Solaredge Technologies Inc (SEDG) 2017 Q2 法說會逐字稿

Welcome to the SolarEdge Conference Call for quarter ended June 30, 2017. This call is being webcast live on the company's website at www.solaredge.com in the investor section on the events calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved, and any recordings, reproduction, transmission of this call without expressed written consent of SolarEdge is prohibited.

You may listen to the webcast replay of this call by visiting the event calendar page on the SolarEdge investor website. I would now like to turn the conference over to Erica Mannion, at Sapphire Investor Relations, Investor Relations of SolarEdge. Please begin.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the quarter ended June 30, 2017, as well as the company's outlook for the third 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 June 30, 2017. Ronen will review the financial results for the quarter and provide the company's outlook for the third 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 U.S. GAAP.

The non-GAAP measures are presented in this presentation, as we believe that 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 U.S. GAAP. Listeners who do not have a copy of the quarter ended June 30, 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. I'm happy to report that we concluded our second quarter with strong results. We are reporting record revenues for the quarter of $136.1 million, gross margin of 34.6%, GAAP net income of $22.5 million and a record non-GAAP net income of $25.8 million. We also reported a record cash flow from operations of $31.6 million.

Let's look at what has driven these positive results. Our revenues hit a record high this quarter, and we continue to execute on our business plan in all parameters. We increased our gross margin and profitability while ASP erosion was within our plan. This increase in gross margin is mainly a result of effective cost-reduction which continues to be a focus for our R&D team, together with efficiencies associated with increased revenues, translating into lower per unit production cost.

In the second quarter, we shipped 563 megawatts of AC nameplate inverters, approximately 274 megawatts of which we will ship to North America. Overall we shipped 1.8 million power optimizers, and 75,000 inverters, yet another record.

I want to take this opportunity to highlight some aspects of our business and to address some additional noteworthy measures. Our record revenues this quarter were driven by a modest increase in our North American sales, coupled with significant growth in Europe, in particular, from Germany and the Netherlands. In addition, we continue to see positive momentum in other markets such as Japan, Australia and India, where our newly established team is engaged in developing large commercial opportunities.

As in last quarter, our commercial sales continue to grow even slightly more than the very nice growth in our residential sales. In the last quarters, as we continued to increase our R&D teams and related expenditure, which allows us to continue to drive down product cost and more important, to introduce new products.

This quarter, we announced our new S-Series Power Optimizer. The new S-Series Power Optimizer is approximately 40% better in power density, and introduces a new innovative safety feature that extends safety to the connector level. The new safety feature is designed to detect heat abnormalities and initiate shutdown before an arc occurs in order to prevent potential fires.

This S-Series Power Optimizer is expected to be available in 2018. We also unveiled our larger capacity Three Phase Inverters. The up to 100 kilowatts inverter solution enabled reduced installation time and cost while also providing smart energy management control. The new product opens new opportunities for large commercial projects for the company, and even meets the needs of large utility project, where we can continue to deliver our advantage in system design, added production and safety at a competitive price.

A few weeks ago, at the Intersolar North America, we announced the world's first Inverter Integrated Electrical Vehicle Charger. By supplementing grid power with PV power, our Level 2 EV charger offers charging up to 6x faster than a standard Level 1 charger with its innovative solar boost mode. Integrating an EV charger into our inverter, furthers our strategy of extending inverter functionality from pure solar inversion and monitoring, to turning an inverter into the central component for home energy management applications. This is part of our longer-term plan for growth and business expansion.

Our HD-Wave inverter's rollout is complete, and now available worldwide. Market acceptance for this game-changing inverter is strong. A noteworthy side, since the beginning of Q2, we had been seeing strong evidence of component allocation issues, mainly for power components used in midsize Three Phase Inverters. This phenomena, together with the increasing demand for our products and the expansion of our product line, puts more pressure on our component supply chain. We are mitigating this pressure by expanding our approved vendor list, but in the near future, we do expect that we will have some increase in air shipment costs and longer lead times in order to meet the higher demand for our products.

The competitive landscape continues to be a source of much discussion in the industry this quarter. We are still not seeing any new products or players in the market and remain confident in our technology leadership and the intellectual property we have to defend it.

We are also confident that our increased cash position, which now exceeds $274 million, puts us in a strong position to continue to develop new products and expand our business, both geographically and into other aspects of energy management.

I would like to conclude with a brief look at our bottom line numbers. Our non-GAAP net income was $25.8 million, and we generated record cash from operation -- operations, amounting to $31.6 million. As we have proven over the past quarters, our financial strength positions us well to continue to increase market share in the U.S, Europe and other global markets, even in markets that are going through change and challenges. It has also enabled us to leverage our very strong research and development team to bring new products to current and new markets, while managing a very effective cost-reduction plan.

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 second quarter of 2017, I would like to remind listeners that while the overview will be on a GAAP basis, in certain cases, I will be discussing non-GAAP numbers and measures, which exclude the impact of stock-based compensation and deferred tax as well as non-GAAP earnings per share.

Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. Now let's start with our financial results for the second quarter of 2017.

Total revenues were $136.1 million, compared to $115.1 million last quarter, and $124.8 million in the prior year period. Revenue growth this quarter was mainly attributed to our growth outside of the United States. While sales in the United States modestly grew this quarter, Europe and the rest of the world represented 45.9% of our revenues. This quarter, only one customer exceeded 10% of revenues, and our top 10 customers accounted for approximately 59.5% of revenues.

Gross margin for the quarter was 34.6% compared to 33.6% in the prior quarter, and 31.4% in the same quarter last year. A relatively stable price environment, combined with our continuous cost-reductions, increased sales of HD-Wave inverters related to other products, and stronger euro compared to the U.S. dollar, were all contributing factors to our improved gross margins.

Moving to operating expenses. Research and development expenses were $12.7 million, an increase of 11% compared to the previous quarter and an increase of 38% compared to the same quarter last year. This increase is in line with our continued investment in new product development and focus on cost reduction. Our R&D team headcount is constantly growing, enabling us to expand teams and expedite development of new products. In addition, this quarter shows slightly higher increase in expenses since annual salary adjustments are implemented at the beginning of the second quarter. As we mentioned in the past, we intend to continue and invest our resources to expand research and development teams in the near future.

Sales and marketing expenses for the quarter were $12 million, an increase of 11% compared to the previous quarter, and 34% increase compared to the same quarter last year. Other than seasonal growth usually seen in the second and third quarter due to the timing of the large solar industry trade shows, the industry -- the increase this quarter represents our continued investment in our -- in and outside of the United States to support our growing business.

G&A expenses were $3.3 million for the quarter, a decrease of 26% from the prior quarter, and an increase of 6% year-over-year. As a reminder, last quarter, we needed to increase our accrual for doubtful accounts, mainly due to the uninsured portion of AR balance related to the bankruptcy of Sungevity.

In total, operating expenses for the second quarter were $28 million or 20.5% of revenues. Compared to $26.7 million or 23.2% of revenues in the prior quarter, and $21.2 million or 17% of revenues for the same quarter last year.

The result of the increased revenues and gross margins and the reduced increase in operating expenses, is that operating income for the quarter was $19.1 million compared with $12 million in the previous quarter and $17.9 million for the same period last year.

Financial income this quarter was $3.6 million compared to $1.4 million in the previous quarter, and a financial expense of $0.5 million for the same period last year. The relatively high financial income is a result mainly of the euro revaluation against the U.S. dollar that is combined with higher euro denominated accounts receivable and cash balances, resulting from our sales growth in Europe. In addition, the financial income includes increased income from investment in marketable securities.

Taxes on income this quarter were $0.2 million, compared with a tax benefit of $0.8 million and tax expenses of $0.1 million for the same period last year. The relatively low tax rate this quarter is mainly attributed to the tax holiday from which the Israeli subsidiary is benefited until June 2018; changes in our deferred tax assets as a result of the increasing R&D expenditures, and favorable changes in the applicable tax rate for technological companies in Israel.

GAAP net income for the second quarter was $22.5 million compared to a GAAP net income of $14.2 million in the previous quarter, and a GAAP net income of $17.3 million for the same quarter last year. Our non-GAAP net income was $25.8 million compared to a non-GAAP net income of $16.5 million in the previous quarter, and of $19.9 million for the same quarter last year. GAAP net diluted earnings per share was $0.50 for the first quarter -- for the second quarter, compared with $0.32 in the previous quarter and $0.39 net diluted GAAP EPS for the same quarter last year. Non-GAAP net diluted EPS was $0.55 compared to a non-GAAP net diluted EPS of $0.36 the previous quarter, and a non-GAAP net diluted EPS of $0.44 in the same quarter last year.

Turning now to the balance sheet. As of June 30, 2017, cash, cash equivalents, restricted cash and investments were $274.7 million compared to $27.6 million as of March 31, 2017. During the second quarter of 2017, we generated $31.6 million in cash flow from operations. AR balances increased nominally this year -- this quarter, and were $79.9 million as of June 30 compared to $79.3 million last quarter. However, this amount represents a lower DSO compared to the last quarter, mainly to -- due to a more even distribution of sales over the quarter.

As of June 30, 2017, our inventory level, net of reserves, was at $56.2 million compared with $60.9 million in the prior quarter.

Moving on to guidance for the third quarter of 2017. We expect revenues to be within the range of $155 million to $165 million, and gross margins to be within the range of 33% to 35%.

I will now turn the call over to the operator to open it up to questions.

(Operator Instructions) And we'll take our first question from Vishal Shah with Deutsche Bank.

First question is on the revenue outlook for the third quarter. Can you talk about where the strength is coming from? Is it still European markets, are expecting U.S. to pick up? And also, what is the sun pricing environment, you mentioned stable pricing. I know you had kind of said in the past that you expect price declines of about 10% on a year-over-year basis. Is that still the case? And then finally, what do you think the gross margin impact is from some of the recent tightness in the supply chain you're talking about?

So one by one. Revenue outlook would come from the growth we believe in both U.S. and Europe. We'll know better by the end of the quarter, but I think there is a good chances that U.S. sales starting to grow nicer than what we saw in Q2, but we'll know only at the end of the quarter. But we feel confident that we'll have overall growth almost in any territory. What was the second question? Pricing? We still assume -- for the total year, the estimation of 10% ASP erosion. I think we gave estimation of 10% to 15% ASP erosion by the beginning of the year, it's still assumption today. On the early basis, we don't see any major change. We think that the total ASP erosion will be within the range we gave you at the beginning of the year. What was the second?

Yes, the third question was around the supply chain issues that you mentioned and the impact on gross margins.

So, I think the impact on the gross margin will be small. It's still within the 33% to 35% that we are giving you, which is, as you remember from a few years ago, within the estimation of how we can grow over until the end of next year to somewhere in the area of 36% to 37%. The effect is, will be on a higher cost of air shipment and a little bit on longer lead times, but I don't think it will influence yet any major parameter of the quarter. From the global perspective, it seems that for high-power -- mainly high-power activity component and modules, there is quite several occasions situation that probably will be with us until Q2 next year. So it's something we will have to work with and live with and overcome in the next, I believe, 3, 4 quarters.

We'll take our next question from Jeff Osborne with Cowan and company.

A couple from me. Ronen, I was wondering, could you give us a sense of what HD Wave penetration is as a percentage of the megawatts that were shipped in the quarter?

(inaudible) in Q , (inaudible) they were producing only HD Waves so beside storage inverters that are a few thousand of these in Q2, 2000 to 3000 inverters were storage inverters. Most of the rest is HD Wave, and it's all the one phase inverters we're selling, which is more or less 2/3 to 70-some-percent of the total sales of the company.

And all the Three Phases is not HD Wave at the moment?

No, no. Three Phase is not HD Wave yet. Only by the end of 2018.

Got it. And then, how do we think about the OpEx trajectory in the second half? Certainly you've given guidance on the revenue and nice growth there, but just given the kind of internationalization of the company, how do we think about more feet on the Street as well as some of the product initiatives that you have that you highlighted at Intersolar?

So I can say several things, and let me differentiate between R&D and sales and marketing and G&A. On the R&D, as we mentioned in the previous calls and throughout the quarter, we believe that overall, we'll try to grow by 25% in the expenditures. However, given our financial position, usually, the problem with growing R&D is not actually whether you have restrictions on the budget or not. It's actually having the right people to recruit them, have them joining the company and have them become useful in a way that the organization can absorb and they can basically prove themselves. And as such, while we would like to grow more than 25% year-over-year, I believe that this 25% is the right number, simply given the fact that there is a certain amount of people that you can hire and train within a limited period of time. When you talk about sales and marketing, so first of all, the second and the third quarter are usually higher on sales and marketing because of the large trade shows, we have Intersolar and SPI, and also in other areas around the world. And we're operating in many geographies, as you can see. So usually, you see a little of a bigger growth there, which is supposed to be much smaller in Q4. And when it comes to G&A, G&A is fairly stable and growing quite slowly. Because of the fact that already have all of the, I would call it infrastructure, needed to support a company of that size. In general, the rule of the thumb is that, on the annual basis, operating expenses as percentage of revenue should decrease in order to allow us to increase profitability. And we still believe that this will be the trajectory that we're supposed to see.

Got it. And last question I had, just with the softness or the slower market here in the U.S., do you have any concerns about channel inventory with some of the older product or do you feel comfortable that, that's been flushed out?

We don't think that there is a higher inventory in the channel today than what it was in Q1. I think in a way, maybe the opposite is true. We do see a tendency for some people to build inventory due to the Suniva case. So this is something that we wouldn't know on a namely basis, but we do see, or do hear in the market there are some people that are building inventory, assuming this will change the behavior of customers towards the end of the year. But we, in general, I think, see less inventory in channels than what we saw at the beginning of -- in similar time in Q1.

We'll take our next question from Mark Strouse with JPMorgan.

I'll add my congratulations as well. So can you just talk about the competitive landscape? I think you've been gaining share for quite a while now. But is it fair to say that during Q2, that your market share shift accelerated as some of your distressed competitors, potentially became even more distressed? And then, kind of on the flip side of that, are you seeing any signs of new competition coming in anytime over the next year or so?

So we hear the rumors that Huawei is supposed to come with commercial -- residential inverters and optimizers. We didn't see any of these components. All we saw was mockups in some shows. So we don't know better than you if those are just mockups, if something will show in the market. We feel very confident with our intellectual property to protect what we invented a decade ago and leading the space with. Regarding accelerating market share, I don't think we have enough data points to confirm such a claim. I guess, we'll have to wait and see and hear a few other earning calls next week. And then maybe we -- you, all of us will have a better view of the exact market share. But I think that we feel very confident with our ability to take market share in the U.S. and in Europe.

Thanks, Guy. Just one quick follow-up if I can. What was the mix of C&I during Q2? And how should we think about that trending over the next few quarters?

So all in all, it was slightly higher than in the last quarter. As we said last quarter, it was a little bit over 32% of revenues and this quarter was slightly higher, and not much more. But given the fact that of course the growth that you saw in revenues, that means also the sales grew nominally. And as Guy mentioned in the previous call, we truly aim for at the end of 2018 to be 50-50 percent between C&I and residential, and we clearly see that C&I is continuing to take more and more share of our revenues.

And we'll take our next question from John Windham with Barclays.

We've done a lot of work this quarter on channel checks and the feedback on HD Wave was overwhelmingly positive. So congratulations on the product launch. Having said that, can you talk a little bit about the S-Series and where that's going to fit in the product portfolio and through -- more specific on when that might roll out in 2018?

So the answer is, we start -- we'll replace in full the current optimizers. It's the new ASIC that we have operating in the -- in less for, I think, close to a couple of years. It has better power to volume density, which means that it's all -- in power electronics as you know, translating to cost reduction. And it has this unique feature which we think is very important. As you're probably aware of lots of problems with connector, where we can detect in the connector temperature. And therefore, stop the system if the temperature is going above a normal connector temperature way before an arc will start. As you understand, there are 2 -- in one hand, we want to enjoy the cost reduction, on the other hand, we're hoping to be in the quarter, manufacturing the 80%, 90% of our optimizers already -- or with fully automatic assembly centers. So transforming those into the next generation probably will take us 3 to 4 quarters. So I would expect that we'll start to roll out the new product by Q2, and we will finish to roll it out by the end of next year.

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

As a follow-up to the ASPs question and topic. I was wondering if you might be able to split out the year-on-year change that you see for resi versus commercial. I know you were talking about a blended decline of 10% to 15%. But in so far as you could split that out, that would be helpful.

We cannot split each one of them because some of the products are actually going to the same markets. But I'll try to give you a little bit of the trends that we see. So I can say that in general, there are some effects that are eventually baked into the ASP that are mostly related to mix or geographical mix. And this is the fact that, due to the higher sales that we see in Europe right now as a percentage of revenue, and due to the fact that the euro became much stronger than the US dollar, that means that now, we're actually seeing in some cases that the -- on a dollar basis, the ASP in Europe is increasing. And, of course, the bigger the amount of sales in Europe, the overall effect is much bigger. So if you take out all of these effects related to geographical mix and currencies that are somehow distorting the view, we generally see relatively stable ASP environments, where we see almost no market-wide changes or pressures on the ASP. There are pinpoints that we sometimes need to react or change prices based on demand or based on opportunities. But in general, we see no new competition, no new competitive price pressure, no new different products that require us to, right now, drop the prices. And as such, we see a relatively stable ASP environment overall.

Great. As a follow up to margins, I think I heard you say -- I think you said, 36% to 37% long-term gross margins. I was wondering if you might be able to expand on that. Back to the IPO, you guys were talking about your long-term margins being between 30% and 35%. In this quarter you're hitting close to 35%. So longer term, assuming the competitive environment stays stable, where do you think margins could go?

So from the very first days on the road show we were very consistent. We said 32% to 37%, and this is something that, over the last 2.5 years, we reiterated that we still see as our long-term model. In general, when we look at the gross margin it's a combination, of course, of the ASP but also of the company's ability to drop the costs. And dropping costs mainly comes from innovation and mainly comes from the ability to execute on, I would call it magazine of cost reduction measures that we already have; where each one of these elements require R&D activity that is always coming on the account of new products. So it's always a balance what do you do? Do you do more product development or more cost-reduction? We feel very comfortable with the 37% moving forward. Even if we see competition growing or where it is today, we believe that the amount of identified cost-reduction items, especially now with HD Wave which is only at the very beginning of its way when it comes to cost reductions, and the ability to continue and improve the products. From the new generation of optimizers, we see a lot of it areas where we can continue and do this. And as such, it seems that we can continue and drop costs higher than ASP. On the other hand, to see much higher than 37%, is something that is hard for us to see, simply because of the fact that this industry did not experience something like it before, and we always believe that there is some balance between your ability to grow margins and your customer's power to try and take some of these margins away from you and move to their margins. So we're still very comfortable with the upper limit of the 37% from the last 2.5 years and we'll do everything to continue to execute on this.

Great. One more if I may. In terms of your growth outlook. You focus on residential or you're growing your commercial. The segment that you're not in is utility scale. Can you give us an update on your ability to address utility scale? What the timing might be? What do you expect your value proposition to be? With the string inverters kind of attacking the utility scale market, how are you looking at that market and that segment now? And what could be the timing as to when that business could kick in?

So we started to reach, I think prices -- especially with the new jumbo Jupiter that allows us to compete on the market of industrial or utility scale projects that are based on string inverters. This is a part of our core development to 2018, and I believe that the first product is a good fit. And by the end of 2018, mid 2019, we will have a full suite of products aiming specifically for utility scale projects. And I believe that with time, we'll take our share of this segment as well.

We'll take our next question from Joseph Osha up with JMP securities.

Yes, my congratulations as well. I'm wondering if we can talk about HD Wave and the Three Phase market a bit. I heard you say late 2018. What are the key challenges here? Is it simply a case of tripling the electronics on the AC side, and maybe just talk a little bit about what the advantages of HD Wave might look like in that Three-Phase market.

So the topology of suites of the HD Wave is what we believe is a much better topology . It will allow you to improve efficiency to above 99%. Today, we are at around 98%, 98.5%. The difference in percentage of efficiency is not the main point. The main point that it will reduce the (inaudible) by half. And therefore, it will allow you to reduce dramatically the size of inverter while reducing the passive components as magnetic capacitors. It's a long development process. There is nothing that -- there is no specific points that are more complex than others. When we developed the core topology of the HD Wave, we developed in parallel, both topologies. But we have -- we have given R&D power. We have a more or less 30% to 50% of all our resources are focused on cost reduction and that's how we can improve our gross margin quarter-over-quarter. And with the rest of the R&D team, we have to prioritize development, and we prioritize the One Phase over the Three Phase. So that's the only reason why the Three Phase will come next year where the One Phase came a year ago.

Okay, second quarter. And then just a follow-up on the many, many margin questions. Let's say hypothetically that you do end up at this 37% and you and Ronen are looking at it and saying, "Gosh, this is high, relative to history." At that point do you start giving any additional margin back as price?

I think we'll just enjoy the cost reduction to increase market share. We always can reduce price, increase market share, or increase price and take smaller market share. I think if it's around 37% it's better to increase market share than to increase gross margins, but that's an opinion like any other opinion.

In (Operator Instructions) We'll take our next question from Colin Rusch with Oppenheimer.

Can you talk a little bit about the currency impact on gross margins and just kind of give us a sense of how large that was in the quarter?

So in general -- we cannot give that and give the numbers themselves. I can say that they are not -- not all of the growth that you saw this quarter was attributed to this much smaller effect. But in general, when we saw that in the last years, because of the shrinking euro towards the U.S. dollar, as we saw the margins also reducing and we suffered a little bit. Now we see a little bit better, I would call it better-than-expected effect. And think that most of the effect of the currency is not actually on the pricing of the gross margin, it's actually on the financial income because the side effect of having the high AR balances in euros, means actually that when the dollar is de-evaluating against the euro, you see the very high financial income. So maybe, one should say, you should add some of the unusually high financial income and put it into the margins in order to really see the effect. But I would say that, it's a positive effect but not all of the improvement that you saw from the last quarter.

Okay, that's super helpful, Ronen. And then, just in terms of geographic diversity, it's nice to see how diverse the end markets are. Can you can talk a little bit about your anticipation of mix in the third quarter embedded in your guidance? From a geographic standpoint.

So first of all, we -- the guidance assumes growth in, I would say, most, if not all of the regions in which we are operating. So as Guy mentioned at the beginning of the call, we believe -- or the questions -- we believe that U.S. market will show a little bit of a better growth in the third quarter compared to the second quarter. And we do expect at the same time that the summer in Europe is continuing to play a very nice effect that will allow us to grow. We expect that the ratio will be close to where it is right now. And again, we'll have to see where the quarter ends, but in general, we do not expect major shifts in the U.S. and non-U. S. business. All in all, though, we also see that again, it is not affected in the numbers. But the growth that we see some of the regions is also in Japan and India, Australia, those markets who does not really affect dramatically, right now, the numbers, are also growing also in nice and substantial percentages. But this is coming off a smaller base. So all in all, we will continue to see non-U. S. strong sales over the third quarter. And this is what is also baked into our guidance.

(Operator Instructions) We'll take our next question from John Quealy with the Canaccord.

Just maybe to the balance sheet for a minute. The movement of generated cash into marketable securities in the long-term side. Just talk about your uses for those -- for that cash moving forward. Obviously, you talked about deepening the supply chain on some part shortages, et cetera, the R&D push, and then also is something we haven't talked about it, M&A. So just, if you don't mind, just give us an overview of why putting the cash there now, and how you feel about deploying it inorganically?

Okay. I'll start from the second part of the question. Most of our investments based on our investment policy are relatively to a -- are to a short duration. Both given expected movements in interest rates, but also given the fact that we know that some of the money will have to be liquidated within a reasonable timeframe, if we decide to do any moves such as M&A that you have mentioned or any other act. At the same time, given the interest rate environment that you see today on time deposits, if you don't invest it in marketable securities, even for a short duration, you get close to 0%. And given the substantial amount, we simply think that a few more points to the EPS is something that never harmed anyone. From cash deployment's point of view, nothing really changed dramatically. The first thing is that, as a company, the bigger you are, the more you need to maintain cash to run your working capital. Increased sales mean increased manufacturing, means increased sourcing, means increased sourcing of components. We are sourcing some of the components for our contract manufacturers to make sure that we are in control of our supply chain. This is something that also requires cash. And we also have cash that is always there to support our warranty obligations. As an inverter company that gives 25 years warranty, it's not just important to accrue everything and put it in your balance sheet. Having money to actually support this accrual is something that we deem to be very important. And the last issue again is the M&A front. We are looking for companies. We believe that once opportunities will come, we should be able to perform and basically acquire a company that could add to the revenues and profitability and as such; I'll leave the cash as it is right now. In general though, we do not see very long-term investments. Most of the investments are short-term securities.

Okay, thanks and as my follow up, just back to the gross margin question but tied to product vitality. Some of the things that we saw at Intersolar were -- my guess are 24-month pipe introductions. Can you just comment on the cadence of gross margins and products moving into the sort of '18, '19 timeframe, inherently better margins, et cetera? What sort of product vitality of that booth we saw, how much of that should be in sales in, I don't know, in a year?

So thank you, first of all for the question. So, in general, as we said all along, we will not see, either from new products or existing products, that are enjoying cost reductions, we usually don't see a one-step function jump in gross margins. Given the fact that again, sales are so much diverse in products in geographies and in segments that even if you grow one specific product, it does not affect automatically across the board. And as such, you will see, I would call it more of a linear crawling up gross margin towards the 37%, then a jump. The 35%, 37% that you mentioned before is something that we can be achieved within the next few quarters. It is not something that will have to wait, we believe, for 3, 4 years. But at the same time, again, it is something that you'll see more of a steady growth than one jump that will happen immediately.

And as there are no further questions. I'd now like to turn the conference back over to CEO, Guy Sella, for any additional or closing remarks.

In summary our second quarter results show continuous successful execution of our business strategy, with record revenues and consistent growth and profitability. We are well positioned to continue to expand our business with new product offerings and in new territories. We look forward to continuing this momentum. Thank you for joining us on today's call. All the best.

And once again, that concludes today's presentation. We thank you all for your participation, and you may now disconnect.