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

Hi. Welcome to the next segment of the Sustainable Energy and Tech Conference. I'm Chris Souther, the research analyst covering the space here at B. Riley, and I'm pleased to welcome SolarEdge to discuss some of the interesting developments in that company. And really, focus historically has been kind of power conversion, energy management and really going beyond really just kind of the solar inverter is, I think, a very interesting story that they have to tell here. So maybe you can introduce yourself, who you are and just provide kind of a background on the company and some of the opportunities you see ahead of you here.

Sure. So thank you, Chris, for having us. It's a pleasure to be here. My name is Lior, I'm Director of IR and Finance Operations for SolarEdge. And yes, we think we have a very interesting story. We're already the biggest inverter company in the world. And in the recent years, we've decided to take our power conversion skills and capabilities into different markets, but adjacent one and ones that we think we can add value. And we did so with the 3 acquisitions, adding a critical power division, acquiring Kokam, which is cell and lithium-ion cell manufacturer. And the most -- the last one was SMRE, which laid the foundation for our e-Mobility Division. So we're very excited about all of these areas, and we're looking ahead to a brighter future.

Excellent. That's perfect. So maybe just you can talk a little bit about the overall trends in the solar market, maybe touching on some of the market share and penetration of module level power electronics like you guys provide versus some of the traditional string and central inverters. And maybe kind of start from there, it would be great.

So I think we see a very interesting phenomena taking place in that, and is that the inventory is really becoming the brains and the heart of those systems, especially as more and more of the energy management capabilities are coming in, in software. Everything is really centralized on the inverter. And when you're talking about the inverter, we have the string ones. This is where the industry started. We have the Chinese string inverters. You have the European string inverters, and you have the MLP, the module level power electronics, which you will see us and Enphase there. And these are the more technological inverters you will see in the market that will provide a more enhanced set of capabilities and can really also lay the foundation on adding more and more layers of smart energy solutions afterwards. So this is in terms of what you see in the inverter space in terms of products. And then in terms of the markets, so the U.S. market, following the rapid shutdown regulation in the residential side is really controlled by us. And in Enphase, so you will see a very strong presence of MLP there in order to meet the rapid shutdown. These are really the only 2 products out of the box that meet this regulation. In places outside of the U.S. where you don't have the rapid shutdown regulation, you will see a more competitive environment. You will see the European invertor players, the Chinese ones as well.

Excellent. So maybe just talk a little bit about some of your upcoming product cycles on the solar side. And I really think a few of these kind of next-generation products have a great ability for you guys to gain significant share and enter some new markets pretty successfully. So when starting with residential, maybe talk a little bit about the Energy Hub product. What are some of the new capabilities there and what you're seeing from customers as far as adoption of that product and interest?

So the Energy Hub is our new inverter for the U.S. market. And it's really an all-around player, sort of taking an analogy from the sports world. But it will enable to connect to your storage and the PV system and -- to be your EV charging. So it really encompasses everything you need in terms of energy management. And it also -- more aesthetic, no pavements in the wall, no adding more other small boxes to make sure that everything is covered. It's all coming in one box. We see a very good reception of that in the U.S. market. We gave some of these numbers. We saw that we increased from roughly 5,000, 6,000 units to more than 15,000 in recent quarter. So this is a very good product that we now put out there, and we see a very good reception of that. In the optimizers part, we're also working on the next-generation of optimizers, and we're constantly looking at increasing the watt supportage for each of the optimizer so they can support a higher wattage, and by that, decreasing the levelized cost of energy, so that, on the solar front. On the resi side, we're expanding our offering in the C&I space. So we are going to launch a new commercial inverter. And down the road, at the end of this year, we're also looking into launching our utility product, which is a fairly new one for us. So those work on all fronts of the solar space, and we're looking ahead to put those products out.

Excellent. And as you're entering some of these larger system size, inverter markets, can you talk a little bit about how is the channel change when you go to kind of commercial, when you go to utility? And talk a little bit about the competitive nature of some of those markets from a pricing perspective and how the feature set that you guys are bringing to the table can improve upon and potentially still have kind of good pricing power relative to some of the solutions that are out there I think would be helpful for people to understand.

Right. So you -- you're absolutely right. It's different, those segments are, in many ways, a different business. It's a different sales cycle. It's a longer one. It usually involves a design work as well because you usually have those needs on the other side of the transactions. And also in terms of ASP, as the system size grows, the average selling price declines. And this is what you see when you scale those solutions. So the C&I segment is one that is demonstrating lower ASPs, if you compare it to the resi, and then the same goes for utility. In terms of our advantage, we bring a lot of the capabilities we have in the resi space, also to the C&I space. And that means monitoring and optimizing. And you should think about a common Walmart with thousands and thousands of modules on the roof. If something goes wrong, it's a real added value to just know right away where things went wrong rather than having someone go on the roof and try and inspect each and every module. So this is just an example. And the same goes for the other advantages. Even if you talk about a large utility field, just from clouds, you can have a very significant effect on shading. And this is one of the elements that we can also provide. So we see the need for our capabilities, both in the C&I and the utility space. We are more present now in the C&I. We have a better set of products right now to that space, but we are working hard on rolling out our utility product at the end of the year. And in the longer horizon, probably 3, 4 years, to maybe even disrupt this market with a really intelligent product.

And some of the other markets that you've talked about entering here, include the storage. And obviously, through the acquisition of Kokam, you got kind of a foothold within that market. But now as you're looking to launch a residential product, first, with third-party cells and then eventually with your own cells, just what can you kind of say about the product launch that's upcoming and your ramp-up within that business? You talked about $100 million to $150 million in battery storage revenue, mainly in the second half of the year. So -- but maybe just talk a little bit about the ramp and going from third-party to your own cell factory over the next couple of years, what that's going to look like.

Yes. So we are planning to roll out the first generation of batteries out to the market probably Q2. And then, yes, we guide for somewhere between $100 million to $150 million in revenue for this year for 2021. In parallel, we're working very hard on the construction of our Sella 2 factory in Korea, which we are very excited about. It's a 2-gigawatt hour factory, 56,000 square meters, state-of-the-art. And we plan to rely on that factory in terms of the sales that will provide the next-generation of our batteries, and down the road also, the batteries for commercial segment and for utility. So first generation will be rolled out using a third-party cell manufacturer, a very reputable one. And then we will start 2022 having the capacity on our hand through our new factory. We will ramp it up. It will take probably a quarter to 2 quarters to ramp it up to full production, and that will take place in the first half of 2022. And we will exit 2022 with the full production capacity of 2 gigawatt hour. And then in 2023, we will already operate fully on that capacity.

That's great. And maybe just, what are you seeing from customers as far as demand for this product? I think several suppliers have talked about not being able to keep up with demand, and we've seen Sunnova yesterday talking about just -- they've had shortages from their suppliers. And it seems like quite a few players were trying to multi-source and still not able to get enough of the product. So entering into that market where there is so much demand, what are you seeing as far as that demand from customers? And how does that kind of impact thank your pricing and different things like that? That when you laid out pricing strategy a couple of years ago at the Analyst Day, it was very steep drop. So what does it look like at this point, do you think?

So I fully agree. I think it's all of these things that you described. On one hand, we see a very strong demand for batteries for solar storage purposes. But we see a very constrained market. If you try and get a Tesla Powerwall today, you will probably get a date of supply around September. So the market is very much constrained. You don't see a lot of megawatt hours shipped each and every quarter. And I think that the constraint on the supply side are really somewhat distorting the ability to know what's the real demand out there. And the prices you see right now in the market are really driven by resiliency, and I would call it, energy independence rather than economic sense. So I think that once supply is stabilized -- and again, we will have 2 gigawatt hour of capacity to provide and we'll see how that will affect the market. I think once more and more supply will come in, we will be able to know what's the real demand out there. Obviously, the market is constrained. Most of the battery players are aiming to the EV world. So this is one clear explanation of why. And hopefully, we will have the capacity to serve our customers and our partners. And this was also one of the motivations leading us to acquire Kokam, which is, we just -- we engage with different sales manufacturers, and we noticed the inability to commit on volume for us. So to that respect, we decided that the best route for us will be to own our own cell manufacturer.

That makes a lot of sense. And looking at kind of the recent COVID impacts on particularly the solar inverter business. We saw kind of a weird impact, I think, early on, where there was a fear that the residential would be more impacted than commercial. And then in the back half of the year, there was kind of a realization that, that commercial business had kind of slowed down a fair bit just as far as projects getting pushed out. And they're like -- it created a situation where your commercial channel was quite full. So it seems like those problems are kind of starting to subside here. But maybe you can kind of just address where we stand with that commercial channel and how things are starting to look for the rest of the year here, would be helpful.

So you're right. At the beginning, this was also our assumption. We thought that residential is going to take a larger hit than commercial, but we ended up on the wrong side of that, yes. But it makes sense that businesses, shopping malls and the Targets and Walmarts had more urgent things to take care of rather than putting a solar system on the roof right now. But we are seeing a gradual recovery on that front. We have the monitoring systems so we can see each and every inverter that is being hooked up and know. And we have seen that in recent quarters, and this is also was one of our comments on the earnings call. We saw an increase in the pull-outs in the channels. And that's a very encouraging sign. And we expect that to continue and eventually translate also to our inventory levels. We have seen only a slight reduction in those right now. But if what we see in the pull-outs and sales through continues, then we should see that also translated into our commercial inventory levels. And we believe that gradually, we will get there by end of Q2.

Okay. In the fourth quarter, we certainly saw -- and with the first quarter guidance, the margin profile of the solar business has certainly been impacted by the strength in residential, the strength in the U.S. and -- but then your first quarter guide, obviously, very impressive. And you've talked about maintaining that kind of high 30% range for the solar business through the year. So maybe, can you talk about some of the moving pieces within the solar margins as far as tariffs, the Sella 1 ramp? And how you're able to have so much confidence in that strong margin profile kind of continuing after -- it seemed like it was a little bit more depressed going back a year or so ago. Yes, maybe kind of discuss that.

So I think there are many, many moving parts when you look at that. And starting with the sales mix, so different markets, the dynamics in the U.S. yield a very high and healthy margin. And when you move out to the Europe territories, then it goes down and the same goes for commercial. So there are many moving parts there. But if you look at our Q1 guidance, actually, the midpoint of the guidance is 37%, which is the high, high end of our long-term model for the solar business, which is 36%, give or take 1%. In terms of the different moving parts, there's a constant work on cost reduction for our products in order to meet any ASP erosions that we see out there. This is one perspective of that. In addition, we are constantly increasing the portion of our non-tariff products. We're already at the 85% range, and we look forward to exceeding the 90% of those. And once we finish with the ramp-up of Sella 1, then that also will translate in. So there are many different moving parts. It's really hard to try and capture each and every one of them. And this is the reason that we try and range it and say the plus and minus 1% are exactly to accommodate those, the different mix that we might have each quarter in terms of the geographies we sell or segments that we sell. But we feel very comfortable with the 36%, give or take 1%.

Maybe the next area to focus on, I think, is the electric vehicle business, which -- another piece that you acquired a small company and have kind of great plans as far as building in kind of the SolarEdge focus on cost, efficiency, and production and kind of engineering around the solution. So you're in this first win, very encouraging. And it seems like this is much -- very much an SMRE show versus you guys. But can you talk about the win you have for the E-Ducato? What is this going to bring to you as far as relevance with some of these OEMs? And you had said not to necessarily expect further wins right off the bat here. But talk about kind of the scope there and how you think it positions you longer-term to be a player within this space.

Right. So it wasn't a full SMRE show. It was seated by SMRE, that is fully correct. But I don't think without the SolarEdge muscle and capabilities, SMRE as a small start-up could actually deliver to FCA what today is the talent. It just will not work.

Okay.

But it's true that this is something that laid the foundation. It was seeded by SMRE. And by the way, this is also the reason that we will see a very low-margin in this project, is because the design is something that was already set up. And in the automotive industry, once a design is closed, you cannot even change the color of the capacitor. So we're very limited on our ability to change any of the costs for that design. But the margin will improve from where it is right now as production will scale and meet the full production. It will still not be the margins that we would expect from future e-mobility projects. But it is the first one, and it was very important for us to get in to this very exclusive, I would call it, Tier 1 automotive vendors. And now that we're in this club, we're going to look and try and make new friends in this club now that we're in. And like you mentioned, there are no quick wins in this industry. A typical project from a to z to be designed into a car could take 3 to 4 years, which is what, together with the SMRE, we went through in this project. Quick wins could be -- if you look at the powertrain that we designed, we could look for other automotive players that share the same chassis with the other automotive players in order to save cost. And for those, there could be some quick wins options. But even a quick win in this industry is probably 1.5 years to 2 years. So in that case, instead of these players going and working to that 3, 4 years route from scratch, we can just come and say, "Hey, we've already been validated and verified with Fiat. We know you guys share the same chassis. We can do it half the time rather than developing everything from scratch." So it's a very big opportunity. The LCV market is one that fits us very well because not that much of -- it's not a passenger vehicle. We're not going to compete with the BMWs and the Volkswagens of the world. And there's no range anxiety. And at the same time, coupled with the restriction that combustion engine vehicles will have, especially in Europe and city centers, we think this is a very good opportunity for us to bring the power conversion capabilities we have in electronics and actually bring value. A powertrain, at the end of the day, is batteries. We already know how to do those. It's BMS, which we know how to do very well. It's VCU, the vehicle controller unit. It's the onboard charger. So it really encompasses a lot of our capabilities, and of course, the inverter inside.

And to your point on kind of other potential OEMs on similar chassis, I mean, your agreement, just to be clear, does not include Ram ProMaster, where -- which is basically kind of the same vehicle over here, correct?

No. Just E-Ducato.

Okay. Got it. And what -- can you talk real quick as we kind of wrap up here, the volume expectations for that business ramping up?

Yes. So we talked about $100 million to $120 million for this year. And you should take that together with each unit being sold for tens of thousands of dollars depending on the specific configuration and number of batteries. So that should yield you the quantities that we expect. And in terms of the future, it really depends on how the vehicle will be received and adopted in Europe. The Ducato, the combustion engine version was a very popular one in Europe. Probably sold in tens of thousands of units each year. So even a modest translation of that to EVs will be meaningful.

Definitely. Well, I appreciate you taking all the time here, and thanks very much.

Thank you. Pleasure to be here. Thank you, Chris. Looking forward to meet you. Bye-bye.