SolarEdge Technologies, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited; dollar amounts below are in U.S. dollars. The company designs and sells solar power optimizers, inverters, monitoring and related energy solutions worldwide.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $166.6m | $128.5m | $417.7m | $378.4m |
| Gross profit / margin | $58.1m / 34.9% | $41.9m / 32.6% | $143.8m / 34.4% | $121.7m / 32.2% |
| Operating income | $25.4m | $18.2m | $56.5m | $55.9m |
| Net income | $28.0m | $15.6m | $64.7m | $53.7m |
| Diluted EPS | $0.61 | $0.35 | $1.44 | $1.21 |
| Operating cash flow | $33.6m | $24.4m | $90.9m | $57.7m |
- Q3 revenue rose 29.6% year over year; nine-month revenue rose 10.4%. Nine-month operating income was nearly flat despite higher revenue and gross profit, as operating expenses increased.
- Gross margin improved in both comparison periods. Management cited lower per-unit production costs, supply-chain efficiencies and scale benefits, partly offset by price erosion and, in Q3, higher warranty, logistics and personnel costs.
- Q3 net income increased 79.1%; nine-month net income increased 20.5%. Net income benefited from higher financial income and lower income-tax expense, including deferred tax benefits. These items mean earnings growth was stronger than operating-income growth.
- Cash and cash equivalents were $149.4m at September 30, 2017, versus $104.7m at December 31, 2016. Marketable securities totaled $153.8m and restricted cash was $1.4m. Management said cash and operating cash generation should cover anticipated needs for at least 12 months.
- Nine-month investing cash outflow was $49.7m, mainly reflecting purchases of marketable securities and $13.2m of capital spending. Financing cash inflow was $3.8m, primarily from option exercises.
- The balance sheet reports no borrowings or debt line item. Current assets were $424.6m and current liabilities $92.4m. Working capital was approximately $332.2m; the filing does not provide a stated debt-to-liquidity measure.
Business changes and operating metrics
- International markets drove growth: non-U.S. revenue was 51% of Q3 revenue versus 33% a year earlier, and 45.3% for the nine months versus 34.2%. Q3 growth was notable in Germany, the Netherlands and other non-U.S. markets.
- For Q3, shipments were 89,737 inverters, 2.04m power optimizers and 676 MW of inverter nameplate capacity. Year-over-year increases were 41.7%, 24.0% and 45.1%, respectively.
- Management reported blended average selling price per watt decreased 7.3% in Q3 and 10.5% for the nine-month period, citing commercial-product mix, market price erosion and greater sales to large customers with volume discounts.
- As of quarter-end, the company had shipped approximately 20.6m optimizers and 856,000 inverters; approximately 492,000 installations were connected to its monitoring platform. Products were sold in about 47 countries and installed in more than 120.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management’s stated liquidity view is that available cash and operating cash flows are sufficient for at least the next 12 months.
- Manufacturing concentration is a key risk: SolarEdge depended on two contract manufacturers and several limited- or single-source suppliers, and expected to rely mainly on one manufacturer while transitioning and ramping the new manufacturer. Supplier capacity, component availability, delivery, yield and cost could be affected.
- Non-cancelable purchase obligations were approximately $158.0m, with a $1.1m provision for loss already recorded. Warranty obligations totaled $71.6m, up from $58.4m at the start of the period.
- Two customers represented 31.2% of trade receivables at September 30, 2017. Two customers accounted for 21.6% of Q3 revenue; one customer accounted for 12.5% of nine-month revenue.
- Foreign exchange is material: 40.3% of nine-month revenue was denominated in currencies other than the U.S. dollar. Management estimated a hypothetical 10% Euro/U.S. dollar movement would change nine-month net income by $14.0m, and a 10% New Israeli Shekel/U.S. dollar movement by $5.1m. Q3 and year-to-date financial income benefited substantially from exchange-rate movements.
- The filing disclosed uncertainty around potential U.S. solar import tariffs following the ITC’s October 31, 2017 recommendations and a separate Section 201 petition; potential remedies could raise system prices, reduce solar demand or disrupt purchasing and supply. Other cited risks include solar incentives and net-metering policy, competition, product performance, industry cyclicality and geopolitical conditions in Israel.
- Legal claims may arise in the ordinary course; the company also said it initiated legal proceedings, contributing to higher Q3 legal expenses. The filing does not provide a clear estimate of potential exposure. The company reported no material changes to previously disclosed risk factors other than the manufacturer-concentration and U.S. trade-environment supplements.
- Revenue recognition guidance was scheduled for adoption on January 1, 2018, using the modified retrospective method; the company was still finalizing its impact analysis. Management expected no material impact from adoption of the new stock-compensation modification guidance.
Important facts for investors to verify
- Whether gross-margin improvement can persist amid falling average selling prices, higher logistics costs and warranty exposure.
- Progress and execution risks in the contract-manufacturer transition, including the concentration of suppliers and the $158.0m purchase commitments.
- Whether customer and receivable concentration changes, and whether collections support the reported operating cash generation.
- How much earnings performance depends on foreign-exchange movements and deferred tax benefits rather than core operations.
- The eventual scope and effect of U.S. trade measures, and the outcome or exposure of legal proceedings.
- The effect of adopting the new revenue-recognition standard and the future expense and dilution associated with equity awards.