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.

And with that, ladies and gentlemen, if you have a question, simply press star 1-1 on your telephone to get in the queue. To withdraw the question, just simply press star 1-1 again. One moment for our first question, please. And it comes from the line of Mahip Mandoy, with Credit Suisse. Please go ahead.

Hey, good morning and congratulations on the quarter. Thanks for the questions here. There's this question on the bookings. Can you talk about the bookings growth? Which market do you see the bookings growth coming in from? And how do you define a backlog or contracted order?

Yeah, in terms of kind of the geographic region, certainly we're seeing strong bookings in the U.S., Australia, Middle East, North Africa. The areas in which we've been participating in the last 12, 18, 24 months, we're really starting to see that backlog really grow in those regions, which is really exciting for the team because they've spent a lot of effort and a lot of time developing those markets. And now we're starting to see fruit be born there. In terms of contracting awarded, you know, the way we describe it is similar to others in the industry or along the lines of, you know, letters of intent or verbal letters of intent or signed POs. A lot of within our backlog have multi-project, multi-year awards, which we're seeing more and more of as we kind of transition into the back half of 23 and into 24. A lot of our customers, both EPC and developers, are really looking to FTC to kind of service their needs on a multitude of projects, both internationally and domestically.

This is Sean. Just to add to that, I think Patrick is spot on. But I think now that we have this extensive portfolio of products, both 1P and 2P for solar solution, crystalline solution, you know, we can service these large portfolios. And we're seeing more and more customers come forward with the desire to make a deal on a large portfolio as opposed to a one-off project, which we're really excited about.

Got it. I understand. Could you talk about the bookings in the U.S. markets right now? What's with the market, especially given one of your competitors kind of talked about a slowdown in the U.S. market? Just curious what you're seeing there.

Yeah, I mean, from a perspective, you know, obviously we view IRA as a tailwind, and we talked about last quarter, you know, there are certain projects that are going to, you know, push to the right as waiting for IRA guidance. But with the influx of modules that we've seen quarter on quarter as it relates to UFLPA, we actually see a net benefit to what we saw a quarter ago. So we're really excited about, you know, the modules that are coming into the market, what that brings for the back half of the year. And so we've seen really an incremental improvement from Q1 to Q2 on this.

Any guidance on when you expect a resolution on IRA or UFSB?

I mean, we absolutely would, you know, hope it happens sooner rather than later. But, you know, we have confidence and certainty that it's going to happen. We positioned ourselves, I think, very, very well with our joint venture plan. It's starting up on schedule here in Texas. And so, we think we're very well positioned for IRA and, you know, hopefully it happens sooner rather than later. I guess it's a bit anyone's guess right now, but we're absolutely confident it's going to happen.

I'll jump back to the queue. Thanks for the questions.

Thanks. Thank you. One moment for our next question, please. All right. And it comes from the line of Phil Shen with Ross MKM. Please proceed.

Hey, guys. Thanks for taking the questions. Had a couple of follow-ups on bookings. As it relates to the $235 million in Q1, can you share what the percentage was that was from the U.S.? And then also, can you share how much of that you think is for 23 versus 24? And then finally, how much of it might be multi-year? Thanks.

Yeah, Phil, thanks for the question. I mean, in terms of kind of the breakdown, you know, U.S. versus international, most of the projects were in the U.S., and we continue to kind of see that. Within that 235, there was several projects that are multi-year, multi-project, ultimately awards. And so, if you look at kind of the dispersion of revenue, certainly we'll see some in kind of the back half of 23, which is why, you know, we're so excited about the growth trajectory that we're seeing. but also into 2024 as well.

Great. Thanks, Patrick. And then I think I heard you say that you expect incremental improvement in bookings in Q2 versus Q1. I wanted to confirm that. And then also, does that suggest that Q2 bookings could surpass Q1? And then how do you expect that trend into Q3 and Q4?

So we didn't say specifically, you know, the bookings between kind of Q1 and Q2. I will say, you know, we are seeing more and more projects go through than what we've seen, you know, kind of the last time we spoke at our last earnings call. And so that comes from the international side, which isn't subject to UFLPA. But with the modules getting released in the market, we're seeing more and more opportunities for projects in the back half of the year. The bidding process that we've seen with our sales engineering team has never been higher, and that gives us a lot of confidence and excitement that the back half and our bookings are on solid form and will continue to do well.

Phil, this is Sean. We really see a positive trajectory this quarter versus last. And you can see that, obviously, in our results from the bottom in Q3 through the improvements in Q4 and now the positive gross margins in Q1. So we feel good, frankly, about the business right now. And that's based on a lot of input from customers around the world.

Great. Thanks, Sean. Yeah, you guys have done great on the margin front. And on that thread, can you talk about how margins could trend in the back half? Should we continue to expect margins to tick up? And is there any way to quantify? I know you haven't given official guidance, but any kind of color would be fantastic. Thank you.

Yeah, so we definitely see a positive trajectory based on everything happening in the front half of the year for the back half of the year. And so we feel good about continued improvement. But we're not really going to quantify or guide in the back half of the year at this point. But we definitely see a positive trajectory and feel good about things going forward. Yeah, and Phil, I think the other thing I'll add there is, you know, again, we continue to drive incremental, you know, we anticipate to drive incremental gains on the margins throughout the back half of the year. Again, as Sean said, we're not going to guide at this point, but you can see the guide that we have for Q2, you know, the guidance range on the margins between 9% and 12% on, you know, solid revenue growth. And as some of these projects come to fruition in the back half, we'll continue to anticipate operating leverage on the business. Then you can see some additional incremental gains. Obviously, huge gains on the last two quarters. We would love to do that, but we're not going to see that. But again, you'll continue to see incremental gains for the next couple of quarters is what we anticipate at this point.

Great. Thanks, Phelps. I'll pass it on.

Thank you. One moment for our next question. All right. And that question comes from the line of Donovan Shaffer with Northland Capital Markets. Please proceed.

Hey, guys. Thanks for taking the questions. So I believe, I think we've gone over this before, but I think the extreme damping approach you do with the Voyager that allows, you know, horizontal stow with no torsional galloping, I think you're applying that to the Pioneer as well. You know, correct me if I'm wrong on that, but so when you talk about, you know, now that that's 1P being applied in a 1P context, I think that gives you more of an apples to apples comparison in terms of, you know, other 1P designs and to compare, you know, steel content versus other 1P designs. So I'm curious to know, you know, Do you see yourselves coming in kind of consistently below competitors in steel content because of that innovation? And have you started to get any kind of customer feedback? How are they responding to that approach? Do they like it? Are they skeptical about it? Do they worry there's too little steel? Or do they see it as, gosh, this seems like a really elegant design. Why doesn't everyone do it this way?

Hey, Donovan, this is Sean. Thanks for the question. So we believe our first product, the Voyager 2P product, is the best engineered 2P solution in the world. And we get that feedback very consistently from our customer base. I mean, they like all aspects of it, like, for example, the constructability and the fact that we have a reduced component count and it requires fewer hours for construction, which in this market environment or this labor environment, is a real positive. So as we started with a clean sheet of paper on our 1P, we knew the market didn't need just another Me Too 1P. We wanted to design a product that had in it a lot of the advantages that we see in the Voyager 2P. And in fact, we got customer feedback while we were still on paper. So we didn't wait until we had a a product that we're out there selling, but we went to some of our very close customers and said, hey, what does your current 1P solution lack? And what do you like about the Voyager 2P? So we can design our pioneer 1P to solve the problems that you see in the market today with 1P and really have a 1P solution that brings with it all the great advantages that you see in our 2P Voyager solution. and bring that to market in our 1P. And so we have this great constructability advantage. We use a really interesting and it's really a cool proprietary technology called Python Clips. for mounting modules, and it's something that we get tons of positive feedback about. You're right. We have the same STO strategy on our Pioneer product that we have on our Voyager product, and our customers like that. They really do see this as an elegant solution that carries with it many of the advantages that our two-piece solution offers over the competition. I never want to speak poorly of competitors, so I don't necessarily want to talk about a comparison, but we're getting a lot of really positive feedback. As we mentioned, we also sold our first or shipping our first solution in the quarter in the U.S. and in Australia.

Yeah, and I think the other part, you know, we talked to customers, as Sean alluded to and talked about, you know, we really engaged with our customers early on, and that was informed by the 500 megawatt agreement that we signed kind of at the launch of our Pioneer product. And, you know, that was a customer that was really deeply engaged with us. The other part that's really exciting is we're able to sit down with our customers and really kind of offer a solution-based approach. Whether it's a 1P or a 2P, we're really configuring to the site-specific. And I think that has really kind of created a distinct competitive advantage for us in the market with our customers and one that they really enjoy. We're not selling what we have. We're selling a solution. And we're agnostic. Whether it's a 1P or a 2P, we've got a product that all of our customers want.

Okay, great. Thanks. That's helpful. And then my follow-up question with the pioneer is, well, I guess first would be, what is, can you share kind of the mix of DG or even maybe more broadly, like how you see that playing in, you know, a lot of the conversation, like you talked about, you know, being able to do more comprehensive design solution and coming in. Yeah, I think the DG inherently involves more shipping these types of kits. And you probably, you know, in that case, you're partnering with someone and not doing as much. Maybe the partner is doing more of the design work for these smaller projects. So kind of what mix is that kind of contributing now or likely to contribute, kind of how you see the DG part contributing, but then also is that, is Pioneer an important part of that? Because You know, we talked about smaller sites and odd shapes sometimes better for 2P, but of course a lot of people have preference for 1P and sometimes it's just, you know, ideology bias, whatever. So, you know, do you see the Pioneer driving, you know, driving uptick or improvement in the DG channel? And is it available now in the DG channel? You know, is there additional kind of work you have to do to put that into KITS?

Hey, thanks for the question, Donovan. Yeah, we are extremely excited about the DG business that we launched. And the business, the team's doing a great job. We're really seeing growth in that business. And we're very excited about it. Yes, it's our intention to have the DG business to be a mix of both our 1P Pioneer solution and our 2P Voyager solution. And we are working with a partner, and that's going very, very well, quite frankly. But we're extremely excited about the DG business and the prospect of growing it further. I'll let Patrick comment some more as well.

Yeah, I think from a 1P versus 2P, from a DG perspective, sure, there are customers that have kind of a 1P bias that now we're able to offer to them, but also we're able to operate in areas that may have certain hype restrictions. So it really opens up our our PAM and our competitive advantage, you know, ultimately to our customers. As Sean talked about, we have a partner out in the market that we engage with, but we also have an internal DG channel that we operate within that services customers. So, you know, we're taking kind of multiple paths approach to the DG market. We certainly are very excited about the opportunity in the inbound inquiries that we've gotten as it relates to that business and the partnerships that, you know, we formed and are looking to form.

Okay, great. Thanks, guys. I'll take the rest offline.

Thank you. One moment for our next question, please. And it comes from the line of Amit Daya with HCWaywright. Please proceed.

Thank you. Good morning, everyone. Most of my questions have been asked, but just with respect to the international markets, how will your operating cost structure change as you continue to grow in markets abroad?

So if you think about the markets in which we operate, I mean, they really focus in on kind of the constructability advantage that both Pioneer and Voyager ultimately offer. So we participate in markets where, you know, we're able to realize margins in line with, you know, kind of our objectives of being 20% plus. And so we're not looking at, you know, margins or projects that have lower margins, really focused on where can we create value. in the areas like the U.S., Australia, Middle East, North Africa, Europe, et cetera, areas where we feel like we have a distinct advantage in order to maintain and grow our margins.

Understood. And then just a follow-up on the DG side. Was there any contribution from DG in this quarter?

Absolutely, yes. There's contribution from the DG business. We launched the DG business and, you know, obviously several months ago. And we're seeing, you know, great response, and absolutely there was revenue contribution from DG in the quarter we just closed.

All right, guys, that's all I have for now. I'm taking my other questions offline. Thank you so much.

Thank you. Thank you. Thank you. One moment for our next question, please. And it comes from the line of Jeff Osborne with TD Cowan. Please proceed.

Yeah, thank you. Just a couple questions on my side. I was wondering if you could touch on, I think, WEC when they reported who acquired the Samson Solar Project from Invenergy had highlighted some damage to the facility from wind in early March. I was just curious if you have any exposure, if there's any language about that in your 10Q. I haven't had a chance to review that if it's out.

Hey, Jeff. No, we haven't had any claims on our tracker products in the area.

Got it. And then you mentioned the lead times. What are those, you know, as the panels have started coming in? You know, is that a 10-, 15-week process? Can you just give us an update there? Obviously, you mentioned Q2 doesn't have some of the benefits, but I'm just trying to think of, as we see the import data coming and improving, is that a tailwind for Q3, or are lead times, you know, stretched out to Q4, just given the steel supply constraints that you might have?

Yeah, we do see things improving, quite frankly, Jeff. And obviously, you know, the lead time depends on the particular project and the complexity and the location and where we're sourcing the steel from. But our virtual supply chain, so to speak, really allows us to minimize lead times and support our customers. But we're definitely seeing some improvement in lead times looking forward.

The last question I had is just around diversification. I think the 10K talked about 50% of receivables, give or take, was with one customer. Last year, I think it was 20% to 30% of revenue with one customer. I didn't know with just the growth and backlog here if the pipeline is diversified.

Yeah, the way I looked at it, Jeff, you know, as we grow, you know, we get kind of new customers and we grow the share of wallet with existing customers. And we've certainly seen that kind of through our pipeline, which informs our backlog, which will ultimately kind of reform our revenue as these POs kind of convert from intake. to actual revenue. And so we've seen a diversification both internationally in the U.S., but also with our customer base. And you'll see that as we kind of get up to the outward quarters of Q3, Q4 and into 2024, a much broader diversification.

Great to hear. That's all I have. Thank you.

Thanks.

Thanks. Thank you. One moment for our next question, please. And it comes from the line of Pavel Motunov with Raymond James. Please proceed.

Yep. Thanks for taking the question. Can we get an update on what you're seeing in steel costs and how that's flowing through the value chain?

From a steel cost perspective, obviously, we had kind of a large uptick in 2022. We have seen steel prices come down quite dramatically over the last several quarters. That obviously has an impact on the whole industry, and it was really good to see that these input costs were finally starting to come down from their kind of pre- and post-COVID highs.

Yeah, the other thing I would say, Pablo, is remember, when steel prices were at their peak you know, we really looked at what can we do in control, and that's why we're so proud of what the team has done in terms of reducing 20% of the steel content, and so that's helped to make us more robust, but we are seeing a downward trend in steel pricing. Yeah, and I think the other thing that just to reinforce is, you know, when we do our pricing, we're updating our quotes every two weeks, and so we don't want to take the commodity risk on the steel prices going up, and so Again, that's a continuous process where we refine those pricing just to make sure that we have a mitigator against any increases in steel prices.

Okay, that's good to hear. And secondly, we haven't talked for a little while, I think, about software. What's kind of the adoption curve or customer uptake of your software solution and What's the outlook on that slice of the revenue mix?

So we're really excited about the growth and the opportunity that software presents. We have several different versions of the software that benefit the customer in different areas. And so we've seen a lot of excitement from the customer base in terms of software and We see software still, you know, relatively small component of the overall, but definitely, definitely a lot of opportunity for growth.

All right. Understood. Thank you.

Thanks. One moment for our next question, please. Can you come from the line of Julian Dumoulin-Smith with Bank of America? Please proceed. Hey, good morning, team. Thank you guys very much for the time.

Appreciate it. Nicely done here. Just wanted to follow up on the gross margin conversation. Obviously doing very nicely here at the start of the year. If I recall right, you guys had kind of a heuristic of 12% to 18% gross margin target against $100 million to $150 million in revenue. Can you talk about what your scaling looks like on gross margin here? I mean, obviously doing very well going back to some of the first questions asked. How do you think about this compounding, whether that's fixed cost absorption or otherwise, into kind of 100 million plus kind of run rate on revenue here? And I got to follow up.

Yeah, so hey, Julian, it helps. So I think if you listen to Sean's prepared remarks again, if you look at this quarter and kind of

scale that to $100 million range, that would fall right into what we talked about this time last year, really one year ago today in that 10 to 15% range. And so again, we continue going down to Phil's question earlier, As we incrementally grow revenue and, you know, we continue to expect to get some additional uptick in terms of margins as the revenue continues to grow over time. So I think that, you know, what we talked about last year still holds true, and we're continuing to, as that business grows, continue to get some additional operating leverage to get to that point where we've talked about since the IPO of hitting that 20% gross margin target, we think we're on track to do that.

Hey, Julian, did you have another question? Yeah, sorry about that.

Thank you very much. Just related to domestic contents, if you can, can you kind of discuss what you're seeing actively with your clients, you know, vis-a-vis their willingness to proceed on contracting? Is there some sort of pent-up demand, if you want to call it that again? You talked about panel availability, but I'll frame it slightly differently in terms of IRA clarity with the lawyers here. And then ultimately, what does that mean for 10, especially if this is one of these gating items in terms of that domestic international split as you look at it 24 here? Is it kind of 70-30 or more of domestic?

No, Julie, the way I look at it, I mean, the projects that were going to get delayed because of IRA, those were kind of really known in the Q1 timeframe as they looked to kind of build out their back half of the year project. really nothing incremental in terms of projects that have been, you know, delayed or ultimately pushed out that we've seen. I think from our perspective, you know, with the, you know, kind of recent influx of modules over the last kind of six to eight weeks, you've seen projects that are ultimately moving forward. And the big gating item was really around the modules rather than IRA. But, you know, we engaged with the customers. You know, steel content and – or, sorry, steel availability relates to kind of the U.S. as a big focus point. They like the joint venture that we, you know, we announced in Q1, and, you know, we'll be able to kind of really service their needs. But there are a good amount of projects that are kind of proceeding forward with modules through the back half of the year, and so that's what we're really excited about.

All right, fair enough. Pense of demand is not the way to say it. It seems like a lot of that's already reflected in your views here. Yes. Thank you, guys.

Thank you. One moment for our last question in queue, please. And it comes from the line of Kashi Harrinson with Piper Sandler. Please proceed.

Good morning. Thanks for taking the question. So you provided qualitative guidance indicating you expect strong growth in the second half of the year. In an attempt to convert qualitative to maybe a little bit more quantitative guidance, maybe you could point to another quarter in the past where you feel like you've delivered strong sequential growth. Anything we can look into in history to provide some frame of reference?

I think we, you know, like we said before, we really don't want to give annual guidance at this point. But we just, you know, as I mentioned, we feel a lot of positive momentum. We think that, you know, in terms of UFLPA, we're seeing a lot of relief. And while there's, you know, some frustration that the IRA regs have not yet been published, we, you know, net-net, we're seeing it all as an overall – tailwind to us. And so we're feeling positive about it. It's really hard for me to go back historically and align to a specific quarter because we think that, you know, at this point, the company is a different company. We have really leaned things out in terms of the internal operations and streamlined. So it's hard for me to go back and align, you know, kind of what will the back half of this year be as compared to quarters in the past.

Okay, fair enough. And then just my follow-up question. Last quarter, you provided a non-UFLPA backlog, and I think you've been providing that for a few quarters now. Can you give us a sense of where that is today? Thank you.

So we've continued to put emphasis on all the non-UFLPA opportunities out there. As we said previously, we came up very quickly with the first solar-compatible version of the product so we could focus there. And then we've looked at where we've really focused internationally. We've seen that when UFLPA was at its worst, people tended to buy us toward 1P, and so we we ultimately, you know, developed and released our 1P product. I don't know, Patrick, in terms of the specifics, if you wanted to comment any further.

Yeah, if you look at the $235 million that we booked this quarter, about $190 million of that is not subject to UFLPA, so either international or, you know, has modules. And then, you know, if you look at kind of the total backlog in terms of the contracting awarded, that's grown to about 35 to 40 percent. So, You know, I think, you know, and kind of piggybacking off what Sean said, controlling what we can control, we've really had kind of that concerted effort and shift to, you know, broadening our reach both with our customers in the U.S. markets, but also the international markets. And we've been really able to grow that non-USLPA approach. backlog pretty significantly in a short amount of time, which allows us to kind of shorten that intake to PO process because we're not waiting around for projects that, you know, may have modules, you know, three, six months from now. So, it's a really good effort by the team, and, you know, we expect that to continue to make progress there.

All right. Thanks for that. Thank you.

Thank you. And with that, ladies and gentlemen, I will pass it back to management for any final remarks.

So, thanks very much for joining our call. We are extremely excited about the business we are a part of, and we are extremely excited about the results that the team has generated. You know, we talked last quarter and the quarter before about Q3 being our low point, and now we have more proof points that that's absolutely the case. We are extremely excited about the trajectory moving forward. And so we look forward to next quarter and sharing our results with you then. Thanks very much.

And thank you all for participating. You may now disconnect.