Solaredge q1 2018 becoming a smart energy company – solaredge technologies (nasdaq sedg) seeking alpha electricity questions grade 6


Today, the company sells its products in the United States, China, Europe, South Africa, and Latin America, but seems to have spread its sales channels too thinly, with operating expenses exceeding gross profit in each of the last two years. Gamatronic financials

In 2017, Gamatronic reported net income of -6.3 million NIS (-$1.8 million) on revenues of 65.7 million NIS ($18.4 million). 2017 revenue was down 13% YoY, but gross margin improved significantly, from 28.1% in 2016 to 36.2% in 2017, reducing the operating loss from 9.3 million NIS ($2.6 million) in 2016 to 4.5 million NIS ($1.3 million) in 2017, and bringing cash flow from operations close to break-even.

During the earnings conference call, SolarEdge CEO Guy Sella blamed Gamatronic’s lack of profitability to sales and marketing (S&M) inefficiencies, a diagnostic confirmed by the financial statement. Gamatronic 2017 gross margin of 36.2% falls within SolarEdge’s 36-38% target range for the solar inverter business, but operating expenses were a whooping 40% of revenues in 2016, and 43% in 2017.

SolarEdge is purchasing substantially all of Gamatronic’s assets, including its intellectual property, brand, and tangible assets, for $11.5 million, and a two-year earn out provision for 50% and 33% of the net income of that business in each year following the closing. We don’t believe that the earn out provision will amount to much more than $500k, bringing the total acquisition price at some $12 million.

At $12 million, SolarEdge is paying 0.65x 2017 sales and 0.5x shareholders’ equity, which is a very attractive price if SolarEdge manages to put OpEx under control and bring the business back to profitability, and an absolute bargain if SolarEdge eventually grows the new business unit to a meaningful share of the $7.7 billion worldwide UPS business. Small, but meaningful acquisition

While at its current size Gamatronic is just a drop in the bucket for SolarEdge (initial contribution to total revenues below 3%), we view the announcement as proof of management’s disciplined and value-conscious approach to capital allocation.

SolarEdge is acquiring another Israeli company in an adjacent field with sizable TAM for a discounted price, which limits the downside while providing ample room for appreciation. (At the core of a UPS system sits an inverter that converts DC power from a battery to AC power for the appliances)

Since its foundation, SolarEdge has proved capable of rapid value-accretive organic growth. Now the company has an opportunity to prove its ability to integrate and turn around an acquisition. If successful, the operation will serve as a blue print for future acquisitions that can help accelerate shareholder value creation.

During the earnings conference call, management provided guidance for marginal positive EPS contribution in full year 2018, as SolarEdge cuts redundant costs, including compliance costs associated with being a publicly traded company. One of the first priorities will be investment in sales & marketing to capitalize on what SolarEdge sees as a strong product offering, and bring the unit back to growth.