Business context and reporting period
SolarEdge Technologies, Inc. designs and sells solar photovoltaic power optimizers, inverters, monitoring services and storage solutions. This Form 10-Q covers the three months ended September 30, 2016, compared with the three months ended September 30, 2015. The company announced a change to a December 31 fiscal year-end beginning in 2017; July 1–December 31, 2016 is a transition period. The filing is unaudited.
Financial performance and position
Unless noted otherwise, amounts are U.S. dollars; financial statement amounts below are in millions.
- Revenue was $128.5 million, up 11.7% year over year. Gross profit rose 24.9% to $41.9 million; gross margin improved to 32.6% from 29.1%.
- Operating expenses increased 26.7% to $23.6 million, including R&D of $9.9 million (+42.1%) and sales and marketing of $10.0 million (+21.7%). Operating income was $18.2 million, up from $14.9 million; operating margin was approximately 14.2% versus 12.9%.
- Net income was $15.6 million, up 8.2% from $14.4 million. Diluted EPS was $0.35 versus $0.32; basic EPS was $0.38 versus $0.37. The effective tax burden rose: income tax expense was $3.0 million versus $0.4 million, including $2.2 million of deferred tax expense.
- Operating cash flow was $24.4 million, compared with $5.9 million in the prior-year quarter. Investing used $8.5 million and financing provided $0.3 million. Cash and cash equivalents increased by $16.2 million to $90.0 million.
- At September 30, cash and cash equivalents were $90.0 million, marketable securities totaled $115.7 million, and restricted cash was $0.9 million. Current assets were $323.4 million and current liabilities $78.5 million. Total assets were $412.9 million; stockholders’ equity was $274.9 million.
- No revolving-credit borrowings were outstanding. The facility allowed up to $40 million, subject to eligible-receivables limits, and was scheduled to terminate December 31, 2016 without extension. The company reported compliance with its covenants.
Material changes versus the prior comparable period
- Growth in systems sold, particularly in the U.S. and Europe, drove revenue higher; shipments included 63,360 inverters, 1,645,708 power optimizers and 466 MW of inverter capacity, compared with 54,195, 1,460,277 and 356 MW, respectively.
- Management attributed gross-margin expansion to lower per-unit production costs, supply-chain efficiencies and economies of scale. At the same time, blended average selling price per watt fell 15.9%, reflecting product and customer mix, market price erosion and euro depreciation against the U.S. dollar.
- Higher operating costs reflected increased hiring and investment in product development and commercial growth. Stock-based compensation expense increased to $3.1 million from $1.8 million.
- Operating cash flow improved, aided by a $13.1 million inventory reduction and other working-capital movements, though higher receivables and lower payables partly offset the benefit.
Outlook, commentary, risks and unusual items
- Management stated that cash, marketable securities and expected operating cash flows should meet anticipated cash needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Key exposures include dependence on two contract manufacturers and limited- or single-source suppliers; two vendors represented 62.8% of trade payables. Non-cancelable purchase obligations were approximately $68.1 million, with a $1.9 million provision for loss already recorded.
- Two customers represented 31.1% of net receivables at quarter-end; one customer accounted for 12.4% of quarterly revenue. Foreign-exchange exposure is significant: approximately 28% of quarterly revenue was in non-U.S.-dollar currencies. Management estimated a hypothetical 10% euro/U.S. dollar move would affect quarterly net income by $2.7 million, and a 10% NIS/U.S. dollar move by $1.4 million.
- Warranty obligations totaled $56.4 million, up from $51.2 million at the start of the quarter. The company also disclosed contingent obligations to BIRD-F of approximately $1.1 million and to Israel’s Office of the Chief Scientist of $1.0 million, generally payable only if related project revenues arise.
- Subsequent events: in October 2016, the company purchased certain patents for $0.6 million and established a wholly owned China subsidiary to support contract-manufacturer activities. Management reported no material changes to the risk factors in its prior Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether revenue growth and improved gross margin persist despite falling selling prices and ongoing market price pressure.
- The renewal or replacement of the credit facility scheduled to terminate December 31, 2016, and the company’s liquidity needs during the transition reporting period.
- Supplier concentration, purchase commitments, and the adequacy of warranty reserves as the installed base expands.
- Customer concentration and foreign-currency sensitivity, including the effect of euro and NIS movements on revenue, costs and earnings.
- The deferred-tax expense and the sustainability of reported net income after the higher tax charge.