SolarEdge (SEDG 47.78, -8.53, -15.14%) is trading sharply lower today after
reporting Q2 results/guidance last night. In terms of quick background, SEDG is
a supplier of solar PV inverters and power optimizers. It's a bit different
than other solar stocks. Without getting too technical, SolarEdge has invented
an intelligent inverter system that it believes has revolutionized the way
power is harvested in a solar photovoltaic (PV) system.
The SolarEdge direct current (DC) optimized inverter system maximizes power generation at the individual PV module level. It does this by deploying power optimizers to each PV module. 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. In sum, SolarEdge seeks to overcome limitations of standard PV systems through its innovative DC optimization technology, making solar energy more attractive and accessible.
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 primarily sells directly to large solar installers.
In addition to seeing market share growth domestically, SEDG has been boosting sales outside the U.S.. International sales now comprise close to half of the company’s total sales. Also, growth in the commercial segment should provide nice tailwind. Commercial makes up a third of sales, but the segment is expected to pull even with residential 50/50 by the end of 2018.
Turning to the Q2 results, non-GAAP EPS rose 49% year/year to $0.82, but that was actually a bit below market expectations. Revenue rose 66.9% year/year and 8% sequentially to $227.1 mln, which was in-line with prior guidance of $220-230 mln. Non-GAAP gross margin increased to 36.5% from 35.0% last year but down from 38.4% in Q1. The sequential decline is partially a result of an ASP decrease of its commercial products, as SEDG cut prices to drive market share in the commercial segment. Looking ahead to Q3, SEDG expects revenue of $230-240 mln, which is in-line with market expectations, and for gross margins to remain flat around 36-38%.
Looking quickly to the competition front, SEDG recently filed a patent infringement lawsuit in Germany against China-based Huawei Technologies, which is selling a competing product. SolarEdge says Huawei is infringing on its power optimizer technology. The lawsuit was filed initially on one patent and then was extended to an additional two patents.
During the Q&A on the call, it's clear that competitive threat was on analysts' minds. Responding to inquiries on the topic, SEDG noted that in Australia and Germany, the quantities sold by Huawei are negligible today. It does not sound like it's much of an issue in the U.S., at least not yet. SEDG said it has stronger patent protection in the U.S.; they seemed to hint they would file patent lawsuit if Huawei enters the U.S. market. With that said, SEDG concedes that competition will come at some point. And like any competition, it will improve the industry.
A big reason the stock is trading lower today is that an EPS is quite rare for SEDG. This was their first miss since Briefing.com has been reporting earnings on them, so at least through 1Q15. Investors may thus be a bit spooked, and based on the analyst questions on the call, the competitive threat from Huawei seems to be constituting a real concern. It's clear that SEDG's technology works very well and has advantages over standard PV systems. However, competitive threats and the potential impact of tariffs (mainly for components) is weighing on the stock. The company’s sequential decline in gross margin could also be raising concerns. Hopefully, SEDG bounces back with an upside quarter in Q3, but investors seem a bit nervous.
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