FTC Solar, Inc.

Hello, thank you for standing by and welcome to the FTC Solar 3rd Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Bill Michalik, Vice President of Investor Relations. Please go ahead.

Thank you and welcome everyone to FTC Solar's third quarter 2022 earnings conference call. Prior to today's call, you've likely had opportunity to review our earnings release, supplemental financial information, and slide presentation, which were posted earlier today. If you've not reviewed these documents, they're available on the investor relations section of our website at ftcsolar.com. I'm joined today by Sean Hunkler, FTC Solar's president and chief executive officer, Phelps Morris, the company's chief financial officer, and Patrick Cook, the company's chief commercial officer. Before we begin, I remind everyone that today's discussion contains forward-looking statements based on our assumptions and beliefs in the current environment and speak only as of the current date. As such, these forward-looking statements include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings for more information on the specific risk factors. We assume no obligation to update such information, except as required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes a full reconciliation of each non-GAAP financial measure to the nearest applicable GAAP measure. In addition, we'll discuss our executed contracts and awarded orders, collectively referred to as backlog, and our definition of this metric is also included in our press release. With that, I'll turn the call over to Sean.

Thanks, Bill, and good morning, everyone. Starting at the market level, The Uyghur Forced Labor Prevention Act, or UFLPA, and its rules for module importers and reviews by U.S. Customs and Border Patrol continues to prevent solar modules from getting into the country and, in turn, prevents a large portion of projects in the industry from moving forward. This obviously also delays our ability to convert a large portion of our backlog into revenue, as you'll see when Phelps discusses our Q4 outlook. While extraordinarily frustrating, we are not sitting idle. We are making great strides in our efforts to improve our near and long-term positioning and remain optimistic about FTC Solar's future. There are four primary takeaways I'd like to leave you with today. First, our total backlog continues to grow nicely and is approaching the $1 billion mark, currently sitting at $961 million. This includes $203 million added since August 9th. This growth is supported by our efforts to build and strengthen customer relationships, add new customers, including top-tier developers and EPC companies, and accelerate our international expansion. Our international expansion was just at its early stages when the regulatory issues started here in the U.S. We've made great progress on this front. We've told you about a number of projects in Australia, and we were recently awarded our largest to date in the country, 128-megawatt hybrid solar project, which is expected to be the largest DC-coupled solar and battery project in the country. In addition to Australia, we have also recently been awarded projects in South Africa, Kenya, Malaysia, and Thailand. In addition to our backlog progress, our total project pipeline has now reached a new record level at 90 gigawatts. The international portion of that has more than doubled year to date and now represents the majority of our pipeline. The second takeaway is that 165 million of the 203 million we've added to backlog in the last three months is not expected to be impacted by UFLPA. This gives us confidence that we've seen the lows in terms of revenue in Q3. This backlog includes international projects, U.S. thin film, or U.S. crystalline projects for which modules have been secured. Much of our recent focus, actions, and accomplishments will also serve to continue to bolster this portion of our backlog as we await resolution of UFLPA. For example, the team has been working hard behind the scenes to work on a cost-effective solution for U.S. thin film modules. which we recently made available to customers filling an obvious gap in our offering. This gap was a result of our previous decision to focus our R&D team's efforts toward providing solutions for crystalline modules first, which in a normalized environment represents the bulk of the overall U.S. market. And that was perhaps a reasonable position when crystalline modules were flowing normally. However, more recently, that gap in our offering has been more noticeable, has impacted our ability to convert backlog into revenue, and frankly, was something we needed to rectify to hedge against a delayed UFLPA resolution. I'm pleased to say that while this new solution has only recently been made available, we already have multiple project awards in the hundreds of megawatts for this solution in our backlog additions. Another example includes the recent announcement of a new 1P tracker solution called Pioneer. Having this differentiated new 1P tracker greatly expands our served market around the world, giving us more opportunities to win projects where there is a preference or benefit for 1P. Our solution offers 18% to 36% fewer foundations than other leading competitor solutions and is projected to generate 5% higher energy output than other leading competitor solutions. Customer enthusiasm for our new product has been strong. And in fact, we launched Pioneer along with a 500 megawatt order from a top EPC from Morris. The third takeaway today is around our gross margins. While our current gross margins do not meet our or frankly your expectations, we do believe we are making significant progress behind the scenes. As we shared with you at the time of our Q2 earnings announcement, we believe we are on track to deliver gross margins between 12% and 18% as revenue gets to the $150 million quarterly revenue run rate. That is enabled by, one, our design to value initiative, which we had previously discussed with you at length and has allowed us to take more than 20% of the cost out of our tracker systems, providing a product cost structure to enable double-digit gross margins on future projects. Two, leveraging expertise brought in-house with our HX acquisition, including our design to manufacturing efforts, which ensure that our DTV efforts are also easy and cost-effective to manufacture. And three, building out our DG business, which has higher margins than ASPs. We have received a lot of interest in our offering since launching earlier this year, along with great feedback. Our DG pipeline is growing very quickly, and there are two nice-sized portfolios of projects in the Midwest and West Coast, which in total will be in the range of 500 megawatts, included in our backlog additions this period. Obviously, at our current low revenue run rates, the gross margin improvements remain muted, but will be even more apparent as our revenue run rate grows and our R&D team continues to grind out incremental cost improvements. And the final takeaway I want to leave you with is that our liquidity position is stable. We ended the quarter with $50 million in cash on our balance sheet. In addition, we have no debt and a $100 million revolver, which remains undrawn. For the fourth quarter, we expect to be approximately cash neutral based on our current forecast and anticipated collections. This sets us up nicely as we enter what we expect will be an improving financial position in 2023. So in closing, we believe we have turned the corner and seen the lows from which we will grow. Volumes are still depressed at the moment as U.S. customers try to find solar modules, but the pent-up demand represented by our pipeline and backlog is incredibly large and growing. The proportion of our backlog that is not expected to be impacted by UFLPA is improving and will be enhanced by our new U.S. thin film offering, our new 1P tracker offering, and the continued growth of our international business. We now have a strong product cost structure on future projects, which puts us on track for double-digit gross margins as our revenue run rate recovers. and our cash position is stable and expected to be flat in Q4, setting us up nicely ahead of expected improvement in 2023. We believe our actions during this industry slowdown have positioned us to show improvement in the near term and to once again outpace market growth once module availability returns to normal with significantly enhanced profitability. With that, I will turn the call over to Phelps to provide more detail. Thanks, Sean, and good morning, everyone. As a thought to Sean's comment, I'd like to provide some additional color on the third quarter performance in our outlook. So let's begin with the results of the third quarter. Our results for the quarter were in line with guidance ranges. Revenue was $16.6 million at the lower end of the range with a depressed level reflecting the lower demand environment in the U.S. amidst the UFLPA-related module constraints that Sean talked about. This revenue level represents a decrease of 46.1% compared to the prior quarter and a decrease of 69% year-over-year driven by lower volume and partially offset by a higher ASP. GAAP gross loss was $9.5 million or 57.4% of revenue compared to $6.5 million or 21.2% of revenue in the prior quarter. Non-GAAP gross loss was $8.2 million or 49.8% of revenue. The margin percentage is also towards the lower end of the range on the lower revenue level. The result for this quarter compares to a non-GAAP gross loss of $7.7 million in the prior year period, with the difference primarily driven by the lower product revenue partially offset by improved logistic margins. GAAP operating expense was $17.2 million. On the non-GAAP basis, excluding stock-based compensation and certain other expenses, operating expenses was $9.1 million compared to $8.4 million a year-ago quarter. This is better than our guidance range due to some cost management activities in the quarter. This relatively small year-over-year increase was driven by the growth in staffing and other costs related to public company requirements. GAAP net loss was $25.6 million, or 25 cents per share, compared to a loss of $25.7 million or $0.26 per share in the prior quarter, and compared to a net loss of $22.9 million or $0.24 per share in the year-ago quarter. Adjusted EBITDA loss, which excludes approximately $7.9 million, including stock-based compensation expense, certain consulting and legal fees, severance, and other non-cash items, was $17.7 million. This result compares to an adjusted EBITDA loss of $17.7 million in the prior quarter and $16.1 million in the year-ago quarter. As Sean mentioned, regarding liquidity, we ended the quarter with $50 million of cash in our balance sheet, no debt, and access to our $100 million revolver, which remains undrawn. In addition, while we did establish a $100 million ATM program during the quarter, we did not tap into it, and at the present time, given the stability of our liquidity position, we have no plan to utilize the facility in Q4. With that, let's turn to the outlook. We continue to expect the third quarter to represent the low-water mark in terms of revenue and margin. We do believe we have seen the lows and will grow from here. As Sean discussed, the actions we've taken by adding a U.S. thin film module solution, introducing a new 1P tracker, Pioneer, and our international business will help mitigate the near-term impact of UFLPA, which has delayed our ability to convert backlog into revenue. We have roughly $165 million of backlog that includes these products, the U.S. thin film projects, international products, and U.S. projects with crucial modules that are not expected to be impacted by UFLPA because they're already in hand. which gives us confidence that we have seen the lows. The flip side is that over 80% of our backlog is U.S.-based projects scoped with crystalline panels, which have been delayed due to UFLPA. This continues to be very frustrating and has impacted our ability to convert our backlog into revenue. As such, while we expect good revenue growth on a percentage basis from third quarter lows, we do expect revenue for the fourth quarter to be lower than our previous target. In addition, our growth margin expectations for the fourth quarter also reflects an improvement from the third quarter as we see an improved revenue mix and improved project margins as a result of our internal initiatives. However, the results are similarly impacted as the overhead cost absorption is still being spread across a relatively low revenue base. Collectively, these factors slow down to adjusted EBITDA, offset to a degree by the continued focus on controlling costs that we have implemented considering the module uncertainty in the markets. One item to highlight is a number of our members of our executive leadership team, including Sean, Patrick, and myself, had voluntarily elected to take a vast majority of our salaries in stock versus cash, subject to a minimum cash requirement to maintain benefits. This began on July 1st and will continue through the end of 2022. We believe this shows the management team's confidence in the long-term prospects of the company once the regulatory headwinds lift. Moving to the specifics for our guidance, Revenue growth, we're anticipating a 40% to 60% off the Q3 load to be between $23 and $27 million. Non-GAAP gross loss of $3.5 million to break even, or a negative 15% to zero. As you might expect, the percentage ranges vary more greatly at these lower revenue levels. Non-GAAP operating expense between $10 and $11 million, and adjusted EBITDA loss between $14.5 and $10 million. Finally, While we are still looking for incremental clarity on how much module supply will be available to customers, we expect to see continued sequential revenue improvement in the first quarter of 2023, along with continued margin improvements. With that, we will conclude our prepared remarks, and I'll turn it over to the operator for any questions.