SolarEdge Technologies, Inc. (NASDAQ:SEDG) Q4 2022 Earnings Call Transcript

SolarEdge Technologies, Inc. (NASDAQ:SEDG) Q4 2022 Earnings Call Transcript February 13, 2023

Operator: Welcome to the SolarEdge Conference Call for the Fourth Quarter and Full Year Ended December 31, 2022. This call is being webcast live on the company’s website at www.solaredge.com in the Investors section on the Event/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 expressed 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 Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge.

Erica Mannion: Good afternoon. Thank you for joining us to discuss SolarEdge’s operating results for the fourth quarter and full year ended December 31, 2022 as well as the company’s outlook for the first quarter of 2023. 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 fourth quarter and full year ended December 31, 2022. Ronen will review the financial results for the fourth quarter and full year, followed by the company’s outlook for the first quarter of 2023. 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 in the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies with all rights reserved. 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 as we believe that they provide investors with the means of evaluating and understanding how the company’s management evaluates the company’s operating performance. These non-GAAP measures should not be considered in isolation from or as a substitute for or superior to financial measures prepared in accordance with U.S. GAAP.

Listeners who do not have a copy of the quarter ended December 31, 2022 press release, or the supplemental material may obtain a copy by visiting the Investors section of the company’s website. Now I will turn the call over to Zvi.

Zvi Lando: Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call today. We are pleased to report that we have concluded the quarter with record revenues of $890 million and record revenues for the year 2022 of $3.1 billion. I will start with a summary of 2022 and the main themes which shaped the year and how we expect them to impact our business moving forward. Total revenues in 2022 grew 58% over the previous years — the previous year and 63% in the solar business. Growth in the solar business was across all segments and regions and practically in every country in which we operate. Most notable in year-over-year, we saw significant growth in the United States, Germany, the Netherlands, Italy, the UK and France.

Additionally, in 2022, we saw several new markets reached significant size and generate meaningful revenue, showing significant potential for future growth, including Taiwan and Brazil. A key highlight of 2022 was the growth of our revenues coming from Europe, which grew by 89% year-over-year. This remarkable growth is a function of the increase in power prices prior to the beginning of the Ukraine-Russia conflict and the accelerated increases ever since as well as the expansion of our portfolio to include inverters, EV chargers and batteries addressing the specific European market needs. An additional boost to our annual revenues came from the introduction globally of our own batteries that have been well received by our customers. Note that in the first quarter — fourth quarter of 2022, 52% of the batteries attached to new PV installations with our inverter systems were of our own battery and 48% were batteries from other suppliers attached to our inverter systems.

This, together with the trend of increased battery attachment rate, are an indication of the healthy potential for continued growth of sales for our batteries. From a segment point of view, we saw significant revenue growth and portfolio expansion in both of our key segments. On the residential side, we launched SolarEdge Home, offering a complete energy management system for the home, including PV, battery backup, EV-charging, load control and the homeowner app to manage them all in one single place. SolarEdge Home is now available in the U.S., Europe, Australia and Brazil. And combined with our designer software, it provides our customers an end-to-end solution for design, proposal, installation and commissioning, all working together out of the box.

In the commercial segment, our growth this year is attributed to market share gains, expansion into new applications such as floating PV as well as the successful adoption rate of our commercial portfolio with its safety offering in the fast-growing segment of corporations, progressing their ESG programs. Based on the demand we are seeing in our substantial backlog, we expect the momentum in the commercial segment to continue into 2023. On the operational side, we are very pleased with our accomplishments in 2022, which was a very challenging year. In the first half of 2022, we faced COVID-related factory shutdowns and component challenges, in particular, in light of the volumes that were needed to support the growth in demand. Despite these challenges, we were able to ramp the Mexico factory and to increase our overall inverter and optimizer gigawatt shipments 47% year-over-year.

We believe that the infrastructure and resilience we developed in 2022 will serve us well as demand for our products continues to increase. And now let’s turn to the fourth quarter. This quarter, we generated record revenues for the company, led by record revenues from our global solar business driven from significant quarter-over-quarter growth in the United States. In aggregate, we shipped this quarter a record 3.1 gigawatts of our DC-optimized inverter solution, and 217-megawatt hour of residential batteries. This quarter, we shipped 6.7 million power optimizers and 315,000 inverters. We also delivered record shipments this quarter to France, the Netherlands, Spain and Brazil. In these countries, in particular and across our global markets in general, growth this quarter came from a higher portion of sales of inverters and optimizers versus batteries and as a result of the strong demand for our products for new solar installations.

From a demand and inventory point of view, we continue to see very strong demand from Europe for all products and relatively low inventory levels in the channel. This is validated by our distribution sales with data for Europe, which was at record levels in November prior to the holiday season for both residential and commercial products. In North America, residential sell-through reports from our distributors for the fourth quarter were seasonally down more so than we have seen in the recent years — in the recent past. Early reports from the start of 2023 are showing an improvement. However, in light of the uncertainties in the market related to NEM 3.0 and the economic environment, we are mindful and cautious of the rate of the recovery.

That said, we are confident in the long-term strength of the U.S. residential market and recently strengthened our position in this market by announcing corporations with two important players in the market, Sunnova and Freedom Forever. From a segment point of view, we shipped this quarter 1.6 gigawatts of residential inverters and optimizers, 27% more than the last quarter; and 1.5 gigawatts of commercial product, a 6% increase from last quarter. In discussing the residential segment, I want to elaborate on the opportunities and dynamics coming from the NEM 3.0, the new metering policy in California, which comes into effect in April. Under the new NEM 3.0 tariffs, average export rates dropped by approximately 70% compared to the current policy.

But this number is a bit misleading as there are times in the year and specific days where the export rates are actually higher than they were under NEM 2.0. This will make coupling of solar PV with a battery, a more attractive proposition for California homeowners, especially if the battery is smartly used to import and export power at the right times. We have seen such transitions happen in the past in Europe, in countries like the UK, Germany and Belgium. And while it takes the market time to adjust to the new reality, we typically experienced significant growth in PV plus battery installation rates following such tariff transition. Our large installed base of TV plus batteries in time of use or self-consumption markets has enabled us to both gain experience managing such use cases as well as develop specific algorithms to maximize the import and export optimization.

Additionally, our DC coupled architecture is specifically suitable for such schemes as the system can maximize the amount of energy at stores from the solar panels without clipping TV power due to the AC inverter size, even at 200% DC oversizing. DC coupling also means there is only one AC to DC conversion for energy stored in the battery, as opposed to three conversions in an AC-coupled architecture. We estimate that 5% to 7% of stored energy is lost in these power conversions. And when charging and discharging the battery every day, this can amount to up to 10 days of additional power every year from a DC-coupled system like ours. Finally, in self-consumption mode, DC coupled batteries are simple to install and commission as they only require one DC connection to the inverter and do not require main panel upgrades.

As such, we believe that after a transition period following NEM 3.0 coming to effect, we will see a gradual market recovery and good adoption of our solar PV plus battery solutions in California. Moving to the commercial segment, where we are seeing strength across all geographies, including Asia Pacific, Europe and the United States. Our growth in the Commercial segment, as I mentioned earlier, is a product of multiple trends, such as corporate ESG, the push to reduce carbon footprint, floating PV, community solar, carports and others. And additional segments in which we see increased traction is agri PV and dual use of land. Most recently, we have seen government initiatives to prioritize and grow this segment in countries such as Italy, Japan, Taiwan and others.

For this application, we are offering a comprehensive solution based on our inverters optimizers and recently released land adaptable trackers from our subsidiary SolarGik. The design flexibility of our solutions and the safety features we offer make our portfolio of product attractive for this growing application. Moving from segments to products. As mentioned this quarter, we shipped 217-megawatt hour of residential, single and 3-phase batteries. This is lower than our battery shipments last quarter as in some cases, we have not yet caught up on inverter volumes of the specific inverters needed for these battery installations. We are focused on ramping the new 3-phase backup inverter that we discussed last quarter, to address the strong demand for this configuration of inverters plus batteries.

Photo by Bill Mead on Unsplash

Overall, the global attach rate for batteries to our inverters increased this quarter to 11.1% of new residential installations compared to 8.5% of the new installations in the third quarter. The highest attach rates that we see for batteries to our inverters are in Germany, where the attach rate is 61%, Italy with an attach rate of 56% and the UK with an attach rate of 31%. I would like now to address installation signs. As adoption of battery systems grows, the need to better manage time of installation is becoming critical for our customers. They require both short time of installation, often aiming to complete a PV plus battery installation in a single day, as well as predictability of installation times to enable them to better plan the time of their electricians and installation crews.

We are focusing on the installer experience from system design to physical installation and commissioning. Our design of software enables the installer to design the exact system to meet homeowner needs and then automatically export it to the SolarEdge installation app, which helps guide the physical installation and then commissioning the entire system. Our SolarEdge home network provides wireless communication between the inverter battery, EV charger and load controls, eliminating time-consuming installation of communication wires, while our DC coupled architecture means you can often avoid costly and time-consuming main panel upgrades. Our step-by-step commissioning process enables commissioning a PV-only system in less than 25 minutes and a complete PV with battery backup system in approximately 45 minutes.

We are aiming to reduce the commissioning time by more than 50% in the coming year. Our goal is to enable our customers to consistently install a PV plus battery system in less than one day. Given the increased demand for PV systems worldwide and the fact that the availability of qualified installation crews is becoming a significant bottleneck for growth, we are placing emphasis on installation time and simplicity across all of our product portfolio via product development, training and automated support applications. In early January, we announced the acquisition of Hark Systems. Hark is an energy analytics and industrial IoT company based in Leeds in the UK. Their Software as a Service, SaaS suite of products allows companies to get granular level of energy transparency, and then start acting on what they are seeing.

It integrates with solar storage, EV charging services, HVAC, factory machinery, building management systems, lighting systems, smart meters and other assets. Hark is a start-up at the point of scale up and has demonstrated that it can deliver value to different stakeholders of their customers which includes supermarket chain, industrial processing companies, energy companies and real estate services. Besides the stand-alone product, which we intend to roll out to a selected group of customers in 2023, we believe that the Hark team can play a great role in adding new and innovative capability to our overall commercial offering and support us as we increase our product portfolio in this space. The closing of this transaction is awaiting regulatory approval in the UK, which we expect to receive within the first half of 2023.

Moving to our non-solar business. Our Sella 2 factory ramp-up is on schedule, and we are shipping sales from the new factory to our customers. The sale we are shipping, which will also be incorporated into our residential and commercial batteries, is designed and optimized for stationary energy storage application, and can reach up to 8,000 cycles, has high energy density and high power throughput through a wide temperature range. Our E-Mobility revenues continue at a steady rate as we continue to supply powertrain units to Stellantis. In parallel, we are engaged in additional electrification opportunities, however, at a lower scale than initially anticipated, which has led to the write-off of intangible assets related to the original acquisition of this division as will be further detailed by Ronen.

Before I hand the call over to Ronen, I would like to update on our plans for U.S. manufacturing. We are executing a plan for U.S. domestic manufacturing of inverters and optimizers on the basis of a combination of contract manufacturing and owned facilities. We expect first products to be manufactured in the third quarter of 2023 and are aiming for the majority of the IRA credited residential and commercial products for the U.S. market to be manufactured domestically by the second half of 2024. Some of the details of this plan are still dependent on the impending clarifications from the treasury. To summarize my remarks, we are pleased with the growth we have seen in the fourth quarter and the entire year, which are a result of our global presence and multi-segment approach.

We believe this approach will serve us well during some of the market transition expected — transitions expected in 2023. And now I will hand it over to Ronen.

Ronen Faier: Thank you, Zvi, and good afternoon, everyone. This financial review includes the GAAP and non-GAAP discussion. Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. Segment profit is comprised of gross profit for the segment less operating expenses that do not include amortization of purchased intangible assets, impairments of goodwill and intangible assets stock-based compensation expenses and certain other items. Before I start the financial review for the quarter, I would like to address two issues that impacted our GAAP financials while having minimal to no effect on our non-GAAP results. As part of our year-end procedures, we addressed the existence and valuation of intangible assets related to our past acquisitions.

While as mentioned by Zvi, our E-Mobility divisions continue to deliver products and is part of our future strategy. Following our financial and business analysis, we came to the conclusion that the intangible assets related to this business which included mostly goodwill, is no longer justified. As such, we have written off this quarter a GAAP amount of $107.4 million representing our entire intangible assets related to this acquisition. In addition, we wrote off intangible assets in the amount of $7 million related to our automation machine business that continues to operate as usual. The second noteworthy item is related to tax expenses. Under the Israeli tax regime, an Israeli corporation with sales of over 10 billion new Israeli shekels, approximately $3.1 billion is subject to reduced corporate tax of 6% on income derived from technological products.

Following our growth this year, we have crossed this threshold and we are, therefore, eligible for such benefits. The impact on our actual taxes reflected both in our GAAP and our non-GAAP results is minimal since whatever expenses saved in Israel are paid in the United States in the form of GILTI tax. However, the impact on value of our deferred tax assets in Israel is significant since we will be able to utilize these tax assets at the lower corporate tax regime. Turning now to our quarterly review. Total revenues for the fourth quarter were a record $890.7 million a 6% increase compared to $836.7 million last quarter and a 61% increase compared to $551.9 million for the same quarter last year. Revenues from our solar segment, which include the sales of residential batteries were a record $837 million, a 6% increase compared to $788.6 million last quarter and a 66% increase compared to $502.7 million for the same quarter last year.

Solar revenues from the United States this quarter were $305.5 million, a 21% increase from the last quarter and a 19% increase from the same quarter last year, representing 36% of our solar revenues. Solar revenues from Europe were $473 million, a 1% decrease from the last quarter and 145% increase from the same quarter last year, representing 57% of our solar revenues. While we sold less batteries in Europe this quarter due to seasonal factors, our inverters and optimizers revenues in Europe grew this quarter by 26% compared to the last quarter. This quarter, we saw record revenue in the Netherlands, Spain and France. Rest of the World solar revenues were $58.5 million, a 5% decrease compared to the last quarter and a 12% increase from the last year, representing 7% of our total solar revenues.

On a megawatt basis, we shipped 880 megawatts to the United States, a record 1.8 gigawatt to Europe, and a record 481 megawatts to the rest of the world, surpassing 3 gigawatts of record quarterly product shipments. 48% of the megawatt shipments this quarter were commercial products, while the remaining 52% were residential products representing a higher sales mix towards the United States. In the fourth quarter, we shipped 217.6 megawatt hour of our residential battery, the vast majority of which were shipped to Europe driven by the strong adoption and demand for our 3-phase battery. ASP per watt this quarter, excluding battery revenues, was $0.237, a 2% increase from $0.233 last quarter. This ASP per watt increase is mainly a result of a stronger euro, decreased portion of commercial product in the mix as well as the result of price increases we have implemented in previous quarters.

Our ASP per kilowatt hour was $473 this quarter. It is worth noting that our single and 3-phase batteries are sold at different ASP per kilowatt hour since they are based on different technologies in different markets. This quarter, we had no change in our selling prices for both battery types. Revenue this quarter from our non-solar businesses were $53.6 million. Consolidated GAAP gross margin for the quarter was 29.3% compared to 26.5% in the prior quarter and 29.1% in the same quarter last year. Non-GAAP gross margin this quarter was 30.2% compared to 27.3% in the prior quarter and 30.3% in the same quarter last year. Gross margin for the solar segment was 32.4% compared to 28.3% in the prior quarter. The higher gross margin this quarter is a result of the price increases we have implemented in previous quarters, a stronger euro and a higher mix of residential products.

As we continue to ramp our global manufacturing and as a result of the holiday season that impacts our logistic flow in every fourth quarter, we did not have a meaningful improvement in our shipping expenses, which we expect will continue to decrease as a percentage of revenue in the upcoming quarters. Good subject to tariffs, excluding batteries shipped into the United States from China, accounted for a record low of 11% of our U.S. shipments this quarter. This has a further decrease compared to the 24% last quarter and is mainly attributed to the ramp of our manufacturing in Mexico, which is supplying the majority of our residential products to the United States an increased portion of U.S. commercial products coming from our production site in Vietnam.

Gross margin for our non-solar segment was minus 4.6% compared to 11.2% in the previous quarter, a result of Sella 2 ramp-up costs and lower margins on our e-mobility sales. On a non-GAAP basis, operating expenses for the fourth quarter were $119 million or 13.4% of revenue, compared to $108.3 million or 12.9% of revenues in the prior quarter and $94.1 million or 17.1% of revenues for the same quarter last year. Our solar segment operating expenses as a percentage of solar revenues were 13% compared to 12.2% last quarter. We expect to see increased efficiency in this ratio in the next quarter as our revenues continue to grow faster than our expense base. Non-GAAP operating income for the quarter was a record $149.6 million compared to $120.2 million in the previous quarter and $72.9 million for the same period last year.

This quarter, the solar segment generated a record operating profit of $162.2 million compared to an operating profit of $126.7 million last quarter. The non-solar segment generated an operating loss of $12.5 million compared to an operating loss of $6.5 million in the previous quarter. Non-GAAP financial income for the quarter was $59.4 million compared to a non-GAAP financial expense of $31.6 million in the previous quarter. Our non-GAAP tax expense was $37.5 million compared to $34.5 million of the previous quarter and $7.9 million for the same period last year. This quarter tax expense includes the capitalization of R&D expenses spent outside of the United States as explained last quarter. GAAP net income for the fourth quarter was $20.8 million, compared to a GAAP net income of $24.7 million in the previous quarter and $41 million in the same quarter last year.

Our non-GAAP net income was a record $171.5 million compared to a non-GAAP net income of $54.1 million in the previous quarter and $62.8 million in the same quarter last year. GAAP net diluted earnings per share was $0.36 for the fourth quarter compared to $0.43 in the previous quarter and $0.74 for the same quarter last year. Non-GAAP net diluted EPS was $2.86 compared to $0.91 in the previous quarter and $1.10 in the same quarter last year. Turning now to the balance sheet. As of December 31, 2022, cash, cash equivalents, bank deposits, restricted bank deposits and investments were $1.7 billion. Net of debt, this amount is $1 billion. This quarter, we generated $111.3 million in cash flow from operations. AR net increased this quarter to $905.1 million compared to $785.3 million last quarter.

As of December 31, our inventory level, net of reserve, was at $729.2 million compared to $561.4 million in the prior quarter, mainly a result of higher level of battery raw materials, some of which are related to the ramp of our Sella 2 factory. Let me to summarize the full year 2022. Revenues for the year were a record $3.11 billion, a 58% increase from $1.96 billion in calendar year 2021. Revenues related to the solar segment were a record $2.92 billion, a 63% increase compared to 2021. GAAP gross margin was 27.2% compared to 32% in the prior year. Non-GAAP gross margin was 28.2% compared to 33.5% in the prior year. GAAP net income for 2022 was $93.8 million, a 45% decrease compared to $169.2 million in the prior year and GAAP diluted EPS of $1.65 compared to $3.06 in the prior year.

Non-GAAP net income for 2022 was a record $351.2 million, a 29% increase compared to $272.9 million in 2021. And a record non-GAAP diluted EPS of $5.95 compared to $4.81 in the prior quarter. This year, we generated $31.3 million of cash flow in operations. Turning to our guidance for the first quarter of 2023. We’re guiding revenues to be within the range of $915 million to $945 million. We expect non-GAAP gross margins to be within the range of 28% to 31%. We expect our non-GAAP operating profit to be within the range of $150 million to $170 million. Revenues from our solar segment are expected to be within the range of $875 million to $905 million. Gross margin from the solar segment is expected to be within the range of 31% to 34%. I will now turn the call over to the operator to open it up for questions.

Operator, please.

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Q&A Session

Operator: And we’ll take our first question from Julien Dumoulin-Smith with Bank of America.

Alex Vrabel: It’s actually Alex Vrabel for Julien. If I can kick off with just one on European growth. Obviously, year-over-year, really, really robust. When we think about some of the stuff you mentioned in the past, whether it’s Italian super bonus or other incentive schemes, know there’s some moving pieces there as well as I think you mentioned sort of installer constraints as far as their availability to install these things being a governor on growth. What do you expect for European growth here in 2023 with sort of the moving pieces that I’m referencing here?

Zvi Lando : Well, I think I think that what we need to add to the factors that you mentioned is actually our production capabilities because as mentioned throughout this year, in many cases, we see that the demand is far exceeding our ability to manufacture and deliver. And as such, this is yet another item that needs to be taken into account. In the Analyst Day that we had last March, we basically guided to 20% to 30% growth year-over-year. We feel comfortable still with this kind of guidance, and we’ll try to do everything in our capabilities to manufacture and actually exceed this number. But other than this, we do not give any annual numbers.

Alex Vrabel: Got it. And then just one on margins. I’m just curious, when we look at the 1Q guide, it seems like there’s a pretty big gap between non-GAAP solar-only and the non-GAAP consolidated Wondering if you can clarify kind of what the drag is there and the magnitude as well as if you can sort of clarify what are battery margins in the resi segment, I think you referenced 15% margin number in the past. Curious how that’s trending?

Zvi Lando : So I think that here, several things to take into account. First of all, what we experienced, especially in the first half of 2023 is that our non-solar margins reflect expenses related to the ramp-up of Sella 2 factory. We need to understand that when we are ramping this kind of a, what we call process factory, which is a little bit different than discrete manufacturing. At the very beginning, the amount or yield of product that is coming out of the production line is relatively small, and it is actually increasing over time once you’re stabilizing the process. And by the way, once you’ve stabilized the process, the yield is usually very consistent. That actually means that throughout this process, we are throwing away a lot of materials until we are stabilizing the process.

So I think that what you saw in Q4 and as you mentioned, also in our guidance for Q1 is pretty much reflecting this. We also see a little bit of variance in our E-Mobility division, related to the type of powertrain units that we’re providing to Stellantis, and it is mostly related to what is a portion of batteries that exist in this one, in general, the bigger the battery component is the lower is the margin. And there, there’s a little bit of moving pieces. I would say that in the non-solar business, the driving factor for margins, at least in the next two quarters will actually be Sella 2. When it comes to the batteries gross margins on residential batteries that are reported as part of our solar segment, not the non-solar segment. In this case, we said that our target margin is to get to about 25%.

And actually, the 15% was in Q3 2022. And we’re actually getting closer and closer to the 25% that we have basically targeted for. And I assume that we will get to it this year.

Operator: And we’ll take our next question from Brian Lee with Goldman Sachs.