SolarEdge Technologies, Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Company Representatives:]

Zvi Lando - Chief Executive Officer Ronen Faier - Chief Financial Officer Erica Mannion - Sapphire Investor Relations, Investor Relations for SolarEdge

[Operator:]

Good day, everyone. Welcome to the SolarEdge Conference Call for the Fourth Quarter and Full-Year Ended December 31, 2020. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Event Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved, and any recording, reproduction or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event Calendar page of the SolarEdge Investor website.

[Erica Mannion:]

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year December 31, 2020, as well as the company's outlook for the first quarter of 2021. With me today are Zvi Lando, Chief Executive Officer; and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the fourth quarter year ended December 31, 2020. Ronen will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2021. We will then open the call for questions. Please note, today’s call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the Safe Harbor statements contained in our press release and the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended December 31, 2020 press release or the supplemental material may obtain a copy by visiting the Investors section of the company's website. Now, I will turn the call over to Zvi.

[Zvi Lando:]

Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. We are pleased to report that we have concluded the quarter with revenues of $358 million and the year with record revenues of $1.46 billion. Revenues for the fourth quarter in our solar business were approximately $327 million, also above last quarter's solar revenues. Our solar revenues this quarter reflects strength in the U.S. residential market, which we had anticipated in our earnings call last quarter. In fact, the quarter-over-quarter growth in shipments from the residential segment in the U.S. was in excess of 50%. We expect this strong growth in our revenues from U.S. residential products to continue in the first quarter of 2021 as well.

[Ronen Faier:]

Thank you, Zvi, and good afternoon everyone. This financial review includes the GAAP and non-GAAP discussion. A reconciliation of the pro-forma to GAAP results discussed on this call is available on our website and in the press release issued today. Total revenues for the fourth quarter were $358.1 million, a 6% increase compared to $338.1 million last quarter and a 14% decrease compared to $418.2 million for the same quarter last year. Revenues from the sale of solar products were $327.1 million, a 5% increase compared to $312.5 million last quarter. U.S. Solar revenues this quarter were $132.3 million and represented 40.4% of our solar revenues. Solar revenues from Europe were $146.7 million or 45% of our revenues. This quarter our top 10 solar customers represented 64% of our solar revenues and included more European customers than last quarter. Three customers accounted for more than 10% of our solar revenue. While the pricing levels remained stable this quarter, blended ASP per watt for our solar products increased by approximately 12.5% compared to last quarter, a direct result of higher revenues from residential products offering and the increased portion of revenue derived from the United States. In line with what Zvi explained, inventory levels held by our distributors in the United States were healthy on the residential side and still higher than desired on the commercial segment. This is in line with our expectation and this level will return to normal towards the second quarter of 2021. This quarter revenues from our non-solar products were $31 million, led by sales of lithium-ion batteries by Kokam and increased sales by e-Mobility. GAAP gross margin for the quarter was 30.8% compared to 32% in the prior quarter and 34.3% in the same quarter last year. Non-GAAP gross margin for the quarter was 32.5% compared to 33.5% in the prior quarter and 35.5% in the same quarter last year.

[Operator:]

Thank you. We’ll here first today from Mark Strouse with JPMorgan.

[Mark Strouse:]

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

[Ronen Faier:]

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

[Mark Strouse:]

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

[Ronen Faier:]

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

[Mark Strouse:]

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

[Ronen Faier:]

Thank you.

[Operator:]

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

[Stephen Byrd:]

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

[Zvi Lando:]

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

[Stephen Byrd:]

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

[Zvi Lando:]

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

[Operator:]

We'll move next to Colin Rusch with Oppenheimer.

[Colin Rusch:]

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

[Ronen Faier:]

So, first of all, what we’re recalling and you mentioned the non-GAAP. You need to understand that there is a big difference, as you can see, and it's growing between the GAAP and non-GAAP. A lot of it is related to the stock-based compensation given the fact that stock price hiked so much. And therefore, these expenses are representing a bigger portion. But in general, I would start by saying that the way that we would like to see gross margins in a way that allows us to be between 22% to 23% of operating profit on a non-GAAP basis, so that means that we are aiming at around 15%, 16% of non-GAAP operating expenses coming for the solar business. Now, I think that we need to differentiate here between the solar and the non-solar business. In the solar business, the revenues are relatively high. And as long as we are able to maintain growth rates, the numbers of the revenues and the impact is going to be so large that you should see an operational lever where when the numbers are growing, operating expenses as a percentage of revenues will go down. We continue to invest in R&D as much as we can. Today, it's hard to broaden much more or as quick as we would like the R&D, simply given the fact that we already have a base of many people. So therefore, to get many people in a short time is an issue. On sales and marketing and G&A, there are economies of scale. And therefore, we should expect to see this operating leverage continue. The issue and the big question is usually around the newer businesses, because these are businesses that are in a, I would call it, investment mode. And naturally, we would like to invest there in R&D or market development. So, for example, in the e-Mobility space, we definitely want to increase the product selection and we want to go to newer generation. In general there, I would assume that you may see a situation where the growth in operating expenses is similar to the growth that you will see in the revenues. But when you tie everything together with the solar that is so much bigger than the others, again, you should see that in the overall picture as a percentage of revenues, non-GAAP operating expenses should decline over time.

[Colin Rusch:]

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

[Zvi Lando:]

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

[Operator:]

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

[Philip Shen:]

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

[Ronen Faier:]

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

[Philip Shen:]

Okay, thanks again. So as a follow-up there, you guys talked about revenues from e-Mobility of $100 million to $120 million, what do you think storage can contribute this year and perhaps a mix by quarter would be helpful as well? Thanks.

[Zvi Lando:]

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

[Philip Shen:]

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

[Operator:]

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

[Jed Dorsheimer:]

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

[Zvi Lando:]

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

[Jed Dorsheimer:]

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

[Zvi Lando:]

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

[Jed Dorsheimer:]

Got it! Thanks guys.

[Zvi Lando:]

Thank you.

[Operator:]

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

[Brian Lee:]

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

[Ronen Faier:]

So as you mentioned, the margins are normalized or getting back to the levels that we used to talk before, about 36%, give or take 1% and this is basically a result of several things. The first one is the fact that we start to see the United States being back, a more meaningful portion of our revenues, of the solar revenues. As we mentioned before, actually at the end of Q2, what we saw is that when the pandemic started and the U.S. market was hit, we were able to grow substantially in Europe that in a way that on one hand did not impact the revenues maybe as much as it would hit unless we were so active in Europe, but at the same time, the higher competition and intensity in Europe prescribed much lower gross margins, and at that time by the way we have noted is about a 500 basis point difference between the U.S. and Europe in this regard. Over time two things happened. The first thing is that the euro got a little bit stronger compared to the U.S. dollar. This is something that of course helped our margins in the sense that we’re still manufacturing dollars and therefore we collect more dollars on every euro sales that we’re doing. And the second one is that once we are starting to sell in the United States, where the competition is a little bit lower on the residential due to the rapid shutdown regulations, then we were able to charge higher revenues then to increase the margin. And there is another issue that happened in the fourth quarter, and this is the fact that in general, the commercial solar that is characterized with lower gross margins compared to residential was again lower compared to the previous quarters. So this is the main change that happened. Looking forward, as already described in our guidance, we expected the non-GAAP gross margin to be at 36% to 38%. So the midpoint is already at the higher range of our long-term target and we expect this to continue to happen. We continue to do cost reduction all the time. The pricing environment is relatively stable, both in the United States and in Europe and we are continuing all the time to shift more and more production to a non-Chinese manufacturing, at least the production that comes to the United States and compared to 60% of shipments of non-Chinese products in Q4, about 85% of these products that will come to the U.S. in Q1 will be already from non-tariff. So this is something that definitely drives us to the higher range and the higher levels that we guided. There is one phenomena though that we need to mention, and this is actually for the later part of the year. While we assume that we will see the normalization in the solar margins in Q1 and Q2, actually in Q3, once batteries are starting to get bigger volumes and starting to have more effect on our margins, then here in the past we discussed approximately 25% expected margins on batteries, we expect that the overall portion of batteries in the revenues mix will drive this margin a little bit down. So in general, we are normalizing in solar without batteries. Once batteries will come, we will basically provide guidance a little bit about how to model and how to expect gross margins to be related to the volume of batteries of the overall revenues.

[Brian Lee:]

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

[Ronen Faier:]

So I'll start answering one by one and if I missed anything please, Brian let me know. In general, we expect volumes will initiate this quarter and we believe that they will stabilize around Q2 or beginning of Q2 toward the end of the year. So I would assume that the majority of the revenues will come between Q2 to Q4. And that means that the debt point in Q2, we already expect to see positive gross margin on this product. However, I think that we need to depreciate between the longer-term margins that we expect on e-Mobility and the margins on this project and the two key differentiators is first of all, the fact that in e-Mobility unlike in solar, it's very hard to do cost reduction once the product is defined. Nevertheless, if it was launched or not, because in the e-Mobility space, once you have defined the product and you basically validated the product with the manufacturer, you cannot change any component, and that of course reduces dramatically your ability to either make changes in the product for cost reduction or even to negotiate with your suppliers, because they know that they are already designed into the product. In the case of this E-Ducato project, it's a product that we inherited from the acquisition of SMRE and therefore there is not a lot that we can do in this specific product to reduce cost and we expect to see single-digit margins starting in Q2 and they will not be very high. Once we will see two things happening. First of all, if indeed the market acceptance is going to be good for this product, then we will see higher volumes and then we will be able to spread the fixed costs that we already have here over a larger amount of units, and this of course will increase the gross margin. And second, we will be able, maybe over time when we’ll have more projects to go and reduce our cost of product if we're using them or components if you use them in other products as well, because then we have more leverage with the suppliers. But in any case, I do not expect it to happen, not in 2021 and not in the volumes that we're discussing right now. Lastly, 30%, I do not believe that this is a number that can be achieved in the near future in e-Mobility. If you look today at comparable companies in the e-Mobility space, you see best margins being at about 18% and these are very technological and very good companies. It will take us the time to get that level of expertise. But at the same time you usually see that the cost per unit is high enough that the overall contribution to profitability, even if the margin is lower is very high, because every unit is very expensive. So I hope that we answered all of the components. If not, let me know what I missed.

[Operator:]

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

[Maheep Mandloi:]

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

[Zvi Lando:]

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

[Maheep Mandloi:]

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

[Zvi Lando:]

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

[Operator:]

We'll hear next from Moses Sutton with Barclays.

[Moses Sutton:]

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

[Zvi Lando:]

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

[Moses Sutton:]

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

[Zvi Lando:]

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

[Operator:]

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

[Marshall Carver:]

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

[Zvi Lando:]

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

[Marshall Carver:]

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

[Ronen Faier:]

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

[Marshall Carver:]

Okay, thank you.

[Zvi Lando:]

Thank you.

[Operator:]

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

[Zvi Lando:]

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

[Operator:]

And that does conclude today's conference. Again, thank you all for joining us.