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

Good morning, everybody. It's Jeff Osborne, Sustainability and Energy Transition Analyst at Cowen. Very pleased to have Ronen Faier join us as the first presentation that I'm hosting as part of our Second Annual Sustainability and Energy Transition Summit. Ronen, thanks for taking time out of your busy day to hop on with us.

Happy to be with you.

Thanks again. I imagine most tuning in are familiar with SolarEdge, but do you mind just taking 2 to 3 minutes to introduce what you folks are up to and then we can proceed with our fireside chat.

Of course. So SolarEdge is a company that is active within the PV solar space. The company invented a few years ago a new technology called DC optimized inverter system that actually allows solar systems to be easier to be deployed, can produce a little bit more energy and meet all of the energy standards and safety standards and being able to be tracked using our cloud-based monitoring portal. over time, the company developed and grew to become the largest inverter company in the world by means of revenues with sales in approximately 40 countries installations in 133 countries. In the last 3 years, the company grew into new areas through acquisitions. We have entered the UPS business uninterruptible power supply systems business. We entered the storage business by acquiring a company in Korea that makes lithium-ion batteries and also the e-mobility by acquiring a company in Italy that is making engines for electrical vehicles. So today, the company is selling approximately last quarter, almost $600 million a quarter, growing relatively quickly and active in everything from generation of solar energy through storage of this energy and usage of the energy itself.

Excellent. Certainly been a transformation in the years that I've covered it. One issue that I wanted to touch on to kick things off was the semiconductor supply chain, chips, capacitors, things like that.

Certainly, you've been plaguing pretty much everything in my coverage universe. Can you just touch on sort of what you've seen in the last 6 months and what the outlook is over the next quarter or 2?

So what we've seen is, as you mentioned, very large disruption. I think that today, we're in a relatively strange situation where our growth is more dependent on the ability to get semiconductor chips rather than getting demand for our products. So in general, we see shortages coming from most of our suppliers. Those shortages are something that started in 2020 and one of the things that make it a little bit more complex is the fact that we grow at approximately 30% to 50% year-over-year that makes it an [ issue ]. I can say that we do see that things are relatively stable, which is not necessarily good, meaning that you don't see a lot of more added capacity at least in the last 6 months. You do see some added capacity in the horizon. I think that this is something that we expect to see towards the end of the year or beginning of next year, at least because a lot of the capacity is being placed. And from time to time, you see sporadic interruptions coming from issues related to COVID due to, for example, the shutdown that we saw in Russian [ high ], just about a few weeks ago. So I would say that it's restricted, it's limited. It's limiting our growth in many senses. But at the same time, it is something that we believe that we'll see a little bit of an end at the end of the tunnel, at least at the end of this year.

Is there -- just a follow-up on that. Is there one particular type of component that's more challenging than others? Or has it changed?

No. So actually, it's mostly -- I would say that it's mostly semiconductors. So it's the ASICs that we're using. It's MOSFETs, it's capacitors that we're using. But by the way, from time to time, you either -- you even see a little bit of sporadic shortages in items that you wouldn't expect, such as PCBs. This is one thing that we do see a solution already happening. We do see an increase. And actually, in the last few weeks, the word that we start hearing from some of the suppliers is that they start to see slowdown in orders or cancellation of orders that came especially from what we call white appliances or computing appliances. So they feel a little bit more relieved in their ability to provide us with the product.

That's great to hear. Maybe on the -- so you faced inflation on that side of the house. Can you talk about what you've done with price over the past quarter or 2? And then how that sort of flows through the P&L from a time line perspective?

Sure. And maybe before talking about the price move that we made, I think that the biggest issue for us was actually not just the component shortages when it comes to prices because sometimes you have a component that cost $1, and now it's like double to $2 per component that you have on 1 component per system that the system cost about $1,000. So the price is actually not a major issue from here. I think that the price increases that we saw came mostly due to shipment costs that are increasing, ever-increasing actually in the last 2 years, and you see a lot of limitations there. And also our growth that necessitates us to expedite most of the shipments in order to fill the gap between the time that we get the orders and the time that we're able to increase the capacity. And I think that this is the main reason for us that we saw margins squeezing over the last few quarters. Starting Q1, we started to increase prices. We increased them across the board, but at different rates, so in general, we are increasing prices, and I would call it. Now it's already about high single digits compared to where we were just about 3 quarters ago. And we are increasing based on the competitive landscape in each and every region. So for example, in Europe, commercial, where we see most Chinese competition, we are increasing in, I would call it, lower single-digit numbers. In the United States where you see a little bit less of this kind of competition we're able to increase a little bit more. And when it comes to storage, which is a productive need, we can increase it even at close to 10% increase. So in general, this is something that started in Q1, it is materializing in full in Q3, and we do expect to continue and see a little bit more price increases over the next few quarters as long as we do not see a relief in the shipment situation. The result is that we saw our margin squeezing towards Q1, definitely for Q2, but we believe that we're going to start seeing a relief as a combination of these price increases and some relief maybe on other areas in Q3 and towards Q4.

That's good to hear. Maybe just with the news in the last 24 to 48 hours, maybe we can switch gears to how the AD/CVD investigation here in the U.S. impacted your business historically? And then maybe too early to tell what the phone call traffic has been in light of yesterday's news. But can you just talk about what the impact has been and what your outlook is in light of the news from yesterday?

So first of all, the impact was virtually 0. As I mentioned at the beginning of the call, we now face a situation that I've at least never faced in my 12 years in SolarEdge. And this is the fact that there is so much of an over demand that we are not able to fulfill orders in some cases. We take today orders, especially when it comes to commercial, we take orders for January and February next year already. So in a sense, -- what we did see already is that, at least, of course, this is a U.S. issue. On U.S. residential, we didn't see any impact on the business. We saw an increased orders coming from our customers because they felt that they can -- even if this investigation will materialize into additional penalties or tariffs, they will be able to roll the price to the customers. And therefore, we didn't see any impact. And so was the case in commercial because commercial grew very nicely. We started to hear up until yesterday from some of the developers that if there is no relief, they may see in Q4 slowdown in their orders on commercial projects, and we're not really embedded into utility projects in the United States, at least not to a large extent. What happened yesterday is the fact that we believe that this is going to increase the demand to the products. Again, since we're over demanded, we will not see any impact on the business, but I do think that we will see a little bit more inclined towards where I would call it a little bit more balanced mix between U.S. or Europe. And if there wasn't this really from yesterday, we would have expected to see a little bit higher sales going to Europe at the end of the year, which would negatively impact our margin due to the fact that today, at least we see lower margins in Europe. So no impact from demand point of view. Maybe a little bit positive impact from a margin point of view starting in Q4.

Got it. And then I want to come back to the -- I'll ask it now on the margin side for the U.S. business, you're building a factory that can avoid the tariffs. So can you just touch on how much of your U.S. business today is subject to tariffs and then how that plays out in the second half since you alluded to a stronger second half of the U.S.?

Sure. So at least in Q1, 32% of the products that we brought into the United States were already subject to Chinese tariffs. And -- but not less important, by the way, all of the other products came either from Vietnam or Israel where with shipment costs, these are relatively expensive costs. We are building or ramping up already a factory in Mexico. It's a factory that provided, I would say, single digit of our U.S. supply in Q1, about 20% of our supply in Q2 and is expected to provide 100% of our residential supply into the United States in Q4. So by definition, this is something that not only remove all of the tariff on residential. Commercial will still be subject to tariffs because it comes from China. I expect to have less than 1 -- less than, let's say, 10% of our products coming to the U.S. subject to tariffs by the end of the year. But actually, the biggest relief that will happen is that the shipment costs that are so expensive today to bring things from Vietnam and from Europe and Israel to the United States are going to be relieved with local shipping that is a little bit cheaper than ocean freight.

And I think in the past, you flagged that as a couple of hundred basis points of shipping...

Right.

At West.

Actually, the entire impact of shipping costs from Q1 last year 2021 to Q1 2022, where, by the way, Q1 '21 was already elevated was 480 basis points worse compared to last year. So yes, this is a major relief that we expect to see.

That would be great to see that come through. Maybe switching gears into your prior question I asked, you alluded to the utility scale market and having sort of a load to no exposure now in the U.S. and maybe some in international markets. Can you talk about what the product portfolio is or will be in that space? You've had some announcements in 2019 that never really played out. From that Analyst Day, you had a recent Analyst Day a few months back that you lead into that sector a bit more. But maybe just touch on what you're seeing and sort of what we should be paying attention to with the timing of the product launch there.

Sure. So first of all, already today, we have, I would say, close to 200 megawatts of utility-scale installations that were maybe products that are not actually built for utility. So for example, we have a 77-megawatt installation in Taiwan that is built with our 120-kilowatt inverter that is, I would call it, mid commercial to large commercial products rather than a utility product. And this is something, by the way, that still see -- we still see utility installations, especially if you see installations that are in areas that are -- the tearing is not necessarily very flat because our technology allows to compensate for this. In places where you see very large installations that are using bifacial modules because then the tearing effect or the color of the tearing very much impact again their production, and this is something that works very well for our products and also floating systems that are sometimes can fall into the category of utility scale installations. But still, this was not a unique, I would call it, product for utility. Starting last year, we have started installing in test sites, our 330-kilowatt inverter which is going to be our main utility product for the years to come. We already have one installation in Israel. We have installations in Europe where we will soon have in the United States. And we expect to start seeing revenues or substantial revenues because these are already paid projects. We expect to see more substantial revenues coming in 2023. In general, our position in utility is that over time, we would like to provide a full end-to-end solution. So this will be a solution that is built on inverter, where the inverter side will be bigger as years will come. So the first -- again, the next one is 330 kilowatts. It is going to be a company with trackers using the tracker company that we acquired in Israel and is already making first installations, and it is going to be accompanied with storage systems coming from our acquisition in Korea. So we believe that within the next 2 to 3 years, we will have a full scale and end-to-end product for utility.

Got it. I look forward to seeing that. It's obviously about 2/3 of the megawatts installed around the globe that today you don't address. So...

The lower -- on a lower cost per watt. So it is...

Absolutely. About 1/4 of the price, if not lower. But yes, maybe switching gears, I would love to better appreciate what you're seeing in Europe. You've got the combined storage and home residential solution. It sounds like from our conversations with folks, commercial is quite strong in light of the higher electricity prices. But what's differentiated about your sort of combined storage and solar solution? And what are you seeing in general in Europe?

So I'll start maybe with General Europe. And General Europe is in great demand for solar. Again, something that we haven't seen. Unlike the United States where the commercial market is relatively small compared to utility and residential. Europe is almost 50-50 residential commercial business, at least for us. And when you look at the balance I think that of utility, residential, commercial. Commercial will be the largest portion of Europe. And the higher, I would call it, the higher electricity prices, combined with -- now you start to see impact of the war in Ukraine, where people are feeling a little bit less secure about their ability to have electricity at reasonable prices plus a very, very strong government policies that are encouraging solar systems, such as the Ecobonus in Italy is pushing the demand very strongly, both in residential and commercial. So in residential, first of all, we see very strong demand -- and we see, I would call it, selective demand for solar and storage because in places like the Netherlands, there is no limitation on how much electricity, for example, you can push to the grid. There is a very nice feed-in tariff paid and net metering. So basically, why buying batteries, if you can sell everything to the utility company, while at the same time, in Germany, you see very great demand for batteries. About 80% of the residential systems are installed in Germany are with batteries because they are designed for self-consumption. So we see very nice demand there. We see amazing demand in Italy because the Ecobonus system actually provides you with 110% payback from the government on your installations. So in a sense, you see reverse elasticity of demand to price, the higher the price, the bigger the demand is because you get more money. You get more profit from the government by doing this. And we see very strong demand for our products in those places for storage and inverters. In other places, it's mostly inverters. Actually, it's not storage. When it comes to commercial, again, the demand is just booming. So in every country, prices are high. In Germany, electricity prices for commercial or for industrial purposes are about 50% higher. In residential in some areas by the way, they are 3x higher. In Netherlands it's close to 50% higher, in Poland it's about 60% higher. The demand is very large. Most of the installations there are not with storage or at least not to date. Most of them are used for peak shaving or for internal consumption. And again, the world just increased the demand for these products. So we see I would say, an unprecedented demand to our products right now in Europe. And actually, we do not see anything that is about to change it, at least in the near future.

We did have -- investors can type in questions on their screen, and we did have one that just popped up. I'm looking at my adjacent screen here. And basically, they're asking about what your market share is in Europe for residential and commercial? Is that something that you could articulate?

I'll try to articulate because unlike in the U.S., where you have a Wood MacKenzie that provides I would call semi accurate data. Europe is not one country. So every country has its own numbers. I would assume that in Netherlands, we're anything between 30% to 40% in residential and about the same number in commercial. Germany, I would say that we're about, I would say, 15% to 20% residential, 25% commercial. Italy, I would assume that we're about 25% in everything. Poland, I would say, around 20% on commercial, there is no residential. Belgium, I would say, low double digit, and the same would apply for, I would say, France. But again, every country is different. U.K., we have I believe, around 20%, 25% in residential commercial. So I would say that anything between 20% to 40% will be fairly representative number in most of the European currencies.

Okay. That's helpful. The next question I had is a more technical question. We get asked a lot about the evolution from silicon to silicon carbide and where companies are in that journey as the system gets more efficient, certainly has a more pronounced impact on the electric vehicle space than solar. But where are you folks in your evolution towards silicon carbide or gallium nitride-based systems?

So we, of course, evaluate it. For many years, we were very much reluctant to use silicon carbide just analyzing the fact that you can get pretty good results using the right that would put us magnetic and MOSFETs and capacitors. And given the fact that silicon carbide was a relatively rare commodity at very high prices. So maybe you could get a very nice results using silicon carbide, but then from a price perspective, most of this will go to the SiC manufacturers rather than the companies. In our last product, this is mostly related to the e-mobility products and the storage product. We are using silicon carbide. The amounts are not very large, and there because of the price of the system, we see the benefit of cost and price. And we are evaluating future products to be based on silicon carbide in general, on the inverter side. On gallium nitride, again, it's another area that we're looking. This is an area that we can use in our optimizers. We believe that GaN products, in general, are going to be a little bit more I would call it, a wide spread. And therefore, you may see a price benefit. And therefore, I would assume that most of our next generation will use at least one of these 2 technologies.

Got it. The next few questions we already touched on. I wanted to ask you about the new targets in Europe and in particular, as public buildings and commercial buildings are required to have solar. Does that change your go-to-market strategy or penetration strategy? I would imagine it's maybe less through distribution, which people like [ Carnegie ] and others are your customers there, how do you penetrate a market like that, that maybe is different with new construction?

So it's -- actually, it's not dramatically different. From the very beginning, I don't think that it changes a lot our strategy. In general, the products that we've developed are very much suitable for the European market and I think are well accepted because of the building block, at least in commercial, the building block of the 120-kilowatt inverter that is built out of 3 units that make the installation very easy. You don't need the crane for installers, it's very important to be able to do it this way. It's something that's got a lot of I will call it support from the market. And all in all, I think that we see very good traction from a quantity point of view and performance point of view. So we didn't change the strategy quite alone. I think that there are 2 aspects that will be important. One is that some of our education and marketing will go to developers and not necessarily just the installers because today, we are educating installers, but we sell to the distributors because they can manage the volumes better and also the credit risks related to these customers. So I don't think that we will change the distribution model, but we will engage, I think, more and more in our marketing materials and training with the homebuilders. That's the first thing. The second thing, I think, is more related to what we showed over the -- in the Analyst Day, and this is the future of solar systems as we see them because I think that the more we are moving towards more and more solar and more and more usages of electricity, especially around EV charging and electrification that is coming due to the fact that in Europe, you move from heating from gas into heat pumps and I would call it, electricity usage methodologies, you need to have more and more power coming to the plant or your home and the infrastructure does not necessarily allow this to happen simply because you need so much more electricity that you need very high investment in infrastructure. The beautiful thing about solar and batteries and the fact that they're actually local. The sun is everywhere. And if you know how to store energy, you can basically manage everything. And our vision is eventually to be able to use, I would call it, a battery as a center of our, I would call it, energy management capabilities and having PV or grid or any other energy generation sources is just different sources that are feeding one area which is, I would say, will most likely be storage that will then use the factory or the home to all of the usages that you will see there. And I think that in that sense, our training and our marketing and our go-to-market will be mostly to look at solar, not as just PV in order to reduce cost or to be cost-effective, but actually to be one source of energy that needs to be managed in conjunction with other storage methods or, I would call it, generation methods that will be managed using our systems, and this is what at least we will try to do.

Got it. We've only got about 3 or 4 minutes left. I want to squeeze 2 in and we have 1 investor question. So 1 for me, I know you've been spending a lot of time in Korea. Would love to understand the sort of ramp of your own storage capacity. You've got the Samsung SDI agreement for this year. But how do we think about the ramp of Sella 2 where you'll be making your own cells?

So yes, we have Samsung SDI for 1 gigawatt this year. And if we want, by the way, we can extend it to more, they'll be happy to sell, of course. We have just opened our Sella 2 factory 2 weeks ago. This is going to be at least initially 2 gigawatt hour factory. We will ramp it, I would say, to about 1 to 2/3 of this capacity by the end of this year, and we will ramp towards beginning of next year this factory as well. So I believe that somewhere in the second half of next year, we will have a run rate of 2 gigawatt hour that we can use in our residential storage batteries that we're building, again, very much dependent on demand. If we see higher demand, we can do it quicker. And afterwards, we can increase the capacity of Sella 2 up to 4 gigawatts, although this will take a little bit while because we need to add more machinery. So in general, at least by mid next year, we should be fully wrapped up, if needed, we can do it before.

I assume that would add significant margin there, maybe 10, 15 points by making the cell yourself versus buying from someone else or not?

At least in the current prices right now because right now, again, prices are higher and we don't see erosion. We believe that over time, prices will stabilize at around 25% margin.

I got it. And then a question from an investor is asking about if you could elaborate on the Uyghur Forced Labor Prevention Act that I think takes effect later this month in June and any impact to SolarEdge's business there, either directly for inverters or indirectly, I guess, for panels.

So again, we need to understand what's the impact and where it is coming? Because today, our business is international. And right now, as long as these regulations, which, if I understand, are mostly related to the U.S. market are not impacting the European market, we do not see any direct or indirect impact to the business. In general, I think that -- I do not know what is happening in China and to what extent we can avoid having modules from China. But in essence, there needs to be a decision. Modules will come mostly from China in the next few years. And as long as we need to make a decision whether we want more solar or other issues that are humanitarian, all of them are important. I do not know what is the policy. We like to see happy people, and we don't want to see forced labor. But I think that at a certain point, there is going to be a decision point at least in the United States, where it's more important. For us, at least, given the fact that we are not dealing with modules, this is something that does not impact us directly and indirectly, again, the demand is so big. If we see less demand coming from the U.S., we know how to fulfill everything to the other regions in which we sell.

Maybe the last question, we only have about 45 seconds left is on your balance sheet is quite robust. I've always been thinking you would have bought something by now either in the hardware or software space. But what is your M&A strategy? And now that the sort of stack bubble has burst, are valuations or potential targets a bit more reasonable than maybe they were in the past?

So definitely, that's something that we can say. The reason that we were not very active in the market in the last 3 years in acquisitions was the fact that we thought that everything is too expensive. We didn't see in many places, the economic I would call it, viability of buying a company at, I don't know, $500 million valuation for a company that sells $20 million and loses $40 million. We see now much better valuation. In general, what we are aiming to buy is mostly related to energy management and mostly related to the ability to take storage to take energy generation from all forms and to combine it with our solar offering. And here, I think that we start to see more and more opportunities coming.

Is the auto grid acquisition by Schneider impact you at all? Because I think you were an investor in that company, right?

No, we made a little money out of it, which is always nice. But in general, no, and I think that what we got mostly from this relationship was us understanding better this market and being able to influence some of the technological directions there.

Well, perfect, I thoroughly enjoyed the conversation. I'm afraid we're out of time.

[indiscernible]

Absolutely. Thanks for joining us.

Bye-bye. Thank you.