FTC Solar, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the FTC Solar second 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 at that time, please press star 1-1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Bill Michalik, Vice President, Investor Relations. Sir, please begin.

Thank you, and welcome, everyone, to FTC Solar's second quarter 2023 earnings conference call. Before today's call, you may have reviewed our earnings release, supplemental financial information, and slide presentation, which are 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 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 required by law. As you'd expect, we'll discuss both GAAP and non-GAAP financial measures today. Please note that 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 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. Our earnings announcement today includes a mix of near-term disappointment with project delays impacting revenue, as well as some very positive developments, including a number of significant project wins here in the past few weeks, which will boost our performance as we head into 2024. Getting right into it, our revenue for the second quarter came in at 32.4 million, which was below our guidance range of 42.5 to 52.5 million. For the third quarter, we now expect to see revenue in the 24 to 34 million range, which, While we didn't have a public guidance number out there, I can tell you significantly below our prior internal expectations. The second quarter shortfall is largely related to contracted revenue being pushed between quarters. Specifically, projects from one customer were delayed to allow for additional planning and review around domestic content, as these projects are looking to take advantage of those incentives in the Inflation Reduction Act, or IRA. The review has now been completed and the approach finalized, but it had the effect of pushing revenue from Q2 to Q4. As it relates to our third quarter expectations, our bidding activity remains very high, and we have won a fair amount of new business. But the timing of many projects going to purchase order has been slower or pushed out by customers, whether due to domestic content clarity, module availability or delays in permitting, interconnection, or other issues. Unfortunately, given our current revenue run rate, a small handful of projects can have an outsized impact on our results. That will improve as we get back to scale, but it's a problem we need to manage now. The good news is that we have seen a significant uptick in project activity and wins in the last few weeks, including several notable projects which should position us for a meaningful improvement as we head into 2024. As a result of visibility around these projects, we now expect that we'll return to revenue growth in the fourth quarter and be on an accelerating path as we enter the new year. We expect the fourth quarter will be our highest revenue quarter in 2023. While the cadence of our revenue growth is different than we may have hoped a quarter ago, we have a number of bright spots in our business that give us a great deal of confidence in our future. One, we believe our manufacturing cost is now in line with our leading competitors. We are more competitive than ever and we will get better with scale. Two, our average new project margins puts us on track to achieve the gross margin targets we provided in the past. This includes our target of achieving a gross margin of 12 to 18% at the $150 million quarterly run rate and a 20 plus percent margin over the longer term. Even with lower revenue in the second quarter, we saw gross margin expand another 90 basis points. We're set up for a strong margin expansion as revenue grows. We're confident in our cost structure, and we have a lot of margin leverage. But obviously, the level of revenue which drives cost absorption is a key driver of the actual performance. Three, we are now actively in the market with our 1P solution. We believe the 1P market has done better in this time of restricted module availability, and we didn't have a solution until more recently. We now have a solution and a growing 1P pipeline. And with a recently received UL certification, we're focused on converting that pipeline to awards. In fact, we just won our largest 1P award to date at 140 plus megawatts. So we are on our way. And by the way, that 140 megawatts is part of an overall one gigawatt award that we received in the last few weeks, which includes supplying a large multi-technology renewables project in the Pacific Northwest. Four, we continue to grow our international business and are gaining traction in new regions. A couple of examples over the past few weeks include a new 120 megawatt award in South Africa. We also won a new 300 megawatt award for multiple projects in Italy and Spain, including utility scale agrivoltaic projects. These will be our first projects in these countries as we continue to expand in Europe and expand our served markets. We have now been awarded projects in a dozen countries outside the US. And with the recent addition of our 1P Pioneer solution, we believe we'll be even better positioned to continue to grow our international business as well as our business overall. Five, our backlog has now grown to 1.6 billion with 259 million added since May 10. The recent project awards I've mentioned, among others, have helped us grow backlog to this new level. Most of these new multi-project awards include projects that we expect will have near-term purchase order dates, and in some cases beginning initial production on the first projects during the fourth quarter of this year, with final projects expected to run through the end of 2025. The majority of the remainder of our backlog is 2P, which we expect will be increasingly constructed as module availability improves. The continued growth of our backlog and the recent additions of certain projects that we expect will include more near-term start dates allows us to continue to be cautiously optimistic about 2024 and gives us a nice foundation for future growth. And then sixth and finally, we continue to control our operating expenses. You'll notice that our Q2 OPEX came in better than we had guided. and that, along with the improved margins, allowed us to keep adjusted EBITDA flat quarter over quarter despite the lower revenue. We'll continue to control costs and look for efficiencies in many places. However, we will invest more in sales and engineering to support growth and the pipeline conversion. So in summary, while our cadence of revenue recovery is slower than we would have hoped a quarter ago, we have seen an exceptional spate of wins in the past few weeks which gives us confidence in a return to growth in the fourth quarter and into 2024. Our international expansion continues, and our newly certified 1P offering will only enhance that growth over time. We are positioned with a product cost structure that will enable our run of gross margin expansion to resume and reach new highs, along with that revenue growth. And we will keep a cap on operating expenses while investing for future growth. With that, I'll turn it over to Phelps. Thanks, Sean, and good morning, everyone. I'll provide some additional color on our second quarter performance and our outlook. So let's begin with the second quarter. As Sean mentioned, product delays in the quarter resulted in revenue coming in below our guidance range of $32.4 million. This level represents a decline of 20.9% relative to the last quarter and an increase of 5.3% relative to the year-ago quarter. As we move on to gross profit, as you would expect, the delay in revenue also slowed down and caused margin to come in below our expectations. However, with project margins continuing to improve, we were still able to expand our gross margin percentage relative to the last quarter, even on lower revenue. Specifically, our GAAP gross profit was $2.2 million, or 6.8% of revenue, compared to $2 million, or 5% of revenue, in the prior quarter. On a non-GAAP basis, gross profit was $2.6 million, or 8.2% of revenue, compared to a non-GAAP gross profit of $3 million, or 7.3% in the prior quarter. This represents a 90 basis point improvement quarter over quarter on the non-GAAP gross margin, our second quarter of positive margin since our IPO, and a 58 percentage point improvement over the past three quarters. On a year-over-year basis, we delivered improvement to the non-GAAP gross profit of $8 million on less than $2 million increase in revenue. The improvements were driven primarily by improved tracker direct margins, helped by our product cost reduction efforts. Moving to OpEx, our GAAP operating expenses was $12.6 million. On a non-GAAP basis, excluding stock-based compensation and certain other expenses, our operating expense was $9.7 million compared to $12.4 million in the year-ago quarter. This was below or better than our guidance range. The year-over-year improvement was driven primarily by lower R&D and personnel-related expenses. Next, GAAP net loss is $10.4 million, or 9 cents per share, compared to the loss of $11.8 million, or 11 cents per share, in the prior quarter, and compared to a net loss of $25.7 million in the year-ago quarter. Our adjusted EBITDA loss, which excludes approximately $3.2 million, including stock-based compensation expense and certain other non-cash items with $7.2 million, which was just above the low end of our guidance range. The result was approximately flat versus the prior quarter and represented an improvement of $10.5 million compared to an adjusted EBITDA loss of $17.7 million in the year-ago quarter. Finally, regarding liquidity, we had an operational use of cash for the quarter, offset by usage of the ATM facility for which we received $15.2 million of cash within the quarter. In aggregate, we ended the quarter with $33.8 million of cash on the balance sheet. We continue to hold no debt on the balance sheet. We have an undrawn credit revolver, as well as $76 million remaining under the ATM program at quarter end. So with that, let's turn our focus to the outlook. Based upon our current view, which includes the project delay Sean's mentioned, we expect the third quarter revenue to be flattest to down relative to the second quarter. Our gross margin performance will be based on how revenue comes in. If the revenue is down, the lower cost absorption will lead to margins coming in lower sequentially. However, if revenue is flat or slightly up, then we could see margins come in higher than the second quarter. We expect this to be followed in the fourth quarter by a resumption in revenue growth and margin expansion as the recent project wins are expected to begin production. Specifically, our targets for the third quarter call for the following. First, revenue between $24 and $34 million. Next, non-GAAP gross margins between $0.7 million and $3.1 million, or between 3% and 9% of revenue. Next, non-GAAP operating expenses between $10 and $11 million. And finally, adjusted EBITDA loss between $10.3 million and $6.9 million. Looking forward, the recent uptick in project wins give us increased confidence that the revenue ramp expected in the fourth quarter should continue into 2024. So in closing, the actions we've taken to strengthen the company, broadening our product offerings, refocusing our sales efforts, and improving our cost structure will benefit GreatLit moving forward. These efforts, coupled with $1.6 billion in backlog, have positioned us to not only grow, but to grow profitably. With that, we conclude our prepared remarks, and I'll turn it over to the operator for any questions. Operator?