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SolarEdge Technologies Inc (NASDAQ:SEDG)
Q4 2019 Earnings Call
Feb 19, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the SolarEdge Conference Call for the Fourth Quarter and Full Year Ended December 31, 2019.

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 the 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 Event Calendar page of the SolarEdge Investor website.

I would now like to turn the conference over to Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Erica, you may begin.

Erica L. Mannion -- Partner and Founder

Good afternoon.

Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year ended December 31, 2019, as well as the Company's outlook for the first quarter of 2020. With me today are Zvi Lando, CEO, VP of Global Sales; and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the fourth quarter and full year ended December 31, 2019. Ronen will review the financial results for the fourth quarter and full year, followed by the Company's outlook for the first quarter of 2020. Then 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 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, 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 December 31, 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.

Zvi Lando -- Chief Executive Officer and VP Global Sales

Thank you, Erica.

Good afternoon and thank you, all, for joining us on our conference call.

We are pleased to report that we have concluded the quarter with record revenue of $418 million and the year with record revenues of $1.43 billion, thus achieving our second consecutive year of higher than 50% year-over-year growth. We are reporting many other record and noteworthy financial results, and I will let Ronen go into them further in a few minutes.

As expected, most of our growth originated from our solar business, while we continued to grow and invest in our acquired businesses in line with our plans. This quarter, we shipped over 1.6 gigawatt of AC nameplate inverters, approximately 788 [Phonetic] megawatts of which were shipped in North America. Shipments to Europe consisted of 620 megawatts. This quarter, we shipped 701 megawatt of commercial products compared to 543 megawatt in the previous quarter. Overall, this quarter we shipped 4.5 million power optimizers and approximately 187,000 inverters.

I know many of you are concerned about the effect that the coronavirus may have on our business. Before addressing the business aspects, I'm happy to report that all of our and our CM's employees at the factory in China are healthy and most have returned to work. We share with all of you our wishes for the full recovery of those who are ill and express sympathy for those whose lives have been disrupted by this tragedy. Regarding the delivery of products, we do not expect any disruption to our revenue in Q1 or Q2. As is to be expected, we may experience some level of continued air shipment in order to meet the growing demand for our products.

Just a bit of background on how we have been able to manage the situation. In anticipation of the increase in product demand in 2020 and the usual manufacturing slowdown during the Chinese New Year, we took several actions prior to the outbreak of the coronavirus. We built inventory in Q4 which was shipped to our distribution centers, as is reflected in our financial reports.

In addition, we secured with our CM to continue manufacturing during the Chinese New Year at a reduced rate. As a result, when the Chinese New Year vacation was extended due to the coronavirus, the manufacturing lines at our CM in China continued to operate and manufacture products. These two measures, combined with increasing capacity in our factories in Hungary and in Vietnam, enabled us to continue to meet capacity needs of our customers despite the unfortunate circumstances that developed.

In recent weeks, we are witnessing gradual return to normal activity in our Chinese factory and in our supply chain. Assuming this trend continues, we do not currently foresee interruptions in Q2 either, which is typically a stronger quarter. Since the outbreak of the coronavirus, we have been working closely with our CM, Jabil, in managing the supply chain and manufacturing. We appreciate their support and close relationship in this challenging time.

On other noteworthy items. We are seeing strong momentum in commercial shipments with record megawatts shipped in Q4 and expected 20% to 30% further growth in Q1. In that context, we announced this quarter an agreement signed with Enfindus, a large solar developer, for 1 gigawatt of product to be delivered over the next four years, primarily for rooftop installations across Europe, the vast majority in Spain.

Another area of recent growth is in shipments of storage compatible inverters. In the fourth quarter, we saw an increase of almost 60% compared to the prior quarter, and our Q1 backlog is more than double the volume shipped in Q4. We are seeing this accelerated growth in North America, Australia, and even more pronounced in Europe, based on the 3-phase storage inverter which we began shipment of at the end of the third quarter.

Also during the quarter, we received in Japan JET certification for our single phase HD-Wave inverter. To date, only two other non-Japanese inverters have completed JET certification, and as far as we are aware, only one other non-Japanese inverter company has been certified for the latest new anti-islanding regulation, as we have been certified recently. This milestone will allow us to approach the residential and small commercial Japanese solar market on top of the commercial markets in which we have been active for several years now.

In our new businesses, we are focusing on development and testing of new and improved offerings. In the last quarter, we conducted five evaluation tests of our improved commercial UPS system. The tests were successful with positive customer feedback. While this is still low volume from a business perspective relative to our solar business, we are encouraged by the customer response to our offerings. Similarly, in our e-mobility business, during the fourth quarter we delivered on orders of dozens of electrical power trains and batteries for light commercial vehicles that are in testing by automotive OEMs. In our battery business, we are progressing in accordance with our plans to expand our manufacturing factory, while our current factory is running at maximum capacity and fully sold out.

And with this, I hand it over to Ronen who will review our financial results.

Ronen Faier -- Chief Financial Officer

Thank you, Zvi, and good afternoon, everyone.

Before starting the review of our financial results for the fourth quarter and full year 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, changes in deferred tax, amortization and depreciation of acquired assets, cost of product adjustments and other one-time expenses related to the acquisitions of SMRE, Kokam and the UPS Division; finance expenses related to the impact on financing expenses of the revenue recognition standard; and the adoption of the newly enacted leasing accounting standard as well as non-GAAP earnings per share.

I will conclude this introduction by noting that the effect of the acquisitions closed in the reported years on the GAAP results is meaningful as a result of amortization of accounting elements identified in the purchase price allocation studies that we've recently performed. This reconciliation of pro forma to GAAP results discussed on this call is available on our website and in the press release issued today.

For the fourth quarter of 2019, total revenues were $418.2 million, a 2% increase compared to $410.6 million last quarter and a 59% increase compared to $263.7 million for the same quarter last year.

Revenues from the sale of solar products were $389 million and were driven by very strong growth in the United States, while Europe and rest of the world demonstrated typical fourth quarter seasonal slowdown. US solar revenues grew this quarter to $236.6 million and represented 60.8% of our solar revenues. These US revenues included a negligible amount of safe harbor revenues. Solar revenues from Europe were $118.9 million or 30.6% following the traditional seasonal pattern of the solar industry. Rest of the world solar revenues were 8.6% of our solar revenues.

This quarter, our top 10 solar customers represented 64.4% of our quarterly solar revenues, a modest decrease from the last quarter, and only one distributor accounted for more than 10% of revenues. Blended ASP per watt decreased this quarter by approximately 8% compared to the last quarter, representing a higher proportion of commercial inverters shipped. The overall pricing environment of our products remained stable this quarter.

This quarter, revenues from our non-solar products were $29.2 million, mostly attributed to sales of lithium-ion batteries.

GAAP gross margins for the quarter were 34.3% compared to 33.9% in the prior quarter and 30.2% in the same quarter last year. Non-GAAP gross margin this quarter was 35.5% compared to 35.1% in the prior quarter and 30.9% in the same quarter last year.

Non-GAAP gross margin for the solar activities was 37.8% compared to 35.4% in the last quarter. The increase in the solar business gross margin is a result of increased product margin compared to previous quarter due to cost reduction activities, product mix and lower accrual for future warranty obligations. The lower accrued warranty expenses this quarter are a result of our periodic update of the warranty accrual assumptions, including reduction in the cost of replaced and refurbished products, logistic costs and other elements related to our customer services.

Given the significant size of installed base to which we apply the warranty reserve, the quarterly effect was significant, and excluding this one-time income, our non-GAAP solar margin would have been approximately 34.5%, primarily due to increased air shipment costs. While these warranty related cost reductions will continue to positively affect our next quarters, their magnitude will be lower.

This quarter, air shipments continued to put pressure on our gross margin and reflected approximately 180 basis points increase compared to the previous quarter. While, with the expansion of our manufacturing capacity, we were expecting a reduction in air shipments, as Zvi mentioned, the impact of the coronavirus is such that we will continue to experience air shipments for at least the first quarter of 2020.

Non-GAAP gross margin for our non-solar activities was 4.9% compared to 29.5% in the previous quarter. Lower margins on sale of lithium-ion products compared to the previous quarter and year-end inventory and cost adjustments in the acquired businesses, combined with relatively high fixed costs, yielded these very low margins.

Moving to operating expenses. In total, operating expenses for the fourth quarter were $92.7 million or 22.2% of revenues compared to $73.3 million or 17.9% of revenues in the prior quarter and to $55.8 million or 21.1% of revenues for the same quarter last year. On a non-GAAP basis, operating expenses for the fourth quarter were $63.1 million or 15.1% of revenues compared to $54.8 million or 13.3% of revenues in the prior quarter and $45.1 million or 17.1% of revenues for the same quarter last year. Our non-GAAP solar operating expenses as a percentage of the solar revenues were 13.8% compared to 12.3% last quarter.

This quarter, GAAP operating expenses included non-recurring expenses of $22.4 million. These expenses included $12.2 million of accelerated expenses related to share payments in the SMRE acquisition; a $4.9 million settlement of free acquisition claim related to Kokam which we expect to collect from amounts held in escrow; and $5.3 million loss related to the sale of a software business previously owned by SMRE.

Our GAAP operating income for the quarter was $50.5 million compared to $66 million in the previous quarter and $24 million for the same period last year. Non-GAAP operating income for the quarter was $85.3 million compared to $89.2 million in the previous quarter and $36.4 million for the same period last year. This quarter, non-solar activities resulted in non-GAAP operating loss of $8 million compared to a net loss of $0.3 million in the previous quarter, mostly as a result of the lower margins. Financial income for the quarter was $11.1 million compared to financial expense of $17 million last quarter and a financial income of 0.3% [Phonetic] for the same period last year. The increase is a result of the foreign currency gains resulting from the strengthening of the euro compared to the US dollar.

Tax expense was $9.2 million this quarter compared to $7.3 million in the prior quarter and $11.1 million for the same period last year. Our non-GAAP tax expense was $10.4 million compared to $10.2 million in the previous quarter and $6.2 million for the same period last year.

GAAP net income for the fourth quarter was a record $52.8 million compared to a GAAP net income of $41.6 million for the previous quarter and $12.9 million for the same quarter last year. Our non-GAAP net income was a record $87.4 million compared to a non-GAAP net income of $63.6 million in the previous quarter and $31.5 million for the same quarter last year. GAAP net diluted earnings per share was $1.03 for the fourth quarter compared to $0.81 in the previous quarter and $0.27 for the same quarter last year. Non-GAAP net diluted EPS was a record $1.65 compared to $1.21 in the previous quarter and $0.63 for the same quarter last year. Our non-solar businesses generated $0.26 of non-GAAP diluted earnings per share loss attributed mostly to the lower margins and year-end inventory adjustment.

Turning now to the balance sheet. As of December 31, 2019, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $467.5 million compared to $432.9 million on September 30, 2019. During the fourth quarter, we generated $83.1 million in cash from operations. Safe harbor orders, which were paid prior to the end of the year were approximately $75 million, most of which was offset by advance payments we made to vendors and contract manufacturers. These safe harbor orders will be delivered in Q1 and Q2 2020. In addition, our balance sheet includes net debt of $15.8 million related to loans taken by Kokam and SMRE prior to our acquisition.

AR net increased this quarter, reaching $298.4 million compared to $292.2 million last quarter. DSO this quarter in the solar business was 65 days, a decrease from 75 days last quarter, a result of a more balanced delivery pattern during the quarter and a tight control over customer lines of credit. As of December 31, 2019, our inventory level net of reserves was at $170.8 million compared to $134.3 million in the prior quarter. Most of this increase is related to inventory in transit shipped at the end of the quarter and delivered to our customers at the beginning of the year, which, as Zvi mentioned, help us to overcome the coronavirus related manufacturing disruptions. Additionally, $39.7 million of our inventory amount relates to non-solar inventory, the majority of which is raw materials held by Kokam.

Let's move now to summarize the full 2019.

Revenues for the year was $1.43 billion, a 52% increase from $937.2 million in calendar year 2018. Revenues related to our solar business were $1.34 billion, a 46% increase compared to 2018. GAAP gross margin was 33.6% compared to 34.1% in the prior year. Non-GAAP gross margin was 34.9% compared to 34.6% in the prior year.

GAAP operating expenses were $289.4 million, representing 20.3% of revenues compared to $179.8 million in 2018, which represented 19.2% of revenues. Non-GAAP operating expenses were $220.9 million, representing 15.5% of revenues compared to $150.1 million in 2018, which represented 16% of revenue.

GAAP net income for 2019 was $146.6 million, a 14% increase compared to $128.8 million in the prior year and a GAAP net diluted EPS of $2.90 compared to $2.69 in prior year. Non-GAAP net income for 2019 was $233.2 million, a 48% increase compared to $157.3 million in 2018 and a non-GAAP net diluted earnings per share of $4.44 compared to $3.17 in prior year. Non-GAAP net income for our solar businesses was $254.1 million, a 57% increase compared to $162 million in 2018. This year, we generated $259 million in cash from operations.

Moving now to the guidance for the first quarter of 2020. We expect revenues to be within the range of $425 million to $440 million. Revenues from the sale of solar products are expected to be within the range of $405 million and $415 million. We expect gross margins to be within the range of 32% to 34%. Gross margins from solar activities is expected to be within the range of 33% to 35%.

I will now turn the call over to the operator to open it up for questions. Casey, please.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Colin Rusch with Oppenheimer Funds.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Thanks, guys. Could you speak a little bit to what's going on in the commercial market? Obviously, the growth in that segment has been very strong. Can you talk a little bit about where you went in and why as well as the prospects for some geographic expansion besides just Japan?

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, momentum in the solar business has been -- in the commercial business has been improving in the last few quarters, and it's very widespread geographically. We're seeing good momentum in the US, but also in places like Brazil, Australia and Asia Pacific, and Asia Pacific in general. It has not been related to new products. We're actually expecting to release new products in that area only in the next quarter. So it was based on our current product portfolio, just broader adoption of our solution and a wider geographical spread of our sales force.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Okay. And then on the energy storage products, at the Analyst Day, you talked about that being ready mid-year. Can you give us a progress update in terms of where you're at from a testing perspective and when we can expect that product to go out into base shipments?

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, we're roughly on schedule with the plan that we presented at the Analyst Day. But we don't expect to generate significant revenue from this product before the second half of the year.

Colin Rusch -- Oppenheimer & Co. -- Analyst

Okay. I'll have some follow-up questions offline. Thanks, guys.

Zvi Lando -- Chief Executive Officer and VP Global Sales

Thank you.

Operator

And our next question comes from Mark Strouse with JPMorgan.

Mark Strouse -- JPMorgan -- Analyst

Yeah. Hi. Good evening. Thanks very much for taking our questions. Zvi, I was just hoping you can maybe touch on the competitive dynamics within resi and any market share data that you track that you think is worthwhile.

Zvi Lando -- Chief Executive Officer and VP Global Sales

Yeah. GTM -- if we start with North America, GTM latest numbers I think gave us somewhat -- just about 60% market share. We don't have the means to track that much more accurately than what is reported. We look at it installation company by installation company and measure what is our share of their business, and sometimes even more importantly, what is their business because actually today market share trends can come more as a result of how these installation companies are faring one compared to each other rather than if you are gaining one installer versus the other. We don't see any -- there are movements here and there, but we don't see any significant trends in one direction or the other in the market.

In terms of the global residential market, we're seeing good momentum in Australia and in particular in Europe, in Germany, that comes back to what I mentioned before about the offering of a residential 3-phase storage compatible system which we began to ship at the end of the third quarter and that is giving us access to the large residential market in Germany, which we did not have an ideal offering for in the past.

But overall, as you can hear from the description, we're spread across many segments and many geographies. So there is not any one geography or segment that has a huge impact by itself, and we're managing and tracking each one to maximize our market share in that specific segment or in that specific geography.

Mark Strouse -- JPMorgan -- Analyst

Okay. Very helpful. And just a more quick one, and I'll go back in queue. Ronen, you said immaterial safe harbor revenue in 4Q. Is there any contribution to your 1Q guidance from safe harboring?

Ronen Faier -- Chief Financial Officer

So, in general -- as I mentioned at the end of my part, we received approximately $75 million as prepayments for safe harbor orders. All of them are going to be shipped within Q1 and Q2. The majority of those are coming from relatively large customers. The small customers usually do not place safe harbor, and what we expect for the next quarter is pretty much what we expected from them anyway. So in general, I think that, of course, while everything will be both delivered in Q1 and Q2 in roughly similar numbers, we do not see a major change or difference compared to what we expect to see in a regular year.

Mark Strouse -- JPMorgan -- Analyst

Okay. Very helpful. Thank you.

Operator

And our next question comes from Philip Shen with Roth Capital Partners.

Philip Shen -- Roth Capital Partners -- Analyst

Hey guys, thanks for the questions. First one is on the Q1 margin outlook. It looks a little bit light relative to Q4. I was wondering if you might be able to provide a little bit more color around that, why it might be down from 37%. And perhaps was it due to the higher mix of safe harboring or maybe higher mix of commercial volumes? Thanks.

Ronen Faier -- Chief Financial Officer

So, as I mentioned in the script that we read, usually during the fourth quarter while we do our financials for the year, we update our assumptions for the warranty accrual. And this year, given a lot of cost reductions that we were able to do, both in the cost of products that we delivered to customers or in refurbished products that we sell as replacement units as well as some changes that we did both in the shipment costs and other costs that we had, we saw a relatively nice reduction in the cost of every shipment or product that we sell for replacements.

Now, today we have such a big installed base that when you take this amount and you apply it to the installed base, you get a fairly good reduction in the overall cost. This contributed dramatically to this quarter, where if we wouldn't have this periodical update that we do every two quarters, our gross margins will be approximately 34.5% and not 37.8% as they were right here. So we basically enjoyed a one-time benefit.

Which means that once you normalize the gross margins, the gross margins for Q4 were slightly lower. Again, without this one-time adjustment, this quarter, the gross margins will be about 1% lower than the margins that we saw in Q3. This is mainly as a result of the higher air shipments that we noted in the last quarter. We expected last quarter to incur additional air shipments of 250 basis points. Actually, it was closer to 180 basis points. And when you take this and you combine it with a little bit of cost reduction, the end result, again, neutralizing this adjustment was about 100 basis point less.

For Q1, we basically expect the same trend. So it means that due to the coronavirus disruption, we are able to manufacture the product that we need. But we may need more air shipments to ship them, which will continue to put pressure on the gross margins. But all in all, the effect that we see is mostly related to the higher air shipments compared to any other aspect of our operational factors.

Philip Shen -- Roth Capital Partners -- Analyst

Great. Thanks, Ronen. And then, as it relates to the air shipments, just to be very clear -- and sorry if I missed this, but is it factored into your Q1 guidance?

Ronen Faier -- Chief Financial Officer

Of course.

Philip Shen -- Roth Capital Partners -- Analyst

So how much have you factored into the Q1 guide? And then also, can you talk to us about -- give us a little bit more color on coronavirus? I know Zvi talked a bunch about it. But for example, what kind of utilization or throughput -- or output are you guys operating at right now relative to where you would prefer to be? One of your peers was talking about being closer to 50%. So some color on that and how you plan on navigating through would be great. Thanks.

Ronen Faier -- Chief Financial Officer

Okay. So, I'll start with the margin, and then Zvi will answer about corona. With regards to the margins, in the fourth quarter, the overall effect of the air shipments was slightly higher than 500 basis points, and this is something that we baked a similar assumption into Q1 as well. There may be a little bit of savings there, again, very much related to our manufacturing. But in general, this is the assumption that we have baked into the assumptions that you see on the guidance.

As for the corona itself, Zvi will answer.

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, since the beginning of Chinese New Year, which was prior to the big impact of corona -- but as I mentioned, we were operating during Chinese New Year at the rate of somewhere in the China factory of 40% to 50% capacity, and we held that steady through the period since and it's beginning to climb up in the last week, and we anticipate it will gradually increase to the, call it 80%, 85% of the planned capacity over the next three or four weeks. That's as it relates to the China -- for the China factory. And obviously the other factories are working at normal levels.

Philip Shen -- Roth Capital Partners -- Analyst

Great. Thanks for the detail on both topics. And I'll pass it on.

Operator

And our next question comes from Maheep Mandloi with Credit Suisse Securities.

Maheep Mandloi -- Credit Suisse -- Analyst

Hi. Thanks for taking the questions. Could you just probably talk about your thoughts on the mix of residential versus commercial going forward for Q1 and for the rest of the year, especially as you've launched the 3-phase products in Europe and other regions and have access to the Japanese market now?

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, actually, the residential opportunity in Japan is at its infancy. So we don't anticipate that to be a major factor in the next few quarters. In terms of the 3-phase product for Europe, that is a residential product and we anticipate that to continue to grow and contribute to the growth on the residential front, while in parallel, as I said before, we see a lot of opportunity to grow in commercial both here in North America as well as in some of the emerging market that are more emerging markets like India, Brazil, Spain and such that are more commercial-oriented right now.

So, generally the mix that we are typically at is around 40-60, so 40% commercial, 60% residential. I don't think that it's going to differ dramatically from that ratio in the next few quarters. We have plans and products to introduce that should allow us to grow in both segments, and I anticipate that the growth will be roughly the same in both segments, so the ratio will remain the same.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. Thanks. And maybe just on your visibility. Could you just talk about like how much visibility do you have going forward? I know you haven't guided Q2. But as we look for shipments in Q2, do you still expect any impact from the coronavirus in Q2 based on where you're standing today?

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, actually visibility from a backlog perspective for Q1 and Q2 is very good compared to anything that we had in the past in terms of the visibility of demand. And as we said, our current inventories and production rate and assuming -- again, assuming that the trend that began with the return of our employees to working in the factories and the ramp-up plans that we're executing in our other factories hold, we should be able to deliver without interruption on the Q2 -- Q1, of course, and Q2 orders as well that we already see them quite clearly.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. Just like one last question from me and I'll jump back in the queue. From an ASP point of view, it looks like the residential ASPs were down just from my preliminary milestone, 8% in the quarter. Could you probably talk about like what led to that? Or is the cost reduction more on the commercial side than on the residential side?

Ronen Faier -- Chief Financial Officer

So, actually the 8% that we mentioned was across the board, not on the residential side, and the main reason for it is actually mix. From pricing environment in Q4, we didn't see any major changes in pricing to the customers themselves, and therefore, any movements that was there in ASP was mostly related to the mix of the products or related to mix among our countries. In general, due to the fact that we have shipped dramatically higher amount of our commercial products, this is something that of course drags the ASP per watt down, and this was mainly the case in this quarter.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

And our next question comes from Jeff Osborne with Cowen & Company.

Jeffrey Osborne -- Cowen and Company -- Analyst

Hey, good afternoon, guys. Just a couple of questions, maybe following up on Philip's questions around the margins because there's a lot of discussion about sequential changes, Ronen. I just want to make clear or understand. The cumulative magnitude of air shipping off of the 34% or so base of gross margins is about 500 basis points. And then there is an additional hit.

Ronen Faier -- Chief Financial Officer

Correct.

Jeffrey Osborne -- Cowen and Company -- Analyst

Okay. So that gets you to 39%. And then I assume there is an additional hit because of tariffs still. Or can you just talk about that? It just seems like your normalized gross margins are closer to 40%, and, as Vietnam ramps, I'm just trying to understand what your Company looks like.

Ronen Faier -- Chief Financial Officer

So, first of all, let's start with the air shipments. The effect that we had in Q4 was close to 500 basis points, indeed, and this is something that, again, we expect to continue at least into Q1, given the fact that, with although having enough products to ship due to our manufacturing in light of the coronavirus, in some cases we do need to airship everything because of the fact that the ramp-up back from the Chinese, that is a little bit slower. So this is the first thing.

When it comes to what we call the arithmetic effect of the margins related to the tariffs themselves, I can say that it's roughly 200 basis points of effect when you take into account the price increases that we did on one hand and the fact that today still the vast majority of the products coming are coming from China. And we see this in our cost of goods sold.

Jeffrey Osborne -- Cowen and Company -- Analyst

Got it. And just to that point, can you touch on how your expansion in Vietnam and Hungary is going and the percentage of your capacity that would be tariff free? Any thoughts on that?

Ronen Faier -- Chief Financial Officer

So, in general, it continues to be very much as planned with one modification, of course, is that, as the revenue grows, we also need to adjust all the time upwards the amount that we need to manufacture in Vietnam and Hungary. In general, we don't break, completely, the products and where they come from. But in general, we expect to be, by the end of the year, with the majority of the products coming to the United States coming from non-tariff countries.

There will be, though, some part that is still coming from China, either due to the fact that capacity in Vietnam is ramping, but again the demand is ramping relatively quicker, and also due to the fact that in order to allow the ramping to be very smooth, in some cases, we do not mirror all of the product production in all of the sites and therefore we may find ourselves that in some situations products sold to the US of a specific model are not necessarily produced in Vietnam or in Hungary and therefore are coming from China. But again, the idea is to have the vast majority coming from Vietnam and Hungary.

Jeffrey Osborne -- Cowen and Company -- Analyst

Got it. Just two quick ones, if I could. The $75 million of safe harbor. It sounded like you said that that would sort of be equally spread out between Q1 and Q2. A, did I hear that right? And then, B, can you just articulate if there is any meaningful C&I mix to that or is that 100% residential? That was question one. And then question two is around the visibility. Can you just talk about what the lead times you have are and whether you're fully booked into Q1 and taking orders for Q2?

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, the delivery of the safe harbor will be roughly split between Q1 and Q2. The final ratio will be some optimization also of air shipment costs and getting it when it's needed and not spending money on air shipments to get it before that. There is C&I in the mix. So it's not only strictly residential. There is also C&I safe harbor in the $75 million.

And the last part of the question?

Jeffrey Osborne -- Cowen and Company -- Analyst

Yeah. I was asking about lead times and whether you're fully booked for the guidance and what visibility, how far into Q2 are you taking orders.

Zvi Lando -- Chief Executive Officer and VP Global Sales

So Q1 obviously is fully booked, and Q2 is more than 50% booked at this point. And we're continuing to take orders for delivery in Q2. But it's more than 50% booked already.

Jeffrey Osborne -- Cowen and Company -- Analyst

Excellent. That's all I had. Thank you.

Operator

And our next question comes from Jim Ricchiuti with Needham & Company.

Michael Cikos -- Needham & Company -- Analyst

Hi guys, this is Mike Cikos on for Jim Ricchiuti.

Zvi Lando -- Chief Executive Officer and VP Global Sales

Hi.

Michael Cikos -- Needham & Company -- Analyst

Just a couple of [Speech Overlap] questions for you. First on pricing. With respect to the mix issues that we saw this quarter, just wanted to get a sense. So, was residential pricing stable in Q4 if we exclude any mix issues coming from commercial? And then, I guess similarly, I know over the last couple of years, that pricing has been relatively stable versus -- I guess over the longer term, you've seen a more traditional, call it 5% to 7% price erosion. How do you see pricing playing out over 2020?

Ronen Faier -- Chief Financial Officer

So, first of all, for the first part of the question, yes, prices have been stable in Q4 as they were in the previous quarter. I think that, all in all, the, I would call it the competitive environment, do not support dramatic price reductions at this point of time. When it comes to looking into the future, in general, we do not see today yet anything that is disrupting dramatically the, I would call it competitive landscape, as was the case in previous year where prices indeed fell from let's say anything between 5% to 10%. And if you remember, these were the days where still most of the inverter companies were making relatively large amount of profits, some of them were looking to be acquired and therefore tried to capture market share.

I think that today we have a much more rationalized environment where other than us and maybe one other company, most of the inverter companies are not really making money. And with the absence of heated competition or anyone that really can sacrifice major profitability, prices are relatively stable. On a customer basis, you will see or you may see some changes based on volumes or growth. But all in all, today, at least, we do not see any competitive reason to go back to the 5% to 10% that we used to see in the past.

Michael Cikos -- Needham & Company -- Analyst

Okay. That's helpful. And then just shifting back to the supply chain. I appreciate everything that you guys are elaborating on with respect to coronavirus. But I just wanted to ask, is there I guess more of an impetus to accelerate your manufacturing facilities over in Vietnam and Hungary given coronavirus or are you guys able to tackle everything with what you currently have set up in China and the ramp that you had already laid out to us at the Analyst Day?

Zvi Lando -- Chief Executive Officer and VP Global Sales

So, as Ronen mentioned before, the motivation for ramping our non-China production was there prior to corona in order to be able to supply all of the North American demand from a non-tariff location. So within that context, we've been working on ramping Vietnam, ramping Hungary and also building Sella I [Phonetic], the factory in Israel. So we've been pushing on all cylinders to get that done for the tariff reasons. Corona fits in the same place [Phonetic] but that didn't make a huge difference because we've been pushing hard on this anyway.

Operator

And our next question comes from Jed Dorsheimer with Canaccord Genuity Incorporated.

Jed Dorsheimer -- Canaccord Genuity Group Inc. -- Analyst

Hi, thanks and congratulations on a good quarter.

Zvi Lando -- Chief Executive Officer and VP Global Sales

Thank you.

Jed Dorsheimer -- Canaccord Genuity Group Inc. -- Analyst

I guess first just higher level sort of on the non-solar side of the business in how do I guess conceptually think about the ramp as we look out over the sort of the three legged solution that you're trying to push. So far we haven't seen a huge ramp in terms of growth that's largely been on the solar. Would you attribute that to the EV being 60% Tesla in North America? And as you look at 100 plus vehicles coming into the market over the next couple of years, how are you guys thinking about sort of that geographic mix shift and rate of growth on the non-solar side of the business? And then I have one follow-up.

Zvi Lando -- Chief Executive Officer and VP Global Sales

I think we've been describing that the businesses that we bought were not anticipated to contribute major revenue or profit in the next, call it, 12 to 24 months. It's seeding us in markets that are long-term and synergetic to our markets. And we're executing on the plan to make that happen. And what I reported was early indicators that represent that we're on path with the plan that we've laid out. But I don't see that having any meaningful impact on our financial numbers, top line or bottom line, like I say, in the next 12 to 24 months.

Jed Dorsheimer -- Canaccord Genuity Group Inc. -- Analyst

Got it. So I guess you wouldn't see an acceleration as you see a greater number of non-Tesla based EVs coming into the market too. I would think that that would be pretty significant opportunity for you in terms of the rate of growth, particularly on the storage side.

Zvi Lando -- Chief Executive Officer and VP Global Sales

As I mentioned, currently our offering is relevant for the light commercial vehicles segment, which is a growth segment, and we are seeded with a few opportunities but in this industry, the time that it takes these type of opportunities to evolve into meaningful volumes is a long period of time. So that's the segment that we are operating in.

We see a tremendous potential. That's why we are in this segment, and we're tracking to what we plan to do in terms of putting ourselves in a position to ride this wave in the future. But in terms of something that becomes real volume and significant numbers, it will take, this way, time to develop.

Jed Dorsheimer -- Canaccord Genuity Group Inc. -- Analyst

Got it. And then, Ronen, just as a follow-up. Since the IPO, I think you guys have been, I mean, dealing with a relatively high class problem in terms of the air shipment. Just, I'm curious why you haven't been able to -- is it a function of competition that you're not able to fully pass the additional costs on to the customers? Or, I guess what are the dynamics associated with that number not having come down to zero, I guess?

Ronen Faier -- Chief Financial Officer

So, I'll maybe start, by the way, by the reason that this is happening because I think that it's very important. This is the second year -- consecutive year that we are growing at 50% from $607 million to $937 million and from $937 million to $1.43 billion. And no company exists at that size usually plan for 50% growth.

Now, you need to understand that in the hardware business -- and I think that you know it better than many -- the fact is that every additional investment that you do in manufacturing capacity, even if it comes from the contract manufacturers, it's relatively large. It's building a building, it's having the floors, having the machinery. And usually you do not plan for 50%. And yet this growth happened to us and we were doing everything in our ability and strength to first of all be able and manufacture. And this is a major task -- and anyone in our operational organization would testify.

When it comes down to the air shipments and can we basically roll them to our customers, it's actually a business decision that we've made. As you had noted, this is a high-class problem. Yes, maybe we could have rolled everything to our customers and get another 100% of margin or not, but we still decided that we would like to be able -- and the fact that we are profitable -- to be able to come to our customers and say, look, we support you. Growth problems are our problems. We are dealing with it. We will pay for it. The only thing that you need to do is to order us in advance as possible, allow us to plan properly -- the growth and allow us to plan properly, the manufacturing. And as long as you do these, we will bear the costs associated with allowing you to grow.

Another element that we added is the fact that we saw, across the history of SolarEdge, many smaller customers growing with us simply because of this. Because they knew that once we commit to something we're able to deliver it. And this was the case here. We believe that, now, with the capacity that we are building -- and again, the coronavirus is a relatively good example -- I think that we're getting closer to solve this issue. And we hope that our customers will appreciate the fact that when we needed to suffer some costs and bringing products to them, we were doing it on our account and in most cases we see customers appreciating this.

Jed Dorsheimer -- Canaccord Genuity Group Inc. -- Analyst

It's been quite the story, so I won't argue with the success. Thank you.

Ronen Faier -- Chief Financial Officer

Thank you, Jed. Thank you.

Operator

Our next question comes from Brian Lee with Goldman Sachs.

Brian Lee -- Goldman Sachs -- Analyst

Hey guys, thanks for taking the questions. I just had two. One was on the megawatts. I guess overall residential megawatts were down sequentially from Q3. Megawatts for North America, they were up over 30%. So it seems like the commercial volumes accounted for a much larger part of the mix here and drove all the North America growth. Is that the right reading? And could you give us a sense of how much your residential megawatts in North America declined quarter-over-quarter and year-over-year?

Ronen Faier -- Chief Financial Officer

So, Brian, we'll have to check this and come back, especially since we don't have this data in front of us. In general, though, I would just like to mention one thing. And this is the fact that, all in all, a lot of the shipments that you see and what we report is not relatively or not necessarily related to what was installed. Sometimes we ship in advance due to manufacturing reasons or sometimes -- because manufacturing reasons or shipment issues you see higher commercial mix in general. So I wouldn't take one to one and reflect from what you see in shipment to what you see in the installation.

With regards to the numbers, I'll have to check and kind of come back with it later.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Yeah, we'll circle up with a follow-up there. The second question is also on the model, I guess. With the ASPs -- I know there's been a few questions here around how you get to the minus 8% that's reported here. I mean, when we run the math, you gave us the commercial megawatts, you gave us the residential megawatts and if we flow that through the model mix shift from Q3 to Q4, a lot more commercial, drives about a 4% ASP reduction on a blended basis. So there is another 4 percentage points that seems to be implied by either commercial ASPs having come down by, it would seem, the math would suggest low to mid teens or residential ASPs having come down by close to 7%, 8% or mix of those two.

So, I know there is different moving pieces here, but the mix itself only explains about 4 percentage points of the 8% reported. So could you give us maybe a bit more color around what might be happening in terms of the bridge for the other part of the ASP decline here? Thank you.

Ronen Faier -- Chief Financial Officer

Sure. So, again, let me start by saying that when you look at prices that we give to our customers, prices remained stable. So, all of the changes that you see in the ASP are strictly a, I would call it, a result of the fact that you simply see changes in the mix themselves. So we do not see anything that is happening in, I would call it, real numbers or real prices falling in what we sell to the customer.

Now, when it comes to the analysis, it's actually a combination of several things. First of all, not all commercial sales are born the same with the same ASP. Because, for example, if you take a 33 kilowatt inverter or a 120 kilowatt inverter, the ASP per watt can be dramatically different. And now, the fact that you shipped commercial megawatt very much depends not only to whether it's commercial or residential, but actually which kind of commercial product you sold. That's number one.

The other thing that needs to be taken into account is that today in the residential sale that you see, you see today higher portion of elements that are not necessarily just related to the solar products. So, as we discussed in the Analyst Day, the RP elements related to smart home and smart energy products, these are usually products that are [Indecipherable] and they do not have a label of nameplate capacity. So by definition, selling more commercial is actually in this case diluting the amount of the residential sales that are characterized with this higher ASP due to the other elements.

So I think that, all in all, I'm not sure that I can give you exactly what is the reason for every piece that is moving or -- at least we can but we cannot do it publicly because this is a business information. But I can tell you that all of the changes that are coming are basically based on, first of all, move toward a higher mix of commercial in the commercial itself moving to higher capacity systems, and in general, the fact that when you have lower residential in the mix, the lower is the portion of the RP elements that are increasing to the ASP per watt that you see.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Thanks, guys. I appreciate the color.

Operator

At this time, this concludes today's question-and-answer session. I will now turn it back to Zvi Lando for closing remarks.

Zvi Lando -- Chief Executive Officer and VP Global Sales

In summary, we concluded a very positive year on all fronts, far exceeding the $1 billion mark in revenues and above $230 million in non-GAAP net income, all of this while investing significant resources in laying the ground for future growth and expansion into adjacent markets. We're proud of our achievements, particularly in what was a challenging year for us given the professional and personal loss of Guy Sella, our Founder and longtime CEO who is greatly missed. I thank our team for the contribution and thank you for joining us on the call today. Thank you.

Operator

[Operator Closing Remarks]

Duration: 80 minutes

Call participants:

Erica L. Mannion -- Partner and Founder

Zvi Lando -- Chief Executive Officer and VP Global Sales

Ronen Faier -- Chief Financial Officer

Colin Rusch -- Oppenheimer & Co. -- Analyst

Mark Strouse -- JPMorgan -- Analyst

Philip Shen -- Roth Capital Partners -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Jeffrey Osborne -- Cowen and Company -- Analyst

Michael Cikos -- Needham & Company -- Analyst

Jed Dorsheimer -- Canaccord Genuity Group Inc. -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

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