SolarEdge Technologies, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2018. SolarEdge designs and sells solar power optimizers, inverters, monitoring services and related energy solutions worldwide. Financial amounts below are in U.S. dollars; income and cash-flow figures are for the stated periods.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $227.1 million | $136.1 million | $437.0 million | $251.2 million |
| Gross profit / margin | $81.9 million / 36.1% | $47.1 million / 34.6% | $161.5 million / 37.0% | $85.7 million / 34.1% |
| Operating income | $40.7 million | $19.1 million | $81.5 million | $31.1 million |
| Net income | $34.6 million | $22.5 million | $70.3 million | $36.7 million |
| Diluted EPS | $0.72 | $0.50 | $1.46 | $0.83 |
| Operating cash flow | $43.9 million | $31.6 million | $107.9 million | $57.2 million |
- Q2 revenue grew 66.9% year over year and net income grew 53.5%; first-half revenue rose 74.0% and net income rose 91.4%.
- Q2 shipments increased year over year: 113,767 inverters, 2.74 million power optimizers and 985 MW of inverter capacity. First-half shipments were 213,413 inverters, 5.21 million optimizers and 1,785 MW.
- Cash, cash equivalents and restricted cash were $216.6 million at June 30, 2018; available-for-sale marketable securities totaled $221.0 million. Current assets were $616.0 million and current liabilities $154.0 million. The company reported no outstanding debt.
- First-half investing cash outflow was $63.9 million, including $21.4 million of property and equipment purchases and net investment in marketable securities. Management said available cash and operating cash flow should meet anticipated needs for at least 12 months.
Material changes and management commentary
- Revenue growth was primarily driven by higher system volumes, with significant growth in the U.S., Netherlands, Germany and Australia. Non-U.S. sales were 47.8% of Q2 revenue versus 45.9% a year earlier.
- Blended ASP per watt declined 10.5% in Q2 and 3.2% for the first half. Management attributed the erosion to a greater commercial-product mix, commercial pricing actions, higher-capacity products, euro weakness and selective residential price reductions.
- Gross margin improved as lower per-unit production costs, supply-chain efficiency and scale benefits outweighed price erosion. Cost of revenue also rose with volume, warranty accruals, logistics and personnel costs; component shortages contributed to increased air shipments.
- Net financial expense was $2.5 million in Q2, versus $3.6 million of financial income a year earlier, primarily reflecting foreign-exchange movements. First-half net financial expense was $1.9 million versus $5.0 million of income in 2017.
- First-half income tax expense was $9.3 million, compared with a $0.6 million tax benefit in the prior-year period. Drivers included Israeli current taxes, a $3.9 million GILTI provision and a $0.8 million adjustment to the U.S. transition-tax estimate. The tax-reform estimate remained provisional.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or margin guidance. Management’s liquidity assessment covers at least the next 12 months.
- Warranty obligations reached $97.3 million at June 30, 2018, up from $65.3 million a year earlier; first-half additions and adjustments were $27.5 million. Management linked higher warranty costs to rapid growth in the installed base.
- Non-cancelable purchase obligations were approximately $321.1 million, and capital-expenditure commitments approximately $35.8 million. The company relies on three contract manufacturers and limited or single-source component suppliers; those vendors represented 58.3% of trade payables.
- Key stated risks include U.S. import tariffs, solar-policy and incentive changes, competition, demand and forecasting uncertainty, product performance, supply constraints, foreign-exchange exposure and customer concentration. A 10% currency move was estimated to change six-month net income by $11.9 million for the euro and $4.6 million for the Israeli shekel.
- One customer represented 16.25% of Q2 revenue and approximately 18.3% of receivables at quarter-end. The company reported no anticipated credit risk from that receivable concentration.
- In July 2018, SolarEdge completed its purchase of substantially all Gamatronic UPS-business assets for approximately $11.2 million in cash, with earn-outs tied to business net income for the following two years. Purchase accounting was still being assessed.
- SolarEdge filed a German patent-infringement action against Huawei and a distributor, later extending it to two additional patents. Separately, a former-customer bankruptcy trustee sought approximately $2.5 million in alleged preferential or fraudulent transfers; the company said it had defenses and did not expect a material adverse effect.
- SolarEdge adopted ASC 606 on January 1, 2018 using the modified retrospective method. The filing reports a $3.9 million reduction to opening retained earnings and a $3.9 million increase in long-term deferred revenue at adoption; it also reports a $1.0 million reduction in first-half net income from the standard’s effects.
Important facts for investors to verify
- Whether shipment growth and improved gross margin can continue as ASPs decline and tariffs, component availability and logistics costs evolve.
- The size, timing and cash impact of warranty claims, purchase commitments and capital-expenditure commitments.
- Customer and supplier concentration, including the ability to mitigate single-source component and manufacturing risks.
- Future currency and tax impacts, particularly euro and shekel movements, GILTI and the final U.S. tax-reform calculations.
- Gamatronic integration, purchase-price allocation and potential earn-out payments, along with developments in the patent and bankruptcy-related litigation.