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

Okay. Up next, we have Lior Danziger...

Hi, everyone.

Who is the new VP of IR with SolarEdge. So Lior, thank you for joining us.

My pleasure.

[Operator Instructions] In the meantime, I'll go ahead with the fireside chat. So Lior, welcome from Israel. Thanks for coming in and really appreciate the time.

So much fun to finally have this face-to-face and in person, so it was definitely worth the travel.

Great. So what's going on in Europe, wanted to check in with you on how that is impacting the demand on the ground. So in our checks over the past few weeks since the war started, demand for DG solar has exploded with everybody wanting to get off of Russian gas. And I think this is just the beginning. And you guys have a fantastic business in Europe with substantial market share in both commercial and residential and wanting to see what you're seeing. Are you seeing your distributors and other customers accelerate their ordering and wanting to get a product even earlier? So what are you seeing out there right now?

So relating directly to the conflict that we're seeing right now, directly with regards to Russia and Ukraine, we don't really have an extensive business over there. But I think it's logical to expect that we will see accelerated demand in Europe. And we've already been observing very strong and healthy demand in that region as well, both in residential and commercial, so it is logical to assume that, that could continue. But I think it's maybe a little too early to see what's going on. We should wait a little. I think it's more of a question of how long this conflict is going to last for now, and we will have to wait and see. And of course, it could also have other implications. We already see energy prices going up, fuel prices going up, so you can expect that to have an impact as well. But all in all, for now, accelerated growth in Europe, and we expect that to continue.

Yes. It's -- whatever expectations we had before, I think, are now going to be even larger. And so -- and SolarEdge has very nice mix of business between U.S. and Europe and rest of world. So our estimate is that, call it, only 50% of the business is U.S., and then maybe 40% Europe, 10% rest of world. So that's Europe. Now what countries in Europe are you seeing the greatest strength? Is it Germany, Benelux, et cetera?

So we're definitely seeing very strong and healthy demand in Germany. That is driven by self-consumption trend and high storage attach rates. Netherlands is very strong; Italy; U.K. There's a great incentive plans in Italy that also helps to fuel the demand even more. We're seeing some other countries like Poland growing very nicely for us. So it's always hard to capture Europe in one explanation or -- because there's a lot of different markets, different rates of adoptions of solar energy and solutions. But all in all, I think we're very well positioned in Europe to capitalize on all of these opportunities. And even if we're lucky to see even accelerated growth in demand in Europe coming from the recent events, we will do our best to try and capitalize on those, but we've already seen a very strong demand in Europe.

Great. Let's compare the regions. When you think about SolarEdge -- sorry, SolarEdge Europe versus U.S., which region do you think is growing faster, Europe or U.S.?

It's a good question. And I think, to that, maybe we should also add the element of storage. So for now, we're pretty much at the neighborhoods in terms of mix that you mentioned. But it could be the case that if the demand for the residential batteries in the U.S. is translated as we expect, then it might be tilted more towards North America in terms of the mix. But right now, both are growing very nicely.

Okay. As it relates to batteries, you just brought up, you're starting to flow those batteries into the country. And it could be a very nice addition to revenue. So I just wanted to see if you could remind everybody where pricing stands. I think you recently had a price increase for batteries. So just remind everybody how many megawatt hours do you think you could do in the U.S. in '22, what the pricing roughly is. I think it's roughly maybe $600 a kilowatt hour.

That's the neighborhood.

Okay. Is that after the price increase?

Yes. That's the neighborhood.

Okay. Great. And then talk about the margin profile, I think it's not as good as your corporate margin profile but maybe mid-20s or something. So maybe volume and that margin profile.

So what we've been trying to do is really accelerate the ramp-up of assembly of the battery pack that -- we're doing right now, we're utilizing the Samsung agreement that we have. So basically, we're getting 250-megawatt hour of battery cells every quarter, and we were in the process of ramping up our capability to get those 250-megawatt hour of battery cells and assemble that to a battery pack, which is really the end product that we're putting out there. So in that sense, we're completely on track. Ramping up is going nicely, and we should get to 250-megawatt hour of assembly production capacity by the end of next quarter. And we guided that we will ship somewhere between 100- and 120-megawatt hour in Q1. So I think in that sense, everything is going on track. You mentioned the pricing. And we look forward to see what the demand will be. We do think that maybe the demand is somewhat distorted at the moment in terms of understanding what the real demand is in the solar space. We are constructing Sella 2. In parallel, we will have that capacity coming on as well. And I think that once we will have that capacity and some other peers will increase their capacity as well, then the demand -- the real demand in the solar space will probably be revealed, and then we can answer that part of your question.

And it will likely continue to increase after it gets reviewed.

We definitely hope so.

So -- and then, was I close on the margin profile, maybe mid-20s percentage?

So it's not in the 36%, give or take 1% that we always used to guide for solar business. It's slightly below that. But all in all, I think it is in a lower margin but not in the exact neighborhood that you mentioned but lower than the 36%.

Got it. So not as low as where I was, likely in the 30-ish level. Okay. Great. I think that's useful for folks out there. So let's move on to -- well, actually, let's stay with batteries for a moment because you talked about 250-megawatt hours per quarter assembly by end of Q2. But we have seen batteries, really, you can't airfreight them. They're too heavy. So the shipments have -- you can ship by Q2, but then the revenue recognition, I can imagine is 2 to 3 months later. Or how long should we think about in terms of recognizing that 250-megawatt hours, a full quarter or maybe a little bit longer even?

So there is some lagging, but once you get to that full assembly capacity and then you start to ship, so basically, it should match, right, once you're at full capacity. So for now, it's a matter of a few weeks, I would say, once -- from shipment to recognition.

Because you're shipping -- so that brings up my next question. What kind of impact from Ukraine and Russia and the war? Is there any impact on your battery process for manufacturing or supply? Actually, nickel might be a bit impacted, right? So let's talk through that.

That's a different question.

Well, yes, let's talk about that in a moment. So any impacts in terms of freight from the war or supply chain?

So without commenting exactly on Q1, I think it's fair to assume that Russia and Ukraine conflict will have implications on freight and cost, and we talked about energy prices going up. So fuel is going up, and you can -- one can expect longer routes because of everything that is going on. But for now, we haven't seen any material impact for us.

Okay. So that brings up the next topic. Your batteries are NMC, right?

Yes.

Nickel, manganese, cobalt. And so with the war, the nickel trade has actually been halted in London at 40,000 metric tons -- or the $40,000 per ton versus, I think, a few weeks back of $20,000. And so how much of your nickel has been contracted long term and at what pricing? And then when do you think you get exposed to the potential spot market?

So right now, again, we're utilizing the Samsung agreement. So basically, we're buying a finished product, right? We're buying a battery cell. Some portion of that cost is indexed, and this is usually the case with metals. So in that sense, there was no surprise for us because we will know what we were facing. Going forward, and we're talking about Sella 2, and we need to procure, so I think in that sense, given our size and given the strategic relationship we have with -- already with some of these vendors, Kokam has been operating since 1989, so far, we've been able to procure what we need. And usually, these are strategic relationship with commitments of long-term type of nature. So for us, it's been okay for now.

Okay. And what percentage of the overall cost structure is the nickel for a battery?

It's not something that we disclose.

Okay. But I'm guessing it's modest as opposed to a large percentage.

Yes.

So okay. Any questions out there? All right. I'll continue. Great. So let's talk about the U.S. market. You have a nice business here, a top 2 player for residential and I think a top player for commercial. I want to say #1, but -- #1 for MLPE, but there are large players that don't do MLPE as well. And so when you think about the growth rates of those 2 businesses, residential is pretty well understood. There's a lot of -- there are a lot of public companies following, so we can follow that. But how fast is your commercial U.S. business growing?

It's actually growing very fast. And we've seen very nice demand right now, and we also alluded to that in the last earnings call. And by the way, not only in the U.S. we see very strong and healthy demand on historical levels on commercial segment, really. And maybe in Europe, it's driven mostly about the rise in electricity prices. In the U.S., maybe I would mention a lot of ESG initiatives driving corporations to reduce their emissions and offset their emissions, and that drives a lot of demand. The commercial segment, you can divide it into 3 subsegments, right? The ground mount, the floating and the rooftop. We've been very present with the rooftop subsegment. We are working very hard to increase our presence in the ground mount installations, community solar installations that we've seen. And we think we have a good value proposition that we can bring to the table in these subsegments and the commercial segments overall. And right now, it's growing very nicely for us.

Great. And what's your expectation for battery sales to the U.S. commercial market? Is that a meaningful source of potential?

So right now, we will probably utilize most of our capacity into the residential space, not yet into the commercial space. It will still -- it will, of course, be an avenue that we'll explore and pursue in the future. But at the moment and given all the constraints that we just discussed and the ramp-up that we're doing and the healthy demand that we're seeing in the residential space in the U.S., in some of the markets in Europe, we will probably direct most of our capacity to the residential spaces first and then to the commercial space. But...

And what's the expectation for -- let's say, you get to the 250-megawatt hours by the end of Q2, how much of that will be destined for the U.S. resi market and how much for the European resi market, maybe 80% to the U.S., 90%?

So again, I think we will have to wait and see what the demand is. If the demand in the U.S. is really as high as some expect, I think we will probably direct most of our capacity to that market first, higher ASPs, healthier margins. But there is very strong demand in Europe. There's a self-consumption trend that we've seen and observing. And if you have storage that you can couple with your solar system, then your ability to sell is much better. So we are going to direct a considerable portion to the European markets as well.

Yes. And there is that battery company in Germany, a residential battery company, that had a number of fires. And so they shut down a lot of the batteries in Europe. I think it was Germany. The company is called Seneca, I believe. And so I can imagine that drives demand for your batteries. And so okay, that's interesting. Any questions out there? Go ahead.

Yes. Lior, [indiscernible] early stage, climate [indiscernible] technology focus [ section ], which is the electricity grid had really hard time keeping up with companies like yours. Curious how you're finding that sort of the grid edge and the grid linking up with the new -- all of your [indiscernible]. How are you [indiscernible] technology solutions for those things? You just adopt them or helping them along?

So we are helping them along, in many cases. Grid stability is an important issue and definitely one that we should look at as more and more new technologies are coming into the space. And that can also create grid instability in that sense. So actually, our solutions also help to manage these types of events and load management and advance management. And we have a very extensive capabilities in that area as well, actually, and also down the future on the road map.

Great. You have an Analyst Day that's coming up, and it's at the end of the month, so it's pretty close. And I can imagine investors want to get a sense or a preview of what we might hear. So what do you think you guys might talk about?

So first, we're very excited to have one and in person, and it's been 3 years since the last one that was in 2019. And we think it's a very good time for us to get together, recalibrate some of the things, discuss where we are. There are many new things that we want to share with the investor community. Many exciting avenues to explore in the solar space. We're going to talk about the different segments, the offering in residential, the very strong demand that we're seeing in commercial and how we're going to address that. We're going to discuss the utility space. We have the first product coming out and some first installations that we're now getting the feedback and learning. And we're very excited about the opportunity that we have in that space as well. And we're also going to talk, of course, about the non-solar part of our business, the various divisions we have and, of course, with a look to the future technologies. And hopefully, we will see you there.

Good. Yes. Go ahead, [ Tim ].

Can you talk more about your utility product and the size of that market and just talk about how it's formulated and...

Just for the audience online, the question is, can you talk about the utility scale market and the TAM?

Sure. So we're taking our first step into the utility segment. We're launching our first product. It's a 330-kilowatt inverter, and we think we have a good value proposition that we can bring to the table into that space and make MLPE also a viable solution for utility installations. The competition is completely different. The motivations of customers is something different from what you see in commercial space, in residential space. It's much more financially-oriented type of project, very high sensitivity to ROI. And I think that we have -- we think we have the solution that can assist those developers to have better ROI but also have better means of actually managing the system. So when you think about a large utility field, for example, let's take 2-megawatt, you can now replace it with 6, 330-kilowatt inverters. Now you have a distributed type of field. If anything happens, if something goes wrong, you're only losing 1/6 of that field, and you have the ability to quickly manage it and replace it, rather than having to deal with 1 huge container of 2-megawatt that is the case today.

And why would not the existing inverter companies do the same -- the existing companies servicing the utilities at the same time?

So the question is why don't the existing product offerings do that? And really, there are companies that do that. They offer -- so there's a central inverter, right, which is 1 -- or I guess, 2-megawatt inverter. And then there's string inverters, and so that can be -- you were saying 330-kilowatt. And so other companies actually provide that as well. So my question for you, in supplementing [ Tim's ], is do you expect to put optimizers on these utility-scale modules and then...

Yes, yes. It's part of the solution, and it's a different type of technology. So it's a different architecture, and you do have optimizers in place to get the monitoring, you do get all of the other benefits that helps you reduce O&M costs and all of the others, and then you get a better ROI.

So is the optimizer a dually or a quad, like is it 1 to 2 or 1 to 4?

We have 1 to 2, and we will have 1 to 4 as well.

Okay. Great. So -- and do you expect the -- from a CapEx front -- and I think you've already done these utility scale projects. So it's actually not all that new, but you're going to be probably packaging it better. Do you expect the typical project that you address to be 20 megawatts or 300 megawatts? Do you think your -- you could really be competitive from a valued CapEx and total cost of ownership standpoint with a 300-megawatt project?

We believe that we can. Again, we're taking the first step. So in terms of modeling and numbers, there's no meaningful impact in '22 or I would say, even next year. But what I would say is that it's a gradual process. You learn a lot. It's the first product out, and it's a 330 kilowatts. So there are bigger ones out there. And we do have a plan in our R&D road map down the road to come up with some new inverter, a larger one, that will be able to compete with those large PCS systems, Chinese ones, very low-cost ones. But that is only 3, 4 years down the road [indiscernible] not now. But -- so what I'm trying to say is that we're going to try and take the first steps. It was in that 330-kilowatt inverter, learn a lot from those projects installation, get the customer feedback and then grow to larger installations throughout their larger devices.

Great. Okay. So let's continue with the preview. And so that's utility scale and then e-Mobility, and you have other opportunities out there that are nonsolar. So maybe talk through, what is the status of e-Mobility now? I think it's maybe slowed down a little bit with component shortages and so forth. But do you expect the segment to accelerate in the coming year or 2?

So we did have a slight setback, as you mentioned, not so much coming from our side. It is ramping up, and we are expecting to see it normalize back to where it was. I think the potential in the e-Mobility space is immense. The TAM is by far the largest one. And it's a huge opportunity for us that we think we can explore and we think we can capitalize on. Right now, we are mostly focused on executing the projects that we have and working with Stellantis on providing them with the quantities and the powertrains that they need. And it's a long journey in these type of projects, and it's going to take some time to see if we can have some more. We do have a funnel of projects, and we are exploring those. We are working and engaged to try and do some more, and we will have to wait and see.

Okay. Got it. Anything else out there? Okay. Let me go back to -- anything else actually about this preview for the Analyst Day that would be useful for us to be aware of? Do you think you might come out with new metrics? Or what's the expectation?

So my dear friend Ronen is not here. I'm not going to steal anyone's thunder, and I do want people to come. And then I invite you all to show up and you as well, Phil.

Fair enough. Yes, of course. And the event will be at Carnegie Hall in New York City on March 29.

On March 29, yes.

Okay. So you're now in EV chargers as well, right?

Yes.

And so what's the outlook for that business? Is it primarily Europe? Do you expect to bring that to the U.S.? What kind of revenue could it be for '22 or '23?

So it's not only in Europe. It is more pronounced in Europe, I agree. And I think it's associated with the self-consumption trend that we discussed, and we are seeing increased demand for that as well. So it's already in the U.S. It's in Europe. It's what we like to call RP average, revenue per installation. So it's part of our attempt to increase the revenue that we get out of every installation that we do, and we increase the capabilities of the system to be also about electricity generation but also about electricity consumption. And the EV charger is one of these elements. And we're going to talk about EV chargers as well on the Analyst Day.

Great. Okay. Well, I think we've run out of time. Thank you, Lior. Let's give him a round of applause.

Thanks.