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SolarEdge Technologies Inc (NASDAQ:SEDG)
Q4 2020 Earnings Call
Feb 16, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone. Welcome to the SolarEdge Conference Call for the Fourth Quarter and Full Year ended December 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 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 call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Please go ahead.

Erica Mannion -- Investor Relations

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year ended December 31, 2020 as well as the company's outlook for the first quarter of 2021. 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 fourth quarter and year ended December 31, 2020. Ronen will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2021. 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 a sole property and copyright of SolarEdge Technologies with all rights reserved.

Please note this presentation describes certain non-GAAP measures including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with US GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how the company's management team 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 and prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter-ended December 31, 2020 press release or the supplemental material may obtain a copy by visiting the Investors section of the company's website.

Now I will turn the call over to Zvi.

Zvi Lando -- Chief Executive Officer

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 revenues of $358 million and the year with record revenues of $1.46 billion. Revenues for the fourth quarter in our Solar business were approximately $327 million, also above last quarter's Solar revenues. Our Solar revenues this quarter reflect strength in the US residential market which we had anticipated in our earnings call last quarter. In fact, the quarter-over-quarter growth in shipments from the residential segment in the US was in excess of 50%. We expect this strong growth in our revenues from US residential products to continue in the first quarter of 2021 as well.

We have also experienced very healthy growth in our Solar revenues from countries outside of the US and Europe with record quarterly revenues in Australia where we finished 2020 with over 30% year-over-year growth. Our Europe Solar revenues was down from Q3 as is the typical seasonal behavior of the European market. However, on an annual basis, we are closing the year with record Solar revenue in Europe of $579 million, up from $522 million last year led by the Netherlands, Germany, Italy and Poland. We are very happy with these results, in particular in a challenged COVID year.

This quarter we shipped over 1.36 gigawatt of AC nameplate inverters. Approximately 457 megawatts of which were shipped in North America. Shipments to Europe consisted of 594 megawatts. From a segmental point of view, we shipped this quarter 556 megawatts of commercial products and 798 megawatts of residential products. This split represents the strength in residential I discussed earlier and a noticable reduction in commercial shipments, in line with what we explained in our call last quarter regarding the slower recovery of commercial installations and the higher inventory of commercial products in the channel.

In the fourth quarter we believe commercial installations worldwide were still impacted by the economic slowdown. However, we did see an increase in the installation rate of our commercial products and a reduction in inventory level this quarter, which we believe indicates that the recovery in the commercial segment is under way. Overall, this quarter we shipped 3.6 million power optimizers and approximately 156,000 inverters. As discussed in our last call, the ramp-up production in our Sella 1 manufacturing facility in Israel continues. This together with our manufacturing in Vietnam and Hungary will enable us to supply approximately 85% of our US products without tariffs by the end of the first quarter of 2021.

On the product side, I want to spend a bit more time on our residential offering and in particular our complete storage system. We continue to see good market acceptance and strong demand for our Energy Hub single phase storage inverter. In the fourth quarter, we shipped to the US close to 15,000 energy hub inverters, up from approximately 6,500 in Q3. So far we released the Energy Hub in power levels between 3.8 kilowatt to 7.6 kilowatt. In the coming months, we will release the high power version with inverter offerings of 10 kilowatt and 11.4 kilowatt. The high power versions are especially important as average installation sizes increase with consumers being more aware and interested in more power and more stored energy for backup and outage scenarios.

Our Energy Hub supports today EV charger integration, multiple batteries for increased capacity and multi-inverter configurations through our backup interface for increased power. In the coming months we will add generator integration and high backup power modules allowing 7 kilowatt and 10 kilowatt of continuous power, critical for backup of a typical house load during power outages. The product is designed to handle consumption patterns [Phonetic] that we have learned from our installed base of tens of thousands of battery reconnected inverters. We see the Energy Hub as a differentiated storage system, optimized for energy harvest and energy management in grid connected and backup scenarios. To complete the system, the Energy Hub is connected to a battery in the DC coupled configuration aimed to enable harvesting of all the energy from the modules on the roof. To clarify typically a system is oversized such that the total power of the modules on the roof or of the individual module is larger than the capacity of the inverter. As such in an AC coupled configuration, the utilization of the energy generated from the roof will be limited by the size of the inverter.

In our SolarEdge DC coupled configuration, all the energy generated by the modules will be harvested and either used to tower the required house consumption or to charge the battery in parallel, thus extending backup time and increasing system utilization. The Energy Hub inverter can be coupled with a third party battery as we currently offer or our own battery. In that regard, we are on track with the schedule discussed last quarter of the initial shipments of our own battery in Q2 and meaningful volumes in Q3.

In the commercial segment, we are beginning these shipments of the new and large synergy inverter with power rating of up to 120 kilowatts. In parallel, we began shipments of higher power commercial optimizers of up to 1,100 watts for a two-module configuration. This in order to match the trend of high power modules that are becoming available around the world. The higher power modules and optimizers combined with the higher power inverter will reduce the cost per watts for hour commercial installers and we expect it will increase adoption similar to what we have seen in 2020 where our annual commercial megawatt shipments were up more than 25% compared to 2019.

In addition, we are seeing growing adoption of our Designer software workflow solution, which enables installers to easily design complex rooftops and seamlessly export the design for quick installation and monitoring setup after installation. On average every month approximately 70,000 designs are created on the platform by more than 12,000 in solar accounts.

Moving to our non-solar business. As announced earlier today, SolarEdge e-Mobility has been selected as the Tier 1 supplier for full powertrains and batteries for the Fiat E-Ducato. For those of you who are not familiar with this vehicle, the Fiat Ducato is recognized by many as the leading light commercial vehicle in Europe and has been produced since 1981. Recently FCA presented the electric version of the Ducato and we are proud that SolarEdge e-Mobility has been selected to supply the full powertrain and batteries for this vehicle in Europe. Our solution include inverters, DC to DC converters, batteries, onboard chargers, vehicle controlled units and software for electrical vehicles.

As I've mentioned in past calls, we have already delivered prototypes for close to 100 E-Ducato vehicles that are accumulating mileage throughout Europe today. We believe the experience gained through this project which has including adapting some of our production lines to automotive quality standards will service in our solar and other businesses well beyond the already exciting news of being part of the e-Mobility industry. The automotive industry planned this vehicle years before they hit the road. This nomination reflects a long-term investment and is in line with our growth plans beyond solar that we have laid out in our earnings call and that form the basis for our acquisition. Subject to market acceptance, in 2021, we expect our e-Mobility business to deliver between $100 million to $120 million of revenue.

In our energy storage division, Kokam's revenue grew by 25% this year and for the first time in many years Kokam is profitable. As a reminder, we completed the Kokam acquisition in October 2018, and this year we have ramped the existing lithium-ion cell and battery factory to full capacity. This quarter we also welcome S.W. John [Phonetic] to our team as the General Manager of Kokam. Mr. John is an industry veteran with more than two decades of experience in leadership positions in Samsung Electronics. We are excited to have him onboard to lead our energy storage business out of Korea.

This quarter we also began construction of our Sella 2 factory in Korea. This factory, which is part of Kokam represents another pillar of our growth strategy beyond solar and once completed will manufacture 2 gigawatt hour of lithium-ion cells per year. The factory is spread over 56,000 square meters just outside of Seoul, will be a state-of-the-art manufacturing facility and is expected to start production in the first half of 2022. This capacity will enable us to supply cells for our own battery storage solutions and for other applications.

We ended 2020 with record revenues of $1.46 billion, slightly above those of last year. Like most, when the pandemic hit, we adjusted both our expenditure and forecast to take into account the impact of the economic slowdown and given the circumstances, we are pleased to have completed the year with revenues slightly above those of last year. No less important, we were able to deliver these results while continuing to invest and execute on our solar and non-solar growth strategies.

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. This financial review include the GAAP and non-GAAP discussion with reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today.

Total revenues for the fourth quarter were $358.1 million, a 6% increase compared to $338.1 million last quarter and a 14% decrease compared to $418.2 million for the same quarter last year. Revenues from the sale of solar products were $327.1 million, a 5% increase compared to $312.5 million last quarter. US Solar revenues this quarter were $132.3 million and represented 40.4% of our solar revenues. Solar revenues from Europe were $146.7 million or 45% of our revenues. This quarter our top 10 solar customers represented 64% of our solar revenues and included more European customers than last quarter. Three [Phonetic] customers accounted for more than 10% of our solar revenues.

Our pricing levels remained stable this quarter. Blended ASP per Watt for our solar products increased by approximately 12.5% compared to last quarter. A direct result of higher revenues from residential products offering and the increased portion of revenue derived from the United States. In line with what Zvi explained, inventory level held by our distributors in the United States were healthy on the residential side and still higher than desired on the commercial segment. This is in line with our expectation and this level will return to normal toward the second quarter of 2021. This quarter, revenues from our non-solar products were $31 million led by sales of lithium-ion batteries by Kokam and increased sales by e-Mobility.

GAAP gross margin for the quarter was 30.8% compared to 32% in the prior quarter and 34.3% in the same quarter last year. Non-GAAP gross margin for the quarter was 32.5% compared to 33.5% in the prior quarter and 35.5% in the same quarter last year. Non-GAAP gross margin for the solar business was 36.2% compared to 34.8% in the last quarter, in line with our solar gross margin target of 36%, plus-minus 1%. This increase in the non-GAAP solar margin as a result of larger portion of US revenues, increased portion of residential products out of the total revenues, improved exchange rates in -- on sales in Europe and cost reduction activities including reduction in the portion of Chinese-made products that are subject to custom tariffs in the United States in our overall product mix. This quarter, approximately 60% of products shipped into the United States came from our non-tariff production.

Sella 1 production continue to ramp according to plan and is expected to reach full production capacity at the end of the second quarter of 2021. Until then the ramp has a negative impact on our gross margin. Non-GAAP gross margin for our non-solar activities was minus 6.4% compared to positive 16.9% in the previous quarter. The decrease was mainly a result of an increase in e-Mobility pre-production expenses related to the E-Ducato projects. The powertrain unit sold in this project are highly complicated systems that includes several components that are produced in part by contract manufacturers and assembled in our Italian manufacturing facilities. Over the last quarter, we have been building manufacturing capacity in Italy that includes an increase in the number of employees and associated expenses that are charged into the cost of goods sold.

As a result of the relatively small number of units currently being produced, the complexity of manufacturing and the fact that we have built production capacity that can suffice the projected manufacturing level starting in Q1 2021, our margins on these projects are currently negative. Once we stabilize the manufacturing at the higher output level, the margin will be at a single digit level based on current anticipated volumes.

Moving to our operating expenses. In total GAAP operating expenses for the fourth quarter were $95.9 million or 26.8% of revenues, compared to $77.7 million or 23% of revenues in the prior quarter and $92.7 million or 22.2% of revenues for the same quarter last year. A major part of the increase this quarter is a result of stock-based compensation. On a non-GAAP basis, operating expenses for the fourth quarter were $72.9 million or 20.4% of revenues, compared to $63.2 million or 18.7% of revenues in the prior quarter and $63.1 million or 15.1% of revenues for the same quarter last year. Our non-GAAP solar operating expenses as a percentage of solar revenues were 18.9% compared to 16.7% last quarter.

Our GAAP operating income for the quarter was $14.4 million compared to $30.4 million in the previous quarter and $50.5 million for the same period last year. Non-GAAP operating income for the quarter was $43.5 million compared to $50 million in the previous quarter and $85.3 million for the same period last year. This quarter, non-GAAP solar activities resulted an operating profit of fixed $56.5 million compared to an operating profit of $56.7 million last quarter. This number represents 17.3% of our solar revenues and a slightly lower than our 20% to 23% long-term operating profit model. The non-solar activities resulted in a non-GAAP operating loss of $13 million compared to an operating loss of $6.6 million in the previous quarter, mainly from our e-Mobility division.

Financial income for the quarter was $10.4 million compared to financial income of $15.8 million in the previous quarter and financial income of $11.1 million for the same period last year. This income is a result of foreign currency changes, offset by increased finance expenses related to the accounting treatment of our convertible debt and leases. Tax expense was $7.2 million this quarter compared to a tax expense of $2.4 million in the prior quarter and $9.2 million for the same period last year. Our non-GAAP tax expense was $4.6 million compared to $1.6 million in the previous quarter and $10.4 million for the same period last year. Our tax rate is positively affected in the last quarter by higher deductible expenses for tax purposes resulting from exercise of employees stock compensation.

GAAP net income for the fourth quarter was $17.7 million compared to a GAAP net income of $43.8 million in the previous quarter and $52.8 million for the same quarter last year. Non-GAAP net income was $55.7 million compared to a non-GAAP net income of $65.9 million in the previous quarter and $87.4 million for the same quarter last year. GAAP net diluted earnings per share was $0.33 for the fourth quarter compared to $0.83 in the previous quarter and $1.03 for the same quarter last year. Non-GAAP net diluted earnings per share was $0.98 compared to $1.21 in the previous quarter and $1.65 in the same quarter last year.

Turning now to the balance sheet. As of December 31, 2020, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $1.2 billion. Net of debt, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $530.2 million. During the fourth quarter of 2020, we generated $27 million in cash from operation. AR net increased nominally this quarter to $218.7 million compared to $183.1 million last quarter. DSO this quarter in the solar business was 75 days, an increase from 70 days last quarter. As of December 31, 2020, our inventory level net of reserves was at $331.7 million compared to $297 million in the prior quarter. A substantial portion of this growth is attributed to an increase in raw material inventory in anticipation of start-up production in our e-Mobility division and to a lesser extent an increase in our finished good in the solar business.

Let's move now to summarize the full year of 2020. Revenues for the year were $1.46 billion, a 2.4% increase from $1.43 billion in the calendar year 2019. Revenues related to our solar business were $1.36 billion, a 1.5% increase compared to 2019. GAAP gross margin was 31.6% compared to 33.6% in the prior year. Non-GAAP gross margin was 33% compared to 34.9% in the prior year. GAAP net income for 2020 was $140.3 million, a 4.2% decrease compared to $146.6 million in the prior year and GAAP diluted EPS of $2.66 compared to $2.90 in the prior year. Non-GAAP net income for 2020 was $224.4 million, a 3.5% decrease compared to $233.2 million in 2019 and a non-GAAP diluted earnings per share of $4.11 compared to $4.44 in the prior year. Non-GAAP net income for our solar business was $264 million, a 4% increase compared to $254.1 million in 2019. This year, we generated $222.7 million in cash from operations.

Moving now to the guidance for the first quarter of 2021. We expect revenues in the first quarter to be within the range of $385 million to $405 million. Revenues from the sale of solar products are expected to be within the range of $360 million and $375 million. We expect non-GAAP gross margin to be within the range of 34% to 36%. Non-GAAP gross margins from solar activities is expected to be within the range of 36% to 38%.

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

Questions and Answers:

Operator

[Operator Instructions] We'll hear first today from Mark Strouse with JPMorgan.

Mark Strouse -- JPMorgan -- Analyst

Yes, good evening and thank you very much for taking our questions. Good to see the commercial channel inventory reducing. Curious if you can just quantify that though? I think on the last call you mentioned around 14 weeks, 15 weeks is kind of where that stands maybe as of year-end or as of today would be even better? Thank you.

Ronen Faier -- Chief Financial Officer

So the number is slightly lower this quarter but not dramatically. And again, it depends on the difference between Europe and United States, where Europe, we see the weeks of inventory decreasing while in the US, they are decreasing to a lower extent. I think that the more interesting part, though, is the fact that we do start to see more installations happening in the commercial segment and therefore, we now expect that these kind of inventory levels will start dropping a little bit quicker. But in general we see a small decrease.

Mark Strouse -- JPMorgan -- Analyst

Okay. Okay, thanks. And then just a quick follow-up. Hearing from some others in the industry talking about component supply issues, semiconductor supply issues, any impact on your supply chain. And is that reflected in guidance?

Zvi Lando -- Chief Executive Officer

So in general, Mark, it's something that we used to see in the past, these kind of component shortages and we actually foresaw this are coming in the last few months and got ready for this. As you can see reflected in our inventory levels, our inventory is a little bit higher than usual. First of all, due to the E-Ducato project, but also given the fact that we are holding relatively large amount of components -- of critical components of raw materials that we hold in anticipation for these kind of shortages. At least at this point of time, we feel that we can manage through the shortages, we do not see any impact on the production and we are looking at it very closely. At the same time, we continue to have a very close relationship and discussions with our suppliers, because in many cases we became a major portion of those suppliers. Our capacity or sometimes a sales and therefore both they may not have good interest in staying in very close touch and making sure that we're well coordinated. So at least at this point, we do not see a major effect.

Mark Strouse -- JPMorgan -- Analyst

Okay. I'll hop back in queue. Thank you very much.

Zvi Lando -- Chief Executive Officer

Thank you.

Operator

We'll hear next from Stephen Byrd with Morgan Stanley.

Stephen Byrd -- Morgan Stanley -- Analyst

Thanks for taking my questions. I wanted to first talk about e-Mobility business and just you had a nice success here. Curious in terms of the opportunity, more broadly, I know you've had dialog and work with a number of OEMs. What is your sense of the potential to replicate what you've done here to kind of extend your relationship with additional OEMs? How do you kind of feel about the opportunity beyond what you've just announced?

Zvi Lando -- Chief Executive Officer

So obviously it's a huge market with a lot of potential. At the same time processes take a very long time in this industry and we don't anticipate any quick wins. We're happy with this project, the experience that we gained in this project helped us improve the product, improve our production and capability, gain a lot of experience from all of the mileage that was accumulated and we hope to get future fruits out of this learning and investment, but we don't foresee any quick wins in a short while, but it's a, -- we're excited about this project and excited for having a foot in the door of this huge opportunity.

Stephen Byrd -- Morgan Stanley -- Analyst

That's helpful. And you did provide some prepared comments on sort of the size of the opportunity here with Fiat. Would you mind just speaking a little bit further to that to the extent that the relationship continues to work well. Could you just speak a little bit more to sort of volumes and you talked about the margin situation now? Could you just talk a little bit longer term in terms of your aspirations there?

Zvi Lando -- Chief Executive Officer

So, as mentioned in the comments, to a large extent, it depends on the acceptance of the vehicle. Now we're optimistic because we know it's a very popular vehicle around here in Europe and we are frequently on the road here in Israel as well. The scale that we are, represented in our numbers is the scale of thousands over the next few years. But again, it can go in either direction based on market acceptance.

Operator

We'll move next to Colin Rusch with Oppenheimer.

Colin Rusch -- Oppenheimer -- Analyst

Thanks so much guys. Can you talk a little bit more about kind of the trend line on the opex side. How are you tracking that on a non-GAAP basis to trend over the next several quarters?

Ronen Faier -- Chief Financial Officer

First of all what we calling and you mentioned the non-GAAP, you need to understand that there is a big difference as you can see, and it's growing between the GAAP and non-GAAP. A lot of it is related to the stock-based compensation given the fact that stock price hike so much and therefore these expenses are representing a bigger portion. But in general, I would start by saying that the way that we would like to see gross margins in a way that allows us to be between 22% to 23% of operating profit on a non-GAAP basis. So that means that we are aiming at around 15%, 16% of non-GAAP operating expense coming for the solar business.

Now, I think that we need to differentiate here between the solar and the non-solar business. In the solar business, the revenues are relatively high and as long as we are able to maintain growth rates, the numbers of the revenues and the impact is going to be so large that you should see an operational lever where, when the numbers are growing operating expenses as a percentage of revenues will go down. We continue to invest in R&D as much as we can. Today, it's hard to broaden much more or as quick as we would like the R&D simply given the fact that we already have a base of many people. So therefore, to get many people in the short time is an issue. On sales and marketing and G&A, there are economies of scale and therefore we should expect to see this operating leverage continuing.

The issue and the big question is usually around the newer businesses because these are businesses that are in a, I would call it investment mode and naturally we would like to invest there in R&D or market development. So for example, in the e-Mobility space, we definitely want to increase product selection and we want to go to newer generation.

In general there, I would assume that you may see a situation where the growth in operating expenses is similar to the growth that you will see in the revenues. But when you tie everything together with the solar that is so much bigger than the others, again, you should see that in the overall picture as a percentage of revenues, non-GAAP operating expenses should decline over time.

Colin Rusch -- Oppenheimer -- Analyst

Okay, that's helpful guys. And then in terms of the raw and energy storage product and qualification on that, but can you just give us an update on the timing and when you expect to start shipping significant volumes of that residential product. And then could you tell us a little bit about the incremental development expense to integrate the generator capability into that product?

Zvi Lando -- Chief Executive Officer

So in terms of battery readiness, we are in the midst of the certification processes right now. And that together we're completing building up the manufacturing line is what is leading us to the projection of initial shipments within the second quarter and meaningful volumes in the third quarter, that's the schedule that we communicated last quarter and so far we are on track with that. In terms of, there is no special incremental R&D related to generator integration. Actually the hardware is compatible already. It's a matter of the roadmap for software version releases that causes the fact that the future will be fully operational a couple of -- a few months from now.

Operator

And from ROTH Capital Partners, we'll hear next from Philip Shen.

Philip Shen -- ROTH Capital Partners -- Analyst

Hey guys, thanks for taking my questions. As a follow-up on the storage question there. During the past you guys have talked about targeting 2 gigawatt for -- 2 gigawatt hour run rate for the storage business in '21. So possibly in Q4 is that visible at all, because I assume was that a little bit more likely in 2022 as a target or run rate?

Ronen Faier -- Chief Financial Officer

Basically Phil, here I think that there is a little bit of -- maybe missed -- not good explanation on our side. In general, the 2 gigawatt factory that we're building will be end of -- construction will happen at the end of 2021. At this point, we will have a factory with all the equipment and capacity needed to manufacture 2 gigawatt hour a year. But from this point of time, we will need a few months to start ramping up the activities in the facilities in the new factory. And this is something that takes a little bit more time. So while the capacity -- the build capacity of 2 gigawatt will be there at the end of 2021, only in the first half of 2022 we will be able to ramp up the production with all the three shifts and all the processes to get to this kind of a run rate.

Philip Shen -- ROTH Capital Partners -- Analyst

Okay, Thanks for that. So, as a follow-up there. You guys talked about revenues from e-Mobility $120 million, what do you think storage can contribute this year and perhaps or by quarter would be helpful as well? Thanks.

Zvi Lando -- Chief Executive Officer

So in general, here again, the main question is going to be of course timing which currently looks on track but as noted before, we believe that anything between $100 million, $150 million this year is a number that we're aiming for.

Philip Shen -- ROTH Capital Partners -- Analyst

Okay, great. Thanks for that. I'll pass it on.

Operator

We'll hear next from Jed Dorsheimer with Canaccord Genuity.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Hi. Thanks for taking my question. Congrats on another solid quarter. Quick question, I guess just on the HD Wave and on the solar products the inverter specifically, where are you in the process in terms of the conversion from silicon to wideband gap. And then I have a follow-up to that.

Zvi Lando -- Chief Executive Officer

So in the current version as well as the Energy Hub, we are using -- still using standard silicon for these generations. For newer generations we are looking at different alternatives, obviously.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Got it. I mean, I'm just looking at the analog device spec sheet here that list you guys and talking about a 50% to 60% reduction of component costs. And so I'm just curious, as you see a potential supply demand rise in the commodity cycle here. It would seem like reduction of the passives and in particular copper would seem like a great hedge in terms of that shift. What's keeping you back from making that transition?

Zvi Lando -- Chief Executive Officer

So obviously we will not get into too much detail but those type of considerations are part of our thought process for our next generation products but it's not something that is feasible to be implemented in short cycle that align with the current shortages and try to overcome them with that type of change. So we're looking at these type of alternatives for our next-generation products that are a year or two years away and looking to find the best combination from cost and performance. But to get over the current cycle of shortages, our actions as Ronen described are more traditional in terms of building up component inventory, securing supply and building up a healthy level of finished goods inventory.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Got it. Thanks guys.

Zvi Lando -- Chief Executive Officer

Thank you.

Operator

From Goldman Sachs, we'll hear next from Brian Lee.

Brian Lee -- Goldman Sachs -- Analyst

Hey guys. Thanks for taking the questions. I had two on margins. Just maybe first on the solar margins. It looks like you mentioned the mix in resi, North American strength there helping margins in the near term. So I know in the past you've given us some high level color around trends and the cadence, so in terms of solar margin should we start to see bit of normalization in 2Q, maybe gross margins leveling off moving through the year. I'm just trying to get a sense of if this is kind of the high watermark for solar margins in Q1 given the robust outlook here or if you think there is actually upside from those levels moving through the year?

Ronen Faier -- Chief Financial Officer

So as you mentioned the margins are normalized or getting back to the levels that we used to talk before about 36% give or take 1% and this is basically a result of several things. The first one is the fact that we start to see the United States being a back a more meaningful portion of our revenues -- of the solar revenues. As we mentioned before, actually at the end of Q2, what we saw is that when the pandemic started and the US market was hit, we were able to grow substantially in Europe that in a way that on one hand, did not impact the revenues maybe as much as it would hit unless we were so active in Europe, but at the same time, the higher competition and intensity in Europe prescribed much lower gross margins and at that time by the way we have noted is about 500 basis point difference between the US and Europe in this regard.

Over time two things happened. The first thing is that the euro got a little bit stronger compared to the US dollar. This is something that of course helps our margins in the sense that we still manufacturing dollars and therefore we collect more dollars on every euro sales that we are doing. And the second one is that once we are starting to sell in the United States, where the competition is a little bit lower on the residential due to the rapid shutdown regulations, then we were able to charge higher revenues than to increase the margin. And there is another issue that happened in the fourth quarter, and this is the fact that in general commercial solar that is characterized with lower gross margins compared to residential was again lower compared to the previous quarters. So this is the main change that happened.

Looking forward as already described in our guidance, we expected the non-GAAP gross margin to be at 36% to 38%. So the midpoint is already at the higher range of our long-term target and we expect this to continue to happen. We continue to do cost reduction all the time. The pricing environment is relatively stable both in the United States and in Europe and we are continuing all the time to shift more and more production to a non-Chinese manufacturing, at least the production that comes to the United States and compared to 60% of shipments of our non-Chinese products in Q4, about 85% of these products that will come to the US in Q1 will be already from non-tariff. So this is something that definitely drive us to the higher range and the higher levels that we guided.

There is one phenomena though that we need to mention, and this is actually for the later part of the year. While we assume that we will see the normalization in the solar margins in Q1 and Q2. Actually in Q3, once batteries are starting to get bigger volumes and starting to have more effect on our margins then here in the past we discussed approximately 25% expected margins on batteries, we expect that the overall portion of batteries in the revenues mix will drive this margin a little bit down. So in general we are normalizing in solar without batteries. Once batteries will come, we will basically provide guidance in a little bit about how to model and how to expect gross margins to be related to the volume of batteries of the overall revenues.

Brian Lee -- Goldman Sachs -- Analyst

Okay, I appreciate that color. And maybe a good segue into the second question I had just on, Ronen, you mentioned batteries but e-Mobility, if you do the $100 million of revenue this year, is that all back half weighted in terms of timeframe. And then on the margins, I know e-Mobility has some upfront costs here, they are negative today, but what's the target for margins to go positive in e-Mobility timeframe wise and ultimately are you at the 25% or 30% I think target you've talked about in the past you get there in the back half for this year, if the revenue range you're talking about is achieved?

Ronen Faier -- Chief Financial Officer

So I'll start answering one by one and if I missed anything please Brian let me know. In general, we expect volumes will initiate this quarter and we believe that they will stabilize around Q2 or beginning of Q2 toward the end of the year. So I would assume that the majority of the revenues will come between Q2 to Q4. And that means that the debt point in Q2 we already expect to see positive gross margin on this product. However, I think that we need to depreciate between the longer term margins that we expect on e-Mobility and the margins on this project and there are two key differentiators is first of all, the fact that in e-Mobility unlike in solar, it's very hard to do cost reduction once the product is defined. Nevertheless, if it was launched or not, because in the e-Mobility space, once you have defined the product and you basically validated the product with the manufacturer, you cannot change any component, and that of course reduces dramatically your ability to either make changes in the product for cost reduction or even to negotiate with your suppliers, because they know that they are already designed into the product.

In the case of this E-Ducato project, it's a product -- project that we inherited from the acquisition of SMRE and therefore there is not a lot that we can do in this specific product to reduce cost and we expect to see single-digit margins starting in Q2 and they will not be very high. Once we will see two things happening. First of all, if indeed the market acceptance is going to be good for this product, then we will see higher volumes and then we will be able to spread the fixed costs that we already have here over a larger amount of units, and this of course will increase the gross margin. And second, we will be able, maybe over time when we will have more projects to go and reduce our cost of product if we're using them where components if you use them in other products as well, because then we have more leverage with the suppliers. But in any case, I do not expect it to happen, not in 2021 and not in the volumes that we're discussing right now.

Lastly, 30% is -- I do not believe that this is a number that can be achieved in the near future in e-Mobility. If you look today at comparable companies in the e-Mobility space, you see best margins being at about 18% and these are very technological and very good companies. It will take us the time to get that level of expertise. But at the same time you usually see that the cost per unit is high enough that the overall contribution to profitability, even if the margin is lower is very high, because every unit is very expensive. So I hope that answered all of the components. If not, let me know what I missed.

Operator

We'll move next to Maheep Mandloi with Credit Suisse.

Maheep Mandloi -- Credit Suisse -- Analyst

Hey, thanks for taking the question. This is building upon Brian's question there on e-Mobility. Could you just talk about the nature of this agreement that the Fiat Group in terms of exclusivity and any trials or any pilots going on for the other electric products. And in addition to that, just wanted to understand the operating margin for the business. Assume that given it's more B2B nature the opex should be much lower percentage of sales compared to that for the solar industry. So some color on that also would be helpful? Thanks.

Zvi Lando -- Chief Executive Officer

So, Maheep, I'll try to answer and again if I miss the second question please clarify. So the dynamic in this industry is if you get a nomination letter for a project that solidifies the intend for you to supply the components for that project. We don't necessarily know when commit that we are the sole supplier and we don't necessarily know, but typically in the industry it's seeing supplier definitely for a product of this complexity per project. That's to the first question. The second question as I said earlier, we've been commenting about this opportunity and the fact that it is coming close in the last couple of quarters and we are confident enough to be more clear about it in this call. So at this point, we are not on the verge of any additional project, definitely not a project at this scale within the next couple of quarters. So there won't be quick wins and quick ramps and multiple projects at least not in 2021 here.

Maheep Mandloi -- Credit Suisse -- Analyst

Got it, thanks. Just wanted to understand the operating leverage in this business in terms of sorry. Yes, I just wanted to understand the operating leverage, how much operating expenses, you expect as percent of sales for this business given presume it's more B2B in nature?

Zvi Lando -- Chief Executive Officer

So as we described with the content of what we are delivering and the theme is consistent with what we would discuss practically in every other product that we are delivering in other segments as well. Inverters, DC to AC inverters, DC to DC converters, batteries, lithium-ion etc. So there is definitely technology leverage that is going across the company in serving these applications from design through reliability testing and on the manufacturing line. So there is significant technology leverage and a fair amount of operational leverage that is using our expertise and infrastructure for these new businesses. It's not only e-Mobility, it's also what we are doing in the area of power and UPS' and of course lithium-ion in Kokam is a common thread, although the batteries that are being used today in our e-Mobility project are not coming from Kokam as Ronen mentioned those were inherited already in the design when we acquired SMRE into the frozen design of the solution for this first project.

Operator

We'll hear next from Moses Sutton with Barclays.

Moses Sutton -- Barclays -- Analyst

Hi, thanks for taking my questions. On the storage product launch, once you get certified, once that's complete, how much available capacity will you have in megawatt hours in 3Q, 4Q and exiting the year?

Zvi Lando -- Chief Executive Officer

The truth is that unfortunately we won't have the capacity for the demand that we are seeing. Practically from all regions, there is very strong, full for our battery also from North America, also in Europe and also in Australia, we are comfortable that we will have capacity to meet the numbers that Ronen mentioned earlier to -- in the answer to Phil on the potential projected revenue in the second quarter and maybe some upside to go beyond that. But like I say, I wish we had capacity for all of the demand that will probably come in a better way in 2022 when we have our own factory.

Moses Sutton -- Barclays -- Analyst

That's helpful and if maybe a bit of [Indecipherable] me, but how are you gauging the demand to say that you're -- you don't have enough for it if it's based on the inverter product, because no one's had the product yet. So I'm just wondering how you're sort of getting the sense of the -- an expectation on what the demand will be for the product once available?

Zvi Lando -- Chief Executive Officer

So it's a combination of, we talked to many customers, they ask about the battery, they ask about the specifications of the battery which we share for them. The preference to have a full system coming from the supplier in this case us, is something that is messaged by many customers. And as I mentioned, also in the prepared remarks, at the end of the day we have a huge installed base of storage systems with -- connected with all sorts of batteries, AC coupled, DC coupled, different sizes and different configurations. So we are very familiar with the installers that are installing the systems and with the preferences and with the needs in terms of the consumer needs in the different mode of outages and maximizing self consumption and time of used application. So we are anywhere between comfortable to confident that the battery and the system design are meeting the needs of our inverter installers and that they will want to adopt our full solution once the battery is available.

Operator

We'll hear now from Marshall Carver with Heikkinen Energy Advisors.

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

Yes. Thank you for taking my question. I just had a quick one. You mentioned having some e-Mobility sale this quarter, but the majority would be in 2Q and 3Q, 4Q. In your $3.85 million to $4 million or $5 million 1Q guidance, how much do you think could from e-Mobility. Just trying to get a feel for, is that $1 million, is that $10 million, $20 million, I mean it seems like -- any color there would be helpful.

Zvi Lando -- Chief Executive Officer

So at this point we bucket in the non-solar revenue into one number, which is $25 million to $30 million and we don't list out any individual components of the non-solar business. When the revenue from e-Mobility is sizable enough to warranted, we will be breaking it out separately.

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

Okay. And the$20 million plus this year from e-Mobility would be incremental to the $100 million to $150 million in non-solar?

Ronen Faier -- Chief Financial Officer

Yes, basically, the numbers that we have for the e-Mobility are incremental to the battery storage numbers that we have today. There is no overlap.

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

Okay, thank you.

Zvi Lando -- Chief Executive Officer

Thank you.

Operator

And at this time, I'd like to turn things back to management for any closing remarks.

Zvi Lando -- Chief Executive Officer

Thank you. In summary, we concluded a challenging yet positive year on all fronts. All of this while continuing to invest and laying the ground for future growth and expansion into adjacent markets, the fruits of which we are already beginning to see. We're looking forward to 2021 which we expect will be a year of growth, new product releases and development of our solar and non-solar businesses. Thank you for joining us on our call today and stay safe.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Erica Mannion -- Investor Relations

Zvi Lando -- Chief Executive Officer

Ronen Faier -- Chief Financial Officer

Mark Strouse -- JPMorgan -- Analyst

Stephen Byrd -- Morgan Stanley -- Analyst

Colin Rusch -- Oppenheimer -- Analyst

Philip Shen -- ROTH Capital Partners -- Analyst

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Maheep Mandloi -- Credit Suisse -- Analyst

Moses Sutton -- Barclays -- Analyst

Marshall Carver -- Heikkinen Energy Advisors -- Analyst

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