Erica Mannion - President, Sapphire Investor Relations Guy Sella - Co-Founder, Chairman and CEO Ronen Faier - CFO.

Philip Shen - Roth Capital Partners Vishal Shah - Deutsche Bank AG Mark Strouse - JPMorgan Chase & Co. Jeffrey Osborne - Cowen and Company Christine Besselman - Deutsche Bank AG Arthur Su - Needham & Company Colin Rusch - Oppenheimer & Co. Joseph Osha - JMP Securities John Quealy - Canaccord Genuity.

Welcome to the SolarEdge Conference Call for quarter ended September 30, 2017. This call is being webcast live on the company's website at www.solaredge.com in the investor section on the events calendar page.

This call is a sole property and copyright of SolarEdge with all rights reserved, and any recordings, reproduction or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the event calendar page on the SolarEdge investor website.

I would now like to turn the conference over to Erica Mannion, at Sapphire Investor Relations, Investor Relations for SolarEdge. Please go ahead..

Thank you. Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third ended September 30, 2017, as well as the company's outlook for the fourth quarter of 2017. With me today are Guy Sella, Founder, Chairman and CEO; and Ronen Faier, Chief Financial Officer.

Guy will begin with a brief review of the results for the third quarter ended September 30, 2017. Ronen will review the financial results for the third quarter and provide the company’s outlook for the fourth quarter of 2017. Then we will open the call up for questions.

Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in our press release and the slides published today for a more complete description.

All material contained in the webcast. It is the sole property and copyright of SolarEdge Technologies, with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP diluted earnings per share, which are not measured -- measures prepared in accordance with U.S. GAAP.

The non-GAAP measures are presented in this presentation, as we believe they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance.

These non-GAAP measures should not be considered in isolation from, or substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended September 30, 2017 press release or the presentation may obtain a copy by visiting the investors section of the company's website.

Now I will turn the call over to CEO, Guy Sella..

Thank you, Erica. Good afternoon, and thank you for joining us on our conference call. I'm happy to report that we concluded our third quarter with record results. Once again, we are reporting record revenues for the quarter of $166.6 million, gross margins of 34.9%, GAAP net income of $28 million and a record non-GAAP net income of $31.5 million.

The also reported a record cash flow from operations of $33.6 million. In the third quarter, we shipped 676 megawatt of AC nameplate inverters, approximately 318 megawatts of which will ship to North America, up from 274 megawatts shipped to North America last quarter. Let's look at what has driven these positive results.

Our revenues hit a record high this quarter, and we continue to perform in line with our business plan, grow our market share in all geographies and reduce the cost of our product.

In addition to our market share growth in the United States, mentioned earlier, we are very pleased with our increasing sales in regions in the United States, which represented over 50% of our revenues this quarter. This growth is twofold. First, our well rooted presence in Europe is using increase sales in some of the markets there have strengthened.

Second, our growing investments in new regions, outside of Europe, such as Australia, India and Japan is beginning to bare fruits. This quarter, we also celebrated an operational record. We shipped more than 2 million power optimizers and approximately 90,000 inverters.

In all, we have now shipped more than 20 million optimizers since launching shipment of product in January 2010. Just as a reminder, it was only a 1.5 year ago, that we celebrated the shipment of our 10 million optimizers. Once again, this quarter, our commercial sales continued to grow.

This time, at a similar rate to the growth of our residential sales. On the residential front, we have fully concluded transition of our non-storage, one phase inverters to the HD Wave platform, which is available now worldwide.

While this transition continue to contribute to our expended gross margins, we expect to see more cost reduction on this product line in quarters to come, as cost reduction is the forefront of our R&D efforts. In addition, we're in the process of releasing a new product family named the compact residential solution.

This solution includes a new optimizer and is most scale inverter, that target is segment in the market in which we are not yet playing, mainly, new homes and such as housing projects.

As we recently announced new products offering, including our commercial large scale invertor and our PV Inverter Integrated Electrical Vehicle Charger are generating very positive momentum. All of this new offering will support our growth in the planned market expansion in 2018.

On the north towards this side, we continue to see component allocation issue, mainly for power components needed for many of our inverter families. These shortages, coupled with the increase in demand for our products and the expansion of our product line, increase our cost of shipment and lead times on deliveries to customers.

This was offset by our effective cost-reduction, economics of scale and stable ASP. On the competitive landscape, we continue to take market share from our current competitors and have not seen new players in the MLP market. We remained confident in our technology leadership, innovation and intellectual property we have to defend it.

To conclude, we're very proud to deliver a record non-GAAP EPS of $0.66 per share. Our financial strength enable us to invest the needed resources to develop new products and expand our business into new segments and more geographies. And with this, I hand the speaker over to Ronen, who will review our financial results..

Thank you, Guy, and good afternoon, everyone.

Before starting the review of our financial results for the third quarter of 2017, I would like to remind listeners that while the overview will be on a GAAP basis, in certain cases, I will be discussing non-GAAP numbers and measures, which exclude the impact of stock-based compensation and deferred tax as well as non-GAAP earnings per share.

Full reconciliation of the pro forma to GAAP results discussed on this call is available on our website and on the press release issued today. Now let's start with the financial results of the second quarter of 2017.

Total revenues were $166.6 million, a 22% increase compared to $136.1 million last quarter and an increase of 30% from the revenues of $128.5 million in the same period last year. As we have mentioned in previous quarters, the growing portion of our revenue is generated outside of the United States.

This quarter, for the first time, since the fourth quarter of 2013, sales to Europe and rest of the world comprise more than 50% of our revenues. In addition, this quarter, only 2 customers exceeded 10% of our revenues. Our top 10 customers accounted for approximately 60% of our revenues.

With no substantial change in the competitive environment, this quarter, our ASP remained stable. Gross margin for the quarter was 34.9% compared to 34.6% in the prior quarter and 32.6% in the same quarter last year.

This growth in gross margins was exceeded despite higher than usual airfreight expenses resulted from global shortage in power components.

The increase in our gross margin was primarily driven by continued cost reduction of manufacturing costs and increased portion of sales of our HD Wave product in the total residential inverter needs and increased efficiency of our operations and support department.

Given our increased production level, and the shortage of certain components in the global market, we expect higher than usual airfreight expenses will continue to put pressure on our gross margins for the next few quarters. Moving to operating expenses.

R&D expenses were $14.4 million, an increase of 13% compared to the previous quarter and an increase of 45% to the same quarter last year. This increase was mainly driven from headcount growth and from a stronger news really shackle that denominates our R&D expenses against the U.S. dollar.

We continue to see strength in our profitable business model, which allows us to continue and invest in the development of new product and aggressive cost reduction execution. Sales and marketing expenses for the quarter were $13.2 million, an increase of 11% compared to the previous quarter and a 32% increase compared to the same quarter last year.

This increase was primarily correlated to the higher revenues was also driven by a concentration of large international trade shows during the quarter and our continued investment in expanding our geographical footprint. G&A expenses were $5.1 million for the quarter, an increase of 56% from the prior quarter, and 39% year-over-year.

Other than modest growth, related to the expansion of our overall business, this increase is partially related to the fact that our G&A expenses last quarter were lower than usual due to a reversal of accrual for doubtful accounts. In addition, G&A expense this quarter include litigation expenses from a legal proceedings initiated by the company.

In total, operating expenses for the third quarter were $32.7 million or 19.6% of revenue compared to $28 million or 20.5% of revenues in the prior quarter, and $23.6 million or 18.4% of revenues in the same quarter last year.

As a result of the above, operating income for the quarter reached a record high of $25.4 million compared to $19.1 million in the previous quarter and $18.2 million for the same period last year.

Financial income for the quarter was $2.7 million compared to $3.6 million in the previous quarter, and financial income of $0.4 million for the same period last year. This income is mostly related to a favorable exchange rate between the euro and U.S. dollar.

Taxes of the income this quarter were $0.1 million compared to $0.2 million in the prior quarter and tax expenses of $3 million for the same period last year.

GAAP net income for the third quarter was $28 million compared to GAAP net income of $22.5 million for the previous quarter and GAAP non income -- and the GAAP net income of $15.6 million for the same quarter last year.

Our non-GAAP net income was $31.5 million compared to a non-GAAP net income of $25.8 million in the previous quarter and $20.9 million for the same quarter last year. GAAP net diluted earnings per share was $0.61 for the third quarter compared with $0.50 in the previous quarter and $0.35 for the same quarter last year.

Non-GAAP net diluted EPS was $0.60 compared to $0.66 -- compared to $0.55 in the previous quarter and $0.46 in the same quarter last year. Turning now to the balance sheet. As of September 30, 2017, cash, cash equivalents, restricted cash and investments were $304.7 million compared to $274.7 million at June 30, 2017.

During the third quarter of 2017, we generated $33.6 million in cash flow from operations. AR net increased this quarter, reaching $91.7 million compared to $79.9 million last quarter, mostly reflecting our growth in revenues as our DSO or day sales outstanding remain similar.

As of September 30, 2017, our inventory level, net of reserves, were $62.4 million compared to $56.2 million in the prior quarter. Moving onto guidance for the fourth quarter of 2017. We expect revenues to be within the range of $175 million to $185 million, and gross margins to be within the range of 33% to 35%.

I will now turn the call over to the operator to open it up for questions. Operator, please..

[Operator Instructions]. And we'll take our first question from Philip Shen with Roth Capital Partners..

We'd love to get some more detail on where the strength came from in Q3? I know you've mentioned that more than 50% of your revenues came from international, but can you expand on the international progress that you guys talked about Australia, India -- I think Europe as well.

Off that 50% that is now, or more than 50% that is now international, what's the primary driver there of growth? Is it Europe? Or is it India? Or some combination thereof?.

So I think that about a year ago, we said that on a longer-term, we will pass through 50-50 between the U.S. and rest of world, assuming that couples -- 3 years from now will be at around 33% North America, 33% Europe and 33% Asia. We're progressing on this front specifically in Q2 and Q3, we saw very high strength, mainly from Europe.

In Europe, I think, I mentioned it last time. Germany starting to grow, Italy is flat, but we are gaining market share dramatically. Netherlands, we keep gaining market share and few more nice, yet small, nice markets evolve like Sweden, Poland, et cetera. So the majority of the growth is coming from Europe.

On the Asia side, by far the highest market for us today is Australia, which in Q3 picked very nicely and we expect to see the same phenomenon through 2018..

Great. And then shifting over to the commercial residential mix.

Can you share with us, if you said I missed it but what was at the mix in Q3? And then for both international and commercial resi mix how do you expect that to evolve as we get to 2018?.

It's about 33% commercial today. As I mentioned in the past, I believe that in -- by the end of 2018, we're supposed to be at about 50-50 between commercial and residential..

Great. And then I was wondering if you could give us an update on what could be an interesting and exciting segment in the future of utility scale.

Are you still in track for full suite of products by year-end '18? Or is there -- what should we expect now in terms of timing and breadth of offering?.

I don't think we said that we'll have a full suite of product for utility by the end of 2018. '18 development, I think that this schedule is a bit too optimistic to get a full suite of perfectly fit utility scale product, but it is in development and we believe that we have the best solution under development.

It will take probably year before we'll expose what exactly we're doing..

And our next question will come from Vishal Shah of Deutsche Bank..

I wanted to just understand the housing environment....

Vishal I don't think we hear the question. That is a phone problem or something--.

I wanted to just sort of understand the pricing environment in 2018. I know this year pricing has been better than expected. What you think 2018 looks like? And also as you think about 2019....

Sorry we didn't hear the question..

We'll take our next question from Mark Strouse of JPMorgan..

I think if I heard Vishal, I think, he was asking about pricing, which I was actually going to ask about as well. So pricing has been fairly flat-ish for the last couple of quarters.

How should we expect that to trend in 4Q? And then any comments that you have on 2018 targets would be helpful as well?.

So I wouldn't expect much change in Q4. For 2018, our assumption is that in average, the ASP erosion will be in the size of 7.5% to 10% on yearly basis..

Okay.

And then I apologize if I missed this, but the new product family in residential, when will that be released?.

It's in the releasing process. I believe that it's a full family of invertors from 1 kilowatt to 2.5 kilowatts, based on a combined optimizers that is specific product that aim to small installation that today is a segment that we completely out of. It's controlled by very cheap Chinese invertors and micro-inverters.

So we developed this product specifically. We'll start shipment in the next couple of months. I would expect that in Q1, we are starting -- we aim this product primarily for Europe, because in Europe, there is a lot of incentive for new houses and social housing that required 1 kilowatt to 2 kilowatt installations. So that's the main market.

And I expect that within 2, 3 months, we'll start to see quite a lot of installations..

Okay. If I can just sneak in one more quick one. Ronen, I know you get asked this every quarter, so I apologize. But the cash balance continues to keep building here.

Any change on uses of cash here in the next few quarters?.

So basically not something that the change dramatically from the last time that you and others asked. In general, the company is, of course, profitable in generating cash flow.

Cash flow -- cash is used, of course, to continue and grow the businesses and as you can understand, while volume increase, you need more money in order to have the right working capital.

In addition to these, we have said before that we are looking to expand also our business through acquisitions, and we are still reviewing and looking at opportunities in this field at least..

And we'll take our next question from Jeff Osborne of Cowen and Company..

Most of them have been asked but I didn't know Ronen, if you could quantify the expedited shipping for the power components of MOSFETs, et cetera, that you're experiencing? Can you just discuss how much that impacted gross margin or extra cost that you incurred?.

So in general, it very much changes, of course, based on the volume and amount and not necessarily what we saw in the last quarter is something that will be reflected exactly in the next quarter, but I would say that anything between 1% to 1.5% would be a good estimation..

Got it.

So as we kind of march towards the 50-50 for split and the geographic diversification that you talked about in the 50-50 split meaning resi and commercial, do you think there's still a path to get to the high end of that? I think when you went public, you talked about potentially a 37% gross margin, just as HD Wave and the optimizer automation plays out and diversification of the product, is that something still that can be targeted from the company as longer term perspective?.

For sure..

Perfect. Great to hear and the last one. Just to -- do you have the JUC certification in Japan for both resi and commercial? Or I forget -- I thought it was just one, but if you can just remind us..

We don't have JUC certification yet in Japan. We're in the process. We get approval to JUC approval is up to 10 kilowatt inverters. So our commercial inverters are installed in Japan. Our residential solution is in the process of certification..

And our next question will come from Christine Besselman on behalf of Vishal Shah..

So I know you touched a little bit on the pricing environment. I believe you said 7.5% to 10% for 2018.

Do you still expect 7% to 10% erosion overall for the end of this year, or around 10% rather?.

I think that average will end 2017 with -- we said something in the range of 10% when we started the year.

I think, we'll end up with something closer to 7.5%, but it's a combination -- complex calculation because you need to take product by product and then the exact mix in dollars, but I think, that all in all the result for 2017 will be in the range of 7.5%..

Okay. That's helpful. And then my follow-up question is more on the component shortages site.

And when do you expect that shortages to ease? Will they extent into 2018? Or do you expect them to end in Q4?.

No it won't end in Q4. I think responsible assumption will be that we'll have this phenomena until mid or end Q2 2018. I think that will be responsible assumption..

And our next question will come from Edwin Mok of Needham & Company..

This is actually Arthur Su for Edwin. The first question is just on the guidance, I try to remember correctly, I think December is usually seasonally weak quarter, but you guys were guiding up 8% at the midpoint.

So just kind of understand what are the put and takes driving the upside in the fourth quarter? Are you seeing continued growth in international and do you think the U.S.

is coming back?.

I'm not sure if the U.S. coming back -- that's really, really hard to estimate. It will be great if you can share your view, because you probably have a better overall view than us. But definitely 2017, that historical percentage per quarter in the U.S. was even severe towards Q3 and Q4. So Q4 in the U.S.

is very strong and that's I think the biggest influence on the fact that we still see growth in Q4 and not flattish quarter..

Okay. So can you also provide an update on the automotive lines for DC optimizers? I think you had said that 85% to 90% would be shifted to the automotive line.

Just wanted to see if you have any update on that?.

So we currently have four running ultimate declines. Today it's less than the percentage you mentioned due to the fact that the ramping up of the Romanian factory is slower than expected. Still, we don't have all the employees needed and not all the ships are full.

And on the other hand, the total amount of optimizer, we're producing, is about 10% above what we planned. So we still meet some ultimate decline and those are now in production..

Got it. Okay. And one last question you guys mentioned that there was good momentum in Australia.

Is that in resi or commercial? Or that also include some storage as well?.

Mostly, resi and commercial..

And our next question will come from Colin Rusch of Oppenheimer & Co..

I have a question about the competitive environment.

Are you seeing competitors leave the market particularly in Europe in areas where you're taking share?.

No. I don't think we see competitors leaving the market. We see our ability to keep taking market share from most classical competitors in most of the markets. I don't think I can name one competitive who left the market..

Okay. And then on the smaller inverse, the one the 2 KW.

Can you talk a little bit about the relative pricing and margin on those products versus the balance of the portfolio?.

So the margin will be pretty much equal to the rest of our portfolio. We just develop that full solution from scratch. We put in one enclosure. For unique optimizer that each can connected to two panels. So you have one box that can connect it to 4, 5, 6, 7 or 8 of any 60 cells panels. So all done in one box.

And you have an inverter that was developed bottom up to be able to match exactly this size of capacity, and therefore, the total solution is very attractive in price..

Excellent. And just a final quick one.

How should we think about the tax rate on a go forward basis? The [indiscernible] amounts for this year and into 2018?.

So the tax rate -- just to remind you. Today, our tax rate in Israel, which is still the heart of where the income is drawn to is 0%, given the fact that we have what's called benefited enterprise status.

This status is going to end by June 2018 and at this point, we will start paying taxes at what's called technological tax rate, which is 12% of tax rate on profitability.

Until that point, we would simply see a smaller or relatively small tax rate that is mostly coming from our subsidiaries, which are the U.S., Germany and other locations around the world..

And our next question will come from Joseph Osha of JMP Securities..

Some kind of update on the ramp, in particular into 3-phase products, how that's going? And how you see the toggle? And then, I have a follow up..

I think that the beginning of your question was cut because I am not sure we understand the question, can you please repeat..

Sorry, can you hear me okay? No. HD Wave, just asking about that ramp in particular into 3-phase products.

If you can give us an update into how that's going? And what the sort of switch from conventional to HD Wave might look like over the next few quarters?.

No. The HD Wave -- the 3-phase HD Wave platform will be ready towards the end of 2018. So only then we'll start to produce it..

Okay.

Can you update us on what -- have we dropped all of the non-HD Wave out of single phase?.

So in this regard, yes. Today, all of our inverters that are non-storage inverters are manufactured on the HD Wave platform and, of course, if there's any remaining inventory in any territory they are maybe are older generation, but production is a fully HD Wave for all residential inverters that are non-storage..

During all Q3, we finished to produce any vents to, which is not storage product sometime in Q2 and all of Q3, we'll produced only HD Wave..

Okay.

And just to quantify the earlier comment, you said we'll see some 3-phase products before the end of 2018?.

I said we will finish -- it's a very complex development assuming we won't have hiccups, we will finish the development by the end of 2018..

Okay. And then my last question, I think, I heard one of my competitors mentioned power MOSFETs. Can you mention -- again, I may have missed this, I'm sorry.

What are you actually having difficulty getting? Is it capacitors? Is it MOSFETs? Magnetics? What is it that's being very hard for you to get?.

Magnetics? We produced today almost all of our magnetics alone. So we don't have any issues with magnetics. The components that are missing or did location components or IGBTs and MOSFETs.

This started in February and that's mainly on the high end of quality component like the age 5 of [indiscernible] and modern MOSFET with a very low resistance per square millimeter..

Okay. I heard you mentioned IGBT's, some of these products are pretty high energy devices.

Are you looking at going to silicon carbide from the bipolar IGBT's, like some people in other industries? Any thoughts there?.

We're not choosing silicon carbide due to the fact that we -- it's a long discussion, but we believe that overall in good apologies, IGBT's, and FET would give you much better result than silicon carbide..

[Operator Instructions]. And we will hear from John Quealy of Canaccord..

Two minor modeling questions for me. First on the employee add. You continue to add a lot of employees. We are should we look for most of that P&L impact? Is that R&D? Is that up and cost of sales and then a quick follow up..

The majorities in R&D. While we, of course, invest also in sales and marketing in order to keep increasing market share growth and keep expanding to new geographies..

Okay.

And then, if I heard correctly, I think there was an initiation of litigation as an offensive measure? Can you -- If that's a correct understanding, can you just give us a little bit more detail?.

So in general, we cannot [indiscernible] discuss too much because this is something that is still pending in the middle of the process, but we may initiated the process recently, and it is now being in process, it's not something that we can say more than this..

And ladies and gentlemen, this will conclude other question-and-answer session. I would now like to turn the call back over to CEO, Guy Sella..

In summary, our third quarter results show continued successful execution of our business strategy has record revenues and consistent growth and profitability.

Our financial strengths position as well to continue to increase market share and enable us to leverage our very strong research and development team to bring new products to current and new markets while managing the very effective cost-reduction plan. We look forward to continue in this momentum. Thank you very much for joining us on today's call..

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect..