Tigo Energy, Inc.

Good afternoon, and welcome to Tego Energy's third quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Joining us for today's call from Tego are Zi Alon, CEO, and Bill Rochlein, CFO. As a reminder, this call is being recorded. I would now like to turn the call over to Bill Rochlein, Chief Financial Officer.

Thank you, Operator. We'd like to remind everyone that some of the matters we'll discuss on this call, including our expected business outlook and anticipated costs and market trends, statements about current inventory levels and its impact on future financial results, inventory supply and its impact on customer shipments and our revenue for the fiscal third quarter of 2023, and our ability to penetrate new markets and expand our product portfolio are forward-looking. And as such, are subject to unknown and unknown risks and uncertainties, including, but not limited to, Those factors described in today's press release and discussed in the risk factors section of our definitive prospectus filed with the SEC on April 26, 2023, as supplemented by the prospectus supplement filed with the SEC on May 19, 2023, our quarterly report on Form 10-Q for the quarter ending September 30, 2023, and other reports we may file with the SEC from time to time. These risks and uncertainties could cause actual results to differ materially from those expressed on this call. These forward-looking statements are made only as of the date when made. During our call today, we will reference certain non-GAAP financial measures. We include non-GAAP to GAAP reconciliations in our press release furnished as an exhibit to our Form 8K. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of a financial performance prepared in accordance with GAAP. Finally, I'd like to remind everybody that this conference call is being webcast. And a recording will be made available for replay at Tygo's investor relations website at investors.tygoenergy.com. I would like Nat to now turn the call over to Tygo's CEO, Zvi Alon. Zvi?

Thank you, Bill. Before we begin, we would like you to know that our hearts go out to those impacted by recent violent attacks in Israel. Our Tiger family includes a small number of employees and partners in the region, some of whom have been personally impacted. Our thoughts and prayers are with them and their families during this difficult time. To begin today's discussion, I'll give some background on our company, its recent performance and market trends before turning the call over to our CFO, Bill Roschlein. He will discuss our financial results for the quarter in more depth, as well as provide our outlook for the remainder of the year. After that, I'll share some closing remarks before opening the call for questions. All right, let's begin. For those of you who may be new to our story, Tygo Energy is a global provider of intelligent solar and energy storage solutions. founded in 2007. Our mission is to deliver smart hardware and software solutions that enhance safety, increase energy yield, and lower operating costs for residential, commercial, and utility-scale solar systems. Tygo's largest selling product consists of a series of flexibly designed MLP solutions to meet the particular needs of a broad base of installers. Our superior MLP design provides a number of important benefits to our customers. First, our MLP has an energy efficiency designed to operate on an as-needed duty cycle, which optimizes the MPPT of the solar string when compared to solutions requiring constant optimization and high-duty cycles. Our design is so efficient, in fact, that it is housed in a plastic casing instead of a metal one that uses heat sinks. Second, our MLPE solutions provide customers with a highly reliable product and a very low failure rate. High reliability is driven by the product design, low component count, and duty cycle. Third, our MLPs are quick and easy to install in about 10 seconds each. You literally clip the MLP to the back of the panel and connect the wires. And lastly, we provide flexibility. The Tygo products are certified to work with more than 1,600 inverter types across all market segments, including the Resi, CNI, and utility marketplaces today. Year-to-day MLP revenue grew 153% to 122.9 million compared to 48.6 million in the year-ago comparable period, which we believe was driven by the market's realization of these significant advantages. In addition, Our MLPE product, we expanded our product footprint with an energy intelligence or EI solutions over the past year and a half. These solutions combine a hybrid inverter, battery, and automatic transfer switch configured in a DC coupled architecture. The hybrid design allows for one inverter to be used for both P3 modules and battery. while DC coupling increases the round-trip efficiency by reducing the number of DC to AC conversions needed for the system. Moreover, the system, including the battery, can be commissioned in about 10 minutes. Year-to-date, our EIA solutions revenue grew to $12.1 million compared to $1 million in the year-ago comparable period. Most recently, we announced the launch of Tygo's Green Glove Service Program to provide a premium support experience for first-time residential and new existing commercial installers of Tygo systems. This program is expected to enhance customer confidence in the safety, security, and reliability of Tygo product installation and features a six-point design inspection along with an on-call and post-installation support services. We already have many customers who have signed up for the service, and early feedback has been overwhelmingly positive. Now for the review of our financial results and demand outlook. This quarter, our team navigated industry-wide headwinds driven by elevated inventory levels in the channel. Due to a large contingence of distributor partners who requested that we delay product deliveries into future quarters, our third quarter results in revenue of 17.1 million and adjusted EBITDA loss of $9.5 million. Despite these delays, the number of customers that have signed up in the quarter for TIGOS module-level monitoring services increased to a record level. Monitoring services registration occurs once the solar system installation has been completed for the end customer and provides us with an indication of the level of the product sell-through. Based on the inventory on hand, data from our European customers combined with our internal analysis of the current market demand data, we believe Tygo inventory in EMEA channel represented approximately six months of current market demand at the September 30th of 2023. Inventory digestion cycle will likely continue into early 2024. As we look forward into 2024, we believe distributors will seek to keep lower inventory weeks on hand as they did in 2023. As supply chain lead time shorten, for 2024 our overall outlook for EMEA is for continued growth, albeit at a more moderate pace compared to 2023. In America, high interest rates and net metering policies may delay recovery until the second half of next year at the macro level. Although we do expect to gain AVL traction with the expanding list of TPOs serving the market, and that could be a significant catalyst of growth for us in the region. Regardless of the macroeconomic environment, however, we believe Tygo is well positioned to grow as we execute on the following four initiatives in 2024. One, cost effectiveness. We will continue to sell advantages of using Tygo's products to lower electrical balance of system costs in the solar installation. Two, market expansion. We will continue our market penetration of underserved markets and long-tail customers. Within the Asia-Pacific region, for instance, we invested in additional headcount targeting that region earlier this year, and so our region contributed 19% of the total revenue in the third quarter to achieve sequential growth of 28%. We believe our Green Club program is similarly positioned to provide long-tail installers with VIP customer support experience they will not find elsewhere. Three, EI product expansion. Our EI solution continues to gain traction and provide a $12 million or 9% of the total revenue year-to-date compared to $1 million a year ago in a comparable period. We expect our business momentum to continue with the product line and plan on announcing additional EI products in the future quarters. PredictPlus software expansion. As you may recall, we acquired Foresight Energy in January 2023. Since then, we have integrated and scaled this unique software offering which provides customers with the ability to predict and manage energy demand and load balancing. Our PredictPlus software solutions enables utility and VPP to manage the so-called dark curve challenges posted by changes in electricity demand and generations throughout the day. Our ARR continues to grow as we add new customers for this product. With that, I will turn the call over to Bill to discuss our third quarter financial results and 2023 outlook in greater detail.

Bill? Thank you, Zvi. Turning now to our financial results for the third quarter ended September 30th, 2023. Revenue for the third quarter of 2023 decreased 25% to $17.1 million from $22.8 million in the prior year period. By geography, EMEA revenue was $10.2 million, or 60% of total revenues. America's revenue was $3.6 million, or 21% of total revenues, and APAC was $3.3 million, or 19% of total revenues for the quarter. EI Solutions represented 8% of total revenues in the quarter compared to 8% last quarter and 2% in the prior year comparable period. Backlog, which represents contracted orders expected to be filled within the next 12 months, was $65.8 million at September 30, 2023. Gross profit in the third quarter of 2023 decreased 37% to $4.2 million, or 24.3% of revenue, from $6.6 million, or 28.9% of revenue, in the comparable year-ago period. On a sequential quarter basis, gross margins decreased by 13.3 gross margin points. The sequential change was due to a $1.2 million inventory obsolescence reserve, a $.5 million impact from rebate programs with the remainder primarily due to higher fixed costs as a percent of revenue. Total operating expenses increased 77% to $15.4 million in the third quarter from $8.7 million in the prior year period. During the quarter, the company's increase in its aged receivables balance resulted in a $1.8 million increase in its AR reserves. Operating loss for the quarter totaled $11.2 million compared to $2.1 million in the prior year comparable period. Other income or expense net totaled $51.2 million of income in the quarter. During the quarter, the company amended its agreement with its convertible note holder. As a result, the company will no longer record a mark to market of the convertible note option on its P&L. Income tax expense for the quarter was $11 million. During the quarter, the company reinstated its valuation allowance for deferred tax assets. Net income for the quarter totaled 29.1 million compared to a net loss of 2.4 million for the prior year period, primarily as a result of the previously mentioned mark-to-market adjustment. Adjusted EBITDA loss totaled 9.5 million compared to adjusted EBITDA of 0.4 million in the prior year period. As a reminder, adjusted EBITDA represents operating profit as adjusted for depreciation, amortization, stock-based compensation, and M&A transaction expenses. Primary shares were $58.4 million, and fully diluted shares were $68.4 million in the third quarter of 2023. For forecasting purposes, we expect primary and fully diluted shares for the fourth quarter to be approximately $59 million and $67 million, respectively. Furthermore, the lockup in connection with our D-SPAC will expire on November 23, 2023. We estimate that approximately 17.1 million of our current primary shares outstanding are non-affiliate shares with the remainder representing affiliate shares. Cash, cash equivalents, and short and long-term marketable securities total 41 million at September 30, 2023. Accounts receivable net decreased this quarter to 20.4 million compared to 45.8 million in the last quarter and 14.5 million in the year-ago comparable period, representing 109 days outstanding compared to 61 days and 58 days in the prior quarter and year-ago comparable period, respectively. Inventory's net increased this quarter to 57.4 million compared to 50.6 million last quarter and $12 million in the year-ago comparable period, representing 405 days outstanding compared to 108 days and 68 days in the prior quarter and year-ago comparable period, respectively. Inventory purchase orders typically extend three to six months out, and we have made adjustments to enable us to reduce days outstanding in future quarters. Before I turn the call back over to Zvi, I'll now take a few minutes to provide our financial outlook for our 2023 fourth quarter. As a reminder, Tygo provides quarterly guidance for revenue as well as adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business. The following projections reflect our fourth quarter expectations in light of the previously discussed industry-wide macroeconomic uncertainty. We expect revenue in the fourth quarter ending December 31st, 2023 to range between $15 and $20 million. We also expect adjusted EBITDA loss to range between $8 million and $12 million. Our EBITDA loss range incorporates the variability in our revenue estimate, the impact of rebates we initiated to help clear out the channel, and the impact of age receivables on our AR allowance for the fourth quarter. That completes my summary. I'd like to now turn the call back over to Zvi for final remarks. Zvi?

Thanks, Bill. Overall, we are confident in our team's ability to manage the current macroeconomics environment and are strongly optimistic for the long-term growth prospects of our business. We look forward to providing additional updates in the upcoming quarters. With that, operator, please open the call for Q&A.

Thank you.

Thank you.

At this time, we will conduct the question and answer session. To ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Please stand by while we compile the Q&A roster. Our first question comes from the line of Philip Shen of Roth MKM.

Your line is now open.

Hey, guys. Thanks for taking my questions. Zvi, in your prepared remarks, you talked about how Europe could see some growth in 24, but much more moderate. Is there a way that you can quantify how much you expect your European business to grow in 24 over 23? And then you also talked about inventory being six months in Europe as of September 30th. Can you share what you think it might be as of the end of October or the latest data that you have? And you also talked about that it could be digested by early 24. Any sense of, you know, is it Q1 or is there a risk that it could be Q2? And I think SolarEdge was talking about that it could be extended into back half. So what's the confidence level if you believe that it's early 24? Thanks.

Thank you, Phil. So as far as the growth projections, we cannot provide any specific indication other than we feel exceptionally comfortable with the continued growth in the monitored systems which are being installed. And if that rate continues, we will perform better than 2023 based on those numbers. And as far as the inventory change, we've conducted that information as we've announced or shared with you as of the end of September. I can tell you that we have an updated version, not quite completed for October. I mean, it's early in the month. And the trends seem to be supporting our position, which we took at the time, which was about six months to clean it up completely. which means we will have to start seeing some changes in orders later this quarter or early next quarter, even though the customers, the distributors, would not plan in our view to keep the same level of inventory. So it might be a little bit more modest. But else, we are fairly confident about the depletion rate based on the three checks we have done, two completed and one which is almost completed, as I've indicated.

Okay, thanks.

Most welcome.

Yeah, shifting to the geographic mix of revenue in Q3, can you give us a feel for what that was and then When you think about total 2024 revenue, what kind of geographic mix could we see between U.S. and Europe?

Sure. So in the last quarter, like we mentioned, we had some pretty good growth numbers coming out of the Asia-Pacific region, Singapore, Philippines, Australia in particular, notched some good figures in revenue. The overall mix was 60% EMEA, 21% in Americas. It was previously closer to two-thirds EMEA. It got, at one point, by Q2, it had gotten up into the mid-70s. For next year, we would expect to see something like a two-thirds, about two-thirds of our business being generated from EMEA. And the catalyst in the Americas for us, given the difficult macro picture there, is approved vendor lists. And so that could provide some significant growth for us in that region and but that obviously when we have something to announce on that, we will speak to it. Does that help?

Yes, it does, Bill. Thank you. So just to be clear, two-thirds of the 2024 revenue could be EMEA, but then the remaining third splits between America and APAC, but it's a little bit unclear what that mix might be now. Is that right?

Yes. Yeah, correct. You know, Asia Pacific looks very promising at this point for 2024. And, you know, as has been mentioned by many others, including yourself, you know, America is a bit of a wait and see, perhaps a second half story we mentioned in our remarks. But in our case, you know, we could see some catalyst of growth there for us just by through some ABL activity. That's the wild card a little bit.

Great. Okay. Thanks, Bill. Last question for me on balance sheets. Your cash fell to $2 million. Receivables came down. And inventory has gone up a touch relative to the prior quarter. Payables have come down. So just wondering if you can talk through how you plan on managing working capital and cash and and how you expect your balance sheet to trend ahead. Thanks.

Yes, so it does take a quarter or so to reduce the spigot, so to speak, on the supply chain when it comes to ordering inventory and managing the build cycle. And so we went through that process this quarter, and that's why you saw more inventory on our books. But at $57 million or, you know, 405 days worth of inventory, there's a clear path to convert that to cash. And so with that, you can see even with an EBITDA loss, you could most likely see some positive cash generation from working capital coming that way. And then, you know, as we get six months down the road, I mean, we'll readjust as necessary to wherever the current conditions are.

Okay. Thanks, Bill. Thanks, V. I'll pass it on.

Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Eric Stein of Craig Hallam. Your line is now open. Hi, it's V. Hi, Bill.

Hi.

Hi. Hey, so, you know, given this channel health industry-wide, you know, well-known, I'm just thinking about as you look at new markets, some of the new products, I mean, does that present an opportunity for you? Obviously, maybe at lower levels, but does that present an opportunity for you given the As you said, the cost benefit, the efficiency benefit, the faster install. Just curious if that is a possibility or if I'm off base on that.

We are going to see changes, as we've indicated, by continued growth in Asia Pacific and We've seen it happening earlier last three quarters with the extra investment we've made. We also envisioned that the software PredictPlus is going to continue and actually provide some major expansion in 2024. That was a new addition this year. And needless to say, we are not announcing anything yet, but yes, we are continuing to work on improving our offering to the market in ways that we believe will help us further expand on the benefits that we bring, specifically the very fast commissioning time compared to pretty much anyone in the industry, and the much more efficient solution from an energy perspective. I will add one more additional point which we have noticed. Rapid shutdown is being adopted rapidly in many places. There are already three countries in Europe who adopted it. Thailand, Vietnam, Philippines, and others. And so we believe that with the adoption of more places where reputationalism becomes mandatory, we will see contribution to our footprint in the market as well.

Understood. That's helpful. You know, maybe, obviously, there's, you know, Master the obvious, quite a bit of uncertainty in the market. Is there a level, I know you're talking about early 24 for Europe and mid 24 potentially or longer for the U.S. Is there a level where you decide as a company to adjust the cost structure? I mean, obviously you're set up for this to be a much, much larger company over time, the path that it was on prior to what's going on with inventory levels. I mean, I'm just curious for thought process on that dynamic.

So we are actually watching what's going on, and we will be continuing to set ourselves up to be staying profitable in the overall as we continue. And we will be acting as quickly and swiftly as we can. So our strategy is not based on hope. It's based on actual numbers.

Yep, got it. I mean, are there measures being taken now to Or is it kind of, you know, those are things that, I mean, obviously you can't do, you know, in really short order. Some of them are more long-term. But, I mean, are there some things that you're doing right now in response to this?

I'll just say that, like many calendar year companies, this is budget season. And so we are working through that right now, and we're working through a variety of contingencies and scenarios so that we can respond to them quickly so that we can maintain profitability. So the answer is yes, we are looking at all that, and it happens to coincide with what is normally a regular budget season for most companies. Got it.

Okay, that's great. I will take the rest offline. Thanks.

Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Our next question comes from the line of Matthew Ingram of Roth MKM. Your line is now open. Your line is now open. If your line is muted, please unmute and please rejoin using the call me feature.

Thank you at this time, that ends the Q&A section. I'd like to now turn the call back over to Mr. Alon for his closing remarks.

Thanks again, everyone, for joining us today. I especially want to thank our dedicated employees for their ongoing contribution, as well as our customers and partners for their continued hard work. I also want to thank our investors for their continued support. Operator?

Thank you for joining us for today's Tegos Third Quarter 2023 Earnings Conference Call. You may now disconnect.