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

Good morning. Hi, everyone. Welcome to the UBS Global Renewable Conference. This is Jon Windham. I head up alternative energy and environmental services equity research here at UBS. And you are joining us here today for a fireside chat with Ronen Faier, CFO of SolarEdge. SolarEdge is one of the leading U.S.-listed renewable companies. In fact, right now it's the largest market cap per renewable company in the United States. So congratulations, Ronen. It has obviously been a very successful last couple of years certainly in terms of the stock price. Just a couple quick logistical notes as we get into the call. We have 45 minutes today with Ronen. I really appreciate him taking some time to be here with us today virtually. As you can tell by the video, it looks like Ronen is back in the office and by my video that I am not. We'll get started off with just some questions from me for Ronen. But as we go, if anyone on the livestream has questions, do feel free to e-mail them to me. My e-mail address is Jon J-O-N dot Windham W-I-N-D-H-A-M at ubs.com. So with that, Ronen, thank you very much for being here.

Thank you for hosting me.

Yes. It's always a pleasure. Why don't we just start off with -- I'll give you the floor for sort of 5 or 10 minutes, however long you'd like, just to sort of level set us on where SolarEdge is today and then sort of key milestones investors should be looking for over the next 12 months.

So I think that -- first of all, we're living, as you can see, in a very strange times where nobody expected that we will be. So in a sense, just [ ages ] ago, in November, we hosted an Analyst Day where we presented our targets for the next years, including continued growth as we did in the last few years and continued expansion geographically. And we actually see that 2020 is affected by COVID. In a sense, the company today is in a situation where our global presence around the world provides us with a, I would call it, revenue base that allowed us to, I would say, manage through COVID, but it is a little bit different than what we have witnessed in the past. SolarEdge is selling today worldwide. And therefore, when we saw COVID starting, I think, like the rest of the world, we were expecting to see mostly issues related to the supply side while we did not expect a major effect on demand. Over time, especially around late February, beginning of March, we started to see a shift where supply chain stabilized in Asia, while the demand started to be affected mostly in Europe and then into the United States. We're now about 6 months into or 7 months into this situation. And where we are today is that, first of all, the company is, of course, still in business, still selling, still profitable in the last quarters. But the growth trajectory that we showed in recent years did not continue. We actually dropped revenues from Q1 to Q2 and our guidance for Q3. What we see worldwide right now is a world where our sales in Europe are strong and growing, continue to grow. We mentioned it in the calls, both in Q1 and Q2. The European markets were hit by COVID, but in many senses, the sales were not dramatically impacted. We see markets that are growing and continue to grow. We see areas like Germany where we take market share, we believe, and continue to grow our business. And in general, Europe has been a ray of light in this situation. Most of the difference that we do see in light of COVID is actually in the United States where revenues dropped after Q1 to a level that is below what we see today, at least a level of installations that is below 2019. And while we start to see recovery in the United States over the last few months, it's still a relatively slower recovery, and we do not yet see levels of installations that are at the levels that we even used to see in 2019. With that said, we do see, of course, there is an improvement and we do see that business is starting to go back, but I think that we still have a way to go there.

Got it. Thanks for that sort of walk around the globe, Ronen. Maybe we could dive a little bit rather than by geography. If you could talk a little bit about the progress you've had in increasing commercial penetration, particularly in the United States, but also how that's going in other parts of the world.

So yes, our offering for the commercial market is growing year-by-year by introducing products with what we call a bigger chassis, which means that the inverter is having a larger capacity. From 33-kilowatt inverter we had like 4 years ago, today, our biggest inverter is 120-kilowatt inverter. And actually, by the end of this year, beginning of next year, we'll start selling our 330-kilowatt inverters. And this is something that allows us to be more competitive in price and the cost per watt, and this is, of course, drives our growth. So yes, we are growing our commercial share in the last quarter. It was actually more than 50% of the megawatt shift. But in general, I might say that we do see that right now the U.S. market -- because of COVID, the C&I market is a little bit more impacted, and therefore, of course, it impacts our business. At the same time, in Europe and rest of the world, you usually see higher portion of commercial sales, and our commercial share in those markets is bigger compared to the United States.

So just maybe specifically on that, when we're talking about 50% market share, that's in commercial in the last quarter in the United States? And then just to be...

No, no, no. It was a 50% share of the revenues but not market share in the United States. Based on the Wood Mackenzie numbers that came out last week, we were about 13% to 14% in the last quarter. We were a little bit higher in the first quarter in the United States. Outside of the U.S., of course, it's very market-specific. But from all of our revenues, it was more than 50%.

Got it. Got it. Thank you for that clarification. Maybe let's -- thanks for sharing that on the commercial side. Maybe we'll get into the residential, which, historically, has been sort of the core business, which is undergoing quite a bit of change, maybe in 2 fronts: one, the relatively new competitor of Generac in the United States launching a product as well as storage becoming a much bigger part of that end market. So maybe just starting with California, what you're seeing in terms of storage adoption, and then getting specifically into SolarEdge, how your product is different on storage maybe than some of the competitors.

So in general, we usually do not see market by market the adoption. The data that we have is coming mostly from the same sources that you have, but we do see more adoption of storage, and we see much more discussion. And I will say why I'm making the distinction. The main problem today is that the market is not yet having sufficient supply of batteries at the right cost in order to demonstrate its real, I would call it, demand or a real potential. And you see that, today, the major players in the United States are Tesla and LG Chem. And again, both of them are relatively attractive with the amount of batteries that they can provide. You start to see now battery products coming. One of our competitors, of course, Generac announced one and is coming to the market. Enphase is coming with a product, will come at the end of this year. And I believe that only once this supply is going to be in the market, we will see what is the true potential. What we do see is that the discussion about commercial, though, is growing among the large TPOs. They put the relatively high numbers or expectation of attach rate of storage to solar mostly, I believe, in California where there's another element in California which is the resilience that is driving now the request for storage, but also in other areas. I must say that when we talk in the U.S., what you see outside of the U.S., you see less demand and less discussion on storage other than in Germany and Australia. So this is a relatively U.S.-specific area. But I do believe, just like you, that this is something that is going to continue and grow. Where we are in this market. So in order to support storage, we have 2 elements in our solution. The first one is the inverter itself. We have an inverter that can support batteries since about 3 or 4 years ago. We introduced a new inverter called Energy Hub at the beginning of this year. This is an inverter that allows to have a backup for your home, meaning that if you have a battery and a solar system on your rooftop, even if the grid is not available, you can still operate the system. And it's a product that is making, I would call it, the connection and connectivity between solar storage and smart home applications, a very easy and flexible one that will also support the ability in the future to provide areas like demand response or virtual power plant games into the market. So this is a product that we have. A lot of installations that you see today of LG Chem and Tesla are -- batteries are actually happening with this specific inverter because we are supporting all batteries or all the batteries that exist in the U.S. market today. We're basically not a closed garden in this sense. The second element will be our own battery that will come at the end of this year. This is going to be a battery, a SolarEdge battery, that will be first produced using a third-party manufacturer cells. And in 2022, we'll use cells coming from our own Kokam factory, a 2-gigawatt factory that we now build in Korea. And this will be a battery or lines of batteries that will evolve over time that will allow you to have one-stop shop with SolarEdge where you can get the entire solution, inverter battery, what we call the storage solution that connects the battery in the battery from the same supplier enjoying the same support, and I would call it the same ecosystem.

Got you. Maybe to dive in a little bit more to Kokam in the storage solution. Can you talk a little bit about what do you think the sales and marketing advantages are of the one-stop shop? I mean is that sort of driven by feedback from the installers that you've heard of that kind of want one system rather than mismatching multiple brands? If you can just talk through the sort of go-to-market strategy there would be helpful.

So I think that -- as you said, this is something that we hear a lot from installers and also from the, again, TPOs. The main issue today is not even related to the sales and marketing effort that we do. Of course, it's very easy for us if we're going to sell the inverter to sell the battery at the same place. But the main thing that is important is to have one-stop shop when it comes to the support, and it comes to the connectivity of the system. Usually, if you'll have a person on a roof installing a battery, a solar system with a battery, if he would call the support of the battery, he may very much get the answer that it is an inverter problem and vice versa, if we call the inverter manufacturer. And in many times, especially when it comes to support, it's an issue. To have the ability to have one number and to have one support center that can, and this is one of the capabilities of the system, remotely diagnose where is the problem and provide one source of solution is a great comfort and help to the installer itself. From a purchasing point of view, I believe that the customers like to have, again, one source for everything because then their revenue that they give us is bigger, they believe, and maybe they are getting better economies of scale with their bargaining power with us, and in general, it lets them to deal with all of the logistics in one place. So I think that this is why it is so important. Wanted to ask also about Kokam. So Kokam is a lithium-ion battery manufacturer that we acquired in October 2019. One of the issues that we understood back then and we see today, by the way, in the market is that most of the large players are chasing EV. They are not chasing a solar. And our ability to have our own captive supply for battery cells will initially give us the ability to simply be able to ensure that there is enough supply to the market. The second thing that it will allow us is to actually develop and invest in the development of the chemistry that will be better suited for the ESS market compared to the EV, so that means higher number of cycles of charge and discharge and a little bit different C rate. The result of this, by the way, is expected to be a more attractive cost of the battery because this will be a battery that is designed from the first place to be an ESS battery. And with the factory that we're building in Kokam, we're very much on the way to get there.

Perfect. Lots to dig in there, too. So when we think about Kokam and sort of start there, can you sort of walk us through the next year in terms of where that scales to the 2 gigawatts? What's the end date to get to 2 gigawatts of throughput a year?

Sure. So first of all, today, Kokam has a factory of about 150-megawatt hour. It's a very small factory. And we're using the vast majority, if not all, of its capacity today with other businesses, by the way, not related to solar. So we sell ESS systems that are not necessarily going with solar, and we sell to EV applications and other applications. Until the end of 2021, not much is expected to change because we're now building the factory. But at the beginning of 2022, our 2-gigawatt factory will come online, and then we expect to see a gradual increase of capacity that will allow, first of all, to serve us and also serve the other businesses of solar. When we were in the Analyst Day, we tried to give some numbers because people are trying to understand what it means to have a 2-gigawatt factory. So in the world of about $250 selling price per kilowatt installed, today, by the way, the number is much higher, it's around $400 and sometimes even $450, in this kind of world, this translates into about $500 million of additional revenues in 2023. And in 2022, due to the fact that the product -- the factory will take time to ramp up, it's not that you put on the lights and now you produce it at 100%. We said that we expect to have around $300 million of cumulative revenues coming from this factory. But until then, it's going to be few tens of millions simply because this is the capacity we have.

Yes. And so still on Kokam and the storage sort of strategy, obviously, you'll be one of the few companies actually making your own batteries rather than relying on the market. When you go to sell those or sort of communicate with the installers and your main customers is the idea that you can guarantee them a certain amount of supply. I mean what's the sort of advantage of having your own manufacturing in the market?

So I think that that's exactly the advantage. Today, you cannot really count on the level of supply that you can get from your -- from the other players because, again, their interests are somewhere else. We're interested in solar. This is our business. This is what we do right now. And this is why we can guarantee it, and we can guarantee it for a long term. But there's another element that, eventually, we will also produce a battery that is really designed for ESS. When you design a battery for EV, you design a battery with chemistry that will allow 5,000 charge and -- sorry, 1,500 charge and discharge cycles and a C rate that is very high, meaning that you can squeeze a lot of energy from the battery very quickly because when you push the gas of an electrical vehicle, you wanted to accelerate and not go very slowly. When you go to storage, this is exactly the opposite. You want to have at least 4,000 cycles, and you would like to have 1 C rate, meaning the charge and discharge are happening at the same time. The reason that you want it because this will affect the cost of the battery and will allow us by designing our own cells for ESS to make batteries that are at a lower price point over the long term, of course, compared to other cells that are not designed for these purposes. So it's, first of all, supply, but second, it's a product that is designed for its purpose for these installers.

Got it. And maybe switching gears a little bit to back up on a comment you made earlier about, really, product support. It is sort of over the course of time creates real economic moat for SolarEdge as -- and we do hear this from installers. They tend to like to install 1 type of product and deal with that product, customer service because it's what they know. Can you talk a little bit of any challenges or opportunities you've had in scaling the support, that was a company that's grown quite rapidly over the last 7 years, and how you've dealt with the increasing sort of load, if you would, or demand on your support systems?

So first of all, by the way, it was a real growing pain, as you mentioned. We grew in the last 2 years in 2018 and '19 in about 50% in revenues. And since ASP per watt did not change dramatically, that means that the number of units shipped is very similar to that. And although this -- we had another issue, and this is a component shortage situation that was prevailing the market in 2017, '18 and beginning of '19 where, in many cases, we found ourselves in a situation where we could not get all the components that we want. And that means that we needed to either redesign our products to work with other components and, at the same time, also introducing new products. The combination of new product introduction, very large growth and this kind of, I would call it, adjustment to the bill of material created a load on our support -- in our support. And we were not as quick as we wanted at least to expand this. Over time, we took a lot of efforts to increase our support by, first of all, putting much more people, but more important than this, improving the processes that we're doing around support. So we created more digitized channels for chat and to have knowledge that is available in order to reduce the amount of calls. We introduced some for our cities. It was new practices of having a callback and also providing customers with more designated support channels to what they needed. It is still a painful area. It is still growing in support. You never have 100%. You always try to get a little bit better. I do believe that maybe 1 or 2 things that corona did good for us is the fact that now that the growth is a little bit moderated, we're able to take a little bit of a breath and arrange everything around it. But this was a growing pain, and we felt it.

Right. Right. Yes. So a little bit of positive growth in the market, a chance to catch up a little bit on some of the, let's call it, back-office sort of support systems. Can you talk through your support system just so investors have an idea? Is it centralized? Is it outsourced? Just talk to a little bit the actual structure of that organization.

So first of all, everything -- we do not outsource support today. Everything is produced by our SolarEdge people. And we basically have a combination of 2, I would call it, structures. The first one is, in the U.S., we have a support center mostly in California but supporting the U.S. from down in the East Coast to sunset in the West Coast and Hawaii. And this is something that's done from California and starting to be, by the way, more and more decentralized. Again, this is something that COVID helped us to do. We have a support center in Bulgaria with around 100-and-something people that are talking in various languages, mostly supporting the European markets, and we also have local support center in Australia. In addition to those, in each and every country, we also have smaller support centers that are either providing more, what we call, Tier 2 and Tier 3 support. So if you have a problem that is not how do I connect this connector but something that is more relevant, then you are directed to experts in your region that allows either to know better the codes in your country or specific issues. But all of these are SolarEdge employees, and all of these are being trained and managed by headquarters here.