Solaredge Technologies Inc (SEDG) 2016 Q2 法說會逐字稿

Good day, everyone, and welcome to the SolarEdge Fiscal Second 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, of transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to the webcast reply 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. Please go ahead.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fiscal second quarter of 2016 as well as the Company's outlook for the fiscal third 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 second quarter results. Ronen will review the financial results for the fiscal second quarter and provide Company's outlook for the fiscal third quarter of 2016. Then we will open up the call 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 US GAAP.

The non-GAAP measures presented in this presentation as we believe that 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 fiscal second quarter press release or the presentation may obtain a copy by visiting the Company's website under Press Release and Investor Relations sections.

Now 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 fiscal second quarter with strong results. We are reporting record revenues for the quarter of $124.8 million. Our gross margins were 30.9% and, most important, we show a record GAAP net income of $24.1 million, a record non-GAAP income of $19.8 million, and a non-GAAP diluted earnings per share of $0.44. Our cash flow from operations continue to increase quarter over quarter.

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 our business plan in all parameters. We improved our gross margin and profitability while ASP Erosion was within our plan. This improved gross margin is mainly a result of effective cost reduction, which continues to be a focus for our R&D team.

In the fiscal second quarter of 2016, we shipped 416 megawatt of AC (inaudible) inverters, approximately 275 megawatts of which will ship to North America. Overall, we shipped 1.4 million power optimizers and 59,000 inverters. This quarter we also manufactured our 10 millionth optimizer, which will ship this fiscal third quarter.

As our business grows, we continue to diversify our customer base, aggregated revenues from our top five customers has continued to decline over the last five quarters, specifically, the percentage of our revenues from our top five customers has declined from 57.3% in the quarter ended on December 31, 2014, to 46.1% in the fiscal second quarter. It is worth commenting that the composition of our top five customers change from quarter to quarter.

I want to take this opportunity to address some additional noteworthy matters. This quarter we began shipment of our StorEdge Solution primarily to the US, Germany and Australia. Our StorEdge Solution is based on a single DC coupled storage inverter that manages and monitors solar energy generation, consumption, and storage. Together with Tesla's Powerwall Home Battery, our StorEdge Solution allowed homeowners to reduce electric bills and to gain energy independence.

With the StorEdge, unused solar energy is stored in a battery and used when needed to maximize self-consumption and when needed for power backup during electric outages.

This is a new segment not only for us but for the solar energy market and, as such, it is hard to project how fast it will grow and how long it will take to penetrate. Having said that, we see strong interest in the StorEdge Solution and expect to sell thousands of units during the rampup period in the first half of calendar 2016 split between the US, Europe, and Australia.

Demand for StorEdge Solution is generated from different needs. There is a natural market for self-consumption in Germany and Australia, results for a market for backup solutions in countries where the grid is less reliable, and another interesting application is for utilities or energy distributors looking at residential storage as the means for grid balancing and peak shaving applications.

We are aware of several utilities in the United States and Australia that were conducting pilots of 100 to 200 sites for this application before determining large-scale viability.

The (inaudible) 27 and 33 kilowatt inverters in the first fiscal quarter of 2016 accelerated our commercial business both in the United States as well as in Europe where we have seen substantial growth in the megawatt chip of that product.

Our presence in the United States continues to be strong, and this past quarter comprised 74% of our revenues. The brand that we have created as a leader in harvesting, converting, and managing solar energy combined with the growth of the solar market and with the recently announced ITC extension well positions us for continued growth and success in the US.

In Europe business continued to be strong. Specifically this quarter, sales to the UK were particularly high, in large part due to the pending termination of the (inaudible) subsidies. We, of course, do not expect this level of revenues to continue from the UK in the coming quarters. Having said that, business in Italy and France has grown, our business continues to be very strong in Netherland, and we are well positioned to continue to grow in Europe.

We are also heightened interest for our solution in Australia, Japan, Turkey, and South Africa. In Australia, for example, we see strong demand for a backup solution driven mainly by a utility company opening for us a new market and opportunities. Last quarter we introduced our HD-Wave inverter technology and Novel power inversion topology that represents one of the most significant leap in solar technology in the past 20 years.

This quarter we installed our first HD-Wave product on a small scale, and we are gearing up towards more substantial shipment in the fiscal third quarter of 2016. We expect by the fiscal first quarter of 2017 the vast majority of our single-state inverters will be based on this innovative technology.

On a final note, I want to draw attention to our increased profitability. While we take great pride in growing the top line quarter over quarter, our bottom-line profitability growth is no less important to us. Specifically, our operating expenses this quarter represent 15.5% of revenue compared to 16.2% in the prior quarter. This does not mean that we are cutting down on our growth or operating expenses. On the contrary, our R&D and salesforce continue to grow and as of December 31, 2015, we are a team of more than 500 employees.

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

Thank you, Guy. I will start with an overview of our fiscal second quarter and then provide guidance for our fiscal third quarter of 2016.

While the overview will be on a GAAP basis, in certain cases I will be discussing non-GAAP numbers, which excluded the impact of stock-based compensation as well as other non-GAAP measures such as non-GAAP earnings per share. Further reconciliation of 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 the quarter. Total revenues for the fiscal second quarter of 2016 were $124.8 million compared with $115.1 million last quarter, and $73.3 million in the same period last year, representing an increase of 8.5% compared to the prior quarter and 70.3% for the same period last year.

Focusing on what drove this revenue, we shipped this quarter 1.4 million power optimizers and 59,000 inverters to customers in more than 36 countries. Our mixed ASP per watt decreased this quarter mainly as a result of increased sales of commercial products that are characterized with lower ASP per watt. Furthermore, looking at our ASP per product over calendar 2015, we see that ASP Erosion per product was within our plan.

Gross margins for the fiscal second quarter were 30.9% compared with 29.1% for the prior quarter and 21.5% for the same period last year. This gross margin expansion is mainly attributed to the timely execution of our cost reduction plans and further improvements in supply chain efficiencies and reduced logistic costs.

Our gross margin does not yet fully reflect the cost saving related to the automatic assembly line in Hungary or the introduction of our StorEdge product, which is characterized by a higher margin due to the relatively small number of units shipped relative to our total shipments this quarter.

Moving to operating expenses. Research and development expenses were $8.3 million, an increase of 18.7% compared to the previous quarter, and 74.1% year-over-year, an increase that was mostly driven by increasing our R&D headcount.

Sales and marketing expenses for the quarter were $8.8 million, a 7.1% increase compared to the previous quarter and a 56.1% increase on a year-over-year basis. G&A expenses decreased to $2.2 million this quarter, a 36% decrease compared to the previous quarter and a 95.2% increase on a year-over-year basis.

The decrease in G&A expenses is mostly a result of charges we took in our fiscal first quarter including a one-time charge from an accrual for a doubtful account related to an overdue payment of a customer who partially paid its debt this quarter as well as the final adjustment of our G&A expenses related to being a public company that was reflected in our financial results last quarter.

In total, operating expenses for the fiscal second quarter of 2016 were $19.3 million, a 15.5% of revenues compared with $18.7 million, or 16.2% of revenues in the previous quarter and $11.5 million, or 15.8% of revenues in the same quarter last year. We expect operating expenses in the fiscal third quarter of 2016 to continue to increase as we further expand our R&D teams and our geographic footprint.

Operating income for the fiscal second quarter was $19.3 million compared to operating income of $14.9 million in the previous quarter and then operating income of $4.2 million for the same period last year.

Financial expenses for the quarter were $1 million compared to $0.1 million in the previous quarter and compared to $0.5 million for the same period last year. These expenses are mostly a result of changes in the exchange rates and mark-to-market of our USD new Israeli shekel hedging position.

This quarter, we recorded GAAP tax benefit of $5.8 million. Since incorporation, we incurred substantially carryforward net operating losses in Israel. According to GAAP, the creation of a tax asset represents the next tax effect of those NOLs as well as temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

Our growing profitability quarter over quarter and expectations that we will continue to be profitable required the creation of a $6.6 million of a tax asset. Our non-GAAP tax expenses related to those jurisdictions in which we already pay actual taxes was $0.7 million.

As a result of the above, our GAAP net income for the fiscal second quarter was $24.1 million compared to a GAAP net income of $14.4 million for the previous quarter and a GAAP net income of $3.4 million for the same quarter last year. Our non-GAAP net income was $19.8 million compared to a non-GAAP net income of $16.3 million in the previous quarter and a non-GAAP net income of $4.1 million for the same quarter last year.

GAAP net diluted earning per share was $0.55 for the fiscal second quarter compared to $0.32 in the previous quarter and $0.00 net diluted GAAP EPS for the fiscal second quarter last year. Our non-GAAP net diluted EPS was $0.44 compared to a non-GAAP net diluted EPS of $0.36 in the previous quarter and a non-GAAP net diluted EPS of $0.12 in the same quarter last year.

Turning now to the balance sheet. As of December 31, 2015, cash, cash equivalents, restricted cash and investments were $162 million compared with $150.3 million at September 30, 2015. During the fiscal second quarter we generated $13.1 million of cash flow from operations, and this is despite an increase in our inventory.

As of December 31, our inventory level, net of reserves, was at $87.4 million compared to $79.9 million in the prior quarter. Part of the reason for this increased inventory level is in preparation for the Chinese New Year, which will reduce the production capacity of our contract manufacturer in China during the month of February.

Our guidance for the fiscal third quarter of 2016 is as follows -- we expect revenues to be within the range of $121 million to $125 million, and we expect gross margins to be within the range of 29% to 31%.

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

Thank you. (Operator Instructions) Brian Lee, Goldman Sachs.

Hi, guys, thanks for taking the questions, and a great job on the quarter. The first one I had was just on the puts and takes of guidance for the March quarter. Can you give us a bit more granularity, Ronen, about how much you're expecting volumes to be up or down; what type of ASP changes you're embedding there; and, then, lastly, is there any battery revenue guidance in that number as well?

First of all, thank you very much, Brian, for the questions. So -- in general, when we look at the first quarter, we expect -- actually, for 2016, we expect the ASP Erosion to be within the range of 7.5% to 10% that we mentioned before. All in all, this year the ASP Erosion per product was within the ranges that we expected, and we do not see anything that is changing in the environment that requires us to change it a little bit more than this.

It is important to note, though, and I would use this -- your question is a trigger for this, is that as you saw this quarter, the ASP per watt decreased a little bit compared to -- or higher compared to the last quarters, and this is mainly due to the fact that we sold more commercial product. These are a product that are characterized with lower ASP per watt and, as such, you saw this result.

This does not mean that the ASP Erosion is quicker than we expected or that the price pressure is higher than we expected. It simply means that we're selling more commercial products.

Going back now to the quarter that will end in March, we basically expect that despite of the seasonality that you usually see in the first quarter, we will see a flattish kind of sales and quantities in the various regions. Usually, Europe is a little bit lower at the beginning of this quarter and wakes up towards March, and we do not expect any changes compared to this year compared to the last year.

And eventually with regards to StorEdge products, as we said before, we are in the very beginning of this rampup phase of this product and, of course, we're not just dependent on our ability to grow but actually on other factors as well. And, as such, we expect to sell several thousands of these units in the first six months, but the amount is not going to be very substantial compared to the sales of our regular solar system.

Okay, no, that's helpful. Maybe just a quick follow-up on that, Ronen. The update on the status of the store segment, this gives us some basis to start to try to model around.

Can you also provide us a little bit more color on where you're setting the ASPs on that particular product? I know you've said in the past that gross margins will be higher than the corporate average, but the corporate average seems to be tracking above most people's expectations and the original trajectory you set out. So I just want to confirm that that's still the case moving to 2016.

And then also thousands of units in the first half of the year -- is that enough where you'd think you'd start to contemplate providing explicit disclosure around the volume and revenue impact?

So, Brian, hi, this is Guy. So, first, it's pretty similar to what we predicted. The ASP for the StorEdge interface is higher a bit than the ASP on similar inverters. And I think that we weren't surprised. We really believed that we kept the plan and the ASP as we estimated originally. And when you compare product to product, we are even a bit better than what we estimated a year ago, but very, very close to the model that we estimated.

As for the how fast on the side of the market, what we see today is that when the system was just ready to be shipped we saw actual backlog of several thousands of systems. In this type of technology, what the main thing I believe, I guess, is will it be linear? Or people will buy it, use it for a few quarters and only then make the decision if they move forward in a higher volume? And that's exactly the logic gap that we don't have.

And you see it in other industries -- new components and many other things that are so new -- I don't like to use the word "disruptive" because it's not disruptive -- but so unique that people buy a lot in the beginning relatively, a lot try for a period and only then it starts to be more linear. We simply don't know what will be the behavior of the market for this solution. So we cannot give more data just because we don't think we can estimate at this point.

Vishal Shah, Deutsche Bank.

Ronen, on the margin outlook, are you assuming your Hungary line will be up and running, or will you see some positive impact from that in the March quarter? Or you won't see it more likely in the June quarter?

Basically, the line is already up and running in Hungary, and we've finished the initial stage in which we stabilized it, and now it's already producing. The only thing that needs to be taken into account is that today when you look at the Hungary line, it's just one line out of several lines that we're operating in. All the rest are lines that are still done manually and not on an automatic assembly line.

As Guy mentioned before, we do see substantial -- a cost decrease, once all of the lines will be diverted from manual assembly to automatic assembly line, but this is something that will still take a few quarters until we will change all of the lines from manual to automatic assembly lines. We have already ordered the second and the third line, and we're now working on the next orders for the next lines, and we expect it to take place in the next few quarters until everything will be placed there.

But, in general, the line is working, it's working very nicely, and it's really a beautiful line.

Okay, I appreciate it. I believe you must have already started discussions with your customers for June quarter. Could you maybe just provide some color on how -- what other discussions are going in terms of both pricing and volumes? You've seen 60%, 70% year-over-year revenue growth in the past. Could we assume that kind of (inaudible) going forward? Are you seeing some acceleration in the US market or some slowdown? Thank you.

Hi, Vishal, this is Guy. We see strong beginning of the year, a combination of, I believe, our growth plus the fact that the winter in Europe is a bit easier than these last couple of years. So we see a bit stronger year.

We expect that Q2, as usual, will be a nice boost over Q1, but at this point, we don't -- we cannot, of course, share what we believe will be the growth, but eventually and probably, percentagewise, it won't be necessarily as strong as last year due to the fact that, in general, the baseline for 2016 calendar year is higher.

I appreciate that. So one last question. Your OpEx you said will continue to increase, but as you think about leverage in the model, I mean, are you assuming -- you've shown some nice leverage over the last couple of quarters. Do you think that that will continue over the next couple of quarters or should we assume OpEx to sales around that 15.5% levels? Thank you.

On the [year] basis, we assume it will keep improving specifically on Q1, that's the Q that I think it will stay flat or maybe a little bit higher since you hire people to create more business for the year, while the size of the revenue, in general, will be quite similar to Q4. So I would expect that the ratio of OpEx out after the sales would increase a bit in Q1 and will keep decreasing in Q2, Q3, and Q4 calendar 2016.

Philip Shen, Roth Capital Partners.

Guy and Ronen, congrats on strong results, a great job.

Thank you very much.

Thank you very much.

You guys mentioned the ASP declines in the quarter from a mixed basis was a little bit greater than potentially we expected. Can you talk about the commercial/resi mix in FQ2? And can you talk about what you expect between commercial and resi as we go through the year?

So, first of all, Phil, as you mentioned, when we look at the ASP, we look at two dimensions. We look at the ASP per watt because this is what the industry is measuring. But we also look at internally at the ASP per product line. And the fact is that we do see a higher mix of commercial sales in our products, and this is mainly due to the fact that we introduced our 27 and 33 kilowatts inverters in the first fiscal quarter of 2016. Of course, once we started to do this, it accelerated our commercial expansion both in the US and in Europe and while traditionally we used to see something that is closer to 25% of megawatt chip coming from a commercial product, in this quarter it was higher.

We do not yet -- since it's only one quarter that it's growing, we do see signs that the mix of -- or, sorry -- the portion of the commercial product in the mix will get higher. I'm not sure that we can project how high it will get. We believe that in the long term it may be even, but we're not sure how it is going to play alone within the various quarters.

But what we do see is, I would call it, definite increase in our commercial sales and interest for these products.

Edwin Mok, Needham & Company.

The first question, I guess, going back to ASP, you mentioned mix that had some negative effect on blended ASP. Can you share with us what's your plan to ASP for the quarter? And assuming that commercial continues the successful (inaudible) actually, even though in blended ASPs maybe dropping faster than the (inaudible) product basis, does it actually affect your gross margin given that gross margin improvement target that you have given that commercial product doesn't benefit from the (inaudible) wrapped up?

Okay, I will start by saying that, again, when we look at the ASP the more important part for us is to see what is the ASP per product because this is what we are measuring. And, as we said during 2015 and reiterated today, we believe that this ASP Erosion in both 2015 and 2016 calendar would be 7.5% to 10%, and this is what we saw this year, as well, on the [parent] product basis.

When it comes to mix, today when you look at the gross margins of commercial products, this is actually a little bit higher compared to the residential one. The reason is that, first of all, the inverter has a little better gross margins, but also the fact --

The economy of size in the case of the inverter.

Exactly, and also the fact that you are using two modules per one optimizer, which again allows us to have a better margin on the product. So, all in all, the fact that you see the ASP per watt eroded does not mean that there is going to be deterioration in the gross margin. On the contrary, it actually helps the gross margins because it means that we have more sales in higher gross margins.

When it comes to the mix, I can say that, all in all, the expectation of the growth of our commercial products was in line -- sorry -- the real result was in line with our expectations of the growth of these commercial products.

Okay, great, thanks for the color. And then I noticed that on your reported metric, your optimizer shipment actually declined this quarter. Can you explain what happened there?

Yes, it's basically a shifting between two quarters. Last quarter the optimizer ratio of inverter was a little bit higher. One of our larger customers basically made a split purchase where he purchased the majority of the optimizers he needed in the fiscal first quarter and the inverters on the fiscal second quarter. There is no phenomena or anything other than this that is related to this number.

Colin Rusch, Oppenheimer.

Hi, this is Shivani Sud on for Colin Rusch. Can you just give us the size of the incremental cost reductions that are coming from beyond the benefit of increased automation?

Currently, all the cost reduction we see is not yet from the increased automation. It's simply coming from the standard efforts that we do on a cost reduction. We explained, I think, a few times in the past, that we have a set of activities. Some are simpler, some are more complex, which evolved and which we were running constant on all products. And every quarter we see some of the results, so what did we see this quarter is -- 100% was achieved by these efforts. We do not yet enjoy the economic benefit of the automatic line simply because it's still a small portion of the total amount of optimizer we are producing in a quarter.

So just as a follow-up to that one, can we really start to see the benefit of that coming through in the margins?

We are supposed to get two more lines towards Q2. Installing them is another two quarters -- or another quarter -- so probably in Q3 we'll start to see more influence on the automatic lines and probably in Q4 we should see 50% of the total potential of the automatic line in place.

With the full benefit sometime in 2017?

Sometime in 2017, that's correct.

Okay, thank you.

In total, we ordered six lines, and we're supposed to get them until the end of the year.

Jeff Osborne, Cowen & Company.

Congratulations on the results, Ronen. I was wondering if you could just touch on the inventory being a bit higher this quarter heading into a product transition both on your books but also what visibility do you have into your customer base, especially given the weather conditions we had in California with the rainy season that might have delayed some installation?

Actually, the inventory levels are -- the way that we look at them is we compare them based on the forecast that we see both on the quantities that we need but also, by the way, on a mix of the inventories that we're holding.

I would say that the major reason for the increase this quarter is the fact that today when you look at our production, the production is coming from China and from Hungary where the majority is coming from China. And given the fact that the Chinese New Year that takes place in February basically shuts down the operation, both the Chinese customs and the factory for two weeks, and then there is usually another week of getting back to normal.

We wanted to make sure that we do not need to do any shipping not in the ocean freightway that we very much like and, as such, we decided to increase the inventories. Today all of the inventory that you see, net of reserves, are inventories that covered by backlog, covered by some of the inventories related to raw materials that we buy for our contract manufacturers to use in the manufacturing of our product, and everything is covered. We do not see any, I would call it, inventory that is beyond what we need or what we expect to use in the very short term.

Got it. That's great to hear on your books. Do you have any sense of what the inventory is at your customers?

Basically, again, we do not track the inventory of our customers, but we basically understand that there is no difference between the inventory levels that the customers are carrying now compared to where they were last quarter or before. This is usually just a few weeks, and we do not see anything that is piling there with our customers.

Got it. And the last question I had is just can you touch on the UK market? You called that out as being strong, in particular, in the quarter. Is there a way you can quantify that just given the challenges that that market has, moving forward?

It was, I think, expected that the UK will stop the [fit] program. It wasn't known exactly when and by that it caught the market by surprise. So if, by the first part of 2015, you saw the end of the utility program, in general. Then currently we see that all the fit program went down dramatically in the incentive. So by that we expect that the natural business in UK will be reduced.

For that, the RFU element that can grow the market and basically enlarge the offering by adding more home management products for other energy applications in the house, and we believe that this type of product will be available, sometime in the second part of the year we'll be able to increase the market back to the size it was in 2000 -- at the end of 2000 -- of calendar 2015.

Just quickly, I guess the strength in the quarter versus your expectations entering the quarter, was it mainly from the UK or commercial or both or something else that I'm not thinking of?

No, it wasn't something specific. It was split over many markets. And the fact that, in general, the weather was a bit better in December in Europe, so we got a few more percentage over the expectation mainly from Europe.

Michael Morosi, Avondale Partners.

If you look the operating cash flow in the quarter and especially after normalizing for the tick up in inventory, it looks like you're approaching about $20 million a quarter. And with $160 million of cash on the balance sheet, is it time to start thinking about different priorities for this growing cash forward? And what are -- if you could remind us what those priorities are?

Sure. First of all, we are very happy about the fact that, indeed, we are generating cash. As Guy mentioned before, we are very happy about growth, but business was meant eventually to create profitability and cash flow.

When you look at the cash balances, I would say that, first of all, the cash balance is supposed to serve our growth. We believe that while we are growing very nicely today using our own resources and our own team, we believe that there may be other kind of growth opportunities out there, and we're always looking, and we're always seeking whether and what could be complementary to our portfolio to allow us to continue to grow in the future.

In addition to this, we need to remember that solar business eventually is very much also related to bankability. We believe that part of the reason that we are able to grow is the fact that we provide our customers with the feeling that we are a stable company, we are a profitable company, and a company that will be there to support them along the lifecycle of the system, which is a very long one. And, therefore, the increase in cash will also serve as remaining in a business for many good years and continuing (background noise).

Very good, and then as it relates to the NOL, have you disclosed what the NOL balance is and how long of a runway in terms of a tax shield that will offer.

I would differentiate between two major issues related to the tax shield itself. The tax shield is coming, first of all, from the NOLs. We usually indicate this on our annual reports but basically this is one part.

The second part is the fact that there are always timing differences between those expenses that we put on our books for accounting and those expenses related to tax reports. Most of our R&D expenses -- or actually all of our R&D expenses are expensed in the quarter in which they occur according to GAAP. But for tax purposes, at least in Israel, these are spread over three years.

The combination of the NOLs plus this difference of timing of recognizing the R&D expenses is the one that creates this difference. We are now discussing anything related to specific tax region at least publicly but, all in all, of course, as we move in profitability, we should expect that the Company will start paying taxes in the mid-term future.

Great, thanks a lot -- strong quarter.

Thank you very much.

Carter Driscoll, FBR Capital Markets.

Good afternoon. I will echo the sentiments of a very strong quarter, congratulations.

Thank you very much, Carter.

The first question -- I realize your discussions with customers tend to be annual in nature, but is there any color you could provide as to, specifically in the US, what positive or negative impact from the various changes to net metering rules. Obviously, one positive in California, negative in Nevada, if that has any effect on the discussions longer term. And then I have a couple of follow-ups.

In general, we think that the combination of the ITC stability plus the positive changes you mentioned in California is, by far, overcoming any negative change in Arizona. Our expectation is, in general, the US market will keep growing in the coming few years in the rate of 30% to 40% year-over-year, and I think that that's a very healthy growth, and we believe that this healthy growth and our expansion more and more into commercial, we have a great potential for keep growing our business in the US.

Okay. Maybe just shifting gears a little bit -- in Europe you mentioned a few countries that may have surprised. Were there any localities that disappointed in Europe? And then in terms of early forays in (inaudible) StorEdge, any countries you'd like to highlight that you're getting better reception within?

And then, lastly, are there any other potential battery OEMs that you're looking to qualify with outside of your current partner? And how long would that potential process involve in terms of [inter]-testing?

So, one by one, we weren't disappointed from any market in Europe. All of them executed a bit better than we estimated, probably from the combination of the fact that we keep growing momentum plus the fact that, as I mentioned before, the winter in Europe is a bit easier than what it was the last couple of years.

I think the second question was about StorEdge in Europe. In Europe there is one market specifically, which have the program and the subsidies for self-consumption in a way that push people into installation of StorEdge, and this is Germany.

In the other markets, you currently don't see much demand for StorEdge solution with the exception of Italy that, in theory, have a good -- the program there is supported as well, but yet we don't see significant numbers in Italy for StorEdge Solution.

In Netherland and in the UK, in the current situation, I think that to create a market for StorEdge not only in real early adapters that just want a good and new solution, you need to combine it with the other home management -- home energy management devices that, as I mentioned before, we will have in the second part of the year.

Okay. And then, just lastly, any potential other battery partners?

So, yes, but we are not yet giving the specific details unfortunately.

That's fine. All right, maybe just one more I can sneak in. Could you compare and contrast maybe the commercial resi slip between Europe and the US, however you want to quantify it, if you can? Or at least qualify it?

In essence, we can say again, since this is not something that we usually discuss, I can tell you that, as a general rule, we used to see that Europe was more the -- I would call it the ratio of commercial to residential was more strong on commercial on Europe compared to the US with the introduction of the 33 kilowatt and the 27 kilowatt inverters, we start to see that the US market is -- adoption rate of commercial is growing. It is not yet at the levels of Europe, but it is growing in the same direction.

(Operator Instructions) Pierre Maccagno, Northland Capital Markets. Sir, please check your mute button, we are unable to hear you.

You cannot hear me? Hello?

Yes, please go ahead, sir.

Can you hear me?

Yes, hi, Pierre.

Oh, congratulations on the quarter.

Thank you very much.

So I want to see if you could comment on -- well, the thought that you are beating seasonality for the next quarter, that means, I guess, you are gaining market share? Just any comments on your market share in the US currently? And how much more market share you expect to gain as well as maybe even comment on the other regions of the world?

In general, I can say that, as you mentioned before, the fact that there is seasonality and the fact that we are overcoming it means two things. I would start with the fact that, as Guy mentioned before, the winter this year, at least in Europe, seems to be a little bit lighter compared to the previous years, and that means that we see less of an effect coming from there.

On the US specifically, the market share that we are originally looking at is coming from outside sources such as GTM, and I think that they can better cite the numbers than we are given the fact that we know our data but not the overall market data.

I can tell you that what we see is that within our customers, in general, we are growing the volumes, and we are growing the amount that we are selling to them, but I would simply leave the market share answer to the more appropriate research firm.

So the fact of getting the seasonality, is it mostly driven by the Europe situation? Or is that also within the US?

No, it's really by the fact that we are growing and capturing market share. So we couldn't overcome seasonality without gaining market share. We are gaining market share and, therefore, that assists us to overcome the seasonality; that the third year that things are moving this way, and we're happy with this fact.

So any comments about competition from Chinese products, going forward?

We see, definitely, competition coming from a Chinese product. The first wave of Chinese competition that, in a way, got weaker since there was a big difference in the type and quality and the feature set of the European product and the tier 1 product such as us and the other couple, two European leaders to their basic Chinese inverter that you could get for a cheaper price.

We see that in the markets where the Chinese were very strong, they went down in market share since people understood that it's not the apples-to-apples and went back to buy product with much higher reliability in the feature set despite a bit higher price.

But we definitely believe that the Chinese product will become better, and the competition will become tougher and, therefore, we introduced a complete new technology that we give -- believe will give us a great edge not only in quality but also in price and ability -- and strong ability to compete on prices, going forward.

So in what region of the world would you see most of the competition with the Chinese?

We see competition everywhere. It depends between residential and commercial. In commercial you see lots of competition in Europe and the US, very little in Japan. In residential you see less competition in Europe and a bit more -- sorry, in the US -- and a bit more competition in Europe and Australia.

Great. And any news about entering Japan?

We are moving forward. We already got approval to start to sell three-phase inverters in some -- with some utilities in Japan, and we are moving forward, and we expect that in 2017 calendar, Japan will start to be an interesting part of our total business.

Philip Shen, Roth Capital Partners.

A quick question on customer concentration. In last quarter's Q, the two largest customers represented 26% of your revenues. I don't think you followed your Q for this quarter thus far, but I was wondering if you might be able to share with us the latest concentration figures and perhaps the names of the customers as well?

So, first of all, we will be filing in the next there 2 the Q and then the data will be in the customer concentration. In essence, we do not provide names. What we can tell you is that basically we do see less concentration from each and every customer. This quarter three customers were in -- significant customers, meaning that at least in accounting they were more than 10%. The composition and the placement of these customers is changing from quarter to quarter. Again, we do not provide this data on a namely basis.

Okay, great, thanks very much. And congrats again.

Thank you very much.

And, Mr. Sella, I'll turn the call back to you, sir, for any additional or closing remarks.

Guy, Guy. My father is Mr. Sella. In summary, our fiscal second quarter results show continued successful execution of our business strategy with record revenues and consistent growth and profitability. We look forward to continuing this momentum. Thank you for joining us on today's call.

Thank you, and that does conclude today's conference. Thank you for your participation.