SolarEdge Technologies, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results are compared with the corresponding 2017 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and results
SolarEdge designs and sells solar power optimizers, inverters, monitoring and energy-management solutions. It also acquired Gamatronic’s UPS business during the quarter. For Q3, the company reported revenue of $236.6 million; for the first nine months, revenue was $673.6 million.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $236.6m | $166.6m | $673.6m | $417.7m |
| Gross profit | $78.0m | $58.1m | $239.5m | $143.8m |
| Gross margin | 33.0% | 34.9% | 35.6% | 34.4% |
| Operating income | $34.0m | $25.4m | $115.5m | $56.5m |
| Net income | $45.6m | $28.0m | $115.9m | $64.7m |
| Diluted EPS | $0.95 | $0.61 | $2.41 | $1.44 |
Financial position and cash flow
- For the first nine months, operating cash flow was $142.2m, investing cash flow was negative $120.6m, and financing cash flow was $7.9m. Cash, cash equivalents and restricted cash increased $29.5m to $195.0m.
- At September 30, cash and cash equivalents were $192.9m, restricted cash $2.1m, marketable securities $250.5m, and short-term bank deposits $7.8m. Total assets were $852.2m; stockholders’ equity was $539.0m.
- The company reported no outstanding indebtedness and no off-balance-sheet arrangements. Management said available cash and operating cash generation should meet anticipated needs for at least the next 12 months.
- Working-capital movements included a $42.4m increase in trade receivables and an $18.1m increase in inventories during the first nine months.
Material changes versus prior periods
- Q3 revenue rose 42.0% year over year; nine-month revenue rose 61.3%. Management attributed growth primarily to more systems sold, with strength in the U.S. and several international markets. Q3 optimizer shipments increased 47.7% and inverter shipments increased 40.8%.
- Blended ASP per watt declined 15.5% in Q3 and 7.9% for the nine-month period, reflecting product mix, pricing actions, higher-capacity commercial products, and, in Q3, currency translation effects.
- Q3 gross margin declined to 33.0%, mainly due to higher warranty and support costs and lower gross profit on UPS products; nine-month gross margin improved to 35.6%, as lower unit production costs, supply-chain efficiency and scale benefits more than offset price erosion and higher costs.
- Net income growth was aided by income-tax benefits: a $12.3m tax benefit in Q3 versus $0.1m of tax expense in Q3 2017. The company reduced estimates for U.S. transition-tax and GILTI liabilities; these changes make reported earnings less directly comparable.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s stated liquidity outlook is that resources should cover anticipated needs for at least 12 months.
- Gamatronic was acquired July 1 for $12.1m of total consideration, including an $0.9m estimated earn-out; UPS sales in Q3 were negligible. On October 17, after quarter-end, SolarEdge completed the acquisition of approximately 75% of Kokam for an estimated total investment of $88m, including transaction expenses.
- Material operating exposures include dependence on three contract manufacturers and limited or single-source suppliers; those vendors represented 60.6% of trade payables. The company cited component shortages and increased air freight costs. Non-cancelable purchase obligations were approximately $278.0m, with capital-expenditure commitments of approximately $36.2m.
- Foreign-exchange exposure is significant: management estimated that a hypothetical 10% change in the euro/U.S. dollar rate would change nine-month net income by $18.5m, and a 10% change in the shekel/U.S. dollar rate by $6.9m.
- Two customers represented 34.1% of trade receivables. The company also disclosed U.S. import tariffs, including a 10% tariff on specified Chinese products effective September 24, 2018, with an increase to 25% expected January 1, 2019; tariffs could affect demand, margins, timing of purchases and supply.
- Warranty obligations totaled $107.7m at September 30, up from $78.8m at year-end. Legal matters included a former-customer bankruptcy-related claim of approximately $2.5m and an SMA patent-infringement complaint citing a €5m amount in dispute. The company said it believes it has defenses and does not expect these matters to have a material financial effect. SolarEdge also initiated patent litigation against Huawei and a distributor.
- The adoption of ASC 606 reduced retained earnings by $3.9m on January 1, 2018. The filing notes ongoing evaluation of U.S. tax-reform estimates and expects to recognize approximately $39m of lease assets and liabilities upon adopting the lease standard in 2019.
Important facts for investors to verify
- Whether revenue growth and shipment gains can continue despite falling ASP per watt and the disclosed tariff environment.
- Whether warranty additions and obligations continue to rise, and how warranty costs affect gross margin.
- How much of Q3 and year-to-date earnings reflects tax-estimate revisions rather than operating performance, and whether U.S. tax-reform estimates are finalized.
- Execution, integration costs and financial contribution from the Gamatronic and Kokam acquisitions, including the Kokam purchase accounting and earn-out obligations.
- Supplier capacity and component availability, committed purchases and capital spending, customer concentration, and foreign-exchange sensitivity.