SolarEdge Technologies, Inc.
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Good afternoon. Thank you for joining us to discuss SolarEdge’s operating results for the quarter ended March 31, 2017. As we our discuss the Company’s outlook for the Second Quarter of 2017. With me today are Guy Sella, Chairman and CEO; and Ronen Faier, Chief Financial Officer. Guy will begin with a brief review of the results for the quarter ended March 31, 2017. Ronan will review the financial results for the quarter and provide the company’s outlook for the second quarter of 2017. Then we will open up the call up for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from what management’s current expectations are. 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 a 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 it will 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 a substitute for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended March 31, 2017 press release or the presentation may obtain a copy by visiting the Investor section of the Company’s website. Now, I will turn the call over to CEO, Guy Sella.

[Guy Sella:]

Thank you, Erica. Good afternoon and thank you for joining us on our conference call. We concluded the quarter with revenues of $115.1 million, up 3.2% from last quarter and GAAP gross margin of 33.6%. Non-GAAP net diluted earnings per share was $0.36 for the first quarter. In the quarter ended March 31, 2017, we shipped 455 megawatt of AC nameplate inverters. Overall we shipped just under 1.5 million power optimizers and 58,000 inverters. As we discussed last quarter the general slowdown in the residential PV business in the U.S. continues with a cleared field [ph] big economic instability among businesses in the U.S. market, including some instances of bankruptcy. We were mindful and cautious of the increased risk in the market and are fortunate that our strong cash position of $247.6 million enable to secure the appropriate cushions needed to continue and increase our market share, while managing customer risk and pricing. In Europe we believe that the market is improving and despite what is usually a lower revenue quarter due to seasonality, we were able to increase our revenues overall from everything we can measure we continue to gain market share both in the U.S. and in Europe. We have also seen quarter-over-quarter growth in other important countries including Australia and Japan. This quarter we also announced the opening of our office in Bangalore, India and expected that our presence there will start to generate more so this year and years to come. This quarter we had a record high of commercial sales, indicating further market penetration of our [indiscernible] workers in both the U.S. and Europe. Without going into specific examples of installation and product names, I can comment that this quarter we connected many new large systems to our monitoring portal including several large projects in Japan. Alongside the success of our commercial market penetration is the rollout of our HD-Wave inverter which continues in the U.S. and elsewhere as planned. As it’s been discussed the new line of inverters not only improve efficiency and have a design that is expected to yield higher reliability in the long term, but also provide us with significant cost reduction benefits, only some of which are currently seen in our investment line. While we know that investors have been concerned about competitive products from China for many quarters now we have not yet seen any significant new product or players in the market and remain confident in our technology leadership and our intellectual property rights we have definitely [ph]. This quarter we have began working with additional contract manufacturer for production in Europe. We are in the ramp up phase with this new manufacturer, which will enable us to continue production out of Europe in China. Let's take a brief look at our bottom line numbers. Our Non-GAAP net income was $16.5 million and we generated cash from operation amounting to $25.7 million. Our financial strength position us well to continue to increase market share even in markets that are weak right now and it is also enable us to focus on new markets and leverage our very strong team of research and development for bringing new products to current and new market. And with this, I hand the speaker over to Ronen, who will review our financial results.

[Ronen Faier:]

Thank you Guy and good afternoon everyone. Before starting the review of our financial results for the first quarter of 2017, I would like to remind listeners that starting 2017, our fiscal year is aligned with the calendar year. In addition, I would like to mention, that while the overview will be on a GAAP basis, in certain cases I will be discussing non-GAAP numbers and measures which exclude the impact of stock-based compensation and deferred tax as well as non-GAAP earnings per share. Full reconciliation of the pro-forma to GAAP results discussed on this call is available on our website and in the press release issued today. Now let's start with the financial results for the first quarter of 2017. Total revenues were $115.1 million compared to $111.5 million last quarter and a $125.2 million in the prior year’s period. Revenue growth the quarter was many attributed to growth in Europe and the rest of the world while sales in the U.S. market remains relatively flat in absolute numbers and accounted for approximately 64% of total sales, compared to 67% in the previous quarter. This quarter one customer exceed 10% of revenues and our top ten customers accounted for approximately 64% of the revenues. Gross margins for the quarter was 33.6%, compared to 35% in the prior quarter and 32.5% in the same quarter last year. As a reminder our gross margin last quarter was positively impacted by a approximately 2% from both cost reductions related to our warranty extensions, as well as from increased payment – insurance payment sorry covering a bad debt from SunEdison. The improvement in gross margins is a result of our continued cost reduction in product manufacturing, logistics and support combined with a relatively stable pricing environment. Moving to operating expenses research and development expenses we $11.5 million, an increase of 10.8% compared to the previous quarter and an increase of 31.6% compared to the same quarter last year. This increase is in line with our plans to further invest in new product developments and continue our focus on cost reduction. We are fortunate to be able to in invest these resources given our strong financial performance. Sales and marketing expenses for the quarter were $10.8 million, an increase of 3.5%, compared to the previous quarter and a 22.1% increase compared to the same quarter last year. G&A expenses were $4.4 million this quarter, an increase of 42% from the prior quarter and an increase of 28% year-over-year. While ongoing G&A expenses decreased by approximately $0.2 million compared to the last quarter, this quarter we needed to increase our accrual for doubtful accounts mainly due to uninsured portion of AR balance related to the bankruptcy of Sungevity and an overall deterioration in the credit stability of few of our customers in the U.S. In total, operating expenses for the first quarter were $26.7 million, or 23% of revenue, compared to $23.9 million or 21.4% of revenue in the prior quarter and $21 million or 16.8% of revenue in the same quarter last year. Operating income for the quarter was $12 million, compared to $15.1 million in the previous quarter and $19.7 million for the same period last year. This reduction in operating income compared to the previous quarter was driven by onetime items which included a contribution of $2.2 million of additional gross margin due to cost reductions related to our work expenses recorded in Q4 2016 and expenses related to an accrual of doubtful accounts recorded this quarter. Financial income for the quarter was $1.4 million, compared to expenses of $3.2 million for the previous quarter and financial income of $2 for the same period last year. This financial income is a result maybe of the euro revaluation against the U.S. dollar and offset of a portion of our unrealized foreign currency losses recorded last quarter. This quarter we recorded income tax benefit of $0.8 million compared to income tax expenses of $2.2 million in the previous quarter. An income tax expense of $1 million for the same period last year. The tax benefit is a result of a GAAP related tax asset increase related to our activities in these win. GAAP net income for the first quarter was $14.2 million, compared to GAAP net income of $9.8 million for the previous quarter and GAAP net income of $20.8 million for the same quarter last year. Our non-GAAP net income was $16.5 million compared to a non-GAAP net income of $14.7 million in the previous quarter and a non-GAAP net income of $20.3 million for the same quarter last year. GAAP net diluted earnings per share was $0.32 for the first quarter compared to $0.22 in the previous quarter and $0.47 net diluted GAAP EPS for the same quarter last year. Non-GAAP net diluted earnings per share was $0.36 compared to a non-GAAP net diluted EPS of $0.32 in the previous quarter and a non-GAAP net diluted EPS of $0.51 in the same quarter last year. Turning now to our balance sheet. As of March 31, 2017 cash, cash equivalents, restricted cash and investments were $247.6 million, compared $ 224.3 million at December 31, 2016. During the quarter of 2017 we generated $25.7 million in cash flow from operations. AR balances continued to increase this quarter and were $79.3 million as of March 31, compared to $71 million last quarter because mainly as a result of the concentration of sales towards the end of the quarter where customers start to increase their procurement and inventory level anticipation of a stronger seasonal quarter. As of March 31, 2017, our inventory level net of reserves were at $60.9 million, compared to $67.4 million in the prior quarter. Moving now on to guidance for our second quarter 2017. We expect revenues to be within a range of $120 million to $130 million and gross margins to be within a range of 32% to 34%. I will now turn the call over to the operator to open it up for questions. Operator please.

[Operator:]

Thank you sir and ladies. [Operator Instructions] And we'll take the first question from Vishal Shah with Deutsche Bank.

[Tyler Goldman:]

This is Tyler Goldman on for Vishal. Congratulations on a good quarter. I have sort of a quick question. You guys mentioned increased investment in R&D, just kind of how are you guys thinking about your technology roadmap whether what is the R&D spend going to optimize reserves and closures?

[Ronen Faier:]

Well I think basically we're executing the plan that we presented last quarter as well and it includes increasing the amount of things on all fronts. One phase inverters, three phase inverters, optimizers, as well as storage. In one hand we default approximately 50% of our R&D resources for cost reduction and about 50% to development of new products. In the three phase the ratio is a little bit more into about developing new product since we need to increase the sizes in the line of three phase operator we have. And that's bigger part of the plan going forward.

[Tyler Goldman:]

Great, thank you. Just one more quick question, you guys mentioned that you had a record high commercial sales. Is there percentage of shipments that we should expect exiting 2017 timeframe to the C&I segment?

[Guy Sella:]

Our long-term plans is to reach in the end of 2018 more or less fifty-fifty percent between residential and commercial and fifty-fifty percent between U.S. market and markets in Europe and in Asia. We are above 25% today and moving to the direction of the reaching 50% sometime by the end of 2018.

[Tyler Goldman:]

Thank so much. I’ll pass this on.

[Operator:]

And we’ll take our next question from Philip Shen with Roth Capital Partners.

[Philip Shen:]

Hey guys congrats on strong results. Thanks for the questions.

[Guy Sella:]

Thank you.

[Philip Shen:]

Your blended ASP was down I believe 16% year-over-year in Q1. How do you expect ASPs to trend in Q2 and Q3?

[Ronen Faier:]

Well for the full year as we mentioned we assume for the full year the AAP to be in range of 10%, 7.5% to 10%. Since last quarter the blended ASP eroded by 4% but that's due to the fact that portion of the three-phase inverters grew. So overall we believe that we are right on the line of the expected ASP for the year.

[Philip Shen:]

Okay great. And then with your geographic mix, I think you just mentioned I want to clarify that you're at 45% international, so that would suggest 55% in the U.S. Is that fair?

[Ronen Faier:]

No 65%, 35%. 65% - 64% in the U.S. 36% outside of the U.S.

[Philip Shen:]

Got it sorry, I misheard you. And then that's based on a megawatt bases. Of the 35% can you give us a mix of what that looked like I think last quarter Japan and Australia were at kind of 10% each, over 10%?

[Ronen Faier:]

No, that was by the way dollar basis not megawatt basis. And Australian and Japan are far from being 10% each.

[Philip Shen:]

Right, last quarter you’re have Japan and Australia were 10%. Total…

[Ronen Faier:]

Rest of the world [indiscernible]. Rest of the world was 10%.

[Philip Shen:]

Okay.

[Ronen Faier:]

It will include a little bit but it’s not the exact number. And little bit above 10%. I’m not sure what it is, 11% in this range.

[Philip Shen:]

Okay. Can you give us the mix on megawatt basis between U.S. and international?

[Guy Sella:]

I don’t think we have it with us. We can try to get it for the follow-on question – for the follow- call we have.

[Philip Shen:]

Okay, great. One last question here from me. How should we expect OpEx to trend as we look ahead if you can give it to us by line item that would be fantastic?

[Guy Sella:]

In general as I mentioned in the last call we expect R&D of course to continue to increase at last quarter we said up at approximately 20%, but again it’s an investment that we're always happy to do and make. And we see more opportunities we have the ability to have the financial means. And we have all the desire to increase it even more if can. Sales and marketing are again expected to increase, but in general we see them increasing more in line of the revenue growth may be slightly lower because there are economies of scale. And on G&A excluding an onetime event or allow for doubtful accounts we expect relatively flat G&A along the year.

[Philip Shen:]

Great. Guy and Ronen. Thanks very much and congrats again.

[Guy Sella:]

Thank you very much.

[Operator:]

We’ll take our next question from Edwin Mok with Needham & Company.

[Edwin Mok:]

Great, thanks for taking my question. First, can you remind us where you are on HD-Wave ramp up, in terms of actual production or shipment. How much shipment in HD-Wave in terms of revenue, what would you expect of vast majority of resident to become HD-Wave?

[Guy Sella:]

All this 3 phase – sorry 3 kilowatt, 3.8 kilowatt and 5 kilowatt that we produced in Q1 are all HD Wave. By Q3 as we reported last quarter by Q3, end of Q3 we’ll be producing only HD wave on all phase inverters, but the backup battery system or the inverter for the backup battery system will remain older [indiscernible].

[Edwin Mok:]

I see, okay. Then, I guess a question related to HD Wave we assume a better cost improvement, then this 10% HD decline that you are expecting. So, to the extent that price erode 10% like you expect throughout this year. Does that mean that you can potentially further expand your margin beyond this one.

[Guy Sella:]

Yes we believe so.

[Edwin Mok:]

Okay, okay, great. And then last question I have from me. Just maybe talk a little about kind of StorEdge market. You guys had the StorEdge product out in the market for a while, you talked about Australia being in your market. Where do you see that going, any kind of update there and have you started to see any kind of market demand pickup for StorEdge in other markets outside of Australia?

[Guy Sella:]

Well we see demand for storage the highest demand you can find is in Germany followed the Europe by Italy, Australia is probably the size of Germany may be a little bit smaller and you see demand coming for Hawaii. I think that what you see today is that most of the third generation battery systems based on Powerwall and other options were installed. Majority, I think, is really pretty close to non-battery, is non-installed yet. We're expecting to start a new generation of batteries with Tesla and with LG to be installed sometime from mid-May and on.

[Edwin Mok:]

I see okay, great. Last question, actually I have one more if you don’t mind me squeezing in. So, commercial has done really well this quarter and you talk about Europe growing. I'm just curious in terms of, if you compare, let's say, Europe versus U.S., right, how much is sales coming from commercial in U.S. versus international? And it's a lower level and just quite understand that this growth you'd see commercial is Europe or U.S. can you give us some color on that will be helpful. Thank you.

[Guy Sella:]

Very close to fifty-fifty. The commercial more or less very higher level numbers because it all depends on what project we installed and commission when, but around 10%, 15% are rest of world and remaining 85% split pretty much fifty-fifty between the U.S. and Europe, little bit more to Europe, but very close to fifty-fifty.

[Edwin Mok:]

I see. So commercial – U.S. commercial has actually come up quite a bit from just what you guys have done last year is that fair to say that?

[Ronen Faier:]

As I mentioned during, I think, all the calls last year the problem with commercial is that each sale is big or dramatically, than each sales of residential of course and that you have timing issue between the time that you sell and installed, et cetera. So it’s not a very smooth graph, but yeah we're see nice increase the U.S. commercial installations.

[Edwin Mok:]

Great. That’s all I have thank you.

[Guy Sella:]

Thank you.

[Operator:]

We’ll take our next question. We’ll take our next question from Colin Rusch with Oppenheimer.

[Unidentified Analyst:]

Hi and this is Lewis Silberman [ph] For Colin. How much automation remains to be implemented in your manufacturing process and what is the timeline for that implementation?

[Guy Sella:]

I think that’s a very, there is never and to a work of automation until all lines will be dark and people will not be in the sector, it will take many years. I think you are far more to optimizers. Optimizers we are now that's produced today in Europe produced on fully automatic lines. We are renting up now two automatic lines in China they are supposed to be ramped up before the end of the quarter. From this point on about 50% of everything we’ll be producing in China will be coming from automatic line and then we’re ramping up another automatic line in Europe. So I think that by the end of the year I would expect that 80%, 85% of all optimizer will be produced from fully automatic line. Saying that we still have lots of automation between the S&P, top level assembly what’s called AAC, Automated Assembly Center. Lots of automation automatic testing, and handling and MI soldering and lots of other automation, but these coming through the year and every equipment you improve the statistical reliability and reduce a bit the cost of the assembly.

[Unidentified Analyst:]

Okay, that's very helpful. Another question is, can you talk a bit about demands from emerging economies, especially like Central South America, are you seeing any?

[Guy Sella:]

So South America we are not active. We see lots of e-mails coming from Brazil, from Chile, it could be coming from Argentina, but we are to be honest, not yet active there. We are not very small company, but we very are far from being a big company. We have to therefore decide where we invest and to build our geographical offices in the smart way that we can build them, [indiscernible] people, merge them with the organization, verify if the [indiscernible] we have access to Mexico, Guatemala, little bit in Central America, but we do not have our presence in any significant business in South America.

[Unidentified Analyst:]

And within Central America is relatively small.

[Guy Sella:]

Yes it’s very small for now, yes.

[Unidentified Analyst:]

Okay. And lastly housekeeping item like can you talk about what drove the increasing payables and also receivables?

[Ronen Faier:]

So let’s differentiate between the receivables in Japan. On the receivables side, as I mentioned on the call in the first quarter is a quarter that we usually characterized with bad weather in Europe and at least in Northeastern part of the U.S. this year was also a little bit of California. And in general that numbers you do not see a leaner sales throughout the quarter, but you rather see sales starting to pick up and be much more intensive towards the end of February in beginning of March because most of the starters are stocking up towards the strong months of installations from April to September. And this inclination combined with the [indiscernible] could it mean that AR is increasing. From payables point of view this is again a natural growth related to the fact that as we see the volumes increasing and we see more demands coming along then we are preparing by increasing inventories and buying more and more product as well as having our manufacturers producing at higher pace.

[Unidentified Analyst:]

Okay, very helpful. That's all I have. Thank you.

[Ronen Faier:]

Thank you.

[Operator:]

We’ll take our next question from Carter Driscoll, with FBR.

[Nathan Mitchell:]

Hi this is Nathan Mitchell on for Carter. Thanks for taking my questions. Congrats on the quarter first of all. And I was wondering is there anywhere in particular in Europe that's surpassing your expectations that you kind of outlined in your last call?

[Ronen Faier:]

In general I can say that Europe is growing beyond our expectations or I would say across all regions, but I can say that the seasonality and the growth that you see is coming mostly from the Netherlands, where we mentioned before, that is a strong region for us, Germany and I think across the Board the around everywhere including Italy and other countries, as well. But I think the Netherlands and Germany, are the most leading one.

[Nathan Mitchell:]

Okay cool thank you. And then any update on the M&A front?

[Guy Sella:]

We’re working hard to find interesting candidate. So far we eventually do not have nothing to report.

[Nathan Mitchell:]

Okay great that's all I have. Thank you.

[Guy Sella:]

Thank you.

[Operator:]

[Operator Instructions] Mr. Sella there are no further questions left in queue at this time I’ll turn the call over to you for any closing remarks.

[Guy Sella:]

In summary, despite tough U.S. market conditions we concluded this quarter with strong financial results in all parameters. And growth of our global footprint, including the new office in India and increase sales Japan and Australia. We remain confident that the next quarter we’ll show continued growth for SolarEdge and that our significant investment in R&D will yield positive results for innovating technology. And we maintain our leadership position in the market. Thank you for joining us on today’s call.