SolarEdge Technologies (SEDG) Q2 2023 Earnings Call Transcript

SolarEdge Technologies (SEDG 2.81%)
Q2 2023 Earnings Call
Aug 01, 2023, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the SolarEdge conference call for the second quarter ended June 30, 2023. This call is being webcast live on the company's website at www.solaredge.com, in the Investors section on the Event Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved, and any recording, reproduction, or transmission of this call without the 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 call over to J.B. Lowe, head of investor relations for SolarEdge.

J.B. Lowe -- Head of Investor Relations

Thank you, David, and good afternoon, everyone. Thank you for joining us to discuss SolarEdge's operating results for the second quarter ended June 30, 2023, as well as the company's outlook for the third quarter of 2023. With me today are Zvi Lando, chief executive officer; and Ronen Faier, chief financial officer. Zvi will begin with a brief review of the results for the second quarter ended June 30, 2023.

Ronen will then review the financial results for the second quarter, followed by the company's outlook for the third quarter of 2023. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in our press release 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 U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance.

These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended June 30, 2023 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company's website. Now, I will turn the call over to Zvi.

Zvi Lando -- Chief Executive Officer

Thank you, J.B. Good afternoon, and thank you all for joining us on our conference call today. Starting with highlights of our second quarter results. We concluded the quarter with record revenues of approximately $991 million.

Revenues from our solar business were at a record $947 million while revenues from our nonsolar businesses were $44 million. This quarter, we shipped 5.5 million power optimizers and 335,000 inverters. This quarter, we also shipped 269 megawatt hours of residential batteries, a 22% increase from last quarter. Our solar business revenue grew quarter over quarter by 4% and by 38% year over year, mostly driven by record revenues in Europe, offset by a decrease in revenue in the United States and Rest of World.

We saw record revenues in many countries this quarter, including Germany, the United Kingdom, Switzerland, South Africa, and Thailand. Particularly noteworthy is the growth we have been discussing for several quarters in the commercial segment, which has seen megawatt shift go from 1.5 gigawatts in the fourth quarter of 2022 to 2.1 gigawatts in the first quarter of this year to 2.6 gigawatts of shipments this quarter. The solar market is going through a transition, emerging from the recent period of component shortages, high energy prices, and rapid growth to one now impacted by higher interest rates and excess inventory. Given this shift, I would like to review the major trends that we are seeing in the various regions and how it affects our company.

In Europe, installation rates continue to be high in both residential and commercial. However, the strength in the market is somewhat more moderate than what was anticipated heading into 2023, largely due to a milder winter, reduced concerns over energy resilience, and lower electricity prices. With that in mind, our growth in Europe in the second quarter was very strong. Overall, our megawatt shipments to Europe grew by 52% quarter over quarter, including 57% in residential and 50% quarter-over-quarter growth in commercial.

Additionally, sell-through by our distributors in the second quarter was up 49% year over year in residential and up 115% year over year in commercial. On the supply side, the distribution channels in Europe are experiencing higher-than-optimal inventory levels, especially as it relates to solar modules. During the recent period of shortages and expectations for high growth, distributors placed large orders for modules and inverters in order to ensure stability of supply to support the growing demand. As growth in demand has tapered off, distributors are taking a more cautious approach in order to better manage their cash flow.

In addition to taking actions to reduce inventory levels, distributors are also reducing the number of suppliers in their portfolio, which had expanded during the period of shortages. This is the dynamic seen before in the industry during a shift from a period of extreme shortage and accelerated growth to a period of more gradual growth and undisrupted product availability. We expect this inventory adjustment period could continue for the next two quarters, especially when also taking into account the typical fourth-quarter seasonality effect in Europe. We see this environment as an opportunity to grow market share based on our offering that is very suitable to the growing complexity of the European grid, where dynamic tariffs and negative rates are becoming more common.

To deal with this growing complexity, our customers require advanced energy management hardware and software of the sort we recently announced at Intersolar and about which I will elaborate in a few moments. Moving to the U.S. residential market. The combination of higher interest rates and the new net metering 3.0 regime in California has led to a decrease in demand compared to the second half of last year.

As a result, inventories of our product in the various channels are higher than normal as they were built in anticipation of substantial market growth that did not materialize. As a result, our shipments to the U.S. residential markets were down 29% this quarter from the last quarter. Sell-through of our products by our distributors, however, actually rose by over 10% during the same period.

We expect the process of inventory normalization to last at least through the end of the year. Looking into 2024, there are two market trends that we view as positive for our business. First, the expected increase of third-party ownership installations, driven by the shift to lease versus loan financing, a subsegment where our market share has traditionally been higher. And second is the expected increase in storage installations, in particular, the evolving NEM 3.0 battery market, where our DC-coupled system can offer up to 10% more energy on an annual basis when compared with the non-DC optimized module lever electronics solution.

In the U.S. commercial market, we continue to see stable demand, which we expect to gradually grow as a result of lower module prices and as projects that were on hold begin to move forward. This is expected that some developers who had halted project in anticipation of IRA clarifications related to the 10% ITC domestic manufacturing adder move forward with the project execution after realizing that IRA clarity will likely take longer than anticipated. In Rest of World, we see a mixed picture, where some countries are experiencing headwinds due to a higher interest rate.

While others, such as South Africa and Thailand, are growing rapidly due to grid instability and favorable regulatory environments. Moving to products. And I want to spend a few moments discussing the increased investments we are making across our digital solution platform, which is focused on three main pillars. First, our energy management software, known as SolarEdge One, which we recently introduced at Intersolar in Munich.

SolarEdge ONE helps home and business owners optimize their energy production, consumption, and storage. With the proliferation of time of use and dynamic tariffs and growing attach rate of batteries, we believe this will become an increased area of differentiation for our PV plus storage solutions. Second is our installer toolkit, which is a set of tools aimed at helping our customers design, sell, install, and commission PV and storage systems in a fast and efficient manner. At RE+ in September, in addition to demonstrating improvements to our already-short installation and commissioning times, we will be launching our new installer proposal, too, a sophisticated step-by-step software platform to help installers be more effective when selling a PV plus battery system at the kitchen table.

And third, digital infrastructure, which includes grid services and other advanced applications. In the field of grid services, our total number of enrolled sites grew by 70% in the second quarter to over 13,000 sites. In the United States, 16% of our battery installations are now enrolled in grid services programs. In the Netherlands, we launched through two electricity aggregators our first commercial grid services program aimed at grid balancing and already enrolled dozens of commercial sites into the program.

We have a high number of additional enrollment requests and are looking at integrating with additional aggregators in the coming months. Another part of our digital offering is based on our acquisition earlier this year of Hark Systems, which offers commercial customers significant monitoring and connectivity capabilities across increasingly complex energy systems. While still not significant in absolute numbers and likely won't be significant for several quarters, our broad digital offering augments and solidifies our leadership in the residential and particularly in the commercial markets. More importantly, as electrical grids become more constrained and penetration of distributed solar and other renewables increases, optimized interaction with the grid, as well as optimized energy management at the home and in the business will be critical to the positive functionality and economics of the solar installation.

We see this as an opportunity for differentiation for technology companies like SolarEdge and a key reason why we don't believe that the inverter market will become commoditized. More on the product side. We are seeing good progress with our tracker offering as we now have more than 30 megawatts of trackers, either installed or in the process of installation. This new product, which is both lightweight and has a small footprint, provides access for us to new market opportunities and will initially enable us to offer a full solution to the growing agri-PV segment which is lately receiving significant regulatory support.

On the electrical vehicle charging front, we continue to supply our AC EV chargers both the inverter integrated and stand-alone versions, and to date, have shipped over 45,000 units globally. As we unveiled at Intersolar, next year, we plan to release our bidirectional DC EV charger that will be DC-coupled, enabling greater charging efficiency through fewer AC-to-DC conversions. Moving to operations. We are making strides toward building out our U.S.

manufacturing footprint. In the third quarter, we expect to ship several thousand inverters from our contract manufacturing partner site, with this number growing to above 30,000 inverters that we expect to ship from the site in the first quarter. More broadly, we mentioned earlier the fact that inventory levels are high for some products. However, on certain products such as three-phase inverters in the European market, even though we increased output significantly in the second quarter, we are still delivering below demand and, thus, air shipments have been required.

Part of the relief in this area will be via the long-term purchase agreement we announced last week with Infineon that will help give us assurance in the availability of critical power semiconductor components in the years ahead. In our nonsolar business, our Sella 2 battery factory continues to ramp and is on track to reach its full capacity by the end of this year. Additionally, we have initiated manufacturing of the type of cells that will be used in our portfolio of next-generation batteries, starting with the release of a new residential battery planned for the first half of next year. In closing, while we discussed the inventory corrections taking place, the actual PV market is continuing to grow in many places around the world.

For example, Germany, one of the largest solar markets, is expected to grow from 7.5 gigawatts installed in 2022 to 10 gigawatts installed in 2023, with further growth anticipated in 2024. I believe that our portfolio and positioning within diverse markets and applications will benefit us as markets continue to grow in some areas and we begin to recover in others. I will now hand it over to Ronen. Ronen?

Ronen Faier -- Chief Financial Officer

Thank you, Zvi, and good afternoon, everyone. This financial review includes a GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. Segment profit is comprised of gross profit for the segment, less operating expenses that do not include amortization of purchased intangible assets, impairments of goodwill and the intangible assets, stock-based compensation expenses, and other certain items.

Total revenues for the second quarter were a record $991.3 million, a 5% increase compared to $943.9 million last quarter and 36% increase compared to $727.8 million for the same quarter last year. Revenues from our solar segment, which include the sales of residential batteries and trackers, were a record $947.4 million, a 4% increase compared to $908.5 million last quarter and a 38% increase compared to $687.6 million for the same quarter last year. Solar revenues from the United States this quarter were $195.6 million, a 23% decrease from the last quarter and a 37% decrease from the same quarter last year, representing 21% of our solar revenues. Solar revenues from Europe were a record $688.5 million, a 19% increase from the last quarter and 112% increase from the same quarter last year, representing 73% of our solar revenues.

In Europe, we continue to see meaningful quarter-over-quarter revenue growth in general and noticeable records in Germany with 64% growth, reaching close to $300 million of quarterly revenues. Sweden with 106% growth, the United Kingdom with 50% quarter-over-quarter growth, and Slovenia with 54% growth. Revenues from batteries grew slightly this quarter in Europe, limited by the fact that we are still constrained by three-phase inverter supply, which is needed for battery-coupled systems. We do identify some excess battery inventory in the European channels, which will lead to lower battery shipments in the second half of the year.

This inventory buildup will be alleviated as the ramp-up in deliveries of our new three-phase residential backup inverter catches up with our battery manufacturing and delivery pace. We intend to use air shipments in the third and fourth quarters in order to resolve this in balance and fulfill the demand for our products in this segment as a single inverter is typically installed with two to three batteries. Rest of the World solar revenues were $63.3 million, a 17% decrease compared to the last quarter and the 19% increase from the last year and representing close to 7% of our solar revenues. This quarter, we saw record revenues in South Africa and Thailand.

On a megawatt basis, we shipped 666 megawatts of inverters to the United States, a record 3.3 gigawatts to Europe, and 397 megawatts to the rest of the world, surpassing at record quarterly inverter shipments. 60% of our megawatts shipped this quarter were commercial products and the remaining 40% were residential, a result of strong European adoptions of our products and higher European revenues in the total mix. In the second quarter, we shipped 269-megawatt hour of our residential batteries. An increase from 221 megawatt hour last quarter.

The vast majority of our batteries continue to be shipped to Europe. ASP per watt this quarter, excluding battery revenues, was $0.188, a 14% decrease from $0.22 last quarter. This ASP per watt decrease is predominantly a result of increased commercial inverters in the overall mix. partially offset by a stronger euro.

In general, our prices did not change this quarter. Our battery ASP per kilowatt hour was $479 slightly up from $475 last quarter, mostly a result of a stronger euro. Revenues this quarter from our nonsolar segment were $43.7 million, an increase from $35.2 million last quarter, a result of higher storage division revenues. Consolidated GAAP gross margin for the quarter was 32%, a slight increase compared to 31.8% in the prior quarter and 25.1% in the same quarter last year.

Non-GAAP gross margin this quarter was 32.7% compared to 32.6% in the prior quarter and 26.7% in the same quarter last year. Gross margin for the solar segment was 34.7% compared to 35% in the prior quarter and 28.1% in the same quarter last year. The quarterly solar margin change was mostly a result of product mix changes. This quarter, in our solar division, our inverter and optimizer gross margins were approximately 37% as residential inverter and optimizer product margin continued to exceed 40%, and our battery margins were slightly below 25% due to a higher portion of single-phase batteries within the mix.

Good subject to tariffs, excluding batteries shipped into the United States from China, accounted for 6% of our U.S. shipments this quarter, the lowest on record, as a result of the ramp-up in our Mexico manufacturing facility, which is at the level that we expect to maintain in the next quarters. Gross margin for our nonsolar segment was minus 9.6% and compared to minus 31.3% in the previous quarter. Our Sella 2 ramp-up continues as planned, and the increased revenues from our storage division are contributing to the margin improvement in this division.

This quarter, we also include, for the first time, results of our newly acquired Hark Systems in our financial results. While still a very small portion of our revenue, Hark software sales are characterized with very high gross margins. On a non-GAAP basis, operating expenses for the second quarter were $133.3 million or 13.4% of revenues compared to $123.6 million or 13.1% of revenues in the prior quarter and $109.6 million or 15.1% of revenues for the same quarter last year. Our operating expenses as a percentage of revenue increased as a result of our annual employee merit process that takes place in the second quarter.

Our solar segment operating expenses as a percentage of solar revenues were 12.8% compared to 12.3% last quarter, resulting from the same reasons. Non-GAAP operating income for the quarter was a record $191 million compared to $183.8 million in the previous quarter and $84.7 million for the same period last year. The solar segment generated a record operating income of $207 million this quarter, slightly up from $206.7 million last quarter. The non-solar segment generated an operating loss of $16.1 million compared to an operating loss of $22.9 million in the previous quarter.

Non-GAAP financial income for the quarter was $4.4 million compared to a non-GAAP financial income of $24 million in the previous quarter. As the euro to U.S. dollar rate is above $1.1 per euro, we continue to reduce our exposure to the euro by higher frequency of currency conversions to the U.S. dollars.

Our non-GAAP tax expense was $38 million this quarter compared to $33.2 million in the previous quarter and $7 million for the same period last year. And we expect to maintain approximately 20% tax rate on both GAAP and non-GAAP basis for the rest of the year. GAAP net income for the second quarter was million compared to GAAP net income of $138.4 million in the previous quarter and $15.1 million for the same quarter last year. Our non-GAAP net income was $157.4 million compared to a non-GAAP net income of $174.5 million in the previous quarter and $56.7 million in the same quarter last year.

GAAP net diluted earnings per share was $2.03 for the second quarter compared to $2.35 in the previous quarter and $0.26 for the same period last year. Non-GAAP net diluted EPS was $2.62 compared to $2.90 in the previous quarter and $0.95 in the same quarter last year. Turning now to the balance sheet. As of June 30, 2023, cash, cash equivalents, bank deposits, restricted cash, restricted bank deposits, and investments were $1.5 billion.

Net of debt, this amount is $853.5 million. This quarter, cash used in operation was $88.7 million, mostly related to inventory buildup as we believe that we have seen the bottom of our cash use. We expect substantial cash buildup in the next quarters starting in Q3. Accounts receivable net increased this quarter to $1.15 billion compared to $969.5 million last quarter, representing 126 days outstanding, a reflection of our increased revenues that were skewed toward the end of the quarter and in certain cases, extension of credit terms to our customers, mainly in the United States.

As of June 30, our inventory level net of reserve was $984.2 million compared to $874.2 million in the prior quarter. As a result of the slowdown in the shipments to the United States, slower growth rates in Europe, and more streamlined manufacturing, our finished goods inventory increased substantially this quarter. At the same time, we are slowly reducing our component safety stocks and battery sales as the component availability becomes less of an issue. Turning to our guidance for the third quarter of 2023.

We are guiding revenues to be within the range of $880 million to $920 million. We expect non-GAAP gross margin to be within the range of 28% to 31%. We expect non-GAAP operating income to be within the range of $115 million to $135 million. Revenues from the solar segment are expected to be within the range of $850 million to $880 million.

Gross margins from the solar segment is expected to be within the range of 30% to 33%. I will now turn the call over to the operator to open it up for questions. Operator, please.

Questions & Answers:

Operator

[Operator instructions] In the interest of time, we do ask that you limit yourself to one question and one follow-up question. And we will take our first question from Mark Strouse with JPMorgan. Please go ahead.

Mark Strouse -- JPMorgan Chase and Company -- Analyst

Great. Thanks for taking our questions. I wanted to start with the 3Q revenue guide. When we look at the $80 million, $90 million dip quarter over quarter, can you break down how much of that is driven by Europe, U.S., Rest of World? It sounds like the inventory issue is fairly broad-based.

But I'm just curious, if we should think about that kind of -- if Europe is 70% of your revenue and U.S. 20%, is that similar kind of mix for the change quarter over quarter?

Ronen Faier -- Chief Financial Officer

Hi, Mark. Thank you very much for the question. So, actually, when we look at the guidance for the next quarter, we need to look a little bit region by region because we see a little bit of a different dynamics. I would say that most of the reduction that we see is coming, first of all, from less revenues of batteries, mostly in Europe.

As we've mentioned in the prepared remarks, we find a solution -- we found a situation that our batteries shipments were a little bit faster than our ability to ramp up the inverters that come with them, mostly three-phase inverters. And as a result, there is a built inventory within the channels there that needs to be cleared in order to continue and grow. And this will be cleared mostly through the adoption or getting more inverters from us during the third and the fourth quarter. And this is why, by the way, we're also increasing our air shipments.

So, first of all comes this decrease. The second one comes actually from optimizers. Again, in Europe, it's also happening in the United States, but a little bit more in Europe because Europe is more characterized with commercial systems. Because of the fact that inverter shipments were a little bit slower to ramp compared to the other products, again, because of the three-phase products that we needed to get more components, what we usually see is that installers and especially commercial installers who are installing the modules faster than they do the inverter.

Actually, they install the inverter only at the very last moment, used to take a little bit more optimizers in order to make sure that they can basically complete the installations of the modules in the either on the roof or in the overall installation. And then once the inverter comes, they simply install it and commission it. So, since the majority of the revenues came from Europe, the majority of the down this quarter is also coming from Europe because of these two phenomena. At the same time, when we go to the United States, as Zvi mentioned, we believe that we have basically a lower amount that we do not expect to go much lower in the next quarter because of the fact that, on one hand, indeed, the inventories are high, but still, some of the products that are needed are still missing there, and we're going to ship them.

And when it comes to Rest of the World, again, it's a relatively shift mixed situation where, again, we expect to see, I would say, something that will be relatively flattish. So, the majority will come from Europe. The majority will come from batteries and inverters that were, first of all, delivered --

Zvi Lando -- Chief Executive Officer

And optimizers.

Ronen Faier -- Chief Financial Officer

Optimizers, sorry, that were, first of all, delivered. And rest will be relatively flattish to maybe slightly down.

Mark Strouse -- JPMorgan Chase and Company -- Analyst

OK. That's extremely helpful. Thank you. I thought your comments were interesting regarding the European distributors and kind of managing the number of suppliers.

Just curious if you can give us a fairly high-level update on what you're seeing with the overall competitive environment.

Zvi Lando -- Chief Executive Officer

Yeah. So, Mark, the phenomena that I described, and it is indeed for those that have been active in Europe for years, it's something that we've seen through the cycles. I could give you an example that some of our distributors in Poland are carrying, today, 10 brands of inverters, six or seven of them are new that they didn't have before, that during the period of shortage, they just took whatever they could get ahold on because that's what the installer needed. And now, as things stabilize, they're paring down the number of brands that they're carrying into a more classical combination of, call it, the high-end base and the economic solution, if you will.

And this is a dynamic that has repeated itself multiple times and it's more pronounced in the module side. And if you've seen some of the reports and from our discussions in with distributors, they also emphasized that the inventory levels on modules are abnormally high. And a lot of that inventory is by now the module pricing in the market is significantly lower than the prices at which those modules were purchased. So, they're -- a lot of distributors are in some form of financial challenge.

And with that, they are resolving that by going to a -- on the overall offering to low levels of inventory that are maybe lower than those that they would normally carry in this type of a period, especially because the overall demand is still high, but just in order to control their financials. So, the market is very active. Installations are up and demand for equipment is strong. Just there's an adjustment on the channel side to limit their portfolio, drain the volumes that they've accumulated during the closing months of the shortage period and get back to a more sustainable growth type of module -- model, excuse me.

Mark Strouse -- JPMorgan Chase and Company -- Analyst

OK. I'll take the rest offline. Thank you very much.

Operator

We'll take our next question from Brian Lee with Goldman Sachs. Your line is open.

Brian Lee -- Goldman Sachs -- Analyst

Hey, guys, thanks for taking the questions. I had a couple here. I guess, first off, maybe for you, Ronen. I appreciate some of the color around the different dynamics in Europe, Rest of World, U.S.

that played into the weaker maybe than expected 3Q guidance here. It sounds like some of that's persisting though beyond just this quarter. So, can you give us sort of an early read into what you're expecting as you think about the timing of inventory balance, battery shipments, and weakness in U.S., as well as seasonality you called out? Like is there a path for 4Q to be flat, up, down? Just kind of give us the puts and takes around how we should be exiting the year on the top line. And then I might have missed this, but did you give a specific battery shipment guidance as well?

Ronen Faier -- Chief Financial Officer

Start from the second. No, we didn't give a specific guidance for batteries, but they are going to be down substantially next quarter compared to this one, given the dynamics that we see, especially in Europe, more batteries in the channels than, I would say, normally, the distributors would like to have because they're still missing the inverter. So, on batteries, it's definitely going to be substantially lower next quarter. Now, when it comes to the dynamics in the quarter, and unfortunately, life is very complex in this area, and I will try to give a little bit of the puts and takes there.

I'll start from Europe, again, being the center of our sales today. In Europe today, what we see is that the inventory levels, on one hand, are relatively high. But when you look at the days outstanding, which is a result of the sell-through from the channel, they are not high at all. They're actually at the normal level.

And when we are looking at the point-of-sale data of how much is being sold from the channels, we see record levels over the last two quarters that, to our understanding, are continuing, which means that in that case, the demand is there. The demand is fairly strong, not maybe as strong as people believed from the very beginning of the year, but still very strong. And therefore, you would say that the levels of inventory that the distributors have and maybe a little bit of change in patterns and making orders a little bit shorter time from the time that they need it because there is enough supply in the market creates a situation, where basically some of them even say that it will be one or two quarters, but not more than this until the inventory levels are adjusted because you don't see a big gap. The problem in Europe is that you go into the fourth quarter.

And going back to the normal days of solar, usually, the fourth quarter is seasonally low in Europe compared to the third quarter. First of all, because of the fact that this is start of the winter, and nobody wants to enter the market with -- or the winter with too much inventory. Second, because of the holidays themselves, there are less days to install during the quarter. So, here, we see mixed phenomena where we believe that market dynamics are very healthy and will require faster recovery of the inventory levels and faster increase in volumes.

And the impact of winter is not known. And let's not forget that there are still a war in Europe. So, I'm not sure where it's going to be the concerns about electricity there. In the United States, I think that we see a different phenomenon.

In the U.S., we do see that the inventory levels are higher, much higher than the supply -- than the distributors would like to see. We do see that, as Zvi mentioned, point of sale for our products at least improved in the last quarter, but it is still at a relatively lower level. And therefore, we believe there that overall, it's going to be more than one or two quarters until the situation is being changed. So, if I try to summarize everything, I would say that we're cautiously optimistic to see Q4 being flat to up rather the opposite.

But again, it is a quarter with many different phenomena that are sometimes contradicting that are happening at the same time.

Brian Lee -- Goldman Sachs -- Analyst

That's super helpful. I appreciate that. And maybe just a follow-up on that. You didn't mention batteries.

Is the battery adjustment happening all into the Q? Do you think it goes back up in 4Q? And then I'll just squeeze in my last one. On gross margins, you kind of surprised by how much gross margins are being guided down relative to the strong performance at the beginning part of the year here. Is the entire 300 basis points at the midpoint coming from the air freight? And does that go away after 3Q? Or are there other impacts embedded in there? Just trying to understand the 35% solar gross margin going to basically 32% in three months and then what the sort of forward would be in terms of recapturing some of that, what the levers are there. Thank you.

Ronen Faier -- Chief Financial Officer

OK. So, first of all, I think that the question that was sneaked will be higher answer than the first one. So, I'll start from the first one. In general, we expect the batteries in Q4 -- and again, we do not guide yet, but we expect them to be similar and maybe slightly up compared to the third quarter.

And here, the reason is, again, it's end of the year. Nobody would like to enter -- to exit the year with too much of an inventory. So, we assume that this is more related to less market dynamics and more of inventory management dynamics. And especially, by the way, understanding Brian, that this is a product that is relatively expensive.

And once you have availability in the market and the distributors know that the suppliers do have availability and the availability is relatively close to them. They know that they can get sometimes better is within days, days try to shift a little bit the load at the end of the year because of their financials and the way that they look to the vendors or to the manufacturers themselves. I would say that, at least from a -- if I would take not one or two quarters, but let's say, like two or three quarters ahead, the phenomena is going to be of a growth inventory pattern rather than declining or stabilizing one. It's just that, again, there is a little bit of play where end of the year is determining factor.

On the margins, actually, here, it's -- again, it's a little bit of a different situation. The first thing is that we are going to ship much more inverters that are three-phase commercial inverters during Q3 and Q4. This is the product that is mostly missing in Europe, and this is the product that is usually carrying the lowest gross margins of our inverters compared to any other product except for batteries, by the way. And the second thing is that when you couple the -- because of the characteristics of the installations, when you usually do two modules per one optimizer, actually, when you look at the gross margin of the entire solution, the optimizer is also contributing to a better gross margin on the entire solution than the inverter.

The fact that now we're shipping not only more commercially inverters but actually more inverters than optimizers in the overall mix, this has a bigger impact of this imbalance on the gross margin. This is something that we expect to see into Q3, maybe into Q4. Because Q4, we already see very large amount of commercial inverters that we're going to ship in. So, I would say that actually, a major part of it will be more of the inverter rather than the air shipment.

The air shipment, of course, is very expensive and is also substantial, and this is something that, again, we expect to go away during Q4. So, I would say that these are the two major factors, and both of them are supposed to go away after Q4.

Brian Lee -- Goldman Sachs -- Analyst

OK. Thanks so much. I'll pass it on.

Operator

We'll take our next question from Philip Shen with ROTH MKM. Please go ahead. Your line is open. Philip Shen, your line is now open.

We will next move on to Colin Rusch with Oppenheimer and Company. Please go ahead.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thanks so much, guys. Can you talk a little bit about the R&D spend and how you're thinking about the relationship with Infineon, anything that we should be attending to from a prepayment perspective, how that might streamline some of your R&D spending? Anything else in and around that agreement?

Zvi Lando -- Chief Executive Officer

Yeah, Colin. I think the R&D spending pattern is -- has not changed significantly. We're continuing to invest with mild growth as we're expanding into new areas, new products and continuing to develop next-generation products for the existing markets that we serve. The cooperation with Infineon has two elements to it.

The first is assurance of supply to the components that we use in mass in our current product. So, this is semiconductors and, most significantly, IGBTs that are used in every inverter that we do. That's the first layer of the cooperation with them, and that does not impact R&D, obviously. It's more about -- that's an operational view.

The second element is working together on next-generation power semiconductors like silicon carbide and gallium nitride. And that is a long-term cooperation that is -- again, it's not a big swing on R&D investment one way or another. It's preparing the future of our power semiconductors by working with one of the leading companies in this area, as well as other companies that we work with. So, it's a strategic partnership for us.

Obviously, it's not something that has a direct impact on our R&D spend but more on our road maps and assurance of supply.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thanks so much. And then from a pricing perspective, obviously, we've gone through multiple rationalizations of the solar demand profile over the years. And you've adjusted pricing in various ways. I guess what would you need to see to start taking some price action in the market at some point to continue to take market share? And how you think about the importance of market share in terms of the long-term growth of the business?

Zvi Lando -- Chief Executive Officer

Yes. I think exactly as you described, there's a business-as-usual mode for the market and for being a technology and high-end supplier within the market, where we focus on differentiation and constantly make sure that our pricing is justified by the value and differentiation relative to our -- to our competitors. If you look historically in the market, there is a dynamic where on an annual basis, there's cost improvements that suppliers make. We invest a lot in cost reduction.

There is volumes increase and that supports our cost reduction. And that in turn also enables some price reductions and making sure, again, that the gap relative to our competitors is justified by our value. So, the last couple of years have been very disruptive or very different in terms of the dynamics. I do think that it's likely that next year, following some of the dynamics that we described over here, the market will be back in more of its normal type of situation where things are stable.

And then there is more activity in the area of cost reduction, as well as more activity in the area of reasonable price reduction. So, I don't rule out that happening sometime next year. Right now, we're still not in that type of environment, and we don't see the need to reduce prices and our prices have been stable recently.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thank you so much.

Operator

And we'll go back to the line of Philip Shen with ROTH MKM. Please go ahead, sir.

Philip Shen -- ROTH MKM -- Analyst

Hey, guys, sorry about that. Thank you. You talked about how pricing is stable. That said, are you open to price reductions in early 2024? And perhaps you can talk through it by geography and by end market? And also, can you talk through how many weeks of inventory maybe in the channel by end market and also by geography? Thanks.

Zvi Lando -- Chief Executive Officer

Yeah. So, starting for the -- with the second part. At high level, it's probably in Europe, the inventory levels are still I would say, below a quarter, probably in the range of two months for some products like the three-phase inverters, it's less than a month. For some products like single-phase inverters, it's probably more than two months.

And historically, these are very reasonable inventory levels for the European market. What's happening is what we described, and I described before, is a dynamic where they're sitting on very, very large inventories modules and trying to control financials and in a way, maybe, call it, taking the risk or being on the edge in terms of the overall inventory levels that they are holding. But I think that the inventory levels in Europe are in that range and considered reasonable, maybe on the high end of reasonable. But considering the very high sales through and installation rates, it's not a major bubble, if you will.

The U.S., probably the inventory levels are higher. They're closer to two-quarter level. And as Ronen described, although we're seeing gradual uptick in installation rates and sell-through to work through that type of inventory will probably take a bit longer, unless there's a significant -- more significant uptick on installation rate as maybe as the NEM3.0 becomes more clear. We are seeing much more activity in terms of understanding the value of our DC coupled architecture for California, and I discussed what we -- the anticipation that we have that commercial will also begin to pick up.

But if there isn't a major pickup in installation rates in the U.S., it will take a bit longer to work through that inventory. In regards to the first question on pricing, going back to the answer to the previous -- to the previous question. During 2024 I think that this topic will be a relevant topic as we have a better view on our cost management structure and the market is in a more stable condition. So, I can't say that we rule it out.

At this point, it's just not something that is in discussion for the coming few months.

Philip Shen -- ROTH MKM -- Analyst

Great. Thank you. Shifting over to C&I for a bit. I was wondering if you could update us on what the backlog is there.

And then in terms of your financial targets, if the implied lower EBIT margin for Q3 is just operating deleverage? Just curious about that or if you think there's something more structural. Can you address whether or not the 2023 exit rate targets of 20% to 22% EBIT margins are still achievable? Thanks.

Ronen Faier -- Chief Financial Officer

So, first of all, when we look at the operating margin levels, we don't see anything structural in the way that our financials and our business is working at that point of time. So, I would say that the majority of the less of a leverage that we're going to see in Q3, and again, Q4, we're not yet guiding. But this will be exactly the same phenomenon, it's actually related to the level of revenues rather than related to the level of anything that is happening on the margins or on the pricing level. Now, in general, I can say that we're relatively restrictive on growing operating expenses in general.

We've been and we've seen through various stages of the solar market. We do not see this stage, as was the case in Germany, let's say, or Europe in 2013 when market disappeared. Again, we see it more of a correction rather than a crisis that's going around the overall, I would call it, situation related to financing and a little bit of availability that exists there. So, the operating margin improvement model is exactly the same.

It will resume exactly to be the same operating leverage once revenues are up. And I would say that the fourth quarter target will be achievable based on the revenues forecast that we will provide at that point of time. And if -- whether it will be this or not, it's only a revenue issue rather than anything else. And then so I apologize, but I lost the train of thoughts on your first part of the question.

Philip Shen -- ROTH MKM -- Analyst

No problem. It's on C&I backlog. Can you just give an update?

Ronen Faier -- Chief Financial Officer

Yeah, sure. So, on C&I backlog, I want to talk about, first of all, volumes and then on -- from a volume point of view, from the very beginning of the year, we have already delivered a volume that is very close to the entire last year. And the backlog that we have is more than what we have already delivered for this first half. So, when last quarter, we said that we had something, which, with a very simple math, you could see about 11 gigawatts this year.

This is still a number that we see happening for this year. And again, based on our availability, we'll have more products. It can even be bigger. From backlog buildup, on the other hand, this is something that is changing because as long as the distributors knew, installers knew that there is a lead time of sometimes 12 months for a product, they saw very good reasoning to put an order into place, binding orders as soon as possible to make sure that they get product.

And sometimes, by the way, they did it simply because they knew that there is going to be a little bit of a location, so they wanted to ensure their places. Once we're moving into product availability in the field, and also, if you look at our inventory levels and finished goods inventory levels that are building, by the way, in a healthy way to reduce shipment costs, in the various regions, there is no reason for any particular distributor to put now a backlog into a year from now. So, I can tell you that we have a solid backlog for Q3, of course, Q4, and even Q1. From Q2, where we still take orders sometimes, by the way, we see a smaller backlog.

And I would estimate that over the next few quarters, we will see backlogs being shorter in nature compared to where they were a year ago. This is not necessarily indicative of the actual volumes, it simply means that we will turn more orders into revenues in the same quarter than maybe compared to the spoiled situation that we were a few quarters ago, where we knew before we started already that everything that we can manufacture, we can sell.

Philip Shen -- ROTH MKM -- Analyst

Great. Thanks, guys.

Operator

We'll take our next question from Andrew Percoco with Morgan Stanley. Please go ahead.

Andrew Percoco -- Morgan Stanley -- Analyst

Great. Thanks so much for the time. I just had another follow-up question on the commercial segment. That the percentage of total megawatt sales continues to drive -- go higher quarter over quarter.

It sounds like that's going to be a driver of lower margins in the third quarter. Have you disclosed what the margin level on some of those commercial customers look like on maybe on an average basis? Just trying to think through if commercial continues to grind higher in 4Q and into 2024, what we should think about for a potential floor on gross margins? Thanks.

Ronen Faier -- Chief Financial Officer

Sure. So, I'll start by, first of all, a little bit of the numbers. We used to say that, usually, commercial margins were 500 to 700 basis points lower than residential margins, and this is, by the way, still the case, dependent on the size of the installation, where, usually, when we have a -- the bigger the installation is, the lower the margin is on the product. So, from that point of view, I think that it gives an answer.

We also, by the way, need to remember that not all three-phase inverters that we're shipping are commercial because Europe, and especially Germany, Austria, Switzerland, are markets that three-phase markets where we sell three-phase inverters. And again, most of our shortages today are in three-phase, both in commercial and residential. I would like to add one more thing, and this is that, yes, of course, the more commercial you see, the lower the gross margins. But at the same time, usually because of the fact that these are installations that are bigger, their contribution to the operating margin is close to similar to what you see in residential, simply because they draw with them much less operating expenses.

So, while you do see usually lower gross margin, you can see almost similar operating profit when it comes to these products specifically.

Andrew Percoco -- Morgan Stanley -- Analyst

Got it. That's helpful context. And maybe just to follow up, and apologies if I missed the answer to this. But have you broken down what your expectation is in the third quarter on your solar revenue, specifically between Europe and the U.S.

in terms of quarter-over-quarter trends?

Ronen Faier -- Chief Financial Officer

No, we usually don't break it on a forward-looking basis.

Andrew Percoco -- Morgan Stanley -- Analyst

OK. Thank you.

Operator

We'll take our next question from Jordan Levy with Truist Securities. Please go ahead. Your line is open.

Jordan Levy -- Truist Securities -- Analyst

You know, I think most of my questions are answered, but maybe I'll just ask sort of thinking on the progression on the battery side. The first, kind of on the performance of the current battery state. As you ship them, volumes ramp. And then maybe looking out into next year, as you roll out some of the new initiatives there, just an updated thought there.

Zvi Lando -- Chief Executive Officer

Yeah. Sorry, we didn't hear you that great. But if I understand correctly, the question is about the performance of batteries. So, specifically, batteries are not yet challenged in terms of lifetime and cycle.

So, it's hard to give a clear answer on those. It will take a few more years. From the -- the two parameters that I would consider a critical at point at this time is the first is ease of installation and commissioning time. And the second is reliability and failure rates.

I think we are -- we're far from perfect. But I think we're doing good, and we're getting positive feedback from the market on both. We've introduced continuous improvement on installation times, commissioning software, wizard that guides the installers through the installation process and are getting very good feedback from the market on that topic. And on reliability as well, our failure rates have been low, and performance has been robust.

So, we're pretty satisfied in that area. And again, that's it, on lifetime and cycles, there's still -- it will take some time until that picture is clear.

Jordan Levy -- Truist Securities -- Analyst

Absolutely appreciate you taking my question. Thank you.

Operator

We'll take our next question from Corinne Blanchard with Deutsche Bank. Please go ahead. Your line is open.

Corinne Blanchard -- Deutsche Bank -- Analyst

Hey, good afternoon, and thank you for taking my question. Maybe as a follow-up, so you mentioned having probably two quarters or to clean the channel in the U.S. But I think at the beginning of the call, you mentioned that the sell-through of your products did increase by 10% this quarter. So, I just wanted to clarify this, and then I will have a follow-up on the battery side after.

Zvi Lando -- Chief Executive Officer

Yeah. I think, again, it's a bit about magnitude. So, we are seeing a positive indicator, I would say, of sell-through by our distributors that has increased in the U.S. by 10% quarter over quarter.

But as I described, I think the inventory levels are still such that this is not a sufficient enough increase to drain the inventories quickly. So, either it will take a bit longer for the inventories to decline unless this is an indicator that will continue to improve and sell-through and installation rates will go much higher. But at the current rate, it will take at least a couple of quarters to get through the inventory.

Corinne Blanchard -- Deutsche Bank -- Analyst

OK. Makes sense. And then to follow up on the battery, can you just -- and maybe I missed it, so I apologize if I did. But can you just give like a quick update maybe on Sella 2 and where you trend? And where do you see the pricing on battery going over the next 12 months or so?

Zvi Lando -- Chief Executive Officer

Yeah. So, remember, Sella 2 is -- or our current residential battery offerings are not yet using sales from Sella 2. So, Sella 2 is ramping. And as we described in the prepared remarks, we'll reach its full capacity by the end of the year and is in parallel selling sales and batteries for other applications.

Meanwhile, they are also beginning to produce the type of cells that we intend to use in our next-generation batteries that will be introduced -- beginning to be introduced in the first half of next year. So, gradually, the capacity of Sella 2 will move more to our own batteries. And that will give us flexibility also in terms of assurance of supply, also in terms of pricing, and also in terms of technology of making sure that, really, the sales are optimized for the application and the system of our own batteries and inverters. So, that's the picture regarding Sella 2.

Regarding battery pricing, again, we're not seeing major trends. We did reduce slightly battery prices in -- on our single-phase batteries. But generally, we don't see additional major shifts on battery pricing in the coming couple of quarters.

Corinne Blanchard -- Deutsche Bank -- Analyst

Thank you.

Operator

We'll take our next question from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, excellent. Thanks, team. Appreciate it. Just following up on a few different comments here.

Actually, first off, if I can -- 45x, just would love to get an update here on that front. What percent of the overall production as you think ramping into '24 do you think could ultimately qualify to? What extent could you ultimately leverage even European volume to take advantage of 45x? I just wanted to make sure we double back to that as we get some final clarity here on that front, first off, and then I got a follow-up on the margin conversation.

Zvi Lando -- Chief Executive Officer

So, as I described, we're starting off with inverter manufacturing that will be -- already, we will be delivering inverters that qualify for 45x in the current quarter. But they won't be significant from a financial point of view. And in the fourth quarter, we will be delivering more than 30,000 inverters, and that's when it will begin to have an impact. We intend to continue to ramp, of course, into 2024 and optimize our manufacturing to the mix and ramp initially, of course, to satisfy the U.S.

demand. After we reach that milestone, and we'll continue to add capacity for other purposes, assuming it can -- we can benefit from the same incentives for the regions, but that's still going to take time. And by then, I think a lot of the IRA regulations will be more clear in terms of what is possible and what is not.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. So, it sounds somewhat dynamic, looking to scale off the 30,000 units in 4Q, but the plan, especially as you think about the C&I compliance is still in flux, it seems like. But if I can actually jump back to the margin question and the conversation on that for real quickly. Just to clarify earlier, right? You talked about this inventory issue persisting on the residential side for some quarters here.

But obviously, the C&I looks much healthier. How do you think about the target margin going back to the earlier 20% to 22% as you see or at least as you seem to imply that '24 is going to see materially higher C&I contributions as a percent of the total mix? But yes, and I don't want to read too far into that.

Ronen Faier -- Chief Financial Officer

So, again, yes, to see 2024 because we were also surprised a little bit by the second half of '23. But I would say that the dynamic should be as follows. What we see right now, especially in Q3 and Q4 is the fact that the U.S. market that is correcting right now, which is usually characterized with high resi and higher margins, by the way, compared to other regions, is slowing down very much, which, of course, impact negatively the margin.

And at the same time, Europe is growing, and the commercial side is also growing. And this is also something that takes us a little bit down because the portion of commercial compared to residential in our overall mix, at least in Q3, Q4, is higher than we anticipated or anticipate to see. If you combine these two, yes, the expectation should be that, in 2024, where we believe that, first of all, Europe will come back to course -- course much quicker than the United States. And we will also see, of course, again, there an increase in residential, plus the fact that the U.S.

market that contributes to margin very nicely is also going to go up within, I don't know, two, three, four quarters, but this is still within '24. Yes, we do expect the '24 margins should come back to levels that we've seen at least in the last quarters. With that said, again, the major ace is going to be here, batteries, because we do see that battery prices continue to go down at least right now. And as we've mentioned before, batteries target gross margin should be around 25%.

So, even if today or in some quarters, it's higher than this, I'm not sure that this will persist. So, I would cautiously say that should be, of course, first of all, back in the model, by the way, which we also believe that this may be the case even this year as well for the next two quarters. And second is that, yes, there are some drivers that suggest that '24 can be on the upside part of it rather than on the downside part of it.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Fair enough. I'll leave it there. Thank you, guys. And actually, 45x, any expectations there, just to go back that far?

Ronen Faier -- Chief Financial Officer

So, I'm not sure where the expectations are, but at least from a -- as we said, we believe that the $0.065 is something that we have already in our pockets. So, everything that we'll manufacture this year will be at least the $0.065. We believe that we will retain at least 50% of these to our margins given the fact that manufacturing in the U.S. is a little bit more expensive.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

We'll take our next question from Kashy Harrison with Piper Sandler. Please go ahead. Your line is open.

Kashy Harrison -- Piper Sandler -- Analyst

Good afternoon. Thanks for taking my one question. One question. So, maybe just at a higher level, just given the increasing availability of equipment supply, do you think that the distributors' definition of normal is going to structurally decline? Or do you think -- just given some of these cash flow dynamics? Or do you think this is more of a temporary thing, where, if they thought to your point, two months was normal before? By the time you get back to 2024, that's what they define as normal.

Or does that two months become a month or half a month? Just want to get some sense of how you think about distributor thought process and cash flow dynamics, etc.

Zvi Lando -- Chief Executive Officer

So, what I'm saying is based on experience and the conversations that we had with distributors recently and -- but it could be different. But our judgment would be that, at some point, it goes back to the type of dynamics that we've seen in the past. If you look today, following the period of shortages, first of all, also installers are holding inventory today, which is the phenomena that usually installers don't want to hold inventory. And then on top of that -- and the picture of how much inventory installers are actually holding is not clear.

On top of that, the distributors, they're carrying seven, eight, nine types of inverters, a similar number of module suppliers for each one, they're holding inventory, many part numbers. It's really and their interest and their classical behavior to bring it down and to have a much smaller line card and much more control. So, in that type of environment where installers don't hold inventory anymore, distributors hold a limited portfolio of products, even though the suppliers and the equipment manufacturers will have availability, it's still, I believe, we'll go back to the classical model of holding in the range of a quarter worth of inventory within the distribution channel, give or take, depending on the type of product and dynamics. But I think that that's likely going to be the steady state that the channels will return to following this adjustment and the amount of time it takes.

Kashy Harrison -- Piper Sandler -- Analyst

Thank you.

Operator

And we'll take our next question from Joseph Osha with Guggenheim Partners. Please go ahead. Your line is open.

Joseph Osha -- Guggenheim Partners -- Analyst

Thanks very much. We spent a bunch of time talking about what the inventory drawdown might look like, in particular, in Europe. But as we enter next year, it does seem that we have a few policy headwinds, in particular in Southern Europe. So, I'm just wondering, I know it's really if you can opine what you see the demand picture looking like early next year as we come out of this inventory correction in Europe.

Zvi Lando -- Chief Executive Officer

Yeah. Thanks for the question. Actually, our -- just a few data points. Our installation rates and take Italy, for example, right now are higher than they were a year ago despite the fact that some of the programs have changed and some of the installations are less lucrative for the homeowners.

So, we're not seeing the policy changes having in the countries where there are what you would consider maybe negative policy changes having an impact. And I think it's an opportunity also to explain a little bit more what Europe is. So, you have the large markets like the German market where I mentioned that in 2022, it was 7.5 gigawatts. And this year is going -- expected to be somewhere between 10 to 12 gigawatts of installations and to continue to increase into 2024.

And in parallel to that, you have all kinds of different-sized markets with different type of environment. And just as an example, in the prepared remarks, Ronen mentioned Slovenia. Our revenue in Slovenia in 2022 was EUR 25 million. In 2023, our revenue in a country like Slovenia is expected to be in the range of EUR 70 million to EUR 80 million annually.

So, these small markets that are evolving, they're not so small. And there are not many, but there are multiple such markets. So, all in all, again, things can change, but looking at the European landscape, at least for us, and considering our position in many of these large, small, and midsized markets is -- we're very optimistic still about the dynamics in the European market going into 2024.

Joseph Osha -- Guggenheim Partners -- Analyst

OK. Thank you. 

Operator

We'll take our next question from Vikram Bagri with Citi. Please go ahead. Your line is open.

Vikram Bagri -- Citi -- Analyst

Good evening, everyone. Ron, first off, you mentioned a substantial cash buildup or generation in the next few quarters. Can you talk about capital allocation and particularly about share repurchases that's in the budget?

Ronen Faier -- Chief Financial Officer

So, in general, we do not have plans for this right now. We do experience right now because of the phenomenon that replace -- that explained a little bit later, a longer cash-creation cycle. And this is something that will start to play out in Q3, simply given the fact that we are starting to reduce inventories and collection is going to be a little bit faster. With that said, we still believe, and this is why we also raised capital last year, is that there are opportunities out there to present faster growth and to present a much more comprehensive growth.

We do not believe that we have exhausted these opportunities. We're still reviewing them. Some of them are being due diligence these days as well. And at least, at this point, we believe that there is much better creation of value to investors by acquiring companies, building the business, and building a portfolio rather than just returning it to the investors.

By the way, we feel that this will not be the case, we will surely consider this, but we don't have any religion against it. But I believe that opportunities are going to be created, I believe, in the near term to use this cash.

Vikram Bagri -- Citi -- Analyst

Thank you. And my follow-up is on inventory, again, the hundredth question on the same topic. I apologize if this has been answered. Can you provide the magnitude or at least cadence of rebalancing in third and fourth quarter? Ron, you mentioned in your prepared remarks, U.S.

-- the shipments were down 29%, but the sell-through rose more than 10%. So, inventories in the U.S., it seems like, are already down more than 30% and are still manageable. Your comments on Europe, it sounds like, the inventory rebalancing required is not -- the magnitude is not that big. So, it seems like most of the rebalancing happens in third quarter.

So, the balancing in fourth quarter is more dependent on your projected demand and sort of borne out of caution, and it might not happen. So, if you can comment on the magnitude, if you can characterize what the impact on revenue is, and the cadence. How much of the rebalancing happens in fourth quarter and third quarter? Thanks.

Ronen Faier -- Chief Financial Officer

I'm not sure that I can cover all of it because, again, we see multiple segments, multiple regions, and multiple phenomenon such as the, again, Q4 seasonality in Europe, which is usually a big drawback compared to the fact that, as you've mentioned, and rightfully so, that we believe that the inventory corrections, at least in Europe, are going to be a little bit quicker. In general, I would go again one by one. I'd say that in Europe, I think that, yes, the correction within the distributors should be relatively quick, given the fact that the inventories levels that Zvi mentioned before are not so high when it reflects inventory days while we still see very high -- record-high point-of-sale data. And the bigger question there is going to be, how will Q4 look like? And what is going to be, from a cash perspective, the appetite of the larger installers to continue and maintain -- sorry, distributors, continue and maintain inventories? That's, I think, the biggest question.

Again, I would say that we're cautiously optimistic there, but I'm not sure that I have a good answer. In the U.S., your analysis is almost correct, other than the fact that we start from a relatively high level of inventory. So, even though we decreased the shipment, when we look at the exiting point of the quarter, this is the time where Zvi mentioned that sometimes we've seen some distributors close to two quarters of inventory. This is actually during the quarter.

And this is why we think that this is something that would take a little bit more time. In general, we believe that since Europe is very strong for us, since Rest of World, by the way, continues to be very strong, this will be the thing that will -- and this is, by the way, together, today, close to 80% of our business, this will be the area that will be moving quicker from this kind of correction into more normalized patterns of orders where we think that the U.S. will lag, I would say, by, I don't know, maybe two or three quarters after Europe in this sense.

Operator

And we will take our next question from Jonathan Kees with Daiwa. Your line is open.

Jonathan Kees -- Daiwa Capital Markets -- Analyst

Great. Thanks for squeezing me in. I'll just ask one in the interest of time here. Just wanted to double-click on, you're seeing one of the trends for 2024, the third-party ownership.

I mean, when do you -- can you provide some more color? Is that something that has obviously a shift undertaking now? Do you see that being -- I guess you're anticipating that to be quite material in 2024? And more the first half, second half, and that you have a big offset for the higher interest rates? Yes, if you could just provide some more color about that, that would be great. Thanks.

Zvi Lando -- Chief Executive Officer

Yeah. This is -- you know, it's a trend that a lot of people in the market anticipate for the reasons that you mentioned there are some benefits in the IRA for third-party ownership and as well as the impact of interest rates on loans. Some of the large installers that we speak to are beginning to see this -- the shift, although not in a dramatic manner yet. So, I think it will take some time to build up.

And then, of course, that refers to the origination. So, that's at the time that the consumer closed the contract for that to move through to purchases and installations takes a little bit longer. So, we're not seeing anything rapid happening in this regard, but there is a trend in that direction that is expected by the people. We don't have any special visibility in this.

So, it's more what we read and hear in the market is expected to be a meaningful shift from loan to third-party ownership to lease.

Jonathan Kees -- Daiwa Capital Markets -- Analyst

All right. Great. Thank you.

Operator

And there are no further questions on the line at this time. So, I'll turn the program to SolarEdge CEO, Zvi Lando, for closing comments.

Zvi Lando -- Chief Executive Officer

Thank you. So, in summary, we're pleased with our results this quarter, which demonstrate the advantages of our position across diverse markets and applications. So, thank you all for joining us today, and have a good evening.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

J.B. Lowe -- Head of Investor Relations

Zvi Lando -- Chief Executive Officer

Ronen Faier -- Chief Financial Officer

Mark Strouse -- JPMorgan Chase and Company -- Analyst

Brian Lee -- Goldman Sachs -- Analyst

Colin Rusch -- Oppenheimer and Company -- Analyst

Philip Shen -- ROTH MKM -- Analyst

Andrew Percoco -- Morgan Stanley -- Analyst

Jordan Levy -- Truist Securities -- Analyst

Corinne Blanchard -- Deutsche Bank -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Kashy Harrison -- Piper Sandler -- Analyst

Joseph Osha -- Guggenheim Partners -- Analyst

Vikram Bagri -- Citi -- Analyst

Jonathan Kees -- Daiwa Capital Markets -- Analyst

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