Solaredge Technologies, Inc. (NASDAQ:SEDG)
Q4 2016 Earnings Conference Call
August 09, 2016, 16:30 ET
Erica Mannion - IR
Guy Sella - CEO, Chairman & Founder
Ronen Faier - CFO
Brian Lee - Goldman Sachs
Rachel Ley - Deutsche Bank
Philip Shen - Roth Capital Partners
Edwin Mok - Needham & Company
Michael Morosi - Avondale Partners
Colin Rusch - Oppenheimer
Carter Driscol - FBR Capital Markets
Paul Coster - JPMorgan Securities
Welcome to the SolarEdge Fiscal Fourth Quarter and Year Ended June 30, 2016 Conference Call. This call is being webcast live on the Company's website at www.solaredge.com in the Investor 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 fiscal fourth quarter of 2016, the full fiscal year ended June 30, 2016, as well as the Company's outlook for the fiscal first quarter of 2017.
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 fiscal fourth quarter and the year-end results. Ronen will review the financial results for the fourth quarter and the year ended and provide the Company's outlook for the first fiscal quarter of 2017. Then we will open up 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 the 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 fiscal fourth quarter and fiscal year end press release or the presentation may obtain a copy by visiting the Investor section of the Company's website.
Now I will turn the call over to CEO, Guy Sella.
Thank you, Erica. Good afternoon and thank you for joining us on our conference call. We concluded this quarter below our expectations with fiscal fourth quarter revenues at $124.8 million, at the low end of our guidance, with gross margins above guidance at 31.4%. We show a GAAP net income of $17.3 million and non-GAAP income of $19.9 million and a non-GAAP diluted earnings per share of $0.44. Our cash flow from -- our cash flow generation from operating activities continued to grow and reached $17.3 million this quarter with a total in cash generation in fiscal year 2016 of over $52 million.
This quarter we were impacted by the slowdown in business in the U.S. residential market that affected the large residential installers in the last two quarters to three quarters. Since we have the largest market share in the residential segment in the U.S., we're naturally impacted by what we believe is a temporary market adjustment to last year's ITC changes. Despite the quarter's decline in revenues in the U.S. which I will describe shortly in further detail, we were able to maintain our overall level of quarterly revenues, thanks to our healthy business outside the United States that grew significantly quarter-over quarter. As a general business strategy, we prefer profitability over revenue growth. As such, the results this quarter are sound response to the market changes. Our ASP erosion remained within plan and we did not reduce prices in an unnatural manner in order to increase revenues on account of profitability.
The size of our business remained healthy in the fiscal fourth quarter, in which we shipped 427 megawatt of AC nameplate inverters. Overall, we shipped approximately 1.5 million power optimizers and approximately 58,000 inverters, a moderate increase from last quarter shipments. We see general slowdown in the growth rate over the residential PV business in the U.S., particularly affecting the largest installers. Since we have the largest market share in the residential segment in the U.S. and we sell to all of these installers, we're naturally impacted by their results. Having said that, we believe that this is temporary. While revenues from our distribution channel in the U.S. continues to grow this quarter, the demand from the large distributors was below our and their expectations and the overall results was lower sales in the North America residential market.
In parallel, we were successfully growing our market share in all other geographies, regions and this is evident, in particular, in our increased revenues this quarter in the Netherlands, Germany and Australia. This quarter, we began shipment of our new HD-Wave inverter and we're now ramping up our manufacturing lines with HD-Wave production that will eventually replace our current residential inverter product line. We also introduced this quarter our expanded smart energy management portfolio which includes a new product suite of load switching devices and immersion heater control designed to direct excess PV energy to appliances during the day in order to shift energy consumption to match PV generation.
Looking at our year-over-year figures reveals strong results. We're reporting record annual revenues for fiscal 2016 or $490 million compared to $325 million in fiscal 2015 and an annual net income of over $76 million compared to net income of $21 million in fiscal 2015. In the fiscal year 2016, we had consecutive positive revenues and positive net income quarter-over quarter. We continued to provide new and attractive product offering and grow our presence in regions where we believe the market is mature and for these reasons, we were able to compensate this quarter in sales for generally weaker demand in the U.S. market.
We remain highly focused on profitability and cash from operations. We maintain that profitability and strong balance sheet is key to long term success in this industry and it is critical to being able to support 25 years warranty that characterize Module-Level Power Electronics product.
And with this, I hand the speaker over to Ronen, who will review our financial results.
Thank you, Guy and good afternoon. Before starting the review of our financial results for the fiscal fourth quarter and the full year of 2016, I would like to mention 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 as well as non-GAAP earnings per share. Full reconciliation of the pro-forma to GAAP results discussed in 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 fiscal quarter. Total revenues were $124.8 million compared to $125.2 million last quarter and up 26.8% for the same period last year when revenues were $98.4 million. Revenues which were at the low end of our guidance for the quarter are primarily attributed to weaker sales in the U.S. market and as Guy mentioned, are somewhat offset by an increase in our sales in Europe and the rest of the world.
This quarter we shipped products to customers in more than 41 countries. It is also worth mentioning that despite the competitive pricing environment this quarter, we were able to maintain our average selling prices within the planned erosion boundaries. This quarter, our mixed ASP per watt decreased by 2.7%. Gross margins for the fiscal fourth quarter were 31.4% compared to 32.5% for the previous quarter and 28.7% for the same period last year.
As we stated in the last quarter, gross margins in the third fiscal quarter were positively impacted by a number of external factors including seasonality, lower sales in Europe, a higher ratio of commercial sales and favorable exchange rates. In the fourth fiscal quarter, our gross margins were slightly higher than our outlook and exceeded the guidance, mainly due to factored cost reduction activities.
Moving to the operating expenses. Research and development expenses were $9.2 million, an increase of 6% compared to the previous quarter and 37.8% year-over-year, an increase that like in the previous quarters, was mostly driven by increased R&D headcount. Sales and marketing expenses for the quarter were $8.9 million, relatively stable compared to the previous quarter and a 20.2% increase on a year-over-year basis. G&A expenses decreased to $3.1 million this quarter, an 11.4% decrease compared to the previous quarter and a 35.4% increase on a year-over-year basis.
In total, operating expenses for the fiscal fourth quarter of 2016 were $21.2 million or 17% of revenues compared to $21 million or 16.8% of revenues in the previous quarter and $16.4 million or 16.7% of revenues for the same quarter last year. We expect operating expenses in the fiscal first quarter of 2017 to continue to increase as we further expand our R&D teams and our geographical footprint. We expect this increase to be in line with our expected growth of revenues. Operating income for the fiscal fourth quarter was $17.9 million, compared to an operating income of $19.7 million in the previous quarter and operating income of $11.9 million for the same period last year.
Financial expenses for the quarter were $0.5 million compared to a financial income of $2 million in the previous quarter and financial expenses of $1.7 million for the same period last year. As a reminder, the income generated last quarter was mostly the result of a change in the U.S. dollar's euro exchange rate and the U.S. dollar's new Israeli shekel exchange rates. This quarter, we recorded income tax expenses of $100,000 compared to an income tax expenses of $1 million in the previous quarter and income tax expenses of $800,000 for the same period last year. The lower income tax expenses are a result of the creation of additional deferred tax assets related to the timing of tax deductions from our research and development expenses. GAAP net income for the fiscal fourth quarter was $17.3 million compared to GAAP net income of $20.8 million for the previous quarter and GAAP net income of $9.3 million for the same quarter last year.
Our non-GAAP net income was $19.9 million compared to a non-GAAP net income of $23.3 million in the previous quarter and a non-GAAP net income of $13.8 million for the same quarter last year. GAAP net diluted earnings per share was $0.39 for the fiscal fourth quarter compared to $0.47 in the previous quarter and $0.21 net diluted GAAP EPS for the fiscal fourth quarter last year. Non-GAAP net diluted EPS was $0.44 compared to a non-GAAP net diluted EPS of $0.51 in the previous quarter and a non-GAAP net diluted EPS of $0.31 for the same quarter last year.
Turning now to the balance sheet. As of June 30, 2016, cash, cash equivalents, restricted cash and investments were $186.6 million compared to $172.2 million in March 31, 2016. During the fiscal fourth quarter, we generated $17.3 million of cash flow from operations. This cash generation is despite an increase in days sales outstanding related to our accounts receivable that has grown in the last quarter since higher portion of our sales are directed to distribution, a channel which is characterized by longer payment terms. From a customer concentration perspective, this quarter we had only one customer, a distributor that accounted for more than 10% of our revenues.
Further, our top 10 customers together accounted for 55.2% of our revenues this quarter compared to 60.6% of our revenues in the previous quarter. As of June 30, our inventory level, net of reserve, was $81.6 million compared to $85.5 million in the prior quarter.
Now let's turn to summarize fiscal 2016. Revenues for fiscal 2016 were $489.8 million, a 51% increase compared to revenues of $325.1 million for fiscal 2015. Revenues from the sales of optimizers represented 50% of our revenues, while invertor sales contributed another 45.7%. The remainder is related to sales of other products and recognition of revenues from cloud-based monitoring portal services. On an annual basis, in fiscal 2016, revenues from the U.S. market consisted of 68% of our total revenues compared to 73% in fiscal 2015. Sales in Europe represented 23% in fiscal 2016 compared to 20% in 2015.
Gross margins for fiscal 2016 were 31% compared to 25.2% in fiscal 2015. This increase was mainly attributed to cost reductions and exceeded ASP erosion and reductions in our supply chain expenses such as the elimination of air shipments to ocean freight and better economies of scale related to our increased production volumes. With regard to operating expenses, our expenses related to research and development were $33.2 million, an increase of 50.9% compared to the previous year. Sales and marketing expenses for the year were $34.8 million, 39.5% increase compared to the previous fiscal year. G&A expenses were $12.1 million, an 85.7% increase compared to the previous year. Total operating expenses for fiscal 2016 were $80.2 million, a 49.8% increase compared to $53.5 million for fiscal 2015.
Operating income for 2016 was $71.8 million compared to $28.3 million in the previous year. Our GAAP net income for the fiscal year was $76.6 million, a 262.7% increase compared to $21.1 million in the previous year. Our non-GAAP net income was $79.3 million compared to $29.4 million in fiscal 2015. Net diluted GAAP EPS was $1.73 for the fiscal year compared to net diluted GAAP EPS in the previous year of $0.27. Our non-GAAP net diluted EPS for 2016 was $1.74 compared to non-GAAP net diluted earnings per share of $0.77 in fiscal 2015. During fiscal 2016, we generated $52.4 million of cash flow from operations despite the growth in AR balances and increased inventory levels in the various regions.
And now, our guidance for the fiscal first quarter of 2017 is as follows. We expect revenues to be within the range of $130 million to $139 million and gross margins to be within the range of 30% to 32%.
I will now turn the call to the operator to open it up for questions. Operator, please.
[Operator Instructions]. We will go first to Brian Lee with Goldman Sachs.
I guess first one, I know you've probably been dealing with this conversation for the past few weeks, but Tesla has been vocal about their plans to produce an integrated inverter solution, so just curious what's your take on that is. Does that mean third-party suppliers will be totally designed out for both stationary storage and solar applications, assuming the SolarCity deal is consummated and if that is the case, is that a trend we see more broadly and how do you guys come back for that or position for it?
I will try, I think there are like three different questions under your main question. So the first one, of course, we're aware of Tesla plans [indiscernible] from Elon's comments. So currently, we're not aware of any [indiscernible] and current plans to add inverter to the battery. As we develop an inverter that can work for on-grid and off-grid solution, I guess, other companies can develop such inverters. It will take years to achieve. I believe that once it will be achieved by Tesla, they probably want to use SolarEdge for this specific application. But even today, as you know, SolarCity is less than 10% of our business and they use our product for specific cases where the optimizer is needed and I don't see Tesla in the coming relevant years, developing optimizer and stepping on all of our patents.
So I think that the risk on our business in the coming few years is minimal. On the other hand of this phenomena, while Tesla and SolarCity will be still coupled, there will be many more people that probably will look for other direction. I think that this will create some more opportunities for us that maybe now are less [indiscernible] reach because of the fact that SolarCity is one of our main customer. But overall, I think that Tesla getting into this businesses is a positive sign. I think this area of solar with battery become more and more mainstream, it will work in our benefits and as other people can develop inverters, you can imagine that other companies develop batteries, batteries are and not more complex to develop than inverters.
Maybe on that same topic, on the batteries, can you provide any updates on what the volume figures were for that segment this quarter? And if there's any other customers right now where you're shipping into for storage beyond Tesla and LG?
So currently, everything that Tesla ship, they ship with our inverters and every inverter we ship shipped with Tesla battery. Integration with LG, not yet finished. So currently, all the market, if you want to buy today and you use the Powerwall, as far as I know, the only inverter you can buy today is SolarEdge
As many other new products, what we saw in the beginning was reasonable volume, now, you and myself, we had this discussion in the past and I told you that I believe that the ramp up of this product will be much lower than expected by Tesla.
And I think that everybody see today there is a big gap between the 70,000 demand that Tesla comment in the past to the actual installation. This type of technology is a real shift and under current prices, their growth will be not as fast as some people believe. So we try we're not giving the exact number, but still within a few thousand systems and of course the installation rate is even slower.
And then, the last one maybe for you, Ronen and I'll pass it on. The big jump in receivables, I know you mentioned the specific driver is the mix shift toward more distribution driven sales. What are you seeing now that more of your volume is going through that channel, how the inventory situation is there?
And are you seeing any signs that inventory could be building in that particular channel given the resi slowdown that we've seen? And also I think we've heard in other portions of the solar component value chain that there is some amount of inventory that's built here heading into the back half of the year, so I would appreciate any thoughts on the visibility you have there.
Sure. So in general, we're working with all of our distributors and as you saw by the way, by the customer concentration, we're not talking about one or two, but relatively large amount of players there and we usually work with them hand-by-hand. We're very cautious together with them on their inventory levels and we have a very good visibility into the inventory levels in order not to allow the accumulation of unnecessary inventories there.
That said, we should also mention that right now, we're keeping even a more closer eye on this kind of inventory given the fact that we're starting to ramp our HD-Wave technology and as we're going to do this, we do not want to see any accumulation of inventories that will make the shift toward HD-Wave slower or bumpier because of distributors that are stuck with the inventory. So we work with them hand-by-hand. We have a very good visibility and all-in-all, we simply don't see anything out of usual at this point.
Now on the AR side, as you mentioned and as I mentioned during the call itself, this is of course a channel that is usually characterized with higher or longer payment terms. And as such, they are indeed increased a little bit and so did our days sales outstanding.
We will go next to Vishal Shah with Deutsche Bank.
This is Rachel Ley on for Vishal. I have two questions. So first one is actually related to the customer diversification. So out of the guidance $132 million to $139 million in next quarter, what would you say, what percentage of revenue would be from, let's say, the large leasing companies versus some of the smaller players and some other companies?
It is basically something that we usually do not share. It's not only this is our forecast for the quarter, it's also something that sometimes can change during the quarter. In general, we do not see major trends or major changes in trends where many of our sales are going through distribution and the rest is going to the large installers. Other than this, I think that it's relatively early to comment on this.
So just another high level, can you just give us a little bit more color on your outlook for the next couple of quarters in terms of the slowdown of the U.S. resi market?
Of course, we guide one quarter ahead. So you got the guidance. We don't have better outlook on the American residential market than what you have. What we see for this quarter is it we feel that we reached the bottom of the wave and now we start to see more lively orders and a little bit better business coming from the large installers.
It's natural in the -- of course in situation of Vivint that is coming from a very long turmoil because of the potential acquisition of SunEdison. In total, the market become a little bit healthier and I think that all the natural parameters of the U.S. residential, a very small percentage of installed groups plus the long term ITC that is ahead of us and the fact that panel prices keep going down, I think that long term, I think the potential is great. So I'm very optimistic.
So just a last one, it's about the storage product. So you mentioned before that you don't see it being a major driver, but could you just maybe give us a little bit more of guidance on the next couple quarters on that?
Again, we guide one quarter ahead, it's not few quarters. So unfortunately I will be able to -- not answer your question in full of course, but I think that in the coming quarter, the size of storage solution should be pretty similar to what we see in the last couple of quarters, so a few thousand systems a quarter.
We will go next to Philip Shen with Roth Capital Partners.
I was wondering if you could elaborate more on the outlook for ASPs and the competitive dynamics impacting them? And what kind of ASP erosion do you assume in FQ1? And how do you expect the ASPs trend over next few quarters?
I think that as before, I think that we saw in last, not this quarter, but Q4 and Q1, there was a much higher price pressure coming mainly from our direct competitors. I think that from my view, there is little bit of relaxation of how aggressive people are willing to sell their products for. For our strategy, we have, as you know, a plan on ASP erosion on a yearly basis.
We didn't move outside of the boundaries of this plan in 2015, as we reported for the first couple calendar quarters of 2016, we're within the plan and I'm not seeing us moving outside of the boundary. And as we mentioned, I think you probably remember, for the total calendar year 2016, we're expecting 5% to 10% ASP erosion. I don't have any way to estimate next year, but I don't think it will be more aggressive, if you look at 2017 itself.
In terms of your HD-Wave shipments, what percentage of your inverter shipments in the fourth quarter fiscal year were HD-Wave and how do you see that mix evolving through the subsequent quarters? And when do you expect the vast majority of your inverter manufacturing to be on the HD-Wave platform?
This quarter, this year, we're now reporting the HD-Wave were a small percentage. In this quarter, I expect it to be something close to 20%, 25% from all our shipment. We will be fully transitioned to HD-Wave sometime between Q1 and Q2 next year. It depends on the specific models, we have lots of models for many geographies, some of them probably we'll keep shipping until the end of Q2 next year.
We will go next to Edwin Mok with Needham & Company.
So first one is on the U.S. business, if I did my math right, your U.S. revenue actually declined sequentially this quarter, did I get that right? And then, I think, Guy, you mentioned that you see cost improved trend from your customer, can you maybe describe just [indiscernible] of the quarter, do you start to see stronger as you go through the end of the quarter or things weaken towards the end of the June quarter?
So yes, of course, the total revenues from the U.S. this quarter calendar Q2 were lower than calendar Q1 and that was -- we mentioned in the script that it was compensated by a much higher growth in Europe and some of the Asian countries. What I mentioned to Phil is what we see from -- we have pretty good tracking on the size and the booking of our customers and the volumes of inventory and it seems that the larger installers start to go out of the deep and start to see a stronger business in their front. We cannot yet characterize this with numbers and I think that as you mentioned, the last month of the quarter was already stronger, but it's hard to estimate a short four weeks, five weeks into to give a full analysis out of it.
And then on the international growth that you mentioned, do you think that's just a timing or is it market share gain that you're winning or is it one or two particular market you're entering and start to re-ramp? What I'm trying to understand is, is that a sustainable trend that you expect to continue in the back half of this year and into 2017 or is it just a one quarter bump?
No, so we're keep growing our market share and achieving more and more customers in business in Europe in the last few years. And so Netherlands, we're already number one and very, very big, so of course, in Netherlands we're in a way similar to the U.S. We're very much impacted by the size of the market and it will be a negative change in Netherlands, probably our total business there will be impacted because we already reached a similar or even higher market share than what we have in the residential market in the U.S.
But in Italy, Germany, France, we gained market share quarter-over quarter and that's definitely not a temporary situation. That's a quarter-over quarter gain of market share. Saying that, you need to remember that Europe is having much more clear seasonality when compared to the U.S. So in Europe, January, February are really, really weak months and August is also a weak month due to the vacation. So in general, while we're gaining market share, if you try to accumulate the business in the U.S. and Europe, you need to pay attention for the seasonality in Europe.
And lastly, just on pricing, so I've heard a lot more talk about potential Chinese competitor coming into the U.S. market and coming at substantially lower prices. And you mentioned that your direct competitor has become less aggressive, but have you seen these low-cost products line that's coming to your market and maybe [indiscernible] price in the low-end and any comment about the Asian competitors?
So we're starting to see, it's very, very little yet in the U.S. We have good experience how to compete with these brands, mainly in Netherland. When we entered Netherland, the first two or three inverters were Chinese inverters and we managed very nicely to take most of their market share. We just see now the beginning of Chinese inverters in the U.S. market. I think that the Chinese inverters probably are not a good fit for the U.S. market under the NEC 2014 and their chance to be able to get big market share under NEC 2017 that will require a DC cut-off by every panel are very, very low.
So I think that while we do see them, especially, Huawei, in commercial already the U.S., gaining market share, after Chint, by the way, Chint is the first Chinese broker that target to play the U.S. market and doing well. I think that in the residential market, it's the very, very, very beginning and I'm less worried on their chance to gain market share.
If I can squeeze one more in, can you talk about your commercial efforts? I think you guys talked about [indiscernible] gaining some share in the U.S. How are you guys tracking the U.S. market? And when should we expect to see an HD-Wave version of your commercial inverter?
The commercial, this quarter, was pretty similar to last quarter which was -- we keep seeing growth in commercial all over the world. It's still in the low rate when compared to the residential, simply because the residential is growing as well. But as residential, we already have some countries that we're by far the -- have the biggest market share, it's not yet the case with commercial, so we have much more to gain in commercial.
We're gaining new accounts on a weekly or two-week basis in the U.S. all the time and we're very attractive on prices. So, I think that I feel very comfortable with our ability to grow faster in commercial quarter-over quarter. Regarding HD-Wave technology reaching -- the topology, the same topology for commercial products, as mentioned in the past, sometime by the end of 2017, it's even not yet in the situation that I can tell you, it's probably Q3 or Q4. It's in the earlier stage that for us to estimate when exactly will we have it in the market.
We will go next to Colin Rusch with Oppenheimer.
You mentioned that costs are coming down a little bit faster than expected. Can you [indiscernible] finer point on where you're getting those cost out so far and where you expect that cost to come out separate from HD-Wave transition over the next couple of quarters?
So what I mentioned is that market prices I think are not coming faster than what was expected. Our cost reduction efforts are a little bit faster or more successful than what we were planning. All of it is not yet coming from HD-Wave because of the small percentage of HD-Wave. HD-Wave have a great potential to impact prices further as well as new optimizers that we're now developing.
Most of the cost reduction is coming from the same improvement that we do quarter-over quarter on design, on component, on mechanical parts and finally on the fact that the automatic assembly lines are already starting to supply a significant, not yet majority, far from being majority, but significant part of the optimizer we're shipping to the market.
And then just on terms with your distributor clients, could you just give us a sense of what those actual terms are, are you looking at 90-day payment terms or something shorter than that? Just so we have a sense of how that might trend if those end up being a little bit more -- a little bit higher portion of your sales on a go-forward basis?
So in general our DSOs [indiscernible] lower than 60 days. We don't get to 90 days with our customers, that is something that we don't do. In general, I would say that customers range within 30 days to 45 days and something, sometimes to 60 days, but this will be usually the range we wouldn't go beyond this. We have to remember that when we look at the way that we allocate credit to our customers, it's not only the fact of whether we need the money right now, yes or no, lucky enough we were able to generate cash and we sit on a very strong balance sheet. So it's not actually the timing, but rather the risk that is associated with customers in a young industry that determines it. So we try to be within 30 days to 45 days and sometimes go to 60 days, but not beyond this.
And then just in terms of those dynamics, going back to Brian's question, are the distributors selling those things through that product through before they pay you or do they wait to sell through and then pay you after they've started to ship things?
There is no relation between the sell-through and the payment. They pay us based on the payment terms that we give them, just as we pay our vendors based on the payment terms that we have with them. In general, there is no connection between the two.
We will go next to Michael Morosi with Avondale Partners.
Yes first off, since international is clearly becoming a bigger factor-driving growth, I wondered if you could spend a little bit of time just talking about what kind of the intrinsic level of growth of those key markets is. I know that there are more mature markets and the regulatory drivers might not be as clearly outlined as they are in the U.S. and just given your proximity to those markets, just if you could talk a little bit more about how you expect those overall markets to grow, looking into 2017?
I guess your question is specifically about our business or the total market?
No. Yes, just the overall growth in the international market and the key drivers.
Okay. So I think the picture is probably similar to what you see from other vendors and suppliers to this market. Europe is growing. Europe went through a very long decline in volume and started to grow and it's growing in all countries but the UK. UK is now in a very strong decline due to the fact they stopped the FIT last year. But Italy is finally growing nicely, Netherland keeps growing, all of the other smaller countries starting to grow. Some business we're starting also in Spain, in Portugal, I think the most important is Germany. Germany business, in last three years is below the German government plan.
The government, when they reduced the feed-in-tariff, they plan for a business, constant business of 2.5 gigawatts until 2020, so seven years of 2.5 gigawatt. In the last three years, the business is below 2 gigawatts and it seems that they will start to have talks about how to increase some either feed-in-tariff or taxation mechanism to grow the business again. I think even the talks about it is putting a positive wind and positive spirit into German industry. So let's cross fingers because I think if German market will start climbing again, it will help Europe as a whole.
In Asia, what we see is that there is another six, seven, eight new market, each one is in the size 100 megawatt to 300 megawatt, 400 megawatt, Philippine Thailand, Korea starting to be an interesting market and probably the biggest change is India. India, in my humble opinion will be in the coming two years, either this year or next year, will be number one or two market worldwide, probably pretty similar to China, where it seems that is starting to slow down a little bit, but that's all the information about China is pretty limited and the analysis is limited because the major players that you and us know and be able to contact usually not playing much in the internal Chinese business. So it's a little bit harder to estimate what exactly is the trend there. But I think the smell is that the Chinese market is slowing down a little bit.
And if you could just talk a little bit more about your international sales organization and how your go-to-market differs relative to the U.S. and just the mix of direct sales versus the channel and just dynamics around any investments that you need to make to continue growing that business?
So our approach to all countries is pretty much the same. Once a country become a country that can create $10 million and above a year, we usually open an office which have like two, three, four sales people, two, three, four support people and with this size of office, we can usually take very big market share in such countries as we did in the UK, as we do in Netherlands et cetera. So we have such offices in UK, Netherlands, Italy, Japan and Australia, of course.
So with these type of offices, what we do due to the fact that in most of these countries you will find very little installers that are installing even 10-megawatt a year. So the installers that are outside of the U.S., usually are very, very small. We have some exception in Germany that are kind of the dinosaurs from prior to 2012 era, but outside of [indiscernible] and few others, most of the installers there are very small. So the majority of our business in these countries are going through distributors.
And then finally, if you could just talk a little bit about Germany specifically, I know in the past we talked about how it's hard to go up against some of those incumbent suppliers, but I wondered if that competitive landscape has [indiscernible] a little bit based on your product differentiation or other factors that are opening up that market?
In last six years -- when we started in 2010, we had 0% market share in Germany, an SMA had, I don't know, 60%, 70%. Today we probably have above 10% market share. It's not measured as well as in other countries, so this is a result of what we're reported from distributors. So these numbers are a little bit softer than other numbers. For example, the number that you can find in the U.S. due to the fact that how states are reporting exactly what was installed. But in general, I think that in Germany, we're already above 10% and we're gaining market share from SMA and East Germany and Central European competitor like Fronius quarter-over quarter.
We will go next to Carter Driscoll with FBR.
Can you talk about maybe one of those dinosaurs and its competitive positioning with an investment in one of your competitors and how that's progressing?
So far, I guess you're referring to SMA and Tigo. So far, we didn't see any actual combination of sales, marketing efforts, effective in the market. We're expecting that they will present together in a strong way in Intersolar Munich and this didn't happen. There were very little to almost no presence of Tigo and SMA booth. We didn't see them in Intersolar San Francisco.
We know that they're working together, but so far, we didn't see impact in the market. I think that we have long experience with both companies and I think that we have a very good answer and a much, much super technology and a much, much better integration between the optimizer and the inverter. So I think that, as I said in the past, SMA is a very strong competitor like Huawei, Enphase and few others, but I don't think that the combination with Tigo will change anything dramatic in their ability to compete with us.
Just shifting gears a little bit, can you maybe talk about the shift that we're seeing in the U.S. market from a leasing PPA to an ownership model, if that has any positive effects, obviously as your channel changes? Maybe comment on where you think it's -- I think some of the third-party forecast [indiscernible] think it might be close to parity by calendar year and this year? Maybe just talk about how you think it may or may not affect your business in U.S.?
So specifically on this, I'm not sure that I have better view or data points than what you have. It does seem to us as to you that more business in the U.S. is moving from PPAs in residential market from PPAs to ownership. And I think that in general it is good for our business. I think it will flatten the large installers a little bit. I think that a couple of years ago, there was a tendency that we might end where we have two giant, SolarCity and SunEdison, controlling 80%, 90% of the business, that's definitely not good for any of the supplier, equipment suppliers.
So it's clearly not the tendency today and I think that we're going to see more and more medium and large and healthy players and I think part of it is due to the fact that once you own a system and it's not in PPA, you as a customer care more for who is the installer and the fact that you want to meet him and I think that the localization now become a stronger part and as I think there is very little to non-companies that dominant -- the construction market on a on federal way in the U.S., but it's more local. I think that's what you'll see with solar as well.
Last question, you've got obviously a very large cash pile. Could you maybe address some of the uses outside of reinvesting in the business, are you looking at potential adjacent either vertical-horizontal opportunities and is there anything you can talk at a high level about [indiscernible] anything you're potentially hunting?
So we're looking all the time on areas, as you mentioned that are adjacent to our offering, starting from of course, any storage related product, home energy management product, electrical vehicle product such as chargers. So far we didn't find any -- we found lots of areas where we're starting to investigate and start to see how we can bring real innovation to these areas and hopefully in few years we'll have significant influence on some of them. Home energy management, as I mentioned, we already started and storage, I think you understand our view. But we didn't yet find a Company that we believe is a good target for acquisition and can help us to increase profitability and revenues in a healthy manner.
[Operator Instructions]. We will go next to Paul Coster with JPMorgan.
Obviously a lot of discussion around international scenes, I actually missed what percentage of revenues is U.S. versus international? Did you disclose that? Can you share it with us?
Paul, yes, what we said is that for fiscal year ended June, it was 68% compared to 73% in the last year.
68% was U.S.?
And then, I just want to make sure I understand and did that change dramatically over the course of the year?
So in general, no. We do see a trend where in general, international sales are growing. This is subject to seasonality because, for example, in the first calendar quarter, the third fiscal quarter, we saw that the U.S. was abnormally strong compared to Europe, given the fact that in January and February, almost no one installs in Europe. So I don't think that you can take a trend line and draw it from June to June and say, but in general, we do see that the numbers, both in absolute numbers and in market share in Europe and in some of the Asian countries are steadily growing. And in some cases, they grow quicker than the U.S. market, especially today.
And then, I'm being a bit pedantic here, but you clearly think that the U.S. slowdown is temporary in nature and it sounded like as far as the larger companies are concerned, because you're seeing a change in the purchasing behavior. Can you confirm that such is the case, because when we look at the actual revenues that they're reporting and pointing to, we don't see real acceleration. So commodity will be driven by -- not only, but largely driven by channel replenishment or inventory replenishment at your end-customers. Could you just elaborate a bit to make sure I've not misunderstood that?
I'm not sure that I fully understand the question, but I will try to answer. So I think that, we believe that the U.S. market in natural and in general, the residential is very, very healthy.
The population of solar is very low, the ITC plus the amount of [indiscernible] in most states and price of electricity should push to a much, much higher adoption rate and I think that with time and not too much time, the tweaks of the changes of the post ITC will start to grow the market and my personal view is that it will grow at a 30% to 40% year-over-year, that's my personal view. Regarding the changes in our business this quarter, we don't see higher inventories than what were before and I don't think that we don't see in the U.S. anywhere where the inventory seems to be too high or completely outside of the boundary.
So I think that the slowdown that we saw this quarter is an effect that came to us two quarters, three quarters after the big installers that probably kept their buying SolarEdge according to their original forecast and adapted a little bit of forecast based on the actual bookings they are seeing. And as mentioned, I think that we're already starting to see the growth again in these players.
We will go next to Philip Shen with Roth Capital Partners.
Just a couple of quick ones here. In terms of the commercial resi mix, I don't recall if you shared that for the quarter and was wondering if you could talk about that might trend. I know you want to get to maybe 50-50 in a few years, but then also if you can comment on what that commercial resi mix looks like geographically, international versus U.S.? Historically it's been more 50-50 internationally and caught 80-20 in the U.S., but can you update us on what it looks like today?
In general, Phil, there has been no change or no major change in the ratio of commercial to residential this quarter. As we mentioned before, in general, today commercial is less than one-third of our sales. And indeed as you mentioned, the rate outside of the United States, the ratio is higher while in the U.S. is a little bit lower. In general, this quarter, we didn't see any major shift in the overall ratio. It was very slight movement, just like in the last quarter.
In general, though, we do see of course that our 33 kilowatt invertors that we've already launched last year are catching more and more and being able to be integrated into large projects. But as mentioned before, this is also a market that is very much characterized with smaller players and very segregated players and therefore, I think that the right way to look at it is that overall longer horizon and not just quarter-over quarter. So in general, stability, but -- specifically stability this quarter, in general growth over the last few quarters.
One more here, on this topic of commercial versus resi, can you comment on the profitability of each segment? I know historically, I think the commercial segment might be just a touch more profitable but update us on the profitability of each segment. Thank you.
In general, the trend is exactly as you mentioned, we do see higher gross margin, slightly higher gross margins in commercial rather than residential. It comes, first of all, from the fact that we allow to connect two modules per one optimizer in commercial resi which, of course, decreases some of the cost and allows us to get a little bit of margin. And second, we'd call it, economies of scale within the cost of the inverter compared to the output of the inverter. It is not a substantial difference between the residential and commercial, it's highly more profitable and it still stays the same.
That concludes today's question-and-answer session. Guy Sella, at this time, I will turn the conference back to you for any additional or closing remarks.
Thank you. In summary, our fourth quarter revenues were at the low-end of our guidance while we maintained strong gross margins, profitability and cash generation. Our year-over-year performance was very strong in all financial parameters and we continued to grow our market share while focusing on geographies and customer diversity, new and innovative product and healthy profitability coupled with cash generation. Thank you very much all for joining us on today's call.
That does conclude today's conference. We thank you for your participation.
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