Lower shipments and better ASPs led to a good quarter for SolarEdge Technologies, Inc. The producer of solar inverters and power optimizers from Israel reported $125.2 million in revenues for the first 3 months of 2016 (which equals the company’s fiscal Q3/2016). That’s 0.3% better than last quarter and 44.9% on an annual basis. It also exceeds its own guidance of revenue between $121 to $125 million. Analysts considered SolarEdge’s revenue guidance range of $125 to $134 million for the next quarter was not all that strong, but comes with a good strategy.
For the third quarter in a row, SolarEdge had no debt.
North America by far largest market
SolarEdge shipped 1.4 million power optimizers. Out of the total 416 MW or 52,000 inverters shipped during the first 3 months of 2016, around 302 MW went to North America alone. Founder, Chairman and CEO Guy Sella said, “The number of inverters shipped is slightly lower than last quarter, which is a reflection of our increase in commercial sales and the growing acceptance of our large scale inverters.”
Sella said there is an expected slowdown of residential PV business in the US, which is reflected by reduced rates of installations of large players in the industry. “Since we are supplying to all of these players, we’re exposed to their results,” he said. Adding, “We remain confident that in the mid and long term market demand will continue to increase.”
‘Well positioned through continued diversification’
Jeffrey Osborne, analyst at investment bank Cowen and Company, commented, “SolarEdge looks positioned well for the short-term slowdown in residential due to the continued diversification of its customer base and the increased growth in the company’s commercial segment.” As less than 50% of SolarEgde’s sales are generated from the top 5 US residential installers – and with sales to Solar City smaller than 10% of the total, the inverter supplier is profiting from the second tier US companies that are taking market shares from struggling larger players, explains Osborne.
SolarEdge’s plans to launch utility scale inverters over the next 1-2 years and new markets such as Japan and Australia further reduces its reliance on the US residential market, says Oborne. Along with the US, SolarEdge expects growing demand for its storage solutions in Europe, Australia and South Africa. “This new segment can become a significant source of revenue growth for its business,” said Guy Sella.
Impressive gross margin
The better than expected gross margin of 32.5%, which is an increase from 30.9% in FYQ2/2016 and 27.4% in FYQ3/2016, came from a number of internal and, even more, external factors. “This quarter, almost all factors were in our favour, including a relatively stable ASP despite of a competitive environment, timely execution of cost reduction measures and continued efficiencies in our supply chain activities,” said CFO Ronen Faier. Nevertheless, the company indicated things may go back to the previously planned growth rate from next quarter onwards.
Focus on cost
The management said the company needs to focus on cost-reduction. As a result of this strategy, it has decided not to go ahead with the planned manufacturing facility in Mexico, as “manufacturing with our planned contract manufacturer would not achieve the expected long term economic competitiveness” It will instead focus on increasing capacity at one of its current manufacturing facilities. SolarEdge cooperates with OEMs Flextronics and Jabil at sites in China and Hungary.
Massproduction of new high-effiency inverter starting
SolarEdge will start mass production of its higher-efficient (99% CEC), electrolyte-free lightweight HD Wave inverters from FYQ4/2016 onwards, however it will not recognize the revenue from the same in the same quarter. Moreover, the transition to the new inverter generation will take more time, as one line after the other will be changed. “We are rolling it out slower than expected, mainly because we need to adopt the production lines and due to the high demand,” Sella said during a call with financial analysts. “I think that in Q3 calendar the majority will still be the current products selling, which is a very attractive great inverter and we keep reducing its price. And we will get to the majority probably a couple quarters later.”
Diversification of clientele
For Q2/2016 (which is the last quarter of its fiscal year), SolarEdge has guided for revenues in the range of $125 to $134 million, with a gross margin between 29% and 31%. Philip Shen of Roth Capital Partners pointed out that despite some of its customers facing a rough time (SolarCity and SunEdison among others), SolarEdge guided to growth of +27 to 36% YoY. This, said Shen, “highlights, in our view, the meaningful progress the company is making with diversifying into smaller residential installers via distributors and also into the commercial segment. Our checks suggest C&I could serve as a nice source of growth for the company in the quarters and years ahead. Over the next couple of years, the company could see a 50/50 mix between residential and commercial.”