Bloom Energy Corporation

Good afternoon and welcome to the Bloom Energy third 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 Mr. Mark Messler, Vice President of Finance and Investor Relations at Bloom Energy. Please go ahead.

Thank you. Good afternoon, all, and thank you for joining us on Bloom Energy's third quarter 2019 earnings conference call. To supplement this conference call, we have filed our Q3 2019 earnings release and shareholder letter with the SEC and have posted it along with the 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 we 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, In our earnings release and in our Q3 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 and are in addition to and not a substitute for GAAP financial measures. A reconciliation between GAAP and non-GAAP is included as part of our Q3 2019 shareholder letter. Joining me on the call today are K.R. Sridhar, Principal Co-Founder and Chief Executive Officer and Randy Furr, Chief Financial Officer. KR 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 Randy.

Thanks, Mark. Throughout my prepared comments, I'll be referring to slides and the earnings call presentation that Mark referenced earlier. I'm going to start with financial highlights for the quarter and then talk about our balance sheet. First, some highlights. Note that all profit numbers that I reference will exclude stock-based compensation. So on to slide three. In summary, this was another very respectable quarter. Acceptances were 302 systems, up 47% from Q3 2018's 206 systems. Revenue was $233.5 million, up approximately 23% year over year. Non-GAAP gross margin come in at 25.8%, up 5% from Q3, 2018 and up 350 basis points sequentially. Our non-GAAP operating income was 15.2 million with adjusted EBITDA coming in at 40.8 million. Adjusted EPS was one cent and we ended the quarter with 357.9 million in consolidated cash. and short-term investments, which includes $23.8 million of PPA cash. So excluding the PPA cash, we have $334.1 million of cash and short-term investments. Now on to some color for the quarter. And on to slide four. The 302 acceptances and $233.5 million in revenue were both Q3 records for Bloom. Acceptances were up 46.6% year-over-year and ended up 11.4% sequentially. Revenue was up 22.8% year-over-year and essentially flat quarter-over-quarter. The mix of acceptances where we had low or virtually no installed revenue is what drove revenues being in the flat range on the acceptance volume growth. I will add more color to this in my ASP discussion. Included in Q3's mix of acceptances were both new and existing customers, and in a wide range of verticals to include healthcare, data centers, pharmaceutical, universities, utility scale projects, and food and beverage retail. In total, the 302 systems were spread over eight different end customers In four different geographic markets, the majority of the installations were in the United States. On to slide five. As I just discussed, we do provide specific quarterly estimates. And in our Q2 shareholder letter, we provided you with a range of Q3 average sales price estimates, as well as a range of total installed system cost estimates. For Q319, our average selling price, or ASP, come in at $6,618 per kilowatt, a number at a higher end of our estimated range. Total installed system cost, or TISC, came in at $3,730, a number better and below the bottom end of our estimated range. 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 that 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 whether or not the scope of the work includes installation. Typically, our international business does not include installation. So, once again, I want to stress that the important element is not the trend of the AST or the TISC, but the trend in the delta between the two. The delta represents our unit level profit of the acceptances during the quarter. The midpoint of the estimated ASP and PISC yielded a delta or margin estimate of 2,175 or $2,175 per kilowatt. As you can see on slide five, our actual margin delta was $2,888 per kilowatt, a number exceeding the higher end of our estimates. Now driving this performance was a combination of unusually favorable mix of site acceptances as well as continued reductions in our product and installation cost. Turning to slide six, gross profit excluding stock-based compensation was up almost 53% from $39.5 million in Q3 of 2018 to $60.3 million in Q3 of this year. On a sequential basis, gross profit increased 15.7%. Gross margin came in at 25.8%, a number nicely above last year's 20.8%, and Q2 2019's 22.3%. Operating expenses for Q3 were at the lower end of our estimates. Non-GAAP operating income in Q3 was 15.2 million. Again, this number excludes stock-based compensation. Again, was up significantly both on a year-over-year and sequential basis. Our reported adjusted EBITDA was $40.8 million for the quarter. Non-operating expenses were per plan and adjusted EPS come in at one cent. Now I want to talk about the balance sheet on slide seven. We ended the quarter with $357.9 million of consolidated cash and short-term investments. This includes a total of $23.9 million of PPA cash. So excluding PPA cash, we ended with $334.1 million of total cash and short-term investments. This is essentially flat down about $300K from Q2. However, included in the $334.1 million of boom cash is $112.6 million of restricted cash. This is up by about $68 million from Q2. The driver of this increase in restricted cash is a cash reserve committed to our financing partner in exchange for their commitment to increase their financing limit. This will reduce over time starting July 2020 with the full amount of this increase expected to roll off by June of 2025. Keeping on the balance sheet, but turning to debt, I'd like to make a couple of comments. Of the $664 million in total debt, $261 million is fully non-recourse to Bloom. This represents debt from our PPA companies where Bloom is a minority investor, and once again, debt we are not responsible for. That leaves $403 million in total Bloom recourse debt, of which $312 million of that, representing approximately $330 million in total principal balance, is due in December of next year. The vast majority of the remaining balance, roughly $91 million, is not due until 2024. So clearly the focus is on the approximate $330 million due in December of next year. So what are our plans with respect to this? First off, we are presently in discussions with our existing note holders, and we have selected and hired as an advisor the investment banking firm of Jefferies to help us with our options. At a high level, we will either use a portion of our existing cash to pay down a portion of the notes or refinance all or a portion of our existing notes. Think of this as an extension, but likely under new terms or We will raise new money and pay off all or a portion of our existing notes or do a combination of the three. Obviously, our goal here will be to refinance or raise new debt no later than the first half of next year. We are focused on doing so while choosing the best option for our existing shareholders. But put another way, our primary goal here is to accomplish this with the least amount of dilution. Referencing slide eight, days of sales were down 11 days from Q2 to 13 days. Our days of inventory outstanding was up two days from Q2 to 75 days and our payable days was up from Q2 by six days to 43 days. I'd like to make a comment relative to our service P&L, especially in light of some of the recent press. We've consistently said that we do expect near-term losses in our service P&L. This coming from the updating and modernizing of our installed fleet during our normal service process where we replace older fuel cells with our latest technology. In 2017, we incurred an approximate service loss of $6 million. Last year, that number was about $8 million. For this year, we expect to see service losses in queues one and three and service profits in queues two and four. with full year service losses in the 3 to 6 million range for this year. Quarterly or even annual fluctuations can and may occur. We did see a relatively higher Q3 service loss. This was driven by accelerating some Q4 fuel cell replacements into Q3 to avoid doing this work during the peak wintertime and ahead of the holiday season which is certainly appreciated by our retail and data center customers. With respect to our service P&L accounting, in addition to selling our energy servers installed at the customer site, we sell ongoing operating and maintenance contracts to our customers. We refer to this as service contracts, and these service contracts can and are generally renewed annually by our customers. In summary, the revenue associated with the service contracts is recognized ratably over that service contract term. Again, generally 12 months. The treatment of the cost depends on whether we estimate a profit or loss on the contract. If we estimate a profit on the contract, which we do for all contracts that we've signed over the last several years, then the cost associated with the contract is expensed as incurred. If, however, the service contract is estimated to have a loss, we expense the loss at the time of the contract signing or renewal. Again, all service contracts executed since the beginning of 2015 are profitable. As we've communicated previously, based on the 10 years of data that we've been tracking for service costs, the service revenue over the estimated service contract period, or our current installed base exceeds the cost that we expect to incur to support those contracts. Further details relative to our service costs can be found in the technical note that KR will be referring to in a couple of minutes. Now over to KR for a business update.