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

All right. Let's get started with our next one. I have Lior Danziger with SolarEdge. He is VP of IR and FP&A. But we also have a new Investor Relations person with SolarEdge, J.B. Lowe. J.B., why don't you come up on stage and yes represent. And so over time, investors will get to know J.B. And so SolarEdge, everyone should know they produce optimized inverters. And it's in the MLPE category, module-level power electronics. We -- just for full disclosure, I have known them for a long time. We're a part of the IPO with them, and they are old friends. So we'll get into a little fireside chat here. If people in the audience have any questions, feel free to just jump in, and I'll do my best to call on you. So guys, welcome. It's great to be here, and it's great to have J.B. with me.

Yes.

And Lior is very thankful because he's doing 2 jobs right now. And soon enough, he's going to be able to get back to his day job, which is FP&A.

And safe travels.

Right. And so -- but until then, we will talk through the opportunities that lay ahead. So let's talk about Europe. Europe has been a source of strength for the company. I think quarter Q1 growth, it might be something like 145% year-over-year, I mean, this is just tremendous growth. We've been trying to follow the growth in Europe. And when we talk to, our multitude of distributors there, they see kind of like 50% to 70% year-over-year growth. It's not 100% year-over-year growth, but there is a big backlog, right? And so I just want to check in, do you think 100% is realistic for you guys this year? Or do you think it might be 70-ish percent or somewhere in that ballpark?

So what I would say is that, first, you're right, and Europe is growing amazingly. And I think although we do not guide for a specific growth rate for us in Europe in 2023, it's definitely the case that this will probably be the fastest-growing geographies for us. And by the way, this is driven both by residential and commercial. It's important to say that -- and across the board in the vast majority of the countries that we operate in, in Europe. So without pinpointing a specific growth rate, we're definitely looking ahead towards a very healthy and robust year in Europe again.

Yes. Just want to clarify that, 145% year-over-year growth was for Q4 and Q4...

For Q4.

Right? And so Q1, there's no specific European outlook, but somewhere between 50% and 100% is all very much on the board. Is that fair?

Correct.

100% plus?

So it depends on the supply constraints that we have and some of these moving pieces. But -- but in general, the answer is yes, we're expecting extremely healthy and robust demand in Europe that we've been observing for more than a year now. We were sitting here last year and starting to discuss about that. And the Russia-Ukraine war was, I think, only 2 weeks in. And now year-end, I think it's a consensus now that probably Europe is not going to go back to the Russian gas. It lost 1/3 of its energy resources that needs to be -- that gap needs to be bridged. -- there's a great expectation that a large portion of it will be bridged through renewables and from that solar, and this is probably driving the extremely healthy demand that we're seeing.

Right. So the backlogs in Europe, they were as long as 6 months. Have you started to see them come down? Or do you think they're still pretty high.

They're still higher than when -- where we want them to be. So we're still working on shortening the lead times, and we still have some bottlenecks that we want to resolve and get into a point where we can deliver quicker to the customers. So it hasn't changed dramatically, but we are working on trying to make it better.

Do you expect to be able to change it dramatically this year? Because when we talk to other suppliers and manufacturers, the constraints are all being relieved, right? The congestion, the shipment transit times are going down and then supply, availability of components are -- is improving. And so do you expect to get to a point where you can get a normalized supply and really reduce the lead times that you have? I mean what are the lead times roughly now for Europe? And where do you think they can go?

So first, I agree with everything you mentioned. And we also made a similar commentary as well. We are seeing things getting better, and it's definitely not where we were a year or 2 years ago. So things are getting better on component side and logistics and everything you mentioned. But at the same time, we're growing very, very fast. So it's still a challenge to continue and be able to get the components to be able to ramp up the capacity. So lead times are still longer than where we want them to be probably above the 18 weeks roughly, and we want to shorten those. And we're working very hard on solving those couple of bottlenecks that we have to solve. And then we can probably -- and I would say somewhere towards the second half of the year, we should expect some relief coming.

Okay. So 18 weeks roughly now, back half some relief. Does that mean we go to 14 weeks? Or does that mean we can get to 6 to 8 weeks...

I don't know about 6 to 8 weeks. It will be a gradual process, definitely. So first, let's get to 14 weeks. And then we will work our best to try and continuously shorten the lead times even further.

Okay. Good. And are those lead times similar in the U.S. as well?

Not really. So right now, maybe in the U.S., they are probably 2, 3 week shorter and we can deliver. So there is a change. There is a difference between Europe and what we're seeing...

And so this -- 3 weeks shorter. So Lior can you use the microphone closer? That's okay. So thanks, Cynthia. As it relates to -- so let's shift gears to the U.S. So shorter lead times, we've been writing for a while about a slowdown. The origination slowed down in Q4. And I think Ronen when he was at the Goldman conference, he kind of echoed that a little bit on your Q4 call, you guys kind of said that as well. So I'm guessing that is supporting why the lead times are going down there as well. Since then, we've been running that January, February, we've seen a pickup in the originations. Are you starting to see that in your business as well in the U.S?

So not yet. I would still be consistent with what we mentioned because this is still what we're seeing and maybe we're taking a cautious approach here. But we are seeing some softness still in the U.S. We definitely expect that to bounce back, and we're very bullish on where this market is going. And right now, it could be a near-term thing that will definitely bounce back and pick up and then we will see installations being translated into demand on our site as well...

Yes. So that's -- I think one tailwind that you guys might have is with the Sunruns, NOVAs out there growing their lease offering and gaining share, I think, in this kind of slowdown of the loan originations, that should be a benefit for you because you guys sell a lot into those 2 companies?

Correct, yes.

Can you give us a mix of how much of their inverter volume you think you have?

No, I cannot.

I mean I think it might be in the 10 Ks and they recently just came out. I think we have to check it out, but...

But I think it's common knowledge that we're probably more pronounced with the Tier 1, Tier 2 players...

Right? Okay. So that should be a bit of a tailwind that was a headwind for a while when all the loan guys are growing so much. Okay. So in U.S., let me just ask this question around growth overall. So do you think with that TPO potential tailwind and the overall -- my outlook for resi solar's flat year-over-year growth. Can you grow in the U.S. in 2023?

I think we can. And again, I think it will be this path of maybe observing some slowdown, softness that will then pick up. And if the pickup, if the bouncing back in Q3, Q4 will be meaningful then on an annual level, we maybe be able to grow. At the same time, we think it's important to mention that any such softness that we might see in the U.S. for us is not something that poses a risk for the overall plans that we have for 2023 simply because we just mentioned Europe. Our ability to move that or any slowdown that we might see here to recover that through some of the booming markets in Europe is something that we can relatively easy get done.

Right. We wrote in our Q4 note for SolarEdge that your inverters are effectively fungible, right? So whatever you make in for the U.S. market, if there is a bit of a slowdown, I mean not if, but since we're seeing a bit of a slowdown, there is the ability to shift that volume to Europe. Have you actually done that where you've shifted some volume to Europe more than expected or volume that you would have thought was expected for the U.S. market?

Not yet. We did -- in Q3, if you remember, intentionally diverted some products to Europe in light of the upcoming winter over there, but we still haven't seen this type of behavior right now. But what's important to say is that in case we do see this softness, we have the ability to do. So and by the way, if it's not and some of the other commentary that we've been hearing around here is true and maybe the U.S. resi space is actually going in optimistic place, then we will have the ability to solve that as well.

Okay. Good. So let's shift over to the manufacturing side. So the U.S. Inflation Reduction Act has some nice incentives for inverters, $0.11 for microinverters, $0.065 for residential solar inverters. You guys make not a microinverter. But I do believe you guys expect to qualify for that $0.11 per watt subsidy. And so help us understand the confidence you have in that? What is that based on? What do you think the probability is? Do you think it's closer to 1% or like 90% probability that you think you can get that $0.11?

So we feel quite confident that we're entitled and we will get the full $0.11 simply because it makes sense to look on a system basis. And when you compare the microinverters that are entitled to $0.11 and you want to compare it to the residential system that one might choose, then you should add the optimizers that makes sense. And this is also the confidence that we get from our legal guys working on that. And this is really the operating assumption under which we're working. So...

Okay. So sometimes government doesn't make sense.

Most of the times.

So I get it makes sense. I recognize it because it's a very unfair playing field because you and Enphase serve the same customer. Have you gotten some degree of confidence from the people in Washington, D.C. that it should work out as you expected?

We did. And basically, this is part of why we're feeling confident about assuming the $0.11. But at the same time, even without them, we have plans on what we're going to do. And we should also remember power optimizers if you just change the word of microinverters in the bill to power optimizers...

Just the MLP or something like that.

Right.

So when do you think the treasury guidance comes out for the Section 45X , which is for the manufacturing production tax credit.

Do you know?

Well, I've been writing that it could be as long as a year. But right now, my contacts are expecting sometime before August. If you get to August, you won't be able to get anything done, then it goes into Q4 or September. So you have this confidence, right? I'm wondering if your contacts are also being able to share with you the timing of when treasury comes out.

I don't have any good answer about the timing, hopefully as soon as possible a bunch of clarifications that should be out. And at the same time, what we are doing is we're pushing very strongly on both the contract manufacturing model that we're planning as well as our own manufacturing site that we're also planning. So once the clarifications are out, we will be able to run very quickly on both...

So I've heard energy community comes out maybe May. Domestic content for the [ ITCRA ] comes out maybe June. And then, hopefully, after that soon is 45X July-ish, but otherwise, maybe Q4. So hopefully not a year -- but I did hear from a good contract that it could be a year. So having said all that, let's say, it takes a year, right? Then -- how much of a delay does that result in for your up your manufacturing capacity expansion. So do you want to wait for all the clarification to come out before you guys signed the contracts with the CMs and pursue it and put down money? Or do you think you can go ahead before the guidance actually comes out?

So what we're doing is we're basically promoting both of these contract manufacturer site as well as the own manufacturer site. So we will be able to be as quick as possible once the clarifications are out. It's probably going to be quicker on the contract manufacturer alternative than it is on the own manufacturer side. But again, we need to wait for the clarifications as soon as they are out, we will be ready.

So you'll wait. I mean you have to wait before because you want to have very -- there's ambiguity to the theory that you want certainty. Okay. All right. Just checking in, anybody else out there or anybody want to jump in with a question. Go ahead. So the question is, can you talk about the commercial business in Europe? [ Rosephine ] she's asked a lot of questions about commercial throughout the day. Go ahead.

So -- we've seen -- I think there's no other way to say it, but we're seeing unprecedented demand in the commercial space, actually, not only in Europe, but also in the U.S. And I think what we're seeing is we've seen many organizations and corporations that are looking to go green, whether with a desire to do better or whether because they are being forced to. In 2023, we will have the SEC requirements out asking companies to really show on the financial statements on a line item what they're doing...

The question is at what scale commercial can you...

So I think we're pretty privileged to have an architecture that can fit a wide range of installation sizes.

These guys can do 20 megawatts -- they can do utility scale.

Exactly. And -- so pretty much we can play throughout the commercial segment as a whole, and we're even planning to penetrate the utility space as well. And actually, what we're seeing is even in this handful of projects that we already have on the utility side, we're actually utilizing large commercial inverters. So actually, and a good example would be we have a 77-megawatt project in Taiwan. It is actually utilizing 120 kilowatt of inverters. That's a fleet of inverters, but -- but that is a great sign that the value proposition is already there and it's working. And to that extent, we have an architecture that is good for 15 kilowatts of installation or 16 that can be considered as commercial as well as the very big ones.

So let's shift gears back to the IRA. You said you're going to wait likely to -- until the treasury guidance comes out. Once the guidance comes out, how long will it take to ramp up the first line?

Probably within a few months. The contract manufacturer one probably within a few months, and this is why we said if clarifications will be out throughout Q1, we want to be able to have first units out as soon as Q3 of 2023 throughout the contract manufacturer side, and then it's going to take a bit longer to get their own site up and running.

I'm hearing a little something, but around -- I wonder if you have some partnerships beyond the contract manufacturers that where you guys might be able to collaborate with some other players. Is that -- are those opportunities on the table though...

They are, but not something that we can disclose and talk about...

Okay. Interesting. Yes. So I'll stop asking questions Okay. Good. Let's shift gears. Storage -- how is the ramp-up going in the U.S.? And from a geo target, are you equally serving the European and U.S. market? Or are you emphasizing more of a ramp-up in the U.S. market first. Our checks kind of before the Q4 call where the distributors hadn't seen much of your European storage product yet. And is the focus more in the U.S.? Or have you already ramped up Europe since the Q4 call?

So actually, we're doing most of the batteries actually in Europe...

In Europe?

And I think the attach rates here in the U.S. are probably not where people thought they would be a year and 2 years ago. So we look forward to seeing the attach rates picking up here in the U.S. And when that is to happen and California and M3 and the potential of that becoming a booming storage market, then we will be able to capitalize on that as well and put more and more batteries into the U.S. space as well. Right now, most of our batteries are actually going into Europe.

Okay. So how are the commissioning times for batteries in Europe? Are you down to sub 30 minutes?

That's the commissioning time.

So 2 minutes or...

It could be a minute, it could be 4 or 5 minutes.

So let's -- that's interesting. So -- but on average, what do you think it is?

Probably a few minutes that would be the blended average.

How many?

Few minutes.

Really... That's very good. It's -- because Tesla [indiscernible] might be at the 40-, 45-minute level. Okay. Go ahead, Cynthia. They just launched their battery. So -- and so this is all kind of pretty fresh. So Enphase is out and closer to 90 minutes. So I think that can be very compelling. Have you been able to prove that out in the U.S. as well?

Yes. And I think here, there's also it's a function of us being connected to batteries already from 2017. So when you're installing and commissioning a SolarEdge system or when an installer is coming to do that, they're already familiar with the architecture and have been doing so for years. So one should assume that it only makes sense, it will be an even shorter experience when they use our battery. And this is where we are.

Okay. Let's talk through margins in the remaining time that we have. So Q1, I think your guide is 29-ish percent, 30% solar.

31% to 34%.

Sorry, 32 -- 32.5% for solar and 29.5% midpoint for overall. As we get through the year, I think pricing -- you probably can maintain pricing. Cost structure should come down. My guess is you have margin expansion. And do you see sequential margin expansion by quarter, Q2, Q3 and Q4? Or do you think it is flattish Q2 and then it jumps more in Q3 and Q4?

So it's definitely logical to think about it the way you just mentioned that you can still see this gradual improvement coming into. But at the same time, we do plan to do more in Europe. We do plan to do more commercial. We do plan to blend in more and more batteries. And these are, as you know, characterized with lower gross margin. So at the same time, I think what we should focus on is that we're probably going to stay in those long-term targets that we communicated for solar, it's going to be between 30% to 32% gross margin on a non-GAAP basis. We already exceeded that in Q4 with the 32.4%. And for the inverters and optimizers business, the 36%, give or take 1%, is also still valid, still in place. So as we blend in more commercial, more Europe, more batteries, these are taking the margin down and actually maybe -- not maybe we're actually doing just as good, maybe better on some of the other fronts as we keep the margins, the targets in the same place.

Great. And then FX has been a headwind for a while, but then it's flipped around and now it's a tailwind -- and so when you think about your Q1 guide, what's your baked in assumption for FX Euro? Is it 1.03, 1.2 million.

We do not disclose what we actually baked in...

No longer. Yes, no longer.

Yes. No longer. We used to. But what I can say is that the sensitivity is roughly the same, around 40 to 60 basis points for every movement of EUR 0.01. And here, I think one should also remember that it's not just looking at the average exchange rate that you might see out there because it's not evenly distributed in terms of the operations. And when you're actually invoicing customers, et cetera, and this is where we are in...

Okay. But philosophically, what's the typical approach? Like when you do your Q4 earnings and you're giving your Q1 guide, I'm guessing you're looking at the recent -- you have a month or so -- a month 2 months in the quarter.

It's usually the exchange rate that was around those days.

It is few months. And so then you see what has happened, which is the Euro has appreciated more since the earnings have been reported. So there's maybe incrementally a little bit of upside...

Maybe and again subject to the actual shipments and invoicing...

Already. Yes. Okay. All right. I know investors care about that -- can you quantify how much shipping costs are coming down -- or have come down like in the Q1 period versus Q4? Any sense?

So the rates themselves are going down. Freight costs are going down and container cost, probably these days around 4,500. At the peak of COVID days, it was 20,000. So these are going down. And at the same time, that means that we will probably have some still more room for improvement on our side on logistics front. And without exactly quantifying the basis points, so we can probably still improve.

Okay. Good. Well, I think we're out of time here. Lior, J.B. Thank you very much. Looking forward to continuing to follow the story. I think you have a lot of exciting news ahead. So with that, let's give these guys a round of a plus. Thank you for having us.