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spk01: Thank you. Good morning, and welcome to Fluence Energy's second quarter 2023 earnings conference call. A copy of our earnings presentation, press release, and supplementary metric sheet covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the investor relations section of our website at fluenceenergy.com. Joining me on this morning's call are Julian Nabreda, our President and Chief Executive Officer, Manu Seow, our Chief Financial Officer, and Rebecca Bull, our Chief Products Officer. During the course of this call, Fluence Management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filing for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. View our caution to not place undue reliance on these forward-looking statements, which speak only as of today. please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available on our earnings materials on the company's Investor Relations website. Following our prepared comments, we will conduct a question and answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Julian.
spk06: Thank you, Lex. I would like to send a warm welcome to our investors, analysts, and employees who are participating in today's call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the second quarter, as well as our outlook for the rest of the fiscal year. Starting on slide four with the key highlights, I'm pleased to report that in the quarter, we recognized our record $698 million of revenue and $32 million of adjusted gross profit. our demand was strong across all three of our business lines. And new orders were approximately $847 million highlighted by our services business contracting one gigawatt, and our digital business contracted 2.7 gigawatts. Furthermore, our signed contract backlog as of March 31st was $2.8 billion, a quarter-over-quarter increase of approximately $100 million. even after recognizing almost 700 of revenue during the quarter. I will also note that approximately 81% of our backlog is with non-related parties. Lastly, our recurring revenue businesses, which consists of services and digital, experienced a strong growth during the quarter. Our service attachment rate was 263% for the second quarter, driven by the signing of the service agreement with ORSA. Furthermore, our deployed service attachment rate, which is based on our cumulative active service contract relative to our deployed storage, remains above 90%. Looking specifically at our digital business, we had a very strong quarter as we were able to contract 2.7 gigawatts, which is a 200% increase from the previous quarter. These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management. We still have a lot of work to do regarding our digital business, but we are very encouraged by the results thus far. Turning to slide five, I'd like to discuss the five strategic objectives that we highlighted previously and provide you with an update on our progress. First, on delivering profitable growth. I'm pleased to report that we are raising our fiscal year 23 guidance for both revenue and adjusted gross profit. As Manuel will discuss in more detail, we're able to raise our guidance due to better execution, causing some of our projects being ahead of our expected schedule. Additionally, I'm pleased to report that we're pulling forward our profitability timeline. As you may recall, We previously expected to be adjusted EBITDA positive in fiscal year 24. We do not provide quarterly guidance. However, we're expecting to be close to adjusted EBITDA breakeven in the fourth quarter of fiscal year 23. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we received a 200 megawatt binding award for our Ulster Strat product. making this our third award of energy storage at transmission. As I noted on our previous calls, we are very bullish on the transmission segment and expect this area to grow as transmission congestion becomes a critical issue around the world. Fluence is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem, as we are one of only a handful of companies in the world that possess the technology, experience, and performance requirements necessary to use energy storage as a transmission asset. Third, we will convert our supply chain into a competitive advantage. I'm pleased to say that we have signed a master supply agreement with ASC, under which we will procure battery cells. This partnership adds another high-quality battery supplier to Fluence portfolio. enhancing our ability to meet the growing demand for any storage solutions. This agreement supports our domestic module manufacturing efforts and strengthens our position as a leader in the energy storage industry. Fourth, we will use Fluent Digital as a competitive differentiator and a margin driver. Looking out at our NISPERA product, starting this month, we will begin including NISPERA in our standard hardware solutions offerings. This is an important step as it will provide us with a path to increasing our IRR as we bundle our offerings and execute on our one-cell channel approach we discussed last December. And finally, our fifth objective is to work better. I'm proud to state that Fluent has published its inaugural sustainability report on our website. In this report, we outline our commitment to a circular economy that includes sustainable end-of-life management for our products, as well as our firm stance against forced labor. To publish a sustainability report this quickly after becoming a public company is a true testament to our values and mission to transform the way we power our world for a more sustainable future and demonstrate our leadership within the sector. Turning to slide six, demand for energy storage continues to accelerate. In fact, our pipeline now sits at $11.2 billion, which is up from $10.3 billion last quarter. We expect we will start to see some projects award in the second half of this calendar year that are directly attributable to the Inflation Reduction Act. We reaffirm consolidated revenue growth of 35% to 40% year-over-year for fiscal year 24, irrespective of the issuance of the final IRA guidance. Our 23 guidance increase and the incrementally higher 24 outlook represents an expected benefit to revenues of nearly $500 million over this two-year period. Relative to our expectations on our Q1 earnings goal, conference three months ago. It is worth noting that we're seeing and having success regardless of the IRA. A few examples of recent successes include the binding award in the transmission segment that I previously mentioned. Two, we were recently awarded a 400 megawatt hour contract in Australia for Shell's energy range back project. And as you may recall, we signed a 1,200-megawatt-hour contract with Orsted in December. And during Q2, we signed a service agreement for this project. All of these were achieved without consideration of the Inflation Reduction Act. Turning to slide 7, we are pleased to see that some of the initial IRA regulations have been released by the U.S. Treasury. However, we are still waiting on the domestic content regulations. but we believe the actions we are taking will enable us to meet the domestic content requirements sought by our customers. In regards to our U.S. module manufacturing, we are on schedule and expect production to start in our Utah facility in the summer of 24. As it relates to Section 45X of the IRA or the production tax credit, we are targeting to be able to record the $10 per kilowatt hour incentive associated with manufacturing U.S. battery modules. Right now, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. We do believe it will be a volume driver for us, as many of our U.S. customers have expressed the need for a U.S.-made product. Thus, we expect the $10 incentive will go towards offsetting the cost of reaching economies of scale. From an accounting standpoint, our current expectation is that we will account for the $10 per kilowatt hour incentive on our income statement as a reduction to cost of goods and services. However, this could change based on the final guidelines. Furthermore, we expect to elect the direct pay provision for the first five years of the credit. The exact timing of the cash payment is unclear at this time, as we are still waiting for the clarification from the US Treasury. Currently, we're eagerly waiting for the publication of the IRA guideline for any storage and domestic content, as several of our customers want the final details that it will provide before moving forward with contracts. We encourage our policymakers to act swiftly. However, as I mentioned, Our 24 growth expectations remain unchanged, irrespective of the final regulations being published. Turning to slide eight, as I briefly mentioned, we recently published our inaugural sustainability report, which highlights our vision to implement digital solutions to further optimize the energy storage supply chains and lifecycle. I'm pleased to state that we're committed to promoting social sustainability by fostering diversity and inclusion within the organization. We believe this is essential to develop the innovative organization we need. We aim to increase diversity within the organization by setting targets for diversity hiring. We have established a target for fiscal year 23, which includes that approximately one-third of our employees hired have identified themselves as female. In the report, you will also see that end-of-life management is very important to us, and we have committed to developing a circular economy framework for our products. Additionally, we highlight in the report that we have established a robust supplier code of conduct that is aligned with the International Bill of Human Rights at Work that ensures that our suppliers adhere to ethical and sustainable business practices. We summarize our policy on conflict minerals and ethical sourcing, in which we commit to working towards avoiding the use of minerals within our supply chains from conflict-affected areas. Furthermore, in the report is a signed commitment letter taking a zero tolerance stance regarding forced labor. This is an area that is critical to our values. We also include a roadmap and timeline so our stakeholders can monitor our ESG journey. In the spirit of accountability to transparency, we will provide an update on our sustainability program annually so our stakeholders can track our year-over-year progress. Overall, Fluence Energy's sustainability report demonstrates the company's commitment to sustainable practices and its efforts to drive positive environmental and social impact. to its various initiatives and targets, Fluence Energy is working towards a more sustainable future for all. In conclusion, I'm very pleased with the achievements of the second quarter. Although we're mindful there's still a lot of work to be done, we will look to continue this momentum with progress through the end, the remainder of the year. I will now turn the call over to Manu.
spk07: Thank you, Julian. I will begin by reviewing our financial performance for the second quarter. and then discuss our guidance for fiscal year 2023. Please turn to slide 10. Our second quarter revenue reached a record high of $698 million with a record adjusted gross profit of $32 million. Revenues benefited from a pull forward of more than $200 million into the second quarter from the second half of this year, driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the second quarter, more than 85% of our revenue, or roughly $600 million, came from legacy contracts. The revenue that we pulled forward into the second quarter was associated with legacy contracts, and we now anticipate that almost all of our low-margin legacy backlog will be turned over by the end of this fiscal year. Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half. With regard to operating expense and adjusted EBITDA, second quarter operating expense excluding stock compensation of $61 million or approximately 9% of revenue, which is down from approximately 17% of revenue in the first quarter. We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond. Turning to our cash balance, we ended the quarter with more than $380 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our first quarter earnings call. Rounding out the balance sheet discussion, And in line with prior communication, we saw a decrease in inventory of approximately $300 million in the second quarter 23 from the first quarter 23 level. Our decision to focus on battery supply chain assurance and risk management has enhanced our ability to deliver projects ahead of earlier expectations. Given the improvements in the supply chain environment, And as communicated in our last earnings call, we should expect improvement in inventory returns through the end of the current fiscal year. We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity to meet our cash needs for the next 12 months. Please turn to slide 11. As Julian indicated, we have increased our fiscal year 2023 guidance ranges for both revenue an adjusted gross profit, and narrowed the ranges. We now expect our total revenue to be between $1.85 billion and $2 billion, which is up from our previous revenue guidance of $1.6 billion to $1.8 billion. This is an increase of $225 million based on the guidance midpoint. Driven by our overall project timeline acceleration, While we expect that most of our projects will be executed within the 15 to 18 month timeframe that we have previously discussed, we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future, benefiting both the second half of this year as well as fiscal year 2024. This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects. We are also coming into the third quarter with 100% of our second half 2023 expected revenue in our backlog. Turning to our 2024 revenue outlook, we continue to expect 35 to 40% growth in revenue from 2023 to 2024. Notwithstanding the higher revenue base we now see for 2023, this implies an incremental $300 million of revenue for 2024 relative to our previous outlook. Thus, for the two-year period 2023 and 2024, we now see revenues of more than $500 million higher than what we had conveyed on our Q1 call. We also increased our guidance for adjusted gross profit to be between $110 million and $135 million, which is up from our previous guidance of $85 million to $115 million. It is important to note that this implies an increase in gross margin of approximately 50 basis points to 6.4% based on the guidance midpoint. Before I turn the call back to Julian for final comments, I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the fourth quarter. With that, I will turn the call back over to Julian.
spk06: Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaways from this quarter's results. First, we had a record quarter in terms of our financial performance with our highest revenue and gross margin in Fluence history. we continue to make significant progress on our risk management, most notably in reducing our supply chain risk as reflected in diversifying our battery cell suppliers. Third, we continue to expand our offerings, concentrate our efforts in developing new products and solutions that create value for our customers, as shown in our third Transmissions Segment Award. Fourth, we are positioned and fluent for increased IRR, by including NISPERA in our standard offer starting this month. And fifth, the financial results and accomplished coverage in today's call provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year 23 and to pull forward our timeline to profitability. This concludes my prepared remarks. Operator, we're now ready to take questions.
spk03: As a reminder, if you'd like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from the line of James West with Evercore.
spk06: Good morning, James.
spk04: Hey, James.
spk06: How are you?
spk04: Hey, good morning, guys. Well, Ian, quick question for me about your customer base and kind of how they're thinking about their storage needs right now. I know as we think about last year, it was kind of a mad dash scramble for assets and for getting equipment and batteries in place. We've obviously had the IRA, and there's been some timeline lag on total understanding what the IRA means in the U.S. But are the customers, are they coming to you now still with, okay, what's it going to cost me? Or is it more of a question of when can you get to me? What's the timeline? Because we know you're not just focused on land and expand, but you're focused on profitability too, which I would say was clear this quarter. And so congratulations again on this quarter.
spk06: Thank you, James. I mean, we do a lot of... Our ability to expand our margins, the main driver has been a real, you know, detailed segmentation of the customers we work with. So it might be a long way to answer your question, but so what do we do? We look for customers that value what we offer, you know, that value clearly products that they are sure that they are going to be delivered, that they're going to perform as we tell them that they're going to perform. that will provide services that will keep these solutions up to date and that will, you know, have them running for them when they need it, you know, that they can insure it very well and that they can finance it. So the customers who care about that are the customers we work with. Some of them, you know, some of them, you know, a price is very more important than others or some of them is, you know, ensuring the performance or some of them is, hey, especially where the regulatory systems are going to change, I need somebody who will know, will help me, you know, adapt my systems to it. Why do we see this quarter, which I guess is a little, what do we see in the very front end? Clearly, the reduction in lithium prices and the more liquid market for batteries, you know, opens up more optionality. I think that the RMI that we offer our customers which when prices were going up was something that, you know, make them a little more comfortable. Now it makes them feel better on, you know, signing a contract because they know at the end of the day, they will get something that's in line with what the markets pay or close to what the markets pay. So that's great. So that's globally. You see that, that, that, that on the other side you have in the U S the inflation reduction act, the delayed, some of our customers or, you know, are talking to their off takers and, you know, Hey, asking their offtakers, do you need the products by a certain date, or do you want to wait until we know whether we're going to get this 10% upside that will convert into better prices for your offtake, for whatever services you're selling? The answers are different. I think that some customers will need to have the projects online by a certain date, or the offtakers will need, so those will move forward, we think. Some of them are, you know, this can wait, you know, and that's kind of where, you know, where this will land. So I don't know if that's, you know, that's kind of the landscape of where we are today, you know. So we, today, and the reason why we were able to affirm our growth for next year, irrespective of the IRA, which, you know, was because we have seen very, very strong demand outside of the year. You know, and that gives, you know, you look at our backlog, what we have signed already, what we are seeing outside of the U.S., and we believe that, you know, that we can meet the 35% to 40% growth, irrespective of where the IRA regulations come up, you know?
spk04: Okay. Okay. That's very helpful, Julio. Thanks for that. And then give me a quick follow-up on me, on margins, and maybe for Manu, but the You know, getting the EBITDA break even by the end of this fiscal year, obviously a good target and making good progress there. But how should we think about EBITDA margins as we go through, you know, fiscal 24 and getting to a level of, you know, profitability, sustainable profitability on EBITDA?
spk07: Yeah. So consistent with what we have said in our last call, we expect to be EBITDA positive in the fiscal year 2024. I think you'll see the margins progressively improve as we go through the quarters in the fiscal year 2024 as well. And that's because if you look at our trajectory and look at it from a trailing 12-month kind of revenue average, we continue to grow our revenue. And as you've said, we'll grow our operating expense at less than half the revenue growth rate And if you couple those two comments with the fact that we are signing new contracts in the 10% to 15% margin rate, you can see the profiling of the EBIT progressively growing through the quarters.
spk04: Okay, got it.
spk07: Thanks, guys.
spk04: Thanks.
spk03: Our next question comes from the line of Brian Lee with Goldman Sachs.
spk02: Good morning, Brian.
spk06: Hey, Brian.
spk02: Hey, everyone. This is Miguel on for Brian. Maybe just the first question here on the $500 million incremental for fiscal 23 and 24. You're talking about attributing that to just better supply chain visibility and obviously the better execution here. Maybe could you just expand a bit on that with some specifics or some examples? Is it just... a function of getting, you know, more visibility on batteries? Is it being able to pull in projects faster than expected? Just hoping to get a bit more color there on the execution front. Thanks.
spk06: Yeah, Brian, the way I will, you know, first, clearly it's the fact that our machine is working better. We had the batteries, our manufacturing did a great job this quarter, and we have been able to de-risk our deliveries. in our contract with our customers. So I think the effort of, you know, a lot of work from everybody, from our supply chain, from our sales team, from our manufacturing team, but also at the end that, you know, we have been able to risk our deliveries in a way that, you know, allows us to recognize revenue, even if some of our customers are not fully ready to install the equipment. That's the way to think about it. And the combination of the three. I cannot tell you now. Each one is very essential for this. If the supply chain had not worked, we wouldn't be here. If the manufacturers have not been able to pick up production, it wouldn't be here. If we have not the risk and our implementation teams have not done the work they're doing, we wouldn't be here. So it's the machine working better. And we have identified the projects that we, you know, where we believe we can do this, and those are the basis for our, you know, 500 million better revenue over the next, between this year and next year, no?
spk02: I got it. I appreciate that. And then the follow-up question here is, you know, it kudos on the, you know, update to the guidance, obviously. But outside of that, just we're hearing about module constraints in the U.S., in general, still hampering a bit the solar projects. Could you maybe give an update on what you've seen specifically for projects and your backlog for solar plus storage projects, and maybe to what degree you've seen those kinds of projects push out because of these module constraints? Thanks.
spk06: Yeah. I mean, I don't understand. We haven't heard anything specific from our customers. As you know, we sell to customers who are probably on the – bigger side and have the ability to manage that better but i will tell you what that's clearly one of the reasons we took into consideration when we looked at our risk enterprise risk management and one of the things we changed in our contract was that you know if our pro if our solutions are ready for delivery we you know the customer you know needs to take them irrespective of where they are in their solar project, you know, if it is connected to a solar project or irrespective of where they are with some other elements. So that's what I will tell you. But we, you know, our customers today, I haven't heard anybody, you know, coming up to us and telling us, hey, I'm not going to be, you know, more of the questions on being a little bit cautious are connected to the IRA than where they can get modules in or not. Okay, got it. Thanks, everyone. I'll pass it on. In the U.S., no, please.
spk03: Our next question comes from a line of Maheep Mandeloy with Credit Suisse.
spk06: Hey, Maheep. How are you?
spk10: Hey, good morning. Thanks for taking the questions here. Sorry, I was hopping between calls here, so I might have missed this. The $500 million over the two-year period, is that higher revenues versus the prior run rate, or is that just looking at FI24 versus FI22? Yeah.
spk07: So the way to think about the half a billion dollars is as follows. We've increased the guidance for 2023. And at the midpoint, it's $225 million. And then we've kept the same run rate. So you have a higher 24 implied outlook or outlook based on a higher 2023. So if you take that math to 2024, that's incremental $300 million for 2024. So you add the 225 with the 300. you get to over half a billion dollars of revenue. And that's on the backs of, you know, great project execution. And that's in the second quarter. And that has a read through for the remaining 23 and 24 as well. And, you know, I would be remiss if I don't reiterate the fact that we have very strong demand signals with over a billion dollars increase in our pipeline.
spk10: Got it. I appreciate that clarification. And did you kind of talk about which regions are driving that? And is this customers accelerating the projects or more benefits from manufacturing or procurement on your end? Thanks.
spk07: Yeah, so what I would say, you know, in terms of the demand signals, and if you look at our order book for the second quarter, and as Julian mentioned, we are winning globally. and we are winning both in solutions and in services. So that's kind of color and context for your question on the top line of the demand signals. Obviously, America is two-thirds of our overall business, and that's going to be the larger dollar driver of it, but we are winning globally. In terms of what's driving the revenue upside in the second quarter, We typically will execute a project in the 15 to 18 months, but because of better execution, as well as how we are writing our contracts now, we have the ability to pull forward some select contracts in the lower end of the 15 to 18 month range. And that carries through in the back half of this year and next year as well.
spk10: Got it. Appreciate it. All right. I'll take the rest of my time. Thank you.
spk07: Thanks, Dave.
spk03: Our next question comes from Tom Curran with Seaport Research Partners.
spk08: Hey, Tom.
spk03: Good morning.
spk08: Good morning. For the growth you've had in services assets under management for fiscal 2023 year to date, Could you share with us, for the contracts you've added, the split between those with augmentation and those without?
spk07: Yeah, I don't think we give that split, but the way to think about it is a significant portion of our contracts have the ability to augment the site if the customer so chooses. Gives them an option. Gives them an option. That's the way to think about it. Most of our customers do have the option in their contract if they so choose to augment.
spk06: Years ago or before, it was not an option for customers. They had to take our augmentation proposal. Now, the way these service agreements are, they do have an option and they can decide to take or not take our augmentation proposal. We believe that we're all going to take it, but That's how it works.
spk08: And so you are seeing evidence to support the expectation of a trend towards ever more augmentation opt-in?
spk06: Yeah. The issue is that, you know, as it is an option that the customer can take, we cannot put it as a, you know, background value. You know what I mean? So it's an option that they have. But I think that when we have looked at this, we believe in most cases, It will depend a little bit on where the customer needs are on his side, on his contract and his offtake and stuff. But we say if there's a need for augmentation, they will do it with us. And we have worked from a product perspective. We have made some changes to our to our offering to ensure that we can provide our augmentation offering is a lot wider so we can offer augmentations with different technologies so that I think will also make us a lot more competitive when the time comes and I think it will you know I don't think anybody will be able to get into that territory but you know I don't want to brag about something that hasn't happened yet I appreciate that and then for the consolidated pipeline can you give us a sense of
spk08: How much visibility you have on the portions of that that are megaprojects or storage as transmission awards that, you know, could be doled out over the next 12 to 18 months? And then for storage as transmission, you know, would you expect your next award to most likely come from the U.S., Australia, Germany, or Chile? Okay.
spk06: yeah i mean i prefer not to go into the details about our pipeline you know i think it's you know so you know that would be my preference you know not to not to go into start giving details in the pipeline will make our life all our life more difficult on the transmission as a transmission as a as a storage as a transmission we're working in you know both in europe in chile and the us like you mentioned I will say that most likely it will be again in Europe. That's my opinion. I can say this, and I will say it. The Chile regulation for transmission do not work. Do not work. That system, they designed it. It's not going to work. They came up with this 15 million storage. That's not going to be good. It's not going to work. I think unlikely. I don't know if we'll beat or not. We'll probably, we'll beat, but I think that's going to be a successful project. We continue to see the transmission regulators in Europe, much more, uh, clearly understanding how this works and how they, they, they, how to make the work the U S we're just starting. So, and I said, I'm sure they don't listen to his calls, but it will be good for them to go back, look at it because they, they, We told them this is not going to work, but I think they have a different view of what they want to do. Got it. Thanks for taking my questions. Great.
spk03: Our next question comes from Julian Dumoulin-Smith with Bank of America.
spk06: Hey, Julian.
spk09: Hey, good morning, guys. Hey, Julian. Pleasure.
spk06: Namesake.
spk09: Thank you very much for the time. Appreciate it. That's right. So, listen, I just wanted to first come back to the half billion dollars revenue commentary that Manu provided. Can you elaborate a little bit on what this says about getting to kind of the target gross margins, especially as you think about what that says for next year here? Obviously, you have that improvement through the course this year, but what does that say on the incremental margin that you're getting for next year now that you're really accelerating the revenue side of this?
spk07: Yeah, so... Thanks for your question, Julian. So just a way to think about our gross margin, and you can see that come through our guidance updates. We are signing the new contracts in the 10% to 15% margin rates. And more importantly, the new contracts we're signing, we're keeping those margin rates. And as you look at the increase in the guidance from the last call, the current call, you can see the increase from a gross margin perspective or a gross margin rate perspective of 50 basis points and the new contracts being signed at in the 10 to 15% margin rates that are used. As you roll forward into 2024, that's a good assumption from a gross margin perspective. And as you translate the gross margin into EBITDA, it gets even better and increases our confidence from a EBITDA positive outlook for 2024 is because we are getting operating leverage and we are very disciplined about our overhead expense and our model of spending overhead at less than 50% of our top line growth. So if you model out 23 going to 24, top line growing at 35 to 40% over a higher revenue base in 23, our gross margins contracts being signing in the 10 to 15% rate. Remember, one of the advantages of better execution in 23 is we are able to pull forward our legacy backlog earlier in our life cycle, and therefore there's very little legacy backlog to be executed in the fiscal year 24. So the gross margins on the new contracts are coming through, and then that translates into a very healthy EBITDA.
spk09: Excellent. All right, great. And then just going back to the commentary on the call on – You talked about this new strategy this month about including it as standard in your hardware offerings. What does that say vis-a-vis the Fluence IQ outlook and the revenue contribution and its level of meaningfulness? I think earlier you guys had said it wasn't really that meaningful until 2025. Now that you're including it as sort of quote-unquote standard, does that change that expectation?
spk06: No, Julie, this was always part of the plan. Remember, when we looked at a business, one of the changes we did was integrating the sales channel and our view on when this business will be material and when we will get to have not changed. So, you know, this was part of what we wanted to do. When we announced our plan, our new plan in December of last year, this was, you know, a part of it. It's going as planned as we expected it to be. Remember we talked about single channel and then replatforming our mosaic business. And replatforming is going very well. And the single channel, which is essentially for Nispera, which will give us a base for both upsells and cross-sells. We're able to pull it out. So we are starting, as we've already been done, we're already offering to our customers as part of our standard offer.
spk05: Excellent. Okay, perfect. We'll leave it there.
spk03: Thank you guys very much.
spk05: Speak soon. Thank you, Julian.
spk03: Our next question comes from Ben Callow with Baird.
spk05: Hey, good morning, Ben. Hey, guys. Good results and good progress. Thank you for taking my question. I just wanted to follow up just on margin. I'm sorry to keep going on this question, but I just wanted to think about the different levers and in cost improvements versus legacy contracts i think julian asked something similar to this uh but as we go into then attachment rates of other services software um as we go into 24 and beyond uh and how you guys think about that um and then just my follow-up uh is kind of housekeeping but just the ira benefits in profitability, and I'm sorry, Manu, if you said this, but have you baked any of that into your profitability change going forward, so the production tax credits or anything like that? Thank you.
spk07: Yeah, sure. So, Ben, if I can, there are lots to unpack there, so let me take it as how I understood the question. So if we bridge gross margins from our legacy contracts to some of the new deals we are signing in the 10% to 15% margin range, and we put a bridge in the back of the deck as well, but the drivers of our margins between the legacy contracts and the newer contracts we're signing is better execution, better pricing, and then I would say better risk management. So those are the big drivers. We are also increased our margin expectations to be 10 to 15% from a much lower single-digit expectations we've had in the past. And as a result, when we are executing our legacy contract, we are usually executing them at very low single-digit margins, almost close to breakeven. And as compared to the newer projects, that we are executing in the 10% to 15% margin rates, depending on size and complexity in the region. You can see that trend come through in the gross margin guidance. If you take our first half actuals gross margin rate and compare that to the guidance of the full year and calculated implied second half, you can get to high single digits gross margin rate for the second half of the year. And that's important is because it gives you a good read through of those margins going into 2024 and EBITDA going to 2024, which is what we are pulling forward our EBITDA expectations to be close to adjusted EBITDA break even in the fourth quarter. So that's kind of contextualizing the margins of the legacy business compared to what we are signing from a new contract perspective. In terms of the IRA PTC benefit that you specifically asked to, what we've said is, look, it'll be a contributor to more volume potentially, as opposed to taking us outside of the 10% to 15% margin range. Maybe in the rounds it takes us to the, you know, for those contracts that have the fluence make to the top end of the range versus the bottom end. but we're still within the 10% to 15% margin rates. As we go through the years, to kind of round out your question, we are seeing high attach rates for services on the assets we have deployed. We're seeing 97% attach rates. That's slightly better than what we had last quarter, or kind of in line with what we had last quarter. That, in terms of a meaningful contributor to our margin rates and margin dollars, be better in 24, more meaningful in 25, and then kind of gets to a higher number in 26. Those contracts are at a higher margin rate than our average solutions margins. So it is the power of the install base. It also gives us a great option to kind of sell incremental services as well as attach digital contracts to them.
spk05: Great. Thank you very much.
spk03: That concludes today's question and answer session. I'd like to turn the call back to Julián DeBreda for closing remarks.
spk06: Great. Well, first I want to thank everybody for participating and joining us and your questions. And, you know, we are really, really proud of the work of the team here and the success. This is clearly working better than what we were expecting, so that's great. Great news, and this only will, I think, in a way, reaffirm our commitment to continue working hard because, you know, it really, really makes a difference at the end of the day. So, you know, really happy. And thank you again for participating, and we'll talk to all of you during the quarter, and hopefully see you soon. Bye-bye.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect.
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