SolarEdge Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 7, 2020. SolarEdge designs and sells solar power optimizers, inverters and related monitoring, storage and other smart-energy products. All financial amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $431.2 million | $271.9 million; up 58.6% |
| Gross profit / margin | $140.0 million / 32.5% | $86.1 million / 31.7% |
| Operating income | $67.8 million | $28.0 million |
| Net income attributable to SolarEdge | $42.2 million; diluted EPS $0.81 | $19.0 million; diluted EPS $0.39 |
| Net cash from operating activities | $107.7 million | $56.5 million |
| Capital expenditures | $27.1 million | $10.6 million |
| Cash and cash equivalents | $324.1 million | $223.9 million at December 31, 2019 |
| Marketable securities | $199.0 million | $211.0 million at December 31, 2019 |
| Bank loans outstanding | $14.9 million | All outstanding Kokam loans were refinanced during the quarter |
| Stockholders’ equity | $866.4 million | $811.7 million at December 31, 2019 |
Cash from operations benefited from collections and reductions in receivables and prepaid/other assets, partly offset by a $29.0 million inventory build and a $31.7 million decline in deferred revenue and customer advances. Cash, cash equivalents and restricted bank deposits totaled $351.6 million on the balance sheet; short-term bank deposits were an additional $8.1 million. The company said available resources were sufficient for anticipated cash needs for at least 12 months, including planned capital spending.
Solar segment revenue was $407.6 million, versus $253.1 million; “All other” revenue was $23.6 million, versus $18.8 million. Solar segment profit was $88.0 million; All other reported a $9.3 million segment loss. Shipments included 202,009 inverters and 5.06 million power optimizers, versus 130,672 and 3.03 million, respectively; megawatts shipped rose to 1,850 from 1,144.
Material changes and notable items
- Revenue growth reflected higher inverter and optimizer volumes, especially in Europe and the U.S., and U.S. price increases intended to offset tariffs on China-made products. ASP per watt increased 3.2% year over year.
- Gross margin improved 0.8 percentage points. Scale, manufacturing cost reductions and lower warranty accrual costs were partly offset by tariffs, freight and logistics costs, and warranty support expenses.
- Net financial expense increased to $16.6 million from $6.2 million, primarily due to foreign-exchange movements; the company also recorded a $1.0 million impairment loss on an SMRE affiliate.
- Other operating income of $4.9 million reflected indemnification by a Kokam selling shareholder for a previously settled claim.
- Warranty obligations rose to $186.3 million from $172.6 million at year-end. Trade receivables included a $4.5 million expected-credit-loss allowance, up from $2.5 million; adoption of the expected-credit-loss standard had no material overall financial-statement impact.
Outlook, risks and contingencies
Management reported no material adverse financial impact from COVID-19 in Q1, but said installations declined in certain regions, including the U.S. and Italy, and customers had requested order delays or cancellations. The company expected Q2 revenue to be below Q1, reversing its usual seasonal pattern; it also expected lower gross margin and net income, citing lower volumes, higher freight and component costs, and reduced economies of scale. It anticipated lower Q2 operating expenses from cost controls, reduced travel and other actions. No quantified full-year guidance was provided.
Manufacturing facilities were operating at almost full capacity during Q1 and into Q2. Management reduced hiring, reviewed spending and prioritized R&D projects. Effective April 1, senior executives and directors reduced relevant compensation by 20%; salary increases were suspended and most workforce expansion plans were paused.
- COVID-19 could further reduce demand, delay installations and orders, impair customer collections, disrupt suppliers and increase costs. Management warned that inventory could rise over the next two or three quarters as pre-pandemic purchase and manufacturing commitments continue.
- Non-cancellable purchase obligations were approximately $500.4 million, including a $2.1 million loss provision; capital-expenditure commitments were approximately $71.0 million. The company also agreed to buy South Korean land for about $9 million, payable over three years, for a planned lithium-ion cell and battery factory.
- Two contract manufacturers accounted for 43.4% of trade payables. One customer represented 24.4% of net trade receivables. A major customer or supplier disruption could affect collections, production or costs.
- Foreign-exchange exposure is significant: management estimated that a hypothetical 10% move in the euro, NIS or Korean won against the U.S. dollar would change quarterly net income by approximately $22.4 million, $4.8 million or $11.7 million, respectively. The company had begun hedging certain NIS payroll costs.
- Disclosed litigation includes patent claims by SMA in Germany, patent litigation involving Huawei in China, a former SMRE shareholder claim of about €2.7 million, and a former consultant claim of approximately NIS 25.5 million. The company said it intended to defend the claims; outcomes are uncertain.
Important facts for investors to verify
- Whether COVID-related order push-outs, cancellations and installation declines materially affect Q2 and subsequent revenue, margins and cash generation.
- How inventory, deferred revenue, receivables and customer credit losses evolve as demand and collections change.
- Whether freight, tariff, component and manufacturing-volume pressures cause further gross-margin deterioration.
- Progress and funding needs for the planned Korean battery factory and other capital commitments, alongside the $500.4 million purchase obligations.
- Developments in the disclosed litigation, warranty obligations, customer concentration and foreign-exchange exposure.