Solaredge Technologies Inc

NASDAQ:SEDG

Earnings Call Transcript 2017-Q4

[Operator]

Welcome to the SolarEdge Conference Call for the quarter and year ended December 31, 2017. 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 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 of 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.

[Erica Mannion, IR]

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the fourth quarter and full year ended December 31, 2017, as well as the company's outlook for the first 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 fourth quarter and full year ended December 31, 2017. Ronen will review the financial results for the fourth quarter and full year, followed by the company’s outlook for the first 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 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 US 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 US GAAP. Listeners who do not have a copy of the quarter and year ended December 31, 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.

[Guy Sella, Chairman and CEO]

Thank you, Erica. Good afternoon and thank you all for joining us on our conference call today. We concluded the quarter with revenues of $189.3 million and record gross margin of 37.5%. We have a non-GAAP net income of $41.2 million and a non-GAAP diluted earnings per share of $0.85 and we generated $45.8 million of positive cash flow from operations.

In the quarter ended December 31, 2017, we shipped 766 megawatts of AC nameplate inverters, approximately 461 megawatt of which was shipped to North America. Overall, this quarter, we shipped over 2 million power optimizers and 95,000 inverters. As anticipated, we have continued to grow our revenues and were able to overcome a challenging year in terms of industry wide components availability, while expanding our manufacturing capability to meet the growing demand for our products.

Looking at our year-over-year figures reveal strong results. We are reporting annual record revenues for 2017 of $607 million compared to $490 million in the year ended December 31, 2016 and an annual non-GAAP net income of over $115 million compared to a non-GAAP net income of $79 million in the year ended December 31, 2016. Our non-GAAP diluted EPS for fiscal 2017 is $2.43 compared to $1.72 in the prior year. This year, we generated $136.7 million in cash from operations, an increase from the calendar year that ended December 31, 2016 when we generated $81 million in cash.

Profitability and the strong balance sheet is a key to long term success in this industry and it is critical to being able to support the 25 years warranty that characterize module-level power electronics products. As it’s evident from our strong financial performance, our business is growing at a healthy rate. We continue to stay focused on our bottom line numbers. On this front, we expanded our gross margin by keeping our ASP stable, continuing our cost reduction initiatives and as a result, increased profitability and cash flow generation.

We continue to invest significant resources in growing our R&D and customer support infrastructure to address our expanding geographic footprint with new, more cost efficient products and even better services. We have maintained a relatively stable ASP and our annual gross margin for 2017 reached a record high of 35.4%. We are starting to see products from Chinese manufacturer that has recently introduced optimizer with a reduced set of features and relatively high pricing in Australia.

There have been market rumors about this for some time now and we have heard the product will be introduced in Europe as well. From what we have seen so far, the products have only basic functionality and led communication features and a safety mechanism. We expect their market penetration will be challenging, especially in the United States and leaving Western European countries that are mindful of putting quality products on rooftop and are cautious of security concerns that relate to PV systems and their effect on electrical grid, if not properly secured against cyberattacks.

I would like to mention our recently announced co-operation with Japanese technology leader Omron Corporation. Last month, Omron announced that they will be offering SolarEdge three-phase DC optimized inverter solution, consisting of inverters, power optimizers and module-level monitoring to the high voltage Japanese PV market. As part of the launch, SolarEdge will supply high-voltage, three-phase inverters and power optimizers to Omron for local distribution and sales. Omron’s after-sales service network of 140 locations will address the Japanese markets for the SolarEdge solution. This cooperation with a very prestige and well known technology leader in Japan and worldwide is another indication of our success in establishing the SolarEdge brand as a market leader in the PV solutions.

To conclude, our products have now been in the market and gaining market acceptance for more than seven years. We remain confident in our technology leadership, superior customer services, quality and reliability as well our financial strength, which will help us to maintain our market leadership even as these products surface. Given our growth outside of the United States and our continued investment in new markets and in different regions, we are confident that we can continue to grow our revenues in 2018.

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 the review of our financial results for the fourth quarter and full year 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, the impact of the Tax Cuts and Jobs Act and deferred taxes as well as non-GAAP earning per share. Full reconciliation of the pro-forma to GAAP result 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 fourth quarter of 2017. Total revenues were $189.3 million, a 13.7% increase compared to 166.6 million last quarter, and an increase of 69.8% from revenues of 111.5 million in the same period last year. This quarter, revenues from the United States reached $120.4 million, a record high in absolute numbers and represented 63.6% of our overall quarterly revenues. Sales to Europe were $47 million and represented 24.8% of our quarterly revenue.

You may recall that the winter months are often characterized with a slower business in this region. Revenue generated from sales outside of the United States and Europe reached a record high of 21.9 million, representing 11.6% of our total revenue. From a customer concentration perspective, our top 10 customers represented 62.3% of our quarterly revenue, while only one customer accounted for more than 10% of revenues. On a per watt basis, blended ASP slightly decreased this quarter mainly due to geographic and product mix, while the per product basis, a slight ASP increase was offset by an increase of our commercial sales in the overall mix.

Gross margins for the quarter were 37.5% compared to 34.9% in the prior quarter and 35% in the same quarter last year. This record gross margin level is a result of the stable ASP environment, combined with continued cost reduction initiatives that lower our product manufacturing costs. As was anticipated, we spent more on air shipments in order to accommodate increased product demand and industry wide component availability issues.

On the flip side, fixed expenses related to our manufacturing and support represented lower percentage of our revenues. Our current gross margin level is consistent with the top range of the long term model, which we communicated to investors when we went public in 2015 and we believe that absent unusual circumstances, we can maintain it in the foreseeable future.

Moving to operating expenses, R&D expenses were $16.4 million, an increase of 14.3% compared to the previous quarter and an increase of 58.7% compared to the same quarter last year. This increase, mainly attributed to an increase in headcount, is consistent with our decision to invest resources in product development and innovation, cost reduction and advanced manufacturing processes that will allow us to continue to bring new products to the market as well as reduce the cost of our current products and further improve their quality.

Our financial strength and growing profitability fuel these investments. Sales and marketing expenses for the quarter were $14.1 million, an increase of 6.5% compared to the previous quarter and a 35.3% increase compared to the same quarter last year. This increase is driven by our continued investment in the countries in which we operate already and the expansion of our geographic footprint. G&A expenses were $5.9 million for the quarter, an increase of 16.2% from the prior quarter and an 88.7& increase compared to the same quarter last year, mainly resulting from a one-time litigation expense that we initiated in Q3 and concluded in Q4.

In total, operating expenses for the fourth quarter were 36.4 million or 19.2% of revenue compared to 32.7 million or 19.6% of revenue in the prior quarter and 23.9 million or 21.4% of revenue for the same quarter last year. As a result of all of the factors just discussed, our operating income for the quarter reached a record high of $34.6 million compared to 25.4 million in the previous quarter and $15.1 million for the same period last year.

Financial income for the quarter was $1.5 million compared to a financial income of 2.7 million in the previous quarter and a financial expense of $3.2 million for the same period last year. This financial income is a result of favorable exchange rate gains and interest earned on our investment.

Let's turn now to income tax expenses that were impacted this quarter by the implementation of the Tax Cuts and Jobs Act that was signed into law in December 2017. GAAP tax expenses this quarter were $16.6 million compared to a tax expense of 0.1 million in the prior quarter and $2.2 million for the same period last year. In addition, in the fourth quarter, we booked provisional net text charge of $18.7 million, primarily due to one-time mandatory deemed repatriation tax that is included only in our GAAP results.

This provision for a one-time repatriation tax, which is related to earnings and profit accumulated outside of the United States in 2017 and in prior years, was fully recorded this quarter. However, payment of the repatriation tax will be spread over the next eight years, beginning of April 2018 with the majority of the payment due in the last three years of this eight year period.

The good news is that other than the reduced tax rate in the United States, we will benefit from the new tax law by having the ability to access our cash out in the United States in a highly efficient manner. As a result, we have a greater flexibility with respect to our overall capital allocation and investment decision. On a non-GAAP basis, our tax expenses were $0.2 million compared to $1 million last quarter and 0.7 million for the same quarter last year. GAAP net income for the fourth quarter was $19.5 million compared to a GAAP net income of 28 million for the previous quarter and $9.8 million for the same quarter last year.

Our non-GAAP net income was $41.2 million, compared to a non-GAAP net income of 31.5 million in the previous quarter and $14.7 million for the same quarter last year. GAAP net diluted earning per share was $0.42 for the fourth quarter compared to $0.61 in the previous quarter and $0.22 for the same quarter last year. Non-GAAP net diluted EPS was $0.85 compared to $0.66 in the previous quarter and $0.32 in the same quarter last year.

Turning now to the balance sheet, as of December 31, 2017, cash, cash equivalents, restricted cash and investments were $345.1 million compared to 304.7 million at September 30, 2017. During the fourth quarter of 2017, we generated $45.8 million in cash from operations. Accounts receivable net increased this quarter, reaching $109.5 million compared to 91.7 million last quarter, while DSO remained relatively flat. As of December 31, 2017, our inventory level net of reserve was at $83 million compared to 62.4 million in the prior quarter.

Let's turn now to summarize the 2017 full year results. Revenues for the year were 607 million, a 23.9% increase from 490 million in the calendar year of 2016. GAAP gross margin was 35.4%, compared to 32.8% in the prior year. GAAP operating expenses were $123.7 million, representing 20.4% of revenues compared to 89.7 million in 2016, which represented 18.3% of revenue. GAAP net income for 2017 was $84.2 million, a 32.7% increase compared to 63.5 million in the prior year and GAAP diluted EPS of $1.85 compared to $1.44 in the prior year. Non-GAAP net income was $115 million, a 45.8% increase compared to 78.9 million in 2016 and non-GAAP diluted EPS of $2.43 compared to $1.72 in the prior year. This year, we generated $136.7 million of cash from operations.

Moving on to the guidance for the first quarter of 2018, we expect revenues to be within the range of $200 million to $210 million and expect gross margins to remain flat within the range of 36% to 38%.

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

[Operator]

[Operator Instructions] And we’ll go to Philip Shen, Roth Capital Partners.

[Philip Shen, Roth Capital Partners]

Hey, Guy and Ronen, congrats on the results and the success that you’re having in general. First question I have is about components. I think you gave some color, but I was wondering if we can get a little bit more, this is certainly an industry wide problem. Can you give us some more detail as to how you were able to sidestep the challenges there and if you could quantify what the actual impact due to the shortage of components were in Q4? That would be helpful. And then to what degree, have you quantified that impact or captured that impact for the Q1 guide?

[Guy Sella, Chairman and CEO]

So I think we gave some color and detailed explanation in the past, but practically, the shortage is coming -- started -- nobody understood it, but it started in the end of 2016 where reversely suppliers of high voltage [indiscernible] capacitors found out that their book to bill was 170%. Back then, they didn't understand that it's really coming from a demand, so they basically gave up the understanding only in February to April depending on the supplier 2017. The assumption was that this is supposed to, that it’s supposed to fix itself sometime in the middle of 2018. What we did is obvious. In one hand, we were growing. On the other hand, we had to put major part of our resources in one phase, three phase and optimizers in order to develop second sources and in some cases, different layouts to accommodate other components for these purposes.

We overcome the majority of the effect already in Q2, Q3 2017, but the combination of the shortage of component plus the growth in demand basically reduced dramatically the on hand finished goods inventory we had and we reported all these if you remember. Therefore, we started to move much more into air shipments. We overall supply practically 100% of all demand. Of course at the higher prices, we had to buy some components at the marketplace instead of directly from suppliers. We had to ship big volumes in air shipment. That were the two effects that we saw in Q3 and Q4.

Starting 2018, we went to the major component suppliers and currently from what they can see, the over demand for the same components they mentioned will be with us according to them until mid-2019. Today, we have much more resources for those major component and we have, we of course put in April -- last year April to June, we put very big orders for major suppliers for 2017 and ’18. So, we secured we believe enough components and therefore I believe that slowly we’ll start to build more finished goods inventory, but it will probably take another two, maybe three quarters until the majority of the effect will be behind us. These are under the assumption that we analyze the growth of 2018 properly. If we'll see higher growth than anticipated, it might be with us until 2019.

[Philip Shen, Roth Capital Partners]

Well, congrats on -- great job on sidestepping mostly the issue in general. We've heard in our checks that lead times with key customers are kind of in the 12 plus week timeframe. So should we expect that to continue? So it seems like the volumes are good. You could get maybe some incremental volume, if you cut some of the lead times down or is the volume actually steady and you can just get the wait times down over time and when do you expect to get that wait time down to the typical three to five weeks.

[Guy Sella, Chairman and CEO]

That's what I mentioned. If we -- we have that, as I mentioned in the script, we assume, as I told you last year, we assume nice growth in 2018. Assuming that our assumptions are properly analyzed, we will need probably two to three quarters to overcome the demand and to short the lead time. I cannot promise that we can short it to three to five weeks. It depends on the type of the product and the location or many other parameters, but once we reach there, finished goods inventory in our model, then we go back to the lead time that we had in 2015, ’16, which was in the range of four weeks if I’m not mistaken.

[Philip Shen, Roth Capital Partners]

And let's shift gears to the overall mix. I think you guys talked about 160 plus million of US revenues in Q4. Can you share for Q4, what the megawatts were by region? US and then other regions and then where was the strength beyond the US? What was the mix between Europe and Australia and elsewhere? And then looking ahead into 2018, how do you expect that geographic next either in dollars or megawatts or both to evolve?

[Guy Sella, Chairman and CEO]

So the total was 761 megawatt or 461 -- 766 sorry, where 461 came from North America. The rest if I remember properly, 24% came from Europe and the rest from mainly Australia, Japan, India and a little bit Israel and other small markets. As I mentioned in the past, on a yearly basis, I believe that in 2018, we’ll end the year where 50% or a little bit less coming from the North America and probably around 45%, 45% to 50% coming from North America where the rest is coming from Europe and rest of the word. For our longer term model, probably for 2019, ’20, it will be 33% from North America, 33% from Europe and 33% from Asia. And we are getting there. Japan is growing nicely. Australia is growing nicely. India is growing nicely. I think we are in the right direction to blend the total revenues in the form I just gave you.

[Operator]

And we’ll go next to Mark Strouse, JPMorgan.

[Mark Strouse, JPMorgan]

So could you just give an initial indicator of the launch of the one to two kilowatt resi product, just anything you can share there? I know it's so early. And then, I believe the initial launch was just in Europe. Can you just talk about potentially when you might expand that to other markets?

[Guy Sella, Chairman and CEO]

So we just started to take orders for this product. So far, we see a nice demand, but just the very beginning. Currently, we're in the middle of the Chinese New Year. So during Chinese New Year, we're not producing any new product from the – reasons that you understand, you don't want to take risk or the lines are not full of all the engineers, et cetera. We’re supposed to start to produce mass production, first batches, right after Chinese New Year. So in the last week of February, beginning of March, March, we see a nice demand for the product.

It opens us a segment that is mainly European segment of new house as an installation of one to two kilowatt that we weren’t playing before this product at. We are looking now what will be the effect of that product in other regions. We're probably going to know in about a quarter when and where we want to start to sell these products as well. A lot depends on the actual volume -- actual demand we’ll see in Europe due to all the good reasons that you prefer to first supply all the demand in one region before you open more demand and maybe might have issues with supplying it.

[Mark Strouse, JPMorgan]

And then Ronen, I'm sorry if I missed this, just real quick. Just talk about the expectations for ASPs in 2018? I believe on the last call, you mentioned down about 7.5% to 10%. Is that still about right?

[Ronen Faier, Chief Financial Officer]

So in general, when we look at the ASP erosions, our expectation were usually about 7.5% to 10%, absent of something that really changes the market from competitive landscape. In general, we still see these as a working assumption as long as we don't see anything else because one of the reasons that we put this expectation is in order to match it with our cost reduction targets as well and as such, these are the assumptions that we see. Last year, in 2017, I believe that we saw or at least on a per product basis, we saw almost a flat environment. So this 7.5% to 10% did not really happen and we do not see at least now major changes in the competitive environment, but at least as the working assumption, the 7.5% to 10% can continue and prevail.

[Guy Sella, Chairman and CEO]

That's on a blended ASP. I think that there will be bigger differences here between the ASP erosion on one phase inverters and commercial inverters. As mentioned, we reached what we believe is a good working point of 37% gross margin and we will the effect of better cost in order to gain market share. So of course, in specific segment, specific products, et cetera, et cetera, but we will work our way to keep the gross margin flat and to gain market share with the extra benefit of improved cost we will have.

[Operator]

And we will go to Jeffrey Osborne, Cowen and Company.

[Jeffrey Osborne, Cowen and Company]

Just a quick question following up on Phil’s question, did you quantify the gross margin impact from the MOSFET IGBT shortage? I think last quarter you talked about 150 basis point hit to gross margins we’re having to airship. If you’ve answered that I missed it. Then I have two other questions.

[Guy Sella, Chairman and CEO]

So in general, we quantify, but it's a number that again, once -- now that we got to the area of the 37% that we said from the very beginning that this is the top of the model, we have many levers that we can play in order to make sure that we get to the targets that we want from growth perspective and from, I would call it, market share perspective. And as such, we're playing with those levers within this 37%. So at any given point of time, we can increase air shipments if we would like to sell a little bit more, we can reduce prices, if we want to take more market share. And we have the cost reduction ability to do these. So although we quantify it, I don't think that there is a lot of value in actually taking it as an assumption because if we need to airship a little bit more, a little bit less, we can simply use other leverages in order to have our gross margin stabilize at the level that we wanted to be.

[Jeffrey Osborne, Cowen and Company]

Two other questions and I may have missed this as well. But did you give the C&I mix in the quarter and what that was either percentage of revenue, percentage of units, that will be helpful to add?

[Guy Sella, Chairman and CEO]

So we did not give, but we can give it now. Last quarter, it was 32.7%. This quarter, it was 33.1%.

[Jeffrey Osborne, Cowen and Company]

And as units or revenue.

[Guy Sella, Chairman and CEO]

This is on megawatt shipped.

[Jeffrey Osborne, Cowen and Company]

And then just given that Omron’s new, my last question, how do we think about you leveraging them. My assumption is that that might be somewhat dilutive to gross margin, but equivalent or maybe even better on operating margin, given your leveraging there, OpEx and distribution, but just how do we think about it if Japan were to become notable or a significant contributor to the P&L, what that would look like?

[Guy Sella, Chairman and CEO]

Not necessarily, I wouldn't tweak the models because of the collaboration with Omron in one hand. Prices in Japan are high so gross margin won’t affect on the company level. On the other hand, I'm very happy with this collaboration. I think that mid-term, longer term, it will be great. On the short term, it's still Japan and I'm not expecting that suddenly the conservativeness level and the adoption rate will become exponential. So I would take it as a great support to the quality of the product and a great step forward to be a significant player in Japan, but I wouldn't, in our assumptions, the big effect won’t come in 2018. That’s to be completely honest.

[Operator]

And we’ll go next to Vishal Shah, Deutsche Bank.

[Vishal Shah, Deutsche Bank]

So, a couple of questions. So maybe Ronen, Guy, have you seen any impact at all from the recent [indiscernible] especially in the C&I market and what percentage of your 2018 shipments you think will be C&I. You’ve said in the past up to 50% could be C&I. Do you think that’s still the case?

[Guy Sella, Chairman and CEO]

So we don’t yet see the effect of the change in model prices in the US. But if you look at it, the effect, it will come, in my humble opinion, will affect Q3, maybe a little bit Q2 as you know, channels, both quite a lot of modules in Q3 and 4 of last year and as you know, the average lead time between closing a contract in the US to installation is according to what I’m aware of, maybe you have a little bit different numbers, is 12 to 16 weeks. So I think that we won't see effect of modules in Q1 and in probably also Q2, I think the effect, if will come, will come in Q2 and Q3 and what will be the effect on the Excel spreadsheet.

If you put the additional cost of modules on the total cost of installation of presidential and commercial, I think this completely -- this one changed the Excel in a significant enough way to change the market behavior, but we saw in the past that the market in general and US in particular at the end of 2015, can take these changes in a way more severely emotionally than what we see in the Excel. So I wouldn't put myself in the position to estimate or guess what will be the total effect from Q3 and Q4 2018. I'm sure that in the mid to long-term, it wants to make bigger effect, big effect.

Regarding, I think the second question Vishal was regarding the percentage of commercial. That's correct. Vishal, so I think we assured this in the past and that's why I mentioned also that's also why I mentioned that we might see differences on ASP erosion between commercial and residential. We would like to get on a megawatt basis by the end of the year to 50-50 percent between commercial and residential. And I believe and hope we’re in the right direction to get it. We are gaining fewer percentage, every – 1%, 2% every quarter, plus the effect of the new Jupiter configuration that will allow you to install 100-kilowatt in one installation. I think that’s supposed to get us to this point.

[Vishal Shah, Deutsche Bank]

I just want to clarify, Ronen, the 7.5% to 10% ASP erosion outlook that you mentioned, that's not factored into Q1, right? You're not starting to lower price yet. It's just something that you expect to see maybe in the second half of the year. Is that right?

[Ronen Faier, Chief Financial Officer]

So again, in general, this is a working assumption. We do not see right now anything in the competitive environment that should change it, but in general we believe that, as Guy mentioned, the changes that we’ll do on the prices will be all through the year and whatever is already taken into account in to Q1 is already reflected in our stable gross margin expectation.

[Vishal Shah, Deutsche Bank]

One last question, Guy, if you look at your competitor, Huawei, they launched a product in the European market in middle of last year. What kind of impact have you seen on your market share in the European market? I mean, it looks like you guys have gained market share despite a product launch. So what kind of feedback are you getting from the customers on that product launch?

[Guy Sella, Chairman and CEO]

So we just gained market share in Europe. So I would love to tell you that despite the fact that they released the product in Europe by mid last year, we managed to gain more market share, but honestly I think that they just launched a product in Australia a month ago and it's not yet really available in Europe. I do believe that despite the fact that it will be available in Europe probably sometime in end of Q1 or Q2, I'm quite confident we’ll be able to gain more and more market share.

The product they’re now releasing is a product that does not have communication between optimizers and inverter and therefore do not have safety and/or monitoring. So it's a pretty crippled solution at the higher prices than what we sell. So I'm not expecting to be impacted in the next two, three, four quarters, but we take them very seriously and we are preparing ourselves for any type of slight competition as we do every year with many other good competitors such as SMA, et cetera.

[Operator]

We’ll go next to Edwin Mok, Needham and Company.

[Edwin Mok, Needham and Company]

So just kind of wanted to talk about Ronen in terms of that partnership, do you expect to start shipping to that within this quarter or is that, a lot of it growth drivers over the current quarter?

[Guy Sella, Chairman and CEO]

So it's also in their press release, but the launch of the product from their perspective is March 2018. So probably, we’ll start to see shipments in Q2, but again I just want to -- people won’t take it out of the perspective. The Japanese market is a very conservative market and of course that with Omron, SolarEdge solution have kind of a cautious stamp on it, but it will take time. I'm not expecting exponential growth in Japan, so please do not take it out of proportion that it won’t influence long term. Short term model in the wrong way. I do believe that in mid, longer time perspective of two, three years, it will allow us to become very significant player also in Japan.

[Edwin Mok, Needham and Company]

And then Ronen, on the OpEx, sorry if you talked about it, how do you kind of think about OpEx for this quarter and for the remainder of the year.

[Ronen Faier, Chief Financial Officer]

So in general, the operating expenses and I think that we said it along the script, we have today a very nice situation. We are very profitable, we're growing and we see a situation where while we are increasing our, I would call it financial strength, some of our competitors are either decreasing it or even or -- or being stagnant and that actually gives us a golden opportunity to invest a lot in R&D, to invest in new geography. And as such, I expect R&D to continue and grow throughout the year.

This is one place that we will not put a limitation as long as there are good ideas and good things that we can develop and there are so many of those. I think that the thing that will limit us on R&D will be mostly the natural rate of how many people can you recruit, can you train and can you make sure that are becoming useful employees. And on sales and marketing, this will mostly be a growth that we will do in the new geographies, mostly in Asia Pacific, but also strengthening the areas in which we operate. The only place where we do not expect major growth is actually on the G&A, where in G&A, we believe that currently the cost structure is relatively sufficient.

[Edwin Mok, Needham and Company]

Third question I have is on the manufacturing side, or you guys have, firstly talk about order of manufacturing lines that you got to build the line. Where do you stand in terms of transitioning that automation and are you in a process or starting to looking to do that for the HD-wave inverters as well?

[Guy Sella, Chairman and CEO]

Yes. So, today, we have capacity, automatic line capacity for approximately 80% -- 70%, 80% of our optimizers. We ordered more automatic lines as we, the bigger you get, it takes longer lead time to increase volumes. So increasing volume from 100K units of optimizer a quarter to 200 is much, much easier than to increase from 2 million to 4 million. So we are in the process, we ordered quite a lot of automatic lines for the growth we're expecting in 2018, 2019.

And we are in the process of designing automatic line for the HD-wave and in general, we -- our view is that in three to four years, we will get to the level that once we finish the development of a product, at the same time, we will finish the development of automatic assembly line. So from the day one of the product, in most cases, of course, not for very, very big inverters, but for, let's say product in the weight of -- physical weight of a pound to something in the range of maybe 100 pounds, we'll be able to finish the automatic assembly lines with the development of the product. Pretty much like automotive companies in general.

[Operator]

We’ll next go to Chip Moore with Canaccord.

[Chip Moore, Canaccord]

Thanks. Maybe just a follow up to that. Outside of the component shortages, are you seeing any impact from inflationary pressures at all or are you confident that those manufacturing optimization efforts can more than offset that.

[Guy Sella, Chairman and CEO]

We don't -- we have good control on manufacturing capacity on test production, et cetera. So I'm not expecting -- to put it in proportion, it's very hard. It took a big portion of our management focus in 2017 to increase production volumes and I'm not expecting that something will become easier in 2018, but to increase the total manufacturing capacity, once you have secured enough components and you have good enough component inventory, which we’re building, I think this is completely doable. I don't think this is one of the major risks we see for 2018.

[Chip Moore, Canaccord]

Great. And maybe one more, you talked about having some more flexibility with repatriation of cash. Does that change your thinking at all? Strategically, how do you think about that?

[Ronen Faier, Chief Financial Officer]

So again strategically, we look at the corporate level. The one thing that did happen from the tax reform again, other than the tax that will be paid is the fact that now because of the fact that there is no real taxation on the repatriation of new profits earned outside of the United States, we have a little bit more flexibility and therefore we can better utilize the cash, but we do not expect this matter of fact to change dramatically our strategic decisions.

[Operator]

And we’ll next go to Colin Rusch, Oppenheimer.

[Colin Rusch, Oppenheimer]

Guys, thanks for the comments on R&D. You've got an awful lot of cash on the balance sheet right now. Can you talk a little bit about how you're going to deploy that cash in the areas in R&D portfolio where we're really focused here in 2018?

[Guy Sella, Chairman and CEO]

So of course, we cannot reveal the R&D plan for 2018, but I think you can see from the past, we are working extensively on growing the range of three phase inverters in order to reach very high sizes. None of these will happen over one year. Those are developments that spread over 18 to 30 months programs, but we have projects running of almost any size of inverter. We keep developing ASICs to control more and more of the black component, the ASIC component in our product. We are investing heavily in next generation and generation after next of optimizers. We started to develop our own automatic assembly line at another area and I think that not in 2018, but we believe we’ll come with a next generation of storage product, which will be a step ahead of what you can find today in the market.

[Colin Rusch, Oppenheimer]

And then can you talk about your decision making around balancing price and market share gains at this point and how you're making those decisions on a geographic basis?

[Guy Sella, Chairman and CEO]

It's not an algorithm to try and buy a computer. It's lots of judgment involved. We have very strong general managers in each of the geography. We are right working, the market in India is of course different from the market in Europe. Once you come to commercial market and residential is different in the US and Japan. So there is no one algorithm that is working here. What we have is the general, let’s say, general understanding that 37% gross margin at this point in the evolution of PV industry, at this point of our company efficiency where we are very effective in transferring close to 20% to non-GAAP profitability.

We feel that above this point again, at this point, it’s worth to increase market share and we do it in strategic way where we analyzed at the level of Ronen and myself, Senior Global VP of Sales and the general manager that are very talented and have lots of experience in the market and with us in which geography, this will have higher effect and that's how we control the pricing level, that’s in one hand. On the other hand, we try not to open too big of a gap between different geographies once they're using exactly the same product.

As you probably know, it might be looking at the same product, but due to safety and request for different cause, it might be quite some difference in bigger inverters and also residential regarding the cost of the product when it fits the US or Europe. So it's kind of a judgment call based on the fact that we want to increase market share. We filled it for the coming period, 37% gross margin is a good target and we prefer to use the extra cost reduced benefits in order to gain market share.

[Operator]

And we’ll go next to Carter Driscoll, B. Riley FBR.

[Carter Driscoll, B. Riley FBR]

First off, Guy, I hope you're feeling well physically. First question is really around the R&D spend. Could you at least give us an idea of what you were planning to spend in 2018 in solar versus adjacent products, on a dollar percentage basis?

[Guy Sella, Chairman and CEO]

Honestly, I don’t know the split between adjacent products and what we do today. So, you caught me on this one, but I would, in a rough number, when I look at the amount of teams that are developing products that you’re currently selling and teams that are developing products that we are currently not selling, I think that around 33% of the teens are working on products that we're currently not selling. I cannot promise you that that's exactly the split of the cost, because areas like AC can embed a software, et cetera, servicing all those teams. So it will be hard to estimate what exactly the ratio.

[Carter Driscoll, B. Riley FBR]

And then just as a follow up, adjacently, you obviously were handful with resi and C&I and fulfilling all the outstanding demand, but you have at least talked about in the past plans to go after the utility scale. Has the changes in the module side at all affected those plans and/or timing?

[Guy Sella, Chairman and CEO]

No. It’s just that we -- as mentioned, I think that dollar wise, the total segment of utilities, around a third of the market, if you want to round it up and currently, we do have large installation, but we're definitely not a utility level player and that's definitely something that we’re working on and we'll come to the market with a product that will feed different sizes of modules, different type of technologies in MLP, input voltage in some aspects is more influencing on the technology than the total capacity of the module and you need to cover very well some of the thin film technologies that are going to very high voltages today. We're working on all those fronts, but again, just not to ruin the modules, models, the financial model going forward, none of those will be available in 2018. So those are the programs that I mentioned that development takes much longer than 18 months.

[Operator]

[Operator Instructions] And we’ll next go to Joseph Osha, JMP Securities.

[Joseph Osha, JMP Securities]

Just a couple. First, if I listen to what you said about how you're handling component shortages and the timing of working through that, it would suggest that you probably got more room in the second half of the year, in the first half of the year to start to give some of that pricing back to your customers. Is that -- obviously you've talked about your pricing assumption being steady over the course of the year, but is that a fair conclusion.

[Guy Sella, Chairman and CEO]

I'm not sure it's coming from component shortages. I think it's coming from cost reduction, total cost reduction development, but in general I think [indiscernible] Q1, we are not expecting any major change in pricing that will influence the total model or on the yearly basis, we do expect seven or we plan to up to 7.5%, 10% ASP erosion that as I mentioned in the answer regarding market share, it will be pointed specifically to the right products in the right geographies. So, yes, the effect won’t be on Q1. We’ll see the effect probably more on Q2, 3 and 4. But I think that your assumption that the major effect is on the second part of the year is the right one.

[Ronen Faier, Chief Financial Officer]

And just one more thing, again not being effect on gross, and Joe, but one thing, effect not being, effect on gross margin, but rather the fact that again we expect to continue and maintain this 37%. So the effect is really the effect in the market, more than the effect on the gross margin itself.

[Joseph Osha, JMP Securities]

Right. That was what I was trying to say. I think you expressed it more effectively than I did. And then the second question, the sequential bump in inventories, is some of that perhaps representative of catching up a little bit on some of the component supply issues or is that just a normal operational thing given how quickly the business has grown?

[Guy Sella, Chairman and CEO]

The extra inventory we had by the end of 2017, that's what you mentioned.

[Joseph Osha, JMP Securities]

Yeah. You were up 20 million, so -- but obviously the top line was up as well. So –

[Guy Sella, Chairman and CEO]

Yeah. But the majority is finished goods, 20 million in comparison to 200 million and that's included inventory in transit, actually on ships from Europe and China to the US. So unfortunately, very tiny effect. In our model, we would like to have finished goods on hand in our third-party logistic centers in a much higher percentage of next quarter's sales in order to shorten lead time for our customers and in order to optimize shipping costs. So we are far unfortunately from the model that we operate in 2015, ‘16.

[Operator]

And that does conclude our question-and-answer session for today. I'd like to turn things over to Guy Sella for any additional or closing remarks.

[Guy Sella, Chairman and CEO]

Thank you very much. In summary, our fourth quarter revenues were slightly above our guidance with record gross margins, profitability and cash generation. Our overall performance in 2017 was very strong in all financial parameters and we continue to grow our market share, while focusing on geographic and customer diversity, new and innovative products and healthy profitability coupled with cash generation. I'm sure that we can keep the same trajectory for 2018 and with this, I would like to thank you for joining us on today's call.

[Operator]

And that does conclude today’s conference call. We thank you all for joining us.