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

All right. Good morning, everyone. I think we'll get started here for our next session. It's my pleasure to host and introduce to my left, CFO of SolarEdge Technologies, Ronen Faier. As many of you probably in the audience know, SolarEdge is a market share leader in solar inverters. But increasingly, over the past several years, has expanded its portfolio to include energy storage as well as EV charging and a few other technologies, which we will touch upon here. But I want to thank everyone for joining and definitely thank Ronen for joining us as well.

It's a new year. We have to kick off with some views on kind of the outlook, I'd say. So maybe just Ronen for starters, walk us through your view on broader demand trends heading into 2023, key geos since you're internationally diversified but also key end markets because clearly, you're doing resi, but also very successful in C&I and then there's a venture to move more into utility scale as well.

So first of all, good morning. Thank you very much for joining and thank you for having me. So I think that we start 2023 in a very, I would say, different to where we started '22 and even '21, and this is where we see very strong demand in all markets in which we operate. And I think that the biggest difference between '21 and '22 is that if at that time, it was post-COVID and everyone was a little bit insecure because the value of at least photovoltaics was already known and the payback periods were relatively elaborated, 2022 changed the, I would call it, scenery quite dramatically with the war in Ukraine and the results of the energy prices and trends that we see worldwide. So what we see right now is a world that is striving for photovoltaics for solar and for storage. And we see it actually in almost every region in which we operate, which was the case also in 2022. The biggest interest that we see today is actually coming from Europe. Europe is, of course, going through the war in Ukraine and energy crisis. Energy prices hiked dramatically over 2022 and you see now measures taken by the European countries such as Germany to actually cap the energy prices on some of the corporations. But still, the cap is at a very high price compared to what it used to be before. And combining this with a relatively lower interest rate compared to what you see in the United States, creates a situation where photovoltaic energy in Europe is very interesting payback period of 2.5 to 3 years on a system that will live for 25 years. And a lot of government support. For example, starting this week in Germany, VAT was eliminated on installation of PV systems, which is equivalent to 19% discount on the cost of energy or the cost of the system compared to where it used to be. U.S. is also growing but a little bit more interesting. The NEM 3.0 is expected to impact this market. We understand that everything that will be at least certified by the end of April will still be grandfathered in the old plan, but we do understand that there's going to be a little bit more limitation. I think that we see a demand right now, but we see more signs that this could be something that will slow down over 2023. We do not expect to see smaller solar industry, but we expect to see deceleration in the growth of this industry. And we also believe a little bit that the IRA that is stabilizing very much the benefits of the ITC for the next few years do not put a lot of pressure for anyone to do something today when interest rates are relatively high, and there's a little bit of uncertainty. And when it comes to rest of the world and rest of the world for us is everything that is not Europe and U.S., of course, it's very country-by-country specific. But we also continue to see very strong demand in Asia. So it's Taiwan that is becoming a very interesting C&I market for us. And in general, Japan that is very interesting in the smaller C&I space, Australia that is interesting and other countries like Thailand, Korea and Singapore that are interesting. So all in all, it looks like a very good positive beginning of the year.

That's great. Maybe just to unpack a few of those moving pieces for you. I guess, big picture, revenue growth for you this year, I think if you hit your guidance, you're going to be somewhere in the 50% range year-on-year. I think consensus has 30% penciled in for you top line for '23. So just at a high level, does that seem reasonable, aggressive? And then as you think about U.S. versus Europe, it sounds like you're more bullish on Europe growth relative to the U.S., but how would you sort of characterize Europe in the context of that 30% overall growth expectation that's out there right now?

So I think that the biggest issue that we will continue to face in '23, and I believe into the beginning of '24 is actually supply rather than demand. We do see that either component shortages or a little bit of restrictions on our manufacturing capacity will not allow us to deliver all of the demand that we see ahead of us. And therefore, the growth -- and the 30% is actually the higher end that we guided for the next few years in our Analyst Day -- is something that will mostly be achievable based on the availability of components rather than anything else that we see in the market. So we believe that this is something that, yes, it can happen, and we also believe that if you look into the geographies, Europe will take a bigger portion of revenues in the next year. When we look and when we do our plans for the year, we usually do a bottom-up analysis of the markets. We see markets in Europe that can grow potentially more than 100% year-over-year especially around Germany, the German-speaking countries and even countries like the U.K. So I'm not sure that the U.S., I believe that analysts view this is going to be about around 15%, maybe a little bit less. In some European countries, we see a potential of a much, much bigger growth. And I do believe that you will see this impacting us in 2 ways. First of all, that portion of Europe as a percentage of the overall sales will continue to increase. But also from a mix perspective, since Europe is much more C&I inclined than the United States, I think that you'll continue to see growth in our C&I business.

Okay. Fair enough. And then just on the U.S., you brought up net metering. There's clearly some clarity, but also some moving pieces heading into the new year with that market. There's, I think, an investor perception that you're going to see a big pull forward given the April implementation time line. First question would be, are you seeing that already or are you anticipating that? And then maybe, again, unpack your comments around slower rest of the year, if you will. Is that due to net metering changes? Is that due to a view on the macro with the consumer? Just sort of where is your maybe caution, if you will, on the U.S. market coming from?

So I'm not sure that I know where to put my finger on what's exactly the reason that we have a little bit of a less, I would say, bullish view on the U.S. market right now. Macro is definitely part of it. The fact is that with the U.S. market heavily financed through loans, interest rates that are going up and electricity prices that have not hiked so much in other parts of the world, the payback period is longer. And if you add this to uncertainty around possible recession, and people that may be worried about whether they'll have a job or not, the tendency to go and put a system on your rooftop, where you see a maybe 7.5 to 10 years payback period is doubtful. And to add to this, again, the IRA created the situation because as long as the ITC existed, in every year you used to see a declining income tax credit that will come if you're waiting and this is something that maybe drove people to get a little bit of faster decision-making. Right now due to the fact that everything is stabilized, there is no reason to hurry. If you think that interest rates will go down, if you don't suffer too much from energy prices and you're a little bit worried there is no catalyst for you to go and invest a little bit more. So that's one thing. About the first few quarters of the year, we don't see anything dramatically different in the demand right now compared to where it was before, simply because it was very high before, and it's very high right now. I think that the picture is a little bit more complex because even if there is an ability to source a lot of product during the first quarter, the big issue is going to be in the U.S. is actually working hands. You do not have enough installation capacity. So even if we're able to bring all the inverters and optimizers needed to make installations until April, and I think that there's also a view that as long as you're permitting the plan before April, maybe you can still extend it a little bit, the problem will be around installations. So we don't see anything structurally that will make the U.S. demand very, very large in the first quarter compared to where it is right now. And I'm not sure if I missed anything else on this question.

I wanted to just touch on storage. I think a lot of your comments, the geos, the end markets were related to solar. There is a bit of a plateauing in volume growth we've seen across some of your peers in the storage side of the business. Can you kind of specifically talk to some of the trends you're expecting on your storage business into the new year?

Sure. And I think that maybe as a first note, to my answer, solar and storage should be over time related is one thing. When you see that on 1 hand, utilities are pushing to more net metering based on time of use and a little bit of a bigger difference between the rates that they're buying and the rate that they're selling, storage is becoming much more interesting. The more you see that houses and households are looking for resilience then solar plus storage becomes one thing. If you go today to Germany, 80% of the new systems are installed with storage simply because of the fact that you cannot push electricity into the grid or it's not very worthwhile to do this. And at the same time, people do see a little bit of concerns about whether they'll have electricity once they turn on the light. So I think that over time, it should be the same -- actually, it's the same answer for everything. The plateau that you see, I think, is mostly related to peers that are selling in the U.S. most of the energy storage systems. And I think that it's more related to the U.S. situation rather than anything else. Batteries today in the U.S. are simply too expensive. Payback period is very long. The battery prices are relatively high because of either lack of supply or because of the fact that, by the way, raw materials in storage hiked so much over the last few quarters, I would say, and companies are not willing to sell at a very low margins or it's a loss. And therefore, as long as prices are not going down, we do not see a very clear economic return on these systems. If you take and compare it again to Europe, in Europe, you see today when you put a system with a battery, close to 3.5 years of payback period for the system plus the battery. In the U.S., again, it's about 7.5 to 10 years. It's a very expensive installation that unless you're very worried about resiliency, I'm not sure that the economic benefit is there. So therefore, this is the reason that we see a plateau in the U.S. Our last quarter actually was a record quarter. We shipped 321 megawatt hour in Q3 and this is mostly coming from Europe. More than 75% of our battery sales happened outside of the United States in Q3, at least.

So you talked earlier about the outlook for demand is bullish, but you still have a bit of a supply issue. On batteries, it seems like that may be less the case because you've got to sell a 2 ramping and you added a new supplier here recently. So 321-megawatt hours a quarter, I think your capacity moving through this year will be much above that, I think, 500-megawatt hours plus. So do you anticipate, irrespective of all the comments you made around batteries being too expensive, your supply there will allow you to continue to grow even if there's maybe a plateauing that you're seeing elsewhere in the market, especially in the U.S?

So I believe that, yes. And again, it's mostly related to our business in Europe that you still have a very high attachment rate of batteries, which we have not yet exhausted the ability to grow. So yes, we see an ability to grow. I also believe that we will start to see battery prices moderating and starting to go down especially once we'll have Sella 2, allowing us to reduce also the cost of our battery cells. So yes, we're very bullish about batteries and their ability to grow.

Great. I'm going to shift gears a little bit to the supply side. Obviously, that was a big issue for a lot of the industry last year, but especially for you guys. Where are you still seeing the constraints? I know you've talked about specific chip, chip component and maybe even a time line for when you think that might get back to a normal, if you will?

So in general, there is no major change in the last few quarters. And the fact is that the biggest supply constraints that we see today are related to power semiconductors. It's capacitors, MOSFETs. And here, most of the players in the industry are building subs. And until these subs are built, we will not see major change in the supply pattern. The reason is that these are mostly components that are going either to EVs, where we do not see softer demand there. Maybe, by the way, when people think about recession, they believe that less cars will be acquired, but actually, the portion of EVs out of total cars is increasing. So therefore, we do not see any softness there. And when we talk to our suppliers, they do not see any softness there. And since this is the case, we will have to continue and wait for [subs] to come online and start to release new units. This will start to happen at the second quarter of '23, and will prolong into the beginning of 2024, where we believe that we will see enough capacity in the market. What is improving is, on the other hand, the -- I would call it timing of supplies. Sometimes because of COVID there's -- especially last year because of some of the disruptions that we saw in China, even if you go to the entire amount of chips that you were supposed to get them, if you got them at the very last day of the quarter instead of throughout the quarter, you were not able to manufacture. So I think that while we do not see tectonic shift in the amount of components that are there, I think that we start to see a little bit more stabilization in the ability to project when they're going to come and the fact that you will be able to operate your manufacturing lines in an organized manner.

Is there any way to, I guess, quantify that? I mean we could keep tabs on new fabs that are coming up and getting online. But I think industry-wide lead times are pretty closely followed. Historically, I think normal lead times will be 8 to 10 weeks, and they've been out as far as double that, 16-plus weeks. So where are we today? Where do you think that trend line can go to reasonably over the next few quarters?

So I think that you need to make -- to separate here between resi and C&I. On resi, I think that this 13 to 16 weeks is still in place. And I think that it's slightly improving but not dramatically, mostly around the fact that ocean freight is becoming a little bit more stable, and the routes are becoming less long than they used to be a few quarters ago. In C&I, there is still relatively high lead times. And this is actually related to the availability of components and availability of supply. We take orders today for Q4 2023. And it's not that some of our customers would not like to get products tomorrow morning, simply this is the time that we can actually commit to deliver these products to them. So here, I can tell you that in some cases, you can see even 4 to 6 months of lead time on C&I, especially on the larger systems. And again, this is something that will moderate, but I believe towards the end of the year and not much before.

You mentioned freight. Freight has been in focus, particularly as it relates to your margins. So it seems like Q3 was the first quarter in a long time where you got a little bit of relief. But how much more relief is there? What's a reasonable sort of margin recapture that can happen and over what time frame when it comes to the freight side?

So when we ended Q3, the kind of -- or actually ended Q2 and then updated in Q3, we said it from the end of Q2 2022, to the end of Q2 2023, there's about 600 basis points of margin improvement that can come from a combination of freight and actually tariffs that we pay on goods that we brought from China. In Q3, we have basically took about 140 basis points of this 600 basis points. And we said at that time, and we still continue to say that we believe that we can take all of this remaining 460 basis points until the end of Q2, although it will not happen immediately, but we'll be more inclined into Q2 of '23. And the main reason, by the way, is that in Q1, there is Chinese New Year that is still limiting the amount of manufacturing that we can do, and therefore, we need to expedite shipments. But the trend is positive. First of all, our manufacturing capacity is growing all the time. Mexico is ramping as we planned. We are increasing capacity now in Sella 1 in Israel. And in some of our other factories, the other factories are very much stable, the 1 in Hungary, the 1 in Vietnam are much more stable than they used to be. Even in China, the situation is relatively okay despite of the COVID issues that happened there. It's relatively okay. And in general, we see that once we have more capacity, we can move much more to ocean freight. And to that end, the ocean freight costs are going down not to where they used to be at the beginning of '21, but they're getting closer to them. And this is why we see this as a kind of a moderated trend. In addition to this, again, since we have Mexico growing, we have Sella 1 growing, that means that we bring much less products from China to the United States. So the portion of tariffs is going down. So we believe that this trend is on track.

Because of a lot of those inflationary issues, which seem to be reversing a little bit, you had multiple price increases last year. Are we through that cycle? Do you anticipate any more price increases this year? Or do you have to, at this point, maybe even consider reducing prices now that some of your input costs are coming down? What's sort of the pricing outlook here?

So first of all, it's very geographic dependent one. We are implementing price increases in Europe these days as well because of the various dynamics that we see there. In other areas, we simply look at a competitive environment and of our expected return on the sales of our product, whether we need to adjust prices. We hiked prices last year. This was an industry, and you remember it well that we used to talk all the time about 7.5% to 10% of annual ASP erosion. In the last 3 years -- sorry, up until 2022, it stopped for about 2 years, in '22 prices went up. I don't think that the potential of increasing prices is very big right now. But at the same time, I do not also expect to see major price erosions over the next year or so. So I believe that we're relatively stable with a little bit of an up notch in Europe, at least in Q1.

Sounds like the manufacturing footprint, you're expanding a little bit. Mexico is going well, which you've articulated since the beginning of really last year. Now this new wrinkle with the Inflation Reduction Act, where are you in that process? It sounds like strategically, you're in the mindset of building something for both optimizers and inverters in the U.S., maybe just level set us as to where you are in that whole planning process and the time line?