SolarEdge Technologies, Inc. ($SEDG)

I think we can probably start as more people will join. We have about 20 minutes. So let's go fast actually.

Maybe let's just start. I mean, you had the 1Q this last week, so it's still very fresh, I think, on everyone's mind here. Maybe let's start with the European market view. We just had the fireside chat with Enphase touching base on that. I think you guys have very similar observation of the market in the last 2 months. But can you talk about that inflection point that you have seen on the market? And how do you view that trend to further materialize? Maybe especially if the Middle East impact maybe fades away a little bit? Do you expect a sudden reversal of that enthusiasm in Europe? Or do you expect that to remain?

Yes. Thank you for the question. So as we said in our earnings call, March, we've seen an increase in the activity, which was stronger than expected seasonality and the very same trend continued into April. And from what we could feel and what we hear from the channel in the last week since our earnings call, it continues to be the same. And definitely, the geopolitical situation and the high energy prices are raising a short-term concern that does impact residential as well as C&I customers, and you can see an increase in demand. But our assumption is that this will continue. People, they are concerned about the lasting effect of something like that happening. Independence, energy independence, if you will, at the personal level or at the business level is something that is very, very important. And electricity prices are on the rise because the fundamental demand is growing. So it is -- here, we saw an accelerated increase, but our view is that going into the future, electricity prices are on the rise, and therefore, the demand for solar will continue growing.

Can you talk about maybe resi versus C&I? I mean you mentioned you've seen it in both, but do you see like an acceleration that is faster in residential maybe because of the fear or maybe similar?

So what we are seeing is -- and again, keep in mind that it's been only 2 months. And I would say that a lot of the rising prices in electricity are not yet reflected in the market. So it will take a little bit more time for them to flow through the system. We are seeing it in both resi and C&I. I would say that in C&I, what we are seeing that it is actually growing even faster is the attach rate for batteries. We introduced our next-gen storage solution for C&I, and we are seeing strong demand for that and not only for our solution, but actually for the entire market. So that's something that is very evident on the C&I side. On the residential side, maybe because the attach rates has been high even to begin with, then the impact is not as strong as we were seeing on C&I on the storage side. But on the PV plus storage, definitely an increase in both.

Which country are you seeing -- or are you expecting the most benefit here? I mean, obviously, you have Netherlands and then some of that retrofit load. I think France is very strong, and Germany as well.

So for us, we call it DACH. It's Deutschland, Austria and Switzerland -- not only we, right? And so we refer to it as one region that has a lot of commonalities. Over there, we definitely see a strong increase in demand for both resi and C&I. We have a larger installed base. We have plenty of opportunity in DACH. We are launching Nexis in DACH first, and our entire Q2 supply is already booked. It was already booked 2 or 3 weeks ago. So we are very happy with what we are seeing over there. In the Benelux, the Netherlands and Belgium, what we are seeing is with the expected expiration of feed-in tariffs towards the end of the year, we see a very strong activity around upsell to the base. Our installed base in the Netherlands is almost 800,000 homeowners, but by far, the largest installed base in the country. And we've engaged in different activities in order to come to these homeowners and offer them the ability to upsell to a battery and in some cases, to an improve their system. Italy is very strong on the C&I storage side, actually. We are seeing that as something that is growing for us. And to be honest, one of the things we've decided about 6 months ago that we're going to be very focused. So we are not going in all 20 or 30 or 40 countries that you can find in Europe, but actually on the top markets where we have the opportunity to make a major impact while growing there. So the countries that I mentioned are the main focus. We also have the U.K., Poland and France as well. But we are trying to be in a limited number of countries to have controlled expense level, but at the same time, to maximize the impact that we're getting from the market that is actually waking up now.

And then -- so you mentioned launching Nexis, right? I know you guys are very excited about the product. So maybe let's touch a little bit on that one. Is that just, safe to say, C&I first? Are you going to launch it as well? Just give us that and the timing as well that you expect to start seeing the benefit of it.

Yes. I will try to be...

I can give you 5 minutes just on Nexis.

Because I can speak about Nexis for 20 minutes, I'm so excited. But Nexis is a platform. It's a solution that was built from the ground up for today's market. So it's not a PV only, it's a PV plus storage plus the intelligence that is required in order to optimize the energy between grid, battery, the main loads in the house. And it's a resi solution. It's a global solution. We are launching it first in Germany, then we are going to roll it out to the U.S. and to the rest of the world. We expect that by Q1 2027, 90% of our resi sales are going to be Nexis. Nexis has many advantages to the homeowners, many advantages to the TPOs, to the installers, we've talked about them. But it has a fundamental financial benefits for SolarEdge. The first one is it's a better cost structure than our previous generation. Secondly, it is going to be manufactured in the U.S. with the IRA benefit that is associated with that. And thirdly, because it's a new product, we've been able to actually sign many safe harbor deals with the TPOs that are based on a product that is just being launched, and therefore, it's going to be modern, applicable and very efficient for the market, not only today, but actually 4 or 5 years from now when they are going to be installed. So there is excitement from everybody, mainly from the installers actually. I'm actually positively surprised by the very warm welcome we got from the installers for this product.

Sounds good. Maybe I wanted to go back on geography. I mean, obviously, it's Europe and the U.S. for your main market, I would say, but you have some other international markets as well. Can you just talk about what's your strategy? I mean you have your manufacturing footprint in the U.S., which obviously makes sense with the 45X. And then just for anyone maybe a little bit newer to the SolarEdge story here, any products in the U.S. can be dispatched even to Europe and you still benefit from that 45X. But there's a lot of moving pieces on geopolitics as everyone knows here. Does it make you rethink maybe your strategy? I know as well when Europe is not doing well, I think you get the question from investors, don't you want to exit Europe? So maybe just tell us how do you view things?

Yes. So SolarEdge historically operated in many, many countries around the world. Towards the end of last year, we had made a strategic decision that I was alluding to earlier. We had stopped selling in many countries that were not having a good ROI for us. SolarEdge is selling in 20 countries globally. So it would be the U.S., right? And then, call it, 10 to 12 countries in Europe and another 7 in Asia, Asia Pacific, and that's it. And that allows us actually to have not only the ability to gain market share in each of the countries that we operate in, but actually to apply the single SKU concept that we had initiated. The single SKU concept is very good for us because the supply chain is now streamlined. We are making one product for single phase, one inverter for triple phase and one battery block. And it is very good for the distribution partners as well and for the homeowners. So for all of these reasons, we are having one global strategy. Now -- so that's on one hand. On the other hand, you want to be local because we have local team. In the U.S., the competition landscape is different than in Europe and Asia. So we have to adjust to the different types of competition. But as is evident from the last 2 months, while the resi market in the U.S. is not necessarily that strong, the C&I market in the U.S. is good. Our position over there is structurally much, much better. But Europe and Asia, for that matter, are kind of compensating for the short-term softness in the U.S. So we feel that we have a good balance between U.S. and international. There are benefits for all the markets that we are working in, and we have to be a serious player in each of the markets that we operate in, in order to maximize the benefit for our customers and by definition, to generate the returns that we are expecting.

No, that makes sense. To rebound on your comment, I mean, the C&I market in the U.S. has been pretty good, actually with pretty strong demand. Is there like a scenario where you would maybe want to maybe not exit, but let's say, slow down your U.S. resi exposure and just really focus on C&I here in the U.S.?

No. Our strength in the C&I is something that we have invested in quite a lot. We have -- from a product perspective, there are many good reasons why our C&I solution is very, very good. For the U.S. specifically, we have structural benefits both because of FEOC compliance and the domestic content compliance. There are three main leaders in rooftop C&I. The other two leaders do not have -- do not comply with FEOC and domestic content. And because of that, the large C&I customers are choosing SolarEdge, and we are seeing it both in terms of bookings, in terms of safe harbor transactions and in market share. Our market share is as high as it has been. That being said, the opportunity for us in resi is still very high. We have more than 30% market share in the resi solar. We are going to gain share on the storage side of the house. Our relationships with the TPOs when that softness is going to be removed, is going to pay dividends for us and we are definitely excited about that opportunity as well.

That makes sense. Maybe -- I mean very quickly still on the U.S. resi on the TPO, right? I mean we have had that transition, right, from the 25D. I know you have very limited exposure here. But any view on the market trend and how is that shaping for TPO here?

Yes. I think like you said, the elimination of 25D was something that everybody expected. It happened at the end of last year. And that half of that segment of the market was expected and did decline in this. What people and we as well didn't expect is the slowing tax equity investment. And that's a result of the FEOC and other things that you and your audience are very familiar with. That actually puts some strain on the entire ecosystem, whether it's the TPOs or the installers, and we've seen some unfortunate bankruptcy and difficulties and challenges that are -- were a result of that. We hope, and we hear from other players in the market who are more familiar with the investor side that this situation is going to resolve -- to be resolved in second, either by treasury having a better definition or by investors finding ways to comply with the not that clear kind of definition of FEOC. And when that happens, SolarEdge is well positioned to capture the market share that we deserve because our engagement with the TPOs is there. And we are confident that the product benefits and the engagement benefits that we are bringing with them is going to serve us in the long term. And one of the ways that we ensure that for the longer term is the safe harbor deals that we have signed and that we continue to sign with TPOs as well as with C&I customers. But with the TPOs, we are signing these transactions. The vast, vast majority of them are with a physical work test that allows them to pull the product only when they need it and not just to sit on inventory for the next 3 or 4 years.

Makes sense. Maybe -- sorry, you mentioned something, and I wanted to rebound on that and I lost my thought. But let's go on the safe harbor. I think -- can you talk about how much you have already secured? And then is there like do you have an expectation in terms of like revenue recognition cadence as we go through the year?

Yes. So as we've said, the vast, vast majority of the safe harbor deals that we are signing are physical work test. So -- and the revenue that we reported in Q1 and the guidance that we have in Q2 do not include any significant pull forward. And that's important to note because it's the natural cadence of our business that we are selling to our channel. And the physical work test, the way that it works is that we are signing with our customers agreements today. These are binding agreements. They have the price, the quantity and liquidated damages in case they don't want to take the product. So these are -- they do take it seriously. It's not something that they are just signing because they don't care. And the benefit that, that brings is because we have good visibility into future revenue and future market share, and we can plan our manufacturing footprint accordingly. And they are able to pull it at the time that they need it. So we will recognize revenue only when the customers are pulling the product for their planned installation. And obviously, at that point in time, we'll recognize the revenue. So it's not that we are expecting spikes in revenue in the next 4 years. We're expecting the safe harbor deals to actually translate into a normal cadence of revenue that we are actually very, very optimistic about.

All right. I mean maybe also another point like your price strategy, your pricing strategy, some of your peers have cut some of their price to, I think, more like trying to remain competitive, especially on market that they are trying to enter. So maybe a little less relevant for you. But how do you view just like the pricing profile over the next, I would say, maybe 12 months for you guys?

Yes. So first, I'll comment on what we are doing now, then 12 months into the future. But at this stage, we have not made any significant pricing change. We don't see a need for that. As we mentioned, our entire supply -- initial supply of Nexis is sold out. We are having demand for even more. So we believe that when you bring value to the customers, they are willing to pay a premium for. And our goal is actually to be able to not to give up on pricing, but actually to add value to the customers. And by doing that to gain additional market share. I'd like to remind you that if and when we need to do something like that, we have the room to do it because Nexis has a built-in lower cost structure, and we're going to make it all in the U.S. So from that perspective, at this stage, we feel that we can continue to -- or we can gain market share with Nexis without the need to compromise on price.

That's good to hear. I know we're coming up on time. Maybe what would you say to investors. I think investors are pressing on gross margin profile and breakeven -- operating income being breakeven. Any message you want to share here with them?

Yes. So what we've been doing in the last 1.5 years is slowly but surely putting the foundation for our turnaround and then for our profitable growth. We've stabilized the company. And now at this stage, we have 6 quarters, if I'm not mistaken, of consecutive year-over-year revenue growth, gross margin expansion, and we intend to continue doing that with the midpoint of our Q2 guidance. If you look at the midpoint of the Q2 guidance, we're approaching breakeven point. Our intention is actually to go beyond that point and become profitable like any other company. We see very good reasons or we see good reason for us to continue growing with the introduction of Nexis, gaining additional market share, the introduction of the second generation of our storage for C&I. And there are very, very good reasons why we are optimistic about what we are doing, and we invite investors to join the ride.

Right. I think that's a good message. I know we are right on time. I think you guys have many more meetings with investors. And then I believe you guys will be as well in Munich, right, in about a month and then for us. So maybe if anyone is going there, they can meet with you as well and see the products that would be good.

Thank you very much.

Thank you, Shuki. Have a good day. Have a good day, everyone.

Thank you. Bye-bye, everybody.

Bye.