Bloom Energy Corporation

Good afternoon, and welcome to the Bloom Energy second 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.

Good afternoon, all, and thank you for joining us on Bloom Energy's second quarter 2019 earnings conference call. To supplement this conference call, we have filed our Q2 2019 shareholder letter with the SEC and have posted it along with supplemental financial information that we will periodically reference throughout this call to our investor relations website. 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 Q2 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 Q2 2019 shareholder letter. Joining me on the call today are K.R. Sridhar, Principal Co-Founder and Chief Executive Officer, and Randy Ferg, 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.

Good afternoon to all of you. Welcome to the Q2 2019 earnings conference call. I'll provide you with a brief summary of our Q2 performance and then discuss a few significant Bloom developments, followed by market shifts in power industry that are creating business opportunities for Blooms. Randy Furr will follow to discuss financial performance. In Q2, we achieved 271 system acceptances, a 50% year-over-year increase. We achieved $233.8 million of revenue, which is an all-time record for Bloom. Our gross margin was 17.8%, and operating loss was $67.2 million. Excluding stock-based compensation, our non-GAAP gross margin was 22.3%, and non-GAAP operating income was $1.1 million. Overall, a strong performance. Now on to company developments. We continue to make healthy cost reductions of our current platform. Development of our fourth-generation Bloom 7.5 platform is on track. We financed another 14 megawatts of systems through our partner, Southern Company. Duke Energy One, a subsidiary of Duke Energy, will acquire 37 megawatts of Bloom Energy Server projects through a PPA, a $250 million investment. Adding in our other partner, Exelon, three of the nation's largest power companies have now validated Bloom's unique place in the transforming power market with substantial investments. Following on our announcements on using landfill biogas for power generation, we announced the capability of Bloom servers to run on renewable hydrogen. This breakthrough could enable large-scale storage of intermittent renewable power generated by solar and wind, as well as be an important asset for the hydrogen infrastructure roadmap that Asian countries like Korea and Japan are developing. We are developing landfill, dairy waste, and wastewater source biomethane powered bloom projects. You will hear about them in the coming months. Also, in the near future, we expect another important announcement from us on decarbonization using the Bloom Energy Platform. Now, let us consider the transformational market shifts occurring in the power industry. In the last few months, climate change has impacted the providers and consumers of electricity at an unprecedented scale. In the modern era, this is the first time ever that communities and businesses in the most advanced nation on Earth are being told that they may lose power for 10 days at a stretch. Worse still, in fire-prone areas, there may be no limits to the frequency of these outages if high wind conditions occur. Last month, New York City was unable to provide reliable power to its customers during a hot summer weekend. The common perception is that such events are a new normal. The reality may be worse. Such events are expected to become more severe, more frequent, last longer, and impact more cities in the months and years ahead. It is becoming very evident that our aging and brittle electric grid is not capable of providing us with the basic human need, 24-7 reliable electricity. It is neither built for nor capable of withstanding the consequences of the extreme weather Mother Nature is doling out as we struggle with climate change. Current solutions for coping with the power outages are inadequate and antiquated. Traditional backup generators and batteries are designed to deal with minutes and maybe hours of outage at best, not days. The smog-related pollution from backup generators creates significant health risks. For example, the city of Latrop in California's Central Valley, an area with the worst air quality in all of the United States, expects to burn 10,000 gallons of diesel every day that it is without power from PG&E. Studies show that cancer risk increases by 50% in a local population that is exposed to 10 days per year of dirty emissions from diesel backups. Unfortunately and ironically, all our attention on climate change is focused on solving the long-term problem of decarbonization. Almost no attention has been given to creating resilient solutions. It is imperative that we move with speed and vigor to protect ourselves from the disruption that today's climate change brings, starting with our electric power system. We need large-scale deployment of resilient solutions that will secure and safeguard human lives, property, and economic interests for now and for decades to come. The relevance of Bloom Energy in this rapidly changing world cannot be overstated. There is no other commercial technology that can impact both GHG reduction and bring resiliency in one unified platform. Bloom offers a clean, reliable, and resilient source that is adapted for the post-climate change world. Let me cite some examples on how Bloom Energy Always-On solutions have performed. Four Home Depot stores equipped with Bloom Energy Always-On business continuity solutions rode through hours of power outages multiple times in the New York City area, during a hot summer weekend last month. Bloom has more than 20 deployments located within 100 miles of the epicenter of the 7.1 magnitude earthquake that struck Ridgecrest on July 5th. Every single one operated normally during and after the event, including one right at the epicenter. For years, Our systems have powered customers during and after hurricanes, floods, high winds, earthquakes, fires, and other grid outages. Such successes and heightened customer concern over resiliency is driving an uptick in interest for our solutions as evidenced by increased web traffic, inbound calls, and more deals in the pipeline with the microgrid architecture. A key point to note is that the geographic areas with some of the greatest exposure to extreme weather-related disasters are also the territories where Bloom operates today, California, New York, New Jersey, Massachusetts, and Connecticut. We expect tailwinds for our business as a result. Let me now tell you about the headwinds we have faced in the first half of 2019. The same geographies I just outlined for you are at the forefront of policy discussions about a race to 100% renewables-only power. Such objectives are well-intentioned but ill-informed. There is no credible way to achieve a 100% renewables goal without compromising public safety, reliability, resiliency, and affordability of power. Nevertheless, the political rhetoric continues. The confusion it creates in the marketplace in New York and California has slowed down the conversion of opportunities moving through our otherwise very healthy sales funnel during the first half of the year. We have historically achieved our highest ASBs in New York and California. With fewer orders from those markets in our anticipated acceptance mix for 2020, our revenue growth and margins for next year may not be in line with street expectations. We still expect to deliver healthy year-over-year acceptance growth in 2020, generally in line with expectations. Randy will go into further details shortly. We have high degree of confidence that this is an anomaly that will correct and want to emphasize that we are bullish on these markets going forward. Why? Let me give you six reasons. One, Mother Nature waits for no one. As the number, severity, and duration of outages escalate, We expect customers will act to protect their interests. Two, economics will drive rational business behavior. Utilities in the markets we discussed have already made rate increase requests to their regulators to pay for disaster related costs. This will result in higher grid delivered electricity prices. Number three, aggressive cost down on our product offering will enable us to lower our delivered price of electricity to customers without impacting our margins. Number four, businesses are beginning to quantify the commercial cost of power outages and accounting for it when they switch from grid power to alternatives. Number five, customers are now considering their risk exposure should they be unprepared to deal with long outages after receiving fair warning from their utility providers. Number six, as I mentioned, traditional diesel powered backup is not a viable option for days of power outage impacting large contiguous service areas. We are taking some key steps to expand our U.S. commercial business opportunity. We are introducing a microgrid solution without compromising our product pricing where a customer only has to commit to a five-year contract term. Such a short-term offer is revolutionary in the baseload power business. Our new and simple off-the-shelf microgrid offering provides a solution for customers who would not have traditionally needed one, but now do so for safety, risk mitigation, and business continuity. We are very proud to welcome Chris White as our new Chief Sales Officer. His high energy, passion, talent, and prior experience in building sales teams, partners, and channels, and scaling growth make him a very timely addition. In summary, With the consequences of climate change ratcheting up at an alarming rate, we believe we have reached a tipping point in the way businesses have to deal with electric power. Gone are the days where corporate America could signal virtue and mitigate climate change by only buying or acquiring carbon credits from remote renewable forms. Companies must address the consequences of climate change that is impacting their business operations and assets. The question for business leaders is, are we capable of protecting our employees, customers, and investments if we experience prolonged and frequent power outages? Bloom's platform positions us solely and uniquely in the market to offer electricity that meets their needs. Bloom Energy is affordable, accessible, reliable, resilient, safe, and sustainable. It is the right product in the right market at the right time. We own this market and we will execute and deliver on our vision and mission to serve it. over to you.