SolarEdge Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended December 31, 2015, SolarEdge’s fiscal 2016 second quarter; comparative results are for the three and six months ended December 31, 2014. The interim financial statements are unaudited. Unless stated otherwise, financial amounts below are in U.S. dollars and millions.
Business context
SolarEdge designs and sells module-level power optimizers, inverters and a cloud monitoring platform for solar photovoltaic systems. During the quarter it shipped 59,080 inverters, 1.37 million power optimizers and 416 MW of inverter nameplate capacity. For the six months, shipments were 113,275 inverters, 2.83 million optimizers and 771 MW. In January 2016, the company announced commercial availability of its StorEdge solution.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $124.8 | $73.3 | $239.9 | $140.3 |
| Gross profit | $38.6 | $15.8 | $72.1 | $29.8 |
| Gross margin | 30.9% | 21.5% | 30.1% | 21.3% |
| Operating income | $19.3 | $4.2 | $34.1 | $6.6 |
| Net income | $24.1 | $3.4 | $38.5 | $5.9 |
| Basic / diluted EPS | $0.61 / $0.55 | Not clearly comparable in filing | $0.98 / $0.87 | Not clearly comparable in filing |
- Revenue rose 70.3% in the quarter and 71.0% for the six-month period, primarily from higher sales volume in the U.S. and certain European markets.
- Gross margin expanded as per-unit costs fell, shipments shifted toward ocean freight, warranty and support costs improved relative to revenue, and scale increased.
- Blended average selling price per watt declined 16.5% in the quarter and 13.4% for the six months. Management attributed this to product, geographic and customer mix, including euro depreciation and volume discounts to larger customers.
- Operating expenses increased with headcount and investment in R&D, sales and marketing, and public-company functions. Net income also benefited from a $5.8 million quarterly tax benefit; the six-month tax benefit was $5.4 million, primarily reflecting recognition of a $6.5 million deferred tax asset after management concluded it was more likely than not to be realized.
- Six-month operating cash flow was $19.1 million, investing cash flow was negative $59.0 million, and financing cash flow was positive $1.5 million. Investing outflows included $52.9 million invested in marketable securities and $5.6 million of property and equipment purchases.
- At December 31, 2015, cash and cash equivalents were $106.2 million and marketable securities were $52.4 million; restricted cash of $3.4 million is additional. Current assets were $295.0 million and current liabilities $95.9 million. Cash declined $38.5 million over the six months, largely as funds were invested in securities.
- The company had no borrowings under its $40 million revolving credit line. It reported compliance with covenants; the facility is secured by substantially all assets, includes liquidity and EBITDA requirements, and terminates December 31, 2016. No other debt balance is presented in the supplied filing text.
Material changes, outlook and risks
- Warranty obligations reached $40.9 million, up from $24.3 million a year earlier; additions and adjustments to cost of revenue were $13.2 million in the six months. Inventory increased to $87.4 million from $74.0 million at June 30, 2015.
- Management stated that cash, operating cash generation and available revolving credit were expected to meet anticipated needs for at least the next 12 months. The filing provides no specific revenue, earnings or margin guidance.
- Key exposures include reliance on two contract manufacturers and limited or single-source component suppliers; two vendors represented 76% of trade payables. Non-cancelable purchase obligations were approximately $73.9 million, with a $1.8 million loss provision recorded.
- Customer concentration is material: three customers represented 36.9% of quarterly revenue and 39.5% of trade receivables at period-end. Management said it did not currently foresee credit risk in those receivables.
- Foreign exchange is a notable risk. A hypothetical 10% exchange-rate movement was estimated to change six-month net income by $4.2 million for the euro and $0.9 million for the New Israeli Shekel. The company uses forward contracts to hedge some exposures.
- Other risks identified include solar demand and incentive or regulatory changes, competition, product performance, forecasting and manufacturing capacity, transportation, customer retention, and conditions in Israel. The filing describes ordinary-course legal claims but does not identify a specific material proceeding or quantify a clear loss estimate.
Important facts for investors to verify
- Whether the recognized deferred tax asset is realizable and how much the tax benefit contributed to reported earnings.
- Whether revenue growth and improved gross margins can persist despite falling average selling price per watt and rising operating expenses.
- Customer and supplier concentration, contract-manufacturer capacity, and the company’s ability to meet its $73.9 million of purchase commitments.
- Warranty trends and whether the $40.9 million reserve adequately reflects product performance and expected replacement costs.
- Working-capital conversion, particularly receivables and inventory growth, and the planned use of cash and marketable securities.
- Foreign-exchange sensitivity and compliance with revolving-credit covenants as the facility approaches its December 2016 termination.