SolarEdge Technologies, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; amounts below are U.S. dollars. SolarEdge designs and sells solar PV power optimizers, inverters, monitoring services, and storage solutions.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $115.1 million | $125.2 million | Down 8.1% |
| Gross profit / margin | $38.7 million / 33.6% | $40.7 million / 32.5% | Profit down 5.1%; margin up 1.1 points |
| Operating expenses | $26.7 million | $21.0 million | Up 27.0% |
| Operating income / margin | $12.0 million / 10.4% | $19.7 million / 15.8% | Down 39.2% |
| Net income / diluted EPS | $14.2 million / $0.32 | $20.8 million / $0.47 | Net income down 31.9% |
| Operating cash flow | $25.7 million | $15.3 million | Higher by $10.3 million |
Cash and cash equivalents were $119.9 million at quarter-end, with $126.7 million in marketable securities and $1.0 million of restricted cash. Current assets were $369.5 million and current liabilities $78.6 million. The filing reports no outstanding debt; its $40 million revolving credit facility terminated December 31, 2016. Management said cash and operating cash generation should cover anticipated needs for at least 12 months.
Investing activities used $10.4 million, principally reflecting net purchases of marketable securities and $1.9 million of capital investment. Financing activities provided $0.4 million from stock-option exercises. Cash and cash equivalents increased $15.6 million.
Material changes and management commentary
- Revenue fell mainly because of lower U.S. revenue, average selling price erosion, and a slowdown in U.S. residential installations. Blended average selling price per watt declined 14.2%, while inverter units shipped rose 5.9% and power optimizer units sold remained broadly stable.
- Gross margin improved because of lower unit production costs, supply-chain efficiency, and lower warranty expenses. Gross profit nevertheless declined with lower revenue.
- R&D increased 31.6%, sales and marketing 22.1%, and general and administrative expense 28.3%, weighing on operating income. G&A costs included a $1.0 million increase in doubtful debts, largely related to a customer bankruptcy.
- Net financial income declined 30.5%, primarily due to less favorable foreign-exchange movements. A $0.8 million income-tax benefit in Q1 2017, compared with $1.0 million of tax expense a year earlier, partly supported net income.
- Shipments were 57,761 inverters, 1,469,677 power optimizers, and 455 MW of inverter nameplate capacity. The company reported products sold in about 53 countries and installed in PV systems in 100 countries.
Outlook, risks, and contingencies
- The filing gives no numerical revenue or earnings guidance. Management’s stated liquidity outlook is that available cash and operating cash flows are expected to meet needs for at least 12 months.
- SolarEdge depends on two contract manufacturers and limited or single-source component suppliers, and was transitioning production to a new manufacturer. During ramp-up, it expected to rely mainly on one manufacturer. These vendors represented 66.4% of trade payables at quarter-end.
- Non-cancelable purchase obligations totaled approximately $77.5 million, including a recorded loss provision of $1.2 million. Warranty obligations totaled $61.1 million, up from $58.4 million at the start of the quarter.
- Risk factors include solar-market demand and policy or subsidy changes, competition and pricing pressure, manufacturing and component availability, customer credit and concentration, foreign exchange, product quality, and geopolitical conditions in Israel. One customer represented 12.74% of Q1 revenue and 16.57% of quarter-end trade receivables.
- The company reported ordinary-course legal claims but no specific material proceeding or quantified probable legal loss. Contingent obligations also include guarantees and potential royalties on qualifying products developed with government grants.
Important facts for investors to verify
- Whether pricing pressure and weaker U.S. residential demand persist, and whether unit growth can offset lower selling prices.
- Whether the new contract manufacturer ramps successfully without disruption, quality issues, or higher costs.
- Collection and exposure related to the bankrupt customer, major-customer concentration, and the $77.5 million of purchase commitments.
- Whether improved gross margin and operating cash flow are sustainable despite higher operating expenses and lower reported earnings.