This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk11: 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.
spk12: 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.
spk05: 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.
spk08: Thank you, Julian. I will begin by reviewing our financial performance for the third quarter and then discuss our guidance for fiscal year 2023. Please turn to slide 10. Our third quarter revenue was $536 million, 124% of our prior year. We continue to execute well. as we worked through our legacy backlog, which accounted for more than half of our revenue in the third quarter. As we alluded to on our last call, third quarter had a larger impact from the role of our remaining legacy contracts than we expect to occur in the fourth quarter. We continue to anticipate majority of our low-margin legacy backlog will be turned over by the end of this fiscal year, though, as I've indicated previously, a small portion will bleed into fiscal year 2024. We generated approximately $24 million of adjusted gross profit in the third quarter, which was an adjusted gross margin of 4.4%, slightly lower than the second quarter level. As Julian mentioned, the driver of the decline was one specific legacy project that incurred delays driven by a non-core supplier. More importantly, for the fourth quarter, we expect our margin to be about 10%, which reflects an increased weighting of the higher quality, higher margin orders that we have recently signed relative to prior years, and expect this to be a good proxy for the expected margins in fiscal 2024. Third quarter operating expense, excluding stock compensation, was $54 million, or approximately 10% of revenue, which is lower than prior quarter in absolute terms, though up just slightly as a percentage of revenue. 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. This is also reflected in the year-to-date third quarter operating expense as a percentage of revenue which is 10.9% down from 17.2% in year-to-date third quarter 2022. Turning to our cash balance, I'm pleased to report we ended the third quarter with $416 million of total cash, including short-term investments and restricted cash. This represents an increase of more than $30 million from the second quarter. Rounding out the balance sheet discussion and in line with previous communication, we saw a decrease in inventory of approximately $250 million in the third quarter relative to the second and continue to see improvements in inventory turns. This, coupled with improved collections, drove the increase in our cash balance. In addition, we ended the third quarter with $165 million of undrawn revolver capacity and $80 million of unused supply chain financing, providing us additional sources of liquidity. Please turn to slide 11. I'm pleased to report we have increased and narrowed our fiscal year 2023 guidance ranges for both revenue and adjusted gross profit. We now expect our total revenue to be between $2 billion and $2.1 billion, which is up from our previous revenue guidance of $1.85 billion to $2 billion. As Julian indicated, we are maintaining our outlook for 35% to 40% revenue growth in 2024, despite the higher 2023 revenue guide, as we continue to benefit from growing demand and strong supply chain assurance, though we expect roughly 75% of 2024 revenue to be generated in the second half of the fiscal year based on the current contract schedules we are seeing. We have all of 2024 battery supply secured, and the continued improvements in our supply chain position also helped support incremental increase in 2023 revenue guidance compared to prior estimates. We have also narrowed our guidance for adjusted gross profit to be between $117 million and $132 million, which implies a slight increase at the midpoint from our previous guidance of $110 million to $135 million. As we have indicated on our second quarter conference call, we expect to be close to adjusted EBITDA break-even in the fourth quarter 2023. As we focus on achieving adjusted EBITDA profitability for fiscal year 24 and beyond, we intend to provide formal guidance for fiscal 2024 for both revenue and adjusted EBITDA on our next earnings call, while continuing to provide transparency of other key operating and modeling assumptions. From a cash standpoint, we expect our fourth quarter total cash levels to be near breakeven, and we believe we have ample liquidity to meet our 2024 revenue targets. Please note that our U.S. battery cell supply agreement currently calls for a down payment of $150 million to reserve this capacity, which will be paid in installments over fiscal year 24 and fiscal year 25 and will be funded by our liquidity and customer deposits for these batteries. The first $35 million will be paid in the first quarter of fiscal year 24, and another $35 million will be paid in the second quarter of fiscal year 24. Before I turn the call back to Julian for final comments, I would like to reiterate that we continue to see strong demand, which is reflected in the significant growth of our pipeline, which gives us confidence that we will be close to adjusted EBITDA breakeven in the fourth quarter, and generate positive adjusted EBITDA in 2024. With that, I will turn the call back to Julio. Thank you, Manu.
spk05: In closing, I would like to reiterate what I consider to be the key takeaways from this quarter results. First, we had a solid quarter in terms of our financial performance, clearing out much of our legacy low-margin contracts while generating cash and raising our guidance yet again. we have also reiterated our expectations that we will be close to adjusted EBITDA breakeven in our fourth quarter. Second, we have taken steps to secure our future by locking up our fiscal year 24 battery supply, as well as locking up early domestic battery cell production, providing us a clear first mover advantage. Third, we launched our new AI-based feature for Nispera to help provide our customers with additional tools necessary to lower the total cost of ownership. This concludes my prepared remarks. Operator, we're now ready to take questions.
spk11: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 11 on your telephone. Again, to ask a question, please press star 11. One moment for our first question. Our first question comes from the line of James West of Evercore ISI. Your line is open.
spk04: Good morning, James. How are you? Good morning. How are you?
spk06: I'm doing well, Julian. How are you? Doing well. Very happy today. I'm sure you are. It's a good quarter, and the outlook looks very strong. I'm curious, as we've had IRA guidance provided now, and we obviously know, you and I know, the demand drivers here for energy storage, has there been any net change in that demand, you know, either up or probably up or down, but probably up with, you know, pure guidance out there for the U.S.? And then how are you guys thinking about also the European markets as they start to figure out, you know, the green industrial plan that they've put out there?
spk05: In terms of the U.S., I don't think we have seen a major movement since the guidelines came out. So it's in line with what we said, you know, that for a total demand 35 to 40, and that's what we're guiding revenue for next year, and the U.S. a little bit higher than that. For Europeans, we are seeing some, you know, a little of the markets being a lot more, I would say, moving a lot. So where are we? First, Germany, I think. Germany was a market where it was incipient. Now we see a lot more activity. And then the Nordic countries are another group where we're seeing now a lot more demand. I don't think it's enough today to call for a review in our 35 to 40, but good signs. Especially Germany being such a big economy. I'm sure it's going to be a competitive market, so it'll be a fun ride for us, but that might be meaningful. That's kind of where we are. I think we're very confident about 35 to 40 for next year and positive that we'll see the man getting better. The other one we're seeing that maybe is Canada, which was something that I think I talked about with some of you before. We start seeing the man in Canada, mostly in Ontario. And that has been very, very, you know, that's also very, I think, meaningful. And it could be a huge market, no? And that proves a point, I think, that if I can make maybe a little bit of an ad. You know, as you know, the Canada electric system has a lot of hydropower. And a lot of people, when they see hydropower, they don't see, you know, a need for battery storage. And our view is that, you know, Reservoirs do their jobs. Our job is completely different. We provide services to the grid to ensure stability, to move capacity faster or fast response, to provide black source. These are things that not necessarily reservoirs can do. It really proves a point that even hydro systems or systems that have a lot of hydro capacity need battery storage to ensure that they can you know, adapt to a new power sector landscape.
spk06: Okay, that's very interesting. Thanks for that, Julio. And then a question on Nespera, the adoption of Nespera. How is that, you know, you put much more emphasis the last couple of quarters on that, the adoption rate on the software side of the business. How is that progressing?
spk05: We signed like around one giga. It was mostly mixed pair. We have some mosaic there. And it's doing very well. I think the fact that we have the, you know, the first, you know, integrated portfolio management as a performance management tool that covers all the renewable technologies, storage, wind, solar, really makes a difference. And it has really, you know, that's really helpful. We're very, very happy with it. I think this new tool that we just announced, the maintenance tool, just the beginning. This one is based on temperature readings, but there's voltage charts, state of charts. There's a lot more. The batteries are very, very rich in data. There's a lot of value we will create by harnessing that data and converting it into information that our customers can use to to manage our systems a lot better. Got it. Thanks, William. Great. Thanks, James.
spk11: Thank you. One moment, please. Our next question comes from the line of Brian Lee of Goldman Sachs. Your line is open.
spk10: Hey, guys. Good morning. Thanks for taking the questions. Kudos on the solid execution here again.
spk05: Yeah. Good morning, Brian. How are you? Hey, Brian.
spk10: Good, good. Thank you. Question, I guess, on margins. It's a high-quality problem to have, but you seem to have gotten through a lot of the backlog that had some of the lower margin, less profitable projects. Q4 guide, or I guess the annual guide here for the rest of the year implies Q4 is going to be somewhere in the 11% range, if my math is right. I know you're talking more about 10%, 4%, 24%. and you're going to give us more of an official view here in the next quarter, but what are kind of some of the puts and takes between the 10% and 15% long-term guide, and then mapping that to 24, given you're sort of at a good exit rate here for 23, and it seems like a lot of the legacy projects are now off the books or mostly off the books. Yeah, absolutely.
spk08: So, Brian, there's a lot to unpack in your question, so let me go take it piece by piece. So I think just from how to think about the 24 margins, we are signing contracts in the 10% to 15% margin range, and that is still the case. But the Q4 margin is a good proxy for how to think about 24 margins, right? And as we have a little bit more contribution from Our services business and our digital business maybe ticks up a little bit, but Q4 is a good proxy for 24, and that will continue to increase as we go from 24 to 25. So that's one. In terms of legacy, you're right. We are done with most of our legacy projects. I think there's about $100 million to $150 million that trickles into 24, mostly done in the first half of the year. So as you do the quarterly profiling and the calculus of 24 margins, keep that in mind. And then you're right, the business is performing really well. You know, I would want to point out the fact that, one, we've been fairly disciplined from an overhead perspective. And that's important because as we turn the page to 24, the focus is going to be a lot on EBITDA dollars, right? That is a better measure of profitability than gross margin or gross margin percent. And I think that's what we want the investor community to be focused on. And that's reflected in our comments that we get close to EBITDA breakeven in the current quarter or in the fourth quarter. And then I'll round up my comments from a cash perspective. We generated cash in the third quarter. My comments talk about a cash breakeven in the fourth quarter, which means we generate cash in the back half of the year. so that is another area we are focused on so ebitda and cash becomes much more relevant than gross margin gross margin percent uh my last comment uh before i pass it on back to you is you know the we've been very pleased with the performance of the business and what that's got us is uh it's got us to be a vixie enabled so vixie is well known season issuer and uh we intend to file a universal shelf tomorrow after the market for good housekeeping And, you know, that's really reflective of the confidence that the shareholders have placed in our business that allows us to be a Vixena.
spk05: My only comment on the filing is that we do not intend to raise, we have no plans to raise, you know, capital in any way during, you know, for 24. We don't need it, but I think this is just for housekeeping.
spk08: Yeah, and that's consistent with the comments that we had in Maestro.
spk10: Right. Okay. Yeah, fair enough. No, appreciate all that additional color. I guess second question shifting to maybe the top line here. I know even with the pull forward, it seems like you had here and being able to raise the 23 guidance, you're comfortable with the 35 to 40% growth trajectory into 24. Can you maybe give us a sense of how much of that is just additional demand, bookings activity you're comfortable with heading into next year, and how much of that is maybe conversion timelines? It seems like some of those are maybe pulling in a little bit, if you can provide a little bit more color around that, and then I'll pass it on. Thanks, guys.
spk05: Yeah. I think we are, you know, we're kind of, the way I would maybe phrase it is that When you looked at our backlog and you looked at our 24 revenue, we're covered right in line with where we were last year. So, you know, we feel very, very confident that for what, you know, the backlog that we will convert in 24 is what we will do this quarter and next, that we will be, you know, more than enough to meet the 35 to 40. So we feel very, very confident about it. We will provide you exactly how much of our 24, you know, of our revenue is covered by backlog. In our next earnings call, we will provide guidance on 24. So, you know, I don't want to, you know, get ahead of ourselves, but we are in a similar position to where we were last year, you know, when we were doing this year's planning process. Sounds great.
spk02: I appreciate it.
spk05: Our plan is to provide guidance on 24 in the next earnings call in late November.
spk11: Thank you. One moment, please. Our next question comes from the line of Justin Clare of Roth. Your line is open.
spk02: Yeah. Hi, everyone. Thanks for taking the questions. Hey, Justin. How are you? I'm doing well. I wanted to ask you about a project timeline. So, you know, this quarter you increased the revenue guide again here. And so I was wondering if you're seeing project timelines further compressed, you know, I think you were at around 18 months a little while back here, but things have been trending lower. So, so where, where are timelines today? And, you know, do you see a path to, to continuing to shorten the timelines potentially to, you know, a timeframe of, 12 months, say?
spk05: In general, we don't see timelines compressing. I think that as we looked at our financial planning, we see still projects around the 18 months that we told you. This is a line that we want to work on, and I think this is something that's work to be done. It clearly, you know, there are two drivers for this. One is supply chain and the lead times we need for our supply chain to deliver the product in time. And the other one is, you know, ensuring that our customers are ready with their, you know, infrastructure. So between the two, I think that today, I think we can work with supply chain to accelerate it. There are customers, we can also help them to extend, but there's a limit to that. But today, what we have is an 18-month plan. I mean, I think it hasn't gotten any better.
spk02: Got it. Okay. And then I just want to ask also about your U.S. manufacturing. You signed an agreement here with AESC. How much of that agreement really covers your need for U.S. cells? Does that cover all of your anticipated U.S. cell supply, or are you looking for additional suppliers potentially? And then also, maybe if you could just speak more broadly about the plan for potentially expanding your capacity footprints in the U.S. I think your plan is six gigawatt hours in fiscal 24. How should we think about potentially moving above that?
spk05: Yeah, I think that in terms of we believe this deal, which is signed, will essentially cover a large amount of our U.S. demand. We believe that the U.S. market will, there will be a competition between U.S. manufactured sales and imported sales. And we will be working on both sides of that fence. And so, but we believe that what we have is enough for our expected demand for, you know, for the, you know, for the next years. Sorry, your second question, if you don't mind repeating, Justin, you know, I don't know if I got it. Sorry, a module manufacturer, sorry. On module manufacturing, we are, you know, we build this plant with the ability to increase the output if we want for the module manufacturing. We most likely, it depends on how it goes. We can very, very quickly, you know, this is a, you know, we can double the production very, very quickly, but maybe triple it. So we are, you know, but we will see how it goes and then make the decisions around that. So, you know. Okay, got it. Thanks for looking at that. Okay, thanks very much.
spk11: Thank you. One moment, please. Our next question comes from the line of Julian Dolan Smith of Bank of America. Your line is open.
spk04: Good morning, Julian. How are you?
spk15: Hey, Julian. It's actually Alex Vrabelon for Julian. Hey, Alex.
spk04: How are you?
spk15: Thank you for taking the question. How are you? Listen, keeping on the theme on sort of the US piece here, congrats on the AASC, I guess, announcement. Let me ask you this. How sustainable of an advantage do you think that this is Is there any sort of, I guess, value wedge that you think you can create there relative to, you know, pricing and where you're able to get those batteries? And then I'm not sure if you mentioned it, but are those raw material indexed? I know that you have some sort of indexation on some of the other contracts. Just curious, as far as, you know, you guys having an early mover advantage, if you could elaborate on that a little bit.
spk05: Yeah. I mean, I'll tell you, talking to customers, what I hear from them is that we're the only ones offering this. that we're the only ones talking to them about this. So that's my view. How long of an advantage? How far away are the other suppliers? I don't know. You hear different things from different people. Some people say that they do not believe that the U.S. battery manufacturer will be competitive. I disagree, and we disagree, and we think we'll show it to them later. I will see how long, how long, how far away, how far away I am. I think that it will be, in my opinion, it will be very simple. Once they see that we're here, that we can do it, that we can offer a project that's very competitive, that, you know, we can put the U.S. flag on top of it, that, you know, it really, where they can see that, I'll see them trying to copy it. And, you know, they'll probably be a few years, a couple of years behind. It's difficult to know. Clearly, people don't, you know, don't announce, I haven't seen any announcements, and what I hear from my customers that nobody's talking about this, but, you know, that's what I can, how much, you know, A, I guess your second question goes to A, can we capture higher margin on this, or the second part of your question? Well, you know, we believe that you can, we have to, you know, but we're just starting doing this conversation with our customers, and this is a a plan that, you know, it's a little bit complex. It's very difficult to give a concrete view of where we see that happen. But we do see that our customers are going to get a significant upside and, you know, that we should share part of it with them as we are delivering this to them, you know. It will also, for sure, like we said, for sure it will convert into higher volume, you know, because as I said earlier, we will work on both Offering imported sales and the U.S. content sales. So we will be playing on both sides of the fence. And that's what I think will be the trick here. We're not only riding one horse. So customers who have different preferences, customers who do not prefer a U.S. content, a U.S. domestic content compliant solution, we will offer them also a solution that does not meet that. So really, you know, we're really excited about this prospect and, you know, I think that it will solidify our position in the U.S. market, you know, with, you know.
spk15: Yeah, no, fair enough. Just two quick follow-ups, sort of clean-up questions, if you will, for me, maybe for Manu. Just on the delays in 2Q, should we expect any deferred flowback of LDs? I know you guys have some, you know, seen that. in some historical examples. And then on the deposits piece, I mean, do you expect that to be entirely fronted by customers or is there some sort of, you know, working capital dynamics between cash in from them versus cash out from you guys on the deposits piece, if you can clarify? Thanks.
spk08: Yeah, so I think, let me take the two questions in order. From a margins perspective, I think, you know, any potential LDs, we've kind of boxed it in really well in our third quarter actuals and our fourth quarter guidance. So I think that kind of clears that. In terms of how to finance the $70 million of deposits for the first half of 24, I think a good assumption from a modeling perspective is a little over half funded by the customers and the rest funded by our liquidity or any working capital lines that we have.
spk15: Got it. Appreciate the clarifications. Thanks, guys.
spk11: Thank you. One moment, please. Our next question comes from the line of Ben Callow of Baird. Your line is open.
spk09: Hey, good morning, guys. Thanks for taking the question. Good morning, Ben. How are you? Good morning. Good. Thank you. Joe, sticking on AESC, could you guys talk a little bit about your diligence with them and how you chose them? And then I think they have one plant that's operating and one under construction. But where you would be getting the cells from with them, then I have a follow-up on a different topic. Yeah.
spk05: You know, we don't want to disclose too much, but I'll tell you, one of the main reasons why we picked them and decided to work with them, because we are, these batteries will come out of a reconverted plant, a plant that's just going through, it is producing and it will reconvert to produce battery cells for the the stationary storage so we believe that in the current you know environment that you know they were further ahead than anybody else in in offering this and you know they already have employees already have as you know which is a major issue for some of these plans they already have the technology they have the supply chains working very very well so you know that i mean very very good and you know and clearly also asc is one of the tier one you know battery manufacturers they have been working you know globally or in the U.S. for some time. So that's the reason why we think that they were a good partner and they are in a very, very good position to offer these batteries today.
spk09: My follow-up question on a different topic is just market dynamics. And I'm thinking about Tesla talking about having pricing power in the market for their storage business. And I just want to understand if you guys are seeing that and what's causing that and just the competitive dynamics and how it's changed. Some of your competitors are not as financially strong as you guys or new competitors, anything like that, but then more so on the pricing power. Thanks.
spk05: I don't think the competitive landscape has improved to our advantage. Let me put it that way. I think this is a very competitive market. Tesla is a very, very strong competitor and there are others, as you said, There are a lot of small players who do not have the capacity to do stuff we can offer. But I think we're far away still. I think we're far. I'm going to say far away, but far from the point where the industry consolidates in a way that we are a limited number of players. I don't think we're there. For us, competitiveness is a driver internally to ensure that we beat everybody on price, but not only on price. Price is a driver. It's not the main driver. On ensuring our customers have a product that meets their needs. Price being one, our performance, what we do, how they can bank or finance our investments, the type of guarantees we provide them to ensure that they feel comfortable owning our assets. And I think that, you know, we work very, very hard and we work out every day and we have everybody looking internally. I don't ensure we beat Tesla and any other one that's around.
spk09: All right. Congrats on the results, guys. Thank you.
spk05: Thanks, man. Thanks.
spk11: Thank you. One moment, please. Our next question comes from Alana Pavil, Malkinov of Raymond James. Your line is open.
spk14: Good morning. Good morning. 2024, so recognizing you're going to give kind of more detailed guidance a bit later, but much more back-end weighted revenue picture compared to this year. And I'm just kind of curious why the difference in sequencing.
spk08: Yeah, so I think the way to think about 24 from a first half, second half perspective is as follows, right? If you look at how the 23 guidance has evolved, as we have gone about from our original guidance, which I think the midpoint was 1.55 or 1.6 to where we are, which is closer to 2.05, we've kept the growth rate the same, roughly at 35 to 40%, right? And that adds incremental between $600 million and $700 million of revenue. And given the cycle times of our projects, that's more back-end loaded compared to the first half. So I think the split between first half and second half is largely driven by the strength of our order book. as we've gone through 23. That has resulted in a higher revenue for 24, but it's coming in the back half of the year. We feel really confident, and I'll point to the fact that we have $2.9 billion in backlog as we enter the fourth quarter. And more importantly, we have close to $12.5 billion in pipeline. So we feel very good about where we sit for 24.
spk14: Okay. Let me follow up on the digital AUM kind of coming down in the quarter, you mentioned there was a non-renewal by a particular customer. Is there a certain churn rate or, you know, some other way to just think about digital AUM more broadly?
spk05: I mean, our churn rate is fairly low, about 5%. So, you know, and this customer that didn't renew essentially is an asset that was sold. They were sold to another company. The company had their own system and they decided to, which in a way makes sense, they decided to use the system they used for the other asset. I think that this was within our 5% churn. Churn is very, very low. I just raised it because it appeared in the numbers. I wanted you to be aware of what happened, but we signed almost one giga And so I think it was a good quarter for a digital business in general. And these things will happen from time to time. And as long as they are within the day, we have no indication that we will end the year within the 5% churn rate that we usually have, that we do have for this business.
spk11: Understood. Thanks very much.
spk04: Great. Thank you.
spk11: Thank you. One moment, please. Our next question comes from the line of Cassie Harrison of Piper Stanley. Your line is open.
spk03: Good morning. Hey, good morning, guys. Good morning. How are you? Doing well. Thank you. So, you know, I wanted to go back to just this discussion on cell sourcing. You know, you're highlighting U.S. health capacity from AESC. You're highlighting North Pole. as well, but obviously you still have a lot of Chinese cell exposure today. And so maybe if you look out a few years from now, is your expectation that you will find enough US cell capacity just for US projects and then European cells solely support European projects? And then what does that mean for your Chinese exposure, again, a few years out from where we are today?
spk05: I think that I don't see today in our planning scenario, we don't see a world where the U.S. will be fully supplied by U.S. manufacturer sales, nor in Europe. So that will take some time. The U.S., the Chinese manufacturers are, you know, they do investing need, they have invested, they had a They started earlier. They have invested a lot in technology. It will take a long time for, you know, European and U.S. manufacturers to get there. So that's the way I see it. And that's the way, you know, we want to continue working with our Chinese suppliers and hope to continue working with them for some time. They provide us with very, very good product that, you know, they have good product roadmap and we work with them well. And so we want to continue working. So that's the reality. The other point I will say is that, hey, I want a world where there's free trade. So I want a world where, you know, we can buy batteries from many places because I think that's a world that's better for all of us. A world where our technology will continue evolving, where, you know, we'll have the ingenuity and the capacity of the U.S. engineers coming up with new ideas and making, but also competing with what Chinese and Europeans are doing. So that's the world I hope that we will have for our industry. so that a little bit of our planning reflects that concept. We want that world. That's the world we think that is a world that's better for our technology and better for our standard of living. I don't think we will be able to properly address the challenges of climate change if we try to do this each region or each country apart. We need to cooperate and work together, and that's what I want to do. So that's the way we see it.
spk03: Thanks for the thoughts there, Julian. And then maybe a follow-up question for Manu. Appreciate the commentary on cash for Q4, but maybe just on a multi-year basis or maybe even a target basis, Can you just help us think through what you think the cash conversion of this business is once you hit your targeted long-term margins? Do you think this is a 50% EBITDA to free cash flow business? Is it 60%, 70%? Just some thoughts on how you expect EBITDA to convert to free cash long-term.
spk08: So, I think we laid out a cash model. maybe two earnings calls back. And I think that's a good way to think about the model going forward, right? And the model goes something like this, right? We have our EBITDA, we have some amount of CapEx, and in the last few years, it's been high single digit, low double digit. That'll oscillate a little bit depending on specific needs of the business. And then from a working capital piece, which is the heart of your question, I think what we've said is, take the revenue growth year on year and take 10% of that as a proxy for the working capital usage. And I think that's a pretty good model to think about as you plot out the next couple of years when we get to positive EBITDA territory and beyond. Thank you.
spk11: Thank you. One moment, please. Our next question comes from the line of Tom Curran. of Seaport Research. Your line is open.
spk04: Good morning. Good morning, Tom. How are you?
spk13: Good, Julian. Good. Over in the EU, when it comes to this churning stew of policy proposals, initiatives, regulatory changes that the European Commission has been cooking up in Brussels, you know, whether it's the Green Industrial Plan, Repower EU, or this just-passed Renewable Energy Directive, is there anything in there that's specifically targeted towards the storage as transmission market and expect it to expand and or accelerate your set of storage as transmission opportunities?
spk05: The transmission rules are very, very local. So we have to work market by market. As you know, there is a transmission system for all of Europe. But the work we're doing today is market by market. What we have done in Germany, what we've done in Lithuania. We have not engaged from a pan-European type of process. I think that will take us time. Generally, the way you should think about Europeans is that the way they regulate the transmission system is free access. and essentially free access, let's put it that way. And that means that you need to allow energy coming from third parties. In terms of what we are trying to do, a regulatory challenge when we go into this asset, it's a simple one. It's the following. It's that most regulatory systems restrict transmission operators from dispatching assets. However, when you put the battery support in the transmission line, the system operator or the transmission owner needs to dispatch the assets, needs to use the battery storage as a demand or dispatch it or charge it. And that has created some sort of a legal question that we were able to resolve in Lithuania, we were able to resolve in Germany, and that we're working to resolve in other places, in the UK and in Ireland. But it is a challenge for some of the regulators because it, in a way, it questions the segmentation of our industry. Our industry is segmented, as you know, in demand or distribution, transmission, and generation, and the views that the three should be very, very separated. The way to create values by having them be very, very independent. So demand cannot have distribution, transmission cannot dispatch generation, and all these things, all these rules. I think as our technology goes into the grid, that segmentation blurs. And that's a challenge we have. And that's a challenge we have in the U.S. And that's a challenge we have to cover. I think that this will happen. And there will have to be a regulatory. And we have been able to successfully resolve it in Germany and in Europe. But it is something that we need to work with all the regulatory players as we move forward. But I don't see a pan-European solution for this. This is more of a local issue where we need to work with the local system operators and system regulators.
spk13: This is a very helpful clarification. Thank you for that. And then, Manu, in the quarter, you incurred capex of $7.3 million related to software investments. Would you expound upon the nature of that spending and provide us with an estimate of software capex for fiscal 24?
spk08: Yeah, so let me help start with your 24 question first and then kind of bring it back, because I think it goes to our long-term view on how we think about software and as a key driver of the business, right? So I think we've talked about, you know, call it double digits, low double digits type of CapEx spend. That includes capitalized software as well. And I think it's both our own parties, our employees, as well as any third parties that kind of help develop from a software perspective. It covers both our operating system projects that we are doing as well as the digital initiatives to advance both Nespera and Mosaic, and that adds more capabilities to our current functionality. So that kind of encapsulates where we've been spending money for this quarter and going forward. But I think the overall capitalized software is part of our $10, $15 million.
spk01: Yeah, sure. So this is Rebecca, and I'll tell you from my perspective of leading the technology team. We have a large group of people who create the operating system software platform, and we're actually reinvigorating that platform right now. And that's a big part of how we feed the money, the estimates in for capitalization. We follow along our product development plans to create new functionality on that software for the different markets. And that mostly is labor, and that labor turns into an opportunity to capitalize it. As Manu mentioned, that's also paired with the investment that we make in our cloud-based software. And again, mostly that's labor and delivering some of the new functionality as discussed today, some of that artificial intelligence-based functionality. It's all that labor that goes into creating the different software offerings and leads into a capitalization effort.
spk13: Got it. Thanks, Manu. Thanks for that additional color, Rebecca. Thanks, Tom.
spk11: Great. Thank you. One moment, please. Our last question comes from the line of Craig Shear of TUI. Brothers, your line is open.
spk04: Hey, Craig. How are you?
spk07: Hi. Thanks for squeezing me in. So first I wanted to dig in a little bit on the European transmission answer to Tom's question. I did notice the New York ISO was studying energy storage as a transmission asset. And I think you opined a little bit on the last earnings call about other markets having to address this and having issues. I believe you were mentioning Latin America at the time. Could you opine on the prospects of working through the system by system issue worldwide and being one of the top three or four companies in the world that can even do this, how big a market this could be in five years?
spk05: Let's start with the last part of your questions. This, we believe, could be a material driver for our performance. You know, we have the standard and poor analysis, a little bit stale. It was 30 gigas by 2030, but I think it's stale when you really look at the challenges that transmission has globally. In terms of our, you know, I understood the first part of your questions You know, how's our lobbying effort and are we making progress? This is, as I said earlier, this has to be done. I don't think we need to do this regulator by regulator, you know, and one by one. And, you know, our team identifies where we believe we have the highest chances of, you know, and the highest chances of success. And then that's what we work for on our team. And this is what we did this with AES as a partner. With AES, we have been very successful in Chile. It was great. We're working in several jurisdictions in the U.S. And we have success depending on where we are. But I think after this summer and all the transmission challenges that we have seen, this is going to become a more urgent matter. And as people will see our project coming online in Germany, I think we're going to see the... U.S. system operators, they can go and watch this. They can see it work and they see all the value you can create. I think that we will see a major, major acceleration of this. That's the way I see it. So, you know, we're very happy. Unfortunately, today I cannot announce anything yet, but we're working on a few concepts that hopefully will become into reality soon.
spk07: Thank you for that.
spk05: I'm sure that when Standard & Poor's takes another look at this market, it will significantly increased, you know, from what they were expecting. I think that the that analysis that is a couple of years back is a nice, a little bit stale.
spk07: Thank you for that. And I wanted to dig in a little more on the answer to Pavel's digital question. Is there a trend of customers increasing or decreasing their use of internal systems? Or is the market kind of deciding that, you know, specialized third party digital services is the way to go? Or is it still kind of, you know, case by case?
spk01: So when we talk to customers, we hear the need state for us to provide digital solutions that help them operate these battery systems better. So that's an open space in the market. And that's the one that we're focused on. When you talk about third-party software systems, usually that's related to people that have decided to self-integrate, and that's a very specific section of the market. We're really not competing with that. So we're playing with customers, developers and IPPs that are consuming our products, and they're asking us to provide these digital solutions to help them operate the batteries over the long term. So if your question is, are we competing with self-provided software, I would say not really.
spk05: If I can add one thing, from a product roadmap view, our concept is to integrate our software solutions into our hardware solutions in a way that, you know, there's significant value by having the two, you know, to really create that additional concept. As you know, we sell our Mosaic technology to third parties. We sell our asset performance management system to third parties. But we really think that fully integrating into our assets will create the ownership of our assets a lot more. It will help our customers reduce the total cost of ownership and make our assets more competitive in the market. So that's conceptually what we're doing. But I will say that today, clearly our system, everybody buys from us. Our battery management system, as we deploy it, it will come from us. Where you see that people might have different systems are in the bidding application because there are other players. Even though ours integrates, as I said, very, very well with our infrastructure and in performance management tools, there are not that many players who can offer what we do. which is integrating your solar, your renewables, and your battery storage systems into one system.
spk07: That's one way. Just a quick follow-up. So like two, three, four years out, as you morph this into a more fully integrated business line that historically wasn't necessarily, do you see the churn that you experienced in this last quarter kind of reducing or going away?
spk05: No, I think that the 5% a year is kind of the way we'll go. Remember, the bidding application, because this applies to our whole offering. You know, the bidding applications are competitive. In my market, there will be some people that do it, and then there is also the asset, the performance management tools, also you have third-party competition. So I think 5% is a good number. And for digital applications, it's fairly, fairly low. Great. Thank you. Great. Well, I think that this ends it for today. So maybe I can, you know, just say a parting remark. So we're very, very, you know, proud of the work that our team has done here. The turnaround, you know, Manu was asking me earlier today, it's been almost a year since we arrived here. We're very, very happy for the, you know, the turnaround that our team has done here. Really, really, you know, their eye on the ball on all the drivers that we needed to bring this company to where we are. We're in the brink of getting to our double-digit gross margin and our break-even point in 2000 and in the fourth quarter of 24. And, you know, so very, very happy with the progress. And, you know, this is an industry that is evolving. It's a competitive industry, but we have the desire, the capacity, and the ambition to make this great. I really thank all of you for your questions, your support, and the insights you provide us every time we engage with you because that helps us to do our jobs here every day. Thank you very much and talk to you soon.
spk11: Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
Disclaimer