SolarEdge Technologies (SEDG), which made its IPO debut in March 2015, is rallying today (+22%) to a new post-IPO high after reporting impressive Q4 results/guidance last night. SolarEdge is a supplier of solar PV inverters and power optimizers.
SEDG believes it has invented an intelligent system that has changed the way power is harvested in a solar PV system. Without getting too technical, SEDG's power optimizers provide module-level tracking with the ability to make real-time adjustments of current and voltage to get the most power from each PV module, independent of other modules in the same string.
Its system also shifts certain functions of the traditional inverter to its power optimizers which results in a less expensive inverter. Also, its system is very flexible in terms of design as installers can place PV modules in uneven string lengths and on multiple roof facets. SEDG has also incorporated module-level safety mechanisms and its power optimizers dissipate much less heat than microinverters because no DC-AC inversion occurs at the module level which improves lifetime expectancy.
SEDG primarily sells directly to large solar installers, including SolarCity (acquired by Tesla), SunRun (RUN) and Vivint Solar (acquired by SunEdison). In addition to its market share growth in the US, SEDG has been boosting sales outside the US. In fact, international sales are close to half of sales. This is being driven by 1) its well-rooted presence in Europe, where the market has been bouncing back nicely and 2) growth in new regions, outside of Europe, such as Australia, India and Japan are beginning to bear fruit. Also, a nice tailwind should be growth in the commercial segment. Commercial makes up a third of sales, but it should be even with residential 50/50 by the end of 2018.
Turning to the Q4 results, non-GAAP EPS jumped 166% YoY and 29% sequentially to $0.85, which was much better than market expectations. Revenue rose 69.8% year/year to $189.3 mln, above prior guidance of $175-185 mln. The guidance was even more impressive as Q1 revenue is expected to grow sequentially to $200-210 mln, which is well above market expectations which had expected a sequential decline in Q1.
SEDG grew revenue in each of the geographies in which it operates and the company overcame a challenging year in terms of industry-wide component availability and in terms of growing its manufacturing capacity to support the growing demand for its products. SEDG shipped 766 megawatts of AC nameplate inverters in Q4, approximately 461 megawatts of which was shipped to North America.
On the call, SEDG said its business is growing at a healthy rate and management is staying focused on the bottom line. On this front, SEDG expanded gross margin by keeping ASPs stable and continuing its cost reduction initiatives. As a result, non-GAAP gross margin improved to 37.9% from 35.7% last year and 35.2% in Q3. Non-GAAP operating margin improved to 21.1% from 16.7% in the prior year period.
On the competitive front, SEDG says it's starting to see products from a Chinese manufacturer that has recently introduced an optimizer. However, it has a reduced set of features and relatively high pricing in Australia. There have been market rumors about this for some time now and SEDG says it has heard the product will be introduced in Europe as well.
From what SEDG has seen, these products have only basic functionality and lack communications features and a safety mechanism. As such, SEDG expects their market penetration will be challenging especially in the US and leading Western European countries that are mindful of putting quality products on rooftops and are cautious of security concerns that relate to PV systems and their effect on the electrical grid if not properly secured against cyber-attacks.
In sum, investors are quite pleased with the Q4 results and Q1 guidance. The numbers look quite strong and it was really important for management to address investors' concerns about that competitive threat. That has been a bit of an overhang on the stock but management seems to think that this competing device is of lesser quality. Overall, SEDG is seeing good demand for its products and unlike a lot of solar plays, its technology appears to be superior and less commodity-like than most.