Solaredge Technologies Inc (SEDG) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the SolarEdge conference call for the first quarter ended March 31, 2018. 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 call over to Erica Mannion, at Sapphire Investor Relations. Please go ahead. Investor Relations for SolarEdge.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the first quarter ended March 31, 2018, as well as the company's outlook for the second 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 first quarter ended March 31, 2018. Ronen will review the financial results for the first quarter and provide the company's outlook for the second 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 ended March 31, 2018 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 our first quarter with revenues of approximately $210 million, up 11% from last quarter, and an increase of 82% from the same quarter last year. We are reporting GAAP gross margin of 37.9% and non-GAAP net diluted earnings per share of $0.87 for the first quarter. In the quarter ended March 31, 2018, we shipped 800 megawatts of (inaudible) inverters. Overall we shipped 2.5 million power optimizers and 100,000 inverters. We continued to see diversification of our business, both geographic and product mix.

Specifically, this quarter's sales in the United States accounted for 57% of revenues. Sales from Europe accounted for 30% of revenues. And sales from the rest of the world, primarily Australia, accounted for 13% of our revenues. Our product mix reveals further extension of our commercial sales, which comprised 37% of megawatts shipped this quarter. Looking at our bottom line numbers, our non-GAAP net income hit a record high of $42.6 million or $0.87 per share and we generated record cash from operations amounting to $64 million. Moving to the business front, we have newsworthy updates. Last week, we announced a new SaaS product for grid and solar fleet operators. This is a cloud-based aggregation software product that allows turning multiple solar and storage systems into a virtual power plant. We believe that adding grid services capabilities to our current product offering will increase our differentiation and competitiveness. While we do not expect these services to impact our revenues in 2018 in any significant manner, once such services gain market acceptance they are expected to generate recurring revenues at high margin.

As you know, today we also issued a press release announcing the definitive agreement for acquisition of the assets of Gamatronic Electronic Industries Ltd., a company that develops, manufactures and sells uninterruptible power supply systems also known as UPSs. Gamatronic UPS business will serve as the basis for a new solar business unit. You may recall that we have said that SolarEdge will be developing either organically or by means of acquisition additional abilities outside the solar arena. This acquisition is the second step in this direction followed by our EV chargers, which were developed internally and are already shipping embedded in our inverters.

A little background on the second step, which we announced today. This is an asset purchase of business called Gamatronic. Gamatronic develops, manufactures and sells UPS electrical devices that provide emergency power to appliances when the input power source fails. The company products included UPS system of wide range of outputs, monitoring and management solution of power systems. Gamatronic has been selling its products since 1970 globally including the United States, China, Europe, South Africa and Latin America. The market for UPS products is very sizeable, estimated at $7.7 billion for 2018, and we believe that with Gamatronic business operating as part of SolarEdge, we can leverage our track record of technological innovation, operational excellence and power electronics expertise in combination with Gamatronic's intellectual property, know-how and market presence to build a leading global UPS business. The acquisition is for approximately $11.5 million. Substantially all Gamatronic's assets including its intellectual property, brand and tangible assets and includes a 2-year airing out provision for 50% and 33% of the net income of that business in each year following the closing respectively. The agreement is subject to standard closing conditions and thereafter approximately 100 of Gamatronic's employees will join us as SolarEdge employees. While this acquisition is relatively small in size, it is an opportunity for us to begin to apply our innovative approach to new fields outside the solar arena in order to drive progress in smart energy management and transform the way the world produces and consumes energy.

Given the business we are acquiring is small relative to our revenues, we expect minimal contribution to our 2018 revenue and marginally positive contribution to EPS for the rest of the year. 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 2018, 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 the newly adopted revenue recognition standard, stock-based compensation, one-time asset disposal, one-time transition tax 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 the financial results for the first quarter of 2018. Total revenues were $209.9 million, an 11% increase compared to $189.3 million last quarter and an 82% increase compared to $115.1 million for the same quarter last year. Our record revenues this quarter, which overcame the typical seasonal slowdown, were driven by strong momentum in all regions. This quarter, revenues from the United States reached $118.9 million and represented 56.7% of our overall quarterly revenues. Sales in Europe were $64.1 million and 30.5% of our quarterly revenue. We continued to generate solid revenues from the Netherlands and Germany while also growing revenues in other countries in Europe. Revenues generated from sales outside of the United States and Europe continued to grow and reached a record high of $26.9 million representing 12.8% of our total revenue.

From a customer concentration perspective, our top-10 customers represented 59.1% of our quarterly revenues, a decrease from the last quarter while only one customer accounted for more than 10% of revenues. On a per-watt basis, blended ASP slightly increased this quarter mainly due to geographic and product mix and a slight tailwind from the strength of the euro against the U.S. dollar. Gross margins for the quarter was 37.9% compared to 37.5% in the prior quarter and 33.6% in the same quarter last year. This margin is partially a result of the increased ASP, but was also intensified by further reductions in the manufacturing cost of our products. The component shortages continued to affect our margins this quarter by necessitating us to continue in air-ship products. Having said that, precautions taken the in the previous months to secure various component supply combined with a build-up of safety stock helped us to reduce that depending on the air shipments this quarter relative to the last quarter. We expect to continue to incur air shipping expenses in the next quarter, which will proportionally decrease as percentage of revenues.

I would also note that our gross margins result is at the higher range of our target model and, as discussed in the last call, we aim for gross margins to remain at the approximate level of 37% give or take a single percentage point. Moving to operating expenses, R&D expenses were $17.9 million, an increase of 9% compared to the previous quarter, and an increase of 56% compared to the same quarter last year. As in the last quarter, this increase mainly attributed to the increase in headcount and consistent with our decision to invest resources in product development and innovation, cost reduction and invest manufacturing process that will allow us to continue to bring new products to the market as well as to reduce the cost of our current products and further improve their quality. Sales and marketing expenses for the quarter were $16.2 million, an increase of 15% compared to the previous quarter, and 50% increase compared to the same quarter last year. This increase is mainly a result of an increase in our global headcount.

G&A expenses were $4.7 million for the quarter, a decrease of 20% from the prior quarter, and a 6% increase year-over-year. As you may recall, in the third a fourth quarters of 2017, we incurred a one-time litigation expense, which affected our G&A in that period. In total, operating expenses for the first quarter were $38.8 million, or 18.5% of revenues, compared to $36.4 million, or 19.2% of revenues, in the prior quarter, and to $26.7 million, or 23.2% of revenues, for the same quarter last year. As a result, operating income for the quarter reached a record high of $40.8 million compared to $34.6 million in the previous quarter and $12 million for the same period last year. Financial income for the quarter was $0.6 million compared to $1.5 million in the previous quarter and $1.4 million for the same period last year. This financial income is a result of favorable exchange rate gain and interest earned on our investment, which were offset by $0.5 million of non-cash interest expense resulted from the adoption of the new revenue recognition standard. Under this new standard, payments we receive for services that are to be provided over periods longer than 1 year, such as deferred income from monitoring services and extended warranties, are to be treated for accounting purposes as loans and, as such, subject to deemed interest.

In our non-GAAP results, we separate these expenses out in order to reflect the actual financial income generated from our continued operation. This quarter, we had a tax expense of $5.7 million compared to a tax expense of $16.6 million in the prior quarter and a credit of $0.8 million for the same period last year. On this note, I would like to expand a little and highlight the main drivers of this figure and set future expectations.

Based on the law for industry encouragement in Israel, we enjoyed a 2-year tax holiday that is set to end on June 30, 2018. Once over, our technological company corporate tax rate will be approximately 14%. Since the tax expense is calculated annually, we started to accrue for these taxes in the first quarter using an average tax rate between the tax-exempted period until the end of June and the technological company corporate tax rate from July to the end of the year. To this amount, we add current taxes in all other jurisdictions in which we operate, mainly in the United States.

Under the newly adopted tax cuts and jobs act in the United States, when the foreign tax rate falls below a certain threshold, the newly imposed guilt tax is levied in the United States. This results in an average tax rate of approximately 14% across all geographies for this years despite or actually due to the fact that our tax holiday in Israel ends on June 30 of this year. It should be noted that we do not expect this overall 14% rate to substantially change in the next few years.

In addition, for period-to-period comparison purposes, I would like to remind everyone that, as we discussed on our last call, in the fourth quarter our tax expenses were impacted by one-time mandatory deemed repatriation tax related to the tax cuts and jobs act signed into law in December 2017. GAAP net income for the first quarter was $35.7 million compared to a GAAP net income of $19.5 million for the previous quarter and $14.2 million for the same quarter last year. Our non-GAAP net income was $4.26 million compared to a non-GAAP net income of $41.2 million in the previous quarter and $16.5 million for the same quarter last year.

GAAP net diluted earning per share was $0.75 for the first quarter compared to $0.42 in the previous quarter and $0.32 for the same quarter last year. Non-GAAP net diluted EPS was $0.87 compared to $0.85 in the previous quarter and $0.36 in the same quarter last year. Turning now to the balance sheet, as of March 31, 2018, cash, cash equivalents, restricted cash and investments were $400.8 million compared to $345.1 million at December 31, 2017. During the first quarter of 2018, we generated $64 million in cash from operations. A/R net increased this quarter, reaching $127.5 million compared to $109.5 million last quarter.

DSO this quarter remained flat at 64 days. As of March 31, 2018, our inventory level net of reserves was at $98.4 million compared to $83 million in the same -- in the prior quarter. These elevated inventory levels represent both finished goods in transit and in our warehouses as well as increase safety stock held with our contract manufacturers to ensure un-disrupted production. Before concluding our quarterly review and providing guidance for the next quarter, I would like to refer to the financial aspects of the transaction we announced today.

As Guy described, we have signed an asset purchase agreement with Gamatronic Electrical Industries Ltd. for the purchase of the assets of Gamatronic. In 2017, Gamatronic generated revenues of approximately $19 million and reported an approximately net loss of $1.8 million. Part of this loss was attributed to expenses related to being a publicly-traded company in the Tel Aviv Stock Exchange. We expect that given the revenues of Gamatronic relative to ours and assuming cost efficiencies that can be implemented immediately after the closing of the acquisition as well as the elimination of expenses related to being a publicly-traded company, this acquisition will yield a minimal contribution to our 2018 revenue and marginally positive contribution to EPS for the rest of the year.

Moving on to the guidance for the second quarter of 2018. We expect revenues to be within the range of $220 to $230 million and gross margins to be within the range of 36% to 38%. The Gamatronic assert acquisition is subject to customer closing conditions and we expect to close it very late in the second quarter of 2018. Therefore it will have minimal effect on our second quarter financial results both on the top line and EPS. And now, I will turn the call over to the operator to open it up for questions. Operator, please.

(Operator Instructions). And your first question will come from Mark Strouse with JP Morgan.

So I just want to start with the acquisition if I can. So I understand the elimination of the public company costs and some of the cost synergies you can expect. But can you just provide a bit more color? Are there any revenue synergies to talk about as far as the technologies or any of the sales channels or anything like that?

So as far as sales channels, UPS market and solar inverters are quite different so we are not expecting to be able to leverage our sales channels. From all other perspective, the UPS is very similar to inverters. So in nature, you convert DC to AC. The technology-wise (inaudible) very, very similar. So we are planning to leverage, of course, our topologies. It will come in the second phase. Our operational excellence, our ability to produce much cheaper, much faster big volumes, our cost reduction capabilities that was proven in the last few years. And all in all, it is a much easier market from perspective of the cost per watt and warranty to people that are used to inverters. So just to give the proportion, every selling price for even smaller UPSs are at around $0.10-$0.11 per watt, which is more than what you see similar 3-phase inverters in commercial applications. While those inverters are fit indoor only so the product itself it's cheaper to produce and comes with only 1-year warranty. And on the other hand, it usually come at the higher percentage with a service contract. So you're going to get recurrent revenue from maintaining such installations. So all in all, we think this is a perfect new business for our current capabilities to leverage.

Okay. And then switching gears. I know it just came out, but I just wanted to get your initial take on the law that just passed in California requiring rooftop solar on new home construction, how material that might be to SolarEdge.

So that's something that we are not experts in new buildings and what will be the mandatory size. These type of regulations are available in Europe for quite some time, in U.K., Netherlands, and a few other countries. Usually most people are installing smaller -- under this mandatory law, people are installing smaller system, usually 4 to 8 panels. We just came out with a perfect product for such installation. It's a subset of the HD Wave with a smaller inverter physically and an optimizer that can be connected to 4, 5, 6, 7 or 8 PV modules. So we are well set for such a market in Europe, of course, and California will be a great addition. I am not expert in the amount of new houses in California to estimate the potential growth for the photovoltaic market in California due to this regulation.

From Roth Capital Partners, Philip Shen.

I had a quick follow-up on Gamatronics. You talked about the second phase of work being focused on topology. Kind of going a little bit bigger picture, if '17 revenues were $19 million and '18 is modest in terms of contribution, what kind of revenue could we see in 2019? And historically, with the market size being $7 billion for UPS and them being at $19 million, that's a small share. So what is the plan to gain share? How quickly do you think you could gain share? And which end markets specifically would you plan to attack for that share? And then, finally, can you speak to -- is there kind of synergistic sales at all? I mean what -- beyond the cost synergies and so forth, what other synergies do you imagine and envision. I know there's a lot there.

So I will try. So I would expect that in the first 12 months, so let's assume finish -- to be closing by the end of the quarter. I think in the first 12 months, I wouldn't expect dramatic growth in the run rate of the company. I think in the following 12 months, I think we are supposed to be able to grow significantly in such a market mainly due to the fact that the company as it operates today, Gamatronic, suffer from lack of resources and in many aspects older time priorities and managerial priorities once it comes to marketing and sales budgets. While I don't think we can leverage the current sales people, we'll leverage, of course, the infrastructure of the offices abroad and our support office and customer service in all of those geographies where the obvious first 2 geographies to focus on will be the U.S. and Europe. I think it's not different than what we did in 2010. We started number 200 in the world or whatever it was the number with zero sales and we simply came to the biggest market with the right offering and the right price point and managed to take market share slowly but surely. I think that here we're starting with a very good product. Gamatronic developed along the years very good modular UPS system. It's almost all the right sizes and have a perfect fit of product for data centers. Now we need to increase their competitiveness with what I already described and dramatically improve the sales and marketing of the company based on the knowledge that we aggregate in the last 10 years, the last 8 years. I think that's, like any other market that you are learning, it won't be simple, but I think it's very doable. And I would expect that from the position we are we would be able to take market share fast and in an effective way while increasing the profitability of this business within SolarEdge.

Great. Shifting to (inaudible) as (inaudible).

You disappeared for a second. So you said shifting and then we didn't hear you.

I'm sorry. Okay. I said shifting to margins. I think you mentioned -- Ronen mentioned on the call that you guys are at the higher end of the range now. As a result of that, historically we've said in the past is that you might perhaps give some concessions with pricing. Some of our checks, heading to the results today suggest that, indeed, you may have been giving some price concessions and be trading off margin meaningfully. And so can you speak to that at all? Are you able to kind of reduce pricing a little bit to help additional customers out and at the same time maintain your profitability, strong profitability? And then also comments on any share shifts you expect ahead? Do you expect to kind of accelerate some of your share gains as a result of perhaps being at the higher end of the margin range and being able to win some additional customers?

I think we elaborated in the last 2 calls, but in general we're not expecting to do anything dramatically. What we are -- we feel that we are, on one hand, at a healthy gross margin. On the other hand, there is a push from component suppliers from -- the perspective of component suppliers there is over-demand for the last, at least, 18 months, and we are constantly fighting the request for an increase of component prices. So some of this will balance an increase of component prices. Some of will be dedicated ability through lower prices in big project or in geographies which are more competitiveness on price such as India, et cetera. But in general, I think that our current price of both residential and commercial are very healthy and allow us to take market share with as we stable them in the beginning of Q2. So I am not expecting any dramatic shift in prices in the next 6 to 9 months. We will use this ability to take a big project, to win big project or to close important deals, but nothing that will be wider or more extensive than that.

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

I just had a couple questions. Guy, I was wondering if you can characterize the M&A funnel. It's nice to see you move forward, but the size of the acquisition, I guess, was a little smaller than I think I was expecting just given the cash flow that you guys throw off on a quarterly basis. Can you talk about -- is this something routinely that maybe we could see 2 to 3 small tuck-in deals like this a year? Or is that maybe outside the realm of your thinking?

So I think we also gave the color on that. We are working with quite many options to get into the understanding of potential deals early enough. While we didn't do any large acquisition, we're not against doing a large acquisition if we'll find a case where the multiplier is similar to SolarEdge and the company is healthy and profitable. We are looking for such companies in quite some segments that we believe are adjacent in a healthy way to what we do. One example is the smart meters. Another example is demand response. In all of those -- another example is batteries. We didn't find in none of them companies that were in the position -- that were -- that you could buy them and were healthy in structure and were profitable. But we keep looking. So I guess it's a matter of timing and luck and hard work. At the end, we will be very happy to grow our business not only organically.

Make sense. I just had a couple of quick ones on the solar side that you typically talk about each quarter. So I might have missed it, but can you give the C&I mix in the quarter, Ronen, and the percentage that was HD Wave? Just I'm trying to get a sense of the product cycle. Is that fully implemented? And then just lastly, it always comes up, but any commentary about pricing in the second half of the year? Any change to that 7.5% to 10% annual decline that you typically see just especially in light of the mix impacting pricing this quarter with it being up slightly?

I think there were 3 questions here. So HD Wave is 100% implemented in all on-grid. The only version of 1-phase inverters that is not HD is the backup sold in the U.S. That will be the last inverter to be converted to HD sometime in 2000 -- probably end of this year, beginning of 2019. Regarding prices, I think I gave the feeling, we are not expecting a broader ASP erosion in the coming 2 quarters. I think price is supposed to be quite stable while at the same time we might use our ability be more competitive on very large project or specific bids especially in countries where the price pressure is more brutal such as India, maybe Turkey, et cetera. The last question or the last part of the question was C&I. I think it was, megawatt-wise --

37%.

37%.

And we'll go to Edwin Mok with Needham and Company.

First, maybe drill down on the C&I part a little bit. I noticed that your U.S. are pretty flat for this quarter, seasonally (inaudible) is down. So is it fair to assume that commercial and U.S. crew this year offset decline in resi? And any way you can kind of quantify how much was commercial in U.S., roughly, please?

So we generally do not break between commercial and residential between the various geographies. However, as we noted in the last few quarters, you generally see the phenomenon or I would say the ratio to be relatively similar between the U.S. and rest of the world. Today, with the exception of certain regions like India or places where you see only C&I. But all in all, I think that if you have this 37% of C&I, I would say that, give or take, U.S. and non-U. S. is about the same number.

Okay, great. Ronen, let me stick with you. On the deal, any way you can kind of give us the margin profile of this business? Obviously, is it similar to SolarEdge, higher margin in general, lower margin? And in terms of cost, like OpEx, is it more expensive business to run? Any kind of color you put on that.

Okay. So let's start from the margin. Actually, the margin profile today of this business is very close to ours. The business, given the fact that still the Gamatronic business is relatively smaller than ours. So although you see today similar margins, the potential there is relatively good given the fact that once we will be able to lean a little bit more on our economies of scale, on our ability to better source and operate a little bit more effectively given the size of our operation, we believe that we can even improve them to be better than the margins that you see on SolarEdge today. When it comes to OpEx, again I think that there are 2 things that needs to be differentiated. The first one is that Gamatronic as a standalone company used to be a publicly-traded company and, as you know, being a publicly-traded company means that you still need to have relatively extensive G&A expenses simply to comply all of the regulations of being a traded company. Once these are taken out, and again, once we will see that we will be able to leverage on some of our ability and some of our resources elsewhere, I believe that the OpEx to revenue should be at a similar level as it is today. So all in all, we expect that slightly better margins. Again, not immediately. It will take a while. But slightly better margins with a similar OpEx structure.

From Canaccord, Chip Moore.

Maybe you could talk a little bit more about the rollout of some of these new grid service virtual power plant capabilities. How do we think about the go-to-market strategy? What do you think about adoption potential, market potential over time?

So with the VPP and primary (inaudible), we see that there are already quite a lot of interest from utilities. I think the strongest interest that we are aware of is parts of Germany and Netherlands, Australia and parts in the U.S. That type of business is fully served by the current sales force we have. The same people while coming to utilities, which are involved more in some areas and less in some areas, and actually installing solar first are exposed to such bids. It's already coming as -- especially VPP in Australia is coming as a pull from some of the market while in some cases we are adding it as part of our offering and managed to start the cycle to push utilities into a beta test or a pilot program. In general, I think this is a space that make all the sense. It will take time to grow, to become a significant part of the total revenue dollar-wise. But at the same time, I think it's at least in the current time, it give us an edge and differentiation that I believe will help us and will put us in the pole position once you come to close very big deals with utilities even for the classical installation of solar or especially solar with battery.

Right. And maybe just one more on maybe you can provide a little more color on some of the geographic mix, I guess, in some of the more nascent areas. It looked like Australia was strong. Maybe you can talk about that and India penetration and some other areas.

Okay. So as I mentioned in the call, actually we saw a strong quarter in every region in which we operate. But I would say that all in all -- and again, by the way, we need to take into account that this is in the quarter that is traditionally considered to be a slower quarter compared to the previous one given winter conditions in the Northern Hemisphere. So with that said, again the U.S. continued to be stable, strong. We continue our share-taking there. We continue our expansion. And I don't think that there is anything special to say there. In Europe what we continue to see is the strength of the Netherlands and Germany. In the Netherlands, the market is growing very rapidly. The government put very ambitious targets for solar growth because they are lagging behind with the renewable usage on their grid compared to the E.U. requirements. And therefore the market is there. It's growing and it's expected to grow in the next few years quite substantially. But other than the Netherlands and Germany, Italy is a great market. The U.K. is a great market. And again, even markets like Sweden continue to contribute very nice results. Moving to Asia and Oceania, so Australia is a target market for us, as we mentioned in the last quarters. We see very nice share gains there. We see our product to be more broadly used. And I think that we're satisfied with the growth there. India is growing, but relatively slow. Again, it's a market that takes a little bit more time when you look at the typical sales cycle. But again, when we look at the pipeline that we have there, we feel that all in all it meets our expectations. And again, there are other markets that you are starting to see pop in in places like Taiwan or Korea or other markets that are growing as well. So all in all, it's basically a growth in all regions, but you start to see the direction that Guy mentioned in the last calls of moving towards the 50% U.S., 50% non-U. S. at the end of 2018 and towards a 33% of U.S., Europe and Asia as we move forward towards '19 and '20.

And next we'll hear from Colin Rusch with Oppenheimer.

Could you talk a little bit about the geographic exposure for Gamatronic's assets? Are you getting into any new geographies with these guys? And how much of their sales organization are you going to be able to leverage in your opinion?

Sorry, how much?

What was the second part of the question, Colin?

How much are you going to be able to leverage their sales organization?

So I think, as I mentioned, probably the biggest gap that Gamatronic has today is lack of investment in sales and marketing. And that will be probably the first thing we'll do based on the current structure is to increase sales force, to improve sales processes and to add marketing, which currently, it's something that the company is doing in a very low level. I think that by that we'll be able to increase market share relatively fast in the geographies that the company is selling at, which is mainly some countries in Europe, U.S., a little bit in South Africa, a little bit in China. I am not expecting that we'll -- I am expecting, to put it from the other perspective, I am expecting that it will take us 6 months to start to see the changes that after implementation and probably 12 months from the closing until the system will run as we believe it should run based on the current product. I would expect that in 18, in approximately 18 to 24 months, we'll have new set of products, new topologies, based on the total combined ability of SolarEdge R&D and Gamatronic R&D. And with this set of products, I believe we'll take it to the next phase and start to take market share in a bigger way, building a business that I would expect that in 3 years from now supposed to be in the size of a few hundred million dollars.

Okay. That's very helpful. And then can you talk a little bit about energy storage as a percentage of sales? I don't know how much visibility you have to the solution on a self-serve basis, but I wanted to get a sense of how many of your installs that you're included in are including storage at this point.

So we have very good visibility for that since it it's a specific inverter in North America. And in Europe it requires another interface. So we have good visibility. Today, the storage market is limited I think mainly not from demand in the market, but rather from availability of batteries. So I think that from the perspective of amount of inverters, it's still negligible the amount of inverters we are selling for a battery application, for storage application. But that's not because of limitation on the size of the inverter and I don't think that it's today even limitations in the demand from the market different than what if you remember what I said a couple years ago. Actually it was 3 years ago when we just started. And I said, “Well, the demand building will take time.” I think today, 3 years after the first -- the introduction of such product in the beginning for us with Tesla, I think now it's expected. There is a demand. And it's more of a matter of availability of batteries in order to really drive this market in volume.

Next we'll hear from Carter Driscoll with B. Riley FBR.

Just talking -- you've talked a lot about the improvements you can make in the acquisition from a company perspective, obviously driving out costs and leveraging the sales channel. What about the kind of technology overlap or the ability to use some of yours? I'm assuming their UPS is battery-based. It's not flywheel. So a couple of things. One, talk about the competitive environment. I mean it's been a fairly -- it's a large market,, but a fairly sleepy. Guys like Schneider and Eaton and Mitsubishi have kind of long dominated that space. Maybe talk about some of the specific end markets. Obviously the data center market probably gets the most high-profile, but maybe talk about some of the others like health care. And can you leverage your existing or your push into battery and displace maybe some of their legacy technology? Is that the type of product overlap or the way that you can improve the product profile?

So I think there were quite a few questions here. So the technology developed by Gamatronic is very advanced especially from the software perspective. It has many capabilities that will also help us to improve our storage products mainly in the area of combination with generators and the ability to switch in and out a UPS or storage device in one-cycle frequency. Those are feed correctors that are common in UPS and not yet common in the standard storage that we are selling. On the other hand, we can and will use the HD Wave topologies to further improve the efficiency and the cost of the product they currently have. But that, again, as mentioned before, that will take 18 to 24 months to develop. Saying that, the current set of products that Gamatronic have is very advanced especially, as you mentioned, for the area of -- for the market or the segment of data storage. I think that your question about how you compete big players in the area is the classical question. When we came SMA was number-one, started to sell product 28 years ahead of us. The market, 85% of the world market was in Europe. And if I remember correctly, about 50% were in Germany. So we had to compete with SMA when they had a lead of 28 years in Germany. And with time and dedication, good product, good people, we managed to close a big part of the gap, and I would expect that today we're number-one in residential even in Germany. So I think of course it's always hard to compete. Always there is an advantage for the big players that are already in market such as Schneider that you mentioned and Eaton and Emerson. Those are the 3 biggest ones. But we competed with Schneider in quite some areas and I don't think that we are shy.

I appreciate that color. Maybe just switching gears a little bit. You addressed kind of the elevated inventory. Do you have any sense of how may maybe weeks at the top distributors there are? I mean getting some questions about whether the inventories are just a little bit high, as you mentioned, because they wanted some safety stock or whether they're a little bit elevated and maybe that pulls down some demand in the second half.

We have, I think, good visibility, probably not perfect, to inventory of distributors in Europe and the U.S. I think in general within 4 to 8 weeks I think that majority of the -- from what we can -- from what we can achieve the information, I think in most of the European big distributors the volume, the inventory is within the 4 weeks. In the U.S. I think there are some distributors that have inventory within the 8 weeks period. I don't think these levels are out of the healthy stock and I don't think it's supposed to limit our ability to grow in this quarter for sure.

(Operator Instructions). Next we'll hear from Joseph Osha with JMP Securities.

This is actually Hilary Cauley on for Joe Osha. And I just had a quick follow-up question to the geographic mix. And I was wondering if you guys could break that down in terms of the megawatts shipped by region.

So we usually do not do it based on the megawatts shipped, only on the revenue, as we provided. But again, since all in all the prices are relatively immaterially different between geographies and the separation between commercial and residential, so all in all you can assume relatively similar distribution.

At this time, I'd like to turn the conference back over to the CEO for any additional or concluding remarks.

Thank you. In summary, we concluded this quarter with strong financial results on all parameters and continue growth and diversification of our product mix and geography presence. We are excited to announce our first acquisition, which, once closed, will enable us to apply our financial and technological strengths and innovation to the UPS sector. This is our first non-organic step in business outside the solar arena and will further our mission to drive progress in smart energy management and transform the way the world produces and consumes energy. Thank you very much for joining us on today's call. All the best.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation and you may now disconnect.