SolarEdge ahead on revenue and margins, misses on EPS

Ronen Faier  credit: Eyal Izhar
Ronen Faier credit: Eyal Izhar

CFO Ronen Faier: We're working closely with our sub-contractors to deal with the components shortage.

It was a mixed first quarter for smart energy technology company SolarEdge Technologies (Nasdaq: SEDG). The company overtook the consensus analysts' estimate, and its own guidance, on revenue, reported exceptional gross profitability, again higher than its guidance, but missed the analysts' consensus on earnings per share by one cent. The company's share price fell by 1.32% in late trading yesterday, leaving its market cap at $13.52 billion. The company's guidance for the second quarter is higher than the consensus estimate for revenue, but gross profit is expected to revert to a more usual level.

SolarEdge, headed by Zvi Lando, provides systems for monitoring and optimization of solar energy plants. The company is also active in energy storage. Its first quarter revenue was $405 million, 6% less than in the corresponding quarter of 2020 but 13.2% higher than in the previous quarter. Revenue from solar energy products totaled $376 million, 7.7% less than in the corresponding quarter and 15.1% more than in the previous quarter.

On a GAAP basis, net profit for the first quarter was $30.1 million, which compares with $42.2 million in the corresponding quarter. On a non-GAAP basis, which chiefly excludes stock-based compensation, net profit was $55.5 million, 9.5% higher than in the corresponding quarter. Earnings per share were $0.98, $0.01 below the consensus estimate, as mentioned. The gross margin on a non-GAAP basis was 36.5%, whereas the company had forecast 34-36%, and the gross margin in solar energy products was 39.7%, which compares with a forecast of 36-38%.

"We beat the forecasts on both revenue and gross margin. We missed the analysts' earnings per share estimate by one cent because of an accounting issue to do with inter-company loans within the group," explains SolarEdge CFO Ronen Faier.

Faier says that there were several factors in the first quarter that played out in the company's favor and boosted its gross profitability. "In the home solar systems installation market profitability is higher than in the commercial market, and the quarter was tilted towards home systems. Profitability is higher in the US than in Europe, and the euro exchange rate also worked in our favor during the quarter. Another factor is that we sold more products in the US not made in China, on which customs duties are lower. All in all, our target gross margin for solar products is 36%, and we were at 39.7%, which pulled total gross profit upwards. In the second quarter, things will revert to a more predictable situation."

The guidance for the second quarter is for revenue of $445-465 million (which compares with $332 million in the corresponding quarter of 2020 and a consensus analysts' estimate of $447 million), with a gross margin of 32-34%. Solar products are expected to contribute $405-420 million revenue with a gross margin of 36-38%.

SolarEdge rival Enphase Energy (Nasdaq: ENPH) released financials last week, and its share price has tumbled 20% since then, after the company stressed the problem that is concerning many companies around the world: the shortage of components. While at Enphase the shortage has hit deliveries to customers, SolarEdge appears to be coping better with the situation.

"Because of the components shortage, we are paying more for them in order to receive them in time for production," Faier says. "Sometimes we have to fly them in. Sea cargo prices have almost doubled, and at any given moment we have about 1,000 containers at sea, and incidentally, when the ship got stuck in the Suez Canal, we had 100 containers in the area on their way to customers. Despite the rise in shipping costs and the shortage of components, the first quarter was excellent, and the profit forecast for the second quarter is higher than our long-term target."

Explaining how SolarEdge has managed to cope with the situation well, Faier says, "We have experienced several cycles of components shortages in the past. We are very involved in our sub-contractors' production. We try to balance things out if one has more and another is lacking. Our people work closely with the contractors on procurement. This gives us good insight, and we can gear up faster. We have 'scar tissue' from other quarters - high safety stocks. We hold stock for several months, and at the moment that is working in our favor, and it is also something that the market sees as positive."

What's your view of the global shortage?

"We don’t see it being resolved all that quickly, and we don't think that there are grounds for the optimism that it will be resolved within a quarter or two. We are ready, we're in touch with the sub-contractors' suppliers, and just as with the vaccinations there was talk of telephone calls at 3 am, we too can do that to suppliers, with a promise that we'll be there for them when the wheel turns, and that we can absorb some delay."

Is there a connection between the components shortage and the fact that cash flow from regular activity shrank by 77.6% in the quarter to $24 million.

"That too, because we increased stocks of raw materials, but it was also because of seasonality within the quarter - January and February are weak because of the winter, and in March there is a rise in sales, and part of the payment collection goes awry and moves to the next quarter."

Have you already seen change in the US since the new administration came in?

"Yes and no. The tax benefit for installing solar systems has been extended, but that would probably have happened anyway. What is interesting is Biden's plan to invest $2 trillion in infrastructure, which includes very ambitious targets for reducing greenhouse gases, as presented at the climate conference. When the plan passes, it will be good for us."

SolarEdge ended the first quarter with $1.16 billion in cash and investments, versus debt of $636 million (most of it long term) to holders of its convertible bonds. The company's market cap is $13.52 billion, following a 29% decline from the peak it reached earlier in the year, and a rise of 1,345% since it was floated in 2015.

Published by Globes, Israel business news - en.globes.co.il - on May 4, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Ronen Faier  credit: Eyal Izhar
Ronen Faier credit: Eyal Izhar
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