% and by 49% year-over-year, mostly driven by record revenues in Europe and Rest of World. We saw record revenues in many countries this quarter, including Germany, Austria, Switzerland, France, South Africa and Australia and very strong revenues from the Netherlands and Italy. Considering this was a record revenue quarter from our non-U.S., non-Europe region, I want to share a little more information about the geographic landscape which we define as Rest of World. Revenue this quarter from these regions were up 30% quarter-over-quarter and came from 24 countries across the Asia-Pacific, Africa and South America. Noteworthy countries in size of market and revenue include Australia, Israel, Taiwan, Thailand, Korea, Brazil and South Africa. What I think is often overlooked is the extent of our geographic presence and the growth opportunities in these regions. For example, in South Africa, were due to a significant increase in power outage frequency and duration, we are seeing unprecedented demand for solar product, including our residential battery, or in Japan where a recent regulation of the Tokyo Metropolitan authorities has created a special incentive for PV systems with module level power electronics for which we already have local certification. As we have said in the past and is evident this quarter, our global…

Thank you, Zvi, and good afternoon, everyone. This financial review includes a GAAP and non-GAAP discussion. 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. Segment profit is comprised of gross profit for the segment, less operating expenses that do not include amortization of purchasing tangible assets, impairments of goodwill and intangible assets, stock-based compensation expenses, and certain other items. Total revenues for the first quarter were a record $943.9 million, a 6% increase compared to $890.7 million last quarter and a 44% increase compared to $655.1 million for the same quarter last year. Revenues from our solar segment, which includes the sales of residential batteries were a record $908.5 million, a 9% increase compared to $837 million last quarter and a 49% increase compared to $608 million for the same quarter last year. Solar revenues from the United States this quarter were $255.5 million, a 16% decrease from the last quarter, and a 4% decrease from the same quarter last year, representing 28.1% of our solar revenues. Solar revenues from Europe were a record $577.1 million, a 22% increase from the last quarter, and 102% increase from the same quarter last year, representing 63.5% of our solar revenues. Two countries in Europe represented well above $100 million each, and we achieved record revenues in several countries. In particular, we saw meaningful quarter-over-quarter growth in Germany with 17%, Switzerland with 177%, Austria with 253% and France with 31% growth. Revenue from batteries grew slightly this quarter in Europe, limited by the fact that we are still renting three phase inverter supply, which is needed for a battery coupled system. Rest of the World solar revenues are a record $75.9 million, a 30% increase compared…

[Operator Instructions] We'll move first to Brian Lee with Goldman Sachs. Your line is open.

Hey, guys, good afternoon. Thanks for taking the questions. Just had two, First one, kudos on the gross margin execution here. Clearly, the outlook for 2Q as you've acknowledged, Ronen is ahead of the long-term model. So just wondering if this should be the new level for the rest of this year to be thinking about, or maybe kind of what the levers are here going forward. And then what would make you consider adjusting the long-term targets at some point, and then I had a follow-up.

Okay. So first of all, thank you, Brian. So currently we're not adjusting our numbers compared to what we've guided before. Although indeed, the gross margins that we presented for the next quarter are above was misguided. In many senses, we've improved the margin drivers especially related to the logistic costs, and of course, some of the pricing differences related to the fact that the euro was a little bit better, and it did affect some increases of prices at the beginning of the first quarter. And this is very much impacting gross margins favorably. At the same time, we do know that we expect to see some changes to the mix of our product offerings and sales over the next few quarters, especially with higher amount of batteries that will be shipped. And these are characterized with a little bit of lower gross margins. So on one hand, we still have opportunities to continue to grow gross margins after a long time, but we dealt with component changes, we are doing cost reduction activities within our R&D organization. There are still places to improve the shipment costs and the higher inventories that we have in general, certainly -- in our warehouses, at least certainly help this one. But since we do expect that we'll see some changes at least right now we are guiding for a higher level, will remain for a few quarters, looking at what are the market trends that we see and what is the adoption rate, the future of our product. And then we will decide whether we need to change anything.

Okay, makes sense. Fair enough. And then just again, kudos on executing well in Europe here. There's been more and more chatter. I feel like to start the year around a potential slowdown in that region. And then also some concerns around maybe pricing getting tougher there. So maybe, Ronen, maybe walk us through how much visibility you have in Europe for the second half? It seems like that's a region that has more visibility and historically has had more visibility, the way ordering happens there versus the U.S., but maybe if you could walk us through that. And then also on pricing, what you're doing there, commercial ready, and then also what you're seeing from competition on the pricing front. Thanks, guys.

Yes, Brian. In regards to market dynamic, we don't see right now a change in the pattern of demand in the market in Europe. Power prices have reduced to a certain extent, but they're still quite significantly higher than in the past and the return on the investment is good for both consumers and businesses. And we don't see at least until now any change in the dynamic in the market continues to be strong. On the competitive side, yes, many companies have -- availability of product has increased and the market become more competitive in that regard. And more similar to market dynamics as a test where we are competing on the basis of availability and more on the basis of value and the premium capabilities of our solution, and the other advantages in service and presence. So it's a dynamic that we've lived with for more than 10 years, and are quite comfortable with our ability to obtain premium pricing for our products and solutions.

We'll take our next question from Colin Rusch with Oppenheimer. Your line is open.

Thanks so much guys. Can you talk a little bit about the R&D staff returning the product evolution and cost of programs, rather than just qualifying the components and when we might start to see some incremental improvements on the underlying cost structure for both solar and the battery products?

So, definitely, there's been a shift. I can't quantify exactly, but if at the peak times during last year, we would have suggested that about 60% of the R&D organization is dealing with finding alternative components in order to maintain and keep manufacturing products, that number declined significantly. And on top of we've been able to redirect the R&D resources to focus on, first of all, on development of new products and cost reduction in parallel to adding more R&D resources globally. I don't want to give the exact issue because I don't remember it right now just as quantities and ratios, but there's definitely been a change in that regard. Typically, cycles for cost reduction are a few quarters long until we implement the changes and then put out initial units for qualification. So usually, that type of effort translates to actual cost reduction in the production line, probably in the range of two to three quarters, after we actually put the R&D resources on it. That’s it. Does that answer the question?

Yes. Sure. Thank you so much. And then looking at the battery production, obviously, there's been a lot of movement in and around raw materials. Can you talk a little bit about what your supply chain looks like in terms of pricing, and how that's trending here in the next several quarters and how much of the -- those input prices you've been able to pass on, in some of your forward contracts and models for some of these customers.

Sure. So, when it comes to the battery, we have basically two streams for the battery cells. One is the agreement that we have with Samsung and the other one with the second player that we came up with close, in both cases, as is the case. by the way, in all very major battery supplies, there is a dynamic where the cost of the battery cell is following the ability or actually the price the -- index of raw materials used by the various manufacturers. And therefore, it's a very technical process where at the end of every quarter, there is an adjustment of the price of the battery sales based on the changes in the various raw materials that are comprising it. On top of these there are of course, all of the elements related to the mechanical parts and manufacturing. And here in general, the bigger the amounts are and -- the bigger the volumes are, you see economies of scale getting a little bit more of a buying power when buying those. The other elements that we need to take into account is the fact that we are, of course, ramping seller to and once we will have our own battery manufacturing, then the cost of our products will be tied again to the actual costs related to the material manufacturers not to sell manufacturers anymore, but actually the materials manufacturers. And here the agreements that we have are following again, price indices in general what we see right now, these [technical difficulty] indexes related to the materials that are making batteries are generally moving down, although not yet at the level that we used to see before. So this is a dynamic that we see right now. And we believe that as we grow, we will be able to take more advantages given our economies of scale here.

[Indiscernible] Thanks guys.

Thank you.

Philip Shen with ROTH MKM. Your line is open.

Good morning. Thanks for taking my questions. Congrats on the strong results. First question here is on pricing as a follow-up or checks with a bunch of your customers in the U.S suggest the home hub inverter pricing maybe have been lowered by 10-ish percent effective May 1 in the U.S. Can you talk about that at all? Is it true? How do you expect price in the U.S trend? Are you still -- our guiding really strong margins in spite of this, if true. And also, we were in touch with the European distributor recently, and they're seeing more and more availability of inverters. And I think Zvi you were just talking about you're not -- hitting less on the availability of inverters. But curious to see if you can talk about pricing as well in Europe. They're expecting and looking for a price reduction on that confident as well. So thanks for the additional questions on pricing here. Thanks.

Yes, so starting from the U.S., these in the US, we did repricing of the single phase offering in order to encourage usage and what the market needs of the energy how that leads to the easier attachment of batteries later on. So -- it is the -- in effect, it's more expensive than the normal inverter and on some of the models, it's like lower than it was prior. The overall effect is actually a price increase, and we think it will improve or for sure not hamper the bottom line. In terms of the dynamic in Europe, as I mentioned, this is a -- its back or in a mode of competitive environment, as you know, in Europe. Some of the elements that I discussed before and certainly with the importance of software solutions and energy management components is becoming a very critical differentiating factor between technologies and alternatives. So it continues to be driven type of application. And that's among the reasons why at this point, at least we don't have a plan for any type of broad based price reductions in Europe.

Okay, great. Thanks for that clarity. And then, in terms of the channel inventory, can you talk us through what it might look like in the U.S.. Our check suggest it might have been -- might be a little bit heavy in the U.S. Whereas in Europe, it seems like it might be still tight there. Do you expect master destocking at some point? Just talk us through what you're seeing with channel.

So there are, Phil, I think that your -- the notion here is right. We do see a higher levels of inventory into channels when it comes to what we call weeks or days of inventory on hand compared to Europe, where I would say that U.S., I would say is relatively okay, when it comes to levels of inventory. But because of the fact that some of the sales are a little bit lower, than you see that the weeks of inventory in hand are a little bit higher. And in Europe, we actually see low inventory days on hand. This is by the way, the dynamic that we said related to the higher inventories in the U.S are actually more related to our single phase in water because wherever we're looking at our three phase inverter inventory into channel, this is a place that we see almost across the board in C&I that we see relatively lower levels of inventory. But that regard is that something that I think, more important to mention, and this is that when we are looking at Europe, for example, not only that, we see that the level of inventory is relatively not high, but it's actually that we see record sell out of products coming from the distribution channels. So here again, it's a kind of a double impact. Not only that you don't have a very high-level, it's actually being sold much quicker. And this is something that at least in the U.S right now, we see again, relatively normal levels, but the sell out is a little bit lower.

And we will move next to Mark Strouse with JPMorgan. Your line is open.

Yes, good afternoon. Thanks for taking our questions. I wanted to talk about the C&I business. We talked about this on the last call, the amount of backlog that you have given your visibility for the rest of this year. I'm just at a high-level though curious, some of the weakness that we're hearing about kind of on a macro perspective from the just the general commercial real estate market, is that starting to impact your pipeline funnel opportunities that might manifest in 2024 or later

No, the backlog for C&I is very strong for the remaining of the year. And as I mentioned in the remarks, we are still behind in terms of being able to increase capacity to meet it and this is true globally, there might be here and there some markets that are slowing down a little bit, but other markets that are accelerating. So overall, as also when you -- you look at the reports that I've seen, regarding the expectation for the year-over-year growth in C&I in the US market is expected to be higher than that of the residential. And this is a phenomenon of our knowledge we're seeing globally for the same combination of reasons that I mentioned, the higher power prices and the ESG motivations. And we're engaged in several portfolios of multinational companies are installing systems in several countries on their facilities, warehouses, manufacturing sites, et cetera, for ESG purposes. So as far as we see that the C&I market is, is robust, and our backlog is very strong.

Fair [indiscernible] very clear. Thanks. And then wanted to come back to the comments about U.S manufacturing in 3Q. Are you able to provide more color there as far as where you are in that process, as far as building up tooling, whatever it might be? And then is there any initial color that you can give us as far as kind of quantifying what that output might look like in 3Q, and kind of what the expectation is for that to ramp over the next few quarters?

Sure. So first of all, as we mentioned before, our approach to U.S manufacturing is divided in -- first starting with a contract manufacturer in order to be very fast to the market and to be able to capture U.S manufacturing as soon as possible. So since we are already of course engaged with the contract manufacturers, we already have seen that we're a trained on how to make our products. One of the bigger benefits that we have by having Sella 1 is that when we have a new factory that's supposed to ramp up, we can bring people from that factory to Sella 1 to learn how to make our products, how to build them and how to basically consider the line. This is something that was already done, and I can tell you that we are in process of getting equipment to start manufacturing in Q3, starting to build, training the employees around it. In Q3, still, we're going to see relatively small amounts. And we believe that within 3 to 4 quarters, the contract manufacturer capacity will be built. One of the reasons for this process is because we want to make sure that the quality of the manufacturing also is at the right level, and we want to make sure that we take the right time to do this. At the same time, we are working on our own factory that will be also built been operated by us. We're already in advanced negotiations related to the location of this place. And here, as mentioned, since it will require a little bit more innovation it is something that will take us, I believe, at least a year to start having products coming out from the end of Q3 this year. So I believe that it's going to be in the second half of next year. In general, we intend to have all products coming to the United States, to be manufactured in the United States. So here I think it's more related to the pool from the market rather than our capabilities, we will make sure that our access that are -- we will have excess capacity or enough capacity to cover any demand that comes from the U.S. once we have these two factories ramp up.

Very helpful. Thank you.

And we'll move next to Michael Blum with Wells Fargo. Your line is open.

Thanks. Good afternoon. I wanted to go back to batteries for a minute. It looks like shipments are still not quite taking off. And I just wondered if you could talk about where attach rates are trending both in the U.S. and Rest of World. And should we expect battery shipments to be somewhat constrained until the three phase further supply catches up with demand. Thanks.

Yes. So in the U.S., the attach rate are growing -- let's put it, growing very slowly. We expect it to shift to NEM 3.0 and as people begin to understand how to sell it. And for the reasons that I mentioned during the comments before, we expect the attach rates to gradually increase in the next quarters. In regards to Europe, this is as Ronen referenced in his comments that we are seeing very strong demand for the batteries and actually, the constraint is the availability of our inverters. So we're trying to ramp in further shipment as much as possible because without an inverter, people don't have what to do with the battery. So as we continue to increase our capacity on the inverters, we believe that the volumes of batteries would increase as well. So generally speaking, we are expecting, and we want to also refer to that in the comments about the model and the impact of -- on the margin that the ratio of batteries in our overall -- and our overall shipments will be increasing in the coming quarters.

Great. Thanks for that. And then I wanted to just go back to your prepared remarks comments about rest of world growth opportunities around the countries outside of Europe. Are those markets primarily residential? Are you also seeing strong demand for C&I? And any color you can provide there would be really helpful. Thanks.

So most of those markets are actually much more tilted to the C&I than to residential. Among the markets, as I mentioned, the strongest residential markets are Australia, and Israel the good residential market and South Africa is evolving as a reasonable residential market as well as Brazil. But the C&I portion in almost all of these markets and in particular, in the Asian markets like Taiwan and Thailand, places like that are heavily tilted towards C&I, but they are sizable markets. I don't remember right now for each of these markets, but they're in the hundred megawatts, if not gigawatts scale for many of these countries in terms of the size of the market overall. And like I say, C% to in many cases.

Thank you.

And we'll move next to Corinne Blanchard with Deutsche Bank. Your line is open.

Right. Thank you for taking my question. The first question I want to go back on the European market and trying to get a sense on expectation in 2Q and 3Q versus the first quarter? Can we expect the same growth in the same cadence there?

So without getting into specifically what growth rate we expect in each market and how that fits into the guidance. As I commented, we see continued strength in the European market, for both applications of residential and commercial. And in both cases, most of the European residential market, not all of it, but a lot of it is three phase based. And obviously, all of the C&I market is three phase based. So there, our growth is less dependent on demand. It's more dependent on our ramp of manufacturing, which I mentioned, will take us another couple of quarters until we are at a full scale of matching the supply to the demand. But right now, we continue to see the European market strong, and we are sitting on a robust backlog that we intend to deliver between now and the end of the year.

Okay. And then my follow-up is a similar question more from the residential versus commercial megawatt hour ship. You had I believe you had a 7% or so decrease quarter-over-quarter for the residential one. Do you -- how should we think about it going forward? And I believe the slowdown is mostly driven by the U.S. Should we expect like flat number? Or do you expect further decrease in there?

So again, I separate for a minute between the U.S. and in Europe. In Europe, the situation is more dependent on our supply and our intent is to continue and increase capacity of three phase residential inverters. So the outlook is for likely growth. In the U.S., the dynamic is more market related. And as I mentioned in the remarks, we think that like it happens, by the way, in many markets where there was a significant change in regulation or in the financial atmosphere, it takes the market some time to adjust and to learn how to sell under this environment and how to install under this environment. So it's true for them 3.0 in California, and it true for the rest of the market and the interest rate. So how long it will take for the market to adjust? And is this the bottom level or and is it going to begin to increase? Or is it going to remain flat? I don't think we have a good specific indication on that. But as I mentioned, in terms of midterm, we feel that the dynamics are positive, both from solar adoption point of view and the ITC and everything around it and from our position and technology.

All right. Thank you. I appreciate it.

And we'll move next to Julien Dumoulin - Smith from Bank of America. Your line is open.

Hi. This is Morgan Reed on for Julien. Can you walk through the moving pieces to get to the gross margin improvement quarter-over-quarter? What's coming from cost declines and price increases, FX benefits, shift in mix, things like that. Just curious to try to understand what's driving that.

So personal again, without going into the numbers themselves because the amount of moving parts is growing. I would say that we divided to basically, I would say, two main areas. The first area is the difference between the price of the product that we are manufacturing the product that we're selling this is mostly related usually to currency changes and to mix changes. In these cases, the currency changes definitely helped because of the fact that the euro came back to a level of about 1.8%, 1.9%. And as we mentioned before, at euro of $1.10 per euro were almost on par in margins when it comes to the United States. And therefore, of course, stronger euro is helping there. At the same time, we did see -- and I think that you see it in our numbers, our commercial products within the mix that are characterized with lower gross margin with substantially higher this quarter. So in that sense, the 2 phenomenas were relatively similar in size and not contributing or reducing dramatically the margin difference.

Most of the improvement that we saw this quarter came from other elements that are not related to pricing or manufacturing costs, and these are all of that are cost-related to the supply chain. So by definition, the more streamlined manufacturing we had the shipment costs that used to be elevated went down not yet to levels that they were before. So there's still a little bit of a room to grow there. And I think that it's evident in our margin for the next quarter. And we also saw because of the fact that we have a very streamlined manufacturing, the fact that some of the charges that we used to get from our contract manufacturers did not exist this quarter because they were working at the whole team, having all of the ships occupied. And that's where most of our, I would say, advantage came this year. As mentioned before, we are already getting close to where we see ourselves in our model from the various costs. And from now on, we expect that most of the changes will be related to the mix of the product. So definitely, more batteries would reduce the gross margin, even though, again, on operating profit margins, we are talking about an increase because of the operational leverage that they create. We still see some tailwinds that can help us some shipping and other manufacturing costs. And of course, the currency is always a mystery because we do not know how to project it. At least right now, it seems to be either stable or possibly favorable. But again, this is something that very much changes. So in all aspects, I think that we are getting closer to where we want to be on a model. And I think that right now, the mix of the products will be the thing that will take most of the, I would call it, the driver driving forces when it comes to our gross margin.

That's really helpful. Thank you. And I guess you alluded to it earlier, the improvement in the operating margin kind of throughout the year. I know previously, you had given the sort of guidance of maybe like 20% to 22% operating margin towards the end of this year as we exit. I'm just curious how that's faring given sort of the stronger gross margin than maybe we had expected midyear here. So just curious if your operating margin expectations are changing at all, given the strength of the gross margin line and operating leverage still to pulled in here?

Sure. So here, definitely, we continue to see the operating leverage. We've mentioned before that we expected to see our gross margins getting to the target levels by the end of Q2 and the operating profit margins are at the end of the year to exit the year. In that sense, we're already at 19.5% of operating profit margins on a consolidated level. And on a consolidated level, we said it will be between 19% to 20% on solar, we did say that we'll be 20% to 22%. And again, we are very close to this number again. We feel very confident as we guided the court that will exit the year with operating margins to be delivered. We’ve got one-time before And it relates to our financial modeling.

Thank you. I will talk about top line.

Thank you.

[Operator Instructions] We'll move next to Kashy Harrison with Piper Sandler. Your line is open.

Hello, good afternoon. Good afternoon ladies and gentlemen, and thanks for taking the questions. So as your result of the operating performance was very robust in Q1 while we're seeing a significant amount of operating income in Q1 and Q2 guide, working capital was another big use of cash this quarter. And so maybe just can you provide some context on how you're thinking about working capital and maybe some of that conversion from income to operating cash throughout the year? And then maybe even just at a high-level structurally, how you think about that conversion on a multiyear basis? And then I have a follow-up.

Okay, sure. So first of all, usually, the three elements that are impacting dramatically the working capital is, of course, days sales outstanding when it comes to collections from our customers. Actually, this quarter, we -- our DSO decreased a little bit, which means that we did not see any major change. When it comes to customer to vendor payments, again, our terms have not changed significantly. This thing to change significantly this quarter is actually related to our inventories that grew by about $150 million, and this is actually almost releasing cash from the formula that I will give you in a second. And this is related to the fact that based on our agreement with Samsung, we needed to buy battery cells up until the end of Q1 and pay for them while the batteries that are coming from these sales that are the single phase batteries, mostly going to the United States, are simply being sold a little bit slower, given all of the aspects that Zvi mentioned before related to the U.S. market attachment rate and battery growth. And as a result, we find ourselves where at least in Q1, we're buying battery cells where we have less battery cells. And again, this is about $150 million of difference in our inventory. What we expect to see during this year is that since we've already bought all of these battery cells, we will start clearing them out and therefore, we will reverse this phenomena. We expect to see on an annual basis at approximately 80% of our operating profit is turning into cash within the same period. And this is simply a result of the fact that we do see that our, first of all, we're growing, which, of course, means that usually we are paying…

Sure. Gladly. So first of all, and I apologize for maybe a little bit of education not at the beginning. But when you're ramping a battery manufacturing factory, there's a process or a stage within the ramp up that is called process utilization. You basically adjust various elements within the manufacturing process itself, like temperature like a concentration of materials in the air level of section within vacuum chambers and even the flow of goods on the production floor to the processes that you're using. This is exactly where we were in Q1. That means that at that time, we are consuming a little bit more material because we are making a lot of test, and we are stabilizing the process. Not all of the materials can basically be used and therefore, the yield of the factory is not yet there. This is a process that's supposed to end sometimes within Q1, Q2 or actually it was Q1 and Q2 this year. And at that time, we simply start to grow over time the manufacturing capacity by ramping and increasing the speed of movement components within the manufacturing stations themselves. And this is what we expect to happen in the second half of this year. In general, the manufacturing capacity of Sella 2 is supposed to be 1.7 -- it's 2 gigawatts hour at the beginning because of yield, we expect it to be around 1.7 gigawatts. And we expect to get this -- to this level either by the end of the year or beginning of next year, simply because of the fact that you need to ramp. So what are going to be the usages . First of all, we need to remember that there is a business that is actually growing very nicely for us of the…

And we'll take our next question from Maheep Mandloi with Credit Suisse. Your line is open.

Hi. This is Dave Benjamin on for Maheep. Just, I guess, a follow-up on that on 1 of your earlier responses, you mentioned that you foresee all U.S. products being manufactured in the U.S. But can you detail any of your thoughts on better manufacturing plans for the U.S.?

So at this point, we are focused on getting inverters and optimizers manufactured in the United States, starting with residential and moving on to commercial. We're also waiting to understand clarifications around some of the regulations for batteries and we will -- make decisions once we understand in terms of potentially doing battery assembly in the U.S. Obviously, cell manufacturing in the U.S. is a much more complex and long-term question. But right now, we're focusing on inverters and optimizers. And once we understand the regulations on that reason we'll decide if and how to assemble in the U.S.

And we will take our next question from Joseph Osha with Guggenheim Partners. Your line is open.

Hi there. Thanks, guys. Two questions. First, I appreciate sort of the operating margin target towards the end of this year. But thinking about the longer-term financial model, how quickly is OpEx likely to grow relative to the top line? How should we think about that in the out years?

So it's -- I'm not sure that I have a very good answer for it because I'll try to give you what moves this ratio because it's a little bit tricky. First of all, it's revenue growth. And as we've mentioned before, -- we do believe that in the next few years, we can grow at the rate of 20% to 30%. We said it on the Analyst Day last year, we've actually exceeded it dramatically by growing 58% year-over-year. And I think that with the demand that we see, there are chances to maybe grow even faster than what we think this year as long as the demand is there, and we're able to cope and get the components needed to make sure that -- and the capacity to make sure that we need it. So potentially, it's high growth. The second part of the first is how quickly we can ramp the expenses. And about two-thirds of our expenses today operating expenses are actually employee costs. These are salaries to employees. And when it comes to hiring employees, it's very hard to grow them at the pace of 30%, where you already have more than 5,200 employees working for you. In R&D, this is in particular heart simply because of the fact that you need very skilled people -- and actually, in where we do R&D today, we've already attracted a lot of the talent. So you're actually going into a tool, but it's getting a bit more shallow. So here, I would tell you that we would like to grow as much as we can. I think we do not believe that we can grow at 30% or more year-over-year. When it comes to sales and marketing and G&A, here we usually used to say that we would like to see sales and marketing and G&A growing in average, let's say, it's about 50% to 60% the growth of revenue when we're looking at expenses. So that, by definition, of course, is widening the level. So these are the moving parts. We believe that, yes, we can, over time, go beyond this 22% of operating margins. But then again, we need to remember that we need to see also what's going to be the impact of batteries on the gross margin because this is the other part. So we feel confident that we can increase the operational lever. I think that we gave you what's moving. And we'll have to see again if and when we need to adjust the overall operating margin target.

Yes. That's very helpful. And then my follow-up, I guess I feel like we've kind of been tapdancing und this, so let me just ask directly, how long is it going to take until you have all of your U.S. bound commercial and residential inverters and optimizers, not batteries, but inverters and optimizers being made in the U.S.?

Yes. Generally, we're targeting to try and have all of that capacity produced in the U.S. by the end of '24, beginning of '25.

Okay, great. Thanks. I’m sorry, maybe you guys -- yes, I know [indiscernible]. But thank you. Appreciate the clarity. Have a good day.

Thank you.

And we'll move next to Ameet Thakkar with BMO Capital. Your line is open.

Hi. Thanks for squeezing me in. just one real quick one for me. I was wondering, you guys talked a lot about kind of the NEM 3.0 transition. But during the quarter, do you guys have a rough sense for how much of your revenues kind of came from California?

No, not really. Now generally speaking, when we look at California, in our historical distribution of our revenue globally and then within the U.S. and between the segments of residential and commercial. So California by itself has never been a huge part of our ongoing business. But specifically in Q1, how much is related to California or even water or the installed rate of our product in California during the first quarter, we don't have that type of information in front of us right now.

Hi. Thanks. I will take the rest offline.

And we'll move next to Steve Fleishman with Wolfe Research. Your line is open.

Yes. Thank you. You mentioned in the trends in the U.S. that one of them was the shift to TPO, and I'm curious kind of how much did you see that actually happening in Q1 versus kind of expecting it to happen the rest of '23, '24?

It's definitely more of an expectation based on what you read and see in the market, it's not something that I can say that we've seen a clear indication in the first quarter. What is generally discussed related to the IRA, advantages that go to the TPOs. And this has been a market segment that historically, we have been strong in and made some announcements recently and continue to strengthen and build those relationships further.

Okay. And then just on the C&I growth, maybe -- just -- could you just talk to more trends of how quickly that's growing relative to residential? And just -- is it something that -- any trends that you're seeing in T&I in particular relative to just overall economics of solar.

Thank you. Yes, actually, just related to some of the previous questions about the C&I market in Europe. So while we were discussing the other -- with the other questions, I pulled up some data. So an interesting data point will be that our point-of-sale data from our distribution channels in Europe grew from the fourth quarter to the first quarter by 40%. And from the third quarter to the fourth quarter of '22 by 25% almost. So we are -- these are the type of accelerating factors we are seeing for the growth of the C&I market in Europe. Again, this is a data point related to how much our distributors are selling to installers and EPCs in the C&I market in Europe. So the dynamic is positive and strong over there. Also, again, in the U.S. we didn't grow significantly quarter-over-quarter and megawatt shipments in C&I, but the general assessment in the market is that the expectation is for a stronger year-over-year growth in C&I in the U.S. market compared to residential. So when we look at the three geographies that we typically consider of U.S., Europe and rest of world, we are seeing a momentum of accelerated growth for C&I. And it relates to everything that we discussed in terms of corporates, but as well as the broad adoptions and push. France just passed a legislation that we mandate solar installations on car parks. And that regulation is being adopted by other European countries. So you also see a range of government legislations in different countries encouraging growth in the C&I market. So when we collect all of these indicators together, that's where we conclude that this market has good momentum and they're going to grow at a relatively fast rate.

Got it. Thank you.

And it does appear that there are no further questions at this time. I would now like to turn it back to CEO, Zvi Lando.

Thank you. So in summary, we are pleased with our results this quarter, which demonstrates the advantages of our strong position across diverse markets and applications. And so I want to thank you for joining us on our call today, and have a good evening.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.