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SolarEdge Technologies Inc (NASDAQ:SEDG)
Q1 2020 Earnings Call
May 6, 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 first quarter ended March 31, 2020. 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 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.

Erica Mannion -- Partner and Founder

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31, 2020, as well as the company's outlook for the second quarter of 2020. 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, 2020. Ronen will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2020. 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 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. These non-GAAP measures are presented in the 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 March 31, 2020 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

Thank you, Erica. Good afternoon and thank you all for joining us on our conference call. Given the unusual circumstances surrounding the COVID-19 pandemic, I will take the opportunity during this call to focus most of my discussion on the matters surrounding how we are managing business in light of the situation and provide insight into the coming quarter.

Starting, however, with highlights of our first quarter results. We concluded the quarter with record revenues of approximately $430 million. These revenues include a record quarter in our solar business of approximately $408 million. Overall, this quarter we shipped 5 million power optimizers and 202,000 inverters.

This quarter was in line with our guidance and expectations for continued growth and included highlights such as the record quarter for revenues in Australia, and North America and record commercial shipments by megawatts both globally and in North America. Obviously, in the current environment there are bigger question marks about the future, and I would like to focus on that rather than on the achievements of the quarter that has ended.

At the time of our Q4 earnings call in early February, COVID-19 was an event concentrated in China and the concerns and question marks raised were about the ability to supply. At the time, we communicated but thanks to early measures we have taken, we expect no significant supply issue. And as our results show, we executed all these measures.

Since then the pandemic has spread to various regions of the world in varying levels of severity. Due to our global spread and in particular our large operation in the early and significantly hit locations like Korea and Italy, events on the one hand challenge the company and management. But on the other hand, these events gave us early similarity with the dynamics, which have now affected most of the world.

We learned and implemented early on the tools and procedures needed to keep our workforce safe and efficient such that by the time the virus impacted the United States and countries in Europe, we were able to adjust rapidly. In addition, we have been sharing this know how with customers, distributors and installers. Through March and April, we conducted more than 340 webinars, attended by more than 25,000 people, covering subject matters ranging from news about SolarEdge products to help us sell solar systems remotely and other topics of interest for solar installers.

In some webinars we hosted third-party experts who shared information aimed to enrich the knowledge and capabilities of our customer base of approximately 30,000 global installation companies. On top of the customer engagement activities, early visibility of the COVID-19 impact enabled us to prepare all of our global service manufacturing and R&D centers such that work throughout the period continued its minimal impact other than challenges related to the inability to travel internationally.

Moving on to the business environments, in order to assess market dynamics, we are closely tracking installation rates of our products through our monitoring portals globally and per country. While this is an important indicator, it provides only part of the system as it is not directly indicative of new solar system's sales by our installers. However, we do think it is a helpful tool to foresee market demand. During the COVID-19 impacted month of March and April, installation rates of SolarEdge products outside of the US increased by 15% compared to the same period last year.

Starting from Europe on a per-country basis, installations in Italy, historically a strong SolarEdge market, declined by 47%. In the last three weeks, however, the installation rates there have started to rise again. In the Netherlands, where we are the market leader, our product installations are flat when compared to March and April of last year.

The most positive data comes from Germany where our product installations during this period were up 42% compared to the same period in 2019. This is a result of the lower COVID-19 impact in Germany, coupled with market share gains related to our end of 2019 release of the three-phase residential storage inverter. In the US, during the same period, the installation rate of our products declined by 16% compared to March and April of 2019.

In the US, where the impact of COVID-19 hit later than in Europe, decline in installation rates in April alone were 33% and the number of daily installations has now stabilized for the last two [Phonetic] weeks. Additionally, we are in constant contact with distributors and installers who monitor their inventory levels as well as their view on new solar system sales in their markets. Generally, the sentiment in Europe and Australia is more positive than that in the US. However, the data vary significantly from country to country and among our installers.

Similarly, it is difficult at this point to identify a clear trend between residential and commercial. However, we believe that our global presence and diverse revenue stream both geographically and in multiple segments positions us well to minimize the impact of the pandemic on our business. But there will be an impact on business and this is reflected in our second quarter guidance.

While it is difficult to foresee how long this downturn will last, we are preparing for various scenarios, including the potentially slower third quarter. Preparations include careful scrutiny of our spending and management of operations. Already we have made expenditure adjustments, including the review of all of our variable expenses.

In addition, effective April 1, our senior executives voluntarily reduced their base salaries by 20%. The above measures combined with our strong balance sheet will be used to continue and push and even accelerate the strategic project that we shared with you during and since our Analyst Day. This month we are beginning to ship to North America, our new HD Wave based energy hub inverter, which provide storage and backup offering compatible with third-party batteries and is the basis for our complete solution which will be coupled with our own batteries scheduled for release toward the end of the year.

Later in the quarter, we will start shipping our new commercial inverter with added safety features and higher energy density, followed by a ground-mount dedicated power optimizer with higher power density and better economics. Our focus on long-term R&D project continues as planned with a broad pipeline of product and capabilities for residential, commercial and utility applications.

On the non-solar front, our lithium-ion business [Indecipherable] Kokam in Korea is stable and continued to deliver revenues while utilizing our entire manufacturing capacity. Activities for the expansion of the 2 gigawatt factory are under way as planned. In the e-mobility business, qualification by a Tier 1 automotive manufacturer of our full electrical powertrain solutions continues while we deliver increased numbers of units to accelerate the validation process.

In summary, we are pleased with the results of the first quarter. And while we expect the challenging period in the near future, we are confident that the core strength of our company in technology and execution capability combined with our extensive product roadmap will enable us to come out of this period even stronger.

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. As always, my review include 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. In addition to providing explanation and color around our Q1 numbers, I will provide as much as possible insight on the financial impact we're seeing that COVID-19 is having on our business. While we will make every efforts to provide this insight as you well know and as you all have seen over the last past few months, circumstances surrounding COVID-19 can change rapidly and are outside of our control. And so my inputs on this call is, of course, based on what we are seeing at present.

As for the first quarter results, total revenues were $431.2 million, a 3% increase compared to $418.2 million last quarter and 59% increase compared to $271.9 million for the same quarter last year. Revenue from the sale of solar products were $407.6 million compared to $389 million last quarter and were driven by growth in the United States and rest of the world. US solar revenues grew this quarter to $246 million, represented 60.3% of our solar revenues. These US revenues included safe harbor revenues of $54.1 million, a slightly higher number than we originally planned as we expedited some of these deliveries over non-safe harbor shipments to avoid delays related to possible border closures.

Solar revenues from Europe were $122.3 million or 30% of our revenues. Q1 revenues generated from outside the United States and Europe were $39.7 million, a record number, representing 9.7% of our solar revenues this quarter, most significantly from Australia, in which we had a record quarter. On a megawatt basis, this quarter we delivered 926 megawatt to the United States, 641 megawatts to Europe and 283 megawatts to the rest of the world.

Residential products represented 56% of our megawatt shipped and commercial systems were 44%. This quarter our top 10 solar customers represented 62% of our quarterly solar revenues and decreased from the last quarter and one distributor accounted for more than 10% of revenues. Blended ASP per watt decreased this quarter by approximately 4.3% compared to the last quarter due to a change in the customer mix and devaluation of the euro and Australian dollar against the US dollar.

This quarter, revenues from our non-solar products were $23.6 million, mostly related to the sale of lithium-ion batteries. GAAP gross margin for the quarter was 32.5% compared to 34.3% in the prior quarter and 31.7% in the same quarter last year. Non-GAAP gross margin this quarter was 33.6% compared to 35.5% in the prior quarter and 32.8% in the same quarter last year. Non-GAAP gross margin for solar activities was 35% compared to 37.8% in the last quarter.

Last quarter, our solar margins benefited approximately 300 basis points due to one-time effect related to the implementation of cost reduction measures to our warranty accrual. Excluding this one-time benefit, the solar business gross margin slightly increased as a result of lower than anticipated air shipments, which represented 215 basis points this quarter. These lower-than-anticipated air shipments are mostly attributed to the increased capacity we built in the last quarters.

The lower than expected air shipments were partially offset by a change in the product and customer mix and holiday labor rates paid to contract manufacturers who continue to work on [Indecipherable] during Chinese New Year and the subsequent lockdown in February and early March. We expect our air shipments expenses to be much lower in the second quarter of 2020. Non-GAAP gross margin for our non-solar activities was 9% compared to 4.9% in the previous quarter. The increase was a result of the strong margin from the sale of our lithium-ion batteries offset by lower margin in the machinery and e-mobility groups.

Moving to our operating expenses, in total, operating expenses for the first quarter were $72.2 million or 16.8% of revenues compared to 92.7% [Phonetic] or 22.2% of revenue in the prior quarter and to $58.1 million or 21.4% of revenues for the same quarter last year. On a non-GAAP basis, operating expenses for the first quarter was $66.3 million or 15.4% of revenues compared to 63.1% [Phonetic] or 15.1% of revenues in the prior quarter and $48 million or 17.7% of revenue for the same quarter last year.

Our non-GAAP solar operating expenses as a percentage of solar revenues were 13.5% compared to 13.8% last quarter. This quarter, GAAP operating expenses included a non-recurring income of $4.9 million, that was collected from the major selling stakeholder of Kokam, and indemnification for settlement of a pre-acquisition claim. As part of our reaction to the economic slowdown that we are already seeing from COVID-19 and, as Zvi mentioned, we have reviewed carefully our business plan for 2020 and implemented certain cost-cutting measures, including a reduction in executive management's base salary, general halt on recruitment and freeze on salary increases, which were planned for April. In addition, we are eliminating workforce redundancies and adjusting our headcount and to the reduced level of activity in certain regions as well as renegotiating other expenses such as rental agreements and consulting services. Some of these adjustments are still ongoing and the effect will be seen in our operating expenses for Q2 and Q3.

Our GAAP operating income for the quarter was $67.8 million compared to $50.5 million in the previous quarter and $28 million for the same-period last year. Non-GAAP operating income for the quarter was $78.6 million compared to $85.3 million in the previous quarter and $41.2 million for the same period last year. This quarter, non-solar activities resulted in non-GAAP operating loss of $9.3 million compared to an operating loss of $8 million in the previous quarter, driven by operating losses in the UPS machinery and e-mobility division and offset by profitability of the lithium-ion businesses.

Financial expenses for the quarter were $16.6 million compared to financial income of $11.1 million in the previous quarter and a financial expense of $6.2 million for the same period last year. The decrease as a result of foreign currency changes resulting mostly from unrealized exchange rate fluctuation, and the accounting treatment of intercompany balances and intercompany loan provided for the acquisitions in Korea and Italy. The impact of these unrealized intercompany exchange rate expenses on GAAP and non-GAAP net diluted EPS was $0.24.

Tax expense was $8.9 million this quarter compared to $9.2 million in the prior quarter and $3.9 million for the same period last year. Our non-GAAP tax expense was $12.5 million compared to $10.4 million in the previous quarter and $4.9 million for the same period last year. GAAP net income for the first quarter was $42.2 million compared to a GAAP net income of $52.8 million in the previous quarter and $19 million for the same quarter last year. Our non-GAAP net income was $50.7 million compared to a non-GAAP net income of $87.4 million in the previous quarter and $32.9 million for the same quarter last year.

GAAP net diluted earnings per share was $0.81 for the first quarter compared to $1.03 in the previous quarter and $0.39 for the same quarter last year. Non-GAAP net diluted EPS was $0.95 compared to $1.65 in the previous quarter and $0.64 in the same quarter last year. Our non-solar business generated $0.23 non-GAAP diluted earning per share loss.

Turning now to the balance sheet, as of March 31, 2020 cash, cash equivalents, bank deposits, restricted cash deposit and investments were $558.7 million compared to $467.5 million in December 31, 2019. During the first quarter of 2020, we generated a record $107.7 million in cash from operations. We are happy to be in such a strong cash position with practically no debt during this time.

AR net decreased this quarter reaching $235.7 million compared to $298 million last quarter. DSO this quarter in the solar business was 62 [Phonetic] days, a decrease from 65 days last quarter. Naturally, in light of the financial situation in the market and our global operations, AR and collections are a major point of focus for us. Over the last few weeks, we have closely reviewed our AR balances and the financial stability of our customers. In some cases, we are selectively examining and providing longer credit terms to customers in order to support them in this period.

We will continue to examine the credit worthiness and strength of our customers even more cautiously be paid. And we will carefully consider to adjust credit allocations as needed. As of March 31, 2020, our inventory level net of reserves was at $198.6 million compared to $170.8 million in the prior quarter. Most of this increase is related to raw material of our factory accumulated in anticipation of component shortages and supply chain disruption from COVID-19. These raw materials will be used for manufacturing in the next quarters.

Additionally, approximately $38.2 million of our inventory relates to non-solar inventory, the majority of which is raw materials held in Kokam. As Zvi explained, we expect that the effect of COVID-19 will impact our business in the United States and to a lesser extent in Europe and will result in reduced revenues in the coming two quarters. Given our size and scale of operation, adjusting our manufacturing and inventory level to the new level may take one to two quarters.

Moving now to the guidance for the second quarter of 2020. Before outlining our guidance, I would like to remind you that the evolving impact of COVID-19 pandemic in unprecedented and that makes it difficult to predict with confidence its impact on the company's business for the next quarter and for the rest of this year. Our guidance for the next quarter include the anticipated impact of the COVID-19 pandemic on our businesses, as we viewed today.

In our Q4 earnings call, we told you that approximately 70% of our Q2 2020 orders were already received. Since then we have, of course, received additional orders. However, we have also received requests for rescheduling and/or cancellation of orders. Our current Q2 backlog is large enough to exceed the guidance we have provided and our manufacturing capacity and inventory will facilitate the delivery of those orders. We expect revenues for the second quarter of 2020 to be within the range of $305 million to $335 million. Revenue from the sale of solar products are expected to be within the range of $285 million and $315 million.

We expect gross margins to be within the range of 30% to 32%. Gross margins from solar activities is expected to be within the range of 32% to 34%, reflecting a higher percentage of revenues from Europe that are characterized with lower margins.

I will now turn the call to the operator to open it up for questions. Operator please.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first we'll go to Mark Strouse with J.P. Morgan. Your line is open.

Mark Strouse -- J.P. Morgan -- Analyst

Sorry, [Indecipherable]. Thank you very much for taking my questions. Appreciate it. Ronen, if I could just start with the guidance, the revenue range is wider than usual, not surprising given everything that's going on, but can you just kind of talk about the -- what needs to happen to come in at the high end of that range versus what might happen at the low end?

Ronen Faier -- Chief Financial Officer

So, in general, and as I mentioned, we are sitting today on a backlog that is sufficient to fulfill and basically cover the entire range that we have provided. However, during the last few weeks, we have seen requests for either rescheduling/cancellations. And at the same time, we're also seeing from time to time customers that are either struggling or we are afraid that they will struggle with payment terms.

And as such, even if we have orders that were already received, already booked, already in our orders book with a defined delivery date, we are looking at every order, we talk to every customer and we make sure that not only we are providing whatever was already ordered, but actually we made sure that we are not providing customers with goods that they either do not need or at the same time that we're providing credit to customers that we are a little bit afraid that we will not be able to collect.

Again, the orders are here, but situation is changing rapidly. I think, that every day in almost every week you see new restrictions or continued restrictions. And in this case, we almost as usual decided to take the more, I would call it cautious approach when guiding and given the range that we feel that we can meet.

Mark Strouse -- J.P. Morgan -- Analyst

Okay. That's helpful. And then kind of related to that, just your sense given your conversations with your customers regarding channel inventory kind of maybe if you can talk about what that looked like maybe in late Feb, early March versus what that looks like today. And any kind of trends that you're seeing with sell through for those distributors?

Ronen Faier -- Chief Financial Officer

So, of course, as Zvi mentioned, what we see around the world is very much different between country to country, continent to continent and even customer to customer. So, I'm not sure that I can generalize my entire answer to all of the customers that we see and we talk to. I would say that, in general, we usually see 60 days to 90 days of inventory levels within large distributors, usually smaller distributors are holding smaller amounts because of the working capital needed to do this.

And usually the way that they are measuring these 90 or 60 days is based on the forecast that they see in front of them and what they expect to do. So, I can tell you that all in all, when we deliver the products, I would say that maybe the inventory level on the absolute value may be very similar to what we usually see within the customer. They do not carry much more on the dollar volume. The time that they need consume this inventory may change.

And again, it very much varies. I would say that in Europe, we will see almost regular days and while in the US at least right now with some of the shelter-in-place restrictions, some of the distributors have much higher than the usual days of inventory than they usually carry.

Operator

And next we'll go to Colin Rusch from Oppenheimer. Your line is open.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much, guys. We've been inconsistent checks on lead times and resources, can you give us an update in terms of where you're at in terms of general lead times on products in [Phonetic] particular items that are extended a little bit versus the rest of your portfolio.

Ronen Faier -- Chief Financial Officer

Sure. So, the lead times -- first of all, in the last few quarters, we saw lead times extending as naturally the business grew much faster than our ability to manufacture and ship. This is why we also had the substantial air shipments. For the beginning of the quarter at least Q2 our lead times are almost similar as they were before. And in some cases it was even close to 10 weeks, mostly related to the fact that we decided to avoid air shipment and we're shipping most of our products using ocean freight.

I would say that, in general, what we're aiming to do is to be at around six weeks of lead times once we are able to replenish inventories at the desired levels using ocean freight in all of the territories in which we operate.

Colin Rusch -- Oppenheimer -- Analyst

Great. Thanks so much. And I know the capex loaded [Phonetic] with the battery factory, can you speak to what level we should anticipate for this year as a total number and then equipment availability, is there any delays or parts of that project that you're going to delay at this point given the availability of [Indecipherable].

Ronen Faier -- Chief Financial Officer

So, Colin, since the line was not really good. Your question is mostly related to the [Indecipherable]

Colin Rusch -- Oppenheimer -- Analyst

The Korean battery factory and your build-out on capacity there. What's the expected total capex is and any equipment procurement issue that you're looking at right now? And then is there any plans to delay that project, given the ability to buy ourselves on healthy margins [Phonetic]?

Ronen Faier -- Chief Financial Officer

So, first of all, we're very happy that actually we see they are continuing as scheduled despite of the fact that Korea was one of the first countries that was affected by COVID-19. This product is scheduled and continuing as usual. The plan is to have our 2 gigawatt factory that we'll be able to start manufacturing at the beginning of 2022. The costs associated with this product -- project is about $95 million that is including the land that we actually just bought out right after the quarter. We acquired the land, the building and the machinery.

And all of these expenses and equipment will be bought and deployed over the next 18 months. And we do believe that right now based on the schedule we do not see a delay. We do believe that the continued work that we need to do when it comes to negotiating terms on machinery and since some of the machinery is coming from outside of Korea [Indecipherable] dependent on the ability to travel, to ship and to have technicians coming in. But at least at the point where we are today, we do not see delay to this 2 gigawatt factory beginning to deliver in 2022.

Operator

And next we'll go to Maheep Mandloi from Credit Suisse. Your line is open.

Maheep Mandloi -- Credit Suisse -- Analyst

Hi. Thanks for taking the questions. Just on cost controls, which you announced in the quarter, can you talk about when we could see the benefit in gross margins, either it's in Q2 or the second half of this year?

Ronen Faier -- Chief Financial Officer

So, the cost control and the margin, let's first of all differentiate because a lot of the cost control is also related to the operating expenses and not just to the margins themselves. So, I'll start with the -- I'll start maybe with the operating expenses and then into the margins. Our aim is to be, by the end of Q2, at a run rate of operating expenses that were similar to what we saw in Q3, 2019 and this is around $58 million to $59 million a quarter of operating expenses. And again, since we're implementing these we're already in the beginning of May, of course, not all of this will be realized in Q2, some of it will come in Q3.

When it comes to the gross margins the cost activities that we do there are a little bit hard to predict because not only they are dependent on what we achieve, but also dependent on the revenues, the mix and the customer mix. So, it's the geographic mix and the customer mix. For example, in the quarter of 2020 substantial part of our revenues will come from Europe. And gross margins in Europe are lower than gross margins in the United States.

So, despite of the fact that we already cut costs in our cost of goods sold, in our operational departments and costs related to maybe manufacturing component and shipments, the fact that we're delivering substantially higher volumes into Europe that is characterized with lower margin will take away a little bit of these effects. And this is what you see actually in the guidance that we give.

So, all in all, on opex, we will go back to about Q3, and when it comes to gross margins, the magnitude of selling to each and every territory will determine what the numbers will be.

Maheep Mandloi -- Credit Suisse -- Analyst

Thank you for the clarification. And just want a small housekeeping and another question. So, on the safe harbor, could you clarify how much safe harbor do you expect in the Q2 revenues? And previously you said you might have something in April for safe harbor. And the last question then I'll jump back is just from the other product launches, you touched upon the battery product, but can you talk about the Smart Modules security scale and the Gen4 optimizer? Thank you.

Ronen Faier -- Chief Financial Officer

I'll talk about the -- first of all, about the first part of the question and Zvi will answer the second.

Zvi Lando -- Chief Executive Officer

[Indecipherable]

Ronen Faier -- Chief Financial Officer

So, the safe harbor orders for the second quarter are approximately $17 million, which are important to say that these are not just, of course, residential safe harbor orders but also commercial. But all in all, it's around $17 million. Now with regards to new products, Zvi maybe...

Zvi Lando -- Chief Executive Officer

In short, as I mentioned, the residential battery is, as we said all along is scheduled for the second half initial shipment. We are on schedule with that. We're approaching the service of certification that takes place in multiple places around the world. So, there is still some question mark how much we will be able to ship people and batteries around the world. So, that's the only risk factor on meeting the schedule of delivery in the second half of the year.

Smart Modules, we already delivered today. So, it's not a huge part of the business, but we are delivering every quarter embedded Smart Modules of SolarEdge optimizers already today. And we expect this to ramp while it's still a small portion of the business. Optimizers, I'm not sure in particular to what you are referring. As I mentioned, we have a new optimizer that is high power optimizers specifically for ground-mount installations especially focused on the community solar market in the US. That we'll begin to ship in the next few weeks or before the end of this quarter.

On the standard residential and commercial optimizers enhancements and improvements being introduced continuously. So, there is no specific new generation that is intended in the next few months.

Operator

Next we'll go to Philip Shen from ROTH Capital. Your line is open.

Philip Shen -- ROTH Capital -- Analyst

Hi, everyone. Thanks for the questions. Looking beyond Q2, I was wondering what kind of visibility you have into Q3? How much, for example, of Q3 maybe booked? How do you expect potentially margins to trend? I know you don't -- you're not providing official guidance, but if you can provide any color on that, that'd be great.

Ronen Faier -- Chief Financial Officer

So, naturally again since visibility is already problematic, to Q2, Q3, of course, is much more. I would say that we have limited visibility. We talk to all of our customers constantly, we see the signs in each of our -- in every country. And we are following up very closely with all of our customers and their inventory levels. But I think that again the question here is not just what they have but actually what is going to happen to the installation rate itself during the second quarter.

And therefore, although, the visibility that we have and -- or the level of transparency that we have has been very open and good, the ability to predict Q3 is problematic right now, because I think that neither us nor do the customers know how much of their inventory will be consumed. And this is why we talk about limited visibility.

Now when it comes to the margins themselves, again, this will come mostly due to the fact of what will be the mix between the geographical shipments that we will do. We continue to do cost reduction on the costs side on a continuous basis. Of course, as we mentioned before, as Zvi mentioned, we are working all the time to do it and actually [Indecipherable] some cases we're even accelerating those. But, of course, if you see, see different mix and different countries, this will affect the margins as well.

So, I would say that I don't think that we can say anything substantial right now about the quarter itself and the levels, but I can tell that we are following very closely and we're in constant dialog with our customers to understand where their business is.

Philip Shen -- ROTH Capital -- Analyst

Great. Thanks. I believe you may have indicated for Q1 that the ASP may have been weak because of mix, but I think the US mix went up and US typically has a higher ASP and greater concentration in resi. So, can you provide a little bit more color around why the ASP in Q1 was a bit weaker and to what degree may have just been impacted by some competitive dynamics that you guys might be experiencing?

Ronen Faier -- Chief Financial Officer

So, I think, it was not actually related too much to the competitive environment, it is mostly due to the fact that in Q1, safe harbor deliveries were made due to the fact that again and even expedited that we were very much concerned about closures of borders by the end of the quarter. And therefore, we decided that we expedite whatever we can in order to avoid these and actually to meet the very strict delivery times with the safe harbor.

Naturally, that means that higher portion of our US revenues came to the larger customers, and again, naturally, larger customers get larger discount rates that were pre-negotiated and known for longer time. So, here it is really more of a mix issue rather than anything that change in pricing or pricing environment during this quarter.

Operator

And next we'll go to Jeff Osborne from Cowen and Company. Your line is open.

Jeff Osborne -- Cowen and Company -- Analyst

Hi, good afternoon. Ronen, I was wondering if you could walk us through the gross margins. It's been asked a couple of times, but more specifically the guidance of solar going from 35% to, at the midpoint, 33%. I think you called out a 215 basis point headwind for air shipments. I would assume that that goes to zero. So, it looks like there is about, at the midpoint, a little over 400 basis points. Is it a safe assumption to say that Europe generically speaking is always 400 basis points lower margins or is it mix or are using price in Europe to try to gain share? Or just that magnitude was a little bit higher than I was thinking?

Ronen Faier -- Chief Financial Officer

Yeah. So, here again, the main affect in the Europe and I will give you even the specific numbers. As we mentioned several times in the past, when we started or when we started to actually price products in Europe and the United States, the prices were about the same, but the exchange rate of the euro to the US dollar was approximately $1.20 per euro today. Today, we're talking about a much lower rate and actually over the last 12 months alone, the euro devaluated by 2.8% against the US dollar.

I can tell you that, as of today, the difference in average, the difference between Europe and the US in gross margin is about 450 basis points. Now, this quarter, the main effect that you see in that there is a substantial shift into Europe, Europe is traditionally much stronger in the second quarter and the third quarter, and this move into Europe is, of course, are pushing this gross margin down.

In addition to this, also in Europe, we see sometimes installations that are more heavier toward the commercial products and in the commercial products and especially the larger products within the commercial portfolio that you had also the gross margin usually lower than the residential US market, and this is why you see the effect. This is entirely coming from mix due to geographic and I would call it segmental shift.

Jeff Osborne -- Cowen and Company -- Analyst

Just maybe to follow-up on that like-for-like system, 10-kilowatt residential system in California versus Germany, is that also 450 basis points difference?

Ronen Faier -- Chief Financial Officer

Approximately. Yeah. So, again, varying from customer to customer because customers have a little bit variations in their pricing, but in general, yes.

Operator

And next we'll go to Brian Lee from Goldman Sachs. Your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys. Thanks for taking the questions. Hope everyone is staying safe and healthy. I guess, question on just the guidance, Ronen, you mentioned April or Zvi mentioned April was down 33% in the US, but then stabilizing at those levels. But I also think you mentioned Q3 could be slower later in the call. I might have misheard or misinterpreted, but are you actually expecting Q3 to be worse than Q2. And then if not, what sort of data are you looking at to consider Q2 the bottom here?

Zvi Lando -- Chief Executive Officer

So, maybe I'll clarify exactly what the data we are looking at. We are looking at the rate of installations of new systems pretty much every day, new SolarEdge systems every day in every country and actually even in every state. And we compare that to the rate of installation of new systems a year ago. What I mentioned is that while in Europe and across the world during March and April actually more SolarEdge systems were installed this year than were installed last year during the same period. In the United States during April, there were 33% less installations of new SolarEdge systems compared to April of 2019.

By the way, this vary significantly by state, actually, Texas was more than a year ago and California is down by a bit more compared to a year ago and we look at this as every single state. That is giving us an indication on the general level of business and when we think inventories at the distributors will rundown and they will begin to either bring in new orders or as Ronen mentioned, the reduced risk of requesting to push out or cancel orders. That is what we're baking our Q2 guidance on. Visibility for Q3, as Ronen mentioned is, it's very limited especially in what relates to the United States.

Generally, in several markets around the world, several big markets around the world, there is a sentiment of business as usual. And I think you just have to wait and see if that carries out to Q3 as well. And the US, I think, it's very volatile, the business, as I mentioned is down significantly compared to a year ago and it's, in our mind, very early to predict what will happen in Q3.

Brian Lee -- Goldman Sachs -- Analyst

Okay. Fair enough. Yeah, shifting gears a little bit here, I think, on the safe harbor split here. Just a question around the $75 million you guys had originally guided for, I think, last quarter Ronen you had said, I think, evenly split between Q1 and Q2, roughly speaking. I know you pulled some forward into Q1 here, but it seems like if you hadn't pulled that $17 million or so from Q2, you would have come in about $10 million below the revenue guidance range for the quarter.

Just wondering what drove that dynamic. Was it all production issues at the end of the quarter or were there other issues because I would assume that given you gave the guidance in late February. You had volume demand pretty much locked up for the quarter. So, just wondering where that slippage might have occurred and if you're recapturing that volume in Q2 or if that's some of the rescheduling/cancellations you're seeing?

Ronen Faier -- Chief Financial Officer

Well, actually it's neither, the situation was -- and again, we need to underpin now how the end of March looked in China. At the end of March, it was almost impossible to ship anything outside of China. Ports were not yet there. Airlines almost stopped -- entirely stopped flying into China and bringing a new -- one case, I can even tell you that we chartered an entire plane to fly products from China into the United States.

So, in this case, we did not actually decided that we want to pull in, in order to meet the revenue guidance. Actually, it was the fact that we decided to prioritize safe harbor shipments over non-safe harbor shipments in order to make sure that we are meeting the delivery times of those safe harbor shipments that needed to be around no later than 15 of April.

So, in this case revenues will be approximately the same. We simply took all of the capacity that we could have and we could send outside of China before the end of March. And in this limited and capped capacity we have decided to prioritize safe harbor shipments.

Operator

[Operator Instructions] Next we'll go to Mike Cikos from Needham & Company. Your line is open.

Mike Cikos -- Needham & Company -- Analyst

Hey, guys. Thanks for taking the questions here. And I apologize if I missed this, I'm juggling between a couple of difficult calls. I just wanted to come back to some of the supply chain constraints that you guys saw. And I was trying to figure out, can you give us more color with respect to how those constraints are as we stand today? And whether or not the constraints -- once thos bottlenecks are past you, are you looking to help your distributors build up the appropriate level of inventory in the current demand environment to help reduce your expenses on the air freight shipments?

Zvi Lando -- Chief Executive Officer

So, just to clarify, so we, today, manufacture in several sites. We manufacture in China and Vietnam and in Hungary. Actually, we don't see any supply constraints right now and we are able to deliver on all orders that we received. What we are doing is instead of air shipping we are ocean shipping products and building inventory gradually. But we are currently able to supply all demand and we are looking at the inventory levels of distributors very closely and making sure that no one has any shortage of parts to meet demand.

Mike Cikos -- Needham & Company -- Analyst

Okay. Thank you for helping me out with that. And then there is the follow-up I have for you. With respect to the cost cutting measures that you guys are taking, can you help us better understand how much of this is temporary just because I have to imagine once things start to recover, you guys will be going back to growth mode from your current run rate. So, just trying to get a gauge of how quickly these expenses may come back on as demand starts to recover.

Zvi Lando -- Chief Executive Officer

So, being veterans of cyclical business coming out of the semiconductor industry, looking at these type of events of short-term down and just not being sure for how long this will go. What we look at early items as R&D, the temporary and easy to recover when the business recovers. And it's typically activities that are directly related to the level of the operation. And typically not any type of critical capability or skill that will be difficult to supplement. So, we examine the operation entirely, identify those type of opportunities and those are the cost-cutting measures that we implemented. And when the business recovers, we will be able to recover that activity quickly.

Operator

And at this time, I'll turn the call back to Zvi Lando for closing remarks.

Zvi Lando -- Chief Executive Officer

Thank you. In summary, I think, it's appropriate to point out that we have entered this pandemic not only as a strong company but in a strong industry. Smart energy and solar, in particular, has proven some excellent investments for home and business owners. And I believe that the demand for solar in a climate and world where back up and live independent and growing their importance, we will continue to evolve. Recent events have proven not only for SolarEdge but through our competitors and colleagues that this industry is mature and can serve with the market even in an extremely challenging period. Thank you for joining us on the call today.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Erica Mannion -- Partner and Founder

Zvi Lando -- Chief Executive Officer

Ronen Faier -- Chief Financial Officer

Mark Strouse -- J.P. Morgan -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Philip Shen -- ROTH Capital -- Analyst

Jeff Osborne -- Cowen and Company -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Mike Cikos -- Needham & Company -- Analyst

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