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

Welcome. My name is Jed Dorsheimer. I'm one of the senior analysts at Canaccord Genuity focused on sustainability and ESG for U.S. research. And we are lucky enough to have with us Ronen Faier, CFO of SolarEdge. Those of you who have been kind of following us on this journey in the past few days, our simple hypothesis has been and is that new forms of communication lead to greater need for transportation that results in required new energy sources. And so that model has existed the past 500 years and led to the super nonlinear growth curves that we're experiencing as well as some of the problems associated with those. So with that framework, we're lucky to have SolarEdge, one that I go back a ways actually as I was one of the analysts covering the IPO process, yes. And then I decided to, of course, leave Wall Street altogether and never thought I'd return, and yet here I am. So with that being said, Ronen, I'd like to turn it to you. I mean, you have led the advance of microinverters and really changed the way we think of the solar market in general. You've had a lot of success from a stock perspective, most investors who got in earlier loving this name. But I'd like you to just shape because the business is changing at this point. You're going beyond just solar inverters. And so maybe just lay out how you see the business in terms of the different groups, and then we can dig into some questions from there.

Perfect. So first of all, thank you very much for joining and thank you, Jed, as usual. I hope that next time we can sit next to each other in a real room with real people.

Yes. You're live from Israel right now, right?

I'm live from Israel. We have a beautiful sunset. I put it so the sunset will not disturb, but we have a beautiful sunset in the Mediterranean right now. So basically, SolarEdge, I think that the right definition to look at the company is that we are a power company or a power conversion company that started to expand into solar before it started to do anything else. The history of the company is that it was founded by several people that came from the power part of the Israeli intelligence forces. And when they went out of the army and they wanted to do what they can do with their power conversion knowledge, they looked to what is the right field and they looked at several of them. By the way, UPS, e-mobility, solar were all there. But Guy, our late CEO, understood that solar inverters are not built in the right way. And therefore, as you mentioned, Jed, we started by developing an architecture called DC optimized solution that allows us to, on one hand, be able to get all of the benefits of module level power electronics by having more energy and having flexible design and safety and the ability to monitor the system, but at a cost curve or a cost situation that is very similar to string inverters that you see competing with us outside of the United States and other microinverters that compete with us also in the United States. The fact that we were able to drop the cost relatively quickly and to adapt to the new solar market allowed us to grow very rapidly. We became the largest inverter company at 2018. But the transformation that you discussed and is really happening is that from a just solar inverter company, we became more of a smart energy company in the inverter space. And why is it so important? Because as solar energy becomes cheaper and utilities are starting to push back on the ability to get a lot of electricity to their grid, the inverter becomes something much smarter than just a conversion device from DC to AC. And now you need to have the abilities to have storage and also what we call smart home in order to better utilize the energy. And we made this transformation, and we, of course, continue to do it. But because of the fact that we know how to do power conversion, once we were able to be very good in the solar inverter market and lead the market, we got a little bit of courage to go into other areas that are similar in the core technology but are different markets that allows us to continue and grow. We acquired a company in the UPS space. UPS is uninterruptible power supply systems. It's basically a backup system with an inverter and a battery. So we acquired this kind of a company. We acquired a lithium-ion battery maker because, both with solar but all of the other applications, chemistry that is designed for these applications will be needed and nobody is actually interested in it right now. And we acquired an e-mobility company in Italy recently, where we're already developing and selling to a Tier 1 automotive, testing equipment or testing samples, which we hope that will turn into a light commercial vehicle that in, I don't know, a year or 2 from now, we will be able to sell. So the evolution is from inverter to smart inverter and a power electronics company where all the core technology is shared.

It's funny, the short thesis on the stock hasn't really changed much since when we first brought you public in 2015. So let's just deal with the elephant in the room in terms of competition. I think, if I remember back, it was always Huawei coming in and it never materialized as those people hoped for. So just deal with the competition aspect for a minute in terms of what you see in the market, if that's changed? And I also think it's useful to frame the market not just from U.S.-centric, which we often kind of impose, but from a world perspective, too.

You're very right about this. There is different characteristics to the U.S. and non-U.S. market. In the U.S., safety regulations around solar require to have the ability to shut down the electricity at the rooftop for safety reasons. And that dictated that only MLPE solutions will be really viable into this market. It's basically us and Enphase, a company that is doing microinverter, doing very good product, by the way. And we fight vigorously on every customer and every percentage of market share. Once you go outside of the United States where these requirements do not exist, you see a completely different environment. You see an environment where string inverters are the dominating technology. Even though, again, we're the largest company in the world on the revenue side, the megawatts that are installed are mostly string inverters. And here, you see Chinese companies. You mentioned Huawei, but also CHINT, Sungrow, GoodWe and so many others and also European inverter companies. In the last few years, you see actually a positive situation that there is consolidation in the market. Inverter, a string inverter is not a very technological product and a lot of the IP around it was already expired. Therefore, any company can make a string inverter. And this was the case, let's say, 6 or 7 years ago. With no company making money, I believe other than us and Enphase today in this market, you do see consolidation. So companies like ABB, who entered the market by acquiring Power-One, went out of this market recently. And I think that you start to see, on one hand, consolidation. But in the second hand, you see also moderation of the competition where if companies are not making money, they're not willing to lose so much in order to grow. And now you see a very stable competitive environment. By the way, it's still threatening. We always look at who can come with better or other technologies, but a different environment where less players but strong ones.

So you brought intelligence from a microinverter perspective with the DC optimizer into the market, played out as you expected and hoped or as Guy expected and hoped. And so talk about how that intelligence, the role that, that plays in expanding into some of these other adjacent markets and how that differs between U.S. and other markets, Europe and Asia.

So I think the first thing that happened is that by developing the optimizer, we learned how to make the HD Wave inverter. Our inverter today is an inverter that is different from string inverters in the sense that instead of having large physical components, we're changing them with smaller commoditized components with a lot of computing power that allows us to be more efficient in the way that we transform energy and make products smaller and cheaper. But when you go to the broader areas of power conversion, and this could be a UPS machine, it could be, by the way, an HVAC system. It could be an escalator engine. All of these technologies are using the same traditional 60, 70 years old sometimes technology of power conversion, which we believe that with our technology, we will be able to transform to an area where silicon and semiconductors are allowing you to reduce component counts. And at the same time, by the way, by reducing the amount of physical components, to increase the efficiency of the product, which will allow you to have better cost savings on those. And once you look at again at a vehicle where you have 4 inverters in an EV and you have 1 in a UPS, we believe that these technologies will allow us to basically move them from solar to the other directions.

So I guess one question there is, you've chosen a silicon path, which limits to certain high voltage. And when you move to a high-voltage architecture, you're able to run at a much lower amperage. Can you talk about some of the thoughts and what you've learned in the solar inverter market and whether or not you would also be looking at moving to a high-voltage architecture in some of these other applications?

Essentially, the application that is using most of the silicon today is our DC optimizer. And the DC optimizer is this unit that you put at the back of every module. So by definition, this system is not seeing very high current and not very high voltages. But the beautiful thing that we did, and this is one of our biggest or strongest patents in our 500-and-something patent portfolio that we have is that we developed a technology that allows us to remain at low voltage and running very high current. And that means that even if you need -- at the end, power is basically a multiplication of both. We're able to maintain stable current on the, I would call it, solar array, which allows us to connect the battery on the DC side. This allows us, of course, to be much cheaper in the overall solution and allows us to be very, very, I would say, effective in the way that we convert. But you're right, if you move and when you move into the world of utility-scale especially, you need to have high voltages as well. And we actually are now developing technologies to face this and to be able to come with this kind of solution. So maybe it will not be as silicon-based in all areas, maybe there are some other ways that we can deal with it, but I can tell you that our future utility product is going to be at a high-voltage environment.

Well, I asked that because when you look at it from a systems perspective, it really changes the view. And because now you can look at a lot of the other components. Whether it's in a car, you look at wiring. You have 5, 10 miles of sometimes copper, and that weighs a lot. And so moving to high voltage, low amperage has some applicability in that particular as well as preserving electrons from a leakage perspective. But I guess what I was getting at is, in addition to sort of high voltage, it would almost seem like that systems understanding that you're bringing to the market, learned from the solar market, would also see that, that has some applicability here, almost leading you to that high voltage, low amperage perspective.

Definitely, this is the case. And again, the low voltage decision was made in order to make the right solution for solar, but most of the engineers that we have today in the power division, they're coming also from high-voltage areas. So I think that it's a kind of a knowledge that is evolving all the time, and we know how to play with it and how to transform it. But I do agree that, and this is one of the patents that we took especially into the e-mobility, as you mentioned, that high voltage ability is something that we will need to have, and this is something that we definitely know how to invest and how to make work.

So you're the newcomer in the battery or the storage side of things. So as a relative newcomer, I guess, what's your first thought on that market? We have had a lot of -- we had several lithium companies, companies that are exposed to that earlier in the conference. What are your thoughts on that market? And then I want to dig into that a bit more.

So I'll start by saying that this is not a market that we plan to be in. I think that maybe in one of the meetings that we had before, when people used to ask us what we would like to own, we usually used to say that we wouldn't like to own chemistry. And then we own chemistry today. And I think that the main reason for this was an understanding that we developed is that, first of all, we need to have our own batteries. And we made the decision to adopt, at least for the current application, lithium-ion technology rather than other technologies, believing that since lithium-ion is very widely spread in the EV, the cost curve of lithium-ion batteries could be attractive enough. So when we started to look for cell manufacturers to make our own batteries, we found that nobody is willing to commit. And this is how we learned about Kokam. But along the way, we also understood another issue. And this is that today, nobody is focusing on ESS, on stationary energy storage systems. And it is very important from cost perspective because when you take a battery, we all think of battery as something that's supposed to give energy. But there's like a kind of a pentagon of qualities to every battery that you have, which is the cost and the number of cycles and the energy density and the safety and the C-rate. And what we learned is that today, if you look at most ESS storage systems, they're built on EV batteries and that EV battery's chemistry. That means that they're designed for a high C-rate. Because when you hit the gas on a Tesla, you want to see it jumping to 100 kilometers per hour in 3 seconds. And the second thing, the batteries are designed for 1,500 cycles in general, so they will be replaced every 5 years. What we understood along the process and when we entered this market is that nobody is really designing chemistry that is good for storage. And once you have your own chemistry, you can basically get into an area of the market that today is almost unattended by others because everyone is looking for the big money of EV. So they look at this kind of chemistry. And second is that we can get our own chemistry that will be mostly fitted to what we need: large number of cycles and low C-rate because this is ESS. And we do understand that it's very competitive, but along the way we learn what is the right size of the factory to be more effective. What is the right way to look at chemistry and the cycles. And also, by the way, what is the way to work with the competition. And many of them like LG Chem, we are more cooperating than competing. So we make our first steps. Maybe we'll understand, but we understand much more today that having Kokam allows us to have a real, I would call it, product that suit our exact needs, at least for solar and UPS in the next few years.

So I want to get to the numbers in one second, which is your area of expertise. But just as you bring up chemistry, what is the chemistry that you want to go with? Are you going with an LFP, an NCA? What...

Today, we use NMC, use NMC today, mostly 622, aiming at 811. But even within this, there are other elements that you can change in order to get to the right energy density, C-rate and number of cycles.

So with that, you're seeing a disintermediation of lithium prices on carbonate and hydroxide with that of need for battery, at least a couple of years out. What are your thoughts on securing up capacity at this point in time?

So we are actually taking or doing this and this is also coming from another reason. When you're developing a battery, you cannot even change an electrolyte company without changing the, I would call it, the dynamics of the battery. And therefore, once you're developing a battery or a system, you're basically making sure that you're well backed with long-term agreements with the vendors to make sure that you're there. Now of course, these agreements will be volatile based on the component prices, but at least you know that your ability to get these resources is secure.

So let's get into growth rates of solar and nonsolar. So if I look at the growth of solar products, you talk about sort of a 5%, but you've got a huge opportunity sort of beyond U.S., particularly with Europe and the Green New Deal that many countries have signed on to with that. How should we think about that business over the next year, if you will?

So I must say that we hear also a lot about the new green deal. But actually when we go in deep into the details, right now, it's mostly on the level of, I would call it, statements rather than a real plan. The only plan out there is an eco-bonus plan in Italy that is very interesting. So we're looking very, I would say, interested into this kind of area. But I believe that the growth in Europe can come from -- even without this plan, we're growing. Even under COVID, we grow in Europe right now. And the reason is not only the plans themselves but actually the products. The ability to present new products such as the 3-phase storage backup inverter that is very important, came to Germany and the German-speaking countries, allowing us to take share there and grow beyond the market growth. And with all of the other plans, once they come, we'll know how to do it, but it's starting from the fact that you have a product that is really meeting the requirements there. We do believe that and we guided it in the Analyst Day that in the years without corona, for the next 3 years that we still feel comfortable, anything between 15% to 25% should be a right growth rate given the fact that U.S. will go back to growth at a certain point of time. Europe continues to grow even today. And rest of the world can grow for us due to the fact that we are going into more countries and we expand our offering into those countries. So for the next 3, 4 years without corona, again, corona is changing a little bit the picture because of the U.S., which is substantial part, but 15% to 25% is a number that we feel very comfortable with.

Yes. I guess we don't believe in masks here. So if we look at that, how should we think of the attach rate with nonsolar products in terms of that business? Obviously, it's going to be a higher growth rate because it's off of a much smaller base. But is there a correlation to the core business that we should think about in terms of that crossover?

So I think that there should be correlation. In our view, it will go from -- today, it's about 5%, but I think that there is a demand that is not satisfied due to the lack of supply of batteries. I believe that going to 10%, 20% nationwide makes sense. If you talk to the large Sunnova, Sunrun, Vivint, some of them talk publicly about 40% attach rate. They're about, I don't know, 30%, 40% of the market today. And I assume that in the smaller installers, you see lower attach rate. So our assumption is going towards 20% in the U.S. Outside of the U.S., it's very country-specific. Australia should be higher. Germany should be similar. In Netherlands, I'm not sure that they will have, at least in the next 2 to 3 years. So it's very market-specific.

So margins, how are you thinking? They've come down a bit from your peak as you introduce some of these newer products. How should we think about the balance between share and pricing and sort of the competition with Enphase versus your ability to maximize margins and return to shareholders.

So first of all, I'm talking only about the solar margins because today, again, our business includes margins related to the other businesses that are in kind of investment mode. So in solar, nothing changed dramatically in the margin structure. What changed dramatically is actually the mix. Because when we're looking at the ratio of, let's say, U.S. sales being around 50% where it used to be before, which also brings, by the way, a higher portion of residential versus commercial compared to Europe, I believe that the 36% that we give is not only worth it, it's achievable even under competition because we still see the ability to reduce cost. The thing that is changing the equation is that we're working today in 2 different worlds. And sometimes people do not realize it, as you said, when they look at the United States. In the U.S., the competition is Enphase and SolarEdge because of rapid shutdown. Nobody else can meet the regulations. And therefore, prices can be high. It's a de facto duopoly today. When you go to Europe, my competition is not Enphase. They're not there. We see Chinese inverters. We see Huawei. We see Sungrow. We see CHINT. And we see European strings. So in this sense, once we'll have the right mix of U.S., non-U.S., 36% is there. As long as it's not the case, anything between 300 to 400 basis point lower margins are expected due to the more fierce competition.

Two last questions, we're about out of time. One is a fun one. I've been asking all of the companies. You get to bring one person back, Einstein, Edison or Tesla. Who do you bring back and why? And if there's any lasting things you want investors to think about, then say it now.

Okay. Actually, I'll choose to bring back Guy, our founder, who died a year ago. But unless he comes -- I'm able to do it because he's very stubborn, he would like to stay in heaven. I believe that Einstein will be the person. I think that he's visionary and the width was very high. The second question was what?

So what's the one thing you want people to take away when they think SolarEdge?

I would say, don't let the name mislead you. We are SolarEdge by company, but we're a power company with growth opportunities way beyond solar, where every growth opportunity is actually bigger than the solar market. So if we're successful, we can see a different story here.

Ronen, thank you so much for supporting the event with your time.

Thank you, Jed. Good to see you.

Always good to see you. Take care.

Thank you. Thank you very much, everyone. Bye-bye.