Fluence Energy, Inc.

Thank you for standing by, and welcome to the Fluence Energy Inc. Q3 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, as a reminder, today's call is being recorded. I will now turn the call over to your host, Mr. Lex May, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Fluence Energy's third 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 relating 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 filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, 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 which 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 in 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.

Thank you, Lex. I would like to send a warm welcome to our investors, analysts, and employees who are participating on 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 third 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 $536 million of revenue. We continue to experience strong demand as new orders were approximately $565 million, highlighted by our solution business contracting 1.4 gigawatt hours and our digital business adding nearly 1 gigawatt of new contracts. Furthermore, our signed contract backlogs as of June 30th increased to $2.9 billion. Turning to adjusted gross profit, we delivered $24 million or a margin of approximately $4.4 percent for the quarter. This is slightly lower than the Q2 level of 4.6, primarily because of one project that experience delayed from a non-core supplier. This was an isolated incident which should not hinder us from our expectation of achieving double-digit gross profit margins in Q4. Lastly, our services and digital business, which represent the sum of our recurring business continue to see traction. Our deployed service attachment rate, which is based on our cumulative active service contract, relative to our deployed storage, remains above 90%. As we have noted previously, we typically see a lag between signing solution contracts and entering into a service contract, which is why we believe the cumulative attachment rate is a very metric. Turning to our digital business, We had a very strong quarter as we were able to contract nearly one gigawatt. However, our digital assets under management at the end of the third quarter was slightly lower than the second quarter level as a result of a customer not renewing its contract with us. This slight decline will be more than offset as the new contracts not yet deployed move from our digital backlog to our digital assets under management. While we don't like losing customers, The non-renewal is within our expected 5% rate for churn or customer attrition. Our low churn rates highlights the general stickiness of our customer base. Overall, we still have a lot of work to do regarding our digital business, but we're on track to deliver on our commitments. 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 2023 guidance for both revenue and adjusted gross profit. As Manu will discuss in more detail, we're able to raise our guidance due to better project execution, thanks in a large part to our supply chain's improvement. Additionally, we're reaffirming our expectations that we will be close to adjusted EBITDA break-even in our fiscal fourth quarter. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we signed a 400 megawatt-hour contract that will utilize Northwell batteries. This is a significant milestone, and this will mark our first major project that will utilize European manufactured batteries and illustrates our commitment to diversifying our supply chain. We will convert our supply chain into a competitive advantage. I'm pleased to say that we have signed a US cell supply agreement with ASC, under which we will procure US manufactured battery cells. This is a tremendous achievement for us, as we believe this will position Fluence to be one of the first companies to provide customers with a storage product that qualifies for the 10% investment tax credit bonus under the IRA domestic content rules. This contract provides us access to the limited early US cell supply and gives us a first-mover advantage, which positions us to potentially increase our existing market share. As I mentioned previously, this agreement supports our domestic module manufacturing, for which we expect we will capture the incentive of $10 per kilowatt hour, which I will touch on more shortly. Four, we will use Fluence Digital as a competitive differentiator and a margin driver. I'm pleased to report that we continue to make progress on our Nispera product roadmap. This quarter, we launched an artificial intelligence-based predictive maintenance tool, our first artificial intelligence tool for battery storage on the Nispera platform. I will also discuss this in more detail momentarily. And finally, our fifth objective is to work better. I'm proud to state that Fluence has increased its total cash position by more than $30 million from the second quarter level, further bolstering our liquidity. Our total cash includes cash, cash equivalents, restricted cash, and short-term investments. Turning to slide six, demand for energy storage continues to accelerate. In fact, our pipeline now sits at $12.4 billion. which is an increase of more than $1 billion from last quarter. Additionally, as I mentioned, we saw our backlog increase to approximately $2.9 billion. We expect to see some initial project awards in the second half of this calendar year that are directly attributed to the Inflation Reduction Act. As such, we reaffirm our belief that consolidated revenue growth will be between 35 to 40 percent in fiscal year 24 relative to our increased revenue guidance for fiscal year 23. Turning to slide 7, as I mentioned earlier, we have secured an off-take agreement with ASC for U.S.-made battery cells. This agreement strengthens our capacity to offer customers a storage product that we expect to qualify for the additional 10% investment tax credit. a bonus granted to products complying with the prescribed criteria for domestic content under the IRA. We expect the first US cells to be delivered in calendar year, in calendar Q4 of 24. Additionally, we're still on track to begin manufacturing our battery modules at our facility in Utah in the summer of 24. We know that the battery modules we produce starting in the summer of 24 should qualify for the $10 per kilowatt hour incentive and will support the offering of a product compliant with the IRA's domestic content requirements upon the integration of U.S. manufactured cells in Q4 of 34. In regard to our U.S. module manufacturing, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. Instead, we expect the $10 per kilowatt hour 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 statements as a reduction to cost of goods and services. 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 expected to lack our accounting thus we expect it to be in conjunction with our federal income tax reform. With respect to the U.S. manufactured product, we're exploring whether our first mover advantage will allow us to share some of the benefits our customers will enjoy from our offering, and thus provide us with incremental margin. It is too early to define a concrete view, but as the situation evolves, we will provide more color on this potential option. As you may have seen earlier this summer, the U.S. Treasury Department releases domestic content regulations. Overall, we're pleased to see the regulations. However, there are still outstanding questions that we're hoping the IRS will clarify by the end of the calendar year. Turning to slide eight. I'm pleased to announce we recently launched an artificial intelligence-based predictive maintenance feature for battery and heat storage as part of our NISPERA offering. This is our first NISPERA artificial intelligence-based feature, following the success of the AI capabilities in our MOSAIC bidding application. NISPERA AI-based predictive maintenance feature is an advanced solution designed to upgrade the performance and reliability of any storage system. By harnessing the power of artificial intelligence models This cutting-edge technology prioritizes and acts upon the storage performance issues, thereby significantly reducing downtime and ensuring uninterrupted power supply. From a customer standpoint, the AI-based predictive maintenance feature offered by NISPERA will provide numerous benefits, including minimized downtime, significant maintenance cost savings, enhanced asset reliability, optimize maintenance scheduling, and improve safety. I'm pleased to say that we've deployed this solution onto its first project in California. More importantly, this feature provides another tangible proof point that we're on track with our digital business commitments, which we say will not be meaningful before 2025. In conclusion, I'm pleased with the achievement of the third quarter. Although we're mindful there's still work to be done, We will look to continue this momentum as we progress to the remainder of the year. I will now turn the call over to Manu.