SolarEdge

Caught in a Perfect Storm

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SolarEdge Technologies announced last week its intention to raise approximately $300 million by issuing convertible bonds to be offered to institutional investors. The bonds (not yet priced) are due in five years, on July 1, 2029. Underwriters will be given an option to purchase additional bonds worth $45 million. The current move stems from the company’s cash flow difficulties, which turned negative due to the downturn in the solar market. In fact, the current debt issuance is a kind of “debt refinancing” intended to increase its “cash cushion” ahead of the expected repayment of the company’s bonds worth $550 million. SolarEdge issued these in September 2020 and must repay them in September 2025.

In response to the announcement published after the NASDAQ close, SolarEdge’s stock is plummeting by more than 17% in pre-market trading, after losing about 86.5% of its value in the last 12 months. Another worrying sign of the negative business environment was received last weel, when the company reported to the SEC that one of its customers, PM&M Electric from Arizona, which provides solar panel installation services, has declared bankruptcy. The company owes SolarEdge $11.4 million.

Losing Money on Every Sale

SolarEdge’s Q1 2024 report, published a few weeks ago, illustrates its business and cash flow challenges. Along with a 79% decrease in revenue, the company recorded a GAAP net loss of $157.2 million. Its cash reserves shrank from $634.7 million at the end of Q4 2023 to just $316.3 million at the end of Q1. It also reported that its gross margin on sales in the solar market is negative: minus 3.5%, compared to a positive margin of 35% last year. This figure means that SolarEdge incurs a loss on every product it sells.

In a conversation with Techtime, Sergey Vastchenok, a senior analyst at Oppenheimer Israel, explained that the debt issuance announcement reflects a pessimistic forecast from the company, at least in the near term. “Due to its heavy expense structure, SolarEdge is burning a lot of cash, almost a billion dollars in the last year. The fundraising indicates that the company is not optimistic about a recovery later this year, and therefore it is raising capital to have a ‘cash cushion’ for repayment of previous bonds.”

Collapse of the Concept

Regarding the factors that brought it to this situation, Vastchenok says: “Many tend to attribute this to high interest rates, but in my opinion, this is a secondary factor. In the U.S. market, there is disappointment with Biden’s incentive program for renewable energy, which has only partially materialized, and in certain states, they have begun to impose restrictions on the amount of electricity that can be sold from solar panels. In Europe, the company’s main target market, electricity prices that were remarkably high at the beginning of the war in Ukraine and drove solar demand, have returned to normal levels. Also, in the European Parliament elections, the Green parties lost significant power. There is also increasing competition from Chinese players entering the market. This is truly a ‘perfect storm’ for SolarEdge.”

In his view, management led a flawed concept that collapsed in the past year. “SolarEdge grew too fast, and they did not properly assess potential risks. Throughout the solar market value chain, there was a phenomenon of inventory build-up that got out of control. The company built itself for sales of $5 billion, which was reflected in establishing factories, global expansion, commitments to subcontractors, and a too wide range of products. The faster you grow, the less efficient you are. When the market suddenly crashed, the company found itself with an unsuitable operational structure, which will take time to fix. SolarEdge is the last link in the food chain of the solar market – and it failed to anticipate the market downturn.”

Despite the plunge in the company’s value, Vastchenok does not believe that there will be a factor that will take advantage of the situation to promote a takeover of the company. “There is no incentive for such a move. Such takeovers occur in companies with lots of cash, good business conditions, and room for efficiency. This is not the case with SolarEdge. The recovery and efficiency process will take a long time and will be challenging.”

The background

The background to what is happening in the market is the sales crisis: SolarEdge closed the first half of 2023 with record revenues of $1.93 billion – and then the picture turned completely up side down: in Q3 the company reported a 27% decrease in revenues, and in Q4 it reported a 65% decrease in sales compared to Q4 2022, to about $316 million. The decline continued: in Q1 2024, sales totaled about $204 million – a 78% decrease compared to Q1 2023. Solaredge attributed the declines to inventory accumulation among its customers in Europe (responsible for more than half of revenues), and a general decline in the solar market.

Investors’ reaction to the stock exchange was extreme and persistent: at the beginning of 2023, the company’s stock was trading on NASDAQ at about $300. In March 2023, the collapse began, bringing the stock within about three months to a price of $70. Since then, the decline has continued at a more moderate but steady pace, and today it is trading at about $34 – almost a tenth of its price in February 2023.

Short-selling Attack

A Techtime enquiry revealed that the significant declines in SolarEdge’s stock are likely also related to a short-selling attack that the company is dealing with, which is being carried out with almost unprecedented intensity and volume in the technology industry. In these transactions, investors bet that the stock price will fall: they borrow a stock at a certain price, and upon closing the transaction, they return a stock to the lender – meaning they buy it at its market price. If the stock price falls, they profit; if it rises, they lose.

According to data from Benzinga, which centralizes information on short-selling transactions, about 23.4% of transactions in SolarEdge stock are short-selling transactions. This is a considerable percentage: the short-selling rate at SolarEdge’s main competitor, Enphase, which deals with the same market phenomena, is only about 13.3%, and even this is an exceptionally substantial percentage.

When comparing it to technology companies in other markets, the problem becomes apparent in its full extent: Intel’s short-selling rate is 2.19%, Nvidia’s is 0.12%, and Tesla’s is 3.65%. Even a company like Innoviz, another Israeli company that suffered a painful stock blow due to a misvaluation (during a capital raise), has a short-selling rate of only 8.07%. Moreover, at SolarEdge, this rate is on the rise: about a year and a half ago, it was only about 4.5%. Since then, it has been steadily and consistently rising, meaning there are buyers for the short-sold stocks returning to owners – and therefore the market is forcefully pushed to the bottom.

SolarEdge to Cut Workforce by 16%

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Photo above: Zvi Lando, Chief Executive Officer of SolarEdge

SolarEdge Technologies announced a restructuring plan designed to reduce operating expenses and align its cost structure to current market dynamics. The workforce reduction impacts approximately 16% of the SolarEdge global workforce, or approximately 900 employees, of which approximately 550 are from the Company’s offices and a manufacturing site in Israel. The reduction follows measures which the Company has already taken to align its operations, including discontinuation of manufacturing in Mexico, reduction of manufacturing capacity in China, and termination of the Company’s light commercial vehicle e-mobility activity in Italy.

SolarEdge creates smart energy solutions for solar power market, including intelligent Inverters and Optimizers for photovoltaic (PV) systems, Storage solutions, EV charging, Batteries and Grid Services solutions. During the third quarter 2023 the company witnessed sharp and unexpected decline: Q3 revenues dropped down by 27% compared with the prior quarter to $725.3 million, and down 13% from $836.7 million in the same quarter 2022.

“The results for the third quarter are reflecting a slow market environment,” said Zvi Lando, Chief Executive Officer of SolarEdge. “During the second part of the third quarter of 2023, we experienced substantial unexpected cancellations and pushouts of existing backlog from our European distributors. We attribute these cancellations and pushouts to higher than expected inventory in the channels and slower than expected installation rates.

“In particular, installation rates for the third quarter were much slower at the end of the summer and in September where traditionally there is a rise in installation rates.” Additionally, the Company anticipates significantly lower revenues in the fourth quarter of 2023 as the inventory destocking process continues. Following the announcement of the restructure plan, SolarEgde stock in NASDAQ rose by approximately 3% and the company is traded in a evaluation of $3.9 billion.

Despite weakness in the US, global presence boost SolarEdge results

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Solar stocks have recently experienced a sharp downturn, in the wake of micro-inverters manufacturer Enphase’ earning report two weeks ago. Enphase, which is the primary competitor of SolarEdge, has reported positive results, but lowered its next quarter guidance, pointing that high-interest rates are straining on demand in the US market. Analysts expected a similar outcome from SolarEdge.

Nevertheless, SolarEdge’s report presented a totally different image: record revenues, improved profitability, and a positive forecast for the second quarter. SolarEdge recorded revenues of $943.9 million for Q1, a 44% increase from Q1 2022. In addition, the gross margin, which was a little low in the past quarters, significantly improved to 31.7%, compared to 27.3% in Q1 2022 and 29.3% in Q4 2022. On the bottom line, the company recorded a net income of $136.4 million, more than three times that of Q1 2022. 

Like Enphase, SolarEdge also reported on the general decline in the US market. The company’s revenues in the US for Q1 was $255.5 million, 28.3% of the total revenue. This represents a 16% decline from the previous quarter and a 4% decline from Q1 2022.

Power outages in South Africa, incentives in Japan

How did the company accomplish such remarkable results? A record-high $577.9 million in revenue was earned in Europe, a 22% increase from the previous quarter and twice as much as was made in Q1 2022. Today, two-quarters of the company’s total revenue comes from European sales. SolarEdge recorded top revenues in Germany, Austria, Switzerland and France, and strong results in the Netherlands and Italy. 

Revenues outside Europe and the US also significantly increased by 30%, with record revenues in Australia and South Africa. SolarEdge CEO, Zvi Landa, said in a conference call: “Our global presence and the opportunities in these areas are sometimes overlooked”. According to Landa, the frequency of power outages in South Africa, where the firm reported record revenue, has increased demand for solar solutions, even in the domestic market.

In Japan, new regulation in the Tokyo metropolis generates incentives for purchasing solar panels with SolarEdge inverters. “As stated previously and as demonstrated by the most recent quarter results, our presence and global infrastructure give us business stability as well as new growth opportunities,” said Landa.

SolarEdge Opens 2GWh Battery Cell Facility

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SolarEdge and its subsidiary, Kokam, announced the opening of a two gigawatt-hour (GWh)  battery cell manufacturing facility in the Eumseong Innovation City of Chungcheongbuk-Do, South Korea. The facility, called “Sella 2” is currently producing test cells for certification, with ramp-up expected during the second half of 2022. Sella 2 will enable SolarEdge to have its own supply of lithium-ion batteries andto develop new battery cell chemistries and technologies.

The facility is planned to manufacture battery cells for SolarEdge’s residential solar-attached batteries as well as battery cells for a variety of industries, including mobile applications, energy stationary storage solutions (ESS) and UPS applications. It includes also the storage needs of its e-Mobility division based on the 2019 acquisition of the Italian S.M.R.E. Last year, the e-Mobility division has been selected by Fiat to supply full electrical powertrain units and batteries for the production of the Fiat E-Ducato light commercial vehicle.

Zvi Lando, CEO of SolarEdge, said that the opening of Sella 2, “Allows us to own key processes in the development and manufacturing of advanced energy storage solutions, while further securing the resilience of our supply chain.” SolarEdge provides smart energy solutions, including an intelligent inverter solutions to optimize and manage photovoltaic (PV) systems. Its 2021 revenues totalled $1.96 billion, up 34.6% compared with 2021.

Huawei and SolarEdge Patent License Agreement

Earlier this month it has concluded a four years dispute with Huawei Technologies, over claimed patent infringements made by Huawei. In 2018, SolarEdge had filed three lawsuits for patent infringement against Huawei Technologies and its distributors in Germany regarding DC optimized inverter technologies. On May 19, 2022, SolarEdge and Huawei have agreed on a global patent license agreement between the two companies. The agreement includes a cross license that covers patents relating to both companies’ products. The specific terms of the agreement are confidential, but it ends lawsuits between the companies that were pending in Germany and China.

SolarEdge’s Kokam to supply battery energy storage system to Tahiti

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The South Korean lithium batteries manufacturer Kokam, which was aquired by SolarEdge in 2019, has entered into contract to supply Electricité de Tahiti (EDT), a subsidiary of ENGIE, with a Battery Energy Storage System (BESS) serving as Tahiti’s first ‘Virtual Synchronous Generator (VSG)’. Comprised of a 15MW / 10.4MWh battery system with an integrated 20Mvar STATCOM, the state-of-the-art BESS will replace EDT’s spinning reserve diesel generators in order to cost-effectively reduce diesel fuel consumption, allow more renewable energy and strengthen the grid.

By incorporating more renewable generation sources and improving the performance of its diesel genset, EDT may reduce fuel costs of approximately up to ~€1.25M per annum. The VSG is also expected to increase savings in the form of reduced generator maintenance costs and the extension of generator operational lifespan.

Ike Hong, Chief Marketing Officer of Kokam, comments: “Electricité de Tahiti’s BESS demonstrates how innovative and intelligently-designed battery solutions can help utility and industrial customers lower greenhouse gas emissions while also improving their bottom line and increasing grid reliability.”

Emphasizing the critically of Kokam’s Battery Energy Storage System in reducing fuel consumption without risk to grid stability, François-Xavier de FROMENT, Chief Executive Officer of EDT, comments: “Through the VSG technology, EDT acts on its desire to decarbonize electricity production and contributes to the shift to carbon neutrality in French Polynesia.”

SolarEdge to Mass produce full EV Powertrains

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Above: SolarEdge powertrain kits for buses and commercial vehicles

Since it was established in 2006, SolarEdge Technologies has built a strong reputation of a quality provider of optimized inverter solutions for photovoltaic (PV) systems, bringing it ti a total sales of $338.1 million in the third quarter 2020. But but now the company eyes a much bigger and  competitive market: full powertrain solutions for Electric Vehicles.

This week the company appointed SehWoong Jeong as Chief Executive Officer of its subsidiary, Kokam. Prior to joining SolarEdge, he served as General Manager & Executive VP for Automotive Batteries at Samsung SDI, leading a large scale lithium-ion battery and Energy Storage Systems (ESS) business. Headquartered in South Korea, Kokam is a provider of Lithium-ion battery cells, batteries and energy storage solutions. It was acquired by SolarEdge in 2018.

In June, 2020, it appointed Carsten Schmidt to General Manager of its e-Mobility Division, which was established following the acquisition of the Italian S.M.R.E in July 2019. Carsten has more than a decade of experience in the automotive industry, with a focus in electric vehicles, and has held the position of Vice President of Sales in the Hybrid Electric Vehicle Business Unit of Continental AG.

Today, SolarEdge e-mobility division brings to the market a complete powertrain kits for buses and commercial vehicles. It includs electric motors, Lithium-Ion battery modules, High Voltage DC/DC converters, On-Board-Chargers, telematics and more. During the last quarters, it had built manufacturing capacity in Italy that includes an increase in the number of employees, to be prepared to deliver the first batch of full powertrain solutions to a known automotive OEM.

During the earnings call following Q3 results report, the CEO Zvi Lando said the company has made “a meaningful step into the e-Mobility market. During 2020, 10s of electrical vehicles powered by our powertrain units went through an extensive qualification process. In the fourth quarter, we expect to deliver an additional 100-200 kits as mass production is scheduled to begin.” According to his estimation, “SolarEdge will produce thousands of units in the next 6-12 months.”

SolarEdge Opened a New UPS R&D Center

SOLAREDGE HQ
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SolarEdge established a new development center for large UPS systems in the town of Modi’in, near Tel Aviv. SolarEdge plans to develop there a new generation of dedicated solutions for data centers and server farms. The center operates within the company’s Critical Power division and will employ several hundred employees. Simultaneously, the company is currently in the final stages of establishing an electronic manufacturing plant in Tsiporit (in the Upper Galilee). It is expected to open in August 2020 and to employ some 300 workers during its initial phase.

The Tsiporit production plant was Originally planned to employ about 150 workers and to begin operations in early 2019 at a 2.5-acre site that the company has rented for 10 years. Although its operation has been delayed by more than a year and a half, its capacity was doubled. The plant will provide full-scale mass production, New Product Introduction and will produce special production equipment to be used by SolarEdge’s subcontractors.

The UPS operations are founded on the Jerusalem-based Gamatronic company, which was acquired in May 2018 for $41 million. The Modi’in development center will replace the Jerusalem  R&D center built by Gamatronic. In the earning call following 2019 Annual Report, the CEO Zvi Lando revealed that SolarEdge is developing dedicated UPS systems for the commercial market. “In the last quarter, we conducted five evaluation tests of our improved commercial UPS system. The tests were successful with positive customer feedback.

“While this is still low volume from a business perspective relative to our solar business, we are encouraged by the customer response to our offerings.” The company’s stock has recovered from the influence of COVID-19, and the company is trading on Nasdaq at a value of about $7.24 billion.