SolarEdge Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial statements are unaudited. SolarEdge designs and sells solar power optimizers, inverters, monitoring services and storage solutions worldwide.
Financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $136.1 million | $124.8 million | $251.2 million | $250.0 million |
| Gross profit | $47.1 million | $39.1 million | $85.7 million | $79.8 million |
| Gross margin | 34.6% | 31.4% | 34.1% | 31.9% |
| Operating income | $19.1 million | $17.9 million | $31.1 million | $37.6 million |
| Net income | $22.5 million | $17.3 million | $36.7 million | $38.1 million |
| Diluted EPS | $0.50 | $0.39 | $0.83 | $0.86 |
| Cash from operations | $31.6 million | $18.0 million | $57.3 million | $33.4 million |
Balance sheet and liquidity at June 30: Cash and cash equivalents were $113.5 million; marketable securities totaled $160.2 million and restricted cash was $1.1 million. Current assets were $364.9 million versus current liabilities of $78.7 million. The filing lists no debt. Management said cash and operating cash flows should meet anticipated needs for at least 12 months. Six-month investing cash outflow was $50.4 million, primarily reflecting purchases of marketable securities and capital investment.
Changes versus comparable periods
- Q2 revenue rose 9.1% year over year; first-half revenue increased just 0.5%. Sales growth reflected higher unit volumes and greater international contribution.
- Gross margin improved in both periods, which management attributed to lower unit production costs, supply-chain efficiency, scale and lower warranty costs. These gains exceeded product price erosion.
- First-half operating expenses increased 29.4% to $54.6 million, led by higher R&D and sales and marketing spending. First-half operating income fell 17.3% and net income declined 3.6% despite improved gross profit.
- Q2 financial income was $3.6 million, compared with $0.5 million of expense a year earlier; favorable currency movements were the primary driver. First-half financial income rose to $5.0 million from $1.5 million.
- First-half shipments increased: inverters to 132,781 from 110,314; power optimizers to 3.24 million from 2.90 million; and nameplate megawatts to 1,018 from 843. The blended average selling price per watt fell 12.1% for the first half.
Outlook, risks and notable items
- No quantitative revenue or earnings guidance is provided. Management described operating results as subject to interim-period variability and said actual results may differ from forward-looking statements.
- Manufacturing transition is a key risk: SolarEdge depends on two contract manufacturers and limited or single-source suppliers, and expects to rely mainly on one manufacturer during ramp-up with a new supplier. The manufacturers represented 44.7% of trade payables at quarter-end.
- Non-cancelable purchase obligations were approximately $116.6 million, with a $1.2 million loss provision. Warranty obligations totaled $65.3 million, up from $58.4 million at year-end 2016.
- Currency movements create earnings exposure. The filing estimates a hypothetical 10% Euro/U.S. dollar move would change first-half net income by $7.4 million, and a 10% NIS/U.S. dollar move by $3.2 million.
- One customer represented 19.1% of trade receivables at June 30; one customer contributed 13.3% of Q2 revenue. Management said it did not foresee credit risk associated with the receivable concentration.
- On July 10, 2017, the company signed a long-term lease for a 10,000-square-meter Israeli facility intended for prototypes, manufacturing and development of manufacturing and testing equipment.
- Other risks include solar-market cyclicality, policy and incentive changes, competition, product performance, customer credit, and operations in Israel. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Assess whether margin improvement can continue despite declining selling prices and higher operating expenses.
- Track the new contract manufacturer ramp-up, supplier capacity, product quality and delivery performance.
- Review the composition and liquidity of marketable securities and cash conversion, including working-capital movements.
- Monitor warranty accruals, purchase commitments and the concentrated customer receivable exposure.
- Separate recurring operating performance from foreign-exchange gains, hedging costs and tax benefits when evaluating earnings.