FTC Solar, Inc.

Good day, and thank you for standing by. Welcome to the FTC Solar first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's 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. You will then hear a message advising your hand is raised. To withdraw the question, simply press star 1-1 again. and be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Bill Michalk, Vice President, Investor Relations.

Thank you, and welcome, everyone, to FTC Solar's first quarter 2023 earnings conference call. Before today's call, you may have likely reviewed the earnings release supplemental financial information and slide presentation, which were posted earlier today. If you've not yet 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 speaks 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 be discussing both GAAP and non-GAAP financial measures today. Please note that the earnings release issued this morning includes both a full reconciliation of each non-GAAP financial measure and the nearest applicable GAAP measure. In addition, we'll discuss our 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. I'm very pleased to be speaking with you today, not only because we're reporting another quarter of results at the high end of our expectations, but because I believe we are at a significant inflection point in our history as a company. As we prepare to emerge from a module supply-driven downturn, we do so with a stronger and broader product offering, a strengthened team, and a much lower product cost structure. A cost structure that not only allowed us to post our first positive gross margins since our IPO, but a gross margin that is 14 points higher today than it was in the fourth quarter of 2021 on two and a half times the revenue. I believe we're much better positioned to win than ever before, and I'm very excited about our opportunity, particularly as we look to the back half of 2023 and into 24. So let's jump into it. I'll start today with a brief market update. We're beginning to see more projects that have modules or visibility to modules show up in our funnel. In fact, I'd say we're seeing the most traction on that front since the start of the ADCBD and UFLPA module constraint period, leading us to believe the worst of UFLPA may be behind us. While lead times won't allow for a Q2 revenue benefit, It's an encouraging sign as we look ahead to the back half of 2023 and into 2024. We believe the Inflation Reduction Act, or IRA, will also help to increase demand over the long term. We're hearing the guidance from Treasury may be received by the end of Q2. So while our market outlook is becoming increasingly optimistic, as we've discussed over the past couple of quarters, Our goal has been to set the company up to improve our financial results in any market environment. Let me briefly summarize some of the exciting results the team has achieved. First, and perhaps most significantly, we improved our cost structure, eliminating more than 20% of the steel content from our trackers. This, along with launching a higher margin distributed generation business, has supported the significant gross margin expansion that is underway. I'll talk more about that in a moment. Second, we expanded our product line, adding a new cost-effective solution to our Voyager line to support first solar modules. First purchase orders for this solution came in Q4. We also announced a new and differentiated 1P tracker called Pioneer. Pioneer includes features from Voyager and incorporates key customer feedback, and our pipeline for this product has grown quickly. Last quarter, we noted that the first shipments for Pioneer would be in the second half of the year. However, I'm pleased to report that we've since received our first POs in the U.S. and Australia and are shipping product in the second quarter ahead of the prior schedule. Collectively, these new products give us more opportunities to win projects, including where there is a preference or benefit for 1P. Customer engagement and excitement are quite high. Third, we have improved our geographic positioning. In the U.S., we announced a joint venture with a leading manufacturer to support customers who would like domestic content as well as allow us and our customers to benefit from IRA incentives. We continue to expect the facility to be online around mid-year. And as a reminder, we have not incorporated any incremental margin benefit from IRA into our internal models at this point, although we believe there is upside potential. We have also improved internationally. As we entered last year ahead of 80 CBD in the U S module issues, our sales were essentially all in the U S and our pipeline was mostly us to date. We now have been awarded projects in 10 countries outside the U S and in 2022, 20% of our revenue was international. And with the addition of our one piece solution, we have seen a notable increase in engagement with customers around pipeline. And finally, As it relates to our positioning and value proposition with customers, I have never felt better. With 1P, 2P, and First Solar solutions, along with software, we can now engage with our customers as a truly solutions-oriented and technology agnostic partner to optimize each individual project site. With this solution-oriented mindset, our pipeline and backlog continue to grow. Our overall pipeline has reached a new record high at 134 gigawatts, and backlog has grown to 1.4 billion, with another 235 million added since March 1. Collectively, all these actions, along with efforts to strengthen our team, position us very well for the future. In fact, I feel like we are a new and much stronger company as we get closer to what will hopefully be an end to the UFLPA-related module constraints. Some of the benefits of these actions are already showing up in our results now, and others will play an increasing role moving forward, like our new products and additional operational leverage as revenue grows. Looking at the graph at the bottom of page four, you can see that our gross margin expansion is already well underway, even ahead of full UFLPA resolution. In the third quarter of last year, which we have continued to describe as a revenue and margin bottom, we reported non-GAAP gross margin of negative 49.8%. In Q4, we improved to negative 3.4%. In our last earnings call, we targeted Q1 to turn positive in the 2% to 8% range, and we were able to come in at the upper end at 7.3%. As we look at that 7.3%, there are a few things I'd call out. One, it represents a 57-point improvement in just two quarters. Two, It's our first time achieving a positive gross margin since our IPO. And three, it's 14 points higher now than it was in fourth quarter 2021 when we had two and a half times more revenue. At the same $100 million run rate, we believe that our first quarter gross margin would have been in the 10 to 15% range. This, as you may recall, is the margin range we outlined for a revenue level of $100 million in this call one year ago. It's also another proof point that the actions and incredible hard work of the team are paying off and positioning us for strong and profitable growth. And in the last column, as Phelps will discuss, we're expecting further improvements in second quarter. So in summary, I feel very good about what we have accomplished and how we've strengthened the company during this period of module constraint. As the module environment continues to improve, I believe we're positioned with more products and more markets with more customers and more opportunities than ever before and positioned to grow much more profitably. With that, I'll turn it over to Phelps. Thanks, Sean, and good morning, everyone. I'll provide some additional color on our performance and our outlook. Beginning with the discussion with the first quarter, I'm happy to say we've continued our string of solid execution to deliver results at the high end of our guidance range on all metrics for the quarter. Revenue actually exceeded our targets, coming in just a bit above the high end of our guidance range at $40.9 million. Now, compared to last year, which is a pre-ADCVD UFLPA environment, revenue declined 17.5% year-over-year. However, relative to our prior quarter, Q4 2022, revenue increased 56%, which followed the 58% sequential growth we reported from Q3 to Q4 as we continued to gain momentum off the Q3 2022 lows as the team continues to execute. Near term, the sales team continues to focus on our strategy of identifying and servicing non-UFLPA impacted projects, which, as Sean mentioned, is continuing to improve. As we move on to gross profit, we are incredibly pleased to deliver our first positive gross profit since we went public in Q2 2021. Specifically, our GAAP gross profit of $2 million, or 5% of revenue, compared to a loss of $1.9 million, or 7.3% of revenue in the prior quarter. On a non-GAAP basis, gross profit was $3 million, or 7.3% of revenue, coming in at the high end of our guidance range and compared to a non-GAAP gross loss of $0.9 million, or 3.4% in the prior quarter. To put this into perspective, in the past two quarters, we've been able to improve our gross profit as a percentage of revenue by 57 percentage points, flipping from a negative 49.8% at the end of Q3 to a positive 7.3% at the end of this quarter. This represents a truly incredible effort by our whole team, and we'd like to publicly thank them as they work tireless behind the scenes in our design to value and design manufacturing front, as well as supply chain optimization, as well as the sales team to make this happen. So thank you, team. Next, on a year-over-year basis, we delivered improvements to non-GAAP growth loss of $11.8 million, even in the face of the lower revenue, which is $40.9 million this year versus $49.6 million last year. The year-over-year improvements were driven primarily by improved tracker and logistics strike margins, including logistics, which returned positive as shipping has normalized from the pandemic environment. Our gap operating expenses were $14.4 million. On a non-gap basis, excluding stock-based compensation charges, fees associated with the FCX legal settlement, and certain other expenses, our operating expenses were $10.1 million compared to $11.2 million in the year-go quarters. This was below or better than the midpoint over guidance range. This year over year improvement was driven primarily by lower related personnel costs and spending on professional services and continue to keep a keen eye on expenses. Next, net loss was $11.8 million or 11 cents per share compared to a loss of $24.5 million or 20 cents per share in the prior quarter and compared to a net loss of $27.8 million in the year ago quarter. Collectively, The results from our approved margins and continued careful management of operating expenses and overhead flowed down to our adjusted EBITDA results. So, for the quarter, the adjusted EBITDA loss, which excludes approximately $4.5 million of certain charges, including stock-based compensation expense, certain consulting and legal fees, severance, and other non-cash items, was $7.2 million. This was better than the midpoint of our guidance range of $8.5 million. In addition, these results represent an improvement of $3.8 million quarter over quarter when compared to an adjusted EBITDA loss of $11 million in the prior quarter and compared to a $20 million loss in the year-ago quarter. Finally, regarding liquidity, we had a small operational use of cash in the quarter offset by a modest usage of the ATM facility for which we received $5.5 million of cash within the quarter, and we ended the quarter with $41.5 million of cash on the balance sheet. In terms of the ATM program, while we did not have a direct exposure to Silicon Valley Bank, given the volatility and certainty in the bank and capital markets, the board and the management team believe it's prudent to tap into this source of liquidity to a small degree given the landscape. In addition, in terms of our overall liquidity, we continue to hold no debt on the balance sheet, have an undrawn credit revolver, as well as $90-plus million remaining under the ATM program at quarter end. So with that, let us turn our focus to the outlook. Based upon our current view, we expect continued, albeit mild, sequential revenue growth in the second quarter. Importantly, we expect our growth margins to show continued and a significant improvement quarter over quarter. Specifically, our targets for the second quarter call for the following. First, revenue between $42.5 and $52.5 million. Our non-GAAP gross margin is between $4 and $6.5 million, or between 9% and 12% of revenue. Non-GAAP operating expenses between $10 and $11 million. And finally, adjusted EBITDA loss between $7 and $3.5 million. Looking forward, as Sean mentioned earlier, we anecdotally started to hear and see analyst reports touting increased modules making through the U.S. Customs, which is great news. Now, while these improvements were not soon enough to impact our Q2 guidance, As these projects move forward to purchase orders, they have the potential to lead to a strong wrap in the back half of the year and into 2024. In closing, we believe FTC has never been in a better position than it is today, and the excitement we are feeling inside the company is palpable. We have a broader product offering, we have refocused our sales efforts, and we have an improved cost structure via our tireless efforts in the design, manufacturing, and supply chain optimization. These efforts, covered with our $1.4 billion in backlog, has positioned us to not only grow, but grow properly into the future. So with that, we'll conclude our prepared remarks. I'll turn it over to the operator for any questions. Operator? Thank you.