SolarEdge Technologies, Inc. (SEDG) Earnings Call Transcript & Summary

Great. Okay. Thank you, everybody. Welcome to the second day of the JPMorgan Energy Power and Renewables Conference. Thank you very much for joining. My name is Mark Strouse. I cover Alt Energy for JPMorgan. Very happy to have Ronen Faier, CFO of SolarEdge joining us today. This is an overweight rated stock for us, $167 price target. I'm going to begin the session with a fireside chat with some questions. [Operator Instructions]. So please submit, and I can ask your questions for you. So with that, Ronen, welcome. Thank you very much for joining.

Thank you. Thank you for having me.

Okay. So to start, maybe we can just assume there's some folks that are new to the story. Do you just mind giving a brief overview of what SolarEdge is all about?

Sure. SolarEdge is a company founded in 2006 with 5 founders who are coming -- came with the knowledge of power conversion. And we started the company by building and developing the system for a more efficient conversion for photovoltaic solar. So we came with a new technology, inverter technology, called DC optimized solution, which allows every solar installation to be more efficient by eliminating problems like partial shading so we can get more energy, to be easily designed by eliminating some of the other restrictions that exist in other systems when it comes to designing the system, to be able to monitor the system using a web-based tool and to comply out of the box with all of the safety regulations in the United States. We started selling products in the beginning of 2010 and finished 2019 with $1.4 billion of revenues. Most of them are coming from our Inverter business, where we have also become, over the last few years, the largest inverter company in the world. Since our main expertise is power conversion and not just solar inverters, we expanded over time into new fields as well. And over the last 2 years, we acquired 3 companies. We acquired one company in the space of UPS, standing for uninterruptible power systems, which is basically, by the way, an inverter and a battery. We acquired the battery company in Korea that will allow us to have our own captive supply for batteries, which will become a companion of most of the solar systems. And in January 2019, we acquired a company in Italy, that is engaged in the development and selling of powertrain and drivetrains for electrical vehicles. This is basically the engine of an electrical vehicle company. So today, we're NASDAQ traded $7.5 billion market cap, 2,700 people worldwide in 28 locations, profitable, growing and very fun company to work for.

Great. Okay. So I'm going to start with the solar business, which is about 90% of your revenue today. And we'll come back to the kind of the near term and impact from COVID in a bit, but just want to kind of start high level. So pre COVID, you had, I think it was about 12 quarters in a row, setting new quarterly revenue records. What is driving that?

I think it's a combination of 2 major things. First of all is technology. The technology that we're using, it's usually referred as MLPE, module level power electronics, is a technology that really allows solar systems to be more efficient by the fact that every energy unit that you're producing from the system is becoming cheaper on one hand. And at the same time, because of the fact that the product is highly technological, it is more fitting to the evolving, I would call it, a role of the inverter in the overall solar system build. And the idea is that we are able -- our products, our technology enables the products to be more up-to-date and to be able not just to support better harvesting of energy, but actually better management of energy, and this is where the world is going. In addition to this, we were able to be very, I would call it, aggressive in cost reductions and in geographical expansion allowing us to be relatively similar at cost compared to the competitive systems while providing a lot of benefits. And at the same time, because of our very quick and aggressive move into new territories, we were able to grow in many markets and in all of the markets that we work, to grow faster than the market itself. So the combination of very strong technology and very aggressive geographic expansion allowed us to grow so much.

Okay. So inverters have been around since the beginning of solar. Your technology is disrupting the traditional inverters that are out there. What does the penetration look like if we kind of go around the world, different nations of your technology, of this module level power electronics?

I would very much differentiate between the U.S. and the rest of the world. And the main reason is that in the United States, there is a safety regulations that require every system on a rooftop to be able to be shut on the module level, meaning on the roof itself. And that means that if you take MLPE, which is our technology and also another company called Enphase, who allows to put electronics at the back of every module, we comply with the safety regulations out of the box. That means that every installation with SolarEdge system or Enphase are complying with all the regulations, and you don't need added costs to add other components to make the system compatible. This actually created de facto situation where we have duopoly almost in the residential space in the United States between us and Enphase. According to Greentech Media, we're about 55% to 60% of the market share in the United States on the residential space. In commercial, by the way, we see lower penetration of our products because we started to ship and actually introduce more relevant products a little bit later in our evolvement of the company. And therefore, in the U.S. today, we're approximately 17% of the commercial market. Once you go outside of the United States, it's a different situation because the safety regulations do not require to shut down the electricity on the roof. And therefore, it means that you're -- basically can use other technologies such as the, what we call a traditional string inverter technology that predominated the market until we came. And therefore, outside of Europe, I would say that both in residential and commercial, you will find us on a market specific in Europe anything between 15% to 40% in the various countries. And outside of Europe, mostly in Asia and Latin America, you will find us at a much lower rate, mostly given the fact that most of the market is commercial and less residential and therefore it will take us a little bit more time to penetrate. All in all, in all of the segments in solar on a megawatt basis, our technology today is, I believe, less than 10% market share, again, in all segments and all regions. So that means that, of course, the potential of growth is still there, and it's fairly large.

Okay. So despite that lack of safety standards or whatever internationally, that has been the fastest-growing portion of your business, it's about 1/2 or so of your revenue now, I think a few years ago, it was about 1/3. Can you just kind of talk about what's -- what countries are the most material over the last couple of years? And looking forward, what are the biggest opportunities?

The majority of the countries in the last, let's say, 3 years are actually Europe. And the reason here was a combination, again, first of all, of the fact that we became a market or a world leader in the inverter space, which, of course, put us in a very nice position everywhere simply being the most advanced company. But I think that part of the reason that we grew in Europe much faster than the other areas was the fact that the solar world is going into a -- going through a change where a few years ago, the only role of the inverter was to be efficient in the way that it converts DC to AC. You see today more and more limitations about your ability to push electricity into the utility grid. And that means that you need to support much more self-consumption and storage. Because of our technological product and because of the, I would call it, relatively unique capabilities, such as our ability to keep the voltage on the DC side fixed, we're very much easy to integrate with storage solutions on one hand. And at the same time, because of the technological, I would call it, web-based and software-based product, we're able to interact very nicely with home energy management devices. So when you look at the European consumer today that cannot push a lot of electricity to the degree, like in Germany, the fact that we provide better abilities to consume the energy or to store it and use it a little bit later makes our products a little bit more, I would say, attractive compared to some of the older technologies. When it comes to outside of Europe, I think that this is where the potential lies for the years beyond. Because once you get to 25%, 40%, 50% market share in some of the markets, and we're getting there, of course, your ability to grow much faster than the market is not happening. But in the developing countries for solar, at least in Asia and Latin America, we have today a more attractive, I believe, solution for large solar systems that makes C&I systems more efficient in the way that they are designed, and although we're more expensive on the inverter side, we can save a lot of money on the balance of system, the other elements of the products, and we are also still able to produce a little bit more energy. So this allows us to grow there. So I would say that the engine from, let's say, 3 years ago to date was mostly Europe. By the way, in a COVID-affected world where Europe is affected much less than the United States, Europe is indeed a very good source of revenues for us this year, but I would assume that over the next, I don't know, 3, 4 years, you will see more Latin America and more Asia in our overall mix of sales.

Got it. Okay. So you kind of touched on this, but you started primarily with residential products and then evolved into C&I. You have been talking about a utility-scale product, which will be a greenfield opportunity for you. What's the latest on that? And when should we expect that product? And can you kind of talk about the financial impact to that? Because those are typically lower ASP products, do you expect to have similar kind of business model once that ramps as far as margins go?

Yes. Definitely. So first of all, the product will come and will be introduced by the end of this year. This is going to be a product that will be around 300-kilowatt inverters that will come with optimizer that can handle several modules up to 4 modules using one optimizer. And this will allow us to go to the very large C&I systems, which are ground mount, or to small utility. This is a product that will do 2 things. First of all, again, there is always a place to increase the efficiency of the system by our inherent capabilities, meaning to be able to monitor a cluster of modules, to be able to optimize based on clouds that are passing and other shading formats that exist in these small -- in these larger fields that are less frequent than on residential system, but these still exist. And we believe that also our technology, which allows to save on the balance of system, will make the products attractive enough at least to grow. Over the next few years, and this is happening with almost every product that we bring, we start to do cost reduction on the product by eliminating some of the margins of errors that we put by design in new products. And therefore, I would assume that, first of all, you will not see a lot of sales coming from this product in 2020. I believe that in 2021, you'll still see relatively minimal contribution to our revenues because these large systems are usually, I would say, victims of a little bit longer sales cycle compared to residential. And I also believe that at the beginning, the margins will be a little bit lower than our regular margins, simply due to the fact that we want to come with a relatively attractive price point, but at the same time, the cost structure is not going to be optimal. But as we did in all of our products, in all of our years of sales, once we're starting to sell and we were starting to actually manufacture in masses, we're able to shave the cost very nicely by simply starting to take some of the margins of errors away and also being able to negotiate better on components and being able to get better sourcing of components. So I think that this is something that will affect margin on these specific products. I don't know how it is going to affect margins in the overall picture because I do not expect it to be very large portion of our revenues at the beginning, but like all products, you'll see, at the beginning, a little bit lower margins, and then they're going to improve over time.

Okay. All right. So kind of turning to the near term in COVID-19. Just kind of give an update on what you're seeing with the overall market, maybe the easiest place to start would be just with the supply chain, which I think has been relatively recovered by now.

Yes. So I think that it's almost a similar picture that we saw about 1.5 months ago when we released. On one hand, when COVID started, everyone thought that this is a supply chain issue because most of the effect was in Asia and namely in China where we manufacture, we were very quick to recover on this one due to the fact that we were very well prepared for the Chinese New Year vacation that was simply extended and then we were able to operate even when China was in a kind of a lockdown. And I would say that right -- at least right now, all of our supply chain is functioning as normal, and we do not see any disruption. On the contrary, now that we see that this is something that turns into a demand issue more than a supply issue, I must say that we actually have a little bit more capacity than we planned. This is something that helps us on the air shipments that we suffered for so long, now we can actually ship a lot of products by ocean freight and reduce this one. So on the supply chain, I think that we've already recovered. What we do see, though, is that the effect is mostly on the demand and here, dividing the world between the U.S. and the non-U.S. parts. When we were releasing our quarterly results, we gave a little bit of snapshot of how we look at the world based on the amount of installations that are connecting our products to our monitoring portal. Today, almost every system that is being installed is connected to our monitoring portal, and we can basically see how many systems are connected on a daily basis. And when we started to track how does installation look like in the world of COVID, we simply started to compare what is the amount of system and megawatt installed compared to 2019. And what we saw and we shared in our earnings release, and we still see it right now, is that in Europe, the vast majority of Europe is either better than last year, meaning that we actually were able to grow our share and grow our installations, mostly in Germany, by the way, due to the fact that we brought a very nice product that works with storage systems that are very widespread in Germany. And in countries like the Netherlands, we see similar to last year or slightly better installations. And the same applies, by the way, for almost every geography outside of the United States. The only place where we indicated during the call that we saw a very large drop was Italy, where you simply saw a cliff of installation somewhere at the end of February. I'm happy to see that now we see almost a V-shape in the growth, Italy is back to life and almost back to normal in levels that we used to see before. The place that we noted other than Italy that saw big drop in installations was the United States. And in the call, we specifically said that when we compared April and March, we saw about 15% drop compared to 2019 in the number of installations in the United States. And we namely said that in April, we saw 33% drop compared to April 2019. And this was the only place where we saw a much lower installations compared to the last year. While we do see a recovery in the United States, it is not yet at the levels that we used to see before. And it is not yet going beyond what we need -- what we used to see in 2019. Now it's important to say, by the way, that this is, of course, very much a direct result of the shelter in place, because if there is shelter in place, not many people are allowing installers to come to their houses to install or many of the installers were at home as well. So it's not something that would be surprising, but in general, I would say that the U.S., at least on what we see up-to-date data is not showing yet major recovery compared to where it was before COVID started.

Right. What are you hearing from your installer partners or your distributors about homeowner demand and customer demand? Is that where the issue is? Or it's just simply that the installations can't happen, and there's just a building pipeline that might unload in the second half if the lockdowns end?

So I think that it's a mix because we talked to large installers and small installers, and we also talked, of course, a lot to installers worldwide. So let's start from the U.S. because, again, this is the whole market for most people on the call, I believe. I think that in the U.S., you see a mix result because some of the channels out there, the large TPOs are saying that their ability to move into digital channels allow them to continue and generate the same sales as were in 2019. And actually, at least one of them reiterated their guidance for this year, which means that they are okay. I must say that some of the other big guys are not yet in the numbers from what we understand, not on the numbers that they saw in 2019. But I would say that in general, the large TPOs would be closer or slightly better, I believe, in generating new transactions. I do not know about the installations, but on generating. I think that the smaller installers are much more affected because they have less capabilities to go online. And I think that their sales methodology was more door to door. And definitely, this is one that was damaged a little bit more. So I would expect to see that the longer tail is a little bit more affected. Again, I'm talking about the United States, while the larger installers are less affected. And again, at least in one case that was publicly said that the numbers are as were expected at the beginning of the year. Outside of the United States, I think that we see almost business in usual. I think that you see both in Europe and in Asia that both the generation and the installation are not dramatically affected by COVID. Maybe, by the way, there was more growth that we could have seen. Without COVID, we will never know this one. But at least when we look at our rate of installations, as we said on the call and when we talk to them, they see almost business as usual. One thing that we hear, and we're not able to confirm yes or no, is that it seems as if residential is a little bit more stable and less affected than commercial. But it's not something that I can point out any data point and say it's this percent or that percent.

Okay. So on your 1Q call, you talked about your gross margins being impacted by the mix of business, right? So with Europe being stronger than the U.S., that typically has lower margins. I have a question from an investor. In response to your answer a bit ago about over the next couple of years, seeing growth in Latin America and Asia, how should we think about that mix and that impact on margins?

So by definition, we believe that over time, we will see more and more international sales compared to the United States, simply because of the very large market share that we have in the U.S. that does not really allow us to grow dramatically. And at the same time, a lot of the revenues growth that will come from the U.S. will come from what we call the RP elements. The average return per -- revenue per installation, batteries and modules and other products that may be actually over slightly lower margins, but with that said, I think that there are 2 things that work in our favor. First of all, we do see that some of the products that we're selling are more sophisticated products like storage that, on one hand, have better margins compared to the regular inverters. And at the same time, indeed, going to the more competitive markets, the margins can be eroded. When we look at a year without corona, and again, it's very important to say that corona changes everything, COVID, but in a year without corona, everything is baked into our 36%, give or take, 1% that we gave on the Analyst Day. Because if you would look at the U.S., we could be at a higher margins. If you look at the other markets, we would be at the lower margins. And the ability to drop costs compared to the price drops that we do, and we do not do a lot of those, these days will allow us to be in this area. In a COVID-affected world, given the relatively short time that we have to adjust our costs of manufacturing and also, by the way, being a little bit more exposed to currency changes, the more you see outside of the U.S. revenues, the less are our margins or the lower are our margins. And therefore, we already guided for Q2 margins that are lower than the guided long term and the margins compared to before. When we will guide on Q3 and Q4, the -- how much the U.S. is going to improve if and when is very much going to affect the margin. But all in all, when you look at the regular world where we continue to grow in the same amounts and in the same products that we saw, this 36%, plus/minus 1% is something that should go.

Okay. Just getting a few questions on competition. Can you just give us an update on the competitive landscape? I mean Enphase was up against the ropes a few years ago, but they're very much back now. What are you seeing from them? The traditional inverter companies that you are disrupting, I mean they're big companies with established presence. What are you seeing from them?

Okay. So again, I differentiate between the U.S. and non-U.S. In the U.S., of course, Enphase on residential is the biggest competition. Actually, there is a GTM report that comes and show that they continue to gain share, and we lost a little bit of share. Just recently, we're in the mid-50s and we gained -- we lost a little bit, and they gained a little bit, but it's a, I would say, de facto duopoly in the residential space. And I believe that you'll see kind of a swing because a lot of the share moves that you see today are not even just related to us or Enphase. It's actually who is from the installers is gaining share locally. And this is something that continue to happen. All in all, Enphase is a great competition. It's a great product, great technology, and it's an easy one because their price is higher than ours. So in definition, it's not so bad. But this is a competition that is mostly limited to the United States. Outside of the U.S., you do not see Enphase. You see mostly string inverters, and you see mostly Chinese and European string inverters. And here, the competition is much more, I would say, fierce, given the fact that in the lack of the safety regulations that dictates either SolarEdge or Enphase, we need to be more aggressive in the pricing, while the differences are sometimes between us and Chinese products are 30% or 35% differences on the price that we charge. But even there, in those markets, we're able to continue and grow and take share mostly due to the fact that the inverter cost, although, again, we may be 30% more expensive than Chinese, the inverter cost is only about 10% of the cost of the installation. So when you translate the difference, it becomes a very small one. But once you translate everything into LCOE, Levelized Cost of Energy, and our ability to support a much more, I would call it, technological solutions for home energy management and storage, this is value that we know how to sell. And therefore, I would say that we do not see major changes in the competitive landscape for us. I think that we continue to take share outside of the United States, and we do not see anything that disrupts it dramatically over the last few quarters.

Okay. I'm going to ask you in a possible question to answer in 1 minute. Sorry. So energy storage, when should we expect a solution out there? And can you give us the quick 30-second elevator pitch on how you differentiate from a lot of these new competition or new solutions working out?

Now I'll have to hurry. So we'll have the storage product coming at the second half of the year, which will be a battery that is not based on our Kokam sales. This will be based on a third party. It will come by the second half of the year. And relatively, by the way, in small quantities because it's a product that you need to launch very cautiously. Battery is a different animal than inverters, but of course, it will be more revenues in 2021. With regards to the benefits of our products, I think that it's mostly the fact that it's going to work as one system. When we're being installed with an LG battery, a Tesla battery, BYD battery or any other battery today, you buy different components from different players. So if there is a problem with warranty, you need to call someone. They start throwing you from one to another. And there is no, I would call it, very close integration between the battery and the product. When it comes to our product, this is a product that comes from our home. So you have a one-stop shop, everything comes from us, easier to install, easier to be supported on one hand. And on the technological part, it's a system that's supposed to work a little bit better and a little bit closer compared to all other solutions because of the fact that these are components of one systems that were designed to work together. Plus, by the way, today, you see limitations on the amount of products that are sold by some of the other players, I believe that at least when it comes to buying our systems with our batteries, we will have much better, I would call it, excess to supply.

Okay. Ronen, I think we're out of time. I think we should have tried to slot you in 2 consecutive sessions. We didn't even get to the non-solar business, which is extremely interesting as well. So I apologize for that.

Stay tuned and we'll do it in the next one.

Yes. Here you go. Thank you very much for joining and thank you for answering the questions.

Thank you very much. And have a safety -- safe and good day for everyone. Bye-bye.

Yes. You too. Thanks. Bye-bye.

Bye.