Fluence Energy, Inc.

Thank you for standing by. My name is Janice and I will be the operator for today. At this time, I would like to welcome everyone to Fluence Energy Inc. Q3 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask questions during this time, simply press star followed by number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you, and I would now like to turn the conference over to Lexington May, Vice President of Investor Relations. You may begin.

Thank you.

Good morning, and welcome to Fluent Energy's third quarter 2025 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 sections of our website at FluenceEnergy.com. Joining me on this morning's call are Julian Labreda, our President and Chief Executive Officer, and Ahmed Pasha, our Chief Financial 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 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 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 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 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 in today's call. This morning, I will briefly review our Q3 results and then address the impact of recent legislation, which we believe provides a strong foundation for the future of our business. I will also provide an update on the current market environment and the progress we made in executing on our strategy. ADMET will then cover our quarterly financial results and 2025 outlook in more detail. Starting on slide four, I am pleased to report that since our Q2 call, as we expected, we signed two contracts in Australia, worth approximately 700 million of combined revenue. One of these countries is the largest contract in our history. Additionally, we delivered on our first domestic content product, which we believe is the first domestic content compliant battery storage system delivered in the U.S. We're ramping up our U.S. production and working through some typical production ramp-up issues as we scale. And finally, all of our contracts that were halted in the U.S. market due to tariffs and regulatory uncertainty are now reactivated and moving forward. Turning to slide five and our Q3 performance. First, we ended the quarter with approximately $4.9 billion in backlog Since June 30th, we had added to our backlog approximately 1.1 billion of contracts, including the two Australia contracts that I mentioned. Second, we recorded approximately $603 million in revenue, which was below our expectations, mostly due to delays in ramping up volume at our U.S. manufacturing facility. We expect to recover this revenue in fiscal 26 as production rates at these facilities continue to improve and reach their targeted capacity levels. Third, despite this revenue shortfall, we generated a 15.4% adjusted gross profit margin, well above our target for the quarter. And our annual recurring revenue increase to $124 million. And finally, we closed the quarter with more than $900 million in liquidity, including approximately $460 million in total cash, which we believe allowed us to continue operating from a position of financial strength and provide significant flexibility in the current market. Please turn to slide six. Since our last call, several developments have reshaped the energy policy landscape in the United States. The One Big Beautiful Build Act, or the OB3, came out with strong support for battery storage. It differentiates best from other sources of generation by recognizing our technology as a dependable and dispatchable source of electricity. much like nuclear or gas plants. This morning, I would like to highlight four provisions of the OV-3 that provide support to Fluent's U.S. strategy centered on domestically produced energy storage systems. First, the OV-3 extends the investment tax credits for standalone storage through 2034. Second, It establishes new restrictions on the base ITC, limiting eligibility for Chinese equipment. Third, imposes tighter and increasing over time FOC requirements on the 10% domestic content ITC bonus. And fourth, it adds FOC restrictions on Section 45X manufacturing credits. We believe that these provisions enhance our competitive position. As one of the few companies currently capable of delivering domestic content energy storage systems at scale, we're seeing increased customer interest and growing opportunities that reflect the scarcity of compliance solutions in the U.S. storage market. Turning to slide seven, as I noted, The OB-3 adds FBOC restrictions to the Section 45X tax credit, limiting ownership, control, and material sourcing from certain countries. We expect that the forthcoming Treasury rules implementing these restrictions will be workable. And we are actively engaged with our suppliers to ensure compliance by the deadline next year. Here I want to highlight two important topics. First, we are looking at multiple options, none of which requires any significant capital beyond liquidity needs we have previously earmarked, thus not requiring us to raise additional equity. And second, the increasing domestic content thresholds under OB3 favors our established U.S. supply chain. which positions us well to deliver compliant cost-competitive system in this evolving regulatory landscape. Turning to slide eight, the significantly higher tariffs on China proposed by the Trump administration and the uncertain tariff environment overall were the primary reasons for the halt in contracting activity last quarter. More recently, though, the tariffs on certain Chinese battery components has been reduced from 155.9% to 40.9%. This has restored a level of predictability that has prompted customers to resume contracting discussions. We are now seeing early signs of renewed U.S. order activity. supported by our flexible contracting model, global sourcing, and strong customer relationships. As I mentioned earlier, all our contracts that were halted in the U.S. market due to tariffs and regulatory uncertainty are now reactivated and moving forward. Separately, the Department of Commerce issued a preliminary 114% duty on certain Chinese-origin graphite material, with an estimated $5 per kilowatt-hour cost impact that is manageable and reflected in our guidance. We are pursuing alternative sourcing and believe these rulings, along with recent legislation and tariff changes, reinforce the value of our U.S. content leadership and diversify supply chain. Turning to slide nine, I would like to touch on the competitiveness of energy storage. The data is increasingly clear. Battery storage is now one of the most competitive solutions for meeting capacity needs and is superior to gas storage. It's not just about cost. It's also about speed and scalability. Battery projects can be permitted, sited, and deployed far more quickly than new fossil generation, making batteries a flexible tool for utilities and grid operators navigating rapidly growing demand. We've already seen this shift in real-world operations. In June, batteries supplied 26% of CAISO's evening peak demand. Surpassing gas for the first time, that's a landmark moment for our industry. And a clear signal that grid-scale storage is no longer a futuristic concept. It's here, it's working, and it's scaling. Turning to slide 10. In addition to competitive costs, we're also seeing an expanding addressable market for vests. One of the most transformative trends we've seen in the energy landscape is a rapid growth of data center demand, driven by AI and machine learning workloads. These workloads are not only energy intensive, they are also highly variable. Training large AI models or processing inference tasks can lead to sudden spikes in power consumption. placing immense strains on the grid and creating localized reliability challenges. This is where battery energy storage can play a critical and unique role that cannot be filled by conventional sources of generations or renewables. BES can act as a buffer, absorbing rapid surges in power and releasing it during high-demand intervals. effectively leveling out the fluctuations that come with AI-driven compute cycles. What's more, batteries can be co-located at the data center itself or deployed at the transmission or distribution level, offering both behind-the-meter and grid-level flexibility. That's a key advantage in markets with interconnection bottlenecks or constrained infrastructure. Fluence is engaging with leading data center operators to develop storage systems that meet these fast-changing power demands, providing real-time flexibility for some of the grid's most dynamic loads. Initial estimates place the demand for these solutions at $8.5 billion through 2030. Turning to slide 11. Coming back to our Q3 performance, we deliver strong double-digit growth margins driven by discipline execution, cost controls, and supply chain optimization. Our product mix, pricing strategy, and scale are sustaining higher margins in a dynamic market, reflecting a structurally improved margin profile and supporting long-term attractive returns. These results reflect the success of our commitment to profitable growth that we laid out a few years back. Turning to slide 12. As of June 30th, our backlog was approximately $4.9 billion, providing strong visibility into future growth. Since quarter end, we have signed approximately $1.1 billion in additional contracts. including the approximately 700 million from the delayed Australia projects. The backlog is well diversified across North America, EMEA, and Asia Pacific. Momentum remains strong in Asia Pacific and EMEA, and we are seeing early signs of recovery in the U.S., as TIRES-related uncertainty eases, and the enactment of OB3 addresses concerns about risk to the regulatory environment. Our domestic content compliant product, flexible contracting, and resilient supply chain position us to capitalize on this rebound. Our pipeline has grown to $23.5 billion from $22 billion last quarter, underscoring broad global demand. This concludes my prepared remarks. I will now turn the call over to Agnes.

Thank you, Julian, and good morning, everyone. Today, I will review our third quarter financial results and then discuss our liquidity and updated outlook for the remainder of fiscal 2025. Turning to slide 14, starting with our third quarter performance, we generated $603 million of revenue. This brings our year to date revenue to 1.2 billion or 46% of expected full year revenue, which is consistent with our prior year results. Q3 revenue was approximately $100 million or 15% below plan due to a slower ramp up at our new U.S. manufacturing facilities, particularly at our recently commissioned employer facility in Arizona. Enclosures are the final stage in the production process and therefore the gating item from a revenue standpoint. We have already seen recovery milestone met across our cell, module, and employer facilities and expect to reach targeted production levels by the calendar year end. I would note that our delivery commitments have sufficient time contingency to cover this delayed ramp-up. Thus, we expect to continue delivering products to our customers on time and on budget. Our Q3 adjusted gross margin was 15.4%, which reflects solid execution across our portfolio, particularly in Europe and Asia, where we generated more than half of Q3 revenue. Our adjusted EBITDA was approximately 27 million, which reflects the higher margins carried by the international projects during the quarter. Turning to slide 15, we remain focused on maintaining strong liquidity to support our operations. We ended the third quarter with more than $900 million in liquidity. This includes approximately $416 million of cash, with the rest coming from availability under our credit facilities. I'm also pleased to report that last week we executed a new $150 million of supply chain facility. This is Fluence's first ever unsecured facility, which carries an all-in interest cost of approximately 6% and is available to us to meet working capital needs. We appreciate the continued confidence of our relationship banks who share our vision and believe in Fluence's long-term growth potential. On a pro forma basis, this brings our total liquidity as of June 30th to more than $1 billion, giving us additional flexibility to execute on our future growth plans. As I mentioned on our second quarter call, we expected to require a couple of hundred million dollars of working capital during the second half of fiscal 2025. During the third quarter, we have already funded approximately $150 million of that. mostly to purchase inventory, which now totals $650 million. The majority of this inventory will be used to meet our near-term customer commitments. Accordingly, we don't foresee any material additional funding needs in the near term, and we expect to maintain our strong liquidity, which is critical to supporting our growth plans. Turning to slide 16, next I will review our financial guidance for fiscal 2025. We now expect revenue to come in at the low end of our prior guidance range or approximately $2.6 billion. As I noted earlier, the delays in ramping up our U.S. manufacturing facilities have had the impact of shifting approximately $100 million of fiscal 2025 revenue into fiscal 2026. With respect to other guidance metrics, we are reaffirming our ARR of $145 million by the end of fiscal In addition, we are reaffirming our adjusted EBITDA guidance range of $0 to $20 million. We also continue to expect our full-year 2025 adjusted gross margin to be between 10% and 12%. Despite the macro headwinds that have occurred this year, such as tariff and legislative uncertainty, we have continued to take necessary steps to manage the business for profitability and cash flow. And this is reflected in our results. For 2026, we will provide formal guidance on our year-end call in November, consistent with our prior practice. We intend to base guidance on backlog coverage of 80 to 90%, which will represent higher confidence in our revenue and EBITDA forecast compared to the historical practice of 65%. Today, we have fiscal year 2026 backlog of $2.5 billion. In summary, we remain confident in the long-term prospects of energy storage in general and particularly influence its ability to deliver maximum value to our shareholders and customers. With that, I would like to turn the call back to Julian for his closing remarks.

Thank you, Ahmed.

Turning to slide 17, in closing, I will highlight the key takeaways from this quarter's performance and our outlook moving forward. First, the market for energy storage remains robust globally. More importantly, we have started to see the U.S. market activity pick back up after the pause we saw earlier this year. driven by a very supportive backdrop from recent federal legislation and some easing of TARES uncertainty. Second, we're actively working with our supply partners to structure our supply arrangements to achieve compliance with the new requirements under OB3, including the FOC provisions. And we'll continue to do so as new regulations and guidance are issued. We're working towards these being completed ahead of the deadlines under the OB-3. Third, there is a strong business case for battery storage, as battery technology is now cheaper than gas and is uniquely positioned to adapt the growing AI data center power demand to grid conditions. Together, these factors reinforce our confidence, influence, ability to excel in today's environment, and delivering value to our stakeholders. With that, I would like to open up the call for questions.

At this time, I would like to remind everyone in order to ask questions, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question is coming from the line of Brian Lee. from Goldman Sachs. Please go ahead.

Good morning, Brian.

Thanks for taking the questions. I guess first, when I look at the guidance for the rest of the year, fiscal Q4, it implies gross margin. I know you guys don't like to focus on it too much, but you had a really good gross margin in Q3 here. Q4, it's indicating something south of 10%, so below the low end of the guidance range for the year, even though it's a big revenue quarter. So can you kind of talk about the puts and takes on margin into the year-end quarter? And then also, you've got a decent amount of backlog heading into 26, some really good Australia activity here that presumably is going to show up in your 26 quarter. execution. What are you seeing in terms of margin outlook for the backlog? Are we tracking ahead of kind of the 10 to 12 that you did this year? Just trying to understand what to read into Q4, but also what you see in the backlog at the end of 26.

Great. Thanks, Ryan. On the margins for the fourth quarter, the fourth quarter has a lot of U.S. revenue. A lot of the revenue in the fourth quarter comes from the U.S. and it has been affected by the new tariff. We disclosed in the last call roughly $30 million, which generally represents 1%. So that's what's driving, I would say, the softer margin numbers for the year. But from an execution point of view, putting that aside, the other parts of the execution are going, putting the tariff aside, I mean, the other parts of the execution are going very well. We're working hard to take this as high up as we can. So, you know, we're delivering, things are working well. but that's the driver, essentially. You know, as you know, some, we had to take some of those, you know, tariff costs into our, into our results. So, that's driving it. In terms of 26 guidance, I mean, you know, on gross margins for 26, I don't want to provide guidance today, but, on that number, but, What we're seeing is roughly in line with the 10 to 12 that we're giving you that we set for this year. Still some work to do that we're working on, and hopefully things will work out better, but that's where we are at this stage.

Okay, fair enough.

And then Julian, I know you talked a lot about the You had a couple slides here around the policy actions of late and how they impact your business. I know there's been a lot of investor focus and concern around FEOC restrictions and how Fluence fits into the new landscape with your relationship and the ownership structure of AESC. Can you give us a bit more elaboration around how you're navigating that and how you're positioned with respect to FEOC and AESC and if there are actions you need to take in what time frame and what potential investments you might need to make to make that happen. Thank you.

I'll tell you at first, I know that you all have expressed some concern around it. On the macro view, our view has always been that the U.S. battery storage market was going to be a domestic content market. That has been our view even before the IRA and all of that. Think politically about the role that this technology was going to play, how this technology is built, it was going to be difficult to see it being dominated, that the U.S. would allow this to become dominated by Chinese suppliers. So I have been a view from day one, and that's what we've been working on. And, you know, we started this ahead of the IRA. We cleared when the IRA came in. We got in, you know, financial support. And I think now with the OB3, it kind of confirms our view, you know, of that case. So, you know, we don't see it as a threat. It has always been the basis of our assumption planning. I just wanted to give you that general statement. That's very, very important how we see this company. In terms of ASC, which is what you're asking, there are three drivers of 45X credits for any supplier. Ownership cannot be owned by a company that is from certain countries. It cannot be controlled by a company from that group and materials have a limitation of how much of the materials can come from one of the certain countries. We're working on the three of them. You know, ensuring that we have the supply chain that meets the OB3 requirements and we have developed with a, or ASC has developed, we have worked together on developing that supply chain, which is from source out of that area and we need to do, we're working on it. We already have converted some of it. We have many, many suppliers that are going through the process, and we believe our view and that we will be ready by the deadline under the Act. Control is more of how you're going to manage your O&M. And, you know, we've been talking to our lawyers. It can be managed effectively. Ownership is what you all are, you know, are a little bit concerned about. I know it's understandable. You know, we have been working with AAC. AAC is looking at different options, and we are looking at different options. And we believe those options, there are some opportunities, some of them are very viable, that we can execute them on time on the OB3 line. And when we look at us potentially entering into the ownership of the line, when we have looked at that option, it's one of them, not the only one. We believe that we can do it and we can make it work within the cash flow with the financial liquidity that we have today. We do not see any need for any capital raise. And we believe that transaction can be done on time with it. And it's not that complicated. So, you know, I'll tell you, when we looked at the act and we looked at the effort to convert to the act, you know, ownership has been one of them. I think we can, they are not, not only us, there are other opportunities here that they're working on. we can do and we can transact on time to meet the actual requirements. So generally that's the view. And generally, if I can repeat the way I started, if you don't mind, we don't see the FEOC restrictions as necessarily a threat. We see that this in a way confirms our view of how this market was going to evolve. We have been investing on this. We have been moving supply chains to the U.S. It's challenging, and everybody thought that it could not be done, and we're doing it. We are optimistic that the regulatory environment is supporting our view of the market.

I could just squeeze one last one in. Again, you're not going to give 26 guidance, but you know, we're here at the end of almost end of fiscal 25. Uh, you had a lot of good contracts come in in July and August, so, you know, good momentum, but you're almost done for the year. And you talked about at least high level guidance should be 80 to 90% covered. Um, you know, just as you think about maybe being more conservative and having more, um, you know, more visibility into the upcoming guidance range that you're going to give on the next call. But, Is that the way to think about it? You're sort of 80% to 90% covered, and you got this sort of $2.5 billion of backlog thus far through end of July, early August, and whatever you book between now and the rest of the quarter is sort of the starting point of reference for what guidance should look like for next year?

We will base guidance on the backlog we have for 26 at the time of the earnings call. a couple of months to move forward. We have a good pipeline going forward, so we expect the 2.5 to be a higher number of the time. But I'm resolute of guiding to 80 to 90. I think I don't want to go over what happened this year. The market in the U.S. picked up. Things are moving forward. We see good prospects not only in Australia, where we have done a good job, but also in EMEA. You know, SayToon will provide you the actual guidance, but it will be based on the 80% to 90% of the backlog we have for 26 starting on. at the end of the call.

I don't think you need to leave anything in between the lines here. I think there's more to tell you how we are thinking about the guidance when we give our guidance from November. Hopefully, we will continue to do what we have done in the first month. In July, we have signed a Billion One contract, so I think hopefully we will maintain this momentum, but that is where we will end up. The goal is to give you guidance. We have more confidence. unlike in the past where we had 65% coverage and we had to sign contracts and we missed the numbers. So that was the event.

I don't think there's anything beyond that. That's right. Okay. Thanks, guys. I'll pass it on. Thanks, Ryan.

Thank you. Your next question is coming from the line of Dylan Nassano with Wolf Research. Please go ahead.

Morning, Dylan. How are you?

How are you? Can we just start with, comments on data centers. So correct me if I'm wrong, but I mean, it sounds like maybe you're engaging a little more directly with the data centers. Can you just kind of walk us through that? Have you actually signed any kind of new contracts there?

No. So this is a new and emerging need that, you know, as you know, we've been serving data centers indirectly through IPPs and other players who actually provide services to us. But now we have this emerging need that AI data centers who are training or managing complex AI processes have very volatile energy consumption. And there's no other way of resolving that issue and not affecting the grid that adding battery storage. So this is an emerging need. It requires a lot of technical work, especially the response time of the batteries needs to be very, very quick. I want to give you a number not to give my competitors a view, but it requires very, very quick response time to ensure that the electrons in no way affect the algorithms that are learning in the process. So that's picking up. We have a pipeline, but we have not signed an agreement. And as I said in the call, we're working on the solution. The solution is, we think we have it, but, you know, we need to test it and be sure that we have it, you know, available for our customers. But it is our view, this in a way, the reason why we included in the script is not only because clearly it's data center opportunity, but it also shows the expanding scope of products that battery storage can offer. And I think that's where, or solutions, if you want to put it there. And I think that's where, having our view from day one, that the value of this technology should not be only looked at, you know, integrating renewals into the grid. It's much broader, and we'll continue to play a very broad loop, jobs, more broad, more jobs, both behind and in front of the meter as we move forward, so.

Dylan, you're getting cut out.

I'm sorry.

Yeah, sorry. Yeah, your next question is coming from David Arcaro with Morgan Stanley. Please go ahead.

Hello, David.

Good morning. Morning. I was wondering if you could maybe give a little bit more color on just how the U.S. demand picture is trending following the passage of the OBBB and was curious if you're seeing the executive order uncertainty impacting the pace of bookings given that it might impact the solar outlook and any battery attachments to solar?

Well, it's picking up. We remember we had to halt the execution of a few contracts we had signed. All those contracts are now moving forward and are moving forward to execution. There will be generally 26 revenue rather than 25. So very active. We have signed a few contracts as of late. And we're seeing more and more opportunities come up. We haven't seen people concerned today, at least with the projects they're having, concerned about the executive order. I think that the projects that we're working on are projects that people feel are very much solidly within, you know, start of construction. They're already, you know, buying the stuff and putting it in place. So I think at least the projects that are that were signed in which our projects are very, very mature would not be affected or are not affected.

Great. Got it. That makes sense. And let me see. I was wondering if you could just elaborate on the ramp-up issues that you had. I think you mentioned it was at your Arizona facilities, but are those now fully resolved? Any lingering impacts or issues that you're managing through the end of the year?

Yeah, we had some typical ramp-up issues, you know, that come out of putting in place these production lines. In the case of the Arizona facility, we essentially did a technology transfer from what we were doing in Vietnam to the U.S., and, you know, some of the work processes and some of it needed to change to affect the U.S., and that kind of delayed the startup and the ramp. We believe we have it all under control, and we are in the process of starting to ramp up. And we believe that we will be, by the end of the year, we should be able to solve the problem. Unfortunately, we would not believe today that we'll be able to recuperate the $100 million of revenue that we have to move to next year. So we will meet our ramp-up objective for the end of the year. but it will not be enough that we will do more than, you know, from now to year end that will recuperate the 100 in revenue. So that's the reason why we have to be a little bit more. But there are typical, you know, typical ramp-up issues, you know, things that are small but get delayed, processes that need to be affected, processes that needed to adapt to OSHA rules, things of that sort that you only find out or you find out usually. when you are trying to ramp up production out of a facility. The quality of the work is very good. I was on that factory last week meeting the employees, looking at the people who have 40 of our engineers working with them, trying to resolve these issues very quickly, or actually helping them resolve these issues very quickly. And I'm really excited. And it's also, if I can give a little bit of an ad, nobody believed we could buy the enclosure, we can build the enclosure with U.S. steel. These are U.S. steel enclosures. You know, the view was that you could not do it, that it was too expensive, that the steel industry in the U.S. was not going to be able to do it. We now, we are, these enclosures that are coming out of that line are made with 100% U.S. steel. So we're very, very happy with the process and, you know, the We think this is the way to go forward, and we're believers in the U.S. industry. No issues that we have, but we'll make it happen.

Okay, excellent. Yeah, thank you so much. Welcome.

Thank you. Your next question is coming from the line of Julian Dumoulin-Smith with Jefferies. Please go ahead.

Hey, good morning, team. Thank you guys very much. I appreciate the time. Hey, Julian, how are you? Just a follow-up. Hey, it's a pleasure, for my name's sake. Just on this 26 number here, you know, on the 2.5, how would you think about that teeing up here in the next year? I mean, I know you talked about this 80% to 90%. I just want to understand, like, how you think about the line of sight and sort of the timing and cadence of when you see some of that backlog coming in. I mean, do you really see that number accelerating into the end of the year based on OPPB? And then also, can you speak a little bit more? I mean, it's notable the non-U.S. acceleration that you're seeing here, too.

So I don't want to provide guidance for next year, unfortunately. And we highlighted that number, and we highlighted the conservative approach. Remember, last year we guided with 2.6 in our backlog. Not this year. And we guided to 4 billion. So I didn't want to say 2.5 billion, and you tell me these guys are going to guide to 3.8. So that's kind of what we wanted to give you a sense. It's going very well. Things are picking up globally. we are in a very good position, but we're going to be a lot more conservative. That was a message, and I think that's the best message I can say. We are seeing very good momentum, and, you know, Stay tuned. Unfortunately, I don't want to give up. We cannot provide a view today.

We're not shutting down our shop. So I think our goal is to continue to grow and provide service to our customers and grow the business. So that's a goal. So let's stay tuned, but we will come and report. But our sales team is actively working, and we are adding more resources in sales.

That's right. Right. And maybe can you speak to a little bit of what you're expecting on FEOC here and how that's going to be implemented and how you see yourself vis-a-vis like the cadence of bookings? I know someone kind of tried to ask the same question earlier, but how do you think about that driving acceleration or just at least the clarity? Like when does that drive order activity? If folks are safe harbor here, perhaps they're a little... Hello, Julian.

You got disconnected. I didn't get to... Can you repeat again, please? Sorry, the sound in my part got cut out.

Okay, I got you. Look, keep it short. On the FEOC part, you have contracts where perhaps folks have safe harbored perhaps FEOC-exempt equipment. When do you think you'll start to see FEOC-compliant equipment orders really start to come in given the what you're seeing with the O triple B with the timeline there, as you think about it, right? Again, in theory, that might be somewhat lagged. Is that near term? Or do you think that there could be some changes here with the safe Harbor that would force folks to, to procure more FEOC compliant type products? And how do you think about that fitting into your business model?

Good point. Yeah. As you know, safe Harbor gives you a little bit of flexibility on meeting some of the FEOC restrictions. What we said for ourselves and with a, with our suppliers is to meet the actual act deadline, which all happens in the first half of the year, next year, unless we see any changes going forward. That's generally our view. We want to meet the deadlines that are in the act that they are, even though we'll have some flexibility meeting some contracts with things that are slightly different. That's our approach. That's the way we take it. We are taking a I want to call it a conservative approach, but we do not want to lose any of our first moving advantage on this. And I think that part of it is ensuring that we have that supply chain, that ownership and that control, you know, restructuring according to the law as soon as we can.

Got it. Thank you, guys.

Thank you. Your next question is coming from the line of Justin Clara with Roth Capital. Please go ahead.

Hey, Jocelyn. Good morning. Good morning. So I wanted to just follow up on gross margins here. It sounds like the tariffs in the U.S. might affect your gross margin into the fiscal Q4. So just wondering if you're anticipating being able to offset the tariff-related costs in the U.S., whether through pricing, you know, sourcing through your domestic supply chain here or other levers. And if this is a temporary issue, should we anticipate, you know, margins for the U.S., you know, being similar to your international margins over time and what that looks like?

That's a very good question. I think So this reflects the contracts we already signed that was already in our backlog and where we had some rules with our, some, you know, rules or some provisions in our contract, how we divided the tariff effect. The tariff effect on the contracts are a bigger number, but this is the amount, the 30 million is the net amount that we need to reflect in our numbers. And this applies to the contracts we already signed. New contracts come in, they will reflect the new cost structure. and we should see them going back to the normal margin levels of 10 to 15 that we have set for ourselves. This is a temporary situation. There might be some in the first quarter of 26 that still have these issues, so there will be some lingering ones, but I think the majority will be done between this quarter and the first quarter of 26. Got it.

Okay, that's helpful. And then just on the domestic supply chain here, wondering if you could provide an update on the ramp up of AESC's second production line. I think that was expected to come online toward the end of fiscal 20, your fiscal 26. Has that timeline shifted at all, given the recent policy developments? And then are you considering any alternatives for domestic cell sourcing at this point in time?

Good question. As you said, we do not need the second line until early 27. So that's still to be the case. And that's when you look at it, we can live with what we have with the one line going forward. We kind of put that line on pause during the OB3, you know, when things were moving up, people now forget. But, you know, remember the cows came with very strict rules and they're liberalized now. So we kind of put it on hold. Now we will bring it back on as part of our renegotiation on the FEOC. And it should come, you know, I would say probably a little bit later than the first quarter of 26, but it should work with our current volume. However, as you know, there are some challenges. We're also looking at other options just to ensure we don't play, you know, one. We don't dance to only one tune. So we are looking at other options just in case this gets delayed or we get a lot more volume than what we are thinking of or somehow the negotiations with ASC do not work as we expect for the second line.

Okay, got it. Thank you.

Thank you. Your next question is coming from the line of Amitakar with BMO Capital Markets. Please go ahead.

Good morning. Good morning, William.

Thanks for taking my question. Just real quick on kind of OpEx. You guys have historically tried to kind of, I think, grow that at half the rate of revenues. Looks like it's up kind of year-to-date versus the same period last year. Any kind of – and I know you guys have embarked on some kind of cost savings initiatives – Can you just kind of give us an update on where that stands and kind of maybe the timing of when we might start to see some progress on that front?

Okay. So, I mean, in terms of OPEX, I think generally long-term our view is what we have said, keeping our OPEX at half of our growth. However, for next year, most likely we'll keep OPEX flat compared to 2020. to 25. Why? We were expecting a significant growth in 25 in revenue that we were not able to deliver. And our cost structure, in a way, reflects part of it. So that's why I think that for next year, it will be essentially flat. But after 20 cents, it should go back to growing after 26 and 27 onwards. It should grow at half the rate of our top-line growth. That's the way you should think of it. And just to give you a sense of what we're doing, we are looking at our OPEX, especially taking a deep look at all our costs that are not sales or product development or R&D. And, you know, we invest in SAP, so we're looking at our financial costs, our control costs, human resources, all of that, you know, G&A that is not connected to either sales or R&D. and really taking a look and taking advantage of our investments in SAP and other systems that I think are helping. So that's what you should see. Flat for 26, and then going back again at half the rate of the top-line growth at 27 or more.

Thanks for that. And then just one quick follow-up. It looks like ASPs were kind of in the low to kind of mid-300s, $1 a KWH during the quarter period. If I look at your backlog, it implies something in kind of the lower 200s. I don't think that's necessarily a new phenomenon, but is there any kind of additional kind of revenue that you guys end up kind of booking on the product side that allows you to kind of realize a higher kind of realized ASP versus what's implied by bookings?

no it's in line with what i think if you look at our order intake last year i mean we were in 300 so i think it's a timing lag if you wish in the revenue that you are seeing into three those are the contracts we had signed last year and if you go back last year we had in that range 300 plus the only other thing you have to consider is the epc the scope of the projects you know for example in europe This quarter we have more than 50% of my revenue this year is from international businesses where I have EPC as part of the scope. And that by itself increases the price 20-30% more than the base equipment price, which in the U.S., for example, we normally don't do EPC, just the product.

And I would like to, I mean, if you, I'm in the, in the promotion mode today, but yeah, that's true. I mean, we are being able to follow the ASP reductions, you know, in line with whatever, you know, with, with our competitors, no, and we are finding good projects with good margins that significant lower ASPs. I mean, some of you had concerns or ability to do it. We, we've been able to do it with, you know, our investments in R and D are thinking about our projects. So, you know, In a way, clearly, the AP is a threat, but at the same time, it's an opportunity for us all.

Got it.

Thank you.

And like I said, yeah, thanks. Thanks, Amit. All right.

And your next question was coming from the line of Chris Dendrinos with RBC Capital Markets. Please go ahead.

Yeah, good morning. Thank you. Good morning. I'm doing well. I wanted to go back to just kind of some of the manufacturing commentary here, and I guess I'm curious, you know, are you in a position going forward to support a ramp from, I guess, AESC and then separately related? If you do look at a different supplier, can you support the, I guess, the cells coming off that line, you know, maybe if they're, you know, Prismic or Pouch and just trying to understand that? I guess your flexibility to support a different cell structure if you switch suppliers.

We clearly are, currently our supply chain is designed to integrate the ASC batteries. If we were to bring another supplier with another technology, there will be a little bit of work in bringing it up. It's not a lot of work, but it will require some work. However, we do not have any need for new supply during the rest of 25 or 26 will be early 27 needs that we will have enough time to adapt to it.

Got it. Okay. And then as a follow-up, maybe just going back to the last question on pricing dynamics and maybe just broadly, it sounded like in response to a question from Roth that maybe there's pricing increases going on a bit in the U.S. as a result of tariffs. I guess, is that true? And then I guess globally, are you still kind of seeing some incremental pricing pressure or is it kind of dying down? Thanks.

Yeah, good question. I think the U.S. will, over time, will see some pressure on costs. However, today, most of the projects that we are looking at are projects that are, you know, safeguarded under the old IRA provisions, so I don't expect that you will see significant price increases for the next maybe six to 12 months. They will be under the older system. But generally, I think that we should expect some additional increases going forward.

That's the way you should think about it. Thank you.

Thank you. Your final question is coming from the line of Dimple Gassay of Bank of America. Please go ahead.

Hi, good morning. Good morning. Thank you. You know, what are you seeing in the market as far as Chinese players front-running fiat and tariff escalations, you know, ahead of the end of 2025? And maybe anything you can add on what customers are saying on that front. And then I have a follow-up.

Well, you know, we've been selling domestic content, production mostly in the U.S. So those are the customers who we're working with. So the customers who like Chinese equipment, we have not necessarily. So I don't know, to tell you the truth, where we are. They don't, Chinese equipment does not compete with our domestic content offering. So, you know, people are probably from running it. Maybe they are, but it's for other customers, not the ones we're working with.

Perfect.

For projects that are not within our, within our, well, we, the economics of, domestic content on the projects that are safeguarded under the IRA and the new projects is very, very strong and continues to be very strong. And we feel very, very confident that that market will continue to expand.

Okay. And then in the current backlog, what is the tariff sensitivity that perhaps wasn't already baked into the contracts, if any? And are there any potential cancellation risk or mutual terminations that might still be, you know, on the cards?

In the U.N., we don't see any terminations due to tariffs. I think that we have said the contracts that we stopped because of the tariff risk and, you know, how they seem all reactivated, and now with the 40% tariffs this year, and it's going up to 58, I think everybody kind of, you know, the provisions that we are in the contract work. Yeah, and, you know, they're already, they are in our guidance for this year, and, you know, so you shouldn't expect any additional changes.

Got it. Thank you.

Thank you, Imp.

Thank you. I will now turn the call back over to Lexington May, Vice President of Investor Relations for closing remarks. Please go ahead.

Thank you for participating on today's call. If you have any questions, feel free to reach out to me. We look forward to speaking with you again when we report our fourth quarter and full year results. Have a good day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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