SOLAREDGE TECHNOLOGIES, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Form 10-Q or statements incorporated by reference from documents we have filed with the Securities and Exchange Commission may contain forward-looking statements that are based on our management’s expectations, estimates, projections, beliefs and assumptions in accordance with information currently available to our management. Forward-looking statements should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part 1, Item 1 of this report. This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, technology developments, new products and services, financing and investment plans, competitive position, industry and regulatory environment, effects of acquisitions, growth opportunities and the effects of competition. Forward-looking statements include statements that are not historical facts and can be identified by terms such as “anticipate,” “believe,” “could,” “seek,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements inherently involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Given these uncertainties, you should not place undue reliance on forward-looking statements. Forward-looking and other statements regarding our sustainability efforts and aspirations are not an indication that these statements are necessarily material to investors or requiring disclosure in our filing with the Securities and Exchange Commission (“SEC”). In addition, historical, current and forward-looking sustainability-related statements may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve and assumptions that are subject to change in the future, including future rule-making. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this filing. Important factors that could cause actual results to differ materially from our expectations include: • future demand for renewable energy including solar energy solutions; • changes to net metering policies or the reduction, elimination or expiration of government subsidies and economic incentives for on-grid solar energy applications; • changes in the U.S. trade environment, including the imposition of import tariffs; • federal, state, and local regulations governing the electric utility industry with respect to solar energy; • changes in tax laws, tax treaties, and regulations or the interpretation of them, including the Inflation Reduction Act; • the retail price of electricity derived from the utility grid or alternative energy sources; • interest rates and supply of capital in the global financial markets in general and in the solar market specifically; • competition, including introductions of power optimizer, inverter and solar photovoltaic (“PV”) system monitoring products by our competitors; • developments in alternative technologies or improvements in distributed solar energy generation; • historic cyclicality of the solar industry and periodic downturns; • product quality or performance problems in our products; • our ability to forecast demand for our products accurately and to match production with demand; • our dependence on ocean transportation to timely deliver our products in a cost-effective manner; • our dependence upon a small number of outside contract manufacturers and limited or single source suppliers; • capacity constraints, delivery schedules, manufacturing yields, and costs of our contract manufacturers and availability of components; 3 • delays, disruptions, and quality control problems in manufacturing; • shortages, delays, price changes, or cessation of operations or production affecting our suppliers of key components; • existing and future responses to and effects of Covid-19; • business practices and regulatory compliance of our raw material suppliers; • performance of distributors and large installers in selling our products; • disruption in our global supply chain and rising prices of oil and raw materials as a result of the conflict between Russia and Ukraine; • our customers’ financial stability, creditworthiness, and debt leverage ratio; • our ability to retain key personnel and attract additional qualified personnel; • our ability to effectively design, launch, market, and sell new generations of our products and services; • our ability to maintain our brand and to protect and defend our intellectual property; • our ability to retain, and events affecting, our major customers; • our ability to manage effectively the growth of our organization and expansion into new markets; • our ability to integrate acquired businesses; • fluctuations in global currency exchange rates; • unrest, terrorism, or armed conflict in Israel; • macroeconomic conditions in our domestic and international markets, as well as inflation concerns, financial institutions instability, rising interest rates, recessionary concerns, the prospect of a shutdown of the U.S. federal government and the Israeli government's plans to significantly reduce the Israeli Supreme Court's judicial oversight; • consolidation in the solar industry among our customers and distributors; • our ability to service our debt; • any unauthorized access to, disclosure, or theft of personal information or unauthorized access to our network or other similar cyber incidents; • the impact of evolving legal and regulatory requirements, including emerging environmental, social and governance requirements; and • the other factors set forth under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and subsequent reports on Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Except as required by law, we assume no obligation to update these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. 4 Overview We are a leading provider of an optimized inverter solution that has changed the way power is harvested and managed in a solar photovoltaic, known as PV systems. Our direct current or DC optimized inverter system maximizes power generation while lowering the cost of energy produced by the solar PV system, for improved return on investment, or ROI. Additional benefits of the DC optimized inverter system include comprehensive and advanced safety features, improved design flexibility, efficient integration (DC coupled) with SolarEdge storage solutions, and improved operating and maintenance, or O&M with remote monitoring at the module level. The SolarEdge Energy Hub inverter supports, among other things, connection to a DC-coupled battery for full or partial home backup, and optional connection to the SolarEdge smart EV charger. The typical SolarEdge optimized inverter system consists of power optimizers, inverters, a communication device that enables access to a cloud-based monitoring platform and in many cases, a battery and additional smart energy management solutions. Our solutions address a broad range of solar market segments, from residential to commercial and small utility-scale solar installations. Since introducing the optimized inverter solution in 2010, SolarEdge has expanded its activity to other areas of smart energy technology, both through organic growth and through acquisitions. SolarEdge now offers energy solutions which also include energy storage systems or ESS, home backup systems, electric vehicle, or EV, components and charging capabilities, home energy management, grid services and virtual power plants, or VPPs, and lithium-ion batteries. In the third quarter of 2020, we began commercial shipments to the U.S. from our manufacturing facility in the North of Israel, “Sella 1”. The proximity of Sella 1 to our R&D team and labs, enables us to accelerate new product development cycles, as well as define equipment and manufacturing processes of newly developed products which can then be adopted by our contract manufacturers world-wide. In 2023, we expanded the manufacturing capacity of Sella 1 to add an additional inverter line and expect to reach full capacity in the third quarter of 2023. In May 2022, we announced the opening of “Sella 2”, a 2GWh Li-Ion cell factory in Korea. The new factory is intended to help the Company meet the growing global demand for Li-Ion cells and batteries, specifically in the ESS market. Sella 2 began producing and shipping cells at the end of 2022 and is expected to reach full manufacturing capacity in early 2024. In addition, as part of our manufacturing regionalization efforts, we expanded our manufacturing capabilities with a manufacturing site in Mexico which significantly increased our capacity and gave us further flexibility to manage growing demand. In light of the Inflation Reduction Act of 2022 (“IRA”), legislation in the United States that incentivizes the local manufacturing of renewable energy products by providing benefits to installers for the purchase and installation of US-manufactured products, as well as by incentivizing manufacturers of such products domestically, we are planning to establish manufacturing capabilities in the United States by using contract manufacturers and by establishing our own manufacturing facility. We expect to ramp shipments of inverters from a contract manufacturer's US manufacturing site towards the end of 2023. We are a leader in the global module-level power electronics or MLPE market. As of June 30, 2023, we shipped approximately 119.6 million power optimizers, 5.2 million inverters and 213.0 thousand residential batteries. Over 3.5 million installations, many of which may include multiple inverters, are currently connected to, and monitored through, our cloud-based monitoring platform. As of June 30, 2023, we shipped approximately 47.9 GW of our DC optimized inverter systems and approximately 1.4 GWh of our residential batteries. Our revenues for the three months ended June 30, 2023, and 2022 were $991.3 million and $727.8 million, respectively. Gross margin for the three months ended June 30, 2023, and 2022 was 32.0% and 25.1%, respectively. Net income for the three months ended June 30, 2023 and 2022 was $119.5 million and $15.1 million, respectively. Our revenues for the six months ended June 30, 2023, and 2022 were $1,935.2 million and $1,382.9 million, respectively. Gross margin for the six months ended June 30, 2023, and 2022 was 31.9% and 26.1%, respectively. Net income for the six months ended June 30, 2023 and 2022 was $257.9 million and $48.2 million, respectively. 5 Global Circumstances Influencing our Business and Operations Covid-19 Impact & Response Due to the worldwide growing trend in availability and administration of vaccines against Covid-19, we have generally emerged from the Covid-19 pandemic. However, the future impact of the Covid-19 pandemic remains highly uncertain and while we have not experienced any new disruptions resulting directly from Covid-19 in the second quarter of 2023, long lasting impacts of the pandemic and general global economic conditions continue to present challenges to our operations and business. In the second quarter of 2023, we continued to witness a decrease in shipment prices and transit times. In fiscal 2022 as a whole and into 2023 specifically, the industry-wide component shortages, which originated from Covid-19 and were amplified by the increase in demand for our products as well as other manufacturers who are competing for the same components, continued to impact our ability to accurately plan and forecast the delivery of our products to customers and have also increased the cost of ocean and air freight for components and finished goods. However, the overall trend is decreasing quarter over quarter. To mitigate the impact of these disruptions on our supply chain, in some cases, we extended shipment terms that differ from our standard terms in certain transactions, including Free-Carrier and Ex-works (INCOTERMS, 2020) delivery from our manufacturing facilities. This change was implemented as part of our ongoing efforts to expedite shipments to our customers and improve visibility throughout our supply chain. Moreover, industry-wide component shortages require our R&D teams to focus their attention on manufacturing and production design workarounds solutions, which can impact our ability to meet our plans to roll out new innovative products and services and may also result in a higher failure rate of products due to the rapid changes in product designs made prior to the commercial release of the products. Our operation team is working tirelessly to mitigate the impact of the disruptions described above. Impact of Ukraine’s Conflict on the Energy Landscape The conflict between Ukraine and Russia, which started in early 2022, and the sanctions and other measures imposed in response to this conflict have increased the level of economic and political uncertainty. While we do not have any meaningful business in Russia or Ukraine and we do not have physical assets in these countries, this conflict has, and is likely to continue to have, a multidimensional impact on the global economy, the energy landscape in general and the global supply chain. On one hand, in 2022, rising global interest in becoming less dependent on gas and oil led to higher demand for our products. On the other hand, the conflict further adversely affected the prices of raw materials arriving from Eastern Asia and resulted in an increase in gas and oil prices. Furthermore, various shipment routes were adversely impacted by the conflict resulting in increased shipment lead times and shipping costs for our products. While the impact of this conflict cannot be predicted at this time, the circumstances described above may have an adverse effect on our business and results of operations. Inflation Reduction Act In August 2022, the U.S. government enacted the IRA, which includes several incentives intended to promote clean energy, battery and energy storage, electrical vehicles, and other solar products and is expected to impact our business and operations. As part of such incentives, the IRA will, among other things, extend the investment tax credit (“ITC”) for residential solar installations through 2034 and for commercial installations through 2024 and is therefore expected to increase the demand for solar products. The IRA is expected to further incentivize residential and commercial solar customers and developers due to the inclusion of a tax credit for qualifying energy projects of up to 30%. Since these regulations are new and are still pending administrative guidance from the Internal Revenue Service and U.S. Treasury Department, we will be examining the benefits that may be available to us, such as the availability of tax credits for domestic manufacturers, in the coming months. To the extent that tax benefits or credits may be available to competing technology and not to our technology, our business could be adversely disadvantaged. 6 Key Operating Metrics In managing our business and assessing financial performance, we supplement the information provided by the financial statements with other operating metrics. These operating metrics are utilized by our management to evaluate our business, measure our performance, identify trends affecting our business and formulate projections. We use metrics relating to shipments of inverters, power optimizers and megawatts to evaluate our sales performance and to track market acceptance of our products. We provide the “megawatts shipped” and “megawatts hour shipped” metrics, which are calculated based on inverter or battery nameplate capacity shipped, respectively, to show adoption of our system on a nameplate capacity basis. Nameplate capacity shipped is the maximum rated power output capacity of an inverter or battery, and corresponds to our financial results in that higher total nameplate capacities shipped are generally associated with higher total revenues. However, revenues may increase in a non-correlated manner to the “megawatt shipped” metric since other products such as power optimizers, are not accounted for in this metric. Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 2023 2022 2023 2022 Inverters shipped 334,635 228,389 664,288 439,503 Power optimizers shipped 5,531,373 5,215,074 11,972,056 10,939,205 Megawatts shipped 1 4,324 2,516 7,933 4,646 Megawatts shipped - residential batteries 269 251 490 350 1 Excluding residential batteries, based on the aggregate nameplate capacity of inverters shipped during the applicable period. Nameplate capacity is the maximum rated power output capacity of an inverter as specified by the manufacturer. 7 Results of Operations The results of operations presented below should be reviewed in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. The following table sets forth selected consolidated statements of income data for each of the periods indicated. Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Revenues $ 991,290 $ 727,774 $ 1,935,179 $ 1,382,854 Cost of revenues 673,985 545,132 1,317,748 1,021,254 Gross profit 317,305 182,642 617,431 361,600 Operating expenses: Research and development 86,526 74,847 166,399 141,196 Sales and marketing 44,222 38,975 85,188 74,291 General and administrative 36,199 28,121 72,766 54,550 Other operating expense (income), net - 4,687 (1,434 ) 4,687 Total operating expenses 166,947 146,630 322,919 274,724 Operating income 150,358 36,012 294,512 86,876 Financial income (expense), net 3,384 (14,311 ) 27,058 (18,916 ) Other loss - - (125 ) (844 ) Income before income taxes 153,742 21,701 321,445 67,116 Income taxes 34,232 6,617 63,557 18,909 Net income $ 119,510 $ 15,084 $ 257,888 $ 48,207 Comparison of three and six months ended June 30, 2023, to the three and six months ended June 30, 2022 Revenues Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Revenues $ 991,290 $ 727,774 $ 263,516 36.2 % $ 1,935,179 $ 1,382,854 $ 552,325 39.9 % Revenues increased by $263.5 million, or 36.2%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to (i) an increase of $256.3 million related to the number of inverters and power optimizers sold, with significant growth in revenues coming from Europe; and (ii) an increase of $34.7 million related to the number of residential batteries sold mainly in Europe. These increases were offset by a decrease of $28.6 million related to a decrease in the number of ancillary solar products sold. Revenues from outside of the U.S. comprised 80.3% of our revenues in the three months ended June 30, 2023 as compared to 57.3% in the three months ended June 30, 2022. The number of power optimizers recognized as revenues increased by approximately 0.3 million units, or 5.6%, from approximately 5.2 million units in the three months ended June 30, 2022 to approximately 5.5 million units in the three months ended June 30, 2023. The number of inverters recognized as revenues increased by approximately 99.2 thousand units, or 42.3%, from approximately 234.6 thousand units in the three months ended June 30, 2022 to approximately 333.8 thousand units in the three months ended June 30, 2023. The megawatts hour of residential batteries recognized as revenues increased by approximately 74.4 megawatts hour, or 37.7% from approximately 197.0 in the three months ended June 30, 2022 to approximately 271.4 megawatts hour in the three months ended June 30, 2023. 8 Our blended Average Selling Price (“ASP”) per watt for solar products excluding residential batteries is calculated by dividing solar revenues, excluding revenues from the sale of residential batteries, by the name plate capacity of inverters shipped. Our blended ASP per watt for solar products shipped excluding residential batteries decreased by $0.047, or 20.1%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The decrease in blended ASP per watt is mainly attributed to the increase in the sale of commercial products that are characterized by lower ASP per watt, out of our total solar product mix and a relatively lower number of power optimizers and other solar products shipped compared to the number of inverters shipped, leading to a reduced overall effect on our ASP per watt. This decrease in blended ASP per watt was partially offset by price increases that went into effect gradually during 2022 and the first half of 2023, as well as by the appreciation of the Euro against the U.S. Dollar. Our blended ASP per watt/hour for residential batteries is calculated by dividing residential battery revenues, by the nameplate capacity of residential batteries shipped. Our blended ASP per watt/hour for residential batteries decreased by $0.026, or 5.2%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022. The decrease in blended ASP per watt/hour is mainly attributed to the addition of a three phase battery to our product portfolio that is sold at a lower ASP per watt/hour. This decrease was partially offset by the appreciation of the Euro against the U.S. Dollar. Revenues increased by $552.3 million, or 39.9%, in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to (i) an increase of $501.6 million related to an increase in the number of inverters and power optimizers sold, with significant growth in revenues coming from Europe; and (ii) an increase of $99.3 million related to an increase in the number of residential batteries sold mainly in Europe. Revenues from outside of the U.S. comprised 76.7% of our revenues in the six months ended June 30, 2023 as compared to 58.3% in the six months ended June 30, 2022. The number of power optimizers recognized as revenues increased by approximately 1.1 million units, or 10.3%, from approximately 10.9 million units in the six months ended June 30, 2022 to approximately 12.0 million units in the six months ended June 30, 2023. The number of inverters recognized as revenues increased by approximately 225.2 thousand units, or 51.1%, from approximately 440.6 thousand units in the six months ended June 30, 2022 to approximately 665.8 thousand units in the six months ended June 30, 2023. The megawatts hour of residential batteries recognized as revenues increased by approximately 189.7 megawatts hour, or 63.7% from approximately 297.8 in the six months ended June 30, 2022 to approximately 487.5 megawatts hour in the six months ended June 30, 2023. Our blended ASP per watt for solar products shipped excluding residential batteries decreased by $0.048, or 19.1%, in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. The decrease in blended ASP per watt is mainly attributed to the increase in the sale of commercial products that are characterized by lower ASP per watt, out of our total solar product mix and a relatively lower number of power optimizers and other solar products shipped compared to the number of inverters shipped, leading to an overall reduction in our ASP per watt. Moreover, the depreciation of the Euro against the U.S. Dollar, coupled with our increased sales in Europe, accelerated the decrease in our ASP. This decrease in blended ASP per watt was partially offset by price increases that went into effect gradually during 2022 and 2023. Our blended ASP per watt/hour for residential batteries decreased by $0.035, or 6.8%, in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022. The decrease in blended ASP per watt/hour is mainly attributed to the addition of a three phase battery, which is sold at a lower ASP per watt/hour, to our product portfolio. 9 Cost of Revenues and Gross Profit Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Cost of revenues $ 673,985 $ 545,132 $ 128,853 23.6 % $ 1,317,748 $ 1,021,254 $ 296,494 29.0 % Gross profit $ 317,305 $ 182,642 $ 134,663 73.7 % $ 617,431 $ 361,600 $ 255,831 70.7 % Cost of revenues increased by $128.9 million, or 23.6%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to: • an increase in direct cost of revenues sold of $97.5 million associated primarily with an increase in the volume of products sold; • an increase in warranty expenses and warranty accruals of $30.2 million associated primarily with an increase in the number of products in our install base as well as an increase in costs related to the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses; and • an increase in personnel-related costs of $4.4 million related to the expansion of our production, operations, and support headcount, which grew in parallel to our growing install base worldwide and manufacturing volumes which were partially offset by the depreciation of the New Israeli Shekel (“NIS”) against the U.S. dollar. These were partially offset by: • a decrease in shipment and logistic costs in an aggregate amount of $4.1 million due to a decrease in shipment rates and a decrease in expedited shipments costs; and • a decrease of $3.6 million in inventory accrual which is mainly attributed to a lower inventory write-offs as a result of the discontinuation of our UPS related activities in the comparable period. Gross profit as a percentage of revenue increased to 32.0% from 25.1% in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022, primarily due to: • gradual price increases across our product offerings; • a decrease in shipment rates as well as a decline in the portion of expedited shipments; • favorable exchange rates on our sales outside of the U.S.; and • continued cost reduction efforts. These were partially offset by: • an increased portion of sales of commercial products out of our total product mix, that are characterized with lower gross margin; • an increase in warranty expenses and warranty accruals associated primarily with the change in the composition of our install base, as well as an increase in costs related to the different components of our warranty expenses, as reflected in our actual support costs; and • our non-solar businesses, referred to in our financial results as "all other segments", are generally characterized by a lower gross profit which effect was amplified this quarter. 10 Cost of revenues increased by $296.5 million, or 29.0%, in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to: • an increase in direct cost of revenues sold of $195.9 million associated primarily with an increase in the volume of products sold; • an increase in warranty expenses and warranty accruals of $73.7 million associated primarily with an increase in the number of products in our install base as well as an increase in costs related to the different elements of our warranty expenses which include the cost of the products, shipment and other related expenses; • an increase in personnel-related costs of $9.2 million related to the expansion of our production, operations, and support headcount which grew in parallel to our growing install base worldwide; and • an increase of $6.4 million in inventory accrual which is mainly attributed to changes in inventory valuations, and higher inventory accruals related to our initial manufacturing in Sella 2, partially offset by a decrease in inventory write-offs related to the discontinuation of our UPS related activities in the comparable period. Gross profit as a percentage of revenue increased to 31.9% from 26.1% in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022 primarily due to: • gradual price increases across our product offerings; • a decrease in shipment rates as well as a decline in the portion of expedited shipments out of our total shipments; and • continued cost reduction efforts. These were partially offset by: • an increased portion of sales of commercial products out of our total product mix, that are characterized with lower gross margins; • an increase in warranty expenses and warranty accruals associated primarily with the change in the composition of our install base, as well as an increase in costs related to the different components of our warranty expenses, as reflected in our actual support costs; and • our non-solar businesses, that are generally characterized by a lower gross profit which effect was amplified this quarter. Operating Expenses: Research and Development Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Research and development $ 86,526 $ 74,847 $ 11,679 15.6 % $ 166,399 $ 141,196 $ 25,203 17.8 % Research and development costs increased by $11.7 million or 15.6%, in the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to: • an increase in personnel-related costs of $6.7 million resulting from an increase in our research and development headcount as well as salary expenses associated with annual merit increases, which were partially offset by the depreciation of the NIS against the U.S. dollar and employee equity-based compensation. The increase in headcount reflects our continued investment in enhancements of existing products as well as research and development expenses associated with bringing new products to the market; • an increase in expenses related to consultants and sub-contractors in an amount of $2.2 million; and • an increase in expenses related to material consumption in the manufacturing of samples and prototypes as part of our development process in an amount of $1.4 million. 11 Research and development costs increased by $25.2 million or 17.8%, in the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to: • an increase in personnel-related costs of $15.1 million resulting from an increase in our research and development headcount as well as salary expenses associated with annual merit increases, which were partially offset by the depreciation of the NIS against the U.S. dollar and employee equity-based compensation. The increase in headcount reflects our continued investment in enhancements of existing products as well as research and development expenses associated with bringing new products to the market; • an increase in expenses related to consultants and sub-contractors in an amount of $5.0 million; and • an increase in expenses related to other overhead costs in an amount of $2.1 million; and • an increase in depreciation expenses of property and equipment in an amount of $2.0 million. Sales and Marketing Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Sales and marketing $ 44,222 $ 38,975 $ 5,247 13.5 % $ 85,188 $ 74,291 $ 10,897 14.7 % Sales and marketing expenses increased by $5.2 million, or 13.5%, in the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to: • an increase in personnel-related costs of $2.4 million as a result of an increase in headcount supporting our growth outside of the U.S, as well as salary expenses associated with annual merit increases and employee equity-based compensation; • an increase of $1.3 million in expenses related to pre-sale initiatives; and • an increase in expenses related to other marketing activities by $1.0 million. Sales and marketing expenses increased by $10.9 million, or 14.7%, in the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to: • an increase in personnel-related costs of $6.2 million as a result of an increase in headcount supporting our growth outside of the U.S, as well as salary expenses associated with annual merit increases and employee equity-based compensation; • an increase of $1.4 million in training-related expenses as a result of resuming training activities that had been previously cancelled or postponed due to Covid-19 restrictions in 2022; and • an increase of $1.3 million in expenses related to pre-sale initiatives. General and Administrative Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) General and administrative $ 36,199 $ 28,121 $ 8,078 28.7 % $ 72,766 $ 54,550 $ 18,216 33.4 % General and administrative expenses increased by $8.1 million, or 28.7%, in the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to: • an increase in expenses related to consultants and sub-contractors in an amount of $4.3 million; and • an increase in personnel-related costs of $2.0 million resulting from an increase in our general and administrative headcount, as well as salary expenses associated with annual merit increases. 12 General and administrative expenses increased by $18.2 million, or 33.4%, in the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily due to: • an increase in expenses related to consultants and sub-contractors in an amount of $9.5 million; • an increase in personnel-related costs of $5.0 million resulting from an increase in our general and administrative headcount, as well as salary expenses associated with annual merit increases and employee equity-based compensation; and • an increase in expenses related to doubtful debt in an amount of $1.5 million. Other operating expense (income), net Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Other operating expense (income), net $ - $ 4,687 $ (4,687 ) (100.0 )% $ (1,434 ) $ 4,687 $ (6,121 ) (130.6 )% Other operating expenses, were $4.7 million, in the three months ended June 30, 2022, primarily due to: • a decrease of $4.0 million in expenses related to write-offs of goodwill and intangible assets related to the discontinuation of our UPS related activities; and • a decrease of $0.7 million in expenses related to write-offs of property, plant and equipment. Other operating income, net was $1.4 million, in the six months ended June 30, 2023, compared to other operating expenses of $4.7 million the six months ended June 30, 2022, primarily due to: • a decrease of $4.0 million in expenses related to write-offs of goodwill and intangible assets related to the discontinuation of our UPS-related activities; • a decrease of $0.7 million in expenses related to write-offs of property, plant and equipment; and • an increase of $1.4 million in income from the sale of property, plant and equipment and other assets. 13 Financial expense, net Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Financial income (expense), net $ 3,384 $ (14,311 ) $ 17,695 (123.6 )% $ 27,058 $ (18,916 ) $ 45,974 (243.0 )% Financial income, net was $3.4 million in the three months ended June 30, 2023, compared to financial expenses, net in the amount of $14.3 million in the three months ended June 30, 2022, primarily due to: • a decrease of $15.8 million in expenses due to fluctuations in foreign exchange rates, primarily between the Euro and the NIS against the U.S. dollar; and. • an increase of $3.6 million in interest income and accretion (amortization) of discount (premium) on marketable securities. This effect was partially offset by a decrease of $3.0 million in income related to hedging transactions. Financial income, net was $27.1 million in the six months ended June 30, 2023, compared to financial expenses, net in the amount of $18.9 million in the six months ended June 30, 2022, primarily due to: • an income of $21.2 million in the six months ended June 30, 2023, compared to expenses of $20.0 million in the six months ended June 30, 2022, as a result of fluctuations in foreign exchange rates, primarily between the Euro and the NIS against the U.S. dollar. • an increase of $7.9 million in interest income and accretion (amortization) of discount (premium) on marketable securities. This effect was partially offset by a decrease of $3.9 million in income related to hedging transactions. Please refer to the section entitled "Foreign Currency Exchange Risk" under Item 3 of this report for additional information. 14 Other loss Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Other loss $ - $ - $ - - % $ (125 ) $ (844 ) $ 719 (85.2 )% Other loss decreased by $0.7 million, or 85.2%, in the six months ended June 30, 2023, compared to the six months ended June 30, 2022, due to a decrease in realized loss on marketable securities. Income taxes Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Income taxes $ 34,232 $ 6,617 $ 27,615 417.3 % $ 63,557 $ 18,909 $ 44,648 236.1 % Income taxes increased by $27.6 million, or 417.3%, in the three months ended June 30, 2023, as compared to the three months ended June 30, 2022, primarily due to an increase of $30.7 million in current tax expenses mainly attributed to an increase in profit before tax in our foreign subsidiaries. This increase was partially offset by an increase of $3.3 million in deferred tax income. Income taxes increased by $44.6 million, or 236.1%, in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily due to an increase of $50.3 million in current tax expenses mainly attributed to an increase in profit before tax in our foreign subsidiaries. This increase was partially offset by an increase of $6.0 million in deferred tax income. 15 Net Income Three months ended June 30, 2023 to 2022 Six months ended June 30, 2023 to 2022 2023 2022 Change 2023 2022 Change (In thousands) Net income $ 119,510 $ 15,084 $ 104,426 692.3 % $ 257,888 $ 48,207 $ 209,681 435.0 % As a result of the factors discussed above, net income increased by $104.4 million, or 692.3% in the three months ended June 30, 2023 as compared to the three months ended June 30, 2022. As a result of the factors discussed above, net income increased by $209.7 million, or 435.0% in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022. Liquidity and Capital Resources The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 (In thousands) Net cash provided by (used in) operating activities $ (88,711 ) $ 77,415 $ (80,788 ) $ (85,574 ) Net cash used in investing (76,674 ) (310,799 ) (144,454 ) (325,933 ) Net cash provided by (used in) financing activities (4,919 ) (3,929 ) (10,141 ) 648,406 Increase (decrease) in cash and cash equivalents $ (170,304 ) $ (237,313 ) $ (235,383 ) $ 236,899 As of June 30, 2023, our cash and cash equivalents were $557.7 million. This amount does not include $929.0 million invested in available-for-sale marketable securities and $0.3 million invested in restricted bank deposits. Our principal uses of cash are for funding our operations, capital expenditures, other working capital requirements and other investments. As of June 30, 2023, we have open commitments for capital expenditures in an amount of approximately $133.0 million. These commitments mainly reflect purchases of automated assembly lines and other machinery related to our manufacturing and operations. We also have purchase obligations in the amount of $1,443.3 million related to raw materials and commitments for the future manufacturing of our products. We believe our cash and cash equivalents, and available-for-sale marketable securities will be sufficient to meet our anticipated cash needs for at least the next 12 months as well as in the longer term, including the self-funding of our capital expenditure and operational commitments. Operating Activities Operating cash flows consists primarily of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities decreased by $4.8 million in the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, mainly due to higher net income adjusted for certain non-cash items. This was partially offset by a significant increase in inventory procurement as part of our investment in building inventory in order to minimize potential supply disruptions and meet future demand. Investing Activities Investing cash flows consist primarily of capital expenditures, investment in, sales and maturities of available for sale marketable securities, investment and withdrawal of bank deposits and restricted bank deposits and cash used for acquisitions. Cash used in investing activities decreased by $181.5 million in the six months ended June 30, 2023, as compared to the six months ended June 30, 2022, primarily driven by a decrease of $238.0 million in investments in available-for-sale marketable securities, a decrease of $7.8 million in capital expenditures as well as an increase of $6.8 million in proceeds from government grants in relation to capital expenditures. This decrease in cash used in investing activities was partially offset by a $39.5 million decrease in proceeds provided by sales and maturities of available-for-sale marketable securities, an increase of $16.7 million in cash used for a business combination, an increase of $10.0 million in the purchase of intangible assets, and by a $6.8 million increase in an investment in a privately-held company. 16 Financing Activities Financing cash flows consist primarily of proceeds from the sale of shares of common stock in a public offering and employee equity incentive plans. Cash used in financing activities in the six months ended June 30, 2023 was $10.1 million compared to $648.4 million cash provided by financing activities in the six months ended June 30, 2022, primarily due to a $650.5 million decrease in cash provided by the issuance of common stock, net through a secondary public offering which occurred in March 2022 and a $11.1 million decrease in proceeds provided by the exercise of stock-based awards. Secondary public offering On March 17, 2022, we offered and sold 2,300,000 shares of the Company’s common stock at a public offering price of $295.00 per share. The net proceeds to the Company after underwriters’ discounts and commissions and offering costs were $650.5 million. We intend to use the proceeds from the public offering for general corporate purposes, which may include acquisitions. See Note 15b to our condensed consolidated financial statements for more information. Critical Accounting Policies and Significant Management Estimates Management believes that there have been no significant changes during the six months ended June 30, 2023 to the items that we disclosed as our critical accounting policies and estimates in MD&A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, except as mentioned in Note 1, “General”.