Bloom Energy Corporation

Good afternoon, and welcome to the Bloom Energy first quarter 2019 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mark Messler, Vice President of Finance and Investor Relations at Bloom Energy. Please go ahead.

Thank you. Thanks for joining us on Bloom Energy's first quarter 2019 earnings conference call. To supplement this conference call, we have posted to our investor relations website our Q1 2019 shareholder letter, as well as supplemental financial information that we will periodically reference throughout this call. The matters we will be discussing today include forward-looking statements regarding future events and the future financial performance of the company. These statements are subject to risks and uncertainties that we discuss in detail in our documents filed with the SEC specifically the most recent reports on Forms 10-K and 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our Q1 2019 shareholder letter, we refer to GAAP and non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation between GAAP and non-GAAP is included as part of our Q1 2019 shareholder letter. Joining me on the call today are K.R. Sridhar, Principal Co-Founder and Chief Executive Officer, and Randy Furrer, Chief Financial Officer. K.R. and Randy will review the operating and financial highlights of the quarter, and then we will take questions. I will now turn the call over to KR.

Hello, this is KR. A good afternoon to all of you and welcome to our Q1 2019 conference call. Allow me to share my perspectives on our Q1 2019 accomplishments and financial performance. We are pleased to have delivered another record quarter with a strong diversity of acceptances across industry sectors and international markets. Our momentum in the core healthcare, data center, and retail sectors continued, and the diversification strategy we discussed last quarter also delivered results, with more new customers in tech, utility, and life sciences sectors. Overall, in Q1, we achieved 235 acceptances, a 41.6% year-over-year increase, and slightly higher than the midpoint of our estimates. We achieved $200.7 million of revenue in Q1 of FY 2019. Removing the impact of the one-time retroactive ITC benefit for FY 17 that we recognized in Q1 2018, our revenues increased 62% year-over-year. During Q1, we saw strong validation of our value proposition and also made progress in further enhancing and strengthening our competitive advantage. As a reminder, Bloom Energy delivers three key benefits to our customers. Lower and more predictable cost of power, lower emissions, and higher resiliency including the option for uninterruptible power. In our previous calls, I have talked at length about our cost reduction programs. These continue to be a strong focus. During this call, I will focus on the other two value propositions, emissions and resiliency. Let us start with an update on our lower emissions profile our strategy for decarbonization leading to zero carbon solutions. Our decarbonization strategy is multifaceted. To date, all of our customers have reduced carbon footprint when using the Bloom Energy Server fed by natural gas when compared to securing their power from the utility grid. They also reduce smog-creating pollutants and avoid consumption of water. Currently, our primary solution for zero carbon power generation is to offer customers energy service solutions running on directed biogas. Some of our well-known customers, including Apple and the retailer IKEA, have selected this path. In addition to directed biogas, It is our expectation that biogas generated from landfill, wastewater treatment plants, and plant and animal waste will be converted on site to electricity using our technology. In the directed biogas case, biomethane produced from biomass is purified to pipe gas standards injected into the gas pipeline and transported pipe gas is used by Bloom Energy servers to generate electricity. In the case of onsite generation, biomethane produced from biomass goes through a relatively inexpensive and minimal cleaning process before it is fed directly to a Bloom Energy server located onsite. Then the electricity produced from the biomethane is transported via the electrical grid to our customer. The on-site biomethane method is more efficient energetically, has lower capital costs, and lower carbon footprint than even the directed biogas program. In California alone, there is sufficient biomass to generate and deliver as much electricity as 4 million solar panels or a nuclear power plant. This type of on-site biogas powered electricity generation will play a meaningful role as a source of renewable, always-on power, helping to stabilize the grid as penetration of intermittent renewables increases. Legacy power generation has not been able to offer a method for biogas-powered electricity generation that is highly efficient, distributed, highly reliable, and cost-effectively removes moisture, sulfur, siloxanes, and other contaminants from biogas prior to utilization. We believe we have the answers to those problems. By Q1, we demonstrated the increasing commercial readiness of our biogas solution to a pilot with a utility. We commenced the pilot at a landfill facility in January of 2019. We began by conditioning biomethane from the landfill and then feeding it to our onsite biogas-powered system in February. The 50 kilowatt Bloom Energy Server with integrated biogas cleanup module has since operated and delivered 100% clean and renewable baseload power into the local grid. We are excited to have delivered this first demonstration and expect to have commercial onsite biogas deployments in the future. Now let me move to the second topic on our value proposition I wanted to discuss. which is resiliency solutions. According to the Eaton Blackout Tracker, there were more than 3,500 utility outages in the US in 2017 alone. A recent study by the EIA highlighted that the duration of electric power outages in the US has doubled in the past two years with an increase in extreme weather systems being the main cause. Estimates suggest that the total annual cost of power interruptions to the US economy is around $200 billion. With outages increasing in frequency and duration, it seems likely that cost will soar in the future. With the US economy ever more dependent on electricity for its digital and high-tech industry. It should come as no surprise that demand for resilient power solutions is on the rise. Microgrid projects in particular are surging with almost 500 new projects developed in the past six months, more of them in North America than anywhere else. Bloom Energy, is a beneficiary of this trend. Our systems have now been deployed in more than 80 microgrids, with 65% of those deployed in the past three years. We define a microgrid as an electrical infrastructure that has sufficient supply and intelligence to operate independently of the utility grid to meet the demand of a specific site or locality. This electrical infrastructure will operate symbiotically with the larger grid in normal mode. However, it is also able to isolate from the utility grid and provide always-on power to the site or locality when the larger utility grid is out of service for any duration of time. During Q1, we announced several microgrid customers These wins underscore the important role we play in elevating power resiliency for our customers in a post-climate change world and how we help them accelerate time to power when the grid is under strain and utilities are unable to meet fast-growing demand. Let me tell you about two customers. Our microgrid deployment at the headquarters of Extreme Networks aptly describes how we are helping customers solve grid reliability problems. Xtreme experienced three separate power outages to its San Jose offices in the summer of 2018. The outages impacted critical engineering and IT functions. Thereafter, Xtreme deployed a Bloom Energy Server microgrid to provide an electricity supply to its headquarters that will be uninterrupted even if the grid fails. Additionally, Xtreme is reducing its cost of electricity by 25% and reducing carbon dioxide emissions by 20%. Lower cost, lower emissions, and higher reliability. That's a triple win. Let me talk about another microgrid we deployed in Q1 at a New Jersey manufacturing location of engineered materials and optoelectronics components maker, 2-6. The 2-6 microgrid illustrates how we can help businesses remain agile and responsive to growth opportunities when utilities are unable to meet growing power needs in a timely manner. has ramped up production at its Warren facility in the past year to meet demand for its 3D sensing technology. However, it hit a roadblock when the local electric utility was unable to supply power quickly enough to keep up with its growth. This led 2-6 to seek an onsite grid-independent power solution. 2-6 selected Bloom to build a 2.5 megawatt microgrid power system. The microgrid was up and running within nine months of the two companies starting to work together. TwoSix is also reducing CO2 emissions by 15 million pounds per year relative to the power it would have bought from the New Jersey grid. The Bloom solution enabled timely growth, greener growth, and greater reliability for TwoSix. As demand for power from EV adoption and edge data center proliferation increases. The aging grid will become ever more stressed and we anticipate robust demand from microgrid solutions. Finally, moving on to our overall ability to execute our business plan, I'm delighted to share news of two appointments to our leadership team. Former Sunmina president and contact holding CEO Hari Pillai has joined us as executive vice president overseeing the customer installations group. This is the first time we have made a dedicated executive appointment to this position, reflecting our strategic focus to make the install process even more predictable and scalable while reducing the cycle time. Hari is an extremely accomplished electronics and logistics industry veteran, and I'm delighted he has joined our team. We also welcomed Sonia Wilkerson to Bloom Energy as Executive Vice President and Chief People Officer this quarter. David Barber, our previous Chief People Officer, made an indelible mark on Bloom Energy, and it has been incredibly important for us to find the right successor following his sudden passing last year. Sonia is an incredible talent with an impressive HR leadership track record at Cisco, HP, and Infinera, and she is the right cultural fit for us. Her appointment reflects our continued commitment to recruiting, retaining, and developing our talent as we continue to grow. With that perspective, I would like to invite Randy Furr, our Chief Financial Officer, to walk you through our operating results for Q1 and estimates for Q2 2019. Over to you, Randy.

Thanks, K.R. Throughout my prepared comments, I'll be referring to the slides in the earnings call presentation that Mark referred to earlier. First, some highlights. Note that all profit numbers that I reference will exclude stock-based compensation. So on to slide three. In summary, a very respectable quarter. Acceptances were 235 systems, up 41% from Q1 2018's 166 systems. Revenue was $200.7 million, up approximately 62% when excluding the one-time retroactive ITC adjustment from 2017 that flowed into Q1 of last year. Non-GAAP gross margin came in at 15%. Our non-GAAP operating income was a loss of $8.8 million, with adjusted EBITDA coming in at a slight profit of $2.1 million. Adjusted EPS was a loss of 22 cents, and we ended the quarter with $327.9 million in cash in short-term investments, and this excludes $42 million of PPA cash. Now on to some color for the quarter. Referring to slide four, the 235 acceptances translated to $200.7 million in revenue, both Q1 records for Bloom, in line with Q1 historically being down seasonally on a sequential basis, we saw a revenue decline by 6% from Q4's $213.6 million. However, on a year-over-year basis, revenue was up by 18.5% from Q118's reported $169.4 million. And if you exclude the $45.5 billion of one-time retroactive ITC that related to 2017 revenue that was included in Q118, revenue was up by approximately 62% year over year. On to slide five. Our average selling price, or ASP, was in line with our estimates coming in at $6,870 per kilowatt. Once again, our ASPs will vary depending upon the mix of international where we generally do not have the installation revenue included in the ASP. Gross profit excluding stock-based compensation was down from $38.7 million in Q4-18 to $30.1 million in Q1. This was in line with expectations given the lower volume of acceptances that we were expecting due to the Q1 seasonality. On a year-over-year basis, and once again excluding the one-time ITC retroactive benefit received in Q1 2018, gross profit increased over 200% from Q1 2018's $9.5 million to $30.1 million this year. As has been our process since going public, we do provide specific quarterly estimates. And in our Q4 shareholder letter, we provided you with a range of Q1 average sales price estimates, as well as a range of total installed system cost estimates. For Q1-19, both the ASPs and TISC came in in line with those estimates. However, as I previously emphasized, the real key metric is the delta between the two, which represents our margin on equipment and installation of acceptances during the quarter. The midpoint of the estimated ASP and TISC yielded a delta or margin estimate of $1,150, or $1,150 per kilowatt. As you can see on slide five, our actual margin delta was $1,212 per kilowatt, a number better, but generally in line with the midpoint of our estimate. As you can see on slide six, non-GAAP operating income in Q1 was a loss of $8.8 million. Again, this number excludes stock-based compensation, but a number in line with expectations. This is down from Q4's 4.7 million profit, again reflecting the general seasonal decline in volume from Q4 to Q1, typical quarter-to-quarter mix of profitability and acceptances, and our increased operating expense investments in R&D and demand generation activities. The 8.8 million operating income loss for Q1 19 is a substantial improvement from Q1 2018's $22.5 million operating income loss, again adjusted to take out the one-time ITC retroactive benefit. The year-over-year improvement was driven by the 41.6% volume increase. Our adjusted EBITDA came in at $2.1 million for the quarter. Non-operating expenses were per plan and adjusted EPS come in at a loss of $0.22. Turning to the balance sheet on slide seven, we ended the quarter with $369.9 million of cash and short-term investments. This includes $42 million of PPA cash, so excluding the PPA cash, we ended with $327.9 million of cash and short-term investments. Pre-cash flow. which we define as cash flow from operations, less capital expenditures, was a negative 13.6 million. This is generally in line with expectations when factoring in our approximate 9 million non-GAAP operating loss with our 9.4 million of capital additions offset by favorable net working capital quarter-over-quarter changes. Referencing slide 8, days of sales was up 11 days from Q4 to 38 days. The actual accounts receivable balance was essentially flat quarter over quarter. The increase in days come as a result of lower sales volume for the quarter. Our days of inventory outstanding was down three days from Q4 to 70 days. And our payable days was up from Q4 by two days to 35 days on normal business cycle variations. Changing the conversation to Outlook, in Q2, we expect acceptances to be between 250 and 280, ASPs to be between $6,050 and $6,350 per kilowatt, and our total installed system costs to be between $5,175 and $4,875 per kilowatt. Also, we expect operating expenses to be between $41.5 million and $43.5 million. As I mentioned in the past, both ASP and TISC are impacted by a number of factors to include site location and applicable utility tariffs for the location whether the site includes grid outage protection and or is mission critical, the size of the site being installed. Generally, the larger the installation, the lower the cost on a per kilowatt basis. And as previously mentioned, whether or not the scope of our work includes installation. Generally, our international business does not include installation. The bottom line is, The important element is not the trend of the ASP or TISC, but the trend in the delta between the two. This delta represents our profit. One final comment on the outlook. In Q2, we expect to see a one-time benefit of approximately $8 million in our non-product and install profitability, with the majority coming from some innovative solutions surrounding our field replaceable units favorably impacting our service profitability. Once again, thank you for your time, and I will now turn the call back to the operator for Q&A.

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. Again, that is star 1 to ask a question. We will pause for just a moment to compile the Q&A roster. Your first question comes from David Catter with Baird. Your line is open.

Hi, guys. Thank you for taking the question. So I wanted to start on the upfront margin for next quarter. It looks like it might be down a little bit. The midpoint of your guide is down a little bit sequentially. Can you talk about the mix of customers and just kind of some of the dynamics there?

Yeah. Good question, David. We don't necessarily expect margin to be down quarter over quarter. I think if you look at last quarter, we The point of our margin is about $1,150, and we got it about $1,175 this quarter. Obviously, we over-delivered a bit in Q1, and there's no reason to think that we can have some upside in Q2 as well. I want to stress, even at the beginning of the year, we felt like just the general mix of business that we had in the first half of the year was not going to be as good as the mix of business that we had in the second half of the year. And we're just continuing to work through that business that we have. So we don't expect it to be down. We expect it to be essentially flat, maybe slightly up a bit. But we wanted to provide some room in the expectations that we set.

Understood. That's helpful. Thank you. And then maybe just shifting gears to the last point you made on kind of the backlog in the business in the second half, can you provide a little bit of additional color on kind of the opportunity in Korea, the agreement there, and what sort of trends you're seeing in kind of the margin business and the backlog there?

Yeah, look... As KR has pointed out last quarter, our expectations is that we'll diversify the business, and that includes international business, not just in Korea, but in other locations internationally. And we expect that business to continue to grow and be strong for us, as well as our domestic business here. We obviously, we've reported some wins that we've had in Korea. All of that was certainly not shipped in 2018. We had a backlog going into this year. We have booked and we expect to continue to book business in Korea throughout this year and to continue to grow that business. I'll just kind of leave it at that. Anything you want to add? No, I think you answered that.

So we are not changing our guidance. I think the key point Randy is making is we have given you guidance on what to expect in terms of the mix between U.S. and international. And as we sit here today, we expect to track that trend and see no changes.

Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.

Hi, guys. Can you, I guess on that same topic, just talk a little bit about factors of why the second half will be a little stronger than the first half, and then also maybe an update on the Gen 7.5 status?

Yeah, so I think what we stated to you is for all the reasons that Randy gave you, depending on where the geography is, what the utility rates are, the complexity of the install, the size of the install, whether we have mission critical, non-mission critical, they all affect whether we are entering into a new business territory, how much of Korea we have in a particular quarter, depending on where things are. All those things ultimately affect the mix and affect the TISC and the ASB and the DELTAs, what we see, because we have fairly good visibility based on our bookings, and we know where we slotted these bookings through the various different quarters, understand that our installation process is 9 to 12 months, so we have good visibility into it. Coming into the year, we knew that the first half will be lighter in margin and the second half will be better in margin, and that is what formed the basis for it in terms of market segments in terms of where we see the growth, in terms of geographies where we see the growth, and in terms of the mix, what we see between domestic and international. We have already provided you that color fairly clearly during the last call, and we're just telling you that we're tracking to that at this point, and we're tracking to what we put in the plan, and that was the reason I had stated that we expect our growth and margin to be in the 20s in the second half, but expect it to be lighter in the first half.

And sorry, I understand and couldn't hear me. I moved a little closer to the microphone, but I think also he asked about a little discussion on 7.5.

Yeah, so 7.5 is on track. Sorry, I didn't mean to ignore that question. So, you know, thanks for reminding me. And yeah, 7.5 is on track. It is going through the design process and the design iteration process as we speak. And at this point, all that we can tell you is it's on track.

Just one last question. Can you provide maybe some kind of timeframe when you think it'll be in service and then up to full ramp? or a full production? You know, maybe kind of an estimate on that.

Yeah, the current timeline calls for some initial production shipments of the 7.5 in the fourth quarter of next year. We'll clearly ramp over time. Obviously, the current generation of product is a very good product that's out in the market. We certainly want to deplete all the inventory and everything we have of that, so it'll be more like at least a three and probably a four quarter kind of transition to ramp up. So with that said, you can kind of expect a full ramp up by the end of 2021.

Your next question goes from Paul Koster with JP Morgan. Your line is open.

Yes, thanks for taking my question. Can you talk to us a little bit about the health of the bookings and pipeline? I know you don't share bookings numbers, but any anything that kind of gives us a sense of the momentum would be helpful. And I'm particularly interested in whether the PG&E plan to potentially curtail electricity to 5 million customers in California is having any impact on your pipeline.

Paul, that's a very good question. So You know, I can give you a gut feel as opposed to where we see it in the business because, as you know, even when we started the customer, that cycle of acquiring the customer is a relatively long cycle. Clearly, the reports that came out last week, I think, and reported in the Wall Street Journal about potentially five days of continuous outage once the wind speeds get beyond a point fundamentally breaks the compact. that exists between a utility and a customer of providing safe and reliable power to your service territory. And there was a pretty significant swath of their service territory. They said they would do this. We would expect that to translate to people figuring out how to take better control. And we are definitely and always on microgrid solution for that kind of solution. uncertainty that exists today is still there is no clarity on whether the taxpayer, the investor, or the ratepayer is going to bear the burden and how is it all going to be passed on and what is it going to mean to economics? What is the state going to do or not do? So those things need to shake out for our corporate customers to make their decision on what they're going to do next. We see the fundamentals favoring solutions like Bloom. Immediately, I can't tell you that unlike a consumer product where if there is going to be a hurricane, then suddenly all the consumables in the grocery store are off the shelves. You don't expect that kind of a quick turnaround for what we do.

Anything you can share regarding Booking's momentum at the moment? And then my follow-up question is, uh, any business outside of, you know, India, Japan, UK have been cited as potential growth opportunities previously. Uh, when are we going to see some stuff coming from those countries?

Yeah, I'll look on the backlog. You know, I, I've stayed pretty consistent that, that we'll, uh, we'll update that once a year. Again, the orders tend to be lumpy, but one thing I would add on the, on the backlog here is that, um, Often, the international business, we do not have the installation. If you kind of contrast that to the domestic business that we have, you know, where we do have the installation, the time between the bookings and the acceptance or the recognition of revenue, given all that design time, all that planning, all that permit that we have to do, you know, tends to be in that 9- to 12-month range. When we do book business that's... that's international, all that upfront effort has already occurred. And by the time they place the order for the systems, it's down to just the lead time it takes us to build the systems. So often you'll see, or it's even possible, I think we have had this, that we're only international business, we will actually book and ship in the same quarter. if the order comes in early enough in the quarter. And certainly, most of it has been where we book one quarter and ship the next quarter. So I just want to stress that there's a different profile or time between the bookings and the actual acceptance or shipment when it comes to domestic versus international business. But hopefully, that's a little input

Take the second part. And on the international markets, Paul, you identified a couple, and let me address them in particular. We are doing a lot of groundwork in India. Part of the biogas that I talked to you, I think will lead to some really interesting opportunities down the line. But in terms of the positive momentum and where things are, I'll tell you, India recently opened up the gas market to not just the Gas Authority of India, but to a few other players. And they have come in, and now the Indian Oil Corporation is going to create a very large gas facility for the city of Chennai, where a lot of IT companies and other companies are located. So the trends are pointing in the right direction there. In the short term, we have a robust pipeline that we are building. I don't think there's going to be any action, any business action in India until the impending elections that you're very familiar with are completed. People will not make decisions. And again, we know India to be a slow market in terms of entry and then a very fast growth. That is the nature of that market. We are aware of that. We are prepared for that. UK, I think, from a policy and a regulatory perspective, until Brexit is figured out, I don't think we will be putting our energy in it at this point. It's a wait and see.

Your next question comes from Steven Bird with Morgan Stanley. Your line is open.

Hey, good afternoon. Thanks for taking my questions. I wanted to just talk a little bit further about the biogas development. It seems like a very positive development, and this obviously ties into India, but I think it's just more broad. I wanted to make sure I understood from a technical perspective the work you've done with Southern Company. It sounds like you've had really encouraging operational results. Would that imply that you'd be essentially prepared operationally to start deploying the product in the fairly near future using Biogas, or do you feel like you need more time to operationally improve out this approach?

Steven, that's a good question. Definitely, we have been working in the lab on this for a long time. What we demonstrated is a field prototype with the Southern Company in a real, you know, like landfill. There were no surprises. By that I mean there were no unpleasant surprises, and our systems operated the way we expect it to operate. from that gas, which doesn't have to be purified to the levels it has to be purified if it went into a pipeline. That is a very big deal. And the fact that our systems operate that way and not put out SOxNOx particulates means that in a way it's not just zero carbon, it's negative carbon because in the absence of a market for that, that methane is going to go into the atmosphere, which is 25 times more harmful from a greenhouse perspective than a CO2 molecule. Even if it were used in a conventional method, the SOx, NOx, the particulates, the other things that go out, and the energy required to clean it up to make it fully amenable for that technology all adds to the carbon footprint. potentially one of the best solutions out there to take this into on-site generation. Having proven this, we are now signing up pilot customers, and we expect in the next few quarters to be able to tell you about those customers and what we have done. This year is about pilot customers, and it will be full systems with pilot customers, and we expect to go into a greater backlog and funnel with our customers on this starting next year.

That's extremely helpful. I just wanted to shift over to your large customers. Obviously, you're having great success in converting existing customers into follow-on customers. At a high level in terms of that cycle to move forward, from relatively small purchases to very large purchases. I think Randy touched on this a little bit, but I'm just curious, are there any high-level trends you're seeing with respect to that sort of cycle to move from, I'll call it small to very large with some of your existing customers?

There are a couple trends that are noteworthy. The cycle time to transaction with a repeat customer is shorter than the cycle time to transaction with a brand new customer typically on average. That is something that we see very clearly. And also, as a rule, the repeat orders tend to be larger in a single purchase order than a, you know, than a first order. But it is those first orders that become repeat customers. So we focus on, from a numbers perspective, as much of the you know, getting initial customers signed up. But from a volume perspective and a repeatability perspective, we focus heavily on existing customers who scale with us.

Your next question comes from Tahiri Afzal with KeyBank. Your line is open.

Hi, folks. Hi. Yeah, first question for me is, it seems that you guys are back on track in predicting the install phase as you're meeting your acceptance rate. As you scale up into the back half of the year and see more growth into next year, are there any other initiatives you think you need to put in plan?

I think the team we're building, Now, in addition to a very strong team that existed before, but we have really, by putting in dedicated leadership and adding more people, we are looking to the second half ramp and getting ready for it. As we sit here, we feel like we are taking all the necessary adequate steps to be able to step up to that ramp.

Thanks, K.R. And second question, maybe more for Randy. Randy, we got a glimmer of positive free cash flow in one quarter last year. Any line of sight when we could see free cash flow maybe break even and move back up to the positive territory?

Yeah, look, the good news is our free cash flow is tracking pretty well to where it makes sense. You know, we lost roughly eight, nine million dollars in Q1. We had nine million dollars roughly in capital expenditures. And we had, you know, a favorable contribution from working capital, which we expect to continue into the future. Obviously, you know, if you look at a good point of our guidance, we're certainly expecting something a lot more favorable or less lost than roughly eight, nine million dollars that we had in Q1. So we think that we could see neutral free cash flow, you know, this coming quarter Q2. And then obviously with expected profits in the second half of the year, we expect that to go to free cash flow positive. So, you know, I think I'll stop there. I think that answers your question.

Your next question goes from Colin Rush with Oppenheimer. Your line is open.

Thanks so much. Gus, could you break down the revenue and the guidance, 1Q revenue and 2Q guidance, and the acceptances between how many are stack replacements and how many are new builds? Is there a material delta there?

No. So when you say stack replacements, though, what do you mean by that?

I mean, if you're replacing the stacks in an existing installation.

Yeah, so again, if you look at our financials, as we have reported in the shareholder letter, the stuff that's included in acceptances that is an upfront and product That is all new equipment, new installations for which we either sell directly to the customer on a CapEx or it's financed through either our PPA or our leasing managed services transactions. There's a part of our reported revenue and P&L there that we refer to as service, and when we ship these field replaceable units to the field, they end up as an expense in that service P&L, and that's offset by the service revenue that we get. So the guidance that we're providing for Q2, that midpoint of the guidance is all new systems, new revenue and stuff we're shipping out there, and anything that ends up in the expense part of the service, that's all the as we call them, or field replaceable units that we ship back out to the field that we do when the systems deteriorate to a point of about a 45% efficiency. So, hopefully that answers your question.

Your next question comes from with Raymond James. Your line is open.

Hi, so I had a question regarding the microgrid opportunity. Traditionally, the core of the microgrid solution has been battery storage. Are you essentially aiming to display storage in these systems with the Bloom servers?

So a microgrid can, in the real definition of a microgrid, never operate with the battery storage because the battery storage gives you minutes and hours of operation without the grid operating. A microgrid should operate for days, weeks, and months without the grid operating. And you would never be able to put that amount of storage in a single place. So that is the distinction. So the UPS, the availability of uninterruptible power service, can be done with the battery. So this is by no means a replacement for the battery. It is truly a combination of any generation technologies with which we can provide adequate supply to meet all the demands that have been predetermined by the customer that needs to stay on no matter how long the grid is out of service. So in the past, for large industrial customers, for large commercial customers, such a solution did not exist other than a diesel genset that could potentially run for a few days at a time without needing interruption as long as the fuel supply was available. Here, our systems don't even know when the grid goes out because they've already been in operation. There is no need for transition from going from idle to on. So it's one of the most reliable ways of getting the power. And understand that our systems depend on a gas grid that is independent of the electric grid. And the customer is only out of power if these two different infrastructures that are not coupled to each other both fail at the same time, which is highly, highly unlikely. So this is one of the best always-on solutions a customer can have. That's the definition of our microgrid. It's a unique offering, and our customers love it.

We have time for one more question. Your final question will come from Julian Dumoulin-Smith from Bank of America. Your line is open.

Hi. Thanks for taking our question. This is actually Eric on for Julian. So we just wanted to touch upon, first and foremost, are there any updates on the intention to pursue an ITC safe harbor, particularly as the ITC for fuel cells stepped down into 2020, and one follow-up question after that. Thanks.

Look, the ITC that was extended was good for five years. And the way it works, even with the step-down from 30 percent to 26 percent, even with that, have the opportunity to continue to use 30% for all the projects that we've identified and we've started that will go into the future where we commence construction. And the same will occur even on the step down as it goes forward. So as we've been pretty consistent in saying is that, you know, with the change from the old rules to these new rules that we're operating under today, really extends the ITC for us well into year six and maybe even into year seven as we have going forward. And, you know, there's already been some talks in Washington of, you know, possibly looking at this even in the future. So hopefully that's good on the ITC. What's the follow-up or the second question, Eric?

The second question was on expansions, but just, sorry, just to touch on the ITC. So I understand that nuance. I'm just wondering, is there any plan to, say, procure 5% of expected fair market value ahead of year end 19, such as through steel boxes or whatnot, that would allow you to extend the ITC for the projects you haven't identified? That's mainly what I'm wondering.

Yeah, obviously. Obviously, we have plans in place, and we'll talk more about that when we get near the end of this year, but the answer is yes.

Okay, got it. Just wanted to make sure. And then lastly, on the expansions identified with the last call, particularly into the Northeast, could you discuss how that's been progressing so far with first quarter? Primarily, I know you talked about the upfront margin being different depending on the geographical mix. Is Northeast expansion something that you guys are driving pretty heavily with first half?

Yeah, so the answer is yes. Look, the way to think about Bloom is that we operate today in probably 10 states, 11 states. the tariff for the utility rates that are being charged to commercial industrial customers are some of the highest in the US and why is because that lets us achieve our targeted margin or better and and give a customer the savings that that their hurdle rate of savings it takes to transact with the business as our costs come down that lets us enter more and more of these tariff areas. Even in a state like California, the utility rates charged to CNI customers, as you know, vary significantly. That doesn't mean that Bloom is in every single utility in the state of California or in the other states that we operate. However, over time, as our costs come down, we'll be able to move into those regions and territories as well as other states moving forward. Clearly, we're in the northeast today. Back to that comment on, you know, margins can differ. Margins can differ not just from east coast to west coast. They can differ even within the west coast and even within the east coast, depending upon which tariff or which utility that we're operating in. Again, on our land and expand strategy, we really focus on a portfolio approach with our customers. So it's not uncommon. In fact, it's the most common when we book an order from one of our customers that they will have sites both on the West Coast, both in the East Coast, some in some very, very high utility tariff rates, some in some lower ones. We look at this all on a blended portfolio approach to give the customers that target hurdle. So obviously with that, There could be mix for us from time to time, from region to region, depending upon the acceptances that are accepted within that period. And that's really where we were headed with that earlier comment, Eric.

This concludes today's conference call.