Ladies and gentlemen, welcome to the SolarEdge conference call for the third quarter ended September 30, 2019. This call is being webcast live on the company's website at www.solaredge.com in the Investors section on the Event's 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's 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. Please go ahead, ma'am.

Good afternoon. Thank you for joining us to discuss SolarEdge's operating results for the third quarter ended September 30, 2019 as well as the company's outlook for the fourth quarter of 2019. With me today are Zvi Lando, acting CEO and VP Global Sales; and Ronen Faier, Chief Financial Officer. Zvi will begin with a brief review of the results for the third quarter ended September 30, 2019. Ronen will review the financial results for the third quarter, followed by the company's outlook for the fourth quarter of 2019. Then we will open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in our press release and the slides published today for a more complete description. All material contained in the webcast is a sole property and 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 September 30, 2019, 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 Zvi.

Thank you, Erica. Good afternoon, and thank you all for joining us on our conference call. Before I begin, I want to address the unfortunate circumstances that had led me to this position. I was fortunate to work with our Founder, Chairman and CEO, Guy Sella, from 2009 and until his passing 2 months ago. I think everyone who knew Guy will confirm that he was not your typical CEO and that his vision, leadership and dedication that led SolarEdge to become a world leader in PV smart energy technology will be greatly missed. Those of us at SolarEdge miss not only his leadership, but Guy, our mentor, travel companion, technology guru and true friend. The SolarEdge executive management team, most of whom have been working together now for many years, are dedicated to continuing Guy's legacy forward through the continued success of SolarEdge. And now for our results. I'm happy to report that once again, we concluded our quarter with record revenues of $411 million, representing strong growth led by record revenues in the U.S. where we often see upswing in business in the second half of the year and record revenues in Europe, where typically the third quarter is not as strong due to summer holiday season. Similarly, we saw strength and growth in most other region in which we operate. These revenues were based on record quarter in our solar business of approximately $388 million. With this record revenue, we have surpassed for the first time the milestone of $1 billion of revenues in a financial year, and this has been achieved through just the first 3 quarters of 2019. This revenue growth, coupled with our gross margin levels at the upper end of our guidance and increased operational leverage, has enabled us to generate record non-GAAP…

Thank you, Zvi, and good afternoon, everyone. After reporting 18 quarters as a public company alongside Guy, I want to begin by saying that working with him was an honor, a daily challenge of every assumption, in fact, an ongoing process of continuous improvement. And with all of that, it was truly fun. He is greatly missed. Before starting the review of our financial results for the third quarter of 2019, 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 stock-based compensation, onetime asset disposal, change in deferred taxes, onetime acquisition-related expenses, amortization and depreciation of acquired assets and cost of product adjustment related to the acquisitions of SMRE, Kokam and the UPS division, expenses related to the impact on financing expenses of the revenue recognition standard and the adoption of the newly enacted leasing accounting standard, nonrecurring expenses as well as non-GAAP earnings per share. I will conclude this introduction by noting that the effect of the new acquisitions closed in the past 15 months on the GAAP results is meaningful as a result of amortization of accounting elements identified in the preliminary purchase price allocation studies that we have recently performed. 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. For the third quarter of 2019, total revenues were $410.6 million, a 26% increase compared to a $325 million last quarter and a 74% increase compared to $236.6 million in the same quarter last year. Revenues from the sale of solar product were $387.8 million and were driven by strong growth in all regions, in line with the normal seasonality in this…

[Operator Instructions]. Our first question comes from Philip Shen with ROTH Capital Partners.

The first one is on 2020. I know you don't have official guidance for the year, but can you comment in general about the growth, perhaps qualitatively, perhaps, do you see kind of mid-teens type growth for megawatts or revenue? And then can you also comment on what regions you might be seeing some strength as well as some weakness in, for example, Netherlands, historically has been a big part of your business and that country has grown substantially. Is there -- do you see any risk for that country to slow down at all as the grid gets congested there?

So first of all, thank you for the question, Phil. In relation to the 2020 guidance, as we mentioned, we did not provide a guidance yet. But as we guided for the last few years, we continue to see as we said all the time, a low double-digit growth that is usually translated for us between 15% to 25%. This was what we said before, we have no reason to believe that we cannot maintain this in the solar business for 2020 and the years to come. And I will let Zvi answer more about the markets themselves.

Yes. I don't think there's any particular market where we are seeing weakness or expect a negative trajectory. The -- there's a lot of potential growth obviously in Australia. There are some new markets evolving where we are investing a lot, specifically in South America, Brazil, and we also see a lot of opportunities in India. On top of that, we see positive trend in all of the regular market that we serve. Obviously, there are a few markets where our market share is at a very high level. And that is always a challenge to continue to grow. And The Netherlands would represent one of those. At the same time, the commercial market in The Netherlands is expected to grow dramatically in size next year, and we are in a very good position in that segment of the market. So we do see and anticipate growth in that market as well, together with all of the others that I mentioned before.

Okay. Great. As it relates to pricing trends, was wondering if you could comment kind of by geography as well as by segment for what you see for pricing. So specifically, what's the outlook for U.S. resi pricing, especially as you guys ramp up Vietnam and Hungary? In Q1, do you expect to eventually reduce pricing because the tariff won't be a factor? And then how do you expect the outlook for U.S. commercial pricing to trend as well as international resi and so forth with international commercial?

So Phil with regards to the pricing trend, I think that other than in the U.S., where we did increase the pricing in June to overcome the tariff, we do not see major changes. I think that all in all, the pricing environment is relatively stable, and we do not see any change. Outside of the United States, we also see across all geographies and I think across all segments very stable pricing environment. Most of the changes that we see are mostly related to fluctuations in foreign currencies rather than in the price of the products themselves. And therefore, we didn't see any major changes there. Again, we do not see any dynamic that should change it going into 2020, as you mentioned before. And in general, we are ramping Vietnam. We do expect that at a certain point of time, we will have more nontariff or products that are not subject to U.S. tariffs. And we said all along that our intention is to eventually pass this along to our customers as just we were able to pass the tariffs along to them. We will do it in a gradual manner that will reflect both the ramp-up, the pricing that was stable in Vietnam and also the ratio of the Vietnamese made products in the overall mix of our products coming into the United States.

Our next question comes from Maheep Mandloi with Crédit Suisse.

And just from Philip's first question on the -- could you just talk about the cadence of the shipments for next year. Do you see a similar seasonality as we saw in 2019? And just on The Netherlands market, we did see some news flow around a congested grid out there. So have you seen any concerns on that front as the market grows over there?

I'll start with the second part. No, we don't see any slowdown of the market in The Netherlands. It's a strong market for us, and we see strong demand. In regards to the first part of the question, I think as we've discussed also in the previous call as well as in our comments from today, we expect that in Q2 of next year we will be at a point where we have a large enough gap between our manufacturing capability and demand and a much more stable environment in terms of supply and air shipments. Until that point, we will still be challenged with high air shipment expenses and some lumpiness in delivery.

Got that. And second question, if you could just talk about the Q4 guidance. What are the growth rates or growth regions from the mix for international versus U.S. and residential versus commercial in Q4, how you see that shaping up? And then just a follow-up on the inverter failure run rates, which you spoke about. And how should we think about its impact on either new customer orders or the warranty costs going forward embedded in the cost structure?

Yes, I'll take the first part of the question and hand it to Ronen for the latter. In the fourth quarter, we expect Europe to be seasonally down and the U.S. to be seasonally very strong. We also expect the fourth quarter to be stronger on commercial and to resume growth in that area from the third quarter. So I think that answers the question. I'll let Ronen deal with the second part.

Maheep, if you can just repeat so I'll be able to answer correctly. Maheep?

Yes. With regard to the inverter failure, just want to understand how should we think about the failure run rates in Q4 and when do you expect a return to normalized run rates. And have you seen any customer deflections or -- because of the inverter failure issues?

So in general, we see a decreasing trend in our failure rates. It starts, first of all, from the more stabilized product that we see there, the optimizers, the three phase inverters that are, I would call it, more mature products, in general. We saw a decrease over time. We continue to see this. Also in our single phase inverters, we see a decrease that we believe that will continue in Q4. When it comes to the expenses, we need to, of course, remember that the expense is not just related to the amount of failures, but rather to the cost of each and every failure treatment. Meaning, for example, do you use expedited shipments or not? Do you use new products versus refurbished products? Or do you use the full products compared to a single card. In general, we expect the actual expenses to go down into Q4 due to the improvement in the number of failures that we see. And I would call it relatively controlled cost. So we do not see any major changes there in Q4. And in general, I think I have basically answered everything.

Our next question comes from Mark Strouse with JPMorgan.

Just wanted to see if you could give an update on demand that you're seeing for storage, if you've seen any uptick or change in conversations with customers from events such as the fires in Northern California. And then also just -- I know it's still kind of early, but the initial feedback that you've gotten from some of your new storage solutions you unveiled at SPI? Then I have a follow-up, please?

Yes. So to the first part of the question, yes, we do see increased demand as a result of singular events. And this has been the dynamic in storage for the last few years, and we definitely see it in the last few weeks. In terms -- and that comes in parallel to a steady increase in storage adoption. But that's not a dramatic increase. It is more of a steady low percentage rate increase. So we see both of these phenomenons and we expect to ship in the fourth quarter and in the first quarter more storage systems than in the third quarter. But it has not yet reached the point that the adoption rate of storage globally is really spiking and increasing significantly.

Okay. That's helpful. And then just if you can, an update on the competitive environment, if you're conversations with customers have changed at all since SPI and some of the competitive offerings that were unveiled at that show.

Not really. I think customers know the difference between products that are out there and tested to products that are -- seem attractive but are in a prototype phase. Most our conversations are with experienced installers and that are installing large volumes and relates to our products and our issues, whether it's availability or others. So we don't spend and we didn't see much discussions about other alternatives, and we don't see any real impact on the conversation or the demand.

Our next question comes from Brian Lee with Goldman Sachs.

I had two of them. Maybe to start off, a follow-up to one of the questions around pricing. Ronen, it sounds like you are, and you've said this for a couple of quarters, you're effectively going to cut pricing in the U.S. in 2020. I understand it's going to be gradual. But can you give us a little bit more, just from a modeling gains perspective, it'd be helpful. What quarter does that start? And then how many quarters will that flow through? And then once complete, assuming all else equal, mix, et cetera, would blended pricing be back to the low- to mid-$0.20 per watt range where it was last year before tariffs started to drive the pricing increases? And then I had a follow-up.

So I wish you know that I can give you already the right timing that we can do it. But I think that unfortunately, the -- in basis, it is going to be very much related on the cadence of our ramp-up of Vietnam and also the demand that we see here in the United States because those 2 elements are going to very much determine what is going to be the overall mix pricing that we see here between tariff and nontariff products. In general, again, the view is that we would like our customers to get back the prices that we increased in order to overcome the tariff, we will do it. I don't know if it will be immediately in Q1. I would expect it to take a little bit of time because even products that are produced in Q1 and shipped will take time until they reach the United States. And to be honest, once we'll have a much better view on this, we will be happy to share so you can model it. In general, whatever we took in order to overcome this tariff issue, we would like to return to our customers eventually.

Okay. No, that's fair. It makes sense. And then second question, just maybe a little bit on the competitive landscape as we head into 2020. Clearly, you've had good growth here and hung on to market share gains, has not expanded that through most of the year. I think one of your peers in phase inferred that they had one business at a new customer, Tier 1 installer in the U.S., that's historically been an important customer for you. So just wondering, can you update us or provide some more color on the competitive landscape in the U.S. as we head into 2020? And then how you're thinking about potentially mitigating some of that potential share loss here to appear. And then just on the safe harbor, maybe if I could squeeze one last housekeeping one in. The $10 million that you're guiding to for Q4, is that all ordered and shippable product before December 31? How do you define the $10 million?

Okay. So I'll start from the $10 million, which is quicker. Basically, all of these are products that, yes, that are going to be shipped before the end of the quarter. And these are basically -- the way that we look at it is simply products that without safe harbor might have been ordered and delivered in January. And of course, as you know, safe harbor takes many faces and forms but this specifically relates to products that are to be provided this year and expect it to be consumed next year. Now in relation to the competitive environment and here in the United States or specific competitors. In general, and I think that Zvi also alluded to this in one of his answers. We already have countries in which we have very high market share. The U.S., of course, is this one, according to GTM, we're approximately 60% of the U.S. residential market, The Netherlands is one. And when it comes to this market share, some of this market share, we know, at least in the United States was attributed to the fact that some of our competitors could not actually ship products. And therefore, naturally, some customers came to us. I believe that those customers that came to us because of the fact that they couldn't get products, some will stay with us, some may go back. And I also believe that as we are growing and becoming so strong and dominant, some of the other players would like to take second sources which is something that, again, is very natural. We also in our production, try to take second sources in any case. I would say that in general, we do expect that we can continue and maintain our sales level in the United States and continue to increase them. We believe that if one customer for whatever the numbers will be will reduce the share using us, we have the ability to grow share with others. And in general, we believe that we will not see any major effect on our business due to this specific issue, which simply is, I would call it, natural market dynamic where you have such a big market share.

Our next question comes from Jeff Osborne with Cowen & Company.

Just two questions on my end. Ronen, I was wondering if you could just touch on the manufacturing capacity challenges and what the current lead times are. Was there any revenue that, in particular, in commercial, with that being down sequentially and the prioritization towards U.S. residential? Is there any way to quantify what the foregone revenue was or what the demand was that you were unable to fulfill?

I think we -- starting on the capacity area, we increased capacity in the current quarter by about 15% or so compared to the prior quarter, and we will increase capacity in a higher level or close to 40% going into Q4. At the current level, we are roughly matched between supply and demand. And that's why we're air shipping. So I wouldn't put the -- I wouldn't be able to put a specific number on revenue number that was missed at this dynamic, but there could have been a project here and there that someone needed product urgently, especially commercial product because maybe a different inverter that they designed for wasn't available and that, that opportunity was missed due to insufficient product in the channel. But generally speaking, at the current levels, supply and demand are matched. And we are aiming to, as I mentioned before, to reach a point in Q1 where there is a small gap between the 2 in favor of capacity. And in Q2, we're ready to have a large gap that will allow us to have inventories and no one having to go elsewhere when he wants our product.

Got it. That's helpful. And just two sort of housekeeping questions. Is there a way that you can elaborate on the field failures. You alluded to some new customers. It doesn't sound like it was off-spec components. I think that's what you had highlighted in the past. Is this a communication module or something in the manufacturing process of the optimizer or the inverter that had an issue? I was just wondering if you can elaborate on what specifically was the root cause of the problem at the start of the quarter that you feel more comfortable with exiting the quarter? And then maybe for Ronen on the housekeeping side. My understanding is with safe Harbor, you folks need to receive the cash by year-end. So you talked about $10 million of revenue for this quarter. Do you have any sense of what the revenue would be through April of next year and that cash that would need to be paid and in your hands by the end of the year?

I'll start with the first part of the question. So as also mentioned in the notes, the focus is on the single phase inverters. Actually, on three phase inverters and optimizers, we are seeing stable and low failure in replacement rates and they continue to trend down. On the single phase inverter, as mentioned, it's a couple of phenomenons. The first are stabilization of the production line, not with any specific issue with learning processes, on handling, on some manufacturing processes that were causing some failures and as the corrective actions were taken, the failure rates declined. This, combined with what was mentioned that we track very closely the new installers that are registering and are monitoring for the first time and doing their first ever SolarEdge installation. And we've seen an increase in that number. And there's a -- we train them, but there is definitely a learning curve over there. So you know how to install our product quickly and robustly and that was a second cause. The third was we introduced towards the end of the winter the screenless single phase inverters that have a new method of commissioning that some of our installers, including veteran installers had challenges to adapt to that new methodology in the initial phase. And that wasn't necessarily a cause of failure, but definitely a cause of congestion in our phone lines, which I referred to as well. So those are the 3 dynamics that we saw pretty much between May and end of August and beginning of September. And we're tracking all the relevant indices and are seeing gradual decline since mid-September until now.

Jeff related to the safe harbor, so the safe harbor basically has 2 phases. For whatever you deliver before year-end, you do not need to get the cash in advance or to get it before year-end. You can get it based on the regular payment terms that you have. And the second form is where you get a firm commitment, plus cash before the end of the year, for a product that are going to be delivered into March and a little bit of April. I can tell you this we already have several of these transactions that were closed, both on residential and in commercial, by the way. And we also have a number of these kind of discussions with a number of our customers, some of them are large, some of them are smaller, where we believe that they will mature. And of course, we'll see money before the end of the year. As those are not yet necessarily closed, we do not feel comfortable to give a number now. But I can tell you that in any case, it's something that is being negotiated, and we'll see it towards year-end and we'll simply provide data then.

[Operator Instructions]. Our next question comes from Colin Rusch with Oppenheimer.

Could you guys talk about your capacity to deliver storage at this point, both from internal and third-party suppliers. And kind of what we can expect from a ramp cadence as we go forward.

Currently, we deliver storage compatible inverters, but we are not delivering batteries and all of those are being delivered by third party -- third parties. And our road map has us delivering batteries of our own towards the middle of next year.

Okay. I'll take some clarifications off-line. And then as you look at your R&D spend, as a percentage of revenue, it certainly seems like some capacity to increase some spend. What areas are you expecting to focus on over the next period of time, let's call it, the next 12 to 18 months?

So first of all, Colin, you're very much right about the fact that as a percentage of revenue, the R&D spending is going down. This is basically mostly due to the fact that we are increasing revenue so rapidly that it's very hard to match it with finding, recruiting, training and bringing good R&D people onboard. And therefore, certainly, we will see continued growth in the R&D. I would say that in R&D that you see today, you need to divide between the solar and the nonsolar businesses, both of them are reported in our R&D line in the operating expenses. On the solar side, it would be a combination of 3 major activities. The first one will be to bring the larger inverters as we shared the road map to have our larger commercial and -- towards utility inverters by the end of 2020. A second one, of course, is always to continue and increase our product portfolio in order to meet segments that we're already operating, but going into new markets and developing new flavors for the relevant markets such as the product that Zvi mentioned for the German market storage. And lastly, it's cost reduction. In our industry, cost reduction mostly come due to the better engineering and displacing of components and not necessarily just from volume. So I think these are the 3 areas that we put a lot of emphasis in the solar. On the nonsolar business, of course, each company has its own. So on Kokam, it will be the work or mutual work on our battery and future battery as well as product that Kokam is already selling in their markets. In Gamatronic, this is, of course, the next generations of the UPS products that are going to embed storage technology and knowledge and also better manufacturability that will allow to reduce the cost. And when it comes to SMRE and IT, this is more of a, I would call it, startup kind of R&D. But it is related to develop future products, where naturally the time of those products is a little bit longer in the life or in the expectation of revenues.

That concludes our time for question and answer. I'd now like to turn it back to Zvi Lando for closing comments.

Thank you. In summary, we are happy with our third quarter results that show continued successful execution of our business strategy with record revenues and increased profitability. We are well positioned to continue expanding our businesses with new product offerings and in new territories and by leveraging our acquisitions. We look forward to continuing this momentum. I'd like to thank all of you for joining us on today's call.

Thank you. Ladies and gentlemen, that concludes the SolarEdge conference call for the third quarter. You may now disconnect your phone lines, and thank you for joining us this afternoon.