Philip Shen: No problem. Thank you for all the color there, Ronen. Shifting to cash flow and balance sheet, I know you guys have a lot of cash and marketable securities. I was wondering if you could share a little bit more on how you expect cash flow to be in the coming quarters, as you kind of follow this correction? Do you expect — how much burn do you see for Q4 and then through Q3 of next year? And then how do you expect working capital to trend? I see the inventory line has gone up healthily or substantially. And when do you expect the bulk of that to kind of normalize as well? Thanks.
Ronen Faier: Okay. So here the answer is that when you’re growing, you actually usually need a little bit more working capital, because you’re manufacturing, you increase inventories, then you give customer credits. And that means that you consume a little bit more of working capital. When we look at cash flow for the next three quarters, let’s talk about cash flow from operations and let’s also talk by the way about free cash flow, because this is a result also of capital investments. So from cash flow from operations, we expect to see actually an increase in the cash flow from operations generation. As I mentioned in my prepared remarks, we have generated about $41 million this quarter. We expect to see a much higher number in the fourth quarter, and numbers to continue and increase towards Q1 and Q2, simply because of the fact that we have relatively large customer balances from the quarters that we shipped and sold a little bit more.
As I mentioned, we also increased a little bit payment terms for our European customers. And therefore within Q4 and Q1, we will collect relatively heavily on those. When you look at the inventory levels that we’re carrying, we’re carrying quite high inventory levels, because again, we were anticipating growth. And that means that we’re going to start consuming this inventory over time. This will also go back to the cash. And when it comes to paying to our vendors, the fact is that this is more correlated to your manufacturing levels. So therefore, when you’re manufacturing less, you’re actually paying less to your payables. So that means that we expect to see an accelerating cash flow from operations within Q4 and Q1 and hopefully starting to see again growth in revenues starting to impact cash flow in Q2, but it’s still supposed to be positive and of course because of the fact that we still collect and using inventory.
The second part is how do we translate it to free cash flow? And here — well, part of the activities that we’re taking right now is to reduce our capital expenditures. A lot of our capital expenditures last year were aimed at increasing manufacturing capacity almost everywhere around the world. That means procurement of automatic assembly lines, that means, for example, payments for contract manufacturers to take more areas and make them suitable. This is something that, of course, right now other than the investments that we do in the U.S. manufacturing will be very much reduced. In addition to this, of course, at this time, you’re investing a little bit more in areas that when you’re growing, you’re allowing yourself to do, like, maybe a little bit of newer labs or bigger labs.
And that means that also, not only we will see higher cash flow from operations, we will see lower cash flow in investing activities. So overall, we should see an accelerating growth in cash.
Operator: We’ll take our next question from Corinne Blanchard of Deutsche Bank.
Corinne Blanchard: Hi. Good afternoon. Thank you for taking my question. Could you maybe — I know you provided a very good overview with the previous question. But would you be able to give a little bit more color about the U.S. and maybe broken by state, which area you’re seeing strong domain and which one are weak and how we should be thinking about it going into next year?
Zvi Lando: Yes. So, Corinne, referring to our data set that we use for this purpose is the installation rate that the main indicator for us our monitoring connections to our monitoring portal. So I can say that overall, on residential, the connection rates recently for the last, call it, 10, 12 weeks has been relatively flat. And when we break it down by states, it’s showing a small decline in California and an increase in some of the other states, for instance, Puerto Rico, and in other states around the nation. This is on the residential inverter point of view. For batteries, we’re seeing a consistent increase in connection rate. And this is coming from California, because although installation rates are down, installation of batteries are up from the historical base, because whoever or many of those that are installing in California are installing with batteries.
And we also see some increase in battery installations in other states. Again, Puerto Rico is an example. So this is the residential picture where California is slightly down and other states accumulated are slightly up. And overall, the rate of installation for residential in the U.S. is relatively flat. On commercial, as I mentioned also in the prepared remarks, we see on the installation the same type of pattern that we’re seeing on the sell-through data where after some period of installation rates of commercial being relatively flat, we’re seeing a gradual increase, not dramatic but still a positive trend on installation and connections of commercial projects. And as I mentioned, this is across the country specifically in the markets that are strong for commercial.
And we believe it’s projects that have been held for some time because of people waiting for clarity on the IRA or for understanding the interest rate dynamics and the fact that there are low cost modules and people understand that they won’t be clarity on some of those elements for some time. So they’re moving ahead with the projects that were on hold. And we expect this trend to continue.
Corinne Blanchard: All right. Thank you. And maybe for a follow up, switching a little bit here, but could you talk about the competition that you’re seeing in the U.S.? Tesla is coming out with new products. So what do you expect there and maybe what does that mean in terms of pricing pressure over the next three or four quarters?
Zvi Lando: Yes, we didn’t get naturally in this call to a lot of product conversation, especially not on the single phase portfolio. But we are feeling good about our current single phase portfolio. We’ve recently introduced some improvements, have gained a lot of positive feedback on the reliability of the recently released product and the installation times and ease of installation of both the inverters and the batteries. And we feel that we’re in a good trajectory from a market share perspective in the U.S., in particular and what we call the mid tier installers. So we have always been strong with the large tier. We are a bit weaker in the long tail. And we’ve been — we believe we’ve been gaining some ground in the mid tier.
But these are incremental dynamics where we don’t see a major change of pattern. And as a result or related or unrelated, we don’t see major expectation for price changes in the U.S. market for the inverter offering. Batteries in general not only in the U.S., but the battery market is more in an oversupply type of dynamic. And here and there for volume purposes, we might reduce battery pricing. But on the inverters and optimizers we see price stability and expect it to continue.
Corinne Blanchard: Thank you.
Operator: We’ll take our next question from Brian Lee of Goldman Sachs.
Brian Lee: Hi, guys. Thanks for taking the questions. I had a couple here. Just maybe bigger picture because there’s a lot of moving parts as well as numbers that are moving quite dramatically from what we’ve seen just the past couple of quarters. So maybe to start, you’re talking about this normalized level of $600 million to $700 million in revenue, gross margins being 30 to 32 at that level, but then that’s including 500 basis points. So core business is like 25% to 27% gross margin. But if I look at 2022, you were doing that level of revenues and doing higher gross margins without the IRA benefit. And even back then you were struggling with the euro and some component issues, but higher than 25% to 27% gross margin. So I don’t know.
