Solaredge Technologies Inc (SEDG) 2015 Q3 法說會逐字稿

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fiscal third-quarter of 2015, as well as the Company's outlook for the fiscal fourth quarter of 2015.

With me today are Guy Sella, Founder, Chairman and CEO, and Ronan Faier, Chief Financial Officer. Guy will begin with a review of the third quarter. Ronan will review the financial results for the third quarter and the Company's outlook for the fourth quarter of 2015. And then Guy will provide closing comments before opening the call up for questions.

You can find a slide presentation, as well as supplemental information, on the Company's fist website in the Investors section on the Events calendar page.

Please note that this 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 earnings 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 the US GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with a 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 US GAAP.

Listeners who do not have a copy of the third-quarter financial press release or the presentation may obtain a copy by visiting the Company's website under the Press Release and Investor Relations sections.

Now I will turn the call over to CEO, Guy Sella.

Thank you, Erika. Good afternoon, everybody, and thank you for joining us on our first conference call as a public Company following our successful IPO, which represented yet another important milestone in our Company's journey.

We ended our third fiscal quarter on March 31, 2015, with strong results. We are reporting record revenues for the quarter of $86 million. Our gross margin was 27.4% and, most important, we showed a record net income of $6 million.

A little color on what has driven these positive results. As mentioned, our revenues hit a record high this quarter, in spite of what is characterized in our solar market as a seasonality low quarter. This is in line with our expectation of moderate growth despite seasonality, coupled with the addition of new sizable customers. We expect our growth to continue for the rest of 2015, as projected.

In the past quarters, we have placed considerable effort on cost reduction, improvement of our manufacturing capacity and the development of new products. Our improved gross margin is showing the fruits of these efforts. We have been able to reduce product costs while improving quality, and for the first time, we were able to close the quarter with sufficient production capacity in both our manufacturing plants to meet our current needs. This has enabled us to have sufficient inventory on hand for growing our customer demand and to ship most product via lower-cost ocean freight.

Despite the port strike on the West Coast of the United States, which created an operational challenge for us and to many others, we were able to significantly reduce our air shipment costs this quarter as well. Our net income results are also the product of our investment in improving our manufacturing capabilities, reducing costs and developing new products.

In the fiscal quarter -- in this fiscal quarter, our non-GAAP net income was $8.7 million, and our GAAP net income was $6 million. Ronan will elaborate on these differences in his portion of this presentation. These results are part of consistent growth in our profitability which began three quarters ago.

Let's look at our business highlight for the quarter. We have made significant progress with our contract manufacturers this quarter, and that has enabled us to establish inventory and to be more responsive to our customers' needs.

In addition to improving our production capabilities in China and Hungary, we are beginning work on third manufacturing facility in Mexico, which we expect will enable us to supply products at faster pace and lower logistics costs to North America.

This quarter we shipped 248 megawatts of AC nameplate inverters. We shipped approximately 946,000 power optimizers and just under 39,000 inverters, a significant increase from the same quarter last year.

As mentioned, our revenue hit a record high. We had expected increased demand, particularly in the US, and we also benefited from initial significant orders from Vivint Solar, who joined our family of customers.

I want to take this opportunity to address some noteworthy matters. Our R&D team continues its work on our next-generation product, which, as always, will improve visibility, compliance and efficiency while reducing costs. We take pride in what our R&D is doing and focus on innovation as well as cost reduction. We believe this positions us well for market challenges.

In the past quarter, the inverter market in the US has experienced pressure on prices as European inverter manufacturers whose manufacturing costs are denominated in euros enjoyed a lower euro-dollar exchange rate and can offer lower prices. This change in euro-dollar exchange rate negatively impacts us, as most of our manufacturing expenses are denominated in dollars. Although our cost reduction roadmap has helped us to overcome reasonable fluctuations of euro-dollar exchange rates and in order to be more resilient against currency fluctuation, we have begun an actual hedging process to mitigate these risks by increasing local European content paid in euros.

A little insight on our strategy and technology developments. At SolarEdge our mission is to become the leading provider of intelligent inverter solutions across all markets segments. We have a three-pronged strategy for implementing this mission. We plan to include market share in our existing markets by offering our customers more value with integrated features, as well as adding salesforce and marketing efforts to acquire new customers. We will continue to expand our marketing share and commercial segment by developing higher-power inverters. We can also leverage our technology to enter into adjacent market segments. We can apply our Optimizer and fixed-ring voltage technology for management of battery storage.

In line with this strategy, on the sales side, as was expected, the US market continued to lead our strong growth. Our revenue in the US increased by 336% compared to the same quarter last year, led by significant sales to SolarCity and Vivint.

We also see the European market is growing again after many years of decline. While we have continued to grow even in decline phase of the European market, we are now seeing growing demand, particularly in Germany, UK and the Netherlands. We are also optimistic about penetrating new evolving markets such as South Africa and Turkey.

In the past quarter, we continued our one-time development of new products, and in particular important this quarter is the progress we have made with our largest-scale inverter for the commercial market.

We expect in the coming months to release a 27-to-33-kilowatt three-phase inverter which is designed to serve the commercial market. While our position in the residential markets is strong and growing, we see frequent large wins of commercial projects, and this new product will even better position us in this important segment.

Another business highlight is our collaboration with Tesla. Our R&D team has been working hard on an inverter solution that will allow for grid and photovoltaic integration with Tesla Powerwall home battery. This integration relies on SolarEdge fixed string voltage topology, which is part of our DC optimized inverter solution and Tesla Powerwall battery to enable more cost-effective residential solar generation, storage and energy management for the US and global market. We expect our solution to be available for sale by the end of the year.

And with this, I hand the speaker over to Ronan, who will review our financial results.

Thank you, Guy. I will start with a detailed overview of our third fiscal quarter performance and then provide guidance on our fourth fiscal quarter. While the overview will be on a GAAP basis, in certain cases I will be discussing non-GAAP numbers, which exclude the impact of stock-based compensation, as well as other non-GAAP measures such as non-GAAP earnings per share. Full reconciliation of the pro forma results discussed in this call to GAAP results is currently available on our website and in our press release issued today.

Now let me walk you through the results of our third fiscal quarter financial performance. As Guy mentioned, total revenues for this quarter were $86.4 million compared to $73.3 million in the last quarter and $30.6 million in the same period last year, representing an increase of 17.9% compared to the prior quarter and 182.7% for the same period last year.

Drilling down further into some drivers of revenues, we sold to more than 110 direct customers in more than 30 countries this quarter. Our gross margins for the third fiscal quarter were 27.4% compared to 21.5% for the second fiscal quarter and 20.4% for the same period last year. This gross margin expansion is mainly attributed to the cost reduction measures, reduction in proportion of air shipments compared to ocean freight and economies of scale related to the increased production volumes.

With regards to air shipments, increased manufacturing capacity in the last six months allowed us to build sufficient inventories and gradual transition from costly air shipments to ocean freight. The (technical difficulty) the West Coast ports of the United States, which ended in February, forced us to ship some products by air freight and also caused us to divert some of our oceans shipped products to other ports at increased freight expenses.

This quarter we also launched our third-party logistic activities in the East Coast to supplement third-party logistics centers in California and Europe which have been operating for some time. This allows us further flexibility and more efficient supply chain. We believe that further improvement in shipping costs will occur at the fourth quarter of fiscal 2015.

Moving to operating expenses, research and development expenses grew by 15.1% compared to the second fiscal quarter and 12.9% year over year to $5.5 million. Sales and marketing expenses for the quarter were $6.4 million, a 13.5% increase compared to the previous quarter and a 39.9% increase on a year-over-year basis.

G&A expenses increased by 77.5% compared to the second fiscal quarter of 51% -- and 51% on a year-over-year basis. These expenses included $0.5 million of expenses related to our recent initial public offering, and we expect further G&A expense growth related to being a public Company.

In total, operating expenses for the third fiscal quarter of 2015 were $13.9 million, a 20.4% increase compared to $11.5 million in the previous quarter and a 29% increase compared to $10.8 million for the same period last year. Operating income for the third fiscal quarter was $9.8 million compared with an operating income of $4.2 million in the previous quarter and a loss of $4.5 million for the same period last year.

Financial expenses for the quarter was $3.4 million compared with $0.5 million in the second fiscal quarter and $0.6 million for the same period last year. Of this amount, $1.8 million are related to the mark-to-market adjustments of certain warrants granted to a lender in relation of the long-term debt taken in 2012. Financial expenses also included $0.4 million of interest paid for the same long-term debt that was fully repaid in January. The remaining amount is related to foreign exchange rate fluctuations and interest rates paid for the utilization of our revolving credit line.

Our GAAP net income for the third fiscal quarter was $6 million compared to net income of $3.4 million for the second fiscal quarter this year and a net loss of $5.2 million for the third fiscal quarter last year. Our non-GAAP net income was $8.7 million compared to a non-GAAP net income of $4.1 million in the previous quarter and a net loss of $5 million for the same quarter last year. Non-GAAP net diluted earnings per share was $0.20 compared to non-GAAP net diluted earnings per share of $0.12 in the previous quarter and a non-GAAP net diluted loss per share of $1.19 in the fiscal quarter -- third fiscal quarter of 2014.

Turning now to the balance sheet, as of March 31, 2015, cash and cash equivalents were $135.2 million, which includes the net cash IPO proceeds of $134.8 million. This is compared to $23.8 million at the end of December 2014.

Prior to March 31, 2015, the Company fully repaid its short-term borrowings under the revolving AR credit line. In January we also settled our remaining balance of the long-term debt such that we have no debt outstanding as of March 31, 2015.

With regards to cash flow, during the third fiscal quarter, we consumed $13 million from operations. The majority of this consumption is related to AR balances and inventory building, which enabled us to reduce air shipment expenses.

In terms of financial guidance for the fourth fiscal quarter, we expect revenues to be within a range of $92 million to $96 million, and we expect gross margins to be within the range of 26% to 28%.

I will now turn the call to the operator to open it to questions. Operator, please?

(Operator Instructions) Vishal Shah, Deutsche Bank.

Ronan, maybe just talk a little bit about your gross margin expectations for the fiscal fourth quarter. What kind of an improvement do you see from the freight expenses in going away in the fourth quarter, and what do you think the pricing environment is in the near-term?

So, first of all, when we talk about the gross margin expectations for the fourth quarter, we feel we managed to reduce the air shipment expenses quite nicely in the last quarter. But there is still about 1%-1.5% that we believe we can still do in the next quarter related to this air shipment.

In addition, we have constant cost reduction activities that are continuing and, of course, increase the gross margin all the time. At the same time, the gross margin is also affected by other factors such as the pricing environment and sometimes exchange rates related to the mix of geographies. And therefore, in our guidance, we provided this 26% to 28%, taking into account all of these factors.

That's helpful. Can you also maybe talk a little bit about the competitive environment? What -- are you expecting to increase your penetration within, say, a customer like Vivint, or are you selling at the optimal rate? And then do you expect any new customer announcements or expect any more qualifications over the next couple of quarters?

We still expect to grow our market penetration in most of the customers in the US, including then Vivint and the other big customers. We are working -- as you know, we didn't yet penetrate to some of the big accounts. We work on all of them, and I am expecting that in the next coming quarters, two to three quarters, we will manage to penetrate the majority of them.

That's helpful. Thank you.

Edwin Mok, Needham and Company.

So first question on the international mix front, how was it? What was the international mix in the last quarter? And as you go into our fiscal fourth quarter and the first quarter, do you see that mix changing?

The distribution was approximately three quarters coming from the United States and the rest coming from the rest of the world. While we see the US being the major geography for us, still in the next few quarters, we still expect to see growth also in the rest of the United States and the rest of the world outside of the United States.

Okay. Great. That's helpful. And then you mentioned on the fiscal third quarter some of the app cycle, some of the strength come from new customer buildout, wins in a new customer. Right? I was wondering, is that customer building? Because usually when a customer (inaudible) buying a new technology from you guys, do you think that they are actually building up inventory in the first quarter and, as a result on a sequential basis, maybe they don't need to buy as much in the June quarter, or how do we think about that?

We can only estimate and learn. We are not managing the inventory at our customers specifically. But what we see, that once this big customer is Vivint and as we expect these large customers is that they know very well how to plan, and usually they keep a sequence of two to three months of buying before installation. And we believe that we will keep approximately the same pace in the coming quarter.

You mean they are buying in the same way or you mean approximately the same growth rate as they planned for their growth deployment? I just want to clarify that. Sorry.

We expect the volume to remain the same this quarter as last quarter.

Okay. Great. Thanks for clarifying that. And then a question on your operating expense, now that you guys are a public company, how do you think about your OpEx will change? Do you need to spend more? And it seems like you guys mentioned some of the newer opportunity in some of the international markets such as Europe have started to see growth again. Do you see a need to invest more in those markets such as South Africa that you mentioned in your other call?

Basically, Edwin, of course, naturally by being a public company, G&A expenses are going to grow just given all the expenses that we need in order to comply with regulations and build the capabilities of reporting as a Company.

On the sales and marketing side, all of the expansions that we planned into other geographies are within the model that we saw. We do not see any changes that are going to happen, particularly given the fact that we are now a public company. Everything that we planned was related to the fact whether we are public or not.

Great. That's very helpful. And then lastly, on the storage or the barrier announcement you guys have with Tesla, I was wondering if you can maybe dive in a little bit, kind of explain what you guys are doing with Tesla. And assuming that a customer is going to install a Tesla battery in their system, do you guys have an advantage, given that you have a fixed location burner on the solar side, that might (inaudible) for your customers? Do you actually use your kind of inverter or DC Optimizer solution rather than other competitive inverter solution?

In the last few months, we are developing integration with the Tesla battery, the Powerwall. Based on our fixed-ring voltage topology, the DC input voltage to the inverter is always fixed. So the battery can charge itself directly from the DC. And when the inverter wants -- all the system is operated and managed by the inverter -- when the inverter decides, it can take power from the battery and push it to the grid or to the home appliances.

We believe that our solution is unique. We use only one hardware for the combination of grid (inaudible) inverter as well as for backup. And all the inverters that we shipped since 2011, in general, can be retrofitted to these solutions.

I see. Great. That's all I have. Thank you.

Brian Lee, Goldman Sachs.

I was kind of hopping back and forth, so I apologize if some of these have already been asked. The first one I had was around just thinking out longer term, can you talk a little bit, Guy, about where you stand in the utility scale and market opportunity maybe in terms of product timing, and then what sort of qualifications you are targeting to begin entering that market?

In general, today we have a full product line for residential installations in most countries worldwide -- not yet in Japan, as you know, and a very broad portfolio of commercial inverters. As I mentioned, we are coming with another bigger chassis.

In order to penetrate in an optimal way to utility-scale size solutions, we need a larger chassis than what we have today. Saying that, we see occasionally 2, 3, 5 megawatt installations, which are done or in the process of building with what we currently have. But we are expecting to have a really utility-scale inverter only a couple years from now.

Okay. That's great. And then related to that, as you think about the development of that product, what sort of value proposition do you think your technology would be targeting in that segment? Would you be competing as a low-cost provider, or would it be more on the added performance side of the equation? Any help there would be appreciated.

So we believe that, as with smaller systems, we will simply provide better LCOEs. The combination of more power with non-shade situation we see an average of 2% to 6% more power percentage in the first year, and we are expecting that these results are growing with time, due to the growth of mismatched between panels combined with the monitoring, panel-level monitoring, which improves the maintenance of rate and operation of the field, combined to a better LCOE. And at the end of the day, that's probably the single mode or in many cases even only important parameter when you calculate how to build a utility-scale project.

Okay. Thank you. That's helpful. And then maybe just two quick ones and then I'll jump back in the queue. First, a housekeeping one. Were there any 10% customers in the quarter, and then what would your expectations be for Q2?

So during the quarter, we had two more than 10% customers. These were SolarCity and Vivint, and we expect them to remain more than 10% customers in the next quarter as well.

Ronan, are you able to specify what exact percentage?

We are not providing this on a quarterly basis. By the end of the year, we will be able to provide -- which is just next quarter from now -- we will be able to provide everything on an aggregate annual basis.

Okay. Fair enough. And then last one and I'll jump in the queue -- to follow up on Edwin's question around the storage opportunity, can you give us some sense of what the actual unit economics and end market opportunity is? Is this a one inverter per Powerwall type of volume opportunity? Can you give us a sense on the ratio? And then on the ASP for that product, what should we be thinking about on a dollar-per-watt basis? And would that wattage be based on the continuous power of the battery or the peak power ratings of the battery? Any details there would be helpful.

Can you repeat one more time? I think it was two questions. Can you do me a favor and repeat the question?

Yes, sure. So breaking it down, the volume opportunity, so the ratio of how many units you would ship per Powerwall installed? And then secondly, on the ASP of your product, if we think about the dollar-per-watt comparisons, should we -- what would be the dollar-per-watt number that we should be thinking about?

So later this year when we will formally launch the product, we will public the prices. We do not yet public them.

As for the adoption, the solution will start with residential agreed-type storage solutions. So it will be one battery per -- probably one battery for the home. Very little cases I expect to see two batteries.

Since this market is in infancy stage, I think it will be very tough to estimate the adoption rate and how fast it will happen. But I'm very optimistic that with time that will become very big market both in US, Germany and probably also in Australia and South Africa.

Okay. Thank you, guys.

(Operator Instructions) Philip Shen, ROTH Capital Partners.

I'd like to explore pricing a bit. The implied blended ASP in the quarter appears to have been flat to slightly up quarter over quarter. Was that driven by a greater resi mix, and then also how do you expect your blended ASPs to trend in the quarters ahead?

So the average ASP went down a little bit. It was $0.355 last quarter, and it was $0.349 this quarter. As mentioned, we believe that the prices on a yearly basis, expecting to erode by 5% to 10%, so I'm expecting the same rate to happen over the coming four quarters.

Great. Thanks, Guy. In terms of the shipment mix with resin commercial, can you give us the breakdown for the quarter, and then how do you expect that to shift looking forward as well?

So today when we look about commercial, the technology of SolarEdge, which allows us to enjoy both the economy of scale but also the fact that we provide the [para] module, all of the advantages of the para module, better harvesting optimization, allows us to build many commercial projects. Actually, we have several of them on a ground month basis, projects that are starting from several hundreds of kilowatts up to 1 or 2 megawatts.

We do not record or measure the amount of units that are going to these installations, simply because we have many of them and we do not track them.

Okay. Can you update us on the timing of the release of your next-generation optimizer and for your inverter? And then what kind of performance improvements and cost reduction potential can you see with each generation?

Our third-generation inverter is expected to be released to the market in the fourth quarter. As mentioned before, our fourth-generation optimizers will be released sometime between the end of this year and the beginning of next year, according to the cost reduction effort.

With the combination of the two, we have the ability to reduce the prices between now and the beginning of 2017 by up to 20% in order to overcome the ITC changes. We are not expecting that we will need to reduce it so drastically, but that, of course, depends on the market prices.

Michael Morosi, Avondale Partners.

First, as it relates to gross margins, how do you see your gross margin evolving over time, and how are you thinking about that trade-off between price, market share and gross margin as we look out into next year?

Our gross margins for the long-term, our model, as we shared, are going to be or expected to be at 32% to 37%. And this is a process that takes over time. It takes into account the fact that, first of all, we are always reducing the costs of our products. There is a great potential there. We have a magazine of cost reduction activities that we can implement based on the needs where we see the prices in the market, and we can always decide how much of R&D efforts we basically divert from new products into cost reductions.

In addition to this, as we mentioned before, at the end of the day, we are still improving and increasing the efficiency of our supply chain. So we are getting rid of the air shipments as time goes by. Once we will launch the Mexico manufacturing plant, the cost of shipping and the logistics will go down as well. And eventually we believe that the combination of these cost reductions that we will adjust based on prices, the more efficient supply chain and eventually economies of scale due to the fact that we are manufacturing more and more units on a quarterly basis will get us there in the long-term, which we define as measured in years. It's not the next year.

Okay. Thanks for that. And then you covered a couple working capital items that depressed operating cash flow this quarter. How would you expect those to be resolved, and how are you looking at a more normalized cash conversion cycle with respect to inventory days or days sales outstanding?

Okay. So the main two items of working capital that consumed cash this quarter were the accounts receivable and the inventories. I will start with the inventories, given the fact that the inventories increased compared to the last quarter, just given the fact that we would like to get rid of the air shipments. And, therefore, we need both inventories that are always in our third-party logistics centers in California and New York and the Netherlands. And, of course, we have items in transit. We basically have a model of how many weeks of inventory we would like to have those to have on the shelves. And actually, we expect that in order to avoid those air shipments, those level will at least remain the same. We believe that they will also a little bit of increase as sales are going to increase and will consume cash.

When it comes to AR, this quarter AR increased compared to the last quarter, but also our days sales outstanding were a little longer, basically given the fact that some of the sales happened in geographies where payment terms are sometimes a little longer. We believe that, again, once we will go out of the seasonal effect where Europe is a little weaker, we will go down a little bit in the days outstanding of customers. And in general, we do not expect to continue and consume operating cash flows in those levels. We also believe that we will be able to generate cash from operations.

Thanks, guys. Great quarter.

That does conclude the question and answer portion of today's call. At this time I will turn things back over to Guy Sella for any additional or closing remarks.

Thank you. In summary, we are very pleased with our third fiscal quarter results in which we successfully executed all aspects of our business model with strong revenues and profitability growth. We believe that we are well-positioned to continue this momentum.

Thank you very much for joining us on today's call. Looking forward to talking to you again next quarter.