SolarEdge Technologies, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. SolarEdge designs and sells solar power optimizers, inverters, monitoring and storage solutions. The company has also expanded into UPS, batteries and electric-vehicle powertrain technology through acquisitions.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $271.9 million | $209.9 million | +29.5% |
| Gross profit / margin | $86.1 million / 31.7% | $79.6 million / 37.9% | Profit +8.2%; margin down 6.2 percentage points |
| Operating income | $28.0 million | $40.8 million | Down 31.2% |
| Net income | $18.0 million | $35.7 million | Down 49.6% |
| Net income attributable to SolarEdge | $19.0 million | $35.7 million | Down 46.7% |
| Diluted EPS attributable to SolarEdge | $0.39 | $0.75 | Down 48.0% |
| Operating cash flow | $56.5 million | $64.0 million | Down 11.8% |
Amounts are in U.S. dollars. Consolidated net income was lower than income attributable to SolarEdge because the filing reports a $1.0 million net loss attributable to non-controlling interests.
Liquidity, debt and cash flow
- At March 31, 2019, cash, cash equivalents and restricted cash totaled $228.3 million. The company also held $164.3 million in marketable securities and $6.1 million in short-term bank deposits.
- Current assets were $717.5 million and current liabilities were $248.1 million. Total assets were $1.177 billion.
- Bank loans totaled approximately $24.3 million: $19.1 million of Kokam loans and $5.1 million of SMRE loans, with variable interest rates. The balance sheet separately reports $35.6 million of lease liabilities following adoption of the new lease standard.
- Operating cash flow was $56.5 million; investing activities used $20.7 million, including $39.3 million net cash used for the SMRE acquisition, partly offset by marketable-security maturities. Financing activities used $2.6 million.
- Management stated that cash and operating cash flows should meet anticipated needs for at least the next 12 months. The company had $30.2 million of capital expenditure commitments.
Changes versus the prior-year quarter
- Revenue increased by $62.0 million, driven by higher inverter and optimizer sales, growth in Europe, Australia and Israel, and $18.8 million of revenue from acquired businesses. Non-U.S. revenue rose to 56.3% of total from 43.4%.
- Shipments increased: inverters to 130,672 from 99,646; power optimizers to 3.03 million from 2.48 million; and nameplate megawatts shipped to 1,144 from 800. The filing says U.S.-dollar average selling price fell 17.7%, reflecting currency weakness and a greater mix of lower-ASP commercial products.
- Gross margin declined amid foreign-exchange effects, warranty and support costs, price reductions outpacing cost reductions, lower margins and facility underutilization in acquired businesses, and acquisition-related amortization and product adjustments. Supply-chain efficiencies and scale-related savings partly offset these factors.
- Operating expenses rose to $58.1 million from $38.8 million. R&D increased 46.6%, sales and marketing 24.5%, and general and administrative 146.0%; reported drivers included headcount, equity compensation, acquisition integration, legal costs and amortization.
- Net financial expense was $6.2 million, versus $0.6 million of financial income a year earlier, primarily due to foreign-exchange fluctuations. The company reported a $6.7 million increase in FX-related fluctuations.
Outlook, acquisitions and risks
- The filing provides no quantified revenue or earnings guidance. Management said it expected available cash and operating cash flow to cover anticipated cash needs for at least 12 months.
- SolarEdge acquired 56.8% of SMRE in January 2019 for approximately $73.9 million, including cash and SolarEdge shares; the purchase-price allocation remained preliminary. After quarter-end, it spent a further $64.5 million on SMRE shares and reported ownership of 99.6% as of May 10, 2019. SMRE contributed $2.9 million of revenue and a $1.9 million net loss from acquisition through quarter-end.
- The company reported dependence on three contract manufacturers and limited- or single-source component suppliers; those manufacturers represented 48.7% of trade payables at quarter-end. It was discontinuing activity with one contract manufacturer.
- Warranty obligations rose to $136.7 million from $121.8 million at year-end; additions and adjustments charged to cost of revenue were $22.1 million during the quarter.
- Non-cancellable purchase obligations were approximately $242.6 million, with a $2.1 million loss provision recorded. Guarantees included $13.4 million related to bank loans, among other items.
- A former customer’s bankruptcy trustee sought approximately $2.5 million in a disputed transfer lawsuit; the company said it had recorded an adequate provision in expectation of settlement. Separately, Huawei filed two patent lawsuits in China after quarter-end, seeking an injunction and approximately $3.1 million in damages. SolarEdge said it had not yet been served, believed it had meritorious defenses and intended to defend the claims.
- Market risks include foreign exchange exposure: management estimated that a hypothetical 10% exchange-rate change would affect quarterly net income by $8.2 million for EUR/USD, $2.8 million for NIS/USD and $0.6 million for KRW/USD. A major customer accounted for 14.2% of quarterly revenue.
- The company adopted ASC 842 leases on January 1, 2019; comparative periods were not recast. Management reported effective disclosure controls. It reported no material change in risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether the lower gross margin and average selling price stabilize, and how currency movements, commercial-product mix and warranty costs affect margins.
- How much future growth and profitability comes from the acquired UPS, Kokam and SMRE businesses, and the eventual purchase-price allocation and integration costs.
- Whether operating cash flow remains strong after working-capital changes, acquisition spending and the disclosed purchase and capital commitments.
- The size and development of warranty claims, supplier concentration and exposure to non-cancellable obligations.
- Developments in the trustee lawsuit and Huawei patent litigation, including any settlement, injunction or financial impact.
- Changes in major-customer concentration, foreign-exchange sensitivity and acquired variable-rate debt.