Solaredge Technologies Inc (SEDG) 2016 Q1 法說會逐字稿

Welcome to the SolarEdge fiscal first quarter 2016 conference call. This call is being webcast live on the Company's website at www.solaredge.com, in the investor 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 express 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.

I would now like to turn the call over to Erica Mannion, at Sapphire Investor Relations, Investor Relations for SolarEdge.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fiscal first quarter of 2016, as well as the Company's outlook for the fiscal second quarter of 2016.

With me today are Guy Sella, Founder, Chairman, and CEO and Ronen Faier, Chief Financial Officer. Guy will begin with a brief review of the fiscal first quarter results. Ronan will review the financial results for the fiscal first quarter and then provide the Company's outlook for the fiscal second quarter of 2016. 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 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 the US GAAP.

These 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 US GAAP. Listeners who do not have a copy of the fiscal first quarter press release or the presentation may obtain a copy by visiting the Company's website under the press release and investor relation sections.

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

Thank you, Erica. Good afternoon, and thank you for joining us on our conference call.

I am happy to report that we concluded our first fiscal quarter with strong results. We are reporting record revenues for the quarter of $150 million. Our gross margin was 29.1% and most important, we show a record GAAP net income of $14.4 million and a non-GAAP diluted earnings per share of $0.36. We continue to generate positive cash flow from operations.

Let's look at what has driven these positive results. Once again, our revenues hit a record high this quarter and we continue to execute on business plans in all parameters. We improved our gross margins and profitability, while remaining within our plan for 7.5% to 10% price reduction for the year, which we believe supports our goal to increase market share. These improved gross margins are a result of effective cost reductions, which will continue to be a focus for our R&D team.

In the fiscal first quarter of 2016, we shipped 356 megawatts of AC nameplate inverters, approximately 232 megawatt of which we'll ship to North America. Overall we shipped over 1.46 million power optimizers and 54,000 inverters, an increase from the previous quarter. This increase was enabled by continued strong demand for our solution.

As our business grows, we continue to diversify our customer base. Aggregate revenues from our top five customers continue to decline quarter-over-quarter. Over the last four quarters, the percentage of our revenues from our top five customers went down from 57.3% in the quarter ended on December 31, 2014 to 46.4% this past quarter. This quarter, we also received first orders from Energy Home, yet another leading installer in the United States.

I want to take this opportunity to address some additional noteworthy metrics. In many of the markets in which we are active, residential and commercial alike, we are seeing continued growth. Our quarter-over-quarter growth was 16.9% and our overall year-over-year growth was 71.8%. In addition to our continued decrease in sales in the United States, we also continue to expand sales in Europe. In Germany, shipments increased by 59% in megawatts quarter-over-quarter and we also saw healthy growth in the UK, France and Italy.

However, we are cautious and aware that market shifts are common in an industry that is still government subsidized. In the UK, where the solar energy market has been on an upward growth trend, the government announced a very significant reduction in feed-in tariffs effective as of 2016. As such, we expect that the UK will continue as a large market for us for the remainder of calendar 2015, but we expect it will shrink thereafter.

We watch the market carefully and are confident that our global presence and diverse product offering for both the commercial and residential segments serve us well as we enter into new regions.

We see our market share in the commercial markets growing in both Europe and the United States. While there is still lots of work to be done in this segment, a shipment of our 33.3 kilowatt inverters have enabled us to broaden our customer base for commercial projects.

Also new to our business this quarter are several multi-megawatt community solar projects in the US. Community solar arrays are centralized ground mounted solar facilities shared by individual community members who receive credits on their electricity bills for the power produced.

This quarter, we introduced our new HD Wave inverter technology. As we previously announced, we have developed a novel power inversion topology that represents one of the most significant leaps in solar technology in the past 20 years. Our new HD Wave technology increased the inverter's efficiency to 99%, reduced the size and weight of the expensive magnetics and heat dissipation component, typical in today's inverters and is completely electrically capacitor free, a break-through for high-power single phase inverters.

Our research and development team continued to work on new and improved technologies: large three-phase inverters using our HD Wave technology, a broader set of communication and monitoring product with new features and of course, cost reduction activities.

As storage products become commercially available, our inverter provides a very attractive offering. Our fixed spring voltage technologies allow for seamless disintegration with high-voltage batteries. This enables the installer to easily add storage capability to an existing solar system, using a single inverter operating in either self-consumptions or back-up modes.

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

(technical difficulty) overview of our fiscal first quarter and then provide guidance for our fiscal second quarter of 2016. While the overview will be on a GAAP basis, in certain cases I will be discussing non-GAAP numbers, which include the impact of stock based compensation, as well as other non-GAAP measures, such as non-GAAP earnings per share. Full reconciliation for the pro forma results discussed in this call to GAAP results is currently available on our website and in the press release issued today.

Now let's discuss the results for this quarter. Total revenues were at $115.1 million compared to $98.4 million last quarter and $67 million in the same period last year, representing an increase of 16.9% compared to the prior quarter and 71.8% for the same period last year. Focusing on what drove revenues, we sold to more than 125 direct customers in 31 countries. Sales to the US market represented approximately 68.5% of our revenues, a decrease compared to 71.9% in the previous quarter.

Gross margins for the fiscal first quarter were 29.1% compared to 28.7% for the prior quarter, and 20.9% for the same period last year. Our mixed ASP per watt decreased this quarter as a result of volume based discounts and the larger portion of our sales coming from Europe where we see a lower ASP per watt due to the lower euro to US dollars exchange rate. And product mix changes between residential and commercial systems.

This decrease is within our planned ASP per watt erosion of 7.5% to 10% for calendar 2015. Timely execution of our planned cost reduction measures, further improvements of supply chain and the logistic costs, and to a lesser extent, economies of scale, increase product due to increased volumes, together outperformed this ASP erosion and as such, gross margins continue to increase.

Moving to the operating expenses, research and development expenses were $7 million, an increase of 4.3% compared to the previous quarter, and 38.2% year-over-year. Sales and marketing expenses for the quarter were $8.2 million, a 10.9% increase compared to the previous quarter, and 51% increase year-over-year.

G&A expenses increased to $3.4 million this quarter, a 50.9% increase compared to the previous quarter and 194.9% increase year-over-year basis. This increase in G&A expenses is mostly a result of a one-time charge from an accrual for a doubtful account related to an overdue payment of the customer, as well as to final adjustments of our G&A expenses related to being a public Company. We do not expect our G&A expenses to continue to grow at this pace going forward.

In total, operating expenses for the fiscal first quarter of 2016 were $18.7 million, an 13.8% increase compared to $16.4 million in the previous quarter and $11.7 million for the same quarter last year.

Operating income for the first fiscal quarter was $14.9 million compared to an operating income of $11.9 million in the previous quarter and operating income of $2.4 million for the same period last year. Financial expenses for the quarter were $0.9 million compared to $1.7 million in the previous quarter. And compared to financial income of $0.5 million for the same period last year.

As a reminder, last quarter we recognized an expense related to the mark-to-market adjusted of certain warrants, which were exercised in June. With the exception of the effect of foreign currency fluctuation, the level of financial expenses we experienced in this fiscal first quarter is in line with our expectations going forward.

Our GAAP net income for the fiscal first quarter was $14.4 million, compared to GAAP net income of $9.3 million for the previous quarter and GAAP net income of $2.5 million for the same quarter last year. Our non-GAAP net income was $16.3 million compared to a non-GAAP net income of $13.8 million in the previous quarter and a non-GAAP net income of $2.8 million for the same quarter last year.

GAAP's net diluted earnings per share were $0.32 for the fiscal first quarter, compared with $0.21 in the previous quarter and $0 net diluted GAAP EPS for the fiscal first quarter last year. Non-GAAP net diluted EPS was $0.36, compared to a non-GAAP net diluted EPS of $0.31 in the previous quarter and non-GAAP net diluted loss per share of $0.09 in the same quarter last year.

Turning now to the balance sheet. As of September 30, 2015, cash, cash equivalents and restricted cash were $150.3 million compared to $148.4 million as of June. During the fiscal first quarter, we generated $5.9 million of cash from operations and this is despite of an increase in inventories. As of September 30, our inventory level was at $79.9 million, a level that is sufficient to keep air shipments to a minimum.

Our guidance for the second quarter of 2016 is as follows. We expect revenues to be within a range of $118 million to $121 million and we expect gross margin to be within the range of 28% to 30%.

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

(Operator Instructions) Brian Lee, Goldman Sachs.

Actually I had a couple on growth and then a couple on ASPs, if I could try to squeeze them all in.

So maybe first off, Guy and Ronen, there's been some weaker commentary from a peer of yours and a large customer of yours just in the past week. Can you comment on what you guys are seeing in the broader market trends for US resi specifically? Are things slowing, as some are suggesting? I would be curious what your direct large installer customers are saying, as well as what you're hearing from the distribution channel.

It was a surprise for us that from what we see, we believe that the total market next year will grow over -- the residential market I'm specifically talking about -- will grow over the total market this year. That's at least the indicators we are getting when we aggregate the information from all the customers we work with. So I'm not sure I can add to -- more data beside what I'm sharing now.

Maybe as a follow-up to that then, since Guy, you bring up 2016, you guys have growing megawatts at a triple-digit year-on-year growth rate for a little while here. Fiscal Q2 for you looks like it's going to be up around 80%, if my math's right. So if the market is up another, let's say, 50% in 2016, where would you expect you'd settle out relative to that?

I think that I would expect that we're still taking market share in the US, so I think that we'll overcome the growth of the market by probably 10% to 15%. I think that that should be something which I believe is doable when I look at our current market share and what I believe can achieve next year with the new product that we just launched.

Two quick ones on ASPs for me and then I'll pass it on. ASPs were down 7% sequentially. They're flattish through the first half for you, so I just want to clarify that your ASP outlook for the full-year is implying that there's no more than a 3% decline in fiscal 2Q. First, is that right?

And then second, are all of those quotes signed, sealed, delivered? Or is there still some negotiating wiggle room between now and shipment?

No, we pretty much understand the full picture for calendar 2015 and we're not expecting to be outside of the range that we gave you during the road show and ever since of 7.5% to 10% on a yearly basis. We feel very comfortable that we are within this range.

And then lastly, again on ASPs, one of your peers being very aggressive here and vocal about it, for 2016 are there any indications you're getting from customers with that in the backdrop? Is it another 7.5% to 10% ASP decline that you're assuming for 2016? And what kind of indications give you comfort around that at this time?

That's our assumption since the beginning of 2015 and we feel that that's still the right assumption for 2016. Of course, it's easier to predict the next coming two quarters than to predict the end of 2016, but I feel comfortable that these should be the numbers for next year.

Congrats on a good quarter.

Vishal Shah, Deutsche Bank.

On the ASP front, on the margin, has the pricing pressure increased for you relative to the time at the road show? I mean because clearly your competitor has been more vocal about in discounting on some of their customers. Are you seeing any of that impact directly your business at all?

And then how should we think about margin profile going forward? Do you think that your cost deductions will outpace price deductions over the next couple of quarters?

We are not facing I think different pressure in last couple of quarters when compared to what we faced in the beginning of the year. In a way, in the beginning of the year, and I think that I shared this, there were more pressure coming from European string inverters that enjoyed the strong dollar and compared to the euros that made them in-house production more competitive. So I feel the pressure is the same as it was before.

And I'm very confident that next year our cost reduction plans will overcome the ASP erosion and that we'll execute the plan that we described since the road show of improving our gross margin more or less in the same pace as we did in the last couple quarters. And we'll reach above 30% pretty soon.

Philip Shen, ROTH Capital Partners.

In the first fiscal quarter, I think your cost per watt was roughly $0.23 per watt. What was the mix between inverter and optimizer? My understanding is that it historically has been half and half.

Basically this is usually the run-rate that we see between optimizers and inverter. This quarter it was a little bit more inclined towards optimizers for two major reasons. The first reason was that part of our revenue recognition policy we do not recognize revenue from new products until they're at least three months in the field. And our 33 kilowatt inverter that started shipping in Q3 was not fulfilling this term. As such, we recognize revenues from optimizers that were sold together with the inverter, but not the inverter itself.

In addition to this, we saw some cases where customers' orders of optimizers came this quarter and they will be completed with the inverters in the next quarter, simply because of their planning assumption.

Can you talk about the cost down road map for each, as well as perhaps give us an update? Do you see any potential acceleration of what you guys have talked about in the past?

And then how do you expect that mix between inverter and optimizer costs to trend as we get to perhaps mid calendar 2016?

With regards to how each and every product is going to be cost reduced is not something that we provide. But in essence, we pretty much execute the plan as we figured out and as we thought before. And therefore we do not see right now any major changes from what we had before and what we discussed. Basically we have a plan we executed quarter-over-quarter and we don't see anything that changes it right now.

One more if I may. You mentioned a doubtful accounts accrual in the quarter. Can you quantify the size of that accrual and provide some color in general? What happened and do you see more ahead? And then what kind of G&A should we use as a kind of normalized level?

Basically this is related to one single customer, which is simply late on payments. And given the fact that this is not something that we usually see, we decided to be cautious here. It is not something that is widespread or that we saw, let's say, from one single market or a phenomenon that we start seeing. It's related to one single customer.

In essence, the number was approximately $600,000. And in general, we do believe that again, as we said before, and we keep executing on this, is that with the exception of these kind of one-time events, G&A expenses, such as all other operating expenses, should not grow faster than the growth of the revenue. So we do not expect this growth of G&A and we do not expect the reoccurrence of such expenses in the G&A. But of course, sometimes customers have problems to pay promptly and we want to be responsible in the way that we account for this.

Edwin Mok, Needham & Company.

Congrats for a great quarter. First question, just want to circle back on pricing. I think, Guy, you mentioned you're seeing on similar type of pricing pressure in the marketplace. I was wondering have you seen any incremental price pressure come from kind of lower cost suppliers, such as guys in China or other optimized suppliers in the marketplace? Or it this still mostly your European supplier and your main competitor in the larger level part of the (inaudible)?

We see very little in the market we're active in. We see relatively little pressure from Chinese low-cost inverter players. In some markets, you already see that the portion of the Chinese inverters in a market like Netherlands, Australia, are going back down. People have lots of experience and so far not very good experience with this type of low-cost inverters. And their market share is moving back to a smaller and smaller market share.

In the US, we do see that Huawei is getting stronger in commercial, but not yet can we see any influential market share in the residential space.

That's actually really helpful. Maybe second question I have is outside of the US market, I think you mentioned international sales has improved this quarter, particularly with Europe. Can you give us some color around kind of your strategy on that? Is this kind of market-by-market targeting for drive growth? And do you see those markets, or your share in those markets, growing as you go into 2016?

I think that as we've described in the past, we are active in all the European markets, as well as Australia, Japan and starting in South Africa. So if you look at the European market, we are growing our market share in all the main markets, starting with Germany, that despite the fact that the market itself in Germany is a bit smaller than what it was last year, we grew dramatically our market share both in residential and commercial. We are very big and probably number one in Netherlands in the residential space and growing dramatically in commercial.

We're growing very nicely in UK, that as was described, I believe that this is a phenomenon that once past 2016, if the suggested change in regulation will conclude it.

In addition to that, we see very nice growth in France, not yet as we want to see it in Italy. Good signs in Japan and we're starting to build a better market for us in Australia. So I think that will cover most of the important markets for us in the last few quarters.

Last question I have is on the HD Wave inverter that you guys announced. Can you tell us when do you expect that inverter to ramp up to volume, in let's say, I don't know, tier 1, let's say a quarter or half of your sales volume? How long do you think that would take for you to ramp up to that?

And in terms of costs of that inverter, can you give us some -- is there a way for us to think about how much cost saving you can get out of that inverter once you ramp to volume?

We believe that to fully ramp it up will take three quarters. So I would expect it by the end of Q3 80% to 90% of everything we'll ship will be already the new HD technology inverter. We're very mature with the production stages and I believe that the ramp up will be quite smooth.

The only thing that can in a way reduce these percentages if we'll see demand which is dramatically above what we're expecting. But if we estimate the demand properly, I think that we'll be able to almost fully ramp up to -- we'll be able to ramp up to 80% or 90% in three quarters.

As for cost, you understand that we won't share this in great details, but I can tell you that the potential is overcoming in a big way the 7.5% to 10% ASP reduction that we believe we'll have to offer during 2016.

Colin Rusch, Oppenheimer.

I've just got a couple details on the guidance. Can you just give us the underlying assumptions for ASP trajectory as well as the margin impact from the HD Wave ramp in the December quarter?

For December quarter, the one PME impact from the new inverter, we just will ship very small quantities by the end of the quarter. So practically everything that we'll ship will be the car generation.

And then the ASP assumption and the guidance for the December quarter? What's the trajectory on ASPs?

We said for the full calendar 2015 we assumed the ASP reduction will be in the range of 7.5% to 10%, so we are not expecting more than the difference between 7% to 10%. So probably something in the area of 2%, I would assume.

And then could you break out geographic mix for us for 3Q, just in terms of North America and Europe as a percentage of the total and what you're expecting in the fourth quarter?

It's pretty much last -- I think in this one we gave -- the US was 68%. It went a little bit up in the last couple quarters and a little bit down in this quarter. So probably average for the calendar it will be somewhere in the area of 70%, 72% North America and the rest will be Europe. But we're not measuring it more carefully than that. So that's something in the area of 70% to 72% year to date.

And then in the December quarter you expect that to hold firm, or is there going to be additional sales in Europe?

We believe it should stay like that or very similar through 2016. Now we're not expecting dramatic change in this ratio until the end of 2016.

And then the last one is just with the commercial inverters, can you talk about the mix of commercial inverters as a percentage of sales?

We discussed this in the past. We find that it's almost impossible to come with a good KPI for this, therefore we are not reporting it. In commercial installation there are few stages: winning stage, booking stage, delivery stage, commissioning stage. I can tell you that the ratio of commercial is growing all the time, but it's so hard to measure what exactly -- at what point to measure it that we're not reporting it because of that, because it could cause some difficulties in analyzing it quarter-over-quarter.

(Operator Instructions) Michael Morosi, Avondale Partners.

Congratulations on the strong quarter. I may have missed this, but what percentage of shipments in 2016 will be HD Wave?

We assume that in three quarters it will reach 80% to 90%. So for the full-year it will probably be around 50%, but it will very much depend on how the last two quarters of 2016 will look like. And it's at this point a little bit hard to estimate. But in three quarters we should reach 80% to 90% of all shipments to be the new generation.

And then just kind of taking a step back, there's some people say that the growth in the US resi market is strictly on account of the third party owned market. So what is the growth strategy kind of outside of that market? And what can you do to continue diversifying the business mix and create just a more kind of multi-pronged growth story?

Probably the first, what we believe seeing the market, and I think also seeing in data coming from analyst groups, you said the commercial -- small, medium and large commercial is probably would be the most growing segment in the coming two, three years. And big portion of our R&D activities are into developing larger three phase inverters and we believe that we'll be able to take bigger and bigger market share in the commercial. So this covers, and it's overcoming the way the third party ownership fleets that you mentioned.

In addition to that, we are in the final process of getting approval to sell our three phase inverters in Japan. That will, I believe, will open up the commercial market in Japan. We are entering now into Poland, which is a new market in Europe, South Africa and all the storage potential. So I think that we are very much -- we have great new opportunities and a potential to grow into new markets and new segments. And I think that this should much more than overcome any difficulty that might happen in the residential market in the US.

My personal opinion, by the way, is that in 2016 the resi market in the US will be very strong due to the fact that everybody that can will do it pulling from 2017, but that's my personal opinion.

That concludes today's question and answer session. Mr. Sella, at this time I will turn the conference back to you for any additional or closing remarks.

In summary, our first fiscal quarter results show successful execution of our business strategy with record revenues and consistent growth in profitability. We look forward to continue this momentum. Thank you very much for joining us on today's call.

That concludes today's presentation. Thank you for your participation.