Solaredge Technologies Inc

NASDAQ:SEDG

Earnings Call Transcript 2018-Q1

[Operator]

Good day everyone and welcome to the SolarEdge Conference Call for the First Quarter ended March 31, 2018. 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 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 of the SolarEdge investor website.

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

[Erica Mannion, Sapphire Investor Relations]

Good afternoon. Thank you for joining us to discuss SolarEdge’s operating results for the first quarter ended March 31, 2018, as well as the company’s outlook for the second quarter of 2018. 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 first quarter ended March 31, 2018. Ronen will review the financial results for the first quarter and provide the company’s outlook for the second quarter of 2018. 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 a sole property and copyrights SolarEdge Technologies with all rights reserved.

Please note this presentation described 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 it will 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 a substitute 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, 2018 press release or the presentation may obtain a copy by visiting the Investor section of the Company’s website.

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

[Guy Sella, Founder, Chairman and CEO]

Thank you Erica. Good afternoon and thank you for joining us on our conference call. We concluded our first quarter with revenues of approximately $210 million, up 11% from last quarter and an increase of 82% from the same quarter last year.

We’re reporting GAAP gross margin of 37.9% and non GAAP net diluted earnings per share of $0.87 for the first quarter. In the quarter ended March 31, 2018, we shipped 800 megawatts of AC nameplate inverters. Overall, we ship 2.5 million power optimizers and 100,000 inverters.

We continue to see healthy diversification of our business, both geography and product mix. Specifically, this quarter’s sales in the United States accounted for 57% of revenues. Sales from Europe accounted for 30% of revenues and sales from the Rest of the World, primarily, Australia accounted for 13% of our revenues.

Our product mix revealed further expansion of our commercial sales which compromise 37% of megawatts ship this quarter. Looking at our bottom line numbers our non GAAP net income hit a record high of $42.6 or $0.87 per share and we generated record cash from operations amounting to $64 million.

Moving to the business front, we have newsworthy updates. Last week we announced in OHSAS product for grid and solar fleet operators. This is a cloud base aggregation software product that allows turning multiple solar and storage system into a virtual power plant.

We believe that adding grid services capabilities to our current product offering will increase our differentiation and competitiveness. While, we do not expect these services to impact our revenues in 2018 in any significant manner, one such services gain market acceptance, they are expected to generate recurring revenues at high margin.

As you may know today, we also issued a press release announcing the definitive agreement for acquisition of the assets of Gamatronic Electronics Industries Ltd, a company that develops, manufacture and sells uninterruptible power supply systems, also known as UPSs.

Gamatronic UPS business will serve as the basis for a new solar business unit. You may recall that we have said that SolarEdge will be developing either organically or by means of acquisition, additional abilities outside the solar arena. This acquisition is the second step in this direction, followed by our EV chargers, which were developed internally and are already shipping embedded in our inverters.

A little background on the on the second step, which we announced today. This is an asset purchase of business called Gamatronic. Gamatronic develops, manufactures and sells UPS electrical devices that provide emergency power to appliances, when the input source fails.

The company products included UPS system of wide range of outputs, monitoring and management solution of power systems. Gamatronic has been selling this product since 1970 globally, including the United States, China, Europe, South Africa, and Latin America.

The market for UPS product is very sizable, estimated at $7.7 billion for 2018, and we believe that with Gamatronic business operating as part of SolarEdge, we can leverage our track record of technological innovation, operational excellence, and power electronics expertise in combination with Gamatronic intellectual property, know-how and market presence to build a leading global UPS business.

The acquisition is for approximately $11.5 million substantially all Gamatronic’s assets including its intellectual property, brand and tangible assets, and includes the two year earn out provision for 50% and 33% of the net income of that business in each year following the closing respectively.

The agreement is subject to standard closing condition and thereafter hundred of employees will join us as SolarEdge employees. While this acquisition is relatively small in size, it is an opportunity for us to begin, apply our innovative approach to new fields outside the solar arena in order to drive progress in smart energy management and for us some formed the way the uses and consumes energy.

Given the business we’re acquiring is small relative to our revenues, we expect minimal contribution to our 2018 revenue and marginally positive contribution to EPS for the rest of the year.

And with this, I hand the speaker over to Ronen, who will review our financial results.

[Ronen Faier, Chief Financial Officer]

Thank you Guy. And good afternoon everyone. Before starting to review of our financial results for the first quarter of 2018, 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 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 in the press release issued today.

Now let’s start with the financial results for the first quarter of 2018, so it’s on revenues were up $209.9 million an 11% increase compared to 189.3 million last quarter and an 82% increase compared to 115.1 million for the same quarter last year.

A record revenues this quarter, which overcame the typical seasonal slowdown were driven by strong momentum in all regions. These quarter revenues from the United States reached $118.9 and represented 56.7% of our overall quarterly revenues. Sales in Europe were 64.1 million and 30.5% of our quarterly revenue.

We continue to generate solid revenues from the Netherlands and Germany, while also growing revenues in other countries in Europe. Revenue generated from sales outside of the United States and Europe continued to grow and reached a record high of $26.9 million representing 12.8% of our total revenue.

From a customer concentration perspective, our top 10 customers represented 59.1% of our quarterly revenue, a decreased from the last quarter while only one customer accounted for more than 10% of revenues.

On a per watt basis, blended ASP slightly increased this quarter mainly due to geographic and product mix and a slight tailwind from the strength of the Euro against the U.S. dollar. Gross margins for the quarter was 37.9% compared to 37.5% in the prior quarter and 33.6% in the same quarter last year. This margin is partially a result of the increased ASP, but it was also intensified by further reductions in the manufacturing cost of our product.

The component shortages continue to affect our margins this quarter by necessitating us to continue an air ship products. Having said that, precautions taken in the previous months to secure various components supply combined with a buildup of safety stock help us to reduce that to a spending on the air shipments this quarter relative to the last quarter.

We expect to continue to incur air shipping expenses in the next quarters which will proportionately decrease as a percentage of revenues. I would also note that our gross margins result is at the higher range of our targets model and as discussing the last call, we aim for gross margins to remain at the approximate level of 37%, give or take a single percentage point.

Moving to operating expenses. R&D expenses were $17.9 million, an increase of 9% compared to the previous quarter, and an increase of 56% compared to the same quarter last year. As in the last quarter, this increase mainly attributed to the increase in headcount and consistent with our decision to invest resources in product development and innovation, cost reduction and investment in factoring processes that will allow us to continue to bring new products to the market as well as reduce the cost of our current product and further improve their quality.

Sales and marketing expenses for the quarter were 16.2 million an increase of 15% compared to the previous quarter and 50% increase compared to the same quarter last year. This increase is mainly a result of an increase in our global headcount.

G&A expenses were 4.7 million for the quarter, a decrease of 20% from the prior quarter and a 6% increase year over year. As you may recall, in the third and fourth quarters of 2017, we incurred a onetime litigation expense which affected our G&A in that period.

In total, operating expenses for the first quarter were 38.8 million or 18.5% of revenues compared to 36.4 million or 19.2% of revenues in the prior quarter and 26.7 million or 23.2% of revenues for the same quarter last year.

As a result, operating income for the quarter reached a record high of $14.8 compared to 34.6 million in the previous quarter in $12 million for the same period last year. Financial income for the quarter was $0.6 compared to $1.5 million in the previous quarter and 1.4 million for the same period last year.

These financial income is a result of favorable exchange rate gain and interest earned on our investment which were offset by $0.5 million of noncash interest expense resulted from the adoption of the new revenue recognition standard.

Under this new standard payments were received for services that are to be provided over periods longer than one year such as the deferred income for monitoring services and extended warranties are to be treated for accounting purposes as loan and subject to deemed interest. In our non-GAAP results we separate these expenses out in order to reflect the actual financial income generated from our continued operations

This quarter we had a tax expense of 5.7 million compared to a tax expense of 16.6 million in the prior quarter and the credit of 0.8 million for the same period last year. On this note, I would like to expand a little and highlight the main drivers of this figure and set future expectations.

Based on the law for industry encouragement in Israel, we enjoyed a two year tax holiday that is set to end on June 30, 2018. Once over, our technological company corporate tax rates will be approximately 14%.

Since the tax expense is calculated annually we started to accrue for these taxes is in the first quarter using an average tax rate between the tax exempted period until the end of June and the technological company corporate tax rate from July to the end of the year.

So this amount we add current taxes in all other jurisdictions in which we operate, mainly in the United States. Under the newly adopted Tax Cuts and Jobs Act in the United States when the foreign tax rate fall below a certain threshold and newly imposed guilty tax is levied in the United States.

This results in an average tax rate of approximately 14% across all geographies for this year, despite or actually due to the fact that our tax holiday in Israel and on June 30 of this year. It should be noted that we do not expect this overall 14% rates to substantially change in the next few years.

In addition, for a period to period comparison purposes, I would like to remind everyone that as we discussed on our last call in the fourth quarter, our tax expenses were impacted by one time mandatory deemed repatriation tax related to the tax cuts and jobs act signed into law in December 2017.

GAAP Net income for the first quarter was $35.7 million compared to a GAAP net income of 19.5 million for the previous quarter and 14.2 million for the same quarter last year. Our non GAAP net income was $42.6 million compared to a non-GAAP net income of 41.2 million in the previous quarter and 16.5 million for the same quarter last year.

GAAP net diluted earnings per share was $0.75 for the first quarter compared to $0.42 in the previous quarter and $0.32 for the same quarter last year. Non GAAP net diluted EPS was $0.87 compared to $0.85 in the previous quarter and $0.36 in the same quarter last year.

Turning now to the balance sheet, as of March 31, 2018 cash, cash equivalent restricted cash and investments were $400.8 million compared to 345.1 million at December 31, 2017. During the quarter of 2018, we generated $64 million in cash from operations. AR net increased this quarter, reaching $127.5 million compared to a 109.5 million last quarter.

DSO quarter remained flat at 64 days. As of March 31, 2018 our inventory level net of reserves was at 98.4 million compared to 83 million in the prior quarter. These elevated inventory level represent both finished goods in transit and in our warehouses as well as increased safety stock held with our contract manufacturers to ensure undisrupted production.

Before concluding our quarterly review and providing guidance for the next quarter, I would like to refer to the financial aspects of the transactions we announced today. As Guy described we have signed an asset purchase agreement with Gamatronic Electrical Industries Ltd for the purchase of the assets of Gamatronic.

In 2017, Gamatronic generated revenues of approximately $19 million and reported and approximate net loss of $1.8 million. Part of these losses was attributed to expenses related to being a publicly traded company in the Tel Aviv Stock Exchange.

We expect that given the revenues of the Gamatronic relative to our and assuming cost efficiencies that can be implemented immediately after the closing of the acquisition, as well as the elimination of expenses related to being a publicly traded company, these acquisition will yield a minimal contribution to our 2018 revenue and marginally positive contribution to EPS for the rest of the year.

Moving on to the guidance for the second quarter of 2018. We expect revenues to be within the range of $220 million to $230 million and gross margins to be within the range of 36% to 38%. Gamatronic asset acquisition is subject to customary closing conditions and we expect to grow that very late in the second quarter of 2018. Therefore it will have minimal effect on our second quarter financial results both on the top line and on EPS.

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

[Operator]

Thank you. Ladies and gentlemen, the question and answer session will be conducted electronically. [Operator Instructions] And your first question will come from Mark Strouse with JP Morgan.

[Mark Strouse, JP Morgan]

Hey guys. Good evening. Thanks for taking our questions. So I just wanted to start with the acquisition if I can. So understand the elimination of the public company costs and some of the costs synergy you can expect. Can you just provide a bit more color? Are there any revenue synergies to talk about as far as the technologies or any of the sales channels or anything like that?

[Guy Sella, Founder, Chairman and CEO]

Hi. Thank you for the question. So, as far as sales channels, UPS market and solar inverters are quite different, so we’re not expecting to be able to leverage our sales channels. From all other perspective, the UPS is very similar to inverters. So in nature you convert a DC to AC. The technology wise per se is very, very similar.

So we are planning to leverage, of course our typologies, it will come in the second phase, our operational excellence or ability to produce much cheaper, much faster, big volumes, our cost reduction capabilities that was proven in the last few years.

And all in all, it is a much easier market from perspective of the cost per watt and warranty to people that are used to inverter. So just to give the proportion, every selling price for even smaller UPS is already around $0.10, $0.11 per watt, which is more than what you see similar three phase inverter’s in commercial applications. While, those inverters are fit indoor only though the product itself, the cheaper to produce and comes with only one year warranty.

And on the other hand, it’s usually come at the higher percentage with a service contract. So you’re going to get recurrent revenue from a maintaining such installations. So all in all we think this is a perfect new business for our current capabilities to leverage.

[Mark Strouse, JP Morgan]

Okay? Okay. Thanks Guy. And then switching gears, I knew it just came out, but just wanted to get your initial take on the 0aw that just passed in California requiring a rooftop solar on new home construction, how material that might be to SolarEdge?

[Guy Sella, Founder, Chairman and CEO]

So that’s something that we are not experts in your building and what will be the mandatory size. These types of regulations are available in Europe for quite some time in UK, Netherlands and in few other countries.

Usually most people are installing smaller under this mandatory law, people are installing a smaller system, usually four to eight panels. We just came out with a perfect product for such a installation.

It’s a subset of HD way, the smaller invertible physically and an optimizer can that can be connected to four, five, six, seven or eight, the PV modules. So we’re well set for such a market in Europe, of course in California will be at a great addition. I’m not the expert in the amount of new houses in California to estimate the potential growth for the portable type market in California due to this regulation.

[Mark Strouse, JP Morgan]

Okay, that’s helpful. That’s it for us. Thank you very much.

[Guy Sella, Founder, Chairman and CEO]

Thank you.

[Operator]

From Roth Capital Partners, Philip Shen.

[Philip Shen, Roth Capital Partners]

Hey guys congrats on the great results. Had a quick follow-up on a Gamatronics. You talked about, the second phase of work being focused on topology, kind of going a little bit bigger picture if ‘17 revenues were 90 million. In ‘18 is in terms - modest in terms of contribution, what kind of revenue could we see in 2019?

And historically, with the market size being 7 billion for UPS and then being on 19 million, you know that that’s a small share. So what is the plan to gain share? How quickly do you think you could gain share? And which and markets specifically would you plan to attack for that share again?

And then finally, can you speak to - is there kind of synergistic sales at all? I mean, what is beyond the cost synergies and so forth, what other synergies do you imagine and envision? I know there’s a lot there. Thanks for taking that long first question.

[Guy Sella, Founder, Chairman and CEO]

So I will try. So I would expect that in the first 12 months. So let’s assume we’ll finish date. Did the closing by the end of the quarter, I think in the first 12 months, I wouldn’t expect a dramatic growth in the run rate of the company.

I think in the following 12 months. I think we are supposed to be able to grow significantly in such a market mainly due to the fact that the company as it operates today, Gamatronic suffer from lack of resources and in many aspects, older time priorities and managerial priorities once it comes to marketing and sales budget.

While, I don’t think we can leverage the current sales people, we’ll leverage, of course, the infrastructure of the offices abroad and support office and customer service in all of those geographies were the obvious first two geographies to focus on will be the U.S. and Europe.

I think it’s no different than what we did in 2010. We started a number 200 in the world or whatever it was, the number with zero sales and we simply came to the biggest market with right offering and the right price point and managed to take market share slowly, but surely.

I think that here we’re starting with a very good product. Gamatronic developed a very good modular UPS system. It almost all right sizes and have a perfect fit of product for a data centers. Now we need to increase their competitiveness with what I already described.

And then dramatically improve the sales and marketing of the company based on the knowledge that we aggregate in the last 10 years, the last eight years. I think that, like any other market that you are learning, it won’t be simple, but I think it’s very doable. And I would expect that from the position we are, we would be able to take market share fast and in an effective way while increasing the profitability of this business within SolarEdge.

[Philip Shen, Roth Capital Partners]

Great. Thanks. So shifting to you disappeared…

[Guy Sella, Founder, Chairman and CEO]

So you said shifting and then we hear you.

[Philip Shen, Roth Capital Partners]

I’m sorry. Okay. I said shifting to margins. I think you mentioned Ronen mentioned on the call that you guys are at the higher end of the range now a result of that. Uh, you know, historically we’ve said in the past is that you might as perhaps give some concessions with pricing, some of our checks, you know, heading to the results today suggests that indeed you may have been getting some price concessions, and not be trading off margin meaningfully.

And so can you speak to that at all? Are you able to kind of reduce pricing a little bit to help additional customers out and at the same time maintaining profitability, strong profitability? And then also comments on any share shifts to expect ahead?

Do you expect to kind of accelerate some of your share gains as a result of perhaps being at the higher end of the margin range and being able to win some, some additional customers?

[Guy Sella, Founder, Chairman and CEO]

I think, we elaborated in the last two calls, but in general, we’re not expecting to do anything dramatically. What we feel that we are on one hand that the healthy growth margin, on the other hand a push from component suppliers, from the perspective of component suppliers there is also demand for the at least 18 months. And we’re constantly fighting to requests for increase of component prices.

So some of these will balance increase of component prices, some of it will be dedicated ability to lower prices in big project or in geographies which are a more competitive on price such as India, et cetera.

But in general, I think that our current price of both residential and commercial are very healthy and allow us to take market share with, as we stabled in the beginning of Q2. So I’m not expecting any dramatic shift in prices in the next six to nine months. We will use the disability to take a big project, win new project or to close important deals, but nothing that will be a wider or a more extensive than that.

[Operator]

And we’ll go to Jeff Osborne with Cowen and Company.

[Jeffrey Osborne, Cowen and Company]

Yeah. Good afternoon. I just had a couple of questions. Guy, I was wondering if you could characterize the M&A funnel. It’s nice to see you move forward. But the size of the acquisition I guess was a little smaller than I think I was expecting just given the cash flow that you guys are off on a quarterly basis. Can you talk about, is this something routinely that maybe we could see two to three small tuck in deals like this a year? Or is that -- maybe outside the realm of your thinking?

[Guy Sella, Founder, Chairman and CEO]

So we -- I think we also gave the color on that. We are working with quite many options to get into a understanding of potential deals early enough. While we didn’t do any large acquisition, we are not against doing a large acquisition.

If we’ll find the case, were the multiplier is similar to SolarEdge and the company is healthy and profitable. We were looking for such companies in quite some segments that we believe are adjustment in a healthy way to what we do. One example is the smart meters, another example he said, demand response.

In all of those -- another signal in other example is batteries we didn’t find none of them are companies that were in the position that, that were -- you could buy them and were healthy in structure and were profitable. But we keep looking. So it’s just -- I guess it’s matter of timing and luck and the hard work. At the end we’ll be very happy to, to grow our business not only organically.

[Jeffrey Osborne, Cowen and Company]

Makes Sense. I just had a couple of quick ones on the solar side, you typically talk about each quarter, so I might’ve missed it. But can you give the C&I mix in the quarter run in and the a percentage that was HD-wave. Just I’m trying to get a sense of the product cycle. Is that fully implemented? And then just lastly it always comes up, but any commentary about pricing and the second half of the year, any change that 7.5% to 10% annual decline that you typically see just especially in light of the mix impacting pricing this quarter with it being up slightly?

[Guy Sella, Founder, Chairman and CEO]

I think there were three questions here. So HD-wave is 100% implemented in all on grid. The only a version of phase one, phase inverter’s that is not HD, the backup sold in the US. That will be the last day in work to be converted to HD sometime in 2000, probably end of this year, beginning of 2019.

Regarding prices, I think I gave the filling. We’re not expecting a broader ASP erosion in the coming two quarters. I think price is supposed to be quite stable, while at the same time we might use our ability to be more competitive on very large project or a specific bids, especially in countries where the price pressure is a more a brutal such as India, maybe Turkey, etcetera. Last question or the last part and the question was C&I. I think it was megawatt wise 37%.

[Jeffrey Osborne, Cowen and Company]

Perfect. Thank you so much.

[Operator]

And we’ll go to Edwin Mok with Needham and Company.

[Edwin Mok, Needham and Company]

Great. Thanks for taking my question. First, maybe throw down with C&I part little bit. I noticed that you, U.S. sells is roughly flat for this quarter of the rest of the U.S. down. So is it fair to assume that a commercial and U.S. crew this year offset declines resi and any way you can quantify how much with commercial in U.S. roughly at least?

[Ronen Faier, Chief Financial Officer]

So we generally do not break in or between commercial and residential, between the various geographies. However, as we noted in the last few quarters, you generally see a phenomena where if, say the ratio to be relatively similar between the U.S. and rest of the world today, with the exception of certain regions like India or places where you see only C&I. But all in all, I think that if you have the 37% of a C&I, I would say the giver or take U.S. and on us is about the same number.

[Edwin Mok, Needham and Company]

Okay, great. Ronen, let me stick with you. On the deal anyway, you can’t give us the margin profile of this business, obviously it is similar to a SolarEdge higher margin in general, low margin and in terms of costs of solar OpEx is it more expensive business to run, any color Ronen?

[Ronen Faier, Chief Financial Officer]

Okay. So let’s start from the margin. Actually, the margin profile today of this business is a very close to our. But this is given the fact that to Gamatronic businesses relatively smaller than ours. So from a, although you see today similar margins, the potential there is relatively good given the fact that once we will be able to lean a little bit more on our economies of scale, on our ability to better source and operate the little bit more effectively.

Given the size of our operations, we believe that we can even improve them to be a better than the margins that you see on Solar today. When it comes to OpEx, again, I think that there are two things that needs to be differentiated.

The first one is that Gamatronics is a standalone company used to be a publicly traded company. And as you know, being a publicly traded company means that you still need to have a relatively extensive G&A expenses simply to comply all of the regulations of being a traded company.

Once these are taken out and again, once we will see that we will be able to leverage on some of our ability and silver, some of our resources elsewhere, I believe that the OpEx to revenue should be a similar level as it is today.

So all in all, we expected slightly better margins. Again, not immediately, it will take awhile, but slightly better margins with a similar OpEx structure.

[Operator]

From Canaccord, Chip Moore.

[Chip Moore, Canaccord]

Thanks. Hey guys, maybe can talk a little bit more about the rollout out of some of these new grid service, a virtual power plant capabilities. How do we think about the go to market strategy? What do you think about adoption potential market potential over time?

[Guy Sella, Founder, Chairman and CEO]

So we, the VPP and a primary frequency reserve, we see that there are already quite a lot of interest from utilities. I think the strongest interests that we are aware of these parts of Germany and Netherlands, Australia and parts in the U.S. that type of a business is fully served by the current sales force we have.

The same people while coming to a utilities which are involved more in some areas and less than some areas and actually installing Solar, first are exposed to such bids is already coming as, especially VPP in Australia is coming as the pool from some of the market. While, in some cases we are adding as part of our offering and managed to start the cycle to push a utilities into a Beta test or a pilot program.

In general thing. this is a space that make all the sense. It will take time to grow to -- to become a significant part of the total revenue dollar wise. But at the same time, I think it’s, at least in the current time, it gave us an edge and differentiation that I believe will help us and will put us in in the pole position once you come to close big deals with utilities, even for the classical installation of Solar or frankly solar with battery.

[Chip Moore, Canaccord]

Right. Okay. Thanks for that. And maybe just one more on, maybe you can provide a little more color on some of the geographic mix, I guess, in some of the more nascent area that looked like Australia was strong. Maybe we can talk about that in India penetration and some other areas? Thanks guys.

[Ronen Faier, Chief Financial Officer]

Okay. So, as I, as I mentioned with the call, actually we saw strong quarter in every region in which we operate. But I would say that all in all, and again by the way, we need to take into account that this is in the quarter that these traditionally considered be a slower quarter compared to the previous one given winter conditions in the northern hemisphere.

So with that said, again the U.S. continued to be a stable, strong. We continue our, a share taking dare, we continue our expansion and I don’t think that there is anything special to say there. In Europe what we continue to see is the strength of the Netherlands and Germany, and Netherlands the market is growing very rapidly.

The government put the very ambitious targets for solar growth because they’re lagging behind with the renewable, usage on their agreed compared to the EU requirements that therefore for the market is there, it’s growing and it’s expected to grow in the next few years quite substantially.

But other than the Netherlands in Germany, Italy is a great market. The UK is a great market. And again, even markets like Sweden continue to contribute very nice results.

Moving to Asia and Australia, so Australia is a target market for us as we mentioned in the last quarters. We see very nice share gains there. We see our product to be more broadly used and I think that we’re satisfied with the growth dare.

India is growing, but a relatively slowly. Again, it’s a market that takes a little bit more time, when you look at the typical sales cycle. But again, when we look at the pipeline that we have there, we feel that all in all it meets our expectation.

And again, there are other markets that you start to see popping in places like Taiwan or Korea or other markets that are growing as well. So all in all, it’s basically a growth in all regions, but you start to see the direction that Guy mentioned in the last call, moving towards the 50% US, 50% non-US at the end of ‘18 and towards 33% of US, Europe and Asia as we move forward towards ‘19 and ‘20.

[Operator]

And next we’ll hear from Colin Rusch with Oppenheimer.

[Colin Rusch, Oppenheimer]

Thanks so much guys. Could you talk a little bit about the geographic exposure for Gamatronics assets? Are you getting into any new geographies with these guys and how much of their sales organization are you going to be able to leverage in your opinion?

[Ronen Faier, Chief Financial Officer]

Sorry, how much, what was the second part of the question Colin?

[Colin Rusch, Oppenheimer]

How much are you going to be able to leverage their sales organization?

[Guy Sella, Founder, Chairman and CEO]

So I think as, as I mentioned, probably the biggest GAAP that Gamatronic has today is a lack of investment in sales and marketing and that will be probably the first thing will do based on the current structure, is to increase sales force to improve sales processes and to add marketing, which currently it’s something that the company is doing in a very low level.

I think that by that we’ll be able to increase market share relatively fast in the geographies that the company is selling it, which is mainly, some countries in Europe, US, a little bit in South Africa, little bit in China.

I am not expecting that will, I’m expecting to put it from the other perspective. I’m expecting that it will take us six months to start to see the changes that after implementation and probably a 12 months from the closing until the system will run as we, believe in children based on the current product.

I would expect that the in 18 -- in approximately 18 to 24 months, we’ll have new set of products, the new topologies based on them on them, the total combined ability of SolarEdge R&D and Gamatronic R&D and with this set of product, I believe will take it to the next phase and start to take market share in a bigger way. Building a business that I would expect that in three years from now supposed to be in the size of few hundred million dollars.

[Colin Rusch, Oppenheimer]

Okay. That’s very helpful. And then can you talk a little bit about energy storage as a percentage of sales? I don’t know how much visibility you have to, um, the solution on a software basis, but wanting to get a sense of how many of your installs that you’re included in including storage at this point?

[Guy Sella, Founder, Chairman and CEO]

So we have very good is the ability for that since it’s a specific inverter in North America and in Europe it requires another interface. So we have good visibility. Today the storage market is limited, I think mainly not from a demand in the market, but rather from the availability of spare batteries.

So I think that from the perspective of the amount of inverters, it’s still a negligible. The amount of inverters we’re selling for battery application for storage applications, but that’s not because of limitation on the size of the inverter and I don’t think that - it is today limitations in the demand from the market, different than what if you remember I said a couple of years ago, actually three years ago when we just started and I said well, the demand building will take time.

I think today, three years after the first the introduction of OHSAS product in the beginning for us with Tesla, I think now it’s a expected to reach a demand and it’s more of a matter of availability of batteries in order to really drive this market volume.

[Operator]

Next we’ll hear from Carter Driscoll with B. Riley FBR.

[Carter Driscoll, B. Riley FBR]

Hey guys. Hey Ronen. You talked a lot about the improvements you can make with the in the acquisition from a company perspective, obviously driving out costs and building sales channel. What about the kind of technology overlap with the ability to use some of yours? I’m assuming there UPS is battery base not fly wheel.

So a couple of things; one, talk about the kind of better environment, I mean it’s been a fairly large market but a fairly sleepy, guys like Schneider, Ethan and Mitsubishi, kind of long dominated that space.

Maybe talk about some of the specific end markets. Obviously the data center markets probably gets most high profile, but maybe talk about some of the others like healthcare and you know, can you leverage your existing or you’re pushing the battery and displaced maybe some of their legacy technology. Is that the type of product overlap or the way that you can improve the product profile?

[Ronen Faier, Chief Financial Officer]

So I think there were quite a few. So top question here. So the technology developed by Gamatronic is very advanced, especially from the software perspective. It has many capabilities that will also help us to improve our, a storage product mainly in the area of the combination with the generators and the ability to switch in and out.

And UPS or storage device in a one cycle frequency. Those are, concurrently feed two characters that are common in UPS and not yet common in them in the standard storage that we are selling. On the other hand, and we’ll use the HD-wave topology to further improve the efficiency and the cost of the product they currently have.

But that again, as mentioned before, that will take 18 to 24 months to develop a thing that the current set of products that Gamatronic is very advanced, especially as you mentioned for the for the area of - for the market, for the segment of data storage.

I think your question about the, how you compete to be good players in the area? Is the classical question. When we came, SMA was number one, started to sell product 28 years ahead of us. The market, 85% of the world’s market was in Europe.

And if I remember correctly, above 50% were in Germany, so we had to compete with SMA when they had a lead of 28 years. In Germany and with time and dedication, good product, good people we managed to close a big part of the gap. And I would, uh, I would expect that today we’re number one in residential even in Germany.

So, I think it’s, of course it’s always hard to compete, always the advantage for the big players that are already in market, such as Schneider than you mention and Ethan and Emerson, those are the three biggest ones, but we competed with Schneider in quite some areas and then, and I don’t think that we are shy.

[Carter Driscoll, B. Riley FBR]

Appreciate that color. Maybe just switching gears a little bit, you kind of the elevated inventory, do you have any sense of, how many, maybe weeks at the top distributors? There are, I mean, getting some questions about whether the inventory is that just a little bit high and as you mentioned, because they want us some safety stock in or whether they’re a little bit elevated and you know, maybe that falls down some demand the second half?

[Ronen Faier, Chief Financial Officer]

We have good visibility, probably not perfect to inventory of fed distributors in Europe and the US. I think in generally within four to eight weeks, I think the majority of the, from what we can, achieve the information, I think in most of the European big distributors, the volume, the inventory is within the four weeks.

In the US, there are distributors that have inventory within the eight weeks period. I don’t think these levels are out of the healthy a stock and I don’t think it’s suppose to limit our ability grow, in this quarter for sure.

[Operator]

Operator Instructions] Next we’ll hear from Joseph Osha with JMP Securities.

[Unidentified Analyst]

Hey, this is actually [Haley Caley] on for Joe Osha and I just had a quick follow up question to the geographic mix and I was wondering if you guys could break that down in terms of the megawatts shift by region?

[Ronen Faier, Chief Financial Officer]

We usually do it based on the megawatt shift only on the revenue and as, as we provided, but again, since all in all the prices are relatively, immaterially different between geographies and the separation between a commercial and residential. So all in all you can assume relatively similar distribution.

[Unidentified Analyst]

Okay. Great. Thank you.

[Operator]

And at this time I would like to turn conference back over to the CEO for any additional or concluding remarks.

[Guy Sella, Founder, Chairman and CEO]

Thank you. In summary, we concluded this quarter with strong financial results on all parameters and continue growth and diversification of our product mix and geography presence. We’re excited to announce our first acquisition, which one’s close, will enable us to apply or financial and technological strengths and innovation to the UPS sector.

This is our first nonorganic step in business outside the solar arena, and will further our mission to drive progress in smart energy management and transform the way the world produces and consumes energy. Thank you very much for joining us on today’s call. All the best.

[Operator]

Ladies and gentlemen that does conclude today’s presentation. Thank you everyone for your participation and you may now disconnect.