Fluence Energy, Inc.

questions, I guess, on hyperscaler MSAs. I'm not sure how much you can provide, but I would love to maybe get some detail around quantification of the size of the deals, how many megawatts, over what years, and is it over multiple sites that are already identified? Maybe just if you could elaborate a bit more on kind of the scope of these two MSA deals and how meaningful they are in terms of quantitative impact. Yes.

So I'll tell you, the majority, or the great majority of our pipeline is supported by deals that are behind these two MSAs. And these deals will, and that pipeline is several different data centers around that they have around the US mostly. So that's what it is. In terms of financial, you know, And our current pipeline is 12 gigas, so that gives you a sense. We're not providing the financial numbers around it, as it's too early and we're competing, as you know. So we are not providing those numbers today. But my expectation is that as we end the fourth quarter and bring, hopefully, a good number of these projects, and I can offer numbers including everything, and though not necessarily be providing commercial, I will provide you more financial metrics of this.

Okay, fair enough. Yeah, we'll look forward to that. And then maybe just zooming out a little bit, because this is a new business for you and obviously very, very high growth potential. What's sort of the deployment schedule? I guess, can you help us kind of visualize as you go into some of these, whether they're RFPs or bake-offs, What's the timeline for submitting your design and your proposal to when one is finalized and then when you get a PO to when you're going to deliver to site? What are the sequence of events and how long is that?

They are in a hurry, generally. Most of these projects, as I said, the pipeline we have, we believe will convert into orders. during the year, within a year. So quicker than generally when a pipeline that comes into our things and very, very tight schedules for delivery that we can meet because we've been working on our speed for some time. So I cannot give you today a specific rule. This is what I want, but generally I'll say a lot faster than the conversion rate we have for our order from pipeline to orders and a lot faster of the conversion rate from orders to revenue. than what we do in our normal utility and developer, especially with these two hyperscalers. The case of the developers, it's a little bit different. Those are more project-type. They're looking for pyramids and stuff. So those will probably take a little longer.

OK, understood. Maybe last one, if I could squeeze it in, just on the gross margin bounce back. I know that's been a focus for you guys for a little while, so nice to see it back to the range. Even on the lower volume here in 2Q, that was a pretty impressive gross margin rebound. What does that maybe entail for the back half of the year? Is there volume leverage and some of the efficiencies from this quarter that can spill over? Is there any potential upward bias to margins as you move through the rest of the year? I'll give Ahmed to... Hey, Brian.

So in terms of the gross margin, you're right, an 11% gross margin we earned, which is higher than what we had in Q1. In year to go, we just reaffirmed our guidance where we said 11% to 13%. So we will be somewhere in the middle of that range for year to go. I think at least that is our goal is about 12%. So we will definitely be better than what we earned in Q2.

Okay. Thanks, guys. I'll pass it on.

Thank you, Brian. Good morning.

Thank you. Our next question comes from Dylan Nassano from Wolf Research. Please go ahead.

Hey, Dylan. Good morning. I just wanted to check on the broader data center pipeline. Any updated thinking there in terms of how much of that kind of fits your previous criteria of Pipeline versus leads. And then I noticed there's this six gigawatt hour kind of target for what gets included. Just how did you come up with that number? Any thinking around there would be helpful. Thanks.

I'll tell you that there are numbers for our pipeline and leads. Our pipelines went up like 30% from last quarter. We concentrated a lot on the hyperscalers, and so a good driver of that has been the hyperscalers, who are roughly at 12 gigas. And our leads are three times that. No, generally the same, essentially the same as we had last quarter. We converted some into pipeline, and we were able to replenish it. That's the rule. The six gigas, I don't know what you're referring to, Dylan. I'm sorry.

It's on slide six at the bottom. It says classified assistance, six gigawatts hours or more. Let me check.

But in any event, strong growth. A great opportunity here, and I think that by concentrating on hyperscale, if I can, you know, while we get the point on this, we are in a market segment that we expect will transact faster and that we will convert into execution quickly.

Yeah, Dylan, that's six gigawatt hours. It's not a pipeline. That's how we classify an LDES project, so anything over six gigawatt hours. Okay. Sorry. Yeah, that's for long duration storage.

Okay. Yeah, yeah, those are long duration stories, so they need to be more than six hours, you know, to be long duration as a definition of long duration for us. For us, yeah. So six and more. Okay, that makes sense.

Yeah, I didn't know what it was. Sorry for that. Yeah, my mistake. And then just to follow up on the quarter, I mean, it looks like revenue was kind of lower than analyst expectations, even kind of including this $80 million. So I just wanted to check. Was there any other seasonality in the quarter beyond or other disruptions beyond the shipping stuff that you guys noted?

No, there was none. I think if you recall when we gave our guidance, Q4, we did see about one-third of our revenue in the first half and the rest. Given, frankly, we don't give quarterly guidance, I think that was the only reason why there's a difference. But overall, from an internal perspective, as I mentioned, you know, The $80 million of this shipping delay was the only reason why we were lower on the revenue for Q2, but the shipment we have already received, so we feel pretty good on the year to go.

And if I can add one point, our indication of where we see revenue divided among quarters is more indicative. So you can model it and stuff, but we don't run the company on a quarterly basis, to be very clear. We run it on a yearly basis. That's why we intend to meet our yearly numbers. We try clearly to what we indicate to meet it, but we do not provide quarterly guidance. I know it creates some confusion, but it's a way of trying to help you model and at the same time give the flexibility to manage things effectively and efficiently within the company.

Sounds good. Thank you.

Thank you, Dylan.

Thank you. Our next question comes from Joseph Osha from Guggenheim Partners. Please go ahead.

Hey, Joe. How are you?

Just fine. How are you? Thanks for taking my question. I wanted to drill down a little bit on two product details. Julian, you said that hyperscalers and data center more broadly tends to be more about product quality or power quality. is the implication then that we're seeing a shorter duration configuration, say, you know, an hour or two as opposed to four? That's my first question. And the second question, just to confirm, you know, thinking about the inverters, are you generally being asked to deliver a response time of 10 milliseconds or less? Those are my two questions. Thanks.

Yeah. And the first one, they tend to be shorter duration. You're right. So they, they are a, you know, say, we don't provide anything smaller than two hours, so it's two hours is what we do, and that's where the market is trading, but they tend to be shorter than that. Even though our main point to the data centers, and we engage with them, and they develop in hyperscale, is that the great beauty of our technology, compared to other technologies that are trying to resolve this, is that we can stack business models on top, and we can do quality of power, help them with, you know, doing some of the work of resolving some of the deficiencies of interconnection or backup. We can help them on some on voltage. We can help them on many, many fronts. So that's, I think that as they're looking at the asset, they are expanding also their view of what this can do. That was on that point. On the second one, generally I will say that, sorry, the second one, can you repeat? We're not providing the actual number, but it's very short. That's the way I would put it. We're not providing the actual number because it is proprietary to the solution and to the people we're working with, but it is very, very short. significantly shorter than 100 milliseconds we tend to do for transmission systems and European qualifications.

And just to follow up on that very quickly, that would probably, I assume, create the need for inverters with, you know, wideband gap MOSFETs and some of the exotic stuff.

Yeah, yeah. You need inverters that can provide that capability. That capability is very much dependent on the inverter you use. We work with inverter companies that do it. We have done this in Europe for many years, so we know exactly who do this, how they do it, and their strategy very well. So we have that. And our advanced controls work very well with these inverters and have the processing time to ensure the whole system responds on that, not behind the inverter as it's supposed to.

Okay. Thank you, guys. Thank you very much.

Thank you. Our next question comes from John Windham from UBS. Please go ahead.

Hey, good morning. Nice result. I was wondering if you could talk about the U.S. storage market continues to grow at a rapid pace. Are you able to provide us sort of where you are on being able in sort of capacity in gigawatt hours to provide over the next 12 months? And then just sort of thoughts on the roadmap to keeping up with the market growth over the next two or three years?

Yeah. Yeah, we see the U.S. market growing, expanding significantly. So that's great. What we have, we have, as you know, we have our domestic products, our flagship solution in the U.S. We have the ASC capacity. We enter with another supplier for additional capacity, and we are looking at additional capacity for the 28 going forward. So we have enough capacity to cover the pipeline we see and the conversion rate we expect. We don't provide specifically the numbers, but it's multi-giga capacity, and we have seen no problems getting the – and we are putting the whole infrastructure that delivers that multi-giga operating in the U.S. with a domestic content offering. We can also import equipment if we need to, but our preference is to do the domestic content solution.

Perfect. Thank you. And maybe just a quick follow up. There's been a lot of commentary on the gross margin. But historically, some of the issue has been that operating OPEX as a percentage of revenue has basically been offsetting the positive gross margin. So just your thoughts on internal initiatives to get the OPEX number. down to drive bottom line profitability and free cash flow?

Thanks. Yeah, the operating cost out of percentage of revenue is essentially a function of growth, of growth over the top line. So if you follow it carefully, you'll see that our operating revenue goals, you know, it's very much followed. Our costs are very, very stable, and, you know, how much of our cost represents out of our revenue depends on how much we can grow revenue. So we have seen, and we have an operating leverage that we believe that we can grow this company, that we can keep our costs down at half the rate of growth of our top line, which adds tremendous value. And you'll see it when you look at the numbers, it's very, very clear. It's an operating leverage formula. Unfortunately, as you know, last year we didn't grow. So that's where the operating revenue, the percentage of revenue, of cost of revenue was a little higher than what we expected.

A goal is that we basically create the operating leverage, and we do have that. As the revenue grows, we will maintain that cost discipline, and the cost will be increasing at less than half of the growth in our revenue, as Julian just mentioned.

So I think that's our key focus from my perspective. Thanks so much. Thank you. Thank you.

Thank you. Our next question comes from Amit Sarkar from BMO Capital Markets. Please go ahead.

Hey, Amit. How are you? I'm very well. Thank you, Julian. Thanks for taking my questions. It looks like ASPs, if we'll get revenue and kind of your revenue recognition megawatts for the quarter, we're up pretty nicely quarter over quarter. And I was just wondering, was there a lot more EPC work this quarter, or is this kind of maybe the level we should be thinking about for the balance of the year for modeling purposes?

Yeah, thanks, Amit. This number, as you said, moves up and down quarter after quarter based on the mix of the cells. So I wouldn't read too much on it. We are designed to meet our financial objectives independent of where the ASPs go up or down. And our planning assumptions are they will continue coming down. And we are designed to make money and make it successful. And I'll say even more, every time we have seen ASPs come down, what happens is that demand expands at a rate that is much bigger than the reduction in revenue that comes out of the lower ASPs. We, you know, I wouldn't rate too much on it. I know that's something that you care about a lot. I mean, the analysts care a lot about, but it is not a big driver of our business financial results.

Great. And then I know you had mentioned earlier in answering one of the kind of questions before about kind of your 12 gigawatts. And I think you said that the vast majority of that is data center related. Is that right? You know, is it a little bit over half or is it substantially all of that 12 gigawatt pipeline is data center related?

Yeah. So we have a 12 gigawatt pipeline of data. All of it is data center related. What I said that a great majority was connected to the two MSAs that we just signed. The 12 gigawatt hours, all of it is data center related, of which the great majority, more than 60, or a good portion of it, I want to give a number, comes from and supports these two MSAs, which is high. Understood. Thank you so much.

Thank you. Our next question comes from David Arcaro from Morgan Stanley. Please go ahead.

Hey, thank you. Good morning. I was wondering, are there other MSA opportunities that you're currently working on? Is that something that you would expect most hyperscalers to be pursuing on the storage front?

Yeah, we're looking at it. These are the two that had more urgent needs, but we're looking to work with all of them. So we believe their problems are similar and that we can meet their needs with our capabilities. So we hope to work with all of them.

Yeah, makes sense. Are there any active now or any sense of timing as to when those opportunities might pop up? It seems like they're all very active on the data center side of things. And I imagine looking at storage. So is that also, you know, a near-term opportunity?

I think that it, well, I cannot give you a real sense of time, you know, when they will happen. I think it depends on where they are and what they're doing. I mean, the two that we have signed are people who are very clear on what they need. They're in a hurry to win, and they seem to be ahead of the market, if you ask me. So, you know, but... We're working with everybody. We are contacting all of them, working with them, and the chess is to our head.

Got it. Okay, great. And then the 50% proportion of new customers I thought was notable. I was just wondering, could you give any characteristics of kind of who those customers are? What type of customers they are? Is it the traditional profile of developers and utilities that you would see or any specific locations? I'm curious if it's a new profile.

This is a result of the great work that Jeff Monday, who joined us as our VP of Growth, has done since he arrived. He really had invested significantly in business development, identified all these customers, which are, you know, I'll say, were not the typical we used to work with before, but are the developers or utilities that we have not contacted in the past, and now we have made significant progress. And this is a global effort that we're doing, not only in the U.S., but outside of the U.S. But I will say that, as we said during the call, these are customers that are within our normal or our core customer segments, you know, utilities and developers globally. But great kudos to our sales organization that has really invested into developing and bringing these new customers into the mix.

Right. Okay. Understood. Thanks so much.

You're welcome. Thank you. Our next question comes from Ben Callow from Baird. Please go ahead.

Hey, thanks for fitting me in here. Just back on data centers, hey, good morning. Could you just talk a little bit, you know, because of the specific product they're looking for and the size, if you could talk about just pricing and margin, how we should think about that on these bigger deals? Sure. And then also, my second question, just outside of the U.S. where you see pockets of demand, and then just remind us how margin compares internationally versus the U.S. Thanks very much, guys.

In terms of data centers, I would say, as we said, duration shorter. And I'll say the margin is in line with our guidance of 10 to 15. That's what we'll say. So generally, that's what it is. And both of their needs are quality of power, which we do this for grids globally. We're doing it for them here, and I think it works well. So in terms of margins, margins change market for market. It depends on the competitive environment. We go within our 10 to 15 range, but there are markets that are a little bit more or that go through. more competition than others. I will say that, you know, markets like the U.S. and the U.S. is probably a little bit on the high side, the U.K. on the lower side, you know, and then, so it changes a little bit on, no, it changes market per market, but our 10 to 15 range works for all these markets.

Okay, thank you.

Our next question comes from Maheep Mandloy from Mizuho. Please go ahead.

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uh for the uh best industry or is it high c rate discurances on the supply side if you uh need to make any changes on the cell sourcing for that right we we make any battery great you know as well we make any battery great so you know we the batteries is a commodity whatever they need i think the main driver is ncd ensure and that comes out our package our capability so no real need on on clearly LFP, nobody goes to the MNC for many reasons, but brand or supplier is not relevant for them. Whatever battery we put in our systems, we can make it do great things.

And then separately, like, we saw some battery suppliers proposing high-seeded batteries which go inside the data center for 800-volt DCs. Is that something of interest? Are you exploring or looking at outside the data center? So, thanks.

Yeah, yeah. We're looking at the, you know, our product roadmap includes not only this, many other elements that we're looking at to continue improving our offering to data centers and to ProSolutions. One option is this. I see rates, batteries that will go into that. I think there's some limitations, but it's part of our roadmap that we have for whether it will happen or not. We'll see. But it's not anytime soon.

Thank you.

Thanks.

Thank you. Our next question comes from Moses Sutton from BNP Paribas. Please go ahead.

Thanks for squeezing me in. Congrats on the great update. As these data center opportunities convert into reality, how do we think about the ratio watt for watt, meaning the watts of load to the watts of storage? We've seen examples out there of, you know, a gigawatt data center might need 800 megawatts of batteries and examples that could be a fifth of that, right, depending on their need. So what do these projects start to look like right now as we're connecting sort of a data center TAM in gigawatt terms to the storage opportunity view that you're converting against?

Too early to give you a rule of thumb that we can calculate. We clearly have some views, but it's too early to give you, too premature to give you a rule of thumb. How do you think a gigawatt will take this amount of water? So we will, over time, I think that we'll be able to develop that as it becomes more clear. But today, that we cannot do. But we have, as I said, a 12 giga. pipeline ahead of us, which we want to convert into orders, a good portion of it, within the next 12 months. So that's what, you know, that's what we're concentrating on. And as we learn more about this and we see how the industry develops, we'll provide you a rule of thumb that will give you a better sense of the whole market.

Got it, got it. That's helpful. We'll look forward to that. And then on the MSAs, What's the nature of the exclusivity from what you've won? Are there multiple vendors? I couldn't tell if you were answering that in some of the earlier questions. So for those hyperscalers, are you one of a few players? Are you exclusive? Is that a geographical exclusivity? How do we think of that?

One of a few players. One of a very, very limited number of players. But this is a competitive process. These are not directed, at least not yet. Maybe we'll be able to take them there at some point. They're very limited players and a competitive process. Thank you, everybody, for participating today. We'll be available. Chris will be available. I'll be available to answer any questions you may have. Bye-bye.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.