SolarEdge Technologies, Inc. (NASDAQ:SEDG) Q1 2024 Earnings Call Transcript

SolarEdge Technologies, Inc. (NASDAQ:SEDG) Q1 2024 Earnings Call Transcript May 8, 2024

SolarEdge Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the SolarEdge Conference Call for the First Quarter ended March 31, 2024. This call is being webcast live on the company’s website at www.solaredge.com in the Investors section on the Events Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved and any recording, reproduction or transmission of this call without the express written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event Calendar page of the SolarEdge investor website. I would now like to turn the call over to JB Lowe, Head of Investor Relations for SolarEdge. Please begin.

JB Lowe: Thank you Chloe and good afternoon everyone. Thank you for joining us to discuss SolarEdge’s operating results for the first quarter ended March 31, 2024, as well as the company’s outlook for the second quarter of 2024. With me today are Zvi Lando, Chief Executive Officer, and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the first quarter ended March 31, 2024. Ronen will review the financial results for the first quarter, followed by the company’s outlook for the second quarter of 2024. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management’s current expectations.

We encourage you to review the Safe Harbor statements contained in our press release, the slides posted on our website ahead of this call today and our filings with the SEC for a more complete description of such risks and uncertainties. Please note this presentation describes certain non-GAAP measures including non-GAAP net income and non-GAAP net diluted earnings per share which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation because we believe that they provide investors with a means of evaluating and understanding how the company’s management evaluates the company’s operating performance. Reconciliation of these measures can be found in our earnings release, presentation, and SEC filings.

These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to, financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended March 31, 2024 press release or the supplemental material may obtain a copy by visiting the Investor Relations section of the company’s website. And I will now turn the call over to Zvi.

Zvi Lando: Thank you JB. Good afternoon and thank you all for joining us on our conference call. Starting with highlights of our first quarter results, we concluded the quarter with approximately $204 million in revenue. Revenues from our solar business were approximately $190 million, while revenues from our non-solar businesses were approximately $14 million. This quarter, we shipped 1.1 million power optimizers, 69,000 inverters, and 128 megawatt hour of batteries. As we have done on previous calls, I will start with the market dynamics we see in the various regions and end markets, our underlying demand in these markets, and the implications on sell-through and inventory clean-up. Starting with the U.S. Residential segment.

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Q&A Session

As we commented last quarter, we did not expect significant changes in this market as long as interest rates and electricity prices remain at recent levels. As a result, our first quarter results largely reflect traditional seasonality with inverter and optimizer sell-through down 19% quarter-over-quarter. However, we have seen continued strength in the uptake of our single phase battery product in the U.S. market and sell-through of our battery product was up 26% quarter-over-quarter. This strength is coming from California with the accelerating adoption of battery tied NEM 3.0 systems as well as Puerto Rico where customers need full backup capability. Our DC-coupled solution is particularly well suited for these applications given the incremental energy that is generated when compared with many alternative products.

Moving to U.S. Commercial, sell-through was down 22% from a record fourth quarter, largely due to seasonality. We are encouraged by the trajectory of this market, which is expected to grow this year due among other reasons to the continued demand from large enterprise customers who want to standardize their global portfolios on our product. On a year-over-year basis, sell-through of our commercial inverters was up 42% in the U.S. Moving to Europe, the market started the year slowly due to a slightly longer than usual winter and continued digestion of recent regulatory changes. In Residential sell-through in Europe was seasonally down 19% quarter-over-quarter, with inverters and optimizers down 20% and batteries down 13%. In Commercial sell-through was down 2%, reflecting the relative strength of this market and the good position we have based on the same dynamics that I mentioned when discussing the U.S. Commercial market.

Touching on some of our major markets in Europe. In Germany, the market started the year more slowly than anticipated as declining electricity prices have negatively impacted the economics of solar. There is, however, an expectation that market dynamics will improve given the passing of Solar Package 1 by the German Parliament two weeks ago, which will simplify regulatory requirements on new solar installations. Among other measures in the package are increased feed-in tariffs for commercial installations and incremental support for agri photovoltaic projects, which we expect will increase demand for our products specifically, given our strengths in these segments. In the Netherlands, consumer confidence is recovering slowly following the clarifications around net metering in the fourth quarter.

While the market remains at relatively depressed levels compared to recent years, we expect the market to continue to recover slowly and we are focusing on developing solutions in particular on the software side that will enable us to gain share in this market. I will expand on some of these initiatives in a moment. In the rest of world, we have not seen significant changes in market dynamics outside of typical seasonality, and our revenues continue to be largely derived from Thailand, Taiwan, South Africa, Australia and Israel. The aggregation of these trends and dynamics, in particular the slower pace of seasonal pickup in Germany translated into first quarter sell-through of approximately $440 million, which was slightly below our expectations.

The lower level of sell-through resulted in us under shipping demand by approximately $250 million at the lower end of the $250 million to $300 million range we anticipated and discussed in our call last quarter. Taking the first quarter into account and assuming the traditional seasonality patterns and market trends as we see them today, would bring us at the end of the year to the lower end of the range of underlying business run rate level that we estimated in our previous call for that period. Our expectation for the second quarter is that sell-through should be up 15% to 20% versus the first quarter, meaning we expect to under-ship demand in the second quarter by approximately $250 million to $300 million.

C&I:

C&I:

C&I.:

C&I:

C&I: This customer wanted a complete hardware and software solution that will enable them to generate clean and cheap electricity where relevant and optimize energy management, including selling the generated power to tenants and assisting the tenants with their own energy optimization needs. Given the diversity of the asset portfolio, the combined hardware and software configuration will be optimized per site and application on the basis of the flexibility of our portfolio. In the coming months, we will be deploying PVs to approximately 20% of the sites and one for C&I to all sites on the basis of a paid subscription. We believe that the rollout of SolarEdge ONE for C&I and the additional features that we will deliver in the coming quarters creates differentiation for our solution that will enable us to capture market share and improve profitability, including through the ability to sell software services that deliver recurring revenue.

On our last earning call, we also announced the first shipments of our commercial outdoor battery solution. This new commercial battery will be a key piece of the hardware solution that is managed and optimized by ONE for C&I along with our C&I inverters, EV chargers and energy meters. We recently began taking orders for our commercial battery in Italy and will be rolling the product out to additional markets across Europe and the rest of the world in the coming quarters. At Intersolar next month, we will be showing an additional commercial DC-coupled storage system optimized for indoor applications, which is a common application in some European markets with shipments planned for early next year. Continuing with C&I, an additional angle to broadening our addressable market in this space is pushing into the multi-dwelling unit, or MDU, market.

The MDU space is a relatively untapped market that is gaining regulatory support in various countries and is taking the first steps on its decarbonization journey. This market will require comprehensive portfolio level solutions that incorporate PV batteries, EV chargers, heat pumps and energy management capabilities.

Amperes: Energy management is also an important enabler in the residential space and we continue to roll out new features for SolarEdge ONE for residential. Last month we added a dynamic rate optimization feature and we have approximately 1500 users enrolled across the Netherlands and the UK. We will be rolling out this new capability to additional countries including Belgium, Sweden, Poland and Germany in the coming months. The dynamic rate capability joins the negative rate optimization tool we added to SolarEdge ONE for residential last year in the Netherlands. We have 10,000 sites enrolled in negative rate optimization as of today and have mitigated 162 negative rate events since launching the product in the fourth quarter of 2023.

We will continue to roll out additional features in the coming months that will help us maintain our technological leadership and gain market share in the residential space. As the reliance on software increases and given that residential and commercial PV systems are connected directly to the utility grid, cybersecurity is of critical importance. Over the past few quarters, we have increased our investment and activity on cybersecurity capabilities and certifications and we will continue to ensure that we are at the forefront of this topic in our industry, in particular as regulations are being drafted and implemented in multiple jurisdictions. Let’s talk now about new residential products. At Intersolar in a few weeks, we will be displaying our next generation large capacity three phase inverter for the European residential market that is expected to be released early next year.

This new 20 kilowatt inverter is optimized for the larger rooftops and system sizes that we are increasingly seeing in the German-speaking countries, where the increased need for electricity and self-consumption is leading consumers to utilize all roof surfaces and increase system sizes. As historically our products have been optimized for larger PV plus storage residential systems, this solution will further enhance our differentiation in this segment. This new inverter is based on silicon carbide power switches to drive better efficiencies and will incorporate improved safety and installability features as well. To complement this next generation inverter, we are also developing our next generation residential battery. This battery will be based on a single platform that will unite our single phase and three phase platforms into one.

We will elaborate more on this and other new products in the pipeline for the residential North American market on our next earning call. These new products will help drive down cost per watt and deliver improved installability to our customers, saving them precious time onsite.

TerraMax: Moving to operations. In our Austin, Texas facility, we manufactured approximately 250 MW of single phase inverters in the first quarter and are on target to meet a 500 MW manufacturing run rate in the second quarter. Additionally, in the second quarter we will begin shipments of optimizers and commercial inverters from our second U.S. contract manufacturing facility located in Florida. Also on the operational side in the North American market, we plan to consolidate our product portfolio around an 11.4kW made in the U.S inverter and 650 watt optimizer platform. The initiative will reduce both the number of hardware platforms and the number of SKUs across our North American portfolio. This will result in a more streamlined manufacturing process and improve efficiencies across supply chain logistics, inventory management and services.

Following the consolidation to a single platform, all new inverters will come pre-equipped with PCS, which means customers can install much more PV while avoiding costly main panel upgrades. In closing, our first quarter results were aligned with our expectation of inventory clearing and typical seasonality. As we enter spring, when installations historically tend to rise, we expect channel inventory to continue to decline and revenues to improve. In parallel, we are focused on a suite of new products that we plan to release in the next several quarters to position ourselves for the next growth cycle in our industry. I will now hand it over to Ronen.

Ronen Faier: Thank you, Zvi. Good afternoon everyone. Total revenues for the first quarter were $204.4 million. Revenues from our Solar segment, which includes the sales of PV attached residential and commercial batteries, were $190.1 million. Total revenues from the United States this quarter were $65.3 million, representing 34% of our solar revenues. Solar revenues from Europe were $85.7 million, representing 45% of our solar revenues. Rest of the world’s solar revenues were $39.1 million, representing 21% of our total solar revenues. On a megawatt basis, we shipped 226 megawatt to the United States, 443 megawatts to Europe and 276 megawatts to the rest of the world for just under 950 megawatts of total shipments. As in the fourth quarter of 2023 this quarter, the geographical mix of our revenues is mainly a result of the inventory situation in the channels and is not necessarily representing the installation rates, competitive environment or long-term trends.

68% of the megawatt shipments this quarter were commercial products and the remaining 32% were residential. In the first quarter we shipped 128 megawatt/hour of our residential batteries with the majority shipped to the United States where we see steady growth in installation rates. Similar to last quarter, there was a large portion of shipments of single phase batteries that are manufactured using our inventory of higher cost sales that carry significantly lower gross margins. In the first quarter due to the continued inventory imbalances in the distribution channels, we shipped a higher ratio of inverters to optimizers. As a result, average selling price per watt this quarter, excluding battery revenues was 17.2 cents, a 27% decrease from 23.6 cents last quarter, while the typical ratio of inverters to optimizers is one inverter to 24 optimizers, the ratio this quarter was one inverter to 16 optimizers.

This quarter we initiated some price decreases in targeted regions and products in order to help our distribution channel partners reach balanced levels of their inventory, which will be reflected in our financials starting next quarter. Our battery ASP per kilowatt hour was $383 this quarter, down from $403 per kilowatt hour in the previous quarter. The decrease is largely due to the previously announced price decreases on our residential batteries offset by mixed changes between our commercial and residential batteries. Revenues this quarter from our non-solar business comprising of our energy storage and all other segment were $14.1 million. Following the discontinuation of our LCV business, this revenue is mostly attributed to our energy storage division and is following the seasonal pattern of this industry which sees higher revenues in the back end of the year.

Consolidated GAAP gross margins for the quarter was a negative 12.8% compared to negative 17.9% in the prior quarter, as last quarter included higher charges from discontinued operations and restructuring activities. Non-GAAP consolidated gross margins this quarter was negative 6.5% compared to positive 3.3% in the prior quarter. This amount includes 450 basis points of net IRA benefit. Gross margin for the Solar segment was negative 3.5% compared to positive 4% in the prior quarter. Similar to the last quarter, I would like to give some additional color on the movement of our gross margin given the continued environment of depressed revenues. As a reminder, the first layer of our gross margin, which we define as direct gross margin, is the difference between the price paid by our customers and our direct costs paid to our contract manufacturers.