Please standby. Welcome to the SolarEdge Conference Call for the Q1 Ended March 31, 2019. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the event calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved and any recording, 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 Events Calendar page of the SolarEdge Investor website.
I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for SolarEdge.
Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the Q1 ended March 31, 2019, as well as the company's outlook for the Q2 of 2019. 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 Q1 ended March 31, 2019. Ronen will review the financial results for the Q1 followed by the company's outlook for the Q2 of 2019.
Then we will open the call 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 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 net diluted earnings per share, which are not measures prepared in accordance with U.
S. GAAP. The non GAAP measures are presented in this presentation as we believe that 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, as 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 March 31, 20 18 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 all for joining us on our conference call today. We concluded our Q1 with record revenues of approximately $272,000,000 up 3% from last quarter and an increase of 30% from the same quarter last year. These revenues also include a record quarter in our solar business of approximately $253,000,000 In the quarter ended March 31, 2019, we shipped 1.1 gigawatt of AC nameplate inverters. Overall, we shipped 3,000,000 power optimizers and 131,000 inverters.
Last quarter, we began to separate the solar and non solar activities in order to enable a continued understanding of our solar business without the recent acquisitions. Of course, as soon as a single new business area becomes significant enough, it will be reported separately all in accordance with GAAP principles and regulations. Given recent implementation of newly enacted accounting principle, such as the new leasing accounting standard and the additional accounting effect of the acquisitions such as the amortization of intangible assets, we believe that the presentation and analysis based on non GAAP measures provide a better understanding of the business as management sees it. The non GAAP presentation enables analysts and investors to have full transparency of our solar business and its continued profitability as well as seeing the result of the non solar business. Along those lines, I am happy to report that our non GAAP gross margin increased to 32.8%, up from 30.9% last quarter and our non GAAP gross margin from solar product increased to 34.3%, up from 32.8% last quarter.
As we discussed last quarter, we are reducing our actual support cost while continuing to improve customer support services, mostly as a result of tighter control of support operations and reduced support related logistics expenses. We are reporting non GAAP net diluted earnings per share of $0.64 for the Q1 of 2019. Our non GAAP net income was approximately $33,000,000 and we generated cash from operations amounting to $56,500,000 Despite our recent acquisitions, our strong cash flow generation enabled us to increase our cash level to approximately $400,000,000 while taking on a small debt of approximately $24,000,000 from the non solar acquired businesses. Moving to the business front. As you can see from our result, our solar business continued to grow at a healthy pace, and we see diversification both in our product and geographic mix.
Specifically, this quarter sales in the U. S. Accounted for 47% of revenues, sales from Europe accounted for 40% of revenues and sales from the rest of the world, primarily Australia, accounted for 13% of our revenues. Overall, we shipped approximately 4 21 megawatt of products to the United States this quarter. Our product mix reveals further expansion of our commercial sales, which comprised 44% of our total megawatt shipped this quarter.
As mentioned last quarter, we are working on opening an additional manufacturing site in Vietnam in order to supply product that will not be impacted by U. S. Tourists on Chinese product. This is in addition for our manufacturing sites in China and Hungary. As a reminder, at the beginning of Q1, we announced the acquisition of SMRE with initial purchase of 56% of the shares of the Italian AIM listed company.
Over the course of the quarter and through April 26, we increased our shareholding as planned to over 98% and the company is now delisted. The integration of both Kokam and SMRE is well underway and we expect that over the next few years, these acquisitions will accelerate the clean energy and e mobility evolution that we want to lead. Having said that, the main driver for revenue and profitability for now continue to be our solar products. 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 Q1 of 2019, 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 the newly adopted revenue recognition standard, stock based compensation, one time asset disposal, one time transition tax, changes in deferred tax, one time acquisition related expenses, intangible asset amortization and cost of product adjustment related to the acquisitions of SMRE Kokam and the UPS division and finance expenses related to the adoption of the newly enacted leasing accounting standard as well as non GAAP earnings per share. I will conclude this introduction by noting that the effect of the new acquisition closed in the last month on GAAP results is meaningful as a result of amortization of accounting elements identified in the preliminary purchase price allocation studies that we have recently performed. As our results prior to these acquisitions did not include these elements and since the business results are almost not affected by this amortization, as mentioned by Guy, we believe that non GAAP analysis provides a better view of the way that management analyzes the results of our operations.
Please also note that the Q1 financials represent a change in our consolidation perimeter due to the first time inclusion of SMRE results effective January 24, 2019. Full reconciliation of the pro form a to GAAP results discussed on this call is available on our website and in the press release issued today. For the Q1 of 2019, total revenues were $271,900,000 a 3% increase compared $9,000,000 a 3% increase compared to $263,700,000 last quarter and a 30% increase compared to $209,900,000 for the same quarter last year. Revenues from sale of solar products were $253,100,000 and were driven by record shipments to Europe and rest of the world. U.
S. Revenues were similar to the Q1 of 2018 and represented 46.9 percent of our solar revenues, partially reflecting the industry wide seasonal slowdown of the Q1, while Europe and Rest of the World revenues represented 39.8% 13.3% respectively, and hit an all time record in absolute values. This quarter, our top 10 solar customers represented 62% of our quarterly solar revenues, a decrease from the last quarter, while only one customer continued to account for more than 10% of revenues. Blended ASP decreased this quarter, mainly due to currency fluctuations, higher commercial product sales and higher proportion of non U. S.
Dollar denominated revenues. This quarter, revenues from our non solar product sales were $18,800,000 mostly driven by sales of lithium ion sales and energy storage products and to a lesser extent from UPS products. Revenues from SMRE for the period included in our consolidated reports were slightly under $3,000,000 GAAP gross margins for the quarter was 31.7% compared to 30.2% in the prior quarter and 37.9% in the same quarter last year. Non GAAP gross margins this quarter was 32.8% compared to 30.9% in the prior quarter and 38.4% in the same quarter last year. Non GAAP gross margins for the solar activities was 34.3% compared to 32.8% in the last quarter.
This increase was primarily attributed to product mix as well as lower shipment and logistic costs. Our actual warranty expenses continue to decrease this quarter in comparison to the last quarter in absolute value, while our long term warranty accrual increased as a result of our calculation method that takes into account past expenses. The net effect on gross margin of these two changes compared to the last quarter was negligible. U. S.
Customs tariffs negatively impacted our solar business margins this quarter by 65 basis points. Our non GAAP margin on non solar activities was 13.1% this quarter compared to 7.8% in the previous quarter, where the majority of the result is related to higher margins on energy storage systems. Moving to operating expenses. In total, operating expenses for the Q1 were $58,100,000 or 21.4 percent of revenues, compared to $55,300,000 or 21 percent of revenues in the prior quarter and to $38,800,000 or 18.5 percent of revenues for the same quarter last year. On a non GAAP basis, operating expenses for the Q1 were $48,000,000 or 17.7 percent of revenues, compared to 45,100,000 dollars or 17.1 percent of revenues in the prior quarter and $32,900,000 or 15.7 percent of revenues for the same quarter last year.
Of this non GAAP increase in operating expenses, dollars 1,600,000 were related to the solar activities, the majority of which are related to increase in our R and D headcount. Our non GAAP solar operating expenses as percent of solar revenues were 16.6% with no change compared to the last quarter. The remaining increase of non GAAP operating expenses is mainly an inclusion of the operating expenses of SMRE in the amount of $1,500,000 in RP and L. Non GAAP operating expense related to Kokam and to the UPS division were unchanged. The bottom line result of this GAAP operating of this is GAAP operating income for the quarter of $28,000,000 compared to $24,400,000 in the previous quarter $40,800,000 for the same quarter last year.
Non GAAP operating income for the quarter was $41,200,000 compared to $36,400,000 in the previous quarter and $47,600,000 for the same period last year. Financial expense for the quarter was $6,200,000 compared to financial income of $300,000 in the previous quarter and to financial income of $600,000 for the same period last year. Of this amount, dollars 5,000,000 of expenses are related to the devaluation of the euro, Korean won and Israeli new shekel against the U. S. Dollar, an additional $900,000 are a result of the adoption of the new lease standard.
This quarter, we had a tax expense of $3,900,000 compared to a tax expense of $12,100,000 in the prior quarter, which was affected by one time adjustment to the provisional tax on undistributed earnings and profits resulted from the U. S. Tax reform and a tax expense of $5,700,000 for the same period last year. GAAP net income for the Q1 was $19,000,000 compared to GAAP net income of $12,900,000 for the previous quarter and $35,700,000 for the same quarter last year. Our non GAAP net income was $32,900,000 compared to a non GAAP net income of $31,500,000 in the previous quarter $42,500,000 for the same quarter last year.
The non solar activities generated a $2,800,000 of non GAAP net loss this quarter compared to a net loss of $2,600,000 in the previous quarter, which did not include SMRE. GAAP net diluted earnings per share was $0.39 for the Q1 compared to $0.27 in the previous quarter and $0.75 for the same quarter last year. Non GAAP net diluted EPS was $0.64 slightly higher compared to the $0.63 of the previous quarter and $0.87 in the same quarter last year. It is important to note that our non GAAP consolidated EPS was affected this quarter by $0.02 as a result of the SolarEdge shares issued as part of the SMRE acquisition. Non GAAP net diluted EPS were negatively affected by $0.07 per share as a result of the non solar activities.
Turning now to the balance sheet. As of March 31, 2019, cash, cash equivalent, restricted cash, short term bank deposits and investments were $398,700,000 compared to $392,200,000 at December 31, 2018. During the Q1, we generated $56,500,000 of cash from operation. Actual cash paid in the Q1 for the purchase of SMRE shares and additional Kokam shares was $43,000,000 net of cash acquired. In addition, this quarter, our balance sheet includes net debt of $24,300,000 related to borrowing taken by Kokam and SMRE for working capital needs and capital expenditures prior to the acquisition.
Our current plans are to maintain this debt until we finalize our capital needs for Kokam relating to the increase of manufacturing capacity and the needs of SMRE in relation to long term financing leases on building. AR net increased this quarter reaching $187,500,000 compared to $173,600,000 last quarter. DSO this quarter in the solar business was 68 days, a slight change from 69 days last quarter. As of March 31, 2019, our inventory level net of reserve was at $150,800,000 compared to $141,500,000 in the prior quarter. Approximately $39,500,000 of this amount relates to non solar inventory, the majority of which is raw materials held by Kokam.
Moving now to guidance for the Q2 of 2019. We expect revenues to be within the range of $310,000,000 to $320,000,000 Revenues from the sale of solar products are expected to be within the range of $290,000,000 $300,000,000 We expect gross margins to be within the range of 32% to 34%. Gross margins from solar activities is expected 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.
Thank We'll take our first question from Maheep Mandloi with Credit Suisse.
Hi. Thanks for taking the questions. Can you just talk about the Q2 guidance? What's driving the growth in the sales for the quarter? And also can you also just touch upon what you're seeing on the ASPs in the market individually for the residential and commercial applications in Q1 rest of the year?
Sorry, I followed the first part of the question. I'm not sure about the second. I will answer the first part and then just remind me what exactly was the second part of the question. This is Guy. So we are expecting the non sellers to stay quite flat between Q2 and Q3.
And the majority of increasing demand on Q2 is coming from Europe. In general, you know the market, Q2 is the strongest quarter in Europe. Q3 is almost as strong, but weaker due to the vacants. While in the U. S, usually the second part of the year, H2 is stronger.
So we would expect that the majority of increase will be coming from Europe and we would assume that during the 2nd part of the year, we'll see even higher growth coming from the U. S. And now what was the question about ASP? If you can help me to
Yes. Sure. I just wanted to understand directionally how were the ASPs in the residential and commercial applications when you spoke about the blended average being down because of high commercial mix. But in those individual segments, how were the ASPs in the quarter? And what are your expectations for the year?
And then I have a follow-up after that.
So basically, I think three questions at once. I will try to answer them in a way that will explain what we do and what we see. So ASP of commercial, as you know, is lower than the ASP of residential. It's hard to give the average, depends on the exact type of the commercial, the type of optimizer, etcetera. But it reflects more or less the differences in the market.
So it can be 50% to 60% in average. It depends what you measure, very hard to measure. The gross margin on both products is pretty similar between residential and commercial. So we don't see any negative effect by growing our commercial business. Looking forward in ASP, that's complex this year.
Originally, without the changes in fee in taxation from the U. S. And without the tweet on Sunday, I would expect that we'll see slight decrease in ASP in Q3 and Q4. Saying that with the tweet and with the unexpected future of Texas, I think that we have no clue about what will be the ASP and I will be very happy to learn from analysts like you what you think, because we do not know.
I just go by what you say. But another thanks, that's really helpful color. And just last question from me and then I'll pass along. Given the volume growth in Q1 and Q2, where do you see your what are your thoughts on market share in the U. S.
Markets? Do you think it's growing, flattish? Or how do you
think about that? Thanks. Again, here we think that our market share is growing, but that's very unindependent analysis that we do based on reviewing the many accounts of the Tier 1, Tier 2 and average long tail that we have. The right numbers or the most accurate numbers are coming, as you know from GreenTech Media and those probably will be available by the end of May. So I would expect that we grow a bit in our market share, but I think it's hard to from our position, we have limited view.
It's hard to come with a concluded answer.
Got it. Thanks for taking
the questions and congratulations on the quarter.
Thank you, Maheep.
We'll take our next question from Colin Rusch with Oppenheimer and Company.
Thanks so much. Guys, just thinking about this market share dynamic that you're talking about, what other technologies are you taking share from? Clearly, it seems like you're at a cost points where you could be taking significant share from string inverters at this point? And then I have a couple of follow ups after this.
I don't think we have good enough view of such a question. I think that we see some large centralized inverter companies going down with their market share. I don't think we see any newcomers such as new Chinese taking any market share. And I think Enphase is doing good. So I really don't and I don't think that the differences in market share are in huge percentage.
So I really don't think I have any accurate feeling on this question, sorry.
Okay. That's fine. I'll take it offline with a little bit more to once. And then just in terms of energy storage attach rates, what you're seeing in terms of orders at this point, particularly as folks understand your acquisition of Kokam, what can you tell us about that, specifically related to the U. S.
And then separately in Europe?
So we don't have yet solarized batteries, as you know. Those are planned for the end of the year, beginning of next year. So there is no yet impact of the acquisition of Kokam regarding our own offering in storage products. Saying that, we are today supporting high voltage batteries of LG and in a quite big percentage when Tesla is selling their battery, we are connected on the PV side. So it's AC coupling structure.
We have no intent to reduce the offering of storage in the future, but adding our own high voltage battery. And in addition to that, we are planning to announce and have in the market later this year or beginning of next year, a 3 phase on grid storage for the European market that can work with 48 volt batteries. So all in all, we are increasing our storage offering in 2.5 dimensions, and I believe it will help us to sell many more storage products.
Okay. Thanks, guys.
We'll take our next question from Philip Shen with ROTH Capital. Mr. Shen, your line is now open.
Okay, great. Just want to make sure the line is okay. Thanks for taking the questions. So as a follow-up on the tariff topic, Guy and Ronen, Philosophically, let's say the tariff goes to 25%. Would you expect to pass on all of that to your customers?
Or I think in the first tranche of 10% that first tariff of 10%, that was the expectation and that's what happened not only for you, but also for, I believe, your peer. But now that if we go from 10% to 25%, would you want to do the same thing? Or do you think you might absorb some of that as well yourself?
Different from some leaders, we take decisions based on fact and we cannot tweak our answers. So that's a Sunday tweet by Mr. Trump and before having a real data, real impact, real HS code that we can put on Excel and really calculate impact on gross margin, I think it will be irresponsible from my side to try to give you an answer.
Okay. Fair enough, Guy. And then as it relates to Vietnam, you mentioned that in your prepared remarks, can you share with us who your contract manufacturer is in addition to the timeline of when that facility could be ramped up and would and do you expect to be able to fully serve all of U. S. Demand from Vietnam?
And does it also include both inverter capability as well as optimizer capability? Thank you.
So the Centimeters is Jabil Vietnam. We are in the process of building the lines now, and we're supposed to start producing end of June, beginning of July and of course we'll produce both optimizers and inverters. Regarding the full capacity, that's again something it's hard to predict, especially the future. So it depends on how fast we would ramp up and how fast the demand from the U. S.
Will come. We do have additional line in Hungary and which we can double in case we need relatively in a fast way. So we have enough tools, but to be able to predict the total demand from the U. S. For any quarter in the future, of course, is not something I can do.
Okay, great. And then just a couple of more housekeeping type questions. Can you talk about the why the optimizer units were down in the quarter while inverters were up? Was it simply an inventory or channel situation? And then I think you guys mentioned that international revenues were 53% of overall revenues in the quarter.
Can you talk about how you expect that mix to trend as we go through the year? Thank you.
So regarding Optimizer, it's a split and inventory at channel hands between Q4 and Q1. So we don't see any new phenomena in the market. So I would expect that many people have higher inventory of optimizers in compared to inverters saying that the inventory level in Europe are almost 0 and in the U. S. In average, the inventory are not high as well.
The second question was about the trend in the future of the ratio between inverters and optimizers. Is this correct?
No, between U. S. And international, the international mix.
U. S. And international. So as mentioned, I think, again, that's based on the behavior, but I feel maybe Ronen can answer as well. But I feel that in Q2, it's supposed to be similar or a little bit even higher demand from Europe, and then it will be changed to the other direction in Q3 and Q4 since usually the U.
S. Is stronger in H2 and we see very positive signs in the U. S. Market since the beginning of the year.
Okay, great. Thank you, Guy. I'll pass it on.
Thank you. Thank you.
We'll take our next question from Joseph Osha with JMP Securities. Hi. This is actually Hillary on for Joe. I just kind of want to get back to the non solar. I know you said you're expecting ramp might look like over the next several quarters?
And then longer term, what you kind of see a target or optimal split between solar and non solar? Thank you.
That's even harder than to predict the future. So as mentioned last call, we believe that we built a very strong multi pillar company, which will have UPS and storage sales and other ESS products as well as e mobility and 1 or 2 more segments that we will develop in house. Saying that, and as mentioned before, we do not know yet to give good analysis of how fast we can ramp each of the businesses simply because we're still building them. As you know, we bought the UPS for something in the area of $11,000,000 $12,000,000 and we are working on the Kokam side on establishing a completely new and much more advanced capacity and production capability. And with SMRE, it's in the heart of the automotive industry.
So before we'll see the first one or 2 major deals, it will be very hard to give any estimation as you ask. So all in all, I think that we will have a clearer picture of how fast we can grow the UPS after we'll completely adopt their product, start to produce them on our line, etcetera, something which I would expect will happen in Q1 2020. We will have, I think, better view on Kokam somewhere between Q4 this year, maybe a bit later. And regarding SMRE, I think it's even hard to predict when should we see enough horizon, but it can happen in 1 to 3 quarters from now.
Okay, great. Thank you.
Thank you.
And our next question comes from Jeff Osborne with Cowen and Company.
Hey, good afternoon, guys. Just a couple on my end. I think on the last call, we had talked about getting to a 36% plus solar gross margin range, which was your prior guidance at some point in time, I think in Q3 is what you had indicated. Is that still the trajectory? I know that you guided for improvement in Q2.
I just want to get a sense of what you're seeing for the second with the moving parts of warranty and pricing?
So again, it's not without analyzing Mr. Trump, I think that as mentioned before, we believe, as I think we said last time, 3 to 4 quarters and I think we still feel comfortable with this estimation.
Got it. And then, guys, is there any conversations that you're having around safe harboring of either optimizers or inverters? Is that something that possibly could manifest itself between now April of next year?
Of course, we still need to learn exactly the regulation. I think they are a little bit different from the regulation of the last safe harbor. I think it was in 2013 or I'm not sure, don't catch me on the year. We're learning it, but yes, there is a nice potential. Of course, it will impact, if at all, somewhere between Q4 and Q1 next year.
Got it. And then you highlighted, Ronen, on the debt and keeping that with Kokam and SMRE. Can you just talk about what your plans are for capacity expansion? A 2 part question, I guess. 1, remind us what the capacity is today?
And then 2, where you're going and how much that will cost? Is that something that you can give some guidance on CapEx in particular for the year?
So not yet. So capacity today at Kokam, we have 1 50 to 200 megawatt depend on the blend and the majority are high very high ended sales with up to 11,000 cycles that go to specific very high end markets. And that was the reason why we acquired the company because of the really special capabilities in chemistries, in long term and amount of cycles and so on. Regarding capacity and price of CapEx, we are working and we'll have we're working intensively on checking 3 generations of options of expansion, one is like me too. And then if we will go with this direction, then you probably know the CapEx related to any additional once you go out of capacity we would like to add.
The chances will go with me too in production, different approach and one is based on almost or majority of self development machines. And once I think it will take us 3, 4 months and we'll know what we do, We will share the capacity and more or less the schedule and the expected CapEx investment.
And Jeff, just to add to this, as we said all along, we do expect that once we make the decision, we would try to make the to take the majority of the financing from Korean banks in Korea itself in order not to utilize monies coming from the United States into Korea and not to create any kind of, I would call it, tax accidents.
Makes sense. I appreciate it. Thank you.
Thank you.
And that concludes today's question and answer session. I'd like to turn the conference back to Guy Sella for any additional or closing remarks.
Thank you. In summary, this quarter we continued our expected growth and execution on all fronts. The solar business continued to generate increased demand for our products and we continue to supply the market with top notch innovative technology, while also investing resources in new products that will address the clean energy and e mobility evolution. Thank you all for joining us on today's call. All the best.
And that does conclude today's conference. We thank you for your participation. You may now disconnect.