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

All right. Good morning, everybody. Thank you very much for coming. My name is Mark Strouse. I cover alternative energy and services for JPMorgan here in the U.S. Very happy to have the SolarEdge team. So Lior Danziger, part-time IR and Head of F&A; and then J.B. Lowe, Head of IR coming in. So this is kind of the swansong for Lior. So thank you very much for being here.

My pleasure.

So yes, let's try and make this as interactive as possible. So please just raise your hand if you have any questions. Want to start with Europe, though, that's kind of become the majority of your business over the last several years. Power prices have come down from where they were in the fall. They are still elevated since prewar though. Can you just kind of give us the the latest and greatest in what you're seeing in Europe? And I think especially in light of kind of some of the kind of -- some of the third-party forecasts that have come out for some flattening in that market.

Sure. So basically, what we're still seeing and observing in Europe is not so much different than what we mentioned after our last earnings. So we're still looking at very healthy demand across the board in the markets and in the segments. We mentioned that we still have the 3-phase bottleneck that we're working on to solve, and we can discuss about that later. But overall, and including both residential and commercial, we're still looking at a very healthy demand in Europe. And this would probably still be the fastest-growing geographies for us in 2023.

And do you think that, that is a function of the overall market growing still? Or is that kind of more share gains, do you think, or new customers, new geographies?

So I think it's a combination of all. And although electricity prices went down, as you mentioned, it's still a very attractive economic investment to do to install a solar system in Europe And we're still seeing this driving very strong demand on the residential front. On the C&I side, there's this layer of ESG-driven demand that we're seeing more and more corporations are starting to take their net zero emissions journey. And usually, to start with the solar system is a fairly good step to start with. -- and we're observing this type of demand as well, driving our C&I space in Europe and actually across the board.

You put it in terms of payback periods, I think Ronan has talked about kind of -- I mean, obviously, you've got -- we can't just talk about Europe, right? There's all the different countries. But some payback periods have been kind of low single digits over the recent history. Can you talk about where that stands now? And how -- you put it into context what that looks like in the U.S.?

Sure. So when we were looking at a few months ago, when electricity prices were at the peak, back then, you looked at payback periods as low as 2 in 3 years in some of the markets and some of the installations. Today as electricity prices in Europe moved down a bit, and you're probably looking at 4 to 5 years payback period, and that's still a very impressive payback period to look at for a system that is good for 25 years. This is not the case in the U.S. In the U.S., we're probably looking more at a range of 7 to 9 years of payback period. And that is a good illustration of where the economics are. If you look at a system installation in the U.S. and one in Europe, the economics is a few times better right now in Europe.

Okay. Got it. I'm kind of hopping around here, but I want to stick with Europe and just kind of the 3-phase inverter kind of bottleneck that you have. For people that aren't familiar, can you just kind of talk about difference between single-phase and 3-phase? What the bottleneck is? What particular component, and then kind of timing of when that might be resolved?

Sure. So the difference between 1-phase and 3-phase is the distribution of loads, but specifically talking, we have some residential markets in Europe that are 1-phase, we have some that are 3-phase and the entire C&I segment is served by 3-phasing inverters. So basically, some of, let's say, the more promising or fast accelerating markets in residential space in Europe are 3-phase markets, and we're constrained on those as well as constrained on the 3-phase inverters that we need to provide to the C&I space. So for us, it's a very important bottleneck that we need to work on and we need to resolve. It is also tied to the volume of batteries that we can couple to this type of inverters. So that gives us another strong incentive to resolve this bottleneck so we can also enjoy increased volumes of batteries. So basically, when we will talking about the 1-phase versus 3-phase, it's a different product. It uses some different components. It's a slightly different manufacturing process. And we need to work on getting to the components availability in place, and we need to work on moving some production lines. To do 3 phase, we mentioned, for example, that we're expanding Sella 1 in Israel. What we did was to add a line of 3-phase inverters, so we can have larger quantities. And overall, we believe that by the end of this year, we will have the 3-phase inverter also normalized in terms of the overall supply chain and value chain that we have for it from components to customer deliveries. And that should, as I mentioned, help us enjoy increased volumes of batteries as well into those residential markets that are using the 3-phase inverter.

Right. So kind of tying that last question to the first question. I mean you're still seemingly outgrowing the market even with these bottlenecks in place.

We believe so, yes.

Yes. Okay. Can we switch to the U.S., just maybe starting with California, and then we'll kind of talk about the rest of the country. Just any initial data that you can point us to over the last couple of months since NEM 3.0 went into effect. Yes, and just -- I mean, if there's anything you can say as far as volume, attach rates, getting a lot of questions on that from investors?

Sure. So attach rates are still pretty low. We're looking at single digit. But what we mentioned also after our recent earnings is that we strongly believe that California will go through an evolution that we've seen before. And we mentioned Germany and we strongly believe that California will become a storage market. And we also believe that we have a good solution in place, and we mentioned that we have a solution that was done actually by studying very thoroughly the NEM conditions and trying to figure out what will be the sweet point in terms of the economics and making the sale right now, while still showing a similar payback period where we were before. And I think what is happening right now is that California is going through this education phase, if you will, of these distributors and installers really learning what should be the pitch, what should be the way to make a sale. We're trying to help them with this type of education. And specifically speaking, we put a solution in place that it has taken out the backup functionality, and the associated cost with it, there's hardware costs associated with it, there's an incremental installation cost that is associated with it. And now we have a solution that is less expensive, but can still give you the very smart management that you need under NEM 3.0. So we're still learning where this education phase is, and we're still observing the data. But we're very optimistic that probably within few months or 2, 3 quarters, we will probably see California bouncing back. And this time, we will see it also bouncing back with increased volumes of batteries.

Okay. And does the 3-phase supply matter in California with storage?

Not so much. We're talking about 1-phase in batteries 1-phase inverters.

Got you. Okay. All right. So I think SolarEdge as a company has been talking about kind of the overall U.S. market kind of slowing or being relatively more sluggish in '23 since gosh, late last year, maybe even earlier. Just give us an update there. I mean what you were talking about 7, 8 months ago compared to today? How has that evolved? Has that met your expectations? And can we talk about kind of by region what you're seeing? So I think we've heard about some of the some of the Southern States, maybe some of the Midwestern states where solar has only recently become economic or less economic now with interest rates, right? So update there compared to the Northeast compared to other parts?

Sure. So first, you're right, and we were alluding to that already towards the end of last year. And we're still observing, I would say, somewhat a slowdown in the residential space here, and I think reasons are somewhat clear. We have the still high interest rate environment, and that makes everything more expensive. So your ability to access finance and then actually, you're going to have it at a higher price. And installation cost here is expensive. So the entire value chain is suffering from high interest rate. Inflation is still here. And if you remember, we also mentioned that there is some backfiring effect from the IRA and the incentive that is there for 10 years. So we have a lot of good reasons to wait if you're considering an installation right now in the U.S. We believe that all of these together, and also on top of that, the specific dynamic of California, is driving the slowdown that we're seeing right now. And we're still observing it. So in that sense, we're still looking at a flattish type of year for us in the U.S. residential space. But at the same time, we're very optimistic about where this market is going. And we strongly believe that it will bounce back, and we wouldn't plan our manufacturing footprint that we want to have here if that wasn't the case, and we can talk about that later. Talking specifically, so yes, you mentioned some of the Southern states, and that is true. And we've seen installations picking up in some of the other states as well. And it really depends on where power prices are and where the economics are. But right now, we're still looking at, I would say, slow type of view in the U.S. residential space.

Okay. The same kind of question on U.S. C&I, is that different?

Yes, it is. is. So actually, it's not demonstrating the same slowdown as we've seen in the residential space. I think -- what you've seen on the C&I, and again, this is subject to the 3-phase inverters bottleneck that we mentioned. So you'll see more and more corporations taking the ESG journey. And it's no longer just to tell everyone what you're doing. You actually have to show performance and what you're saving on emissions, and it's going to be standardized very soon. So more and more corporations are taking a proactive approach. And sometimes we'll -- the first call that they do and to try and start the journey, and sometimes, we even find them very puzzled about what does it mean? What do we need to do to become a green organization or to become more sustainable? So we try to help them also with that, and there's a great potential there. And we also believe that the C&I space will adopt more and more of the sophistication of the systems and features and functionalities that maybe we're observing today more on the residential side, but they have a very strong need and value proposition also for the C&I front.

Okay. So some of the -- sorry, switching back to U.S. resi. Some of the third-party-owned installers have been a bit more bullish than some of the smaller installers that we've spoken with. Are you -- I think it's -- the data is still very early. But are you seeing anything in your data as far as kind of mix shift maybe? And maybe, for educational purposes, just kind of talk about your mix within the U.S. as far as smaller installers versus like TPO?

Sure. So as you mentioned, it's still somewhat early in terms of the data, but the logic is making sense. It makes sense that these guys will maybe have better times right now than the long tail installers. And just to explain, as Mark said, it is somewhat known that we're may be more pronounced with the Tier 1 and Tier 2 and the large TPOs and maybe less so with the long tail, but we are doing long tail as well. And it makes economic sense that these guys will have better way to manage the financing environment and the shift that you mentioned from cash to PPA and leases. And if that logic is to take place, then it makes sense that it will drive demand for us. And we will be supporting that, and we're ready. We said that other than the 3-phase inverter and looking at the last 2, 3 years, we had constraints all over the place on components and capacity and [ COVID ] and many other things. right now, other than the 3-phase inverters, we're pretty much normalized on all of our products. And therefore, we -- if that logic is to take place, we will be able to support the demand.

Okay. So -- I mean, so we've covered this space we've covered you guys for a long time. The systems are getting more and more complex with storage and EV charging. How do we think about kind of the whatever revenue or gross profit or operating profit per home as those systems evolve? And kind of maybe talk about the -- from a competitive environment, what that means as far as systems getting more complex?

So the system gets more complex, we strongly believe it highlights our strength. So our architecture that was designed initially more than a decade ago was already thinking and taking into consideration all of those future trends that we're seeing today. So the DC-coupled architecture is a very favorable one, for example, for the introduction of storage. We're saving 2 rounds of conversion with that architecture. We're only doing the conversion from DC to AC when you need it. If you look at a comparable AC-coupled system, using a battery, you'll need 3 rounds of conversion and a similar theme goes for the self-consumption devices that are being added these days like EV chargers, heat pumps. So in that sense, we strongly believe that as the system is becoming more complex, it makes maybe life easier for us to show our capabilities and our functionalities, and that should help us differentiate our value proposition actually. And what we're also observing is that as the sophistication increases there's more and more software-based features and functionalities that we're adding. And these are very healthy margin. They justify a premium that we can take. And that enables us also to further differentiate our solution and maybe also make it harder for some of the other players to try and copy or imitate or provide a similar value proposition.

Is there a way for us to model that though? So if you make $1 for a solar-only home, what do you make for somebody that has solar plus storage? What do you make for somebody that has solar plus storage plus EVs?

Sure. So it's maybe not something that we disclose, but I will try to give some color. If you remember, when we're talking about the sophisticated residential spaces that we're serving, we always mentioned that we're probably looking at gross margin there of 40% northward. So if you take that $1 for such an installation, this is probably where we are. And when you add storage, we mentioned we're looking at a different type of gross margin. We mentioned that right from the beginning. We still think that battery is mostly a commoditized product, and we're aiming at 25% gross margin. But the other elements that we're actually -- we like to call them RP, additional revenue per installation, are coming at a usually a rich margin usually around 40% or above, and therefore, they're increasing the overall margin that you're doing on such a specific installation that includes the other elements.

Yes. Okay. I think, since 2015, I think when we first started covering you guys, the kind of the biggest question has always been about competition. I mean, obviously, your market share has ticked higher and higher and higher, but just how -- what's the competitive environment look like? What are you seeing from your existing competitors like a Tesla or Tigo or somebody else? And how do we think about that over time?

Sure. So I'll try to review that quickly by the different regions. So we're all familiar with the dynamic that we have here in the U.S. residential space. It's still somewhat the same. 90% of the market is being dominated by 2 main players, and the rest of them is being divided by all of the others, Tesla being the more pronounced 1 out of these residual 10%. This is still the case. This is still the dynamics that we're looking at. The C&I is different. The competition is different here, but we're actually a very strong MLP proposition to the commercial space. We're leveraging our architecture and our ability to scale, and therefore, we have very good position in terms of the competitive environment in the C&I space. Moving from U.S. to Europe, so -- and you mentioned you're covering us from 2015, so you know how much we have been talking about the competition in Europe. It's always been different. It's a different fish tank. You're competing with the European string inverters, the lights of SMA and Fronius, and you're competing with the Chinese vendors that are pretty much in the headlines right now, and are aiming more and more product into the residential space. I think, here, it's important to mention that we're not necessarily trying to win on availability of product and on pricing because we are putting a premium value proposition on the table. And we're asking for premium price, and we try to offer richer functionalities, feature, better ROI to make the sale happen and this is how we try to win. But definitely, competition in Europe is a more fierce type of competition than the 1 we are accustomed here. And that is also the case for the C&I space in Europe. And moving to what we like to call rest of the world, it's everything outside the U.S. and Europe. These would be markets like Korea, Japan, Australia, South Africa. So again, the competition is stronger. You see more and more Chinese vendors. And you try to compete with them by showing a better ROI, better bankability, a better ability to service your customer. And at the end of the day, we believe a better technology.

Okay. Any questions from the audience? Sure. Yes, go ahead I'll repeat it.

Just wondering about on the competition side and just pricing. It sounds like the answer was no concessions on pricing in Europe, but I just wanted to verify that and kind of talk through pricing dynamics going forward.

Sure. For the webcast, just a general question on pricing.

Yes. So we haven't reduced prices in Europe, although we've been asked about that many times. We actually increased prices in February. And right now, the way that we look at the dynamic in the market in 2023, we're probably not going to reduce prices this year in Europe. And the reason is because we're still seeing our value proposition working and -- pretty well for us and demand is there. So we don't see the need. And we should also highlight that as we add more and more features and more and more functionalities, we actually have an ability to sometimes increase prices by justifying that premium. And this is here to stay. We're adding features, we're adding functionalities. We're making the product richer in terms of what it knows how to do, and that justifies premium. And for now, this is the dynamic we're seeing. We're not looking at reducing prices right now.

With the IRA, can you talk about your manufacturing plans? What you have planned today and then kind of what you're still waiting on as far as guidance from treasury?

Sure. So we'll still planning and working on having a combination of a contract manufacturer site that will be up and running actually very soon, and we will have initial inverters manufactured domestically here in the U.S. already next quarter. And then at the same time, we're working on putting together our own manufacturing facility. And with that combination of own manufacturing and contract manufacturing, we want to be able to meet the entire U.S. demand for us probably by the end of '24, beginning of 2025, and that will be a gradual process that we're taking. So the contract manufacturer will be up and running already next quarter. And at the same time, we're going to continue the work on our own manufacturing facility. And what's going to happen is, treasury is probably going to come up with the clarifications by the end of the year. We're still assuming that we will be entitled to $0.11 a watt, meaning $0.065 for the residential inverter and $0.045 for the power optimizer. But if the clarifications, we're actually growing only $0.465, we will still manufacture inverters in the U.S. and do the optimizers in Mexico, actually, the economics is pretty much the same in that sense. So this is where we are, and we're still working in full force towards it.

Okay. Sorry, on the internal manufacturing, kind of what does that ramp period look like?

It looks on plan and that means that by the end of next year, beginning of 2025, we should be able to meet the entire U.S. demand for us from domestic manufacturing.

Okay. And is this for resi or for resi and C&I?

It will be first for resi, and then we will probably consider and add the C&I products portfolio that is also entitled to [ $0.025 ] a watt under the IRA. That's the plan.

Okay. all right. Is there enough demand in the U.S. to -- I guess, how do you think about sizing the manufacturing given you already have manufacturing in Mexico that's fairly recently added?

Right. Right. And we finished ramping it up towards the end of last year and it actually helped us very much in improving our gross margin and making our logistics more efficient in serving the U.S. market. And we should remember, it's going to be a process of something like 1.5 years to ramp up those 2 sites. So first, Mexico is still going to serve the U.S. market while we ramp up the sites here. And in terms of demand, despite the slowdown that we're currently seeing on the residential side, it's -- we mentioned it's not the case in the C&I space, and therefore, we're pretty much optimistic about the U.S. market as a whole. So we think that the demand will be there, and this is why we'll put in this type of manufacturing footprint plans in place. And Mexico will continue to serve as we do the ramp-up. And then what will happen is we will probably going to direct the Mexico capacity to some of the markets we have in Central and South America. Brazil had a record year for us and has a residential space that is very promising for us. So we will just utilize those lines into some of the other markets that we serve.

Okay. So even with some of the CapEx that you have on the storage side, you're still a CapEx-light business. I mean how do we think about the capital requirements for this internal manufacturing?

So it's going to be a big facility. What we're planning to build here, and we're probably looking at somewhere between $150 million to $200 million of investment that we will do. But under the IRA, the payback period is pretty impressive, and it's a very good investment for us to take. And excluding those, as you mentioned, we would still be considered as a capital-light type of activity.

How do you respond to the question about your capital allocation priorities?

So right now, we mentioned we will probably utilize it first to construct what will be Sellar 3, the manufacturing facility here in the U.S. But at the same time, and maybe this goes back to the fundraising we did last year, we did that when we were observing the inflection point in the C&I space, and we were starting to observe this historical levels of backlog. And we wanted to make sure that we will be as financially sound as we can be so we can grab any of the opportunities that will come along the way and that this could be building Sella 3, for example, it could be the expansion of Sella 2. That is something that we might consider now that we introduce commercial storage system that will be out in the second half of 2024. That will consume a lot of cell capacity so it could be the case. And then there's also the M&A front. So valuations are more reasonable these days. And we have a very strong M&A team that is working on evaluating targets and trying to figure out what will be the right 1 for us. So this is the way that we're looking at our capital allocations.

Got it. Got it. Okay. Any questions? Sure.

Just to [indiscernible] of the Mark's original question when you talked about solar storage and so on [indiscernible], what about the E-charging side and new bidirectional just announced recently. How they would do profile change or actually is still commodity to you? Or it's actually something changing by the direction of this, regular unidirectional charging?

Question on kind of the margin profile for -- as they get more and more into EV charging.

Yes. So it's a fairly new product that we announced last week. And right now, as I mentioned, this goes to the overall ecosystem that we're putting together. It will be another important element, and it should leverage our DC-coupling capabilities. And maybe it's too early to talk about what will be the specific margin. But overall, it's supposed to enrich the overall offering and enable us to justify maybe an even higher premium.

Okay. Can you talk about utility scale? You started in resi, now about 50%, maybe over 50% of your volume is in C&I, getting bigger and bigger. When should we start talking more about utility scale?

We believe that very soon. We're probably going to take a similar path as we did from residential to C&I, from C&I to first small utility and then maybe some larger ones. We actually showed the product last week, the 330-kilowatt inverter in the Intersolar Trade Show. And we have strong belief that this product is a good one to serve the large commercial installation and the small utility ones. And we're getting good feedback. We have installations already in a few sites that we're experiencing the product, and the feedback that we've been getting from the customers is pretty good. And we will probably see more and more quantities next year, and this is when we will probably start talking about numbers. But I think what's important to mention about the utility offering is that we're already seeing a very good feedback to the value proposition because we're already serving and have a handful of utility projects that are actually being served by our large commercial inverter. So for example, we have a 77-megawatt project in Taiwan that is actually using our 120-kilowatt inverter. That's a fleet of inverters. And that asset developer had to pay premium price, but he was convinced with the overall ROI over the lifetime of the system, and that's a very strong signal for us that the value proposition is working. It will -- you can only assume it should get better when you're going to use the utility inverter.

Right. Yes. Okay. With that, we're out of time. Thank you all very much. Lior, Thank, you.

Thank you.