SOLAREDGE TECHNOLOGIES, INC. (SEDG)

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section of this Annual Report on Form 10-K captioned “Business” and our consolidated financial statements and the related notes to those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis contains forward looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed under the sections of this Annual Report captioned “Special Note Regarding Forward Looking Statements” and “Risk Factors”. For discussion related to changes in financial condition and the results of operations for the year ended December 31, 2023 (including as compared to 2022), refer to Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2024.

Overview

We develop, manufacture, and sell products that address a broad range of energy market segments through our diversified product offering, including residential, commercial and large scale photovoltaic or PV, energy storage and backup solutions, electric vehicle or EV charging capabilities, home energy management, grid services and virtual power plants, as well as products in our non-solar businesses including lithium-ion cells, batteries and energy storage systems, prior to October 2024, automation machines ("Automation Machines") and in prior years we also had product offerings for the e-mobility market. In October 2023, we decided to discontinue our LCV activity and the remaining e-mobility activity. Starting January 1, 2024, all e-mobility activity, which includes PV solutions are included under our solar segment. In October 2024, the Company completed the sale of Automation Machines. Additionally, in November 2024, the Company announced the closure of its Energy Storage Division, as part of its focus on its core solar activities

In the fourth quarter 2024 the Company identified one reportable segment: the Solar segment.

Further information regarding our business is provided in “Part I, Item 1. Business” of this Annual Report.

For the year ended December 31, 2024, one customer accounted for 12.9% of our revenues and our top three customers (all distributors) together represented 31.3% of our revenues.

Our revenues were $901.5 million and $2,976.5 million for the year ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024 our gross loss was 97.3% as compared to gross profit of 23.6% for the year ended December 31, 2023. For the year ended December 31, 2024, our net loss was $1,806.4 million as compared to our net income of $34.3 million for the year ended December 31, 2023.

Performance Measures

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 use metrics relating to monitoring (systems monitored) to evaluate market acceptance of our products and usage of our solution.

We provide the “megawatts shipped” and "megawatt hours 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.

1Excluding batteries for PV applications, based on the aggregate nameplate capacity of inverters shipped during the applicable period.

43

Global Circumstances Influencing our Business and Operations

Demand for Products

We have seen a slowdown in demand for our products in our Solar segment from our direct customers since the second part of the third quarter of 2023 and throughout 2024. This was a result of slowed market demand in the third quarter of 2023 and throughout 2024 as distributors began to take actions to reduce inventory levels. In particular, beginning in the second part of the third quarter of 2023, we experienced substantial unexpected cancellations and push outs of existing backlog from our European distributors. We attribute these cancellations and pushouts to high inventory in the channels and slower than expected installation rates both in the United States and to a greater extent in Europe. This trend continued in the subsequent quarters, throughout 2024. Additionally, the Company anticipates that this trend will continue in the first quarter of 2025, as our inventory destocking process continues.

Disruptions due to the war in Israel

Due to the war that began on October 7, 2023, some of our employees in Israel were called to active reserve duty and additional employees may be called in the future, if needed. In the year ended December 31, 2024 approximately 319 or 13% of our employees in Israel have been called to active reserve duty for varying periods. While our offices and facilities are open worldwide, including in Israel, and, to date, we have not had disruptions to our ability to manufacture and deliver products and services to customers. Although the situation is somewhat stabilized due to ceasefires between Israel and Hamas, as well as Israel and Hezbollah, an escalation of the current conflicts in Israel could materially adversely affect our business, financial condition, and results of operations. Due to the ongoing and evolving nature of the conflict in Israel, and the extent of these events, the adverse effect on our business operations is still unknown.

The majority of our key employees and officers are residents of Israel. If any of our facilities in Israel were to be damaged, destroyed or otherwise rendered unable to operate, whether due to war, acts of hostility, earthquakes, fire, floods, storms,other natural disasters, employee malfeasance, terrorist acts, power outages or otherwise, or if performance of our research and development is disrupted for any other reason, such an event could delay commercialization of our products, and if we choose to manufacture all or any part of them internally, jeopardize our ability to manufacture our products as promptly as our prospective customers will likely expect, or possibly at all. If we experience delays in achieving our development objectives within a timeframe that meets our prospective customers’ expectations, our business, prospects, financial results and reputation could be harmed.

44

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. While the impact of this conflict continued to decreased in 2024, an escalation of this ongoing conflict could lead to an adverse effect on our business and results of operations.

Inflation Reduction Act

In August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which includes several provisions intended to accelerate U.S. manufacturing and adoption of 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, among other things, extends the investment tax credit and production tax credit through 2034 and is therefore expected to increase the demand for solar products. The IRA also further incentivizes residential and commercial solar customers and developers through the inclusion of a tax credit for qualifying energy projects of up to 30%. Section 45X of the IRA offers advanced manufacturing production tax credits ("AMPTC") that incentivize the production of eligible components within the U.S. To that end, we established manufacturing capabilities in the U.S. in 2023. These provisions of the law are new and regulations and guidance concerning their implementation are gradually being published by the U.S. Treasury Department. On October 24, 2024, final regulations concerning the application of IRC §45X were published. The regulations contain detailed rules concerning the eligibility, qualifying and accounting for AMPTCs. Of particular relevance to the Company are the rules concerning the qualification and measurement of AMPTCs to Residential Inverters, Commercial Inverters and DC-Optimized Inverter Systems, that are included in the definition of Microinverters. In 2024 we sold a significant part of the AMPTCs we generated from our U.S. production of eligible components.

In January 2025, the new U.S. administration issued executive orders aimed at pausing grants and other government funding that have not already been dispersed to under the IRA, creating uncertainty regarding the ability to secure government awards and grants. This potential loss of financial support could adversely impact our business, and potentially the overall financial performance of the Company.

45

Key Components of Our Results of Operations

The following discussion describes certain line items in our Consolidated Statements of Operations.

Revenues

We generate revenues from the sale of DC optimized inverter systems for solar PV installations, which include power optimizers, inverters, storage and backup solutions, EV chargers, smart energy devices, our cloud-based monitoring platform, extended warranty for our products and grid services. Our customer base mainly includes distributors, large solar installers, wholesalers, and EPCs. In addition, we also generated revenues from the sale of lithium-ion cells, batteries and energy storage solutions and automation machines.

Our revenues from the sale of solar-related products are affected by changes in the volume and average selling prices of our DC optimized inverter systems. The volume and average selling price of our systems is driven by the supply and demand for our products, changes in the product mix between our residential and commercial products, the customer mix between large and small customers, the geographical mix of our sales, sales incentives, end user government incentives, seasonality, and competitive product offerings. Revenues from the sale of lithium-ion cells, batteries, energy storage system or ESS products, are affected by the type of product sold (cell, battery or system) and the type of battery that is sold.

Our revenue growth is dependent on our ability to expand our market share in each of the geographies in which we compete, expand and retain our global footprint to new evolving markets, manage our production capabilities to meet demand, continue to develop and introduce new and innovative products that address the changing technology and performance requirements of our customers and expand of the new businesses we acquired.

In the year ended December 31, 2024, 42.1% of our revenues were generated from the United States, 35.8% of our revenues were generated from Europe, and 22.1% of our revenues were generated from the rest of the world ("ROW"). In the year ended December 31, 2023, 64.0% of our revenues were generated from Europe, 25.5% of our revenues were generated from the United States and 10.5% of our revenues were generated from ROW.

Cost of Revenues and Gross Profit

Cost of revenues consists primarily of product costs, including purchases from our contract manufacturers and other suppliers, as well as costs related to shipping, customer support, product warranty, personnel, depreciation of testing and manufacturing equipment, amortization of intangible assets and other fixed costs, provision for losses related to slow moving and dead inventory, hosting services for our cloud based monitoring platform, variable utility costs, operational costs related to the manufacturing factories, other logistics services, and contract termination costs,  partially offset by AMPTCs we are entitled to under IRA. Our product costs are affected by technological innovations, such as advances in semiconductor integration and new product introductions, economies of scale resulting in lower component costs, improvements in production processes and automation, the volume of products subject to import tariffs (for example, for imports from China to the U.S.) and the volume of products for which manufacturing credits are available (for example, for products made in the U.S.). Some of these costs, primarily personnel, amortization of intangible assets and depreciation of testing and manufacturing equipment, are not directly affected by sales volume.

In November 2024, the Company announced its decision to cease all activities in its Energy Storage Division. As such, SolarEdge is currently in the process of closing down its operations in South Korea, including at Sella 2.

Cost of revenues also includes our operations, production and support departments’ costs. The operations and production departments are responsible for production management such as planning, procurement, supply chain, production methodologies and machinery planning, logistics management and manufacturing support to our contract manufacturers, as well as the quality assurance of our products. Our support department provides customer and technical support at various levels through our call centers around the world as well as second and third-level support services, which are provided by support personnel located in our headquarters. Our employees headcount in our operations, production and support departments has reduced to 1,804 as of December 31, 2024 from 2,857 as of December 31, 2023.

46

In October of 2023, the Company made an announcement regarding its restructuring plans to adjust its manufacturing capacity and increase operating efficiency, including, terminating the manufacturing process in Mexico, reducing manufacturing capacity in China, and discontinuing the Company’s LCV e-Mobility activity, and on January 21, 2024, the Company announced adoption of additional measures in response to challenging industry conditions, including reducing its headcount by approximately 900 over the first half of 2024  through involuntary workforce reduction plans, followed by an additional  involuntary workforce reduction in July 2024 resulting in the layoff of approximately 400 employees (together, the “Restructuring Plans”). These decisions were made in order to better align the Company with current market conditions.

On November 27, 2024, the Company announced the closure of its Energy Storage Division. Under the closure, the Company expects to reduce its headcount by approximately 500 employees, primarily employees working in manufacturing positions in South Korea. In connection with this closure and associated headcount reduction, almost all of the employee population will be dismissed over the first half of 2025.

Gross profit (loss) may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, manufacturing ramp-up costs, restructuring costs, product mix, customer mix, geographical mix, location of manufacturing, shipping method, warranty costs, inventory write-offs, exchange rates and seasonality.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, general and administrative, goodwill impairment and other operating expenses, net. Personnel-related costs are a significant component of the operating expenses and include salaries, benefits, payroll taxes, commissions, severance and stock-based compensation. Our employees headcount in our research and development, sales and marketing and general and administrative departments, has reduced to 2,157 as of December 31, 2024 from 2,776 as of December 31, 2023. Under the 2024 and 2025 Restructuring Plans described above, our headcount will be further reduced over the first half of 2025.

Research and development expenses

Research and development expenses include personnel-related expenses such as salaries, severance, benefits, stock-based compensation and payroll taxes. Our research and development employees are engaged in the design and development of power electronics, semiconductors, software, power-line communications, networking and chemistry. Our research and development expenses also include third-party design and consulting costs, materials for testing and evaluation, ASIC development and licensing costs, depreciation and amortization expenses, and other indirect costs. We devote substantial resources to ongoing research and development programs that focus on enhancements to, and cost efficiencies in, our existing products and timely development of new products that utilize technological innovation, thereby maintaining our competitive position.

Sales and marketing expenses

Sales and marketing expenses consist primarily of personnel-related expenses such as salaries, severance, sales commissions, benefits, payroll taxes, and stock-based compensation. These expenses also include travel, fees of independent consultants, trade shows, marketing, costs associated with the operation of our sales offices and other indirect costs. We currently have a sales presence in many countries worldwide. We may either continue to expand our sales presence to additional regions or reduce our presence in certain regions, globally.

General and administrative expenses

General and administrative expenses consist primarily of salaries, severance, employee benefits and stock-based compensation related to our executives, finance, human resources, information technology, and legal organizations, travel expenses, facilities costs, fees for professional services, and registration fees related to being a publicly-traded company. Professional services consist of audit and legal costs, remuneration to board members, insurance, information technology and other costs. General and administrative expenses also include expenses related to certain legal claims and provision for expected credit losses in the event of uncollectible account receivables balances.

47

Other operating expenses, net

Other operating expenses, net, consist primarily of impairment and abandonment of long-lived assets, as well as goodwill impairment assigned to our reporting units and tested for impairment at least on an annual basis and certain other nonrecurring items.

Non Operating Expenses

Financial income (expense), net

Financial income (expense), net, consists primarily of interest income, interest expense, gains or losses from foreign currency fluctuations, credit loss related to loans receivable and hedging transactions.

Interest income consists of interest from our investment in available for sale marketable securities, deposits, loans to third parties and accretion of discounts related to our investment in available for sale marketable securities.

Interest expense consists of interest related to bank loans, advance payments received for performance obligations that extend for a period greater than one year, related to Accounting Standard Codification 606, “Revenue from Contracts with Customers” (ASC 606), interest related to Accounting Standard Codification 842, “Leases” (ASC 842), amortization of premium related to our investment in available for sale marketable securities, the amortization of debt issuance cost associated with our Notes due 2025 and 2029 as well as the contractual interest expenses from our Notes due 2029.

Our functional currency is the U.S. dollar. With respect to certain of our subsidiaries, the functional currency is the applicable local currency. Financial income (expenses), net, also consists of gains or losses from foreign currency fluctuations, the fair value remeasurement of hedging contracts not designated as cash flow hedge and bank charges. Foreign currency fluctuations primarily consist of the effect of foreign exchange differences between the U.S. dollar and the New Israeli Shekel, the Euro, and other currencies related to our monetary assets and liabilities.

Other income (loss)

Other income (loss) consists primarily of realized and unrealized gains and losses on investments in privately-held companies and realized gains and losses on investment in available for sale marketable securities.

Income taxes

We are subject to income taxes in the countries where we operate.

In the year ended December 31, 2024, we recorded a net income tax expense of $96.2 million, which consists of a $79.2 million of deferred tax expense and $16.9 million current income tax expense. In the year ended December 31, 2023, we recorded a net income tax expense of $46.4 million, which consists of a $89.5 million current income tax expense and a $43.1 million deferred tax income. Our tax rate for 2024 is a negative 6% compared with 57% in 2023. The change in effective tax rate for the year ended December 31, 2024 compared to the year ended December 31, 2023, is mainly due our transition to a significant loss position in 2024 and the valuation allowance recorded against the tax benefit of such loss, as well as the valuation allowance booked against deferred tax assets of the company and its subsidiaries from previous years.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law, making significant changes to U.S. income tax law. These changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years 2018 onwards and created new taxes on certain foreign-sourced earnings (including tax on Global Intangible Low Taxed Income (“GILTI”) and certain related-party payments. The Tax Act also amended Section 174 of the U.S Internal Revenue Code, effective from January 1, 2022, eliminating the option to deduct research and development expenditures currently and requiring taxpayers to amortize them over five years (if incurred in the U.S.) or fifteen years (if incurred outside the U.S.).

48

Furthermore, the Tax Act required the Company to pay U.S. income taxes on accumulated foreign subsidiaries earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets, and 8% on the remaining earnings. The total tax liability will be paid over the eight-year period provided in the Tax Act (ending 2025).

The new U.S. administration has identified potential changes to U.S. tax policy, which could include lowering the corporate tax rate, modifying other corporate tax adjustments, or eliminating other deductions, tax credits, or other tax preferences. We continue to monitor how any changes could affect our business.

SolarEdge Technologies Ltd., our Israeli Subsidiary, is taxed under Israeli law. Income not eligible for benefits under the Investments Law is taxed at the corporate tax rate. The Israeli corporate tax rate is 23%.

Our Israeli Subsidiary elected tax year 2012 as a ”Year of Election” for “Benefited Enterprise” under the Israeli Investments Law, which provides certain benefits, including tax exemptions and reduced tax rates. Upon meeting the requirements under the Israeli Investments Law, the two-year tax exemption has ended on December 31, 2018.

The Investment Law was amended in 2005 and was further amended as of January 1, 2011 and in August 2013 (the “2011 Amendment”). The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investments Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (both as defined in the 2011 Amendment). Under the 2011 Amendment, income derived by Preferred Companies from Preferred Enterprise would be subject to a uniform rate of corporate tax. The tax rate applicable to such income, referred to as “Preferred Income”, would be 7.5% in areas in Israel that are designated as Development Zone A and 16% elsewhere in Israel starting in the year 2017 and thereafter. Our Israeli Subsidiary has established its own manufacturing facility in Israel, located in a Development Zone A, therefore income from manufacturing attributed to that facility is subject to a 7.5% tax rate.

In December 2016, Amendment 73 to the Investments Law (the “2017 Amendment”) was published. According to the 2017 Amendment, special tax tracks for technological enterprises have been introduced, which are subject to rules that were issued by the Israeli Ministry of Finance. A Preferred Technological Enterprise (PTE), as defined in the 2017 Amendment, that is located in the central region of Israel, will be subject to a tax at a rate of 12% on profits deriving from intellectual property, or 6% if its annual revenues exceed New Israeli Shekel 10 billion.

On June 14, 2017, the Encouragement of Capital Investments Regulations (Preferred Technological Income and Capital Gain for Technological Enterprise), 2017 (the “Regulations”) were published. The Regulations describe, inter alia, the mechanism used to determine the calculation of the benefits under the PTE regime. A company that complies with the terms under the PTE regime, may be entitled to certain tax benefits with respect to certain income generated during the company’s regular course of business and derived from the preferred intangible asset.

As of January 2019, our Israeli Subsidiary elected to implement the 2011 and 2017 Amendments starting as of tax year 2019 and as a result, under the PTE regime with respect to our business activities in Israel. Our PTE income was subject to a 12% tax rate in Israel in the years 2019-2021, and in 2022-2023 to a 6% tax rate as we surpassed 10 billion New Israeli Shekel revenues threshold. In 2024, the Company incurred losses for tax purposes.

The Law for the Encouragement of Industry (Taxes), 1969, (the “Industry Encouragement Law”), provides certain tax benefits for an ‘Industrial Company’ as such term is defined in the Industry Encouragement Law. An Industrial Company is entitled to certain tax benefits including, inter alia, amortization over an eight-year period of the cost of purchased know-how, patents and accelerated depreciation rates on equipment and buildings. We qualify as an Industrial Company under the Law and benefit from its provisions as applicable.

Loss from equity method investments

Loss from equity method investments consists of our proportionate share of the net income or loss of equity method investments.

49

Results of Operations

The following tables set forth our consolidated statements of income for the years ended December 31, 2024 and 2023. We have derived this data from our consolidated financial statements included elsewhere in this Annual Report. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for any future period.

Comparison of year ended December 31, 2024 and year ended December 31, 2023

Revenues

Revenues decreased by $2,075.1 million, or 69.7%, in the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily due to (i) a decrease of $1,713.9 million related to a decrease in the number of inverters and power optimizers sold; (ii) a decrease of $187.8 million related to the number of batteries for PV applications sold, mainly in Europe; (iii) a decrease of $81.8 million in the amount of ancillary solar products sold; and (iv) a decrease of $66.0 million in revenues generated from e-mobility components, related to the discontinuation of the Company’s LCV e-Mobility activity. The overall decrease in revenues was due to a decline in demand that began in the second part of the third quarter of 2023. This decline was the result of high inventory in the channels and slower than expected installation rates, leading to substantial unexpected cancellations and push outs of existing backlog, from our distributors.

Revenues from outside of the U.S. comprised 57.9% of our revenues in the year ended December 31, 2024 as compared to 74.5% in the year ended December 31, 2023.

The number of power optimizers recognized as revenues decreased by approximately 10.8 million units, or 62.0%, from approximately 17.5 million units in the year ended December 31, 2023, to approximately 6.6 million units in the year ended December 31, 2024. The number of inverters recognized as revenues, decreased by approximately 770.1 thousand units, or 75.8%, from approximately 1,015.8 thousand units in the year ended December 31, 2023 to approximately 245.7 thousand units in the year ended December 31, 2024. The megawatt hours of batteries for PV applications recognized as revenues decreased by approximately 181.2 megawatts hour, or 24.6% from approximately 737.4 megawatts in the year ended December 31, 2023 to approximately 556.2 megawatts in the year ended December 31, 2024, as a result of lower demand.

50

Our blended Average Selling Price ("ASP") per watt for solar products excluding batteries for PV applications is calculated by dividing solar revenues, excluding revenues from the sale of batteries for PV applications, by the nameplate capacity of inverters shipped. Our blended ASP per watt, for solar products shipped increased by 0.005, or 2.6%, in the year ended December 31, 2024 as compared to the year ended December 31, 2023. The increase in blended ASP per watt is mainly attributed to a higher number of power optimizers and other solar products shipped compared to the number of inverters shipped. This increase in blended ASP per watt was partially offset by price reduction as well as an increase in the sale of commercial products that are characterized by lower ASP per watt, out of our total solar product mix.

Our blended ASP per hour watt for batteries for PV applications is calculated by dividing batteries for PV applications revenues, by the nameplate capacity of batteries for PV applications shipped. Our blended ASP per watt/hour for batteries for PV applications decreased by 0.133 or 28.6%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease in blended ASP per watt/hour is mainly attributed to price reduction of our batteries for PV applications.

Cost of Revenues and Gross Profit (loss)

Cost of revenues decreased by $494.0 million, or 21.7%, in the year ended December 31, 2024 as compared to the year ended December 31, 2023, primarily due to:

Gross profit as a percentage of revenue decreased from 23.6% for the year ended December 31, 2023 to a gross loss of 97.3% in the year ended December 31, 2024 primarily due to:

51

Operating Expenses:

Research and Development

Research and development costs decreased by $44.2 million or 13.8%, in the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to:

Sales and Marketing

Sales and marketing expenses decreased by $17.5 million, or 10.6%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to:

52

General and Administrative

General and administrative expenses increased by $1.0 million, or 0.6%, in the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to an increase in expenses related to provision for expected credit losses in the amount of $13.4 million which was partially offset by:

Other operating expenses, net

Other operating expenses, net, increased by $228.2 million, or 728.8% in the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to:

Financial income (expense), net

Financial expenses for the year ended December 31, 2024 was $14.6 million compared to $41.2 million financial income for the year ended December 31, 2023, primarily due to:

53

Other income (loss)

Other income was $14.5 million for the year ended December 31, 2024 compared to other loss of $0.3 million in the year ended December 31, 2023, primarily due to:

These were partially offset by an increase in loss of $5.0 million as a result of an impairment of an investment in a privately held company.

Income taxes

Income taxes increased by $49.7 million, or 107.1%, for the year ended December 31, 2024 as compared to the year ended December 31, 2023, primarily due to a valuation allowance we booked against the tax benefit of loss we incurred in 2024, as well against deferred tax assets of prior years, partially offset by the tax benefits we generated from the inflation Reduction Act of 2022.

Loss from equity method investments

Net loss from equity method investments increased by $1.5 million, or 441.7% for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

Net Income (loss)

As a result of the factors discussed above, net loss for the year ended December 31, 2024 was $1,806.4 million compared to net income of $34.3 million for the year ended December 31, 2023.

54

Liquidity and Capital Resources

The following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

As of December 31, 2024, our cash and cash equivalents were $274.6 million. This amount does not include $353.9 million invested in available for sale marketable securities, $135.3 million restricted cash, and $3.6 million invested in restricted deposits. Our principal uses of cash are for funding our operations, capital expenditures, other working capital requirements, other investments, and the repayment of our remaining Notes 2025. As of December 31, 2024, we have open commitments for capital expenditures in the amount of approximately $35.0 million. These commitments reflect purchases of automated assembly lines and other machinery related to our manufacturing operations. We also have purchase obligations in the amount of $390.3 million related to raw materials and commitments for the future manufacturing of our products.

Beginning on the fourth quarter of 2024, we entered into a tax credit agreement under which we agreed to sell advanced manufacturing production tax credits. We may enter into additional tax credit agreements in the future.

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, operational commitments and the redemption of our debt.

Operating Activities

Cash used in operating activities consists of net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. Cash used in operating activities increased by $133.2 million for the year ended December 31, 2024 as compared to the year ended December 31, 2023, mainly due to net loss for the year ended December 31, 2024 compared to net income in the year ended December 31, 2023 adjusted for certain non-cash items, partially offset by lower operating working capital requirements.

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, cash used for acquisitions and disbursements and receipts from collections of loans made by the Company. Cash provided by investing activities was $416.3 million for the year ended December 31, 2024 as compared to cash used in investing activities of $268.9 million for the year ended December 31, 2023, primarily driven by an increase of $553.8 million in proceeds from sales and the maturities of available-for-sale debt investments, a decrease of $62.4 million which led to less cash used in the purchase of property plant and equipment, a decrease of $43.0 million in purchases of available-for-sale debt investments, an increase of $32.2 million in proceeds from loans receivable and a decrease of $20.5 million in disbursements of loans made by the Company. These were partially offset by an increase of $17.7 million in cash used in the purchase of privately-held companies.

Financing Activities

Financing cash flows consisted primarily due to the repurchases of our common stock, under our share repurchase program, which expired on December 31, 2024, the issuance and partial repurchase of the convertible senior Notes, and our employee equity incentive plans. Cash used in financing activities for the year ended December 31, 2024 increased by $8.2 million, compared to cash used in financing activities in the year ended December 31, 2023, primarily due to a $267.9 million increase in cash used for the partial repurchase of the 2025 Note, an increase of $50.2 million in cash, used in share repurchases, an increase of $28.3 million in cash, used to purchase the capped call transactions, and $13.7 million decrease in proceeds provided by the exercise of stock-based awards. These were partially offset by a $329.2 million increase in cash provided by the issuance of convertible notes and a decrease of $22.7 million in withholding taxes remitted to the tax authorities related to the exercise of stock-based awards.

55

Convertible Senior Notes

On September 25, 2020, we issued $632.5 million aggregate principal amount of our convertible senior notes ("Notes 2025") in a transaction exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from the offering, after underwriters’ discount and commissions and offering expenses, was $617.9 million.

On June 28, 2024, we sold an aggregate principal amount of $300 million of 2.25% convertible senior notes due 2029 in a transaction exempt from registration pursuant to Rule 144A and Regulation S under the Securities Act. The net proceeds from the offering of the Notes 2029 were approximately $293.2 million, after deducting fees and estimated expenses. Separately, we have entered into capped call transactions. We used approximately $25.2 million of the net proceeds from this offering to pay the cost of the capped call transactions and approximately $267.9 million of the net proceeds from this offering to repurchase $285.0 million principal amount of its outstanding 0.000% Notes 2025. As a result of the partial repurchase of the Notes 2025, we recognized a gain of $15.5 million which was recorded under other income. We intend to use the remainder of the net proceeds from the offering for general corporate purposes.

On July 8, 2024, we sold an aggregate principal amount of $37 million of our convertible senior notes ("Notes 2029"). The Notes 2029 were sold pursuant to the Initial Purchasers’ (as defined in Note 18) exercise of the option granted by the Company to the Initial Purchasers to purchase additional Notes 2029, as described  in Note 18, “Convertible Senior Notes.”

Share Repurchases

On November 1, 2023, we announced the approval by the Board of Directors of a share repurchase program which authorizes the repurchase of up to $300 million of the Company’s common stock. Under the share repurchase program, repurchases can be made using a variety of methods, which may include open market purchases, block trades, privately negotiated transactions, accelerated share repurchase programs and/or a non-discretionary trading plan or other means, including through 10b5-1 trading plans, all in compliance with the rules of the SEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the share repurchase program are determined by the Company in its discretion and depend on a variety of factors, including legal requirements, price and economic and market conditions. The program does not obligate SolarEdge to acquire any amount of common stock. The share repurchase program expired on December 31, 2024.

During the year ended December 31, 2024, the Company repurchased 753,364 shares of common stock from the open market, at an average cost of $66.63 per share for a total of $50.2 million.

Critical Accounting Policies and Significant Management Estimates

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”). The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain (see Note 2 to our annual financial statements for more information).

Revenue Recognition

We generate revenues from the sale of DC optimized inverter systems for solar PV installations which include our power optimizers, inverters, and cloud-based monitoring platform as well as other solar related ancillary products, Lithium-ion cells, batteries, energy storage solutions, and EV chargers. Our worldwide customer base includes large solar installers, distributors, EPCs, utility companies and other customers. Our products are fully functional at the time of shipment to the customer and do not require production, modification, or customization with the exception of some ESS systems that require installation and commissioning. We recognize revenue under the core principle that transfer of control to the customers should be depicted in an amount reflecting the consideration we expect to receive in revenue. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. Provisions for rebates, sales incentives and discounts to customers are accounted for as reductions in revenue in the same period that the related sales are recorded.

56

We generally sell our products to our customers pursuant to a customer’s standard purchase order and our customary terms and conditions. We do not offer rights to return our products other than for normal warranty conditions, and as such, revenue is recognized based on the transfer of control, which includes but is not limited to, the agreed International Commercial terms. We evaluate the creditworthiness of our customers to determine that appropriate credit limits are established prior to the acceptance and shipment of an order.

We provide our full web-based monitoring platform for our solar products free of charge and revenues associated with the service since that date are being recognized ratably over 25 years. In the absence of third party comparable pricing for such service, management determines the revenue levels of this service based on the costs associated with providing the service plus appropriate margins that reflect management’s best estimate of the selling price. These revenues are minimal and we do not expect this to become a significant source of revenue in the near future.

We recognize financing component expenses in our consolidated statement of income (loss) in relation to advance payments for performance obligations that extend for a period greater than one year. These financing component expenses are reflected in our deferred revenues balance. Such performance obligations are those that include a financing component, specifically: (i) warranty extension services, (ii) cloud-based monitoring, and (iii) communication services.

See Notes 2v and 16 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to revenue recognition.

Product Warranty

We provide a standard limited product warranty for our solar products against defects in materials and workmanship under normal use and service conditions. Our standard warranty period is 25 years for our power optimizers, 12 years for our inverters, 10 years for our storage interface and a 10-year limited warranty for our batteries for PV applications. Other products are sold with standard limited warranties that typically range in duration from one to ten years, and in some cases for a longer period. In certain cases, customers can purchase an extended warranty for our battery storage products and for our batteries for PV applications that extend the standard warranty period. In addition, customers can purchase extended warranties for inverters that extend the warranty period to up to 25 years.

Our products are designed to meet the warranty periods and our reliability procedures cover component selection, design, accelerated life cycle tests, and end-of-manufacturing line testing. However, since our history in selling power optimizers and inverters is shorter than the warranty period, the calculation of warranty provisions is inherently uncertain.

We accrue for estimated warranty costs at the time of sale based on anticipated warranty claims and actual historical warranty claims experience. Warranty provisions, computed on a per-unit sold basis, are based on our best estimate of such costs and are included in our cost of revenues. The warranty obligation is determined based on actual and predicted failure rates of the products, cost of replacement and service and delivery costs incurred to correct a product failure. Our warranty obligation requires management to make assumptions regarding estimated failure rates and replacement costs.

In order to predict the failure rate of each of our products, we have established a reliability model based on the estimated mean time between failures (“MTBF”). The MTBF represents the average elapsed time predicted for each product unit between failures during operation. Applying the MTBF failure rate over our install base for each product type and generation allows us to predict the number of failed units over the warranty period and estimates the costs associated with the product warranty. Predicted failure rates are updated periodically based on data returned from the field and new product versions, as are replacement costs which are updated to reflect changes in our actual production costs for our products, subcontractors’ labor costs, and actual logistics costs.

57

Since the MTBF model does not take into account additional non-systematic failures, such as failures caused by workmanship or manufacturing or design-related issues, and since warranty claims are at times opened for cases in which the error has been triggered by an improper installation, we have developed a supplemental model to predict such cases and recognize the associated expenses ratably over the expected claim period. This model, which is based on actual root cause analysis of returned products, identification of the causes of claims and time until each identified problem is revealed, allows us to better predict actual warranty expenses and is updated periodically based on our experience, taking into account the installed base of approximately 132.1 million power optimizers and approximately 5.8 million inverters as of December 31, 2024.

If actual warranty costs differ significantly from these estimates, adjustments may be required in the future, which could adversely affect our gross profit and results of operations. Warranty obligations are classified as short-term and long-term warranty obligations, based on the period in which the warranty is expected to be claimed. The warranty provision (short and long-term) was $432.4 million and $518.2 million, for the years ended December 31, 2024 and 2023, respectively.

See Notes 2x and 15 "Warranty obligations" to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to product warranty.

Inventory Valuation

Our inventories comprise sellable finished goods, raw materials bought for our own manufacturing facilities or on behalf of our contract manufacturers, and faulty units returned under our warranty policy.

Sellable finished goods and raw material inventories are valued at the lower of cost or net realizable value, based on the moving average cost method. Certain factors could affect the realizable value of our inventories, including market and economic conditions, technological changes, existing product changes (mainly due to cost reduction activities) and new product introductions. We consider historic usage, expected demand, anticipated sales price, the effect of new product introductions, product obsolescence, product merchantability, and other factors when evaluating the net realizable value of inventories. Inventory write-downs are equal to the difference between the cost of inventories and their estimated net realizable value. Inventory write-downs are recorded as cost of revenues in the accompanying statements of income and were $698.3 million and $46.4 million, for the years ended December 31, 2024 and 2023, respectively.

Faulty products returned under our warranty policy are often refurbished and used as replacement units. Such products are written off upon receipt.

We do not believe that there is a reasonable likelihood that there will be a material change in future estimates or assumptions that we use to record inventory at the lower of cost or net realizable value. However, if estimates regarding customer demand are inaccurate or changes in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material.

See Notes 2k and Note 6 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to inventory valuation.

Business Combination

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair value. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require our management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired technology and other intangible assets, their useful lives and discount rates. Our management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

See Note 2o and Note 3 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to business combination.

58

Intangible and other long-lived assets

We evaluate the recoverability of finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value.

The more significant estimates and assumptions inherent in the estimate of the fair value of finite-lived intangible assets include (i) assumptions associated with forecasting product profitability, including sales and cost to sell projections, (ii) tax rates which seek to incorporate the geographic diversity of the projected cash flows, (iii) expected impact of competitive, legal and/or regulatory forces on the projections and the impact of technological risk, R&D expenditure for ongoing support of product rights, and (iv) estimated useful lives.

During the year ended December 31, 2024, we recorded an impairment charge of $247.2 million, related to tangible and intangible assets within both the Solar and Energy Storage asset groups.

Acquired identifiable finite-lived intangible assets are amortized on a straight-line basis or accelerated method over the estimated useful lives of the assets. We believe the basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful lives. We routinely review the remaining estimated useful lives of finite-lived intangible assets. In case we reduce the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.

See Notes 2.p and 10 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to intangible assets.

Goodwill

Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any non-controlling interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least on an annual basis.

The goodwill impairment test is performed according to the following principles:

We estimate the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs. Key estimates include the revenue growth rates taking into consideration industry and market conditions, terminal growth rate and the discount rate. The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill, to those reporting units.

We complete the required annual testing of goodwill impairment for the reporting units at least on an annual basis and determine whether goodwill should be impaired. During the year ended December 31, 2024, we recorded an impairment charge of $2.2 million related to the Energy Storage asset group.

See Notes 2.r and 11 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to goodwill.

59

Government grants

Government grants are recognized when there is reasonable assurance that: (1) we will comply with the relevant conditions and (2) the grant disbursement will be received.

In August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which includes several incentives intended to promote clean energy, battery and energy storage, electrical vehicles, and other solar products, and is impacting our business and operations. As part of such incentives, the IRA, among other things, extends the investment tax credit (“ITC”) through 2034 and is therefore expected to increase the demand for solar products. The IRA further incentivizes residential and commercial solar customers and developers by providing significant tax credits for qualifying energy projects. The IRA further provides Advanced Manufacturing Production Tax Credits ("AMPTCs") for U.S. manufacturing of eligible components (under IRC §45X), including PV inverters and DC-optimized systems. The Company has been manufacturing eligible products in the U.S. since the fourth quarter of 2023. In addition to using the tax credits to offset tax due to the U.S. government, the IRA allows taxpayers to elect to have AMPTCs refunded in cash ("Direct Pay") or sell these credits to a third party. The Direct Pay option is available as a one-time election, in any taxable year after December 31, 2022, for a facility in which eligible components are produced, and is applicable for five years. In 2024 the Company sold a significant part of the AMPTCs it generated from the US production of eligible components.

Refundable and transferable tax credits are similar in essence to government grants. This is because the taxpayer can realize the benefit regardless of whether they owe income tax or not in the relevant years. Therefore, these amounts are not considered income taxes and fall outside the scope of Topic 740. Instead, they are treated as government grants.

The Company recognize's AMPTCs as a reduction in the cost of revenues in the statement of income (loss). The Company does this systematically over time as it recognizes the related expenses. The AMPTCs are also reflected in the consolidated balance sheet, according to the way the Company expects to utilize them: as a reduction of income tax payable within accrued expenses and other liabilities, as a tax prepayment, or, if AMPTCs are to be sold, within prepayment and other assets.

As of December 31, 2024 and 2023, AMPTCs of $80,516 and $6,020, were recorded as a tax prepayment within prepayment and other current assets, respectively.

Income taxes

We account for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740, which prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse.

We account for uncertain tax positions in accordance with ASC 740-10 two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement.

See Note 2.af and 26 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to income taxes.

60

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section
of this Annual Report on Form 10-K captioned “Business” and our consolidated financial statements and the related notes to
those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis
contains forward looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events
may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed
under the sections of this Annual Report captioned “Special Note Regarding Forward Looking Statements” and “Risk Factors”.
For discussion related to changes in financial condition and the results of operations for the year ended December 31, 2022, refer to
Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, filed
with the Securities and Exchange Commission on February 22, 2023.

Overview

We
develop, manufacture and sell products in a solar segment that addresses a broad range of energy market segments through our diversified
product offering, including residential, commercial and large scale photovoltaic or PV, energy storage and backup solutions, electric
vehicle or EV charging capabilities, home energy management, grid services and virtual power plants, as well as products in our non-solar
businesses including lithium-ion cells, batteries and energy storage systems, which are part of our Energy Storage Segment as well as
automation machines ("Automation Machines") and in prior years, we also had product offerings for the e-mobility market. In October 2023,
we decided to discontinue our light commercial vehicle e-Mobility ("LCV") activity and the remaining e-mobility activity which include
PV applications, will be included under the solar segment starting January 1, 2024.

In the
fourth quarter 2023 the Company identified two reportable segments: the Solar segment and Energy Storage segment. The Solar segment includes
the design, development, manufacturing, and sales of its DC optimized inverter solutions designed to maximize power generation at the
PV module level and batteries for PV applications. The Solar segment solution consists mainly of the Company’s power optimizers,
inverters, batteries and cloud‑based monitoring platform. The Energy Storage segment includes the design, development, manufacturing,
and sales of high-energy, high-power, lithium-ion cells and BESS solutions for C&I and Utility markets. The Energy Storage segment
provides purpose-built components and solutions, hardware and software, as well as pre and post sales engineering support to design, build,
and manage battery and system solutions according to the customer’s use cases and mission profiles. The “All other”
category includes the design, development, manufacturing and sales of e-Mobility products, automated machines and UPS products (in prior
periods).

Further
information regarding our business is provided in “Part I, Item 1. Business” of this Annual Report.

In
the year ended December 31, 2023, two customers accounted for 24.0% of our revenues and our top three customers (all distributors) together
represented 31.1% of our revenues.

Our
revenues were $2,976.5 million and $3,110.3 million for the year ended December 31, 2023 and 2022, respectively. Gross margins were 23.6%
and 27.2% for the year ended December 31, 2023 and 2022, respectively. Net income was $34.3 million and $93.8 million for the year ended
December 31, 2023 and 2022, respectively.

Performance
Measures

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 use metrics relating to monitoring (systems monitored)
to evaluate market acceptance of our products and usage of our solution.

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.

40

1
Excluding batteries for PV applications, 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.

Global
Circumstances Influencing our Business and Operations

Demand
for Products

We have
seen a slowdown in demand for our products in our Solar segment from our direct customers since the second part of the third quarter of
2023. This was a result of slowed market demand in the third quarter of 2023 as distributors began to take actions to reduce inventory
levels. In particular, beginning in the second part of the third quarter of 2023, we experienced substantial unexpected cancellations
and push outs of existing backlog from our European distributors. We attribute these cancellations and pushouts to high inventory in the
channels and slower than expected installation rates both in the United States and Europe. This trend continued in the fourth quarter
of 2023.Additionally, the Company anticipates significantly lower revenues in the first quarter of 2024 as the inventory destocking process
continues.

41

Disruptions
due to the war in Israel

Due
to the war that began on October 7, 2023, approximately 10% of our employees in Israel were called to active reserve duty and additional
employees may be called in the future, if needed. About half of these employees have returned to work. While our offices and facilities
are open worldwide, including in Israel, and, to date, we have not had disruptions to our ability to manufacture and deliver products
and services to customers, a prolonged war or an escalation of the current conditions in Israel could materially adversely affect our
business, financial condition, and results of operations. Due to the recency of these events, and their ongoing and evolving nature, the
extent of the adverse effect on our business operations is still unknown.

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. In 2022, rising global interest in becoming less dependent
on gas and oil led to higher demand for our products. The conflict 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 decreased in 2023, a change or
escalation of this ongoing conflict could increase the impacts from the circumstances described above and may lead to an adverse effect
on our business and results of operations.

Inflation
Reduction Act

In August
2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which includes several provisions intended
to accelerate U.S. manufacturing and adoption of 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, among other things, extends the investment
tax credit and production tax credit through 2034 and is therefore expected to increase the demand for solar products. The IRA also further
incentivizes residential and commercial solar customers and developers through the inclusion of a tax credit for qualifying energy projects
of up to 30%. Section 45X of the IRA offers advanced manufacturing production tax credits that incentivize the production of eligible
components within the U.S. To that end, we established manufacturing capabilities in the U.S. in 2023 and announced additional capacity
expected during 2024. These provisions of the law are new and regulations and guidance concerning their implementation are gradually being
published by the U.S. Treasury Department. We continue to monitor the benefits that may be available to us, such as the availability of
tax credits for domestic manufacturers. 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.

42

Key
Components of Our Results of Operations

The
following discussion describes certain line items in our Consolidated Statements of Operations.

Revenues

We
generate revenues from the sale of DC optimized inverter systems for solar PV installations, which include power optimizers, inverters,
storage and backup solutions, EV chargers, smart energy devices, our cloud-based monitoring platform and grid services. Our customer base
mainly includes distributors, large solar installers, wholesalers, and EPCs. In addition, we also generated revenues from the sale of
lithium-ion cells, batteries and energy storage solutions, automation machines and EV powertrain solutions for electric vehicles.

Our
revenues from the sale of solar-related products are affected by changes in the volume and average selling prices of our DC optimized
inverter systems. The volume and average selling price of our systems is driven by the supply and demand for our products, changes in
the product mix between our residential and commercial products, the customer mix between large and small customers, the geographical
mix of our sales, sales incentives, end user government incentives, seasonality, and competitive product offerings. Revenues from the
sale of lithium-ion cells, batteries, energy storage system or ESS products, are affected by the type of product sold (cell, battery or
system) and the type of the battery that is sold. Revenues from the sale of Automation Machines and e-Mobility products are affected by
the changes in the volumes, customers’ size and average selling prices of the products we sell.

Our
revenue growth is dependent on our ability to expand our market share in each of the geographies in which we compete, expand our global
footprint to new evolving markets, manage our production capabilities to meet demand, continue to develop and introduce new and innovative
products that address the changing technology and performance requirements of our customers and expand of the new businesses we acquired.

In
the year ended December 31, 2023, 64% of our revenues were generated from Europe, 25.5% of our revenues were generated from the United
States and 10.5% of our revenues were generated from ROW. In the year ended December 31, 2022, 54.3% of our revenues were generated from
Europe, 36.5% of our revenues were generated from the United States and 9.2% of our revenues were generated from ROW.

Cost
of Revenues and Gross Profit

Cost
of revenues consists primarily of product costs, including purchases from our contract manufacturers and other suppliers, as well as costs
related to shipping, customer support, product warranty, personnel, depreciation of testing and manufacturing equipment, amortization
of intangible assets and other fixed costs, provision for losses related to slow moving and dead inventory, hosting services for our cloud
based monitoring platform, variable utility costs, operational costs related to the manufacturing factories, other logistics services,
contract termination costs and renewable electricity production credits. Our product costs are affected by technological innovations,
such as advances in semiconductor integration and new product introductions, economies of scale resulting in lower component costs, improvements
in production processes and automation, the volume of products subject to import tariffs (for example, for imports from China to the U.S.)
and the volume of products for which manufacturing credits are available (for example, for products made in the U.S.). Some of these costs,
primarily personnel, amortization of intangible assets and depreciation of testing and manufacturing equipment, are not directly affected
by sales volume.

We continue
to develop our own manufacturing capabilities. During 2023, we continued to ramp up our manufacturing capabilities in Sella 2, our Li-Ion
battery factory in South Korea which serves our Energy Storage segment. We intend to gradually increase the manufacturing capabilities
of Sella 2 in 2024, which will result in additional expenses. We intend to use our available cash balances for this expansion.

Cost
of revenues also includes our operations, production and support departments’ costs. The operations and production departments are
responsible for production management such as planning, procurement, supply chain, production methodologies and machinery planning, logistics
management and manufacturing support to our contract manufacturers, as well as the quality assurance of our products. Our support department
provides customer and technical support at various levels through our call centers around the world as well as second and third-level
support services, which are provided by support personnel located in our headquarters. Our employees headcount in our operations, production
and support departments has grown to 2,857 as of December 31, 2023 from 2,383 as of December 31, 2022.

43

In October
of 2023, the Company made an announcement regarding its restructuring plans to adjust its manufacturing capacity and increase operating
efficiency,including, terminating the manufacturing process in Mexico, reducing manufacturing capacity in China, and discontinuing the
Company’s LCV e-Mobility activity, and on January 21, 2024, the Company announced adoption of additional measures in response to
challenging industry conditions, including reducing its headcount by approximately 16% over the first half of 2024 through an involuntary
workforce reduction plan (together, the “Restructuring Plan”). These decisions were made in order to better align the Company
with current market conditions. The majority of these activities related to the discontinuation of LCV activity and the reduction of our
manufacturing footprint which occurred in December 2023 and the significant part of the workforce reduction occurred in January 2024.

Gross
profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, manufacturing ramp-up
costs, restructuring costs, product mix, customer mix, geographical mix, location of manufacturing, shipping method, warranty costs, inventory
write-offs, exchange rates and seasonality.

Operating
Expenses

Operating
expenses consist of research and development, sales and marketing, general and administrative, goodwill impairment and other operating
expenses, net. Personnel-related costs are a significant component of the operating expenses and include salaries, benefits, payroll taxes,
commissions, severance and stock-based compensation. Our employees headcount in our research and development, sales and marketing and
general and administrative departments, has grown to 2,776 as of December 31, 2023 from 2,543 as of December 31, 2022. Under the 2024
Restructuring Plan described above, we expect to reduce our headcount over the first half of 2024.

Research
and development expenses

Research
and development expenses include personnel-related expenses such as salaries, severance, benefits, stock-based compensation and payroll
taxes. Our research and development employees are engaged in the design and development of power electronics, semiconductors, software,
power-line communications, networking and chemistry. Our research and development expenses also include third-party design and consulting
costs, materials for testing and evaluation, ASIC development and licensing costs, depreciation and amortization expenses, and other indirect
costs. We devote substantial resources to ongoing research and development programs that focus on enhancements to, and cost efficiencies
in, our existing products and timely development of new products that utilize technological innovation, thereby maintaining our competitive
position.

Sales
and marketing expenses

Sales
and marketing expenses consist primarily of personnel-related expenses such as salaries, severance, sales commissions, benefits, payroll
taxes, and stock-based compensation. These expenses also include travel, fees of independent consultants, trade shows, marketing, costs
associated with the operation of our sales offices and other indirect costs. We currently have a sales presence in many countries worldwide
and intend to continue to expand our sales presence to additional regions.

General
and administrative expenses

General
and administrative expenses consist primarily of salaries, severance, employee benefits and stock-based compensation related to our executives,
finance, human resources, information technology, and legal organizations, travel expenses, facilities costs, fees for professional services,
and registration fees related to being a publicly-traded company. Professional services consist of audit and legal costs, remuneration
to board members, insurance, information technology and other costs. General and administrative expenses also include expenses related
to certain legal claims and allowance for doubtful accounts in the event of uncollectible account receivables balances.

44

Goodwill
impairment

Goodwill
impairment consists of impairment charges of goodwill assigned to our reporting units and tested for impairment at least on an annual
basis, in the fourth quarter of the fiscal year.

Other
operating expenses, net

Other
operating expenses, net, consist primarily of impairment of long-lived assets and certain other nonrecurring items.

Non
Operating Expenses

Financial
income (expense), net

Financial
income (expense), net, consists primarily of interest income, interest expense, gains or losses from foreign currency fluctuations and
hedging transactions.

Interest
income consists of interest from our investment in available for sale marketable securities, deposits, loans to third parties and accretion
of discounts related to our investment in available for sale marketable securities.

Interest
expense consists of interest related to bank loans, advance payments received for performance obligations that extend for a period greater
than one year, related to Accounting Standard Codification 606, “Revenue from Contracts with Customers” (ASC 606), interest
related to Accounting Standard Codification 842, “Leases” (ASC 842), amortization of premium related to our investment in
available for sale marketable securities and the amortization of debt issuance cost associated with our Notes due 2025.

Our
functional currency is the U.S. dollar. With respect to certain of our subsidiaries, the functional currency is the applicable local currency.
Financial (expenses) income, net, also consists of gains or losses from foreign currency fluctuations, the fair value remeasurement of
hedging contracts not designated as cash flow hedge and bank charges. Foreign currency fluctuations primarily consist of the effect of
foreign exchange differences between the U.S. dollar and the New Israeli Shekel, the Euro, the South Korean Won and other currencies related
to our monetary assets and liabilities.

Other
income (loss)

Other
income (loss) consists primarily of realized and unrealized gains and losses on investments in privately-held companies and realized gains
and losses on investment in available for sale marketable securities.

Income
taxes

We
are subject to income taxes in the countries where we operate.

In
the year ended December 31, 2023, we recorded a net income tax expense of $46.4 million, which consists of a $89.5 million current income
tax expense and $43.1 million of deferred tax income. In the year ended December 31, 2022, we recorded a net income tax expense of $83.4
million, which consists of a $94.4 million current income tax expense and a $11.0 million deferred tax income. Our tax rate for 2023 is
57% compared with 47% in 2022. The increase in tax rate was mainly attributed to the GILTI effect of IRC Section 174, requiring the capitalization
of R&D expenditures outside the U.S. (see below), and impairments and losses that did not have a corresponding tax effect.

On
December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law, making significant changes to U.S. income tax law. These
changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years 2018 onwards and created
new taxes on certain foreign-sourced earnings (including tax on Global Intangible Low Taxed Income (“GILTI”) and certain related-party
payments. The Tax Act also amended Section 174 of the U.S Internal Revenue Code, effective from January 1, 2022, eliminating the option
to deduct research and development expenditures currently and requiring taxpayers to amortize them over five years (if incurred in the
U.S.) or fifteen years (if incurred outside the U.S.).

45

Furthermore,
the Tax Act required the Company to pay U.S. income taxes on accumulated foreign subsidiaries earnings not previously subject to U.S.
income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets, and 8% on the remaining earnings. The
total tax liability will be paid over the eight-year period provided in the Tax Act (ending 2024).

SolarEdge
Technologies Ltd., our Israeli subsidiary, is taxed under Israeli law. Income not eligible for benefits under the Investments Law is taxed
at the corporate tax rate. The Israeli corporate tax rate is 23%.

Our
Israeli subsidiary elected tax year 2012 as a ”Year of Election” for “Benefited Enterprise” under the Israeli
Investments Law, which provides certain benefits, including tax exemptions and reduced tax rates. Upon meeting the requirements under
the Israeli Investments Law, the two-year tax exemption has ended on December 31, 2018.

The
Investment Law was amended in 2005 and was further amended as of January 1, 2011 and in August 2013 (the “2011 Amendment”).
The 2011 Amendment canceled the availability of the benefits granted in accordance with the provisions of the Investments Law prior to
2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise”
(both as defined in the 2011 Amendment). Under the 2011 Amendment, income derived by Preferred Companies from Preferred Enterprise would
be subject to a uniform rate of corporate tax. The tax rate applicable to such income, referred to as “Preferred Income”,
would be 7.5% in areas in Israel that are designated as Development Zone A and 16% elsewhere in Israel starting in the year 2017 and thereafter.
Our Israeli subsidiary has established its own manufacturing facility in Israel, located in a Development Zone A, therefore income from
manufacturing attributed to that facility is subject to a 7.5% tax rate.

In
December 2016, Amendment 73 to the Investments Law (the “2017 Amendment”) was published. According to the 2017 Amendment,
special tax tracks for technological enterprises have been introduced, which are subject to rules that were issued by the Israeli Ministry
of Finance. A Preferred Technological Enterprise (PTE), as defined in the 2017 Amendment, that is located in the central region of Israel,
will be subject to a tax at a rate of 12% on profits deriving from intellectual property, or 6% if its annual revenues exceed New Israeli
Shekel 10 billion.

On
June 14, 2017, the Encouragement of Capital Investments Regulations (Preferred Technological Income and Capital Gain for Technological
Enterprise), 2017 (the “Regulations”) were published. The Regulations describe, inter alia, the mechanism used to determine
the calculation of the benefits under the PTE regime. A company that complies with the terms under the PTE regime, may be entitled to
certain tax benefits with respect to certain income generated during the company’s regular course of business and derived from the
preferred intangible asset.

As
of January 2019, our Israeli subsidiary elected to implement the 2011 and 2017 Amendments starting as of tax year 2019 and as a result,
under the PTE regime with respect to our business activities in Israel. Our PTE income was subject to a 12% tax rate in Israel in the
years 2019-2021, and in 2022-2023 to a 6% tax rate as we surpassed 10 billion New Israeli Shekel revenues threshold. We currently expect
not to meet the threshold in 2024 and consequently expect our tax on our PTE income to be 12% in 2024.

The
Law for the Encouragement of Industry (Taxes), 1969, (the “Industry Encouragement Law”), provides certain tax benefits for
an ‘Industrial Company’ as such term is defined in the Industry Encouragement Law. An Industrial Company is entitled to certain
tax benefits including, inter alia, amortization over an eight-year period of the cost of purchased know-how, patents and accelerated
depreciation rates on equipment and buildings. We qualify as an Industrial Company under the Law and benefit from its provisions as applicable.

Loss
from equity method investments

Loss
from equity method investments consists of our proportionate share of the net income or loss of equity method investments.

46

Results
of Operations

The
following tables set forth our consolidated statements of income for the years ended December 31, 2023 and 2022. We have derived this
data from our consolidated financial statements included elsewhere in this Annual Report. This information should be read in conjunction
with our consolidated financial statements and related notes included elsewhere in this Annual Report. The results of historical periods
are not necessarily indicative of the results of operations for any future period.

Comparison
of year ended December 31, 2023 and year ended December 31, 2022

Revenues

Revenues
decreased by $133.8 million, or 4.3%, in the year ended December 31, 2023, as compared to the year ended December 31, 2022, primarily
due to (i) a decrease of $58.2 million in the amount of ancillary solar products sold; and (ii) a decrease of $50.8 million related to
the number of batteries for PV applications sold, mainly in Europe; and (iii) a decrease of $26.0 million in revenues generated from e-mobility
components, related to the discontinuation of the Company’s LCV e-Mobility activity. The overall decrease in revenues was due to
the decline in demand that began in the third quarter of 2023 and continued in the fourth quarter of 2023. This decline was the result
of high inventory in the channels and slower than expected installation rates beginning in the third quarter of 2023, leading to substantial
unexpected cancellations and push outs of existing backlog, from our European distributors, which continued into the fourth quarter of
2023.

Revenues
from outside of the U.S. comprised 74.5% of our revenues in the year ended December 31, 2023 as compared to 63.5% in the year ended December
31, 2022.

47

The
number of power optimizers recognized as revenues decreased by approximately 6.2 million units, or 26.2%, from approximately 23.7 million
units in the year ended December 31, 2022 to approximately 17.5 million units in the year ended December 31, 2023 as a result of reduced
demand. The number of inverters recognized as revenues, increased by approximately 1.2 thousand units, or 0.1%, from approximately 1,014.6
thousand units in the year ended December 31, 2022 to approximately 1,015.8 thousand units in the year ended December 31, 2023. Revenues
from inverters relative to optimizers was higher this year due to a "catch up" in inverter production in the first half of 2023 which
was needed to meet backlog demand that we were not able to fulfill in the previous year. The megawatts hour of batteries for PV applications
recognized as revenues decreased by approximately 148.3 megawatts hour, or 16.7% from approximately 885.7 megawatts in the year ended
December 31, 2022 to approximately 737.4 megawatts in the year ended December 31, 2023 due to a decrease in demand.

Our
blended Average Selling Price or ASP per watt for solar products excluding batteries for PV applications is calculated by dividing solar
revenues, excluding revenues from the sale of batteries for PV applications, by the nameplate capacity of inverters shipped. Our blended
ASP per watt for solar products shipped decreased by 0.049, or 20.1%, in the year ended December 31, 2023 as compared to the year ended
December 31, 2022. The decrease in blended ASP per watt is mainly attributed to 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 as well as due
to an increase in the sale of commercial products that are characterized by lower ASP per watt, out of our total solar product mix. This
decrease in blended ASP per watt was partially offset by price increases that went into effect gradually during 2022 and in the first
half of 2023, as well as by the appreciation of the Euro against the U.S. Dollar.

Our
blended ASP per hour watt for batteries for PV applications is calculated by dividing batteries for PV applications revenues, by the nameplate
capacity of batteries for PV applications shipped. Our blended ASP per watt/hour for batteries for PV applications decreased by 0.016
or 3.3%, in the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease in blended ASP per watt/hour
is mainly attributed to an increase in the portion of three phase batteries, which are sold at a lower ASP per watt/hour and a price decrease
of our single phase batteries, that went into effect gradually during 2023. This decrease was partially offset by the appreciation of
the Euro against the U.S Dollar.

Cost
of Revenues and Gross Profit

Cost of revenues increased
by $7.1 million, or 0.3%, in the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily due to:

48

These
were partially offset by:

Gross
profit as a percentage of revenue decreased by 3.6% to 23.6% in the year ended December 31, 2023 from 27.2% in the year ended December
31, 2022 primarily due to:

These were partially
offset by a decrease in shipment rates as well as a reduced portion of expedited shipments out of our total shipments and a decrease in
customs duties attributed to the decrease in volumes of products manufactured in China for the U.S. market resulting in higher gross margin
of 1.1%.

49

Operating
Expenses:

Research
and Development

Research
and development costs increased by $31.7 million or 10.9%, in the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to:

Sales
and Marketing

Sales
and marketing expenses increased by $4.6 million, or 2.9%, in the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to:

These
were partially offset by a decrease in personnel-related costs of $1.2 million as a result of a decrease in commissions and the depreciation
of the NIS against the U.S. dollar.

General
and Administrative

General
and administrative expenses increased by $34.0 million, or 30.2%, in the year ended December 31, 2023 compared to the year ended December
31, 2022, primarily due to:

50

Goodwill
impairment

Goodwill
impairment decreased by $90.1 million or 100% in the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease
was mainly due to a decrease in the goodwill impairment charge related to three reporting units e-Mobility, Automation Machines, and Critical
Power in the year ended December 31, 2022.

Other
operating expenses, net

Other
operating expenses, net, increased by $4.9 million, or 18.5% in the year ended December 31, 2023 compared to the year ended December 31,
2022, primarily due to:

These
were partially offset by a decrease of $22.8 million in impairment of intangible assets, which was attributed to the intangible assets
impairment recorded in the year ended December 31, 2022 for e-Mobility and Critical Power asset groups.

Financial
income (expenses), net

Financial
income, net increased by $37.5 million or 999.0% in the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily
due to:

51

Other
income (loss)

Other
loss was $0.3 million in the year ended December 31, 2023 compared to other income of $7.3 million in the year ended December 31, 2022,
primarily due to a decrease in gains from the sale of an investment in a privately-held company.

Income
taxes

Income
taxes decreased by $37.0 million, or 44.3%, in the year ended December 31, 2023 as compared to the year ended December 31, 2022, primarily
due to:

Loss
from equity method investments

Net
loss from equity method investments increased by $0.4 million, or 100% in the year ended December 31, 2023 as compared to the year ended
December 31, 2022.

Net
Income

As
a result of the factors discussed above, net income decreased by $59.5 million, or 63.4% in the year ended December 31, 2023 as compared
to the year ended December 31, 2022.

52

Segment
analysis

Following
the discontinuation of the Critical Power segment in June 2022, we operated in four different operating segments: Solar, Energy Storage,
e-Mobility and Automation Machines. In October 2023, we decided to discontinue our LCV e-Mobility) activity and the remaining e-Mobility
activity is included under the solar segment starting January 1, 2024. In the fourth quarter of 2023, we identified two operating segments
as reportable – the Solar and the Energy Storage segments. The other operating segments are insignificant individually, and therefore,
their results are presented together under “All other.”

We
do not allocate our operating segments revenue recognized due to advance payments received for performance obligations that extend for
a period greater than one year (“financing component”), related to Accounting Standard Codification 606, “Revenue from
Contracts with Customers” (ASC 606).

Segment
profit (loss) is comprised of gross profit (loss) for the segment less operating expenses excluding amortization and impairment of purchased
intangible assets, stock based compensation expenses, restructuring charges, discontinued activity charges, impairment of property, plant
and equipment and certain other items (which are reported under "Not allocated to segments").

Solar

Solar revenues
decreased by $105.6 million, or 3.6%, in the year ended December 31, 2023, as compared to the year ended December 31, 2022 primarily due
to a $58.2 million decrease in the amount of ancillary solar products sold and a $50.8 million decrease in the number of batteries sold
for PV applications. As discussed above, this decrease in revenues was due to high inventory in the channels and slower than expected
installation rates beginning in the third quarter of 2023, leading to substantial unexpected cancellations and push outs of existing backlog
from our European distributors.

Solar
operating profit decreased by $122.3 million, or 25.1%, in the year ended December 31, 2023, as compared to the year ended December 31,
2022. This decrease was mainly due to the decrease in revenue followed by a lower decrease of $55.6 million in cost of revenues, which
was primarily caused by a decrease of $96.5 million in direct cost of revenues and a decrease of $43.0 million in shipment and logistic
costs, which were offset by an increase of $78.0 million in warranty expenses and an increase of $13.2 million in inventory write-downs.
Additionally, operating expenses increased by $72.3 million, primarily due to higher personnel-related costs, expenses related to consultants
and sub-contractors and an increase in expenses related to doubtful debt.

53

Energy
Storage

Energy
Storage revenues increased by $7.4 million, or 9.7%, in the year ended December 31, 2023,
as compared to the year ended December 31, 2022.

Energy
Storage operating loss increased by $46.3 million, or 333.7%, in the year ended December 31, 2023, as compared to the year ended December
31, 2022. The increase in operating loss was primarily due to an increase of $48.8 million in cost of revenues associated with ramp-up
cost and an increase in inventory accrual, both related to the start of manufacturing in our Sella 2 factory.

All
other

All
other segments revenues decreased by $35.7 million, or 31.9%, in the year ended December 31,
2023, as compared to the year ended December 31, 2022 primarily due to the discontinuation of the Company’s LCV e-Mobility activity
and the discontinuation of our Critical Power activity.

All
other segments operating loss decreased by $16.9 million, or 54.0%, in the year ended December 31, 2023, as compared to the year ended
December 31, 2022. This improvement was mainly due to a decrease in warranty accruals related to our LCV e-Mobility activity, a reduction
in personnel-related expenses, and a decrease in the loss incurred in the year ended December 31, 2022 associated with the discontinued
Critical Power business.

Not
allocated to segments

Not
allocated to segments revenues increased by $0.2 million, or 35.8%, in the year ended December
31, 2023, as compared to the year ended December 31, 2022.

Not
allocated to segments operating loss decreased by $25.8 million, or 9.4%, in the year ended December 31, 2023, as compared to the year
ended December 31, 2022. The decrease was mainly due to a decrease in goodwill and intangible assets impairment charges, which were related
to our LCV e-Mobility activity during the year ended December 31, 2022. However, during the year ended December 31, 2023 we have experienced
an increase in costs related to the Restructuring Plan, including costs related to the discontinuation of the Company's LCV e-Mobility
activity, and an increase in impairment of property, plant, and equipment, all of which are not assessed by our CODM and therefore not
allocated to any of the segments above.

54

Liquidity
and Capital Resources

The
following table shows our cash flows from operating activities, investing activities, and financing activities for the stated periods:

As
of December 31, 2023, our cash and cash equivalents were $338.5 million. This amount does not include $929.4 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, other investments and potential future share repurchases. As of December 31,
2023, we have open commitments for capital expenditures in the amount of approximately $95.5 million. These commitments reflect purchases
of automated assembly lines and other machinery related to our manufacturing operations. We also have purchase obligations in the amount
of $1,041.3 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

Cash
used in operating activities consists of net income adjusted for certain non-cash items and changes in assets and liabilities. Cash used
in operating activities was $180.1 million in the year ended December 31, 2023 as compared to $31.3 million cash provided by operating
activities in the year ended December 31, 2022, mainly due to lower net income adjusted for certain non-cash items, as well as higher
operating working capital requirements, specifically, an increase in inventory procurement and manufacturing.

Investing
Activities

Investing
cash flows consist primarily of cash used for capital expenditures, cash provided by government grants for capital expenditures, investment
in, sales and maturities of available for sale marketable securities, investment and withdrawal of bank deposits and restricted bank deposits,
cash used for acquisitions, cash provided by the sale of equity investments and disbursements and receipts from loans made by the Company.
Cash used for investing activities decreased by $148.2 million in the year ended December 31, 2023 as compared to the year ended December
31, 2022, primarily driven by a decrease of $210.8 million in purchases of available-for-sale debt investments and an increase of $49.0
million in proceeds from sales and maturities of available-for-sale debt investments. This was partially offset by an increase of $58.0
million in disbursements of loans made by the Company, a decrease of $23.0 million in proceeds provided by the sale of a privately-held
company, an increase of $16.7 million in cash used for a business combination and an increase of $11.2 million in the purchase of intangible
assets.

Financing
Activities

Financing
cash flows consisted primarily of the issuance and repayment of short-term and long-term debt, proceeds from the sale of shares of common
stock in a public offering, and proceeds provided by the exercise of stock-based awards and withholding taxes remitted to the tax authorities
related to stock-based awards. Cash used in financing activities in the year ended December 31, 2023 was $12.0 million, compared to $654.6
million cash provided by financing activities in the year ended December 31, 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 decrease of $38.6
million in proceeds provided by the exercise of stock-based awards. This was partially offset by a decrease of $22.5 million in withholding
taxes remitted to the tax authorities related to the exercise of stock-based awards.

55

Convertible
Senior Note

On
September 25, 2020, we issued $632.5 million aggregate principal amount of our Convertible Senior Notes or Notes in a transaction exempt
from registration pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from the offering, after underwriters’
discount and commissions and offering expenses, was $617.9 million. We intend to use the proceeds of the Notes for general corporate purposes
(see Note 17 to our annual financial statements for more information).

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 $650,526. We intend to use the proceeds
from the public offering for general corporate purposes, which may include acquisitions (see Note 19b to our consolidated financial statements
for more information).

Share
Repurchases

On
November 1, 2023, we announced the approval by the Board of Directors of a share repurchase program which authorizes the repurchase of
up to $300 million of the Company’s common stock. Under the share repurchase program, repurchases can be made using a variety of
methods, which may include open market purchases, block trades, privately negotiated transactions, accelerated share repurchase programs
and/or a non-discretionary trading plan or other means, including through 10b5-1 trading plans, all in compliance with the rules of the
SEC and other applicable legal requirements. The timing, manner, price and amount of any common share repurchases under the share repurchase
program are determined by the Company in its discretion and depend on a variety of factors, including legal requirements, price and economic
and market conditions. The program does not obligate SolarEdge to acquire any amount of common stock, it may be suspended, extended, modified,
discontinued or terminated at any time at the Company’s discretion without prior notice, and will expire on December 31, 2024.

Critical
Accounting Policies and Significant Management Estimates

We
prepare our consolidated financial statements in accordance with generally accepted accounting principles in the U.S. (“GAAP”).
The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates
made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement
presentation, financial condition, results of operations, and cash flows will be affected. We believe that the accounting policies discussed
below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving
management’s judgments and estimates. Critical accounting policies and estimates are those that we consider the most important to
the portrayal of our financial condition and results of operations because they require our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effects of matters that are inherently uncertain (see Note 2 to our annual financial
statements for more information).

Revenue
Recognition

We
generate revenues from the sale of DC optimized inverter systems for solar PV installations which include our power optimizers, inverters,
and cloud-based monitoring platform as well as other solar related ancillary products, Lithium-ion cells, batteries, energy storage solutions,
EV powertrain solutions and machinery. Our worldwide customer base includes large solar installers, distributors, EPCs, utility companies
and other customers. Our products are fully functional at the time of shipment to the customer and do not require production, modification,
or customization with the exception of some ESS systems that require installation and commissioning. We recognize revenue under the core
principle that transfer of control to the customers should be depicted in an amount reflecting the consideration we expect to receive
in revenue. In order to achieve that core principle, we apply the following five-step approach: (1) identify the contract with a customer,
(2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the
performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. Provisions for rebates,
sales incentives and discounts to customers are accounted for as reductions in revenue in the same period that the related sales are recorded.

56

We
generally sell our products to our customers pursuant to a customer’s standard purchase order and our customary terms and conditions.
We do not offer rights to return our products other than for normal warranty conditions, and as such, revenue is recognized based on the
transfer of control, which includes but is not limited to, the agreed International Commercial terms. We evaluate the creditworthiness
of our customers to determine that appropriate credit limits are established prior to the acceptance and shipment of an order.

We
provide our full web-based monitoring platform for our solar products free of charge and revenues associated with the service since that
date are being recognized ratably over 25 years. In the absence of third party comparable pricing for such service, management determines
the revenue levels of this service based on the costs associated with providing the service plus appropriate margins that reflect management’s
best estimate of the selling price. These revenues are minimal and we do not expect this to become a significant source of revenue in
the near future.

We
recognize financing component expenses in our consolidated statement of income in relation to advance payments for performance obligations
that extend for a period greater than one year. These financing component expenses are reflected in our deferred revenues balance. Such
performance obligations are those that include a financing component, specifically: (i) warranty extension services, (ii) cloud-based
monitoring, and (iii) communication services.

See
Notes 2u and 15 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to revenue recognition.

Product
Warranty

We
provide a standard limited product warranty for our solar products against defects in materials and workmanship under normal use and service
conditions. Our standard warranty period is 25 years for our power optimizers, 12 years for our inverters, 10 years for our storage interface
and a 10-year limited warranty for our batteries for PV applications. Other products are sold with standard limited warranties that typically
range in duration from one to ten years, and in some cases for a longer period. In certain cases, customers can purchase an extended warranty
for our battery storage products and for our batteries for PV applications that extend the standard warranty period. In addition, customers
can purchase extended warranties for inverters that extend the warranty period to up to 25 years.

Our
products are designed to meet the warranty periods and our reliability procedures cover component selection, design, accelerated life
cycle tests, and end-of-manufacturing line testing. However, since our history in selling power optimizers and inverters is shorter than
the warranty period, the calculation of warranty provisions is inherently uncertain.

We
accrue for estimated warranty costs at the time of sale based on anticipated warranty claims and actual historical warranty claims experience.
Warranty provisions, computed on a per-unit sold basis, are based on our best estimate of such costs and are included in our cost of revenues.
The warranty obligation is determined based on actual and predicted failure rates of the products, cost of replacement and service and
delivery costs incurred to correct a product failure. Our warranty obligation requires management to make assumptions regarding estimated
failure rates and replacement costs.

In
order to predict the failure rate of each of our products, we have established a reliability model based on the estimated mean time between
failures (“MTBF”). The MTBF represents the average elapsed time predicted for each product unit between failures during operation.
Applying the MTBF failure rate over our install base for each product type and generation allows us to predict the number of failed units
over the warranty period and estimates the costs associated with the product warranty. Predicted failure rates are updated periodically
based on data returned from the field and new product versions, as are replacement costs which are updated to reflect changes in our actual
production costs for our products, subcontractors’ labor costs, and actual logistics costs.

57

Since
the MTBF model does not take into account additional non-systematic failures, such as failures caused by workmanship or manufacturing
or design-related issues, and since warranty claims are at times opened for cases in which the error has been triggered by an improper
installation, we have developed a supplemental model to predict such cases and recognize the associated expenses ratably over the expected
claim period. This model, which is based on actual root cause analysis of returned products, identification of the causes of claims and
time until each identified problem is revealed, allows us to better predict actual warranty expenses and is updated periodically based
on our experience, taking into account the installed base of approximately 125.1 million power optimizers and approximately 5.6 million
inverters as of December 31, 2023.

If
actual warranty costs differ significantly from these estimates, adjustments may be required in the future, which could adversely affect
our gross profit and results of operations. Warranty obligations are classified as short-term and long-term warranty obligations, based
on the period in which the warranty is expected to be claimed. The warranty provision (short and long-term) was $518.2 million and $385.1
million, in the year ended December 31, 2023 and 2022, respectively.

See
Notes 2w and 14 "Warranty obligations" to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form
10-K for additional information related to product warranty.

Inventory
Valuation

Our
inventories comprise sellable finished goods, raw materials bought for our own manufacturing facilities or on behalf of our contract manufacturers,
and faulty units returned under our warranty policy.

Sellable
finished goods and raw material inventories are valued at the lower of cost or net realizable value, based on the moving average cost
method. Certain factors could affect the realizable value of our inventories, including market and economic conditions, technological
changes, existing product changes (mainly due to cost reduction activities) and new product introductions. We consider historic usage,
expected demand, anticipated sales price, the effect of new product introductions, product obsolescence, product merchantability, and
other factors when evaluating the net realizable value of inventories. Inventory write-downs are equal to the difference between the cost
of inventories and their estimated net realizable value. Inventory write-downs are recorded as cost of revenues in the accompanying statements
of income and were $46.4 million and $10.2 million, in the year ended December 31, 2023 and 2022, respectively.

Faulty
products returned under our warranty policy are often refurbished and used as replacement units. Such products are written off upon receipt.

We
do not believe that there is a reasonable likelihood that there will be a material change in future estimates or assumptions that we use
to record inventory at the lower of cost or net realizable value. However, if estimates regarding customer demand are inaccurate or changes
in technology affect demand for certain products in an unforeseen manner, we may be exposed to losses that could be material.

See
Notes 2j and Note 5 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to inventory valuation.

Business
Combination

We
allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired
based on their estimated fair value. The excess of the fair value of purchase consideration over the fair values of these identifiable
assets and liabilities is recorded as goodwill. Such valuations require our management to make significant estimates and assumptions,
especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited
to, future expected cash flows from acquired technology and other intangible assets, their useful lives and discount rates. Our management’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and,
as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition
date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion
of the measurement period, any subsequent adjustments are recorded to earnings.

See
Note 2n and Note 3 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to business combination.

58

Intangible
and other long-lived assets

We
evaluate the recoverability of finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the
carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison
of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying
amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value.

The
more significant estimates and assumptions inherent in the estimate of the fair value of finite-lived intangible assets include (i) assumptions
associated with forecasting product profitability, including sales and cost to sell projections, (ii) tax rates which seek to incorporate
the geographic diversity of the projected cash flows, (iii) expected impact of competitive, legal and/or regulatory forces on the projections
and the impact of technological risk, R&D expenditure for ongoing support of product rights, and (iv) estimated useful lives.

During
the year ended December 31, 2023, we recorded impairment charge of $5.6 million mainly related to intangible assets within the Solar asset
group.

Acquired
identifiable finite-lived intangible assets are amortized on a straight-line basis or accelerated method over the estimated useful lives
of the assets. We believe the basis of amortization approximates the pattern in which the assets are utilized, over their estimated useful
lives. We routinely review the remaining estimated useful lives of finite-lived intangible assets. In case we reduce the estimated useful
life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.

See
Notes 2.o and 9 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to intangible assets.

Goodwill

Goodwill
reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any non-controlling
interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned
to reporting units and tested for impairment at least on an annual basis.

The
goodwill impairment test is performed according to the following principles:

We
estimate the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs. Key estimates
include the revenue growth rates taking into consideration industry and market conditions, terminal growth rate and the discount rate.
The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics.
The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill, to those
reporting units.

We
complete the required annual testing of goodwill impairment for the reporting units in the fourth quarter of each year and accordingly,
determine whether goodwill should be impaired. During the year ended December 31, 2023, no impairment of goodwill has been identified.

See
Notes 2.q and 10 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to goodwill.

59

Government
grants

In
August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the “IRA”), which contains several provisions
intended to accelerate U.S. manufacturing and adoption of clean energy such as solar. Some of the applicable provisions in IRA include
the extension of the Production Tax Credit through 2034. These provisions of the law are new and regulations and guidance concerning their
implementation are gradually being published by the U.S. Treasury Department. Section 45X of the IRA offers advanced manufacturing production
tax credits ("AMPTC"), that incentivize the production of eligible components within the United States. To that end, we established manufacturing
capabilities in the United States in 2023 and announced additional capacity planned for 2024. IRA allows taxpayers to elect to have AMPTCs
refunded in cash ("direct pay") or transfer these credits to a third party. In addition to using the tax credits to offset tax due to
the U.S. government, the direct pay option is available as a one-time election, in any taxable year after December 31, 2022, for a facility
in which eligible components are produced, and is applicable for five years.

Refundable
and transferable tax credits are similar in essence to government grants. This is because the taxpayer can realize the benefit regardless
of whether they owe income tax or not in the relevant years. Therefore, these amounts are not considered income taxes and fall outside
the scope of Topic 740. Instead, they are treated as government grants.

Government
grants are recognized when there is reasonable assurance that: (1) we will comply with the relevant conditions and (2) the grant disbursement
will be received. We recognize PTCs as a reduction in the cost of revenues in the statement of income. We do this systematically over
time as we recognize the related expenses. Alternatively, we recognize the grant immediately if it compensates us for expenses that we
have already incurred. The AMPTCs are also reflected in the consolidated balance sheet as a reduction of income tax payable within accrued
expenses and other liabilities, as a tax prepayment, or as AMPTCs to be sold within prepayment and other assets. The way we expects to
utilize the AMPTCs determines where they are recorded. In the year ended December 31, 2023, we recognized AMPTCs worth $6.0 million for
inverters produced in the United States and sold to customers. As of December 31, 2023, benefits recognized from AMPTCs of $6.0 were recorded
as a tax prepayment within prepayment and other current assets.

Income
taxes

We
account for income taxes in accordance with ASC 740, “Income Taxes.” ASC 740, which prescribes the use of the liability method,
whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis
of assets and liabilities, and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse.

We
account for uncertain tax positions in accordance with ASC 740-10 two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained
on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest
amount that is more than 50% (cumulative probability) likely to be realized upon ultimate settlement.

See
Note 2.af and 25 to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional
information related to income taxes.

60

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section
of this Annual Report on Form 10-K captioned “Business” and our consolidated financial statements and the related notes to
those statements included elsewhere in this Form 10-K. In addition to historical financial information, the following discussion and analysis
contains forward looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events
may differ materially from those anticipated in these forward looking statements as a result of many factors, including those discussed
under the sections of this Annual Report captioned “Special Note Regarding Forward Looking Statements” and “Risk Factors”.
For discussion related to changes in financial condition and the results of operations for the year
ended December 31, 2021, refer to Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 22,
2022.

Overview

We develop, manufacture
and sell products that address a broad range of energy market segments through our diversified product offering, including residential, commercial
and large scale photovoltaic or PV, energy storage and backup solutions, electric vehicle or EV charging capabilities, home
energy management, grid services and virtual power plants, as well as products in our non-solar businesses which address e-Mobility
("e-Mobility"), automation machines ("Automation Machines") and lithium-ion batteries ("Storage").

Further
information regarding our business is provided in “Part I, Item 1. Business” of this Annual Report.

In the year ended December 31,
2022, one customer accounted for 18.5% of our
revenues and our top three customers (all distributors) together represented 34.8% of our revenues.

Our revenues were $3,110.3
million and $1,963.9 million for fiscal 2022 and fiscal
2021, respectively. Gross margins were 27.2% and 32.0%
for fiscal 2022 and fiscal 2021, respectively. Net income was $93.8
million and $169.2 million for fiscal 2022 and fiscal 2021,
respectively.

Performance Measures

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 use metrics relating to monitoring (systems monitored) to evaluate
market acceptance of our products and usage of our solution.

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.

40

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.

Global Circumstances
Influencing our Business and Operations

Covid-19
Impact & Response

Covid-19 continued
to present challenges to our operations and business in 2022, primarily, operational challenges, which we reported on continuously in
our quarterly reports throughout the year, but to a lesser extent than in 2021. Due to the worldwide growing trend in availability and
administration of vaccines against Covid-19, many restrictions that were placed during the pandemic were gradually lifted by governments
across the globe. However, the future impact of the Covid-19 pandemic remains highly uncertain. Resurgences of Covid-19 cases and the
emergence of new variants may adversely impact our results of operations. For example, in the second quarter of 2022, the mandatory government
shutdowns resulting from the increase in Covid-19 cases in Shanghai, that were eased in the beginning of the third quarter of 2022, led
to delays in our scheduled shipments from the Shanghai port. Our first priority continues to be to protect and support our employees while
maintaining company operations and support of our customers with as few disruptions as possible. We
follow the guidance issued by applicable local authorities and health officials in each region in which we do business, including in our
headquarters located in Israel.

While we have not experienced any new disruptions resulting
directly from Covid-19 in the fourth quarter of 2022, the pandemic and general global economic conditions continue to present challenges
to our operations and business. In the fourth quarter of 2022, we began to witness a decrease in shipment prices and transit times, both
however are still not at their pre-Covid-19 levels. In fiscal 2022 as a whole and the fourth quarter of 2022 specifically, the industry-wide
component shortages which originated from Covid-19 and 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 cost of ocean and air freight for components and finished goods. To mitigate the impact of these
disruptions on our supply chain, 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. Our operation team is working tirelessly to mitigate the impact
of the disruptions described above.

41

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 Inflation Reduction Act of 2022 (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”)
through 2034 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.

42

Key Components of Our
Results of Operations

The following discussion
describes certain line items in our Consolidated Statements of Operations.

Revenues

We generate revenues
from the sale of DC optimized inverter systems for solar PV installations which include power optimizers, inverters, storage and backup
solutions, EV chargers, smart energy devices, our cloud-based monitoring platform as well as
grid services. Our customer base mainly includes distributors, large solar installers, wholesalers, EPCs, and PV module manufacturers.
In addition, we also generate revenues from the sale of lithium-ion cells, batteries and energy storage solutions, automation machines
and EV powertrain solutions for electric vehicles.

Our revenues from the
sale of solar-related products are affected by changes in the volume and average selling prices of our DC optimized inverter systems.
The volume and average selling price of our systems is driven by the supply and demand for our products, changes in the product mix between
our residential and commercial products, the customer mix between large and small customers, the geographical mix of our sales, sales
incentives, end user government incentives, seasonality, and competitive product offerings. Revenues from the sale of energy storage system
or ESS products, are affected by the type of product sold (cell, battery or system) and the type of the battery that is sold. Revenues
from the sale of SolarEdge Automation Machines and SolarEdge e-Mobility products are affected by the changes in the volumes, customers’
size and average selling prices of the products we sell.

Our revenue growth is
dependent on our ability to expand our market share in each of the geographies in which we compete, expand our global footprint to new
evolving markets, grow our production capabilities to meet demand, continue to develop and introduce new and innovative products that
address the changing technology and performance requirements of our customers and expansion of the new businesses we acquired.

In the year ended December 31,
2022, 54.3% of our revenues were generated from Europe, 36.5%
of our revenues were generated from the United States and 9.2% of our revenues were generated
from ROW. In the year ended December 31, 2021, 45.4%
of our revenues were generated from Europe, 40.0% of our revenues were from the United States
and 14.6% of our revenues were generated from ROW.

Cost
of Revenues and Gross Profit

Cost
of revenues consists primarily of product costs, including purchases from our contract manufacturers and other suppliers, as well as costs
related to shipping, customer support, product warranty, personnel, depreciation of testing and manufacturing equipment, provision for
losses related to slow moving and dead inventory, hosting services for our cloud based monitoring platform, and other logistics services.
Our product costs are affected by technological innovations, such as advances in semiconductor integration and new product introductions,
economies of scale resulting in lower component costs and improvements in production processes and automation. Some of these costs, primarily
personnel and depreciation of testing and manufacturing equipment, are not directly affected by sales volume.

With
respect to ESS, Automation Machines and e-Mobility products ("Non-Solar") cost of revenues, consists primarily of materials costs, labor
costs associated with the manufacturing, variable utility, and operational costs related to the manufacturing factories, depreciation
of testing and manufacturing equipment, amortization of intangible assets and other fixed costs.

Except for the manufacturing
and assembly activities related to our Non-Solar businesses and the manufacturing of solar products
at Sella 1, our manufacturing facility in the North of Israel, we outsource our manufacturing to third-party manufacturers and negotiate
product pricing on a quarterly basis.

43

During 2022,
supply chain and operational challenges coupled with an increase in demand for our products, resulted in increased use of expedited ocean
freight as well as air freight to deliver our products to our customers in a timely manner. At the beginning of 2022, a high portion of
our products manufactured in non-tariff countries imported into the U.S. resulted in lower custom tariff charges. As a result of the operational
challenges we faced during 2022, the levels of our finished goods inventories required to support our growth were reduced. While we are
seeing an improvement in supply chain disruptions and component constraints towards the end of 2022, we expect to continue to deliver
our products through expedited ocean freight and air freight. To the extent that production in
our Mexican manufacturing facility ramps and production in Sella 1 is expanded as anticipated, we expect inventory levels to return to
those required to support our growing business, the reduction in expedited shipments and air freight usage during the third quarter of
2023.

We
continue to develop our own manufacturing capabilities. For example, we have developed our own proprietary automated assembly lines for
our power optimizers, manufacture sub-assemblies such as cables and magnetic, and own large amounts of equipment in connection with such
manufacturing activities. In 2022, we developed and commenced manufacturing from our first partially automated inverter assembly line
which began production in our Sella 1 manufacturing site. We expect to continue to invest in additional automated assembly lines in the
future. We have designed and are responsible for funding all of the capital expenses associated with existing and planned automated assembly
lines. The current and expected capital expenses associated with these automated assembly lines will be funded out of our current cash
and cash equivalents, available-for-sale marketable securities and cash flows generation. Additionally, we continue to develop our
own manufacturing capabilities in Sella 2, our Li-Ion battery factory in Korea. We expect Sella 2 to continue to incur costs and expenses
as it ramps. We also intend to expand the manufacturing capabilities of Sella 2 in fiscal years 2023 and 2024 which will result in
additional expenses. We intend to use our available cash balances for this expansion.

Key components of our
logistics supply channel consist of third party distribution centers in the U.S., Europe, Australia,
and Japan. Finished goods are either shipped to our customers directly from our contract manufacturers or shipped to third-party
distribution centers and then, finally, shipped to our customers.

Cost of revenues also
includes our operations, production and support departments’ costs. The operations and production departments are responsible for
production management such as planning, procurement, supply chain, production methodologies and machinery planning, logistics management
and manufacturing support to our contract manufacturers, as well as the quality assurance of our products. Our support department provides
customer and technical support at various levels through our call centers around the world as well as second and third-level support services,
which are provided by support personnel located in our headquarters. Our employees headcount
in our operations, production and support departments has grown from 2,052
as of December 31, 2021 to 2,383 as of December 31,
2022.

Gross
profit may vary from quarter to quarter and is primarily affected by our average selling prices, product costs, manufacturing ramp-up
costs, product mix, customer mix, geographical mix, shipping method, warranty costs, exchange rates and seasonality.

Operating
Expenses

Operating expenses consist
of research and development, sales and marketing, general and administrative, goodwill impairment and other operating expenses, net. Personnel
related costs are the most significant component of each of these expense categories and include salaries, benefits, payroll taxes, commissions
and stock-based compensation. Our employees headcount in our research and development, sales and marketing and general and administrative
departments, has grown from 1,912 as of December 31,
2021 to 2,543 as of December 31, 2022. We
expect to continue to hire significant numbers of new employees to support our growth. The timing of these additional hires could
materially affect our operating expenses in any particular period, both in absolute dollars and as a percentage of revenue. We expect
to continue to invest substantial resources to support our growth and anticipate that each of the following categories of operating expenses
will increase in absolute dollar amounts for the foreseeable future.

44

Research
and development expenses

Research and development
expenses include personnel-related expenses such as salaries, benefits, stock-based compensation and payroll taxes. Our research and development
employees are engaged in the design and development of power electronics, semiconductors, software, power-line communications, networking
and chemistry. Our research and development expenses also include third-party design and consulting costs, materials for testing
and evaluation, ASIC development and licensing costs, depreciation and amortization expenses, and other indirect costs. We devote substantial
resources to ongoing research and development programs that focus on enhancements to, and cost efficiencies in, our existing products
and timely development of new products that utilize technological innovation, thereby maintaining our competitive position.

Sales
and marketing expenses

Sales and marketing expenses
consist primarily of personnel-related expenses such as salaries, sales commissions, benefits, payroll taxes, and stock-based compensation.
These expenses also include travel, fees of independent consultants, trade shows, marketing, costs associated with the operation of our
sales offices and other indirect costs. We currently have a sales presence in many countries worldwide and intend to continue to expand
our sales presence to additional regions.

General
and administrative expenses

General and administrative
expenses consist primarily of salaries, employee benefits and stock-based compensation related to our executives, finance, human resources,
information technology, and legal organizations, travel expenses, facilities costs, fees for professional services, and registration fees
related to being a publicly-traded company. Professional services consist of audit and legal costs, remuneration to board members, insurance,
information technology and other costs. General and administrative expenses also include expenses related to legal claims and allowance
for doubtful accounts in the event of uncollectible account receivables balances.

Goodwill
impairment and other operating expenses, net

Goodwill
impairment and other operating expenses, net, consist primarily of impairment
of goodwill, impairment of long-lived assets and certain other nonrecurring items.

Non
Operating Expenses

Financial
income (expense), net

Financial income (expense),
net, consists primarily of interest income, interest expense, gains or losses from foreign  currency fluctuations and hedging transactions.

Interest income consists
of interest from our investment in available for sale marketable securities, deposits and accretion of discounts related to our investment
in available for sale marketable securities.

Interest expense consists
of interest related to bank loans, advance payments received for performance obligations that extend for a period greater than one year,
related to Accounting Standard Codification 606, “Revenue from Contracts with Customers” (ASC 606), interest related to Accounting
Standard Codification 842, “Leases” (ASC 842), amortization of premium related to our investment in available for sale marketable
securities and the accretion of the debt discount and amortization of debt issuance cost associated with our Notes due 2025.

Our functional currency
is the U.S. dollar. With respect to certain of our subsidiaries, the functional currency is the applicable local currency. Financial (expenses)
income, net, also consists of gains or losses from foreign currency fluctuations primarily of the effect of foreign exchange differences
between the U.S. dollar and the New Israeli Shekel, the Euro, the South Korean Won and other currencies related to our monetary assets
and liabilities, the fair value remeasurement of hedging contracts not designated as cash flow hedge and bank charges.

45

Other
income

Other income consists
primarily of realized and unrealized gains and losses on investments in privately-held companies.

Income
taxes

We are subject to income
taxes in the countries where we operate.

In the year ended December 31,
2022, we recorded a net income tax expense of $83.4 million, which consists of a $94.4
million current income tax expense and $11.0 million of deferred tax income. In the year ended
December 31, 2021, we recorded a net income tax expense of $18.1 million, which consists of a $29.7 million current income tax expense
and a $11.6 million deferred tax income. The increase in net income tax expense was mainly attributed to  impairments that did not
have a corresponding tax effect and the change to Section 174 of the U.S Internal Revenue Code, which became effective on January 1, 2022.
The change eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize them over
five years (if generated from a US entity) and fifteen years (if generated from non-U.S. entities).This change to Section 174, as well
as lower tax benefits relating to stock-based compensation, resulted in an increase in the Company’s taxable income and Global Intangible
Low Taxed Income (“GILTI”) tax.

On
December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law, making significant changes to U.S. income tax law. These
changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years 2018 onwards and created
new taxes on certain foreign-sourced earnings (including GILTI, as explained above) and certain related-party payments.

Furthermore,
the Tax Act required the Company to pay U.S. income taxes on accumulated foreign subsidiaries earnings not previously subject to U.S.
income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets, and 8% on the remaining earnings. The
total tax liability will be paid over the eight-year period provided in the Tax Act (ending 2024).

SolarEdge Technologies Ltd.,
our Israeli subsidiary, is taxed under Israeli law. Income not eligible for benefits under the Investments Law is taxed at the corporate
tax rate. The Israeli corporate tax rate is 23%.

Our Israeli subsidiary
elected tax year 2012 as a ”Year of Election” for “Benefited Enterprise” under the Israeli Investments Law, which
provides certain benefits, including tax exemptions and reduced tax rates. Upon meeting the requirements under the Israeli Investments
Law, the two-year tax exemption has ended on December 31, 2018.

The Investment Law was
amended in 2005 and was further amended as of January 1, 2011 and in August 2013 (the “2011 Amendment”). The 2011 Amendment
canceled the availability of the benefits granted in accordance with the provisions of the Investments Law prior to 2011 and, instead,
introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (both
as defined in the 2011 Amendment). Under the 2011 Amendment, income derived by Preferred Companies from Preferred Enterprise would be
subject to a uniform rate of corporate tax. The tax rate applicable to such income, referred to as “Preferred Income”, would
be 7.5% in areas in Israel that are designated as Development Zone A and 16% elsewhere in Israel starting in the year 2017 and thereafter.
Our Israeli subsidiary has established its own manufacturing facility in Israel, located in a Development Zone A, therefore income from
manufacturing attributed to that facility is subject to a 7.5% tax rate.

46

In December 2016, Amendment
73 to the Investments Law (the “2017 Amendment”) was published. According to the 2017 Amendment, special tax tracks for technological
enterprises have been introduced, which are subject to rules that were issued by the Israeli Ministry of Finance. A Preferred Technological
Enterprise (PTE), as defined in the 2017 Amendment, that is located in the central region of Israel, will be subject to a tax at a rate
of 12% on profits deriving from intellectual property, or 6% if its annual revenues exceed New Israeli Shekel 10 billion.

On June 14, 2017,
the Encouragement of Capital Investments Regulations (Preferred Technological Income and Capital Gain for Technological Enterprise), 2017
(the “Regulations”) were published. The Regulations describe, inter alia, the mechanism used to determine the calculation
of the benefits under the PTE regime. A company that complies with the terms under the PTE regime, may be entitled to certain tax benefits
with respect to certain income generated during the company’s regular course of business and derived from the preferred intangible
asset.

As of January 2019, our
Israeli subsidiary elected to implement the 2011 and 2017 Amendments starting as of tax year 2019 and as a result, under
the PTE regime with respect to our business activities in Israel. Our PTE income was subject to a 12% tax rate in Israel in the years
2019-2021, and in 2022 to a 6% tax rate as we surpassed 10 billion New Israeli Shekel  revenues threshold.

The
Law for the Encouragement of Industry (Taxes), 1969, (the “Industry Encouragement Law”), provides certain tax benefits for
an ‘Industrial Company’ as such term is defined in the Industry Encouragement Law. An Industrial Company is entitled to certain
tax benefits including, inter alia, amortization over an eight-year period of the cost of purchased know-how, patents and accelerated
depreciation rates on equipment and buildings.

Results of Operations

The
following tables set forth our consolidated statements of income for the years ended December 31,
2022 and 2021. We have derived this data from our consolidated financial statements included
elsewhere in this Annual Report. This information should be read in conjunction with our consolidated financial statements and related
notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations
for any future period.

47

Comparison
of year ended December 31, 2022 and year ended December 31,
2021