Solaredge Technologies Inc (SEDG) 2017 Q4 法說會逐字稿

Welcome to the SolarEdge Conference Call for the Quarter and Year Ended December 31, 2017. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Event Calendar page.

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

I would now like to turn the conference 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 fourth quarter and full year ended December 31, 2017, as well as the company's outlook for the first quarter of 2018.

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 fourth quarter and full year ended December 31, 2017. Ronen will review the financial results for the fourth quarter and full year, followed by the company's outlook for the first quarter of 2018. Then we will open 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 U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance.

These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter and year ended December 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 all for joining us on our conference call today. We concluded the quarter with revenues of $189.3 million and record gross margin of 37.5%.

We had a non-GAAP net income of $41.2 million and a non-GAAP diluted earnings per share of $0.85 and we generated $45.8 million of positive cash flow from operations.

In the quarter ended December 31, 2017, we shipped 766 megawatts of AC nameplate inverters, approximately 461 megawatts of which was shipped to North America.

Overall, this quarter we shipped over 2 million power optimizers and 95,000 inverters.

As anticipated, we have continued to grow our revenues and we're able to overcome a challenging year in terms of industry-wide components availability while expanding our manufacturing capability to meet the growing demand for our products.

Looking at our year-over-year figures reveal strong results. We are reporting annual record revenues for 2017 of $607 million compared to $490 million in the year ended December 31, 2016, and an annual non-GAAP net income of over $115 million compared to a non-GAAP net income of $79 million in the year ended December 31, 2016.

Our non-GAAP diluted EPS for fiscal 2017 is $2.43 compared to $1.72 in the prior year. This year, we generated $136.7 million in cash from operations, an increase from the calendar year that ended December 31, 2016, when we generated $81 million in cash.

Profitability and the strong balance sheet is key to long-term success in this industry and it is critical to being able to support the 25-year warranty that's characterized module-level power electronics products.

As is evident from our strong financial performance, our business is growing at a healthy rate. We continue to stay focused on our bottom line numbers. On this front, we expanded our gross margin by keeping our ASP stable, continuing our cost-reduction initiatives, and as a result, increased profitability and cash flow generation.

We continue to invest significant resources in growing our R&D and customer support infrastructure to address our expanding geographic footprint with new, more cost-efficient products and even better services.

We have maintained a relatively stable ASP and our annual gross margin for 2017 reached a record high of 35.4%. We are starting to see products from Chinese manufacturer that has recently introduced optimizer with a reduced set of features and relatively high pricing in Australia. There are -- there have been market rumors about this for some time now and we have heard the product will be introduced in Europe as well.

From what we have seen so far, the products have only basic functionality and lack communication features and a safety mechanism. We expect their market penetration will be challenging, especially in the United States and leading Western European countries that are mindful of putting quality products on rooftops and are cautious of security concerns that relate to PV systems and their effect on the electrical grid, if not properly secured against cyberattacks.

I would like to mention our recently announced cooperation with Japanese technology leader, Omron Corporation.

Last month, Omron announced that they will be offering SolarEdge 3-phase DC-optimized inverter solution consisting of inverters, power optimizers and module-level monitoring to the high voltage Japanese PV market. As part of the launch, SolarEdge will supply high voltage 3-phase inverters and power optimizers to Omron for local distribution and sales. Omron's after-sales service network of 140 locations will address the Japanese market for the SolarEdge solutions. This cooperation with a very prestigious and well-known technology leader in Japan and worldwide is another indication of our success in establishing the SolarEdge brand as the market leader in the PV solutions.

To conclude, our products have now been in the market and gaining market acceptance for more than 7 years. We remain confident in our technology leadership, superior customer services, quality and reliability as well as our financial strength, which will help us to maintain our market leadership, even as these products surface.

Given our growth outside of the United States and our continued investment in new markets and in different regions, we are confident that we can continue to grow our revenues in 2018.

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 fourth quarter and full year 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, the impact of the Tax Cuts and Jobs Act and deferred taxes 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 fourth quarter of 2017.

Total revenues were $189.3 million, a 13.7% increase compared to $166.6 million last quarter and an increase of 69.8% from revenues of $111.5 million in the same period last year.

This quarter, revenues from the United States reached $120.4 million, a record high in absolute numbers and represented 63.6% of our overall quarterly revenues.

Sales to Europe were $47 million and represented 24.8% of our quarterly revenue. You may recall that the winter months are often characterized with a slower business in this region. Revenues generated from sales outside of the United States and Europe reached a record high of $21.9 million, representing 11.6% of our total revenue.

From a customer concentration perspective, our top 10 customers represented 62.3% of our quarterly revenues, while only 1 customer accounted for more than 10% of revenues.

On a per watt basis, blended ASP slightly decreased this quarter, mainly due to geographic and product mix. While on the per product basis, a slight ASP increase was offset by an increase of our commercial sales in the overall mix.

Gross margin for the quarter was 37.5% compared to 34.9% in the prior quarter and 35% in the same quarter last year. This record gross margin level is a result of the stable ASP environment combined with continued cost-reduction initiatives that lower our product manufacturing costs. As was anticipated, we spent more on air shipment in order to accommodate increased product demand and industry-wide component availability issues.

On the flip side, fixed expenses related to our manufacturing and support represented lower percentage of our revenues.

Our current gross margin level is consistent with the top range of the long-term model, which we communicated to investors when we went public in 2015 and we believe that absent unusual circumstances, we can maintain in this -- we can maintain it in the foreseeable future.

Moving to operating expenses. R&D expenses were $16.4 million, an increase of 14.3% compared to the previous quarter and an increase of 58.7% compared to the same quarter last year. This increase, mainly attributed to an increase in headcount, is consistent with our decision to invest resources in product development and innovation, cost reduction and advanced manufacturing processes that will allow us to continue to bring new products to the market as well as reduce the costs of our current products and further improve their quality.

Our financial strength and growing profitability fuel these investments.

Sales and marketing expenses for the quarter were $14.1 million, an increase of 6.5% compared to the previous quarter and a 35.3% increase compared to the same quarter last year. This increase is driven by our continued investment in the countries in which we operate already and the expansion of our geographic footprint.

G&A expenses were $5.9 million for the quarter, an increase of 16.2% from the prior quarter and an 88.7% increase compared to the same quarter last year, mainly resulting from a onetime litigation expense that we initiated in Q3 and concluded in Q4.

In total, operating expenses for the fourth quarter were $36.4 million or 19.2% of revenue compared to $32.7 million or 19.6% of revenue in the prior quarter and $23.9 million or 21.4% of revenue for the same quarter last year.

As a result of all of the factors just discussed, our operating income for the quarter reached a record high of $34.6 million compared to $25.4 million in the previous quarter and $15.1 million for the same period last year.

Financial income for the quarter was $1.5 million compared to a financial income of $2.7 million in the previous quarter and a financial expense of $3.2 million for the same period last year. This financial income is a result of favorable exchange rate gains and interest earned on our investment.

Let's turn now to income tax expenses that were impacted this quarter by the implementation of the Tax Cuts and Jobs Act that was signed into law in December 2017.

GAAP tax expenses this quarter were $16.6 million compared to a tax expense of $0.1 million in the prior quarter and $2.2 million for the same period last year.

In addition, in the fourth quarter, we booked provisional net tax charge of $18.7 million, primarily due to onetime mandatory deemed repatriation tax that is included only in our GAAP results. This provision for onetime repatriation tax, which is related to earnings and profit accumulated outside of the United States in 2017 and in prior years, was fully recorded this quarter. However, payment of the repatriation tax will be spread over the next 8 years, beginning of April 2018, with the majority of the payment due in the last 3 years of this 8-year period. The good news is that other than the reduced tax rate in the United States, we will benefit from the new tax law by having the ability to access our cash out in the United States in a highly efficient manner.

As a result, we have a greater flexibility with respect to our overall capital allocation and investment decisions.

On a non-GAAP basis, our tax expenses were $0.2 million compared to $1 million last quarter and $0.7 million for the same quarter last year.

GAAP net income for the fourth quarter was $19.5 million compared to a GAAP net income of $28 million for the previous quarter and $9.8 million for the same quarter last year.

Our non-GAAP net income was $41.2 million compared to a non-GAAP net income of $31.5 million in the previous quarter and $14.7 million for the same quarter last year.

GAAP net diluted earnings per share was $0.42 for the fourth quarter compared to $0.61 in the previous quarter and $0.22 for the same quarter last year.

Non-GAAP net diluted EPS was $0.85 compared to $0.66 in the previous quarter and $0.32 in the same quarter last year.

Turning now to the balance sheet. As of December 31, 2017, cash, cash equivalents, restricted cash and investments were $345.1 million compared to $304.7 million at September 30, 2017.

During the fourth quarter of 2017, we generated $45.8 million in cash from operations. Accounts receivable net increased this quarter, reaching $109.5 million compared to $91.7 million last quarter, while DSO remained relatively flat.

As of December 31, 2017, our inventory level, net of reserve, was at $83 million compared to $62.4 million in the prior quarter.

Let's turn now to summarize the 2017 full year results. Revenues for the year were $607 million, a 23.9% increase from $490 million in the calendar year of 2016.

GAAP gross margin was 35.4% compared to 32.8% in the prior year.

GAAP operating expenses were $123.7 million, representing 20.4% of revenues compared to $89.7 million in 2016, which represented 18.3% of revenue.

GAAP net income for 2017 was $84.2 million, a 32.7% increase compared to $63.5 million in the prior year and GAAP diluted EPS of $1.85 compared to $1.44 in the prior year.

Non-GAAP net income was $115 million, a 45.8% increase compared to $78.9 million in 2016 and non-GAAP diluted EPS of $2.43 compared to $1.72 in the prior year.

This year, we generated $136.7 million of cash from operations.

Moving on to the guidance for the first quarter of 2018. We expect revenues to be within the range of $200 million to $210 million and expect gross margins to remain flat within the range of 36% to 38%.

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

(Operator Instructions) And we'll go to Philip Shen, Roth Capital Partners.

First question I have is about components. I think you gave some color, but was wondering if we could get a little bit more. This is certainly an industry-wide problem. Can you give us some more detail as to how you were able to sidestep the challenges there? And if you could quantify what the actual impact due to the shortage of components were in Q4, that would be helpful. And then, to what degree have you quantified that impact or captured that impact for the Q1 guide?

So I think we gave some color and detailed explanation in the past. But practically, the shortage is coming -- started -- nobody understood it, but it started in the end of 2016, where reversely suppliers of high-voltage FETs, high-voltage IGBTs and some automotive ceramic capacitors found out that their book-to-bill was 170%. Back then, they didn't understand that it's really coming from demand. So they basically gave us the understanding only in February to April, depends on the supplier, 2017. The assumption was that this supposed to -- that it's supposed to fix itself sometime in the middle of 2018. What we did is obvious. On one hand, we are growing. On the other hand, we had to put major part of our resources in 1-phase, 3-phase and optimizers in order to develop second sources, and in some cases, different layouts to accommodate other components for these purposes. We overcome the majority of the effect already in Q2, Q3 2017, but the combination of the shortage of component, plus the growth in demand basically reduced dramatically the on-hand finished good inventory we had and we reported all this, if you remember. Therefore, we started to move much more into air shipments. We -- overall supply, practically 100% of all demand, of course, at higher prices, we had to buy some components at the marketplace instead of directly from suppliers. We had to ship big volumes in air shipment that were -- the 2 effects that we saw in Q3 and Q4. Starting 2018, we went to the major component suppliers. And currently, from what they can see, the over-demand for the same components I mentioned will be with us, according to them, until mid-2019. Today, we have much more resources for those major components and we have -- we, of course, put in April -- last year April to June, we put very big orders for major suppliers for 2017 and '18. So we secured, we believe, enough components. And therefore, I believe that slowly, we'll start to build more finished good inventory, but it will probably take another 2, maybe 3 quarters until the majority of the effect will be behind us. This under the assumption that we analyze the growth of 2018 properly. If we'll see higher growth than anticipated, it might be with us until 2019.

We've heard in the -- in our checks, that lead times with key customers are kind of in the 12-plus week time frame. So should we expect that to continue? So it seems like the volumes are good. You could get maybe some incremental volume if you cut some of the lead times down or is the volume actually steady and you can just get the wait times down over time? When do you expect to get that wait time down to typical 3 to 5 weeks?

That's what I mentioned. If we have -- as I mentioned in the script, we assume -- as I told you last year, we assume nice growth in 2018. Assuming that our assumptions are properly analyzed, we will need probably 2 to 3 quarters to overcome the demand and to short the lead time. I cannot promise that we can short it to 3 to 5 weeks. It depends on the type of the product and the location or many other parameters. But once we reach the finished good inventory in our model, then we go back to the lead time that we had in 2015, '16, which was in the range of 4 weeks, if I'm not mistaken.

Great, okay. Let's shift gears to the overall mix. I think you guys talked about $160-plus million of U.S. revenues in Q4. Can you share for Q4 what the megawatts were by region, U.S. and then other regions? And then, where was the strength beyond the U.S.? What was the mix between Europe and Australia and elsewhere? And then looking ahead into 2018, how do you expect that geographic mix, either in dollars or megawatts or both, to evolve?

So the total was 761 megawatts or 461 megawatts -- 766 megawatts, sorry, whereas 461 megawatts came from North America. The rest, if I remember properly, 24% came from Europe and the rest from mainly Australia, Japan, India and a little bit Israel and other small markets. As I mentioned in the past, I -- on a yearly basis, I believe that in 2018, we'll end the year where 50% or a little bit less coming from the North America and probably around 45% -- 50% to -- 45% to 50% coming from North America, where the rest is coming from Europe and rest of the world, where our longer-term model probably for 2019, '20 will be 33% from North America, 33% from Europe and 33% from Asia. And we are getting there. Japan is growing nicely. Australia is growing nicely. India is growing nicely. I think we are in the right direction to blend the total revenues in the form I just gave you.

We'll go next to Mark Strouse, JPMorgan.

I was hoping you could just give an initial indicator of the launch of the 1- to 2-kilowatt resi product. Just anything you can share there, I know it's still early. And then, is the -- I believe the initial launch was just in Europe. Can you just talk about potentially when you might expand that to other markets?

So we just started to take orders for this product. So far, we see a nice demand, but it's just the very beginning. Currently, we are in the middle of the Chinese New Year. So during Chinese New Year, we are not producing any new product from the reasons that you understand. You don't want to take risk, where the lines are not full of all the engineers, et cetera. We are supposed to start to produce mass production, first batches, right after Chinese New Year. So in the last week of February, beginning of March. We see a nice demand for the product. It opens up a segment that is mainly European segment of new houses and installation of 1- to 2-kilowatt that we weren't playing before this product at. We are looking now what will be the effect of that product in other regions. We're probably going to know in about a quarter, when and where we want to start to sell this product as well. It -- a lot depends on the actual volume we'll see -- actual demand we'll see in Europe, due to all the good reasons, that you prefer to first supply all the demand in one region before you open more demand and maybe might have issues with supplying it.

Okay, Guy. And then Ronen, I'm sorry if I missed this, just real quick. Can you just talk about the expectations for ASPs in 2018? I believe on the last call, you mentioned down about 7.5% to 10%, is that still about right?

So in general, when we look at the ASP erosions, our expectations were usually about 7.5% to 10%, absent of something that really changes the market from competitive landscape. In general, we still see this as a working assumption, as long as we don't see anything else, because one of the reasons that we've put this expectation is in order to match it with our cost-reduction targets as well. And as such, these are the assumptions that we see. Last year, in 2017, I believe that we saw -- or at least on a per-product basis, we saw almost a flat environment. So this 7.5% to 10% did not really happen. And we do not see, at least now, major changes in the competitive environment. But at least, it's a working assumption that 7.5% to 10% can continue and prevail.

That's on a blended...

Yes, blended ASP.

Blended ASP. I think that there will be a bigger difference this year between the ASP erosion on 1-phase inverters and commercial inverters. As mentioned, we reached what we believe is a good working point of 37% gross margin, and we will use the effect of better cost in order to gain market share. So of course, in specific segments, specific products, et cetera, et cetera, but we'll work our way to keep the gross margin flat and to gain market share with the extra benefit of improved cost we will have.

And we'll go to Jeff Osborne, Cowen and Company.

Just a quick question, following up on Phil's question. Did you quantify the gross margin impact from the MOSFET IGBT shortage? I think last quarter, you talked about a 150 basis point hit to gross margins for having to air-ship it. If you answered that, I missed it. Then I had 2 other questions.

So in general, we quantified, but it's a number that again, once -- now that we got to the area of the 37% that we said from the very beginning that this is the top of the model, we have many levers that we can play in order to make sure that we get to the target that we want from growth perspective and from, I would call it, market share perspective. And as such, we're playing with those levers within this 37%. So at any given point of time, we can increase air shipments if we would like to sell a little bit more. We can reduce prices if we want to take more market share, and we have the cost-reduction ability to do this. So although we quantified, I don't think that there is a lot of value in actually taking it as an assumption because if we need to air-ship a little bit more, a little bit less, we can simply use other leverages in order to have our gross margin stabilized at the level that we want it to be.

Got it, that's helpful. Two other questions, and I may have missed this as well. But did you give the C&I mix in the quarter, on what that was, either percentage of revenue, percentage of units? That would be helpful to have.

So we did not give, but we can give it now. Last quarter, it was 32.7%. This quarter, it was 33.1%.

And is that units or revenue?

No, this is on megawatts shipped.

Got it. And then just given that Omron is new, my last question, how do we think about you leveraging them? My assumption is that, that might be somewhat dilutive to gross margin, but equivalent or maybe even better on operating margin, given you're leveraging their OpEx and distribution. But just how do we think about it if Japan were to become a notable or significant contributor to the P&L, what that would look like?

Not necessarily. I wouldn't tweak the models because of the collaboration with Omron in one hand. Prices in Japan are high, so gross margin won't affect on the company level. On the other hand, I'm very happy with this collaboration. I think that midterm, longer term, it will be great. On the short term, it's still Japan. And I'm not expecting that suddenly the conservativeness level and the adoption rate will become exponential, so I would take it as a great support to the quality of the product and a great step forward to be a significant player in Japan. But I wouldn't -- in our assumptions, the big effect won't come in 2018. That's to be completely honest.

And we'll go next to Vishal Shah, Deutsche Bank.

So a couple of questions. So maybe, Ronen, Guy, have you seen any impact at all from the recent Section 201 changes, especially in the C&I market? And what percentage of your 2018 shipments you think will be C&I? You've said in the past up to 50% could be C&I. You think that's still the case?

So we don't yet see the effect of the change in [oil] prices in the U.S. But if you look at it, the effect, if will come, in my humble opinion, will affect Q3, maybe a little bit Q2. As you know, channels, both quite a lot of modules in Q3 and 4 last year. And as you know, the average lead time between closing a contract in the U.S. to installation is, according to what I'm aware of, maybe you have a little bit different numbers, is 12 to 16 weeks. So I think that we won't see effect of modules in Q1 and probably also Q2. I think the effect, if will come, will come in Q2 and Q3. And what will be the effect on the Excel spreadsheet, if you put the additional cost of modules on the total cost of installation of residential and commercial? I think this completely -- this won't change the Excel in a significant enough way to change the market behavior. But we saw in the past that markets, in general, and U.S. in particular, in the end of 2016, can take these changes in a way more severely, emotionally, than what we see in the Excel. So I wouldn't put myself in the position to estimate or guess what will be the total effect on Q3 and Q4 of 2018. I'm sure that in the mid to long term, it won't make a bigger effect -- big effect. Regarding -- I think the second question, Vishal, was regarding the percentage of commercial, that's correct?

Yes, that's right, yes.

Vishal, so I think we assured this in the past and that's why I mentioned also -- that's also why I mentioned that it might -- that we might see differences on ASP erosion between commercial and residential. We would like to get, on a megawatt basis, by the end of the year, to 50%, 50% between commercial and residential. And I believe and hope we're in the right direction to get it. We are gaining few percentage every -- 1%, 2% every quarter, plus the effect of the new Jupiter configuration that allow you to install 100 kilowatt in one installation. I think that's supposed to get us to this point.

Okay, that's very helpful. I just want to clarify. Ronen, the 7.5% to 10% ASP erosion outlook that you've mentioned, that's not factored into Q1, right? You're not starting to lower price yet, it's just something that you expect to see maybe in the second half of the year. Is that right?

So again, in general, this is a working assumption. We do not see right now anything in the competitive environment that can -- that should change it. But in general, we believe that, as Guy mentioned, the changes that we'll do on the prices will be all through the year. And whatever is already taken into account into Q1 is already reflected in our stable gross margin expectation.

Okay, one last question, Guy. If you look at your competitor, Huawei, they launched a product in the European market in the middle of last year. What kind of impact have you seen on your market share in the European market? I mean, it looks like you guys have gained market share despite the product launch. So what kind of feedback are you getting from your customers on that product launch?

So we just gained market share in Europe. So I would like -- I would love to tell you that despite the fact that they released a product in Europe by mid last year, we managed to gain more market share. But honestly, I think that they just launched the product in Australia a month ago, and it's not yet really available in Europe. I do believe that despite the fact that it will be available in Europe probably sometime in end of Q1 or Q2, I'm quite confident we'll be able to gain more and more market share. The product they are now releasing is a product that does not have communication between optimizers and inverter and therefore, do not have safety and/or monitoring. So it's a pretty crippled solution at higher prices than what we sell. So I'm not expecting to be impacted in the next 2, 3, 4 quarters. But we take them very seriously, and we're preparing ourselves for any type of fight, competition, as we do every year with many other good competitors such as SMA, Fronius, et cetera.

And we'll go next to Edwin Mok, Needham & Company.

So just kind of want to talk about Omron. In terms of that partnership, do you expect to start shipping to that within this quarter? Is that one of the growth drivers over the current quarter?

So it's also in their press release, but the launch of the product from their perspective is March 2018. So probably we'll start to see shipments in Q2. But again, I'll just warn to people who won't take it our -- out of the perspective. The Japanese market is a very conservative market. And of course, with Omron, the SolarEdge solution have kind of the kosher stamp on it, but it will take time, I'm not expecting exponential growth in Japan, so please do not take it out of proportion, that it won't influence long-term -- short-term models in the wrong way. I do believe that in a mid, longer-time perspective of 2, 3 years, it will allow us to become very significant player also in Japan.

Okay, great. And then, Ronen, on the OpEx, sorry if you talked about it. How do you kind of think about OpEx for this quarter and for the remainder of the year?

So in general, the operating expenses, and I think that we said it along the script, we have today a very nice situation. We are very profitable. We're growing, and we see a situation where, while we are increasing our, I would call it, financial strengths, some of our competitors are either decreasing it or even -- or being stagnant. And that actually gives us a golden opportunity to invest a lot in R&D, to invest in new geography. And as such, I expect R&D to continue and grow throughout the year. This is one place that we will not put a limitation as long as there are good ideas and good things that we can develop, and there are so many of those. I think that the thing that will limit us on R&D will be mostly the natural rate of how many people can you recruit, can you train and can you make sure that are becoming useful employees. And on sales and marketing, this will mostly be growth that we will do in the new geographies, mostly in Asia Pacific, but also threatening the -- strengthening the areas in which we operate. The only place where we do not expect major growth is actually on the G&A, where, in G&A, we believe that currently, the cost structure is relatively sufficient.

Okay, that's helpful. Third question I have is on the kind of manufacturing side or the -- you guys have previously talked about auto manufacturing line that you got a -- bought or built to your line. Where do you stand in terms of transitioning that automation? And are you in the process of start looking to do that for the HD Wave inverters as well?

Yes, so today, we have capacity, automatic line capacity for approximately 80% -- 70%, 80% of all our optimizers. We ordered more automatic lines as we -- the bigger you get, it takes longer lead time to increase volume. So increasing from -- increasing volume from 100,000 units of optimizers a quarter to 200,000 is much, much easier than to increase from 2 million to 4 million. So we're in the process -- we ordered quite a lot of automatic lines for the growth we're expecting in 2018, 2019, and we are in the process of designing automatic lines for the HD Wave. And in general, we -- our view is that in 3 to 4 years, we'll get to the level that once we finish the development of a product, at the same time, we'll finish the development of its automatic assembly line. So from the day 1 of the product, in most cases, of course, not for very, very big inverters, but for, let's say, products in the weight of -- physical weight of a pound to something in the range of maybe 100 pounds, we'll be able to finish the automatic assembly lines with the development of the product, pretty much like automotive companies, in general.

We'll next go to Chip Moore with Canaccord.

Yes, maybe just a follow-up to that. Outside of the component shortages, are you seeing any impacts or inflationary pressures at all? Or are you confident that those manufacturing optimization efforts can more than offset that?

We don't -- we have good control on manufacturing capacity on testers, production, et cetera, so I'm not expecting -- to put it in proportion, it's very hard. It took big portion of our management focus in 2017 to increase production volumes, and I'm not expecting that something will become easier in 2018. But to increase the total manufacturing capacity once you have secured enough components and you have good enough components inventory, which we are building, I think this is completely doable. I don't think this is one of the major risks we see for 2018.

Great. And maybe one more. You talked about having some more flexibility with repatriation of cash. Does that change your thinking at all, strategically? How do think about that?

So again, strategically, we look at the corporate level. The one thing that did happen from the tax reform, again, other than the tax that will be paid, is the fact that now, because of the fact that there is no real taxation on the repatriation of new profits earned outside of the United States, we have a little bit more flexibility. And therefore, we can better utilize the cash. But we do not expect these mere effects to change dramatically our strategically decisions.

And we'll next go to Colin Rusch, Oppenheimer.

Thanks for the comments on R&D. You've got an awful lot of cash on the balance sheet right now. Could you talk a little bit about how you're going to deploy that cash and the areas in the R&D portfolio where you're really focused here in 2018?

So of course, we cannot reveal the R&D plan for 2018, but I think you can see from the past, we are working extensively on growing the range of 3-phase inverters in order to reach very high sizes. None of this will happen over 1 year. Those are development that's spread over 18- to 30-month programs, but we have projects running of almost any size of inverter. We keep developing ASICs for -- to control more and more of the black components of the AC components in our products. We are investing heavily in next generation and generation after next of optimizers. We started to develop our own automatic assembly line. That's another area. And I think that not in 2018, but we believe we'll come with a next generation of storage product, which will be a step ahead of what you can find today in the market.

Okay, great. And then can you talk about your decision-making around balancing price and market share gains at this point and how you're making those decisions on a geographic basis?

It's not an algorithm that's run by a computer. It's lots of judgment involved. We have very strong general managers in each of the geographies we are working. The market in India is, of course, different from the market in Europe once you come to commercial market, and residential is different in the U.S. and Japan. So there is no one algorithm that is working here. What we have is the general, let's say, general understanding that 37% gross margin at this point in the evolution of PV industry, at this point of our company efficiency, where we are very effective in transferring close to 20% to non-GAAP profitability. We feel that above this point, again, at this point, it's worth it to increase market share. And we do it in a strategic way, where we analyze at the level of Ronen, myself, Zvi, our Global VP of Sales and the general managers that are very talented and have lots of experience in the market and with us, in which geography this will have higher effect, and that's how we control the pricing level. That's in one hand. On the other hand, we try not to open too big of a gap between different geographies once they are using exactly the same product. As you probably know, it might be looking at the same product. But due to safety and request for different codes, it might be quite some difference in bigger inverters and also residential, regarding the cost of a product when it fits the U.S. or Europe. So it's kind of a judgment call based on the fact that we want to increase market share. We feel that for the coming period, 37% gross margin is a good target. And we prefer to use the extra cost-reduced benefits in order to gain market share.

And we'll go next to Carter Driscoll, B. Riley FBR.

First question is really around the R&D spend. Could you at least give us an idea of what you're planning to spend in 2018 in solar versus adjacent products, either on a dollar, percentage basis?

Honestly, I don't know the split between adjacent products and what we do today, so you caught me on this one. But I would, in rough number, when I look at the amount of teams that are developing products that you are currently -- that we are currently selling and teams that are developing product that we are currently not selling, I think that around 33% of the teams are working on product that we're currently not selling. Don't -- I cannot promise you that that's exactly the split of the cost because areas like AC can embed its software, et cetera, servicing all those teams, so it will be hard to estimate what's exactly the ratio.

That's very helpful. And then just as a follow-up, adjacently. You obviously have your hands full with resi and C&I and fulfilling all the outstanding demand, but you have at least talked about in the past, plans to go after utility scale. Have the changes in the module side at all affected those plans and/or timing?

No, just that we -- as mentioned, I think that dollar-wise, the total segment of utility is around 1/3 of the market, if you want to round it up. And currently, we do have large installations, but we are definitely not a utility-level player. And that's simply something that we are working on, and we'll come to the market with a product that will fit different sizes of modules, the different type of technologies in MLP. Input voltage in some aspects is more influencing on the technology than the total wattage capacity of the module, and you need to cover very well some of the thin-film technologies that are going to very high voltages today. We are working on all those fronts. But again, just not to ruin the modules -- the models, the financial model going forward, none of those will be available in 2018. So those are the programs that I mentioned that the development takes much longer than 18 months.

(Operator Instructions) And we'll next go to Joseph Osha, JMP Securities.

Just a couple. First, if I listened to what you said about how you're handling component shortages and the timing of working through that, it would suggest that you've probably got more room in the second half of the year than the first half of the year to start to give some of that pricing back to your customers. Is that -- obviously, you've talked about your pricing assumption being steady over the course of the year. But is that a fair conclusion?

I'm not sure it's coming from component shortage. I think it's coming from cost reduction, total cost reduction development. But in general, I think Ronen covered it. Q1, we are not expecting any major change in pricing that will influence the total model. Where on the yearly basis, we do expect -- or we plan to up to 7.5%, 10% ASP erosion that, as I mentioned in the answer regarding market share, it will be pointed specifically to the right products in the right geographies. So yes, the effect won't be in Q1. We'll see the effect probably more on Q2, 3 and 4. But I think that your assumption that the major effect is on the second part of the year is the right one.

And just one more thing, again, effect -- not being effect on gross -- and Joe, but one thing, effect not being effect on gross margin, but rather the fact that, again, we expect to continue and maintain this 37%. So the effect is really the effect in the market, more than effect on the gross margin itself.

Right. And that was what I was trying to say. I think you expressed it more effectively than I did. And then the second question. The sequential bump in inventories, is some of that perhaps representative of catching up a little bit on some of the component supply issues? Or is that just a normal operational thing, given how quickly the business has grown?

The extra inventory we had by the end of 2017, that's what you mentioned? It's...

Yes, yes. You went -- you were up $20 million, so -- but obviously, the top line was up as well, so...

Yes, but the majority is finished good. But $20 million and compares to $200 million and that includes inventory in transit, actually on ships from Europe and China to the U.S. So unfortunately, it's very tiny effect. In our model, we would like to have finished good on hand in our third-party logistics centers in a much higher percentage of next quarter sales in order to shorten lead time for our customers and in order to optimize shipping cost. So we are far, unfortunately, from the model that we operate in 2015, '16.

And that does conclude our question-and-answer session for today. I would like to turn things over to Guy Sella for any additional or closing remarks.

Thank you very much. In summary, our fourth quarter revenues were slightly above our guidance, with record gross margins, profitability and cash generation. Our overall performance in 2017 was very strong in all financial parameters, and we continued to grow our market share while focusing on geographic and customer diversity, new and innovative products and healthy profitability, coupled with cash generation. I am sure that we can keep the same trajectory for 2018. And with this, I would like to thank you for joining us on today's call.

And that does conclude today's conference call. We thank you all for joining us.