Good day, and welcome to the SolarEdge Conference Call for the Fourth Quarter ended December 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 the sole property and copyright of SolarEdge, with all rights reserved, and any recording, reproduction or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event Calendar page of the SolarEdge investor website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations of SolarEdge. Please go ahead.

Thank you. Good afternoon. Thank you for joining us to discuss SolarEdge's Operating Results for the Fourth Quarter and Full Year Ended December 31, 2018 as well as the company's outlook for the first quarter of 2019. With me today are Guy Sella, Founder, Chairman and CEO; and Ronen Faier, Chief Financial Officer. Guy will begin with a brief overview of the results of the fourth quarter and full year ended December 31, 2018. Ronen will review the financial results for the fourth quarter and full year followed by the company's outlook for the first quarter of 2019. Then we will open the call up for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statement contained in our press release and the slides published today for a more complete description. All material contained in the webcast is the sole property and copyright of SolarEdge Technologies, with all rights reserved. Please note, this presentation describes certain non-GAAP measures, including non-GAAP net income and non-GAAP net diluted earnings per share, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are presented in this presentation as we believe they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter-ended December 31, 2018 press release or the presentation may obtain a copy by visiting the investors section of the company's website. Now I will turn the call over to CEO, Guy Sella.

Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call today. We concluded the quarter with record revenues of $264 million and concluded the year with aggregated revenues of $937 million, making us according to the recent IHS report from Q3 2018, the largest inverter supplier by revenues worldwide. While we continue to grow our solar business, we also made strategic acquisitions in order to take us to the next step towards becoming a leading smart energy solution provider. Specifically, in July of this year, we concluded the purchase of the assets of Gamatronic, becoming a supplier of uninterruptible power supply system. And in October, we concluded our Kokam transaction, becoming a provider of lithium-ion batteries. At the start of January, and not yet relevant for these financials, we acquired the majority stake in SMRE, an Italian provider of integrated powertrain technology and electronics for the e-mobility market. We are very mindful of the fact that this is a lot to take on and our hands are full. Having said that, we are confident that over time, you will see the synergies of this company as we see them and will appreciate that the power of the combined companies will accelerate the clean energy and e-mobility evolution that we want to lead. While these very important acquisitions are still small, dilutive and will of course require substantial investments both in resources and infrastructure, in the next few years, we expect that the main driver for revenue and profitability will remain the solar products. Therefore, so that you can analyze and understand our business, we will keep providing you with the relevant data of our solar business. This quarter, we are reporting a non-GAAP net income of $31.5 million and a non-GAAP net diluted earnings…

Thank you, Guy, and good afternoon, everyone. Before starting the review of our financial results for the fourth quarter and the full year 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 standards, stock-based compensation, onetime asset disposals, onetime transition tax, changes in deferred tax, onetime acquisition-related expenses, intangible assets amortization, and cost of product adjustment related to the acquisitions of Kokam and the UPS division as well as non-GAAP earnings per share. Full reconciliation for the pro forma to GAAP results discussed on this call is available on our website and in the press release issued today. The fourth quarter financials represent a substantial change in our consolidation parameter due to the first inclusion of Kokam results in our consolidated financials. With the full consolidation of Kokam and our expected consolidation of SMRE Group in the first quarter of 2019, the comparison to our past performance is a little difficult. In order to allow analysis of our financial performance, as Guy previously mentioned, where practical, I will separate my discussion between the traditional solar products and the newly acquired activities. These activities will be referred to as a whole and will include the results of the UPS division and Kokam results. In the future, these activities will also include SMRE. A byproduct of this presentation is that I will not read in this section a summary of each line item in comparison to the prior period but rather focus on the analysis of the various items. Full reporting of our consolidated GAAP and non-GAAP results is available on our website and in the press release issued today. Now let's start…

[Operator Instructions]. We'll take our first question from Mark Strouse of JPMorgan.

So wanted to start with the customer support expenses that were highlighted last quarter. Ronen, can you just maybe repeat what you said the impact was this quarter? And then, a follow up would be, what the impact is that's baked into your 1Q guidance? And then at this point, are you expecting anything beyond 1Q, how long should we expect these expenses to go on?

So in general, while we do not open the exact amount of the expenses, I can tell you that the actual expenses were about 15% lower than in the last quarter, which is a result of mainly much tighter -- tightened control on the shipment and the expedited shipments that we had last quarter, which were relatively high. We managed to basically start stopping these expedited shipments during the middle of the quarter. And therefore, you do not see a result over the entire quarter but actually just a half a quarter result. We expect these expenses to continue and go down gradually over next year as we are both going to first of all better control and be able to better supply our warehouses with additional goods. As Guy mentioned before, the fact that we are growing so rapidly in a situation of severe component shortages means that our inventory at the warehouses is relatively low all the time and when we are able to get support units, we try to ship them as soon as practicable. Plus the fact that with time we are also improving some issues that we already know in the product. We believe the difference will continue to go down to normal levels within the course of the next year. And as I mentioned also in the call, it seems the reflection of this result is also reflected in our accrual for long-term warranty because we basically average a few quarters back to smoother activities that we see on the actual cost. We believe that also this accrual for long-term warranty is going to decrease in the course of next year. So I believe that it's a -- I would say within the second half of the year when you're going to see more, I would call it, closer to standard expenses as we used to have before.

Got it. Okay, that's helpful, thank you. And then, can you just give us an update the manufacturing transition due to the tariffs? And then, and I apologize if I missed it but in the slides you referenced you're working on a second manufacturing site in Asia? Is that in the solar business or in the non-solar business?

So this was referred to the solar business. We are starting to ramp up a big operation in an Asian country, which is not China, in order to be able to supply products from a low-cost manufacturing site but still not impacted by the Chinese tariffs. I think that in a quarter we'll know much better about the schedule. We have all the automatic lines for the optimizer already built and in the shipping stage for those lines. But the exact ramp-up schedule is not yet finalized.

We'll take our next question from Philip Shen with Roth Capital Partners.

First one is on your guidance. Can you talk through, where you are seeing the strength in revenues? We are seeing strength in global markets in general and I was wondering if you could talk through which markets might be surprising you to the upside as it relates to demand? And what the drivers might be? So, for example, are you seeing market-driven demand in certain countries and not policy-driven demand? And what do you expect your U.S. versus international revenue mix to be in Q1? I think you said it was 56-ish percent for Q4. And then how you expect that to trend through '19?

So there were lots of questions, but I will try to wrap up. I don't think we have better view than you on the drivers of the market. We were expecting that the year will be healthy. We think that the situation in the U.S. where last year maybe the market, the resi didn't grow. But this year it's supposed to grow as we can see it. I think that IHS pushed a little bit the U.S. forward based on last year maybe a little slowdown in the resi space. At the same time, Europe is keeping the same momentum as we reported like, I think, 1.5 year and we see increased demand in almost all the European countries, even countries that are not completely, let's call it natural for solar, like Sweden et cetera where we very high demand and much bigger and mature infrastructure to install solar systems. And specifically, I think that while it's very, very tough for us as you see from some of the parameters, it's been a bit tougher to our competitors and part of our growth is the fact that while we are getting stronger, some of them get a little bit weaker. They need to invest less in support. They might have issues with supply of product and with all the preparation we did in the last couple of years, we're enjoying this as well. So the way we see it, we would expect a very nice double-digit growth for 2019 in the solar products. And so far, Q1, touch wood, started very, very nicely.

Can you talk about the international versus U.S. mix? And do you expect the international mix to maybe become even larger than the U.S. mix at all in 2019?

To be honest, I don't think we have -- until we'll have utility product and big project and that's -- as you know the product will be available by the end of 2020. We will not have a real streamline of projects before '20, '21. I don't think we'll be able to give good estimation of the ratio so early in the year. I can say that so far, it seems that Q1 will be more balanced, like 50-50, between the U.S. and rest of world. But in general, I don't think we have enough view to estimate the rest view through the year.

Okay, shifting over to the warranty issues and failure rates. Can you talk about the failure rates -- by in our checks, there's a certain failure rate for optimizers and there's a failure rate for the inverters. And then I think there were firmware issues early in Q3. Can you talk about each one of those things and kind of what were the drivers as to why the failure rates were higher than expected? And then -- and which ones have you improved? And how do you expect to get back to your full kind of 36%, 38% type margin, maybe by the end of 2019? I know to Mark's question you talked about improving steadily through the year. But some additional color on that would be great.

So I think again, its like 3, 4 questions. So as we, I think, said in the past that we are changing due to the fact that many components are in shortage, many times suppliers increase lead time from 14 weeks to 700 days where they already within the 14 weeks period and we had to do lots of constant and fast changes. We did have some components that came out of spec and caused some of the failures. As far as we know today, the majority of those beyond us, we didn't change a major component in the last 2, 3 quarters. So we start to see those small phenomenons more under control. As far as firmware, we also -- all the changes, that addition feature set et cetera, supplying inverters with storage with various batteries for different applications et cetera. You all the time have some points that you need to improve. Many of them not related to us but to standard change or to a customer that wants to install different installations that was then in compared to what tested in the beginning, and gaining more from the product we already have. And we change and adapt firmware accordingly. We are lucky that we can do everything remotely. So I am not aware of any case where it's really caused us more than a bit of delay until we change or adapted software to the customer needs. As mentioned by Ronen, trying to cover your last point, I believe that within two quarters we will come back to something in the same range of percentage as we had in the previous couple years.

We'll take our next question from Jeff Osborne of Cowen & Company.

I had another question on warrantee but in a different angle also on the service side. I think one of the issues, Ronen, was that you were, in the past, prior to HD Wave, replacing field replacements with cards or particular items within the inverter, for example, that had failed versus maybe at a cost of $100 or $200 a piece versus sending a full inventor at $1000-plus. Can you talk about with all of the new product introductions and product cycles you've had, a, can you confirm that that was a problem? And then, b, how is that evolving? Is it also going to be resolved over the next few quarters or not?

I don't think that's exactly the situation. In the classical 1 Phase inverter we had 3 PCBs, today we have two PCBs. When the failure is in the communication you still replace the communication board. I don't think there's a big difference and, please remember that HD Wave costs dramatically less than the inverter before, and the numbers that you use are way, way off the real cost of the inverter. So I don't think that the analysis you do is actually impacting anything in the financials as you describe it.

Then what drove the warrantee accruals to be higher then? I'm trying to get a sense of the service cost over the past few quarters. Is it literally what Philip described in terms of field replacements?

No, so that's what we said. It was -- it's more like what we said in Q3 that it was a combination of expediting shipments, a bit higher percentage of replacement that we do and basically a big portion of cost that is coming to improve the service we give to customers. Increased amount of people we have in the field that can actually support people in their own installations. There's a combination of many little things, which all of them now are getting into better mechanism, better improvement. And as mentioned before in the script, I believe that during this year, we will improve the level of service even further while at the same time, reducing the percentage cost of it from the revenue -- or the relative percentage of revenue.

Got it. That's good to hear. Another line of questioning I had, was just you mentioned keeping the debt from Kokam in light of the capacity expansion. Can you talk about what the CapEx needs are for maybe the year or for that particular initiative? I think on prior calls, you had highlighted that it was underutilized, and now all of a sudden you're expanding capacity. So I just wanted to understand the decision-making process around the balance sheet management but also what this will cost.

Okay, so first of all, yes, as we mentioned in, I think, our previous call, the fact was that the Kokam factory, due to lower orders or bookings were underutilized. But still, as we also mentioned, the overall capacity of the Kokam factory is smaller than the needs that we already see right now, and we forecast for the years to come as the solar plus storage is -- demand is increasing all the time. And as such, we will need to do some expansion. When it comes to the actual expansion, I would like to say 2 things. One is that the actual amount that we're going to invest is very much going to be related to the size of the capacity and also the type of the machinery and design of the factory. What we would like to do is to design a factory and use machinery that is of a higher capacity at the lower cost. In addition to this -- and by the way, some of this machine will actually be developed in-house using the machinery team of SMRE that is doing exactly this for the last 20 years. Now in addition to this, when it comes to the way that we're going to deploy the amounts that we will determine that are needed based on the capacity that we would like, our approach will try to be taking debt or even actually local debt in Korea in order to finance this. The combination of the fact that any money that you are entering into Korea from other countries may be one day a subject to the dividend tax, once you would like to repatriate it. The fact that all in all, the more money you put inside, the more cumbersome is the, I would call it corporate structure. At the same time, we know that there is the ability to get credit at relatively good terms in Korea for expansion, especially when foreign investment is involved. And as such, our preference will be either then simply taking money with a very high cost of capital associated with money that we earn or, for example, had we decided to issue stock, we decide to take it as debt, which has a much lower cost of capital and much easier ability to get it in Korea and return it in Korea, without having tax accidents on the way.

And any sense or any other terms of the magnitude of the total debt capacity? I think in the past you had highlighted this as tens of millions? Is it...

This is still the amount, yes.

Got it. And then my last question is, just any sense of how we should be modeling OpEx trends with a full quarter of SMRE coming online? You've given guidance which is helpful around the segments for margins in the top line. But how should we think about the incremental OpEx for that acquisition?

So the SMRE acquisition is supposed to contribute between approximately €2 million to €2.5 million in Q1. So this is the OpEx addition. Revenues are going to be relatively small because of the seasonal nature of this business. At the same time, I would like to mention something which is more important. And this is the fact that part of the acquisition was actually paid in stock. And as many of you maybe saw the S-3 that we filed, you need to take into account -- into the share count the additional shares that we issued when calculating the EPS. So OpEx will be around to 200 -- €2 million to €2.5 million and look at the share count for EPS.

And just for the benefit of everybody on the call, do you happen to have that share count, just so we're all on the same page?

Approximately 1.2 million shares.

We'll take our next question from Colin Rusch with Oppenheimer.

Can we just dig a little bit further into the Kokam CapEx? Can you give us an actual number on cost per kilowatt for the cells, and then for the fully installed systems? And then I've got a follow-up around margins.

Now that's not information that we currently have in details, and we are not planning to share it until we'll establish a factory that we fully control and understand the evolution of data, et cetera. One thing that I will say, as we mentioned on the call about $20 million of the non-solar business came from an ESS transaction that came close to zero margin. In Kokam under our management entries for not taking low-margin transactions. I think it will take, I would say, a healthy margin that is about 10% at least per transaction.

Okay, and I guess, that's a part of my follow up. So what are the margin expectations for the Kokam battery business and how much inventory have you written down at this point?

So again on expectations we will provide once we've streamlined the manufacturing and get to the full utilization that we plan. We simply do not want to give data that later on will be proven as inaccurate. But in general, I forgot the -- sorry I missed the first part of the question. So it was the cost and?

The margin expectation and how much inventory have you written down from the Kokam business?

So actually very little inventory was written down. The only thing that -- because a lot of the inventory of Kokam because of their cash position they did not carry a lot of finished goods inventory, but rather carried it as raw materials. So the amount of inventory written down is relatively small also, by the way, given the fact that based on accounting principles you conduct something that's called PPA, purchase price allocation where you are already entering the inventory at a fair value into your financials. Actually, we had a small write-down in inventory but this is a very, very small write-down on UPS-related inventory. But this is again, it's a negligible amount.

[Operator Instructions]. We'll take our next question from Carter Driscoll with B. Riley FBR.

Can you talk about maybe your expectations of what the M&A acquisitions might be as a percent of sales either by year-end or have to get a ramp maybe a rough percentage in 2020?

I think that it's just a little bit early to provide this right now. The way that we look at it currently is that these are businesses where the potential is very high but all of them require investment. And one of the things that we have decided, given the fact that we really have the luxury -- the fact that solar is providing so much profitability and our ability to help them to grow. We decided that instead of rushing and increasing revenue at the cost of maybe a little bit of ASP erosion or actually take low-margin deals, we decided that we simply allow both Kokam and later SMRE to do the right thing, to build the right infrastructure, to build the right cost structure before they start to sell. Because whatever added revenues we get at the below margin will very slightly affect our bottom line. And as such, I would say that while still early, we do not expect that by the end of the year it will be more than 10%, overall, all the other businesses. And I think that it's really too early to estimate 2020. We on our hand will make sure that once we're able to grow revenues, we will do it in the most profitable, and I would call it, efficient manner.

And then just quickly, I know we're running out of time. Talking about a benign competitive landscape do you anticipate the political environment maybe handicapping one of your prime competitors making an entry into your base business?

I guess you refer to Huawei. I think they're starting -- they have a product in the U.S. They started, I guess, shipping at very small volumes as far as we can understand. So far, we didn't see any place in the market that they took any market share from us. We have, I think, a very good set of products, have very loyal installers, great products coming and great features coming in the coming 18 months. So I think that, as was mentioned in the last few years, I strongly believe that we'll be able to keep growing the company at nice 2 digits despite this extra competition.

Okay the last one for me, are you planning for the tariff increase in China? Have you built that into your second quarter and beyond expectations? Obviously, you're building capacity outside of China but in terms of price increases, are you talking about potentially passing those along as you did from the last round of 10%?

It's 2x in process. On one hand we try to ramp up outside of China in a low-cost Asian factory as fast as possible. On the other hand, if we'll need, we'll increase prices to overcome that tariff for the percentage of the product that we will have to keep shipping from China. And as a secure plan B, we cross fingers that Mr. Trump won't increase the 2000 -- 201 or 301 taxes.

Let me sneak a last one in there. Are there any assets from SMRE that you don't consider core that you might consider divesting?

So actually, no. Whatever we took under SMRE is something we believe that we can utilize. For example, as we said before, the machinery business is something that is already taken into our -- I would call it consideration when it comes to increasing our activities and capacity in Kokam. As I mentioned, we were in Korea where Italian, Korean, American, Israeli teams work together designing the machinery. So this is something that we consider as core. They have a software business that also we believe that can help us. Basically, whatever we took we believe is something that we can utilize in a profitable way.

This concludes today's question-and-answer session. I will turn the call back to Guy Sella for closing remarks.

Thank you. In summary, our fourth quarter results and $937 million record revenues for 2018 show continued successful execution of our business strategy and consistently stable profitability. We are well-positioned to continue to grow our solar business and to further expand our offering with the acquisitions completed and are excited for what SolarEdge will bring to the world in clean energy and e-mobility in 2019 and beyond. Thank you all for joining us on today's call. All the best.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.