Welcome to the SolarEdge Conference Call for the Second Quarter Ended June 30, 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 express 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 for SolarEdge.

Good afternoon. Thank you for joining us to discuss SolarEdge’s operating results for the second quarter ended June 30, 2018, as well as the Company’s outlook for the third 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 of the second quarter ended June 30, 2018. Ronen will review the financial results for the second quarter and provide the company’s outlook for the third quarter of 2018. We will open the call up for questions following. 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 that they provide investors with the means of evaluating and understanding how the company’s management evaluates the company’s operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with US GAAP. Listeners who do not have a copy of the quarter ended June 30, 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. I’m happy to report that we concluded our second quarter with strong results. We are reporting record revenues for the quarter of $227.1 million, gross margins of 36.1%, GAAP net income of $34.6 million, and a non-GAAP net income of $40.6 million. We also reported cash flow from operations of $43.9 million. Let’s look at what has driven these very positive results. Our revenues once again reached a record high this quarter as we continue to execute on our business plan. Revenues increased from last quarter by 8% and 67% from the same quarter last year despite a flat market in the United States. Our growth was driven by both the megawatt expansion of our commercial and residential business in the United States and continuously strengthening demand for our products in Europe. The growth of our commercial business of course by nature reduces the blended ASP per watt, but this is within our expectations and our plans. In the second quarter, we shipped 985 megawatts of AC inverters, approximately 460 megawatts of which were shipped to North America. Overall we shipped 2.7 million power optimizers and 114,000 inverters, yet another record. I want to take this opportunity to highlight some aspects of our business and to address some additional noteworthy metrics. For the third consecutive quarter, we saw growth in our commercial sales comprising today 43.5% of our overall megawatt shipments. Among those projects is a 27-megawatt large ground mounted installation in India, currently under commissioning. We continue to increase our investment in R&D and related expenditures in order to drive down product costs and more important, to introduce new products. We believe that one of our differentiators is technological innovation which leads the…

Thank you, Guy, and good afternoon, everyone. Before starting the review of our financial results for the second 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. Let’s start with the financial results for the second quarter of 2018. Total revenues were $227.1 million, an 8% increase compared to $209.9 million last quarter and 67% increase compared to $136.1 million for the same quarter last year. Our record revenues this quarter were mostly driven by strong growth in Europe and stable revenues in the United States and rest of the world. This quarter, revenues from the United States were $118.5 million and represented 52.2% of our overall quarterly revenues. Sales in Europe were $82.3 million, a record revenue, and 36.3% of our quarterly revenue. Revenues generated from sales outside of the United States and Europe were 26.3 million representing 11.6% of our total revenue. From customer concentration perspective, our top 10 customers represented 61.7% of our quarterly revenues, an increase from the last quarter, while only one customer accounted for more than 10% of the revenues and the overall sales distribution across the big 10 customers was more distributed compared to the last quarters. On a per-watt basis, blended ASP decreased this quarter due to multiple reasons including a combination of a weaker Euro against the U.S. dollar with higher proportion of sales in Europe…

[Operator Instructions] We’ll take our first question from Mark Strouse with JP Morgan.

I’ll apologize for a very open-ended question to start, but Guy, just curious if you can give a bit more color on the competitive environment, specifically those markets where Huawei has entered with a product. And as far as the US goes, are you seeing any change in customer buying behavior ahead of the anticipated launch from them?

So far we show products coming into Australia, Germany. Not yet I think in the US. I think in the US currently there are alphas, but not yet sales of systems. In Australia and Germany the amounts sold are negligible today. And while Australia I think they sell practically from about January and we still see negligible amount of Huawei in the field. The adoption is not fast and maybe even the production, but I am not sure about that. I am sure about the adoption. We don’t see any, even a single account, that we lost any share to Huawei. While if you follow GPN from Q1, and I would expect that you will see the same trend in Q2, we are gaining market share in residential in the U.S. as we are gaining market share in commercial. So, so far, we do not see any loss of market share. If at all, the opposite. But we are sure that the competition, the practical competition will come and like any competition, it will be tough in a way and it will improve the industry, our product, and at the end, the value proposition for the customers. So we feel very comfortable with our overall position and with our availability to grow under the current circumstances with the availability in some areas of the Huawei product.

Two quick questions regarding the patent case. So you filed a case in Germany. Can you just talk about the general expectations for timing of resolution for that market?

Since it is under court procedures, we of course cannot give any specific data. So unfortunately, I cannot answer this question with any type of data. As we said, we filed one lawsuit and then another one. One related to optimizers, the other related to the HD inverter technology. And we feel very confident with the strengths of the case, but it’s under the process and we cannot give any more details unfortunately.

Just one real quick follow-up. Is it fair to assume that the patents in Germany are fairly similar to the patents that you have in the United States? So if Huawei were to come to the U.S. with the exact same product in Germany, that we may potentially see a case in the U.S. as well?

Without giving any details, and I would expect that you would expect that we are working on a few levels of protections against any type of infringement also in the U.S. The total portfolio of patents we have in the U.S. is dramatically stronger than the portfolio we have in Germany.

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

Can you talk a little bit about component shortages, how you’re managing that? Obviously it looks like you’re working a little bit with your balance sheet to mitigate that, and how that might impact growth in the fourth quarter and into early next year?

There is a component shortage and as I said I think twice already, we are putting lots of R&D resources in order to overcome many hiccups on a weekly basis. Just understand the phenomena. From increase of few technologies, data storage, EV in general, and more electronics in any type of vehicles, there is a huge shortage, or on the other hand, book to bill is very high for classical analog components such as high-quality transistors, ceramic capacitors, but many more other components. And we’ve faced this since the beginning of 2017 and I would expect that it will be with us in the coming few years. We managed to develop a system that so far didn’t block any of our production and we can produce and we are producing the capacity needed. If to compare to a year and a half ago, our finished goods inventory is dramatically smaller. And therefore, in the last three quarters we had to ship via air a quite big portion of our product. As Ronen mentioned, we do see ease in this regard and we air shipped this quarter less than what we shipped last quarter and the quarter before. And I would expect that in a couple of quarters we will go back to a completely reasonable dollar wise amount of air shipments. We are building in almost all critical components bigger and bigger safety stock. Not with all of them of course. We are developing new sources. That of course, to be honest, comes on the pace of the cost reduction because it’s more or less the same amount of people that we could put either on furthering our cost reduction or balancing between cost reduction and creating more sources for components that are under risk or that we already know that we will have limitations with them. All in all, I think that we manage and we have all the tools to keep the gross margin that we told you before, 37% plus/minus 1%, and use the availability of product plus the fact that we can still reduce prices in order to increase market share.

Then in terms of the strategy around monetizing the grid services and grid management functionality, obviously that could be direct to the utility grid operators or with your other customers. What are you seeing so far in terms of early indications on who is going to be using that functionality and your ability to monetize? And how should we think about that in terms of market share stickiness of those customers and any sort of recurring revenue that would come from that?

I suggest to look at it from two angles. One angle, and it will take a long time, is stable, long-term monthly payment from every inverter. The amount of payment we can get today from inverter, and it’s very small, two, three, four cases, two if I remember properly in the U.S. and two in Australia, is very interesting. It put the total revenue of inverter over 12 years to be very, very significant. Saying that, it’s negligible volume today. And as I said about storage, batteries, three, four years ago when it started, it’s very, very hard to predict how fast it can grow. The main reason is that in order to make this very broad, you need the collaboration of the utilities and in most cases also the installers because they are the ones that really have the deal with the customer and can share the dollars coming from the utility between us as the technology providers, them the installers since they did sell something more, and the homeowner that need to have some upside as well. Those models, as other models that have many layers in them, it takes longer to develop to efficient level. And therefore, I think that it will become very interesting revenue income because it comes only from software. No more hardware, very little expenses in the back office, but still, it’s not something that we would consider to influence dramatically or even to a level that would be interesting for you in 2019.

Thank you. We’ll now take our next question from Philip Shen with Roth Capital Partners.

First one is on the 301. Let’s say they actually go through with the 25% tariff instead of 10%. Guy, I know you had some comments in your prepared remarks, I just want to make sure I understood. I think you said it might take two quarters to expand capacity in Romania and Hungary to be able to address the US. And then conversely, that would suggest your Chinese facilities would be shipping internationally. Can you confirm kind of your overall plan and then beyond that, what kind of margin impact could we see as a result of the inversion if any at all? Thanks.

You are referring to the fact that we will produce the product in Europe instead of China, correct?

Yes.

Okay. So let’s put proportion. If it remained at 10%, then the effect, our product gross margin, you can recalculate it from there. Gross margin will be about 5% either reduction in gross margin or 10% increase in products in the market, which, from the total residential installation, is negligible. If it were under 25%, that becomes more complex. Today, the situation is that we are managing to produce products in Europe at the same price and maybe a maybe a bit cheaper than products in China, due to the fact that we are more automated in Europe than what we are automated in China. So once we will move the majority or all production to Europe, I would expect that we wouldn’t need to change anything and we will see the same gross margin and a maybe a bit better due to the fact that with the growth and the amount of people we are adding, we will have every quarter more and more people to maintain cost reduction. So overall, once we produce all or vast majority in Europe, I don’t think we’ll see any effect on any of the profitably parameters.

Great. I just want to confirm I understood that right. As it relates to China, is the idea to ultimately shut down China or keep it at a kind of skeleton type volume?

No, the idea is to, today, we originally opened the factories in Europe under the concept of serving Europe from Europe, the US from US, and the rest of the world plus backups from China. Under the current situation, we will use the European capacity to ship to the US, while we will ship to Europe from China. So we need all the capacity in China for extra work, plus we need to, we just basically swap. Instead of producing in Europe for Europe, we’ll produce for Europe in China and for the US in Europe.

Great. Okay, much clearer. Thank you. As it relates, just a quick housekeeping question on the lawsuit. Can you comment on what kind of increasing OpEx we might see as a result of the lawsuits in Q3 and Q4?

At the current couple, three quarters, I would expect that it will be below $1 million a quarter all in all in all in all. I would expect, I don’t know, $600,000 to $1 million until end of the year and maybe the beginning of next year. Depends on move from both sides. It of course will increase, but I don’t know when and to what extent.

Great, then finally, can you comment on the utility scale product launch? Are you still thinking about launching by yearend of this year and then more commercial, well commercial sales six months to 12 months thereafter because of the long sales or development timeframes there?

It depends. It a little bit depends on exactly what you define as what. But as you said, as you saw, we are already commissioning the 23-megawatt field in India. We are in the process of larger projects we’ll have in phases, but we will have more suitable products, some of them as you mentioned coming already the end of this year, some of them coming by mid next year, and I think there will be coming two very big steps sometime by the end of 2019, beginning of 2020. So it will be over more or less four steps. Each one will increase our competitiveness and will open bigger and bigger opportunities.

We’ll now take our next question from Joseph Osha with JMP Securities.

Good afternoon. I wanted to follow-up a little bit on the previous question on the utility, what’s called the utility scale launch. Are we talking about 40 kilowatt…

Just go ahead on the question, it’s hard to hear.

Okay, sorry. Are we talking about the 40-kilowatt 3-phase product that you all showed when you talk about a utility scale launch? Is that the product that we’re talking about?

No, so today you have the synergy which combines three inverters together with one communication board, reduced dramatically the installation time and the cost of AC installation. What I was -- that’s already in the market and shipped. I was referring to four next steps that we didn’t yet present, each one will increase -- will decrease the labor involved and will decrease price and the total benefit we are bringing to utility scale installations. None of them will --

Okay. So, that’s not the synergy product. Because for synergy you rolled out 33kW and 40kW times 3, right? So the last I saw you were up to 120kW and that -- what you’re talking about now is something else?

Correct. That’s a natural evolution of the current set of products. I’m referring to 4 steps of new products.

And then just a follow-up on that, and I know I keep on asking, but I’m going to ask again, what any sense is to when we might see HD Wave show up in some of the 3-phase products?

In 3-phase? That’s what we refer to mid next year. We’re still under plan for mid next year to be actually sold. Alpha is probably earlier.

I’m sorry, what’s probably earlier?

Alpha of the product probably earlier, I hope we’ll be in shipment by mid next year. This is unique topology, lots of innovation and the chances of delay of such big step in innovation is of course very -- we still have good chance that this schedule will slip, but currently we feel comfortable with mid next year.

We’ll take our next question from Jeff Osborne with Cowen & Co.

I wanted to explore 3 quick questions. The ASP decline, if I heard you, Ronen, you talked about you proactively lowered pricing on the commercial side to gain share. A, did I hear you right? And B, was there any movement on pricing deliberately on the residential side as well to gain share or was that just a commercial effort?

So basically, there are 4 elements. One, we, in order to take market share, and I guess you saw the wonderful result, it’s already 43%, 43.5% of our total shipments in Megawatt. In order to increase market share, and I’m quite confident we will see very nice results in many geographies, we reduced prices by the beginning of the year. We had worked to reduce it from without moving from the 37% plus/minus 1% that we shared with you when we went public. We believe that for this part, or this kind of evolution of the company, this is the right amount of gross margin to aim to. The second element was currency that didn’t work in our favor this quarter. The third element is of course derived from the first one, it’s the mix. The average selling price of commercial, as you know, is dramatically lower than the average selling price of residential. The more you have commercial, of course it pushes the total gross margin down. And the last element is that not all the cost reductions that have been done in the agreement of pricing in Q2 were matured enough to get into the accounting policies. Therefore, we’ll see their benefit coming in the coming quarters.

I’m not following you on the last one. If you were aggressive on pricing at the end of Q2, wouldn’t that hurt your margins in the third quarter?

I will explain it. It depends when you close the price list with your manufacturers and then how you roll it into the accounting. So if it’s not closed on the right timing, you will get it from the beginning, or from the period you agreed upon. But you will be able to put it in the accounting only later. So that’s the situation regarding Q2. It’s very technical.

Two other quick ones here. The tax rate was a little lower than we were modeling. Can you just remind us on what the anticipated tax rate would be in the second half of this year and for fiscal 2019?

Yeah sure. In general, tax rates would be 14% moving forward. Because whatever we are taking..

1-4?

1-4, yes. Whatever we are saving in Israel we are paying as GILTI taxes in the United States. You will see from time to time fluctuation from this rate, mostly related to some of the tax assets or benefits that are created that are mostly related to the various jurisdictions. But usually you should see 14% moving on from now.

Ronen, the tax rate this quarter had some one-time items then? Was it lower than you anticipated? Or was this in line?

Yes, this quarter, yes. This quarter we basically, once we had filed or prepared the actual tax returns, some of the assessments that we took at the end of Q4 were now actually realized and therefore there were a little bit of changes in what we call tax assets. But not in the actual payment that was done right now. In general, it’s 14%.

Then the last one is, so you highlighted the potential OpEx impacts from the lawsuit which is understandable. And I know you highlighted Gamatronic is negligible to the top and bottom line. But can you just give us a rough ballpark off what the 100 people that are coming over with the acquisition, how we should think about modeling those people from an OpEx perspective in particular?

In general, it’s approximately $2 million on OpEx.

Annually or full year?

No, quarterly. Quarterly.

In general, the division itself is already profitable in a very, very low number. So the overall sales, while we reduced the cost of the group, is contributing, will contribute very, very little at day one and we believe that it will be able to dramatically increase the profitability of the group within maximum of 4 quarters.

[Operator Instructions] We’ll take our next question from Edwin Mok with Needham & Company.

First question I have is, if I missed it I apologize, but did you talk about how much of the sales come from commercial this quarter? And how do you think that will trend let’s say for the second half of the year and into 2019?

For Q2 it was, the contribution was 43.5% in Megawatt. As we said before, it’s hard to predict quarter by quarter because the difference between when you get design and when you actually sell the product to in many cases to the distributor. But in general, we are expecting increase in the total megawatts and also in the percentage to a level of about 50%. As you remember, probably that’s what I said like couple of years ago. We believe that it will become around 50% sometime next year and in a few years, we’ll be able to bi-launch something in the area of 40,40,20 or 40,30,20 between resi, commercial and utility.

Is there a limitation on how big a type of project, all commercial project you can go after right now given the product that you have? When we talk industrial, obviously your product cannot be cost competitive because of the architecture. Can you talk a little bit about the advantage of your product?

With what we have today, in many cases if you were to run [Indiscernible] and put dollar and dollar and dollar, it will make sense to do any size of big field. Saying that, it’s always complex to convince in the beginning that in cases with no shade, just PID problem and mismatch of panels and growing mismatch with time and dirt, the PV presents, which is third party tool, we didn’t do anything, presents so much benefit, most customers it will take time to convince. And we are in the first stages. So if you would put it in Excel, you would see that even with what we have today, we could penetrate in theory to a bigger percentage of the utility fields with no limitation on size. Because not matter the size of the field, the connection or transformer points are in the size of 1, 2, 3, 4, 5 megawatts, it’s no bigger than that. So for example, in the 25, 27 sorry, megawatt field we are doing in India, there are 11 connection points. So in theory you can do 11, you can do many more. So I think we are very, or we can be competitive if the customer is willing to run a very short Excel with a view of 20 years ahead. And it’s marketing, it’s sales, it’s time, and what’s more important, this is the SolarEdge way, we convince the customers mainly by bringing a better and better fleet of products. And that’s what I referred before that in the coming 1.5 years, we will have 4 steps of products that specifically were designed for utility and I’m sure will increase our market further. Not overnight, but with lots of hard work I think we’ll become an influence player also in the utility field.

And just to be clear, Guy, you talk about the XG wave portion of the three phase inverter. Is it as much of a cost saving as you would expect on the single phase product or is it less because you already have inside your existing commercial inverter, you’ve already done a lot of work in terms of driving costs down? Is that the way to think of the difference of that cost saving on three phase versus single phase?

I think the rationale for the inverter is the same or in the same proportion and maybe even better. Even better in the inverter portion. In the optimizer portion, of course this alone will be divided by more or less half. Because with the current optimizers, and we are working on the optimizer that will be the perfect fit for this product to gain more or less the same benefit on the specific commercial optimizer as well.

We’ll take our next question from Carter Driscoll with B. Riley FBR.

Guy, you talked in the past about ASP per watt is lower in the commercial side, that it’s more profitable than resi. Is that still the case?

Sorry, one more time? I said the ASP is of course naturally different completely. The profitability --

The profitability is better?

The profitability on average is quite similar. I don’t know the numbers exactly and it depends on the fluctuation in deals is bigger than in residential, because we still in many cases compete and need to penetrate in markets like India, etc. So the variance on the ASP within the segment is higher than the variance in residential. But more or less the percentage of profitability are similar. There is no dramatic difference in profitability.

Okay. Is the shift, the slight shift at least in terms of your top 10 customers as percent of sales due to the mix shift between C&I and resi? Or is there something else at play geographically that caused it to go up? I think it had been on a fairly steady downtrend.

Sorry, I’m not sure what in down trend?

You talked about your customer concentration within your top 10 actually ticked up this quarter. It had been in a pretty steady downtrend, I’m wondering, is that anything to do with your commercial share gain? Or was it more geographical in nature? Or was it versus the national players?

It comes from the nature of two main reasons. One, the big TPOs in the US are in general, the suite together, losing market share to the mid tail. Where in the other geographies, we are gaining more and more logos. And since there are no big players in Australia, in Europe, none of them is big. So practically, we gain more logos on the mid-size and therefore they overall slowly reduce the amount of the 10 biggest customers.

Last one for me. Can you talk about some of your non-solar initiatives? You talked about virtual power plant, but maybe EV charging? Any update there where storage, incrementally in different geographies we’re seeing attach rates increase and/or vis-à-vis competitive position improving?

So the vision is of course to supply everything beyond the meter to resi and later to commercial. Today we are supplying batteries. We are still limited with volume due to the fact that majority, vast majority is going with the LG battery which is having today overall limitation in production because what they have they need to split between stationary storage for solar, UPS and automotive. We are working of course on other solutions for that. EV inside inverters is already shipped and gained very nice acceptance. And I would expect that -- again, with time but much faster than other improvements, we will see a very fast adoption rate. It’s very simple, especially in the US, once you go EV in the inverter, you save all the installation costs of EV in the future. The installation cost of EV in the future is anything from $500 to $600, $700. Depends on your house, load boards, the length between the EV location and the load boards, etc. So for the customer to take inverter which is already EV ready, is a difference of around $300. So they save already $300 just by having this opportunity. And since we and most customers believe that in 3, 4, 5 years, most of those customers will have at least one electrical vehicle, it just makes all the sense. And different than what I said about batteries in the past and grid services, I think the adoption will be fast.

Thank you. This concludes our question-and-answer session today. I’ll go ahead and turn the call back to Guy Sella for closing remarks.

Thank you all. In summary, our second quarter results show continued successful execution of our business strategy with record revenues and consistently stable profitably. We are well positioned to continue to expand our business with new product offerings and in new territories. We look forward to continuing this momentum. Thank you for joining us on today’s call. All the best.

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