Solaredge Technologies Inc (SEDG) 2017 Q1 法說會逐字稿

Good day, and welcome to the SolarEdge Conference Call for the Quarter Ended March 31, 2017. This call is being recorded and webcast live on the Company's website at www.solaredge.com in the Investor Relations section on the events calendar page.

This call is the sole propriety and copyright of SolarEdge with all rights reserved. And any recordings, reproduction, or transmission of this call without expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Events Calendar page of the SolarEdge investor website.

I would now like to turn the call over to Ms. Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge. Please go ahead, ma'am.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the quarter ended March 31, 2017, as well as the Company's outlook for the second quarter of 2017. 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 results for the quarter ended March 31, 2017. Ronen will review the financial results for the quarter and provide the Company's outlook for the second quarter of 2017. Then, we will open 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. And the non-GAAP measures are presented in this presentation, as we believe that they will provide investors with the means of evaluating and understanding how the Company's management evaluates the Company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP.

Listeners who do not have a copy of the quarter ended March 31, 2017 press release or the presentation, may obtain a copy by visiting the Investors section of the Company's website.

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. We concluded the quarter with revenues of $115.1 million, up 3.2% from last quarter, and a GAAP gross margin of 33.6%. Non-GAAP net diluted earnings per share were $0.36 for the first quarter.

In the quarter ended March 31, 2017, we shipped 455 megawatt of AC nameplate inverters. Overall, we shipped just under 1.5 million power optimizers and 58,000 inverters.

As we discussed last quarter, the general slowdown in the residential PV business in the US continues with (inaudible) economic instability among businesses in the US market, including in some instances, bankruptcy. We are mindful and cautious of the increased risk in the market and are fortunate that our strong cash position of $247.6 million enables us to secure the appropriate equations needed to continue and improve our market share, while managing customer risk and pricing.

In Europe, we believe that the market is improving and despite what is usually a low revenue quarter due to seasonality, we were able to increase our revenues. Overall, from everything we can measure, we continue to gain market share both in the US and in Europe.

We've also seen quarter-over-quarter growth in other important countries, including Australia and Japan. This quarter, we also announced the opening of our office in Bangalore, India and expect that our presence there will start to generate more sales this year and in years to come.

This quarter we had a record high of commercial sales indicating further market penetration of our three-phased workers in both the US and Europe. Without going into specific examples of installation and product name, I can comment that this quarter, we connected many new large systems, our monitoring portal, including several large projects in Japan.

Alongside the success of our commercial market penetration, is the rollout of our HD Wave inverter which continues in the US and elsewhere as planned. As has been discussed, this new line of inverters not only improved efficiency and has a design that is expected to yield higher reliability in the long term, but also provide us with significant cost reduction benefit, only some of which are currently seen in our bottom line.

While we know that investors have been concerned about competitive products from China for many quarters now, we have not yet seen any significant new product or players in the market, and remain confident in our technology leadership and our intellectual property rights where (inaudible).

This quarter we have begun working with additional contract manufacturers for production in Europe. We are in the ramp-up phase with these new manufacturers, which will enable us to continue production out of Europe and China.

Let's take a brief look at our bottom line numbers. Our non-GAAP net income was $16.5million, and we generated cash from operation amounting to $25.7 million. Our financial strength positions us well to continue to increase market share even in markets that are weak right now, and it also enables us to focus on new markets and leverage our very strong team of research and development for bringing new products to clients in new market.

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

Thank you, Guy, and good afternoon everyone. Before starting the review of our financial results for the first quarter of 2017, I would like to remind listeners that starting 2017, our fiscal year is aligned with the calendar year. In addition, I would like to mention that while the overview will be on a GAAP basis, in certain cases I will be discussing non-GAAP numbers and measures which exclude the impact of stock-based compensation in deferred tax, as well as non-GAAP earnings per share. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today.

Now let's start with the financial results for the first quarter of 2017. Total revenues were $115.1 million compared to $111.5 million last quarter and $125.2 million in the prior-year period. Revenue growth this quarter was mainly attributed to growth in Europe and the Rest of the World, while sales in the US market remained relatively flat in absolute numbers and accounted for approximately 64% of total sales compared to 67% in the previous quarter.

This quarter, one customer exceeded 10% of revenues and our top 10 customers accounted for approximately 64% of the revenues. Gross margins for the quarter was 33.6% compared to 35% in the prior quarter and 32.5% in the same quarter last year. As a reminder, our gross margin last quarter was positively impacted by approximately 2% from both cost reductions related to our warranty expenses, as well as from an increased insurance payment covering a bad debt from SunEdison. The improvement in gross margins is a result of our continued cost reduction in product manufacturing, logistics and support, combined with a relatively stable pricing environment.

Moving to operating expenses, research and development expenses were $11.5 million, an increase of 10.8% compared to the previous quarter and an increase of 31.6% compared to the same quarter last year. This increase is in line with our plans to further invest in new product developments and continue our focus on cost reduction. We are fortunate to be able to invest in these resources given our strong financial performance.

Sales and marketing expenses for the quarter were $10.8 million, an increase of 3.5% compared to the previous quarter and a 22.1% increase compared to the same quarter last year. G&A expenses were $4.4 million this quarter, an increase of 42% from the prior quarter and an increase of 28% year-over-year. While ongoing G&A expenses decreased by approximately $0.2 million compared to the last quarter, this quarter we needed to increase our accrual for doubtful accounts, mainly due to uninsured portion of AR balance related to the bankruptcy of Sungevity, and an overall deterioration in the credit stability of a few of our customers in the US.

In total, operating expenses for the first quarter were $26.7 million or 23% of revenues compared to $23.9 million or 21.4% of revenues in the prior quarter and $21 million or 16.8% of revenues in the same quarter last year. Operating income for the quarter was $12 million compared to $15.1 million in the previous quarter and $19.7 million for the same period last year. This reduction in operating income compared to the previous quarter was driven by one-time items, which included a contribution of $2.2 million of additional gross margins due to cost reductions related to our warranty expenses recorded in Q4 2016 and expenses related to an accrual of doubtful accounts recorded this quarter.

Financial income for the quarter was $1.4 million compared to expenses of $3.2 million for the previous quarter and financial income of $2 million for the same period last year. This financial income is a result mainly of the euro revaluation against the US dollar and offset of a portion of our unrealized foreign currency losses recorded last quarter. This quarter, we recorded income tax benefit of $0.8 million compared to income tax expenses of $2.2 million in the previous quarter and an income tax expense of $1 million for the same period last year. The tax benefit is a result of a GAAP-related tax asset increase related to our activities in Israel.

GAAP net income for the first quarter was $14.2 million compared to GAAP net income of $9.8 million for the previous quarter and GAAP net income of $20.8 million for the same quarter last year. Our non-GAAP net income was $16.5 million compared to a non-GAAP net income of $14.7 million in the previous quarter and a non-GAAP net income of $23.3 million for the same quarter last year. GAAP net diluted earnings per share was $0.32 for the first quarter compared to $0.22 in the previous quarter and $0.47 net diluted GAAP EPS for the same quarter last year. Non-GAAP net diluted earnings per share was $0.36 compared to a non-GAAP net diluted EPS of $0.32 in the previous quarter and a non-GAAP net diluted EPS of $0.51 in the same quarter last year.

Turning now to our balance sheet. As of March 31, 2017, cash, cash equivalents, restricted cash and investments were $247.6 million compared to $224.3 million at December 31, 2016. During the first quarter of 2017, we generated $25.7 million in cash flow from operations. AR balances continue to increase this quarter and were $79.3 million as of March 31 compared to $71 million last quarter. This is mainly a result of the concentration of sales towards the end of the quarter where customers start to increase their procurement and inventory levels in anticipation of a stronger seasonal quarter. As of March 31, 2017, our inventory level, net of reserves was at $60.9 million compared to $67.4 million in the prior quarter.

Moving now on to guidance for our second quarter 2017. We expect revenues to be within a range of $120 million to $130 million and gross margins to be within a range of 32% to 34%.

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

Thank you, sir. (Operator Instructions) Vishal Shah, Deutsche Bank.

Hi. This is (inaudible) on for Vishal. Congratulations on a good quarter. I just had a quick question. You guys mentioned increased investment in R&D, just kind of how are you guys thinking about your technology roadmap and what's the R&D spend going into optimizers or inverters?

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

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

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

Thanks so much. I will pass then.

Philip Shen, Roth Capital Partners.

Hey, guys. Congrats on the strong results. Thanks for the questions. Your blended ASP was down, I believe, 16% year-on-year in Q1. How do you expect ASPs to trend in Q2 and Q3?

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

Okay, great. And then with your geographic mix, I think you just mentioned, I want to clarify, that you are at 45% international. So that would suggest 55% in the US --?

65%, 35%. 64% (multiple speakers) US, 36% outside of US.

All right, got it. Sorry I misheard you. And then that's based on a megawatt basis. Of the 35%, can you give us a mix, what that looked like? I think last quarter Japan and Australia were 10% each, over percent 10%?

That was, by the way dollar basis, not megawatt basis. And Australia and Japan are far from being 10% percentage each.

Right, last quarter I think Japan and Australia were 10% in total, what (multiple speakers)?

Rest of the World was 10%. It was -- close a little bit, but it's -- I don't know the exact number a little bit above 10%. I'm not sure what it is. 11%, 12% in this range.

Can you give us the mix on a megawatt basis, between US and international?

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

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

So in general, as I mentioned in the last call, we expect R&D, of course, to continue to increase at -- last quarter we said, at approximately 20%, but again, it's an investment that we're always happy to do and make. And we see more opportunities, we have the ability, we have the financial means, and we have all the desire to increase it even more, if we can. Sales and marketing are again, expected to increase, but in general, we see them increasing more in line. The revenue growth may be slightly lower because there aren't economies of scale. And on G&A, excluding one-time events or allowance for doubtful accounts, we expect relatively flat G&A along the year.

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

Thank you very much.

Edwin Mok, Needham & Company.

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

Well, today, all this 3 kilowatt, 3.8 kilowatt, and 5 kilowatt that we produce in Q1 are all HD-Wave. By Q3, as we reported last quarter, by end of Q3, we will be producing only HD-Wave and all one-phase inverters, but the backup battery system or the inverter for the backup battery system will remain the older (inaudible).

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

We believe so.

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

No. So, we see demand for StorEdge still. The highest demand you can find is in Germany, followed in Europe by Italy. Australia is probably in the size of Germany, maybe a little bit smaller, and you see demand coming from Hawaii. I think that what you see today is that most of the third-generation battery system is based on the PowerWall and other options were installed. Majority, I think -- it's really pretty close to non-battery, it's not installed yet. We are expecting to start the new generation of batteries with Tesla and with LG to be installed sometime from mid-May and on.

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

Very close to 50-50. The commercial, more or less, very high-level numbers, because it all depends on what project is installed and commissioned when, but around 10%, 15% are Rest of World and the remaining 85% is split pretty much 50-50 between the US and Europe, a little bit more to Europe, but very close to 50-50.

So commercial -- US commercial actually has come up by a bit from just what you guys had done last year, is that fair to say that?

As I mentioned during I think all the calls last year, the problem with commercial is is -- its sale is bigger dramatically, the [neat] sales of residential, of course, and that you have timing issue between the time that you sell and install et cetera. So it's still not a very smooth drop, but yes, we see increase in -- nice increase in the US commercial inflation.

Great. That's all I have, thank you.

Colin Rusch, Oppenheimer.

Hi, this is Louis Sapir for Colin. How much automation remains to be implemented in your manufacturing process and what is the timeline for that implementation?

I think there is never end to a work of automation until all lines are being dark and people will not be in the sector, it will take many years. I think you refer more to the optimizers. Optimizers, we are now everything that's produced today in Europe, produced from fully automatic line. We are ramping up now two automatic lines in China. They are supposed to be ramped up before the end of the quarter. From this point on, about 50% of everything we will be producing in China will be coming from automatic line. And then we are ramping up another automatic line in Europe.

So I think that by the end of the year, I would expect that 80%, 85% of all optimizers will be produced from fully automatic lines. Saying that we still have lots of information between the S&P and the top level of [family] what's called AAC, Automatic Assembly Center. Lots of automation out of automatic testing and handling and MI soldering and lots of other automation that is coming through the year and with every equipment, you improve the statistical reliability and reduce a bit the cost of the assembly.

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

In South America we are not active. We see lots of emails coming from Brazil, from Chile, a little bit coming from Argentina. But we are, to be honest, not yet active there. We are -- very small company but we are very far from being a big company. We had to, therefore, decide where we invest and to build our geographical offices in the smart way that we can build them, recruit the right people, merge them with an organization, verify that the culture is same. So, currently we cover North America. We have access to Mexico, Guatemala, a little bit in Central America, but we do not have yet presence in any significant business in South America.

And within Central America, it's relatively small.

Yes, it's very small for now.

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

Let's differentiate between the receivables and payables. From the receivable side, as I mentioned on the call, the first quarter is a quarter that if we usually characterize with bad weather in Europe and at least in Northeastern part of the US this year, there was also a little bit of California. In general, that (technical difficulty) we do not see linear sales throughout the quarter, but we rather see sales starting to pick up and be much more intensive towards the end of February, beginning the March because most of the installers are stocking up towards the strong months of installations from April to September. And this inclination combined with the (inaudible) means that AR is increasing.

From payables point of view, this is again a natural growth related to the fact that as we see the volumes increasing and we see more demands coming along, then we are preparing by increasing inventories and buying more and more product, as well as having our manufacturers producing at higher pace.

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

Carter Driscoll, FBR.

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

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

Thank you. And then also any update on the M&A front?

We are working hard to find interesting candidates. So far we -- eventually, we do not have nothing to report.

Okay, great. That's all I have. Thank you.

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

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

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation.