Expert analysis: Is SMA out of the woods? Outlook for 2016 is promising

Last Friday, SMA Solar Technology AG hosted its annual Capital Markets Day for analysts and fund managers at its corporate HQ in Niestetal, Germany. At the event, the inverter manufacturer published its outlook for 2016.

From a financial perspective, one has to admit the turnaround achieved in 2015 has been impressive. Having reported operating losses for 11 consecutive quarters between Q4 2012 and Q2 2015, which in sum amounted to €283 million, Q4 2015 marked the second quarter in a row where the company was again able to achieve a positive operating result.

SMA further improved profitability in Q4 of nearly 10%, after achieving an operating margin of close to 7% in Q3 2015. In fact, taking into account one-offs to the tune of €11 million the company booked in the final quarter, the underlying operating margin in the past quarter was of the order of 13%.

ASP declines

For 2016, SMA projects a turnover similar to 2015, i.e. in the range of €1 billion. While average sales prices per Watt inverter power (ASP/W) are expected to continue to decline in 2016 in the double digit percentage range, the company expects to achieve an operating margin of between 8 to 12% this year.

Since 2009, SMA has seen the ASP/W for its inverters decline at a double-digit percentage rate year over year. With an annual ASP/W decline of almost 16% on the inverter power sold in 2015 compared to 2014, the price erosion last year was one of the toughest in recent history for SMA.

Besides the continued price pressure from the market, a second factor was responsible for the above average ASP/W decline that SMA experienced last year.

The business segment with the strongest growth in turnover was the utility-scale segment into which SMA delivers its central inverters. The sales figure here increased by 48% year-on-year (YoY). In the commercial segment, annual sales increased by 30% YoY while turnover remained virtually flat in the residential segment.

As has always been the case, ASPs/W are highest in the residential segment, followed by the commercial segment, and are lowest in the utility-scale segment. In 2014, the residential segment accounted for 31% of the total turnover of SMA and the utility-scale business for some 35%. Over the course of the last 12 months, the contribution of the residential segment has fallen by 600 basis points to 25%, while at the same time, the relevant figure for the utility-scale segment increased by 660 basis points to 41.6%.

Yet lower ASPs/W does not imply a lower profitability of the central inverter business, compared to the string inverters sold by SMA into the commercial and the residential segments. Quite the contrary, in terms of margins, the utility-scale segment has always been more lucrative for SMA than the string inverter business.

Therefore, the strong growth in PV power plant installations in the U.S., where SMA holds a dominant market position with a market share north of 40% was clearly beneficial for the company’s efforts to return to profitability. Yet the increase of central inverter shipments into the U.S. market alone, would not have been sufficient to turn a profit.

In order to achieve this goal, SMA had to improve on two conflicting metrics at the same time: growing its shipments at a faster rate than ASPs were declining, while at the same time significantly reducing the company’s fixed cost base.

Indeed, SMA was able to deliver on both ends: inverter shipments increased by a whopping 44% year-over-year to 7.26 GW. 2015 marked the first year since 2010, where SMA was able to increase its inverter shipments on an annual basis.

This achievement is that much more remarkable as SMA reduced its workforce in 2015 from 5,000 by close to 30% to 3,600, in order to reduce its fixed cost basis. The biggest staff cuts came in the R&D department as well as in administration, where 40% of the employees were made redundant. The sales and marketing department also shed 25% of the workforce during 2015.

With its optimistic outlook for 2016, SMA is conveying the worst is behind it and that despite continued price pressure in the market, the company is well positioned to capture a bigger share of the lucrative market segments in the inverter industry.

In its March edition, pv magazine will examine more closely how SMA has been able to turn its business around and also shed light on its product announcements. The company’s business strategy will be further examined going forward, and contextualized against general market trends in the PV inverter industry.

Edited by Becky Beetz