FTC Solar, Inc.

Thank you for standing by. At this time, I would like to welcome everyone to FTC Solar's second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. I would now like to turn the conference over to Bill Mashalek, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome, everyone, to FTC Solar's second quarter 2024 earnings conference call. Before today's call, you may have reviewed our earnings release and supplemental financial information, 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 Amash Tila, a member of our board of directors and a company founder, Jan Brandt, the company's incoming CEO, Kathy Bannon, the company's chief financial officer, and Patrick Cook, the company's head of capital markets and business development. Before we begin, I remind everyone that today's discussion includes 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 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 backlog and our definition of this metric is also included in our press release. With that, I'll turn the call over to Omar.

Thanks, Bill, and good morning, everyone. As you likely see, we recently announced that Yon Brand has been named the new CEO of FTC Solar and will start on August 19th. Yon is an exceptional leader with great depth of experience in the solar industry. From running all operations for a downstream solar company to CEO of a solar racking company, a board member of SEAL, to being CFO and CTO in a leading-edge storage company that he helped grow very significantly to profitability. Just to name a few, he has excellent hands-on experience and a wealth of relationships throughout the industry. We're looking forward to having him on board and know he'll make an immediate impact. While he hasn't officially started yet, And I believe he's traveling overseas. We're fortunate that he was able to dive into this call to say a few words to this group. So let me turn it over to Jan. Jan?

Thanks, Ahmad. I appreciate the generous introduction and the opportunity to drop in and say hello to everyone. So first, good morning to all of you. I'm excited to be speaking with you even before I started my new capacity. I think you'll find that I like to move quickly, and I'm not always big on formalities. As Ahmad mentioned, I've been in the solar industry for nearly two decades now. I've been in different roles and had varying mandates, whether as a developer, supplier, or industry advocate, but always while maintaining a consistency and perspective for building relationships and helping to foster the long-term growth of the solar industry. I've been familiar with FTC Solar since its founding and have tracked its progress. At the outset, I knew the company and the strong team behind it had developed great technology that would make you take notice. when they came to market with their 2P offering. When you break into a new market with long-term entrenched players, you need to have something unique and value-added to get noticed. FTC quickly secured its spot as a leading provider in that market segment. Even from my perch, I would hear anecdotes about the technology, the constructability, and the relationship the company has with its customers. Now leveraging the technology strength into the 1P segment, I hear similar feedback from the market about the opportunity ahead for FTC. I know many professionals across the industry, whether from my various operating roles, my position on the board of CEO, or through the newsletter that I've run with thousands of readers. Based on my conversation, the company has developed a strong brand in the industry that far exceeds its current financial footprint. Yes, the company at one point found itself as a 2P leader in an increasingly 1P market. but the company has nicely filled product gaps and has the broadest and most comprehensive offering to date. So I see a company with excellent technology, a top-tier brand, relationships with top developers and EPCs in the industry, and a clear path to continue improvements in product and overall cost efficiency. I installed a chief of staff here nearly three weeks ago who has been doing some legwork to help ensure the smoothest possible transition and help me be as impactful as possible on day one at FTC. and I'm looking forward to getting started. I believe the company has the opportunity to be a leader in the market and can enable success for EPCs and asset owners. I'm genuinely excited about the team, the technology, and the position of the company in this great industry, and I couldn't be more pleased to take on the CEO role. I'm very much looking forward to working closely with all of you in a very transparent way and will look to demonstrate this company's capability. Thanks again. Ahmad, I'll turn it back to you.

Thanks, Dion. I appreciate you joining us early and from the road. We're very much looking forward to having you on board. Turning to the results, I'll make a few overarching comments and then turn it over to Cathy to review the financials. At a high level, there are three main takeaways for me this quarter. One, our second quarter financial results were in line with the targets we provided. Two, we continue to remain well positioned for growth and profitability and continue to make further enhancements across the business that will pay dividends in the future. And three, our business, as well positioned as it is, is still currently subscale in revenue and therefore impacted to a greater degree by customer project delays. While we still expect a better second half relative to the first half, Our second half results will unfortunately be lower than our prior expectations. So let me start with that last point. We have seen project delays from customers relating primarily to interconnection and financing. Specifically, three large projects that we are expecting to start construction have now moved to Q4 start dates. Project delays in the construction business are common. and we have seen these types of issues throughout the industry in recent quarters. When you're at scale, you have layers of overlapping projects and more opportunities for compensating adjustments. Unfortunately, we're just not there yet, and the delays have more of an impact. In our case, it looks like a delay of more than a quarter, which will cause our third quarter to be relatively flat again sequentially. pushed the start of the revenue recovery to the fourth quarter and our goal of achieving break-even to 2025. While the delays are certainly disappointing, I do believe we are positioned quite well for a strong recovery, including particularly strong margin growth as revenue ramps. For the past two quarters, I've told you about the progress we've made with our key initiatives to set the business up for growth and profitability. This included accelerating our bookings rate, improving our product cost roadmap, improving business processes, and lowering our break-even revenue level. I won't rehash those points, but we will just add a few brief comments. On sales and products, as it stands today, we have more than $500 million in signed purchase orders, which lays the groundwork for a revenue recovery that we continue to expect to begin in the second half of the year. Specifically, as I mentioned, the fourth quarter, While new additions to purchase orders were not as robust since our last call, we continue to add projects and have new projects in our pipeline. Our customer engagement remains high, and we are strategically adding sales resources to capture more opportunity, particularly internationally, to capture the market growth there as well as in the U.S. Since our last call, we have announced that we hired Tractor Industry Veteran and former CEO of STI Norland, Alberto Echeverria, to lead our international sales efforts. Alberto is an exceptional leader who has been focused on enhancing our international presence and growing our pipeline. We're very excited that he's working on. We also announced that FTC solar board member, Tamara Mullins, stepped down from the board to lead our North American sales efforts. Sandra is a great panelist, and we're very pleased to have her take on this new role. I've already talked about Yun and his great customer relationship, which will be another incredible addition to our capabilities. Our product portfolio is as broad as it has ever been across 1B and 2B configurations with thin film and high-wind solutions and software, with additional products on the way. We can now be truly technology agnostic and optimize each individual project size for our customers. Regarding cost, we believe our product costs are in line with leading competitors, and we continue to execute on opportunities to drive further reductions. We're in a good place from that perspective, and our direct margins today can enable much higher long-term gross margins. Last year, this started to show through. Even at $30 million quarterly run rate, we were entering the double-digit margin range. And finally, our break-even cost has been greatly improved, driven by the higher direct margins as well as reduction and keen focus on op-ex and overhead costs, while continuing to invest strategically in areas like this. We brought our break-even revenue level down from what has historically been over $100 million per quarter down to $50 to $60 million range. or potentially less, depending on regional mix and whether we pay a bonus. So in summary, while we are disappointed to see project delays, we remain well positioned for a healthy recovery. We have a strong product portfolio that is well regarded in industry and can optimize our customers' project portfolios. Customer engagement is a top priority, and we're strategically investing in our sales capabilities to drive additional bookings. with a number of great talent additions in the U.S. and internationally, not the least of which is an exceptional new CEO starting in just over a week. Our product cost structure is in good place and can enable 20% long-term gross margins, and we have a company cost structure that has been reduced to enable quarterly profitability in the $50 million range. As the revenue level improves, the profitability and cash flow potential of the business can show through, With that, I'll turn it over to Kathy. Kathy?

Thanks, Ahmad, and good morning, everyone. I'll provide some additional color on our second quarter performance and our outlook. Beginning with the discussion of the second quarter, revenue came in at $11.4 million, which was within our target range, although below the midpoint. This revenue level represents a decrease of 9.2% compared to the prior quarter, and a decrease of 64.7% compared to the year earlier quarter on both lower product and logistics volumes. GAAP gross loss was $2.3 million, or 20.5% of revenue, compared to gross loss of $2.1 million, or 16.7% of revenue in the prior quarter. On a non-GAAP basis, gross loss was $1.9 million, or 16.8% of revenue, better than the midpoint of our guidance range. This compares to a gross loss of $1.7 million or 13.7% in the prior quarter. While our project margins remain healthy and our costs are much improved, the revenue level in the second quarter was not high enough to absorb the indirect costs. We continue to believe that we have significant margin upside when our revenue levels recover. GAAP operating expenses were $9.6 million. On a non-GAAP basis, excluding stock-based compensation and certain other costs, operating expenses were $8.3 million. This represents the lowest level in more than three years, as we have found efficiencies across the company while continuing to invest to support growth. This result compares to non-GAAP operating expenses of $8.7 million in the prior quarter and $9.7 million in the year-ago quarter. GAAP net loss was $12.2 million, or 10 cents per share, compared to a loss of $8.8 million, or 7 cents per share, in the prior quarter, and a net loss of $10.4 million, or 9 cents per share, in the year-ago quarter. Adjusted EBITDA loss, which excludes an approximate $1.8 million net loss from stock-based compensation expense and other non-cash items, was $10.5 million, also better than the midpoint of our guidance range. This compares to losses of $10.7 million in the prior quarter and $7.2 million in the year-ago quarter. Finally, regarding liquidity, we ended the quarter with $10.8 million in cash and restricted cash on the balance sheet. Based on our current forecast, we expect cash to grow by the end of the quarter through a combination of deposits and collections. We continue to hold no debt on the balance sheet and have about $65 million remaining under the ATM program at the end of the quarter. We have not utilized the ATM in the past few quarters and don't currently have plans to utilize it. With all of those factors, we are actively managing customer deposits and supplier payments. As Ahmad mentioned, the contracted portion of our backlog increased by $32 million to $505 million. With that, let us turn our focus to the outlook. Our targets for the third quarter call for the following. Revenue between $9 million and $11 million, which would be flat to slightly down from the second quarter. Along with this revenue level, we expect non-GAAP gross loss between $4.3 million and $1.5 million, or between negative 47.8% and 13.5% of revenue. As you might expect, the percentage ranges vary more greatly at these lower revenue levels. Non-GAAP operating expenses between $9.3 million and $10 million, And finally, adjusted EBITDA loss between $14.7 million and $11 million. For the fourth quarter, we expect revenue to more than double relative to the third quarter. With that, we conclude our prepared remarks, and I will turn it over to the operator for questions. Operator?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question... Please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. Your first question comes from the line of Philip Shen with Ross Capital Markets. Your line is open.

Hi, this is Matt Ingram on for Phil. For the contracted portion of the backlog of 505, how much of that could be recognized in the next 12 months? And what are the catalysts that you need to see to release more of the backlog sooner? And then secondly, how do you expect bookings to trend over the next few quarters when I have a follow-up?

Kathy?

Thanks, Matt. This is Kathy. Thanks for the question. So, in terms of the $500 million of contracted purchase orders, you know, we've given the guidance for Q1 and talked about it growing in Q4, and we're not giving guidance yet into 2025. But, you know, those projects, you know, the catalyst for Those projects is really just customer execution, right? Those projects are all lined up and ready to go, and it's, you know, customer execution. As they move those through, then those will move through our revenue numbers.

And then how do you expect bookings to trend going forward?

Well, we've had, you know, okay.

Go ahead, Kathy. Okay, go ahead.

Well, I just want to say that, you know, we've had, you know, really an addition of, you know, really strong sales team. You know, Mon talked about the fact that we've added, you know, Alberto for the international market, and we've added Tamara for the U.S. market. And then, you know, in the addition of having Jan join us as the CEO with, you know, really great relationships in the industry, we really expect to see, you know, continued acceleration of the bookings.

Okay, great. Thanks for the color there. And then... We know that these interconnection and permitting challenges have been adversely impacting industry and pushing projects to the right, but have you seen any impact from the new Southeast Asia ADCVD causing module availability constraints and adding an additional headwind on top of the rest of the headwinds that are out there right now?

Yeah, this is Ahmad. We hear a lot about it, but we have not seen it specifically on our projects, although we We hear a lot about the industry-wide issues, but on our current projects, we have not seen this issue surface yet.

Okay, thank you. I'll pass along. Thank you.

Next question comes from the line of Pavel Malkanev with Raymond James. Your line is open.

Yeah, thanks for taking the question. So I appreciate the fact that you're not giving guidance for 25, but you said that EBITDA should turn positive in 25. So what revenue and gross margin run rate is that predicated on?

We need revenue to be between 50 and 60 million per quarter, Pavel. And our current expenses between operating expense as well as overhead is in the 14 million range without bonuses and around 16, 17 million range with bonuses. So at 50 million, we break even without bonuses. At 60, we break even with bonuses.

Okay, okay, that's helpful. In Q4 of this year, do you expect gross margin to be positive?

Kathy?

Yeah, we aren't providing that guidance, but if you, you know, kind of look at how we've been progressing and we've been, you know, talking about the strong project margins that we have, you know, as the revenue grows, you definitely see increases in our gross margin. So, you'll see improvements as that revenue grows quarter to quarter.

Okay. And then, Kathy, as you were talking about the balance sheet, you mentioned that you have no plans to pull on the ATM program. But when we look at cash, $10.8 million, and if EBITDA is a negative, you know, call it negative 10, wouldn't you need to bring in some fresh capital this quarter potentially?

You know, when we look at our, you know, our forecast and timing of, you know, deposits and cash collections on receipts and so forth, you know, the way our projects are set up with, you know, we get down payments on the projects and how we have the timing of our payments to our vendors. You know, we don't need to, you know, fund the projects through the balance sheet. So that's how we see it, you know, playing out based on the forecast that we're looking at now. I mean, we're – You know, we're always, you know, we have not, you know, replaced the revolver yet, but we do, you know, we are in discussions on opportunities like that, but that's not how we have this forecasted.

So, in other words, the working, you had a benefit from working capital in Q2, which was nice to see. Do you anticipate more inflows from working, cash inflows from working capital in the second half of the year?

Yes, we do.

All right. Thanks very much.

Thank you for your questions.

Again, if you would like to ask a question, press star 1 on your telephone keypad. There are no further questions at this time. This concludes this conference call. You may now disconnect.