SolarEdge Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company designs and sells solar power optimizers, inverters, monitoring and related energy-management solutions. Financial statements are unaudited; dollar amounts below are in U.S. dollars.
Financial results and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $209.9 million | $115.1 million | +82.4% |
| Gross profit / margin | $79.6 million / 37.9% | $38.7 million / 33.6% | Margin +4.3 percentage points |
| Operating income | $40.8 million | $12.0 million | +240.1% |
| Net income | $35.7 million | $14.2 million | +151.8% |
| Diluted EPS | $0.75 | $0.32 | — |
| Operating cash flow | $64.0 million | $25.7 million | — |
Net margin was approximately 17.0%, compared with 12.3% a year earlier. Investing activities used $2.3 million, including $11.3 million in property and equipment purchases, net of marketable-security maturities and purchases. Financing activities provided $4.6 million, primarily from option exercises. Cash, cash equivalents and restricted cash increased $66.3 million during the quarter.
At March 31, cash and cash equivalents were $229.2 million, marketable securities totaled $169.8 million, and restricted cash was $1.8 million. Current assets were $571.2 million and current liabilities $158.6 million. The company reported no outstanding indebtedness and no off-balance-sheet arrangements. Management said available cash and operating cash flows should cover anticipated needs for at least 12 months.
Changes and operating developments
- Revenue growth reflected higher system volumes, with significant growth in the U.S., Netherlands, Germany and Australia. Inverters shipped rose to 99,646 from 57,761; power optimizers shipped rose to 2.48 million from 1.47 million; and megawatts shipped increased to 800 from 455.
- Management attributed improved gross margin to currency effects, lower per-unit production costs, supply-chain efficiency, lower warranty-replacement costs and scale benefits. U.S.-dollar average selling price increased 6.0% year over year; management cited currency movements and a mix shift toward lower-ASP commercial products.
- Operating expenses rose 45.4% to $38.8 million, led by higher research and development and sales and marketing costs, including personnel and equity compensation. Stock-based compensation was $6.8 million versus $3.6 million.
- Warranty obligations rose to $88.2 million from $78.8 million at year-end; additions and adjustments to cost of revenue were $13.2 million during the quarter.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided in the supplied filing text. Management’s stated liquidity outlook is that resources should meet anticipated cash needs for at least the next 12 months.
- Component shortages remained a material risk. The company expected continued shortages for the next six to eight quarters, despite placing larger orders and pursuing second sources and alternative designs. Suppliers’ price increases could also pressure cost-reduction efforts. Shortages contributed to higher air-shipment costs.
- The company relies on three contract manufacturers and limited or single-source component suppliers. These vendors represented 60.8% of trade payables at quarter-end. Non-cancelable purchase obligations were approximately $230.3 million, and capital-expenditure commitments were approximately $34.2 million.
- Customer concentration is significant: one customer represented 20.4% of quarterly revenue; two customers represented 32.3% of trade receivables at quarter-end. Management said it did not foresee credit risk from those receivables.
- Foreign exchange is a key exposure. A hypothetical 10% move between the euro and U.S. dollar was estimated to change quarterly net income by $5.4 million; a comparable move between the New Israeli Shekel and U.S. dollar by $2.3 million. Derivative-related losses of $1.4 million were recorded in financial income, net.
- Income taxes were $5.7 million, versus a tax benefit of $0.8 million a year earlier. The quarter included a $1.6 million GILTI provision and a $0.8 million adjustment related to the U.S. transition tax; the company said its tax-reform assessment remained provisional. Israel’s two-year tax exemption was scheduled to end June 30, 2018.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. Adoption reduced retained earnings by $3.9 million at transition and reduced Q1 net income by $0.5 million versus the pre-adoption basis, principally reflecting financing components for certain extended service obligations.
- Subsequent event: on May 9, 2018, the company agreed to acquire substantially all assets and activities of Gamatronic Electronic Industries Ltd. for approximately 41 million NIS, including inventory; closing was expected by the end of Q2 2018.
- The filing reports ordinary-course legal claims but no quantified material legal contingency. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether component supply constraints persist for the projected six to eight quarters and how they affect shipments, costs and margins.
- Whether revenue growth and gross-margin improvement continue after considering currency movements, product mix and customer concentration.
- How warranty costs and the $88.2 million warranty obligation develop as the installed base expands.
- Final tax-reform and GILTI assessments, and the effect of the Israel tax exemption ending.
- Completion, funding and financial impact of the Gamatronic acquisition and the company’s substantial purchase and capital-expenditure commitments.
- Cash conversion and working-capital needs, particularly receivables and inventory, which increased during the quarter.