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

Good day, everybody. My name is Philip Shen, managing director and senior research analyst with ROTH Capital Partners covering renewables. And with me, I have Ronen Faier, the CFO of SolarEdge. So Ronen, thank you very much for joining us today.

Hi, good morning.

So this is our typical fireside chat. I'll go through a lot of Q&A. And for those in the audience, if you want to send questions through the system, you're welcome to do that. Just give me a moment, I actually need to bring up the correct web page. And so in the meantime, I'll just kick off some questions. And so first, let's talk about the U.S. market, Ronen. The demand is very strong. There is a lot of inventory and supply and tightness and limited supply with one of your [ TE ] peers. And so we've been running about this for a while. And I think that's given you guys a bit of an opening to gain some market share. So I was wondering if you might be able to talk through some of those dynamics. I think maybe the last time we did a fireside chat back in after Q3 results, you talked about -- we talked about this dynamic, and you mentioned that it might be -- you might gain some, but maybe you don't keep it. You've seen this play out in the past. So I wanted to get an update from you as to how you expect this to play out?

Sure. So the first thing that we need to remember is that we're not selling directly to installers. We usually sell either to the very large installers or distributors. And therefore, we do not necessarily know who's consuming all of the inventory that we're shipping or the goods that we're shipping. In general, the way that we see it is as follows: we, today, we see the demand in front of us. We know how to deliver it. We were -- and we are aware of some shortages in the market. Some of them we're handling, some of them are shortages that we were able to get ready for by having enough inventories. And therefore, as of today, we can deliver everything that our, I would call it, installers and distributors' needs, and again, we do not know where it goes to. In general, the way that we're working is that we're trying to win accounts on the long-term basis and not opportunistically based on the ability to deliver when our peers cannot or vice versa. We usually try to win with the value that we provide. And we believe that any such opportunity like this is an opportunity that allows us to maybe be exposed to some installers that are not willing to try in regular times. We know that, and we saw it in the past. When there are shortages, our products are used. In some cases, the installers stay with us. In some cases, they go back to the previous supplier because they have a lot of stickiness when it comes to systems to the monitoring portal, even to their habits about how to install and how to run inventories. And therefore, the way that we view it is that we're always trying to fight for long-term market share. And if, in the meantime, we're gaining or losing a little bit because of supply demand issues, this is the case. But in general, as of today, at least we know how to deliver everything that is needed from us.

Okay. Good. And my sense is you guys are gaining some share from some recent checks that we've done so that's fantastic. And as it relates to your availability, do you see some of the availability for your product becoming more limited as well because of this shift in demand to you?

Right now? Right now, no. Right now, we do not see any problem.

So product is readily available?

Yes.

Good. And can you talk about the commercial outlook for the U.S. market? How is that trending? And I guess, I know the U.S. commercial business has historically been more real estate-focused maybe with malls. And well, when I say real estate, I mean retail, that's the word I was looking for, malls and then so forth. Have you guys -- or your customers been able to pivot more so that they can tap into some of the healthier demand? Or are you starting to see some of the retail recovery? So what's the latest for the outlook for the commercial business?

So in general, again, since in many cases, we do not have the right -- the direct contract to the installer itself. I'm not sure that I can tell you everything about the dynamics that are happening. The 2 things that we are seeing is that, first of all, the fact that there are inventories in the channels and we're able to track them, we do see that the point-of-sale data, meaning that the amounts that are being pulled from the distribution is growing over time, and we do see a little bit of acceleration. This is something that is usually attributed either to ending the winter and having a little bit more easier environment in order to install, plus maybe a little bit of a better economic situation. We do not know what is the reason, we do not yet see any. I would say, either jump in the number of solar installations and C&I, but we do see gradual improvement in the point-of-sale data. So I think it's attributed mostly to the seasonality and the fact that people feel a little bit more comfortable with where COVID is today and what are the effects today compared to, let's say, a few months ago.

Okay. So what, on a year-over-year basis, Q1 is wrapping up, but what do you -- from a year-over-year basis, how do you think the U.S. commercial performs? Is it up? Is it down?

No, we expect it to grow.

Good. Okay. And then also in Q2, you expect -- Q2 especially, COVID had really hit Q2. So Q2 year-over-year growth should be healthy, should be very strong. But Q1, even you think there's growth -- most of Q1 last year was strong.

Yes. With the only exception again that since we are the ones who are providing to the distribution. In many cases, maybe you will see that there is a pickup in the amount of installations in Q2 compared to Q2 last year, but it will not be translated immediately to orders for us simply because we need to clear inventories from the channels themselves. But from the pure installation point of view, our expectation is to see, yes, better Q2 this year compared to Q2 last year.

Great. Okay. Thank you for that. Let me just check in to see if there are some questions. I think there is one, I'll get to it later. It's related to the EV business. So let's shift to Europe. In Netherlands and Europe has been a source of strength for you guys. And I've picked up on some risk of Huawei stepping in and wanted to see your -- the latest view of their ability to gain some share. Our assessment is that they may have some limited supply. But are you seeing the impacts yet of Huawei? Are you seeing some distributors shift to them?

So again, we need to understand, Huawei has been in the European market for years. Actually -- and sometimes we're so much focused about the U.S. market that we tend to forget that there are markets outside of the United States. But we're fighting Huawei outside of the U.S. or competing with them outside of the U.S. for the last 6 years, at least, with the commercial product. And also, by the way, with residential, although the residential product was a little bit more delayed in this sense. I cannot say that there is major shift to Huawei today compared to where it was. I think that, all in all, the competitive situation is very similar to what it was before. And I think that there is an interesting phenomena where actually both companies -- Huawei, I think, is more of a representing Chinese string inverters, in general, are gaining from the weakening of the European string inverters. Because unlike in the United States, where you have a de facto duopoly between us and Enphase in the residential space. When it comes to Europe, there is no rapid shutdown. And therefore, you see 3 buckets of competition. You see the MLP, which is mainly us, there is nothing else other than us in large numbers in Europe. You see the European string inverters, may it be SMA, Fronius, remainders of KACO, Fimer who bought the ABB business, and then you see string Chinese. And the phenomena that you see over the last 1.5 years is the fact that actually, we gained share, the Chinese are gaining share, and most of it is happening on the account of the European players because on one hand, you see that our, in a sense, the prices of the Chinese are lower, but they get higher in quality. So today, you can get almost as good quality as a German inverter from a Chinese player, but you'll pay much less. At the same time, our prices, because of our growth into commercial and some of the other, I would call it, the changes that -- or a product that we're selling, our prices today are relatively close to the ones of the string inverters. So if you're willing to pay a little bit more than -- or a small premium, you will go to MLP because then you get all of the benefits related to the technological road map. And therefore, I think that today, the competition between us and Huawei or the Chinese, in general, is less head-to-head, but it's actually how much both of us can bite from the market share of the European string inverters, and therefore, you do not see major shifts between these kind of the size, which is MLP and Chinese string.

Okay. There are some questions from the audience. Here is one related to the SMA ShadeFix. So is your sense that -- what's your view on the ShadeFix SMA solution? And are they also losing share in Germany and elsewhere to the Chinese string?

So the ShadeFix is, to our understanding, it's a minor improvement to a string inverter, but it's not making the string inverter to something that it's not, and this in module level for electronics. ShadeFix can fix some anomalies, it cannot provide everything that -- today, electronics that a bit of the module can provide. And we see as a result that ShadeFix did not create any large opportunities or large revenues to those companies. So in a sense, it's a nice improvement, but not much more than this.

Okay. Good. Here's another question. Can you talk about the resi inverter pricing? Can you talk about the resi inverter repricing going forward? And also how it changes in the competitive landscape from new corners that could affect the ASP in U.S. resi?

So first of all, pricing, pricing is always a combination of the products that you're selling, the mix of the customers and the geographical mix. So when we talk about the U.S. specifically, I think that the only thing that changes today in pricing is actually the mix of customers. In general, prices are not going up or going down dramatically. There are some changes that are, again, coming from the type of the products that you're selling. For example, an Energy Hub will be more expensive on a watt per -- cent per watt, while an inverter that doesn't have, let's say, cellular modem will be a little bit cheaper than the one that has one. And therefore, you do not have today changes in the price list for the customers, you do see changes that are coming from customers that are buying more or buying less. I think that here, the fact that, again, it's a de facto duopoly between us and Enphase, it's an area and they're very disciplined on the pricing. It allows us to be very disciplined at the same time because nobody is actually either gaining or losing major market share due to pricing strategy. And therefore, we're able to keep it as it is right now. Outside of the United States, again, the situation is very similar to this. Today, most of the fights that you see are not around the prices, but rather around the technological road map and the ability to support future technologies like storage, like home energy management. And therefore, the pricing environment is relatively stable there as well.

Okay. Good. Thank you, Ronen. Let's just touch on the failure rates in over the -- this has been an ongoing topic for a few years. And it came with originally 2, 3 years ago, the change in -- or limited supply of chips and then you had a diversified supply and then at one point, took away the LCD screen for LED screen for the inverter and then that created some customer service issues. And so there's -- I don't know what the recent issues are. But can you -- what's the -- there's still some failures out there that are excessive that I hear from customers and they complain about it. And so can you kind of help us understand the root cause of the recent failures? And then what the outlook is as well to fixing those?

So in general, the root cause is actually the same inverters that came at the same time. What we see, and we track this very, very closely. We basically, through our monitoring portal, look at how every harvest -- we got to harvest all the monthly manufacturing or lot and manufacturing lot is behaving over time. And what we did so is that indeed, the inverters from the time -- from that period, were more exposed to failures. And actually, these failures sometimes continue even after the installation. Not all failures are found immediately. You usually see what we call the bathtub curve, where you see more failures at the beginning and then they drop. In some of these cases, the failures are not dropping as fast as they should have been. In essence, in the newer products, we do not see this anymore. So in the newer inverter in the Energy Hub, we see very good results. These are coming back to the stabilized levels that we used to see in our previous generations. And as we do all the time, and we try to make it very clear to our customers as well is that we take the responsibility. Wherever there is a failure, we will do everything in order to make sure that it is replaced promptly that we provide the best service, and we support the best that we can. Failures are happening. We cannot change it. But I think that, over time, we do see that product and especially the newer harvests of products where they are more stabilized with the components and with the testing programs, are fading a little bit less. And we'll simply know wherever there is a failure, we will make sure that our customers are not suffering from this. And we will take full responsibility and fix it. That's our obligation as a supplier.

Okay. So can you give me the kind of the time frame from which the -- like what is the time frame of the harvests that are the issue? Is it 2018, '19? Or is it...

It's mostly around those that came in 2018 and '19, and beginning of '19, actually, again. So there was a very large component shortages occurred.

Okay. When do you think we get past it? So -- because if the current harvest and generation of inverters doesn't have this successive failure, at some point, it should resolve, but do you have a sense for when things might come down?

So again, in the new products, you see -- best to -- going back to the normalized level, and again, we track it. And by the way, you can see it also in our financial debt, overall, since we did not change our accrual policy for years. We only take the actual data from the field. And you can see that actually, the amounts are dropping due to the fact that we do see, in general, lower amounts of failures coming from the products. I think that, in general, there is a kind of a stabilization time. I'm not sure that I can tell you simply because time still passes. So I cannot tell you that I have a history that said that it stops after 2 years and 3 months. But in general, I can tell you that from what we see, again, products that are coming in the recent 2 years or 1.5 years are much less exposed to those. And again, wherever failures are happening to our customers, we are taking the responsibility and we'll simply fix everything.

Okay. Thank you, Ronen. We have a lot of other topics to cover. And unfortunately, we may only have 6 or 7 more minutes, so let's do our best here.

Story of our lives.

Yes. So what's the latest on the utility-scale solution? I know you guys can already do utility-scale with what you have. Are you actively selling the 100-kilowatt inverter now? Is that the utility-scale solution? Or is there something bigger that you plan on releasing? And what's the timing?

Okay. So we actually sell already the 120 kilowatt. And this is something that's been selling. The 100 has been selling for at least a year already. But there is a 330-kilowatt inverter that was actually installed in -- or a few of them were installed in Q1 this year, where we expect more sales coming at the end of this year. So this is going to be 330-kilowatt inverter. Later on, we do expect in the future to have more chassis with larger capacity. So in general, utility solar is an area that we want to penetrate. We have a very elaborated plan about how to do it and a very elaborated product road map, and you will start to see revenues coming by the end of this year.

That's great. So what is the pricing for -- is it a quad, for example? Or actually -- yes, what kind of optimizer would you pair with it? Is it...

Actually, those are optimizers that are -- that can work with 4 modules. And in some cases, they can work even with more. In general, these are the -- you -- all the time, you increase the capacity of the optimizer because the capacity of the modules is increasing. But in general, it's like 4 modules per optimizer. That's the right one. You can do also 2:1, but I think that in large utility, it's less relevant. And the idea is very simple. It needs to be a single cents per watts where utility is today. So we're talking about, in the future, $0.06, $0.07, $0.08 a watt.

Okay. And do you expect this business to grow? Do you expect meaningful market share?

We never know what to expect for, but we're not aiming for something that is small. And we believe the...

Isn't utility-scale kind of closer to like $0.03 to $0.04 a watt of pricing?

It is.

So how do you gain share there? Is it the overall LCOE kind of economic proposition?

Exactly. It's the saving on balance of system and LCOE. But again, the road map is to get to numbers that will be competitive on a cent per watt with other products in the future.

Okay. And how quickly do you think you can get there? In a year? Or in the next 5 years?

No, no, no. It's a few years. It's a roadmap.

It's a roadmap. Okay. And which markets are you most interested in? U.S. or Europe?

I believe the U.S. and Europe will be the most interesting for us at the beginning.

Okay. Okay. Good. Okay. So that's utility-scale. Let's move on to storage. So I know by the end of this year, you're looking to get to 2 gigawatt hours of capacity, and then you'll ramp that up as soon as we get through 2022. So what do you think the volume of sales could be in this year, maybe even by quarter?

So first of all, in 2021, we already said it will be about $100 million to $150 million, but this is actually [ good ] not based on Kokam sales, but actually third-party sales. Then going into 2022, the sales that will come from our Sella 2 factory in Korea. We expect it to be a little bit north of $300 million simply because of the fact that the 2 gigawatt hour will not be available for the entire year because, as you mentioned, we're going to ramp it in the first half. So this is going to be, I believe, incremental of another approximately $300 million. Actually, this was based on price erosion that is -- that was expected to be quicker than it is right now. So there is some upside to the number, we do not know how to define it right now.

And I want to make sure, did you say more than $200 million or $300 million ?

Sorry?

You said more than $200 million in 2022?

No, no. We said it in 2021, it will $100 million to $150 million. And then in 2022, we from Sella 2, the sales can be up from $300 million.

Got it. Got it. Sorry, I just want to make sure we get it right. Okay. Okay. Good. What else do I have on storage in the time that we have, give me 1 second. So as for the residential product, you expect that to be sold starting Q2 in the U.S.?

Correct. Yes.

Good. Have customers already received testing products?

So there are products in the United States. I'm not sure what's the status of them, but we have products in the U.S. already.

Okay. Okay. Good. So let's move on to the EV segment in the last couple of minutes. I'll read this question here, and then I may have some follow-ups. What are the potential margins in the EV inverter segment? Enphase is more cautious about a business where suppliers struggle to make mid-teens margins. So sorry, I'm just reading this from -- directly from the [indiscernible] but the focus is on, what kind of margins do you expect in the EV?

First of all, just to fix. In the EV market, we do not provide the inverter. We provide the entire powertrain. So it's the battery, it's the GCU, onboard charger, inverter and motor. In these cases, we expect to see margins in the longer-term to be in the high mid-teens because these are the margins that you see for automotive companies. It is important to note that in the FCA agreement that we have right now, the margins are going to be single-digit due to the fact that the prices were seeded before we acquired the company. And when we acquired the company, we needed to bring the products to a maturity level that was more expensive. So right now, in the next, I would say, year to 2, automotive will be single digit, and we'll discuss it when we'll have the earning calls. And afterwards, the long-term should be high teens.

Okay. Great. Great. One last question on storage, and then I think we'll wrap it up. When do you think you'll get the UL listing for the U.S. residential storage product?

You cannot sell without your listing, so we expect to have it by Q2.

Okay. Great. Great. Ronen, thank you very much for being here today. And we'll wrap up.

Thank you very much. Stay healthy. Stay safe. Bye-bye.

Bye.